allegheny energy investor meeting and hatfield power station tour september 27-28, 2006
TRANSCRIPT
Allegheny Energy
Investor Meeting and
Hatfield Power Station Tour
September 27-28, 2006
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; 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 exisitng 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.
Paul Evanson
Chairman, President and Chief Executive Officer
4
Activities
TODAY
GENERATION OVERVIEWJoe Richardson
AVAILABILITY IMPROVEMENT PROGRAMLeo Rajter
QUALITY IMPROVEMENTMike Adams
Open dialogue
7:30 pm – Board bus for dinner
TOMORROW
7:00 am Check out; breakfast
7:30 Board bus
8:30 Arrive Hatfield
11:00 Depart Hatfield
12:15 pm Lunch at hotel; open dialogue
1:30 Adjourn
5
Earnings Growth Drivers
Increase Pennsylvania POLR rates
Transition to market-based rates
Improve plant availability
Decrease O&M expense
Reduce interest expense
Expand transmission system
6
$20
$25
$30
$35
$40
$45
$50
$55
2005 2006 2007 2008 2009 2010
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
2006 2007 2008 2009 2010
Generation Rate$ per MWH
Cumulative Increase inPre-Tax Operating Income
$ millions; estimates
Growth Driver: Increase Pennsylvania POLR Rates
7
Growth Driver:Transition to Market-Based Rates
2006 2009
State Maryland, MarylandOhio
MWH transitioning 4.8 million 3.5 millionto market
Increase in pre-tax income $90 million $60 million
Total: $150 millionTotal: $150 million
8
91%
85%83%
76%
82%78%
83%
2002 2003 2004 2005 2008Goal
Supercritical Coal Units
Each 1% improvement provides benefit >$10 million
2006Goal
Growth Driver: Improve Plant Availability
2007Goal
9
$1,186
$985
$818$758* <$730
2002 2003 2004 2005 2006 2007
$700-730
Growth Driver:Decrease O&M Expense
Target
* 2005 = $775 after adjustment
($ millions)
10
Growth Driver:Reduce Interest Expense
Reduced debt by $2.1 billion (Dec. 1, 2003 – June 30, 2006)
Refinanced $1.5 billion in 2006 (through June 30)
Projected reduction in interest expense: $65 million in 2006
11
Growth Driver:Expand Transmission System
PJM approved ~210-mile line
Cost: over $850 million (preliminary estimate)
80% of spending in 2009-2011
In service 2011
FERC approved incentive rate treatment
12
Approved Transmission Line
MMtt.. SSttoorrmm
MMeeaaddooww BBrrooookk
LLoouuddoouunn
PPrreexxyy
550022 JJuunnccttiioonn
Existing Substation
New Substation
Existing Lines
New 500 kV Line
13
Other Growth Opportunities
Demand growing faster than capacity additions
Increasing marginal heat rate
Gas generation increasingly setting PJM prices
Tightening reserve margins
Improving capacity prices
Additional transmission investment
Joe Richardson
Chief Operating Officer - Generation
Allegheny’s Generation Fleet
HatfieldHatfield
16
96% of Output is Coal-Fired
Excludes Gleason peaking unit (held for sale). Output for year ended December 31, 2005.
Supercritical Coal79%
Gas1%
Hydro3%
Hydro11%
Gas9%
Supercritical Coal63%
Output (MWH)
Total Capacity:9,670 MW
Other Coal16%
Other Coal17%
Oil1%
Coal96%
17
Supercritical Coal Units Provide 79% of Output
CAPACITY HEAT RATESTATION (MW) SCRUBBERS SCRs (BTU/KWH)*
Harrison 1,972 Yes Yes 10,0003 units
Pleasants 1,300 Yes Yes 10,1002 units
Hatfield 1,710 Planned -- 9,9003 units
Fort Martin 1,107 Planned -- 9,6002 units
* Site average
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Generation Priorities
Achieve 91% availability by 2008
Achieve top quartile spending
Improve environmental performance
Improve upon top quartile safety
Drive High Performance Organization
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Achieve 91% Availability
2002 2003 2004 2005 2006 2007 2008
Outage Factor(supercritical units)
22%
24%
17% 17%
15%
9%
Reduce planned outages
Reduce unplanned outages
18%
Goal
20
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
1996 1998 2000 2002 2004 2006 2008 2010
Sp
en
din
g, $
mill
ion
s
0%
2%
4%
6%
8%
10%
12%
14%
Un
pla
nn
ed
Ou
tag
e F
ac
tor,
%
Improving Performance, Reducing Spending
O&M and Capital*
Unplanned outage factor
High PerformanceUnder-investment Re-investment
Reduce spending
* Special maintenance O&M and capital for supercritical coal units. Excludes environmental spending.
Goal
21
Achieve Top Quartile Spending
Supercritical Spending per MWH*
$5.32
$6.98$6.38
$6.00
$4.70
2003 2004 2005 2006 Benchmark
INDUSTRY TOP QUARTILEALLEGHENY
* Base O&M, special maintenance O&M and maintenance capital
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SO2
COST* IN REDUCTION*($ Millions) SERVICE (000 tons/yr)
Pleasants Bypass $110 2008 30
Hatfield Scrubbers ~$650 2009 145
Ft. Martin Scrubbers $500 - 550 2009 92
* Estimates
ImproveEnvironmental Performance
23
Scrubber Costs: Reasons for Increase
Site-specific challenges
Topography
Restricted construction space
Increased material handling costs
Fugitive dust constraints limit truck usage
Long pipe conveyors to disposal sites
Higher material and labor costs
24
Scrubber Status Summary
Hatfield:
Signed contracts with Babcock & Wilcox, Washington Group
Received construction permit
Fort Martin:
Seeking approval to securitize additional costs
Pending: contracts with vendors
25
Improve Environmental Performance
0
50
100
150
200
250
300
350
400
2005 2010
SO2 Emissions (thousands of tons)
70%reduction
26
3.13
2.07 1.961.66
2.67
2003 2004 2005 Benchmark20068 mos.
ALLEGHENY INDUSTRY TOP QUARTILE (COAL)
Incident Rate
Improving Safety
27
Creating a High Performance Organization
An engaged, capable workforce with increased involvement
Strengthening employees’ capabilities in key areas:
Results management
Measures, information and analysis
End-to-end process management
Leadership and people
28
Chief Operating Officer – Generation
Joseph H. Richardson
VP Supply Operations
Leo C. Rajter
VP Construction & Engineering Services
Michael V. Herriott
VP Market Optimization & Dispatch
Thomas J. Kalup
General Manager, Fuel Logistics & Operations
James H. Longacre
Regional Director– Peter J. Kotsenas
Regional Director– C. Allen McDonald
Regional Director– Kevin C. Geraghty
Regional Director– Daniel G. Shearer
Regional Director– George J. Farah
Director, Outage Planning – Anthony J. Catanese
Appointed in past 2 years
Generation Leadership
VP QualityMike Adams
Leo Rajter
Vice President, Supply Operations
30
Improving Availability: Conducting Extended Planned Outages
At all supercriticial units; 7 to 14 weeks
Hatfield Unit 3 outage underway
Key activities:
Assessing equipment condition
Inspecting and repairing boilers
Completing preventive maintenance tasks
Planning for future work
31
2005
Ft. Martin 2
COMPLETED PLANNED
Harrison 1 Harrison 3
Hatfield 1 Hatfield 3Hatfield 3
Pleasants 2
Ft. Martin 1 Hatfield 2
Harrison 2 Pleasants 1
2006 2007
Improving Availability: Conducting Extended Planned Outages
Tourtomorrow
32
Major availability projects: Replace waterwall, mixed pass panels, boiler slope
panels with laser cladding Replace reheat outlet header Replace secondary superheater inlet, outlet banks Replace horizontal reheat, reheat inlet header Core maintenance work
O&M: $16 million
Capital: $25 million
Goal: reduce unplanned outage factor from 16% to 5%
Hatfield Unit 3: Outage Scope
33
Unplanned Outage Factor Units Which Completed Extended Outages
Planned Outages: Results
6%5%
1%
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.
34
Outage Planning Results
Supercritical Outage Days8 Months Ended August 2006
100
120
140
160
180
200
Planned Actual
Due to:
• Improved planning
• Experience
• Contractor incentives
Due to:
• Improved planning
• Experience
• Contractor incentives
$5-10 million benefit100% of planned outage scope completed
35
Strengthening Processes
Fund highest-value projects
Optimize fleet-wide outage schedule
Reduce duration of forced outages
Reduce problem resolution cycle time
Improve root cause analysis
Enhance predictive/preventive maintenance
36
Strengthening Preventive Maintenance Skills
Expanding predictive maintenance skills to know what is going to break before it breaks
Strengthening preventive maintenance program through conversion to new computerized maintenance management software
Expanding non-destructive examination of boiler components to better plan for timely replacement
Motor Thermography Scan
FL3 - 3B Condensate Pump-Special3BCP-S - M1H vs M1V
Orbit Display 06-Jun-06 15:17:02
P-PX= 7.08 P-PY= 4.84 LOAD = 100.0 RPM = 1190. (19.84 Hz)
-5 -4 -3 -2 -1 0 1 2 3 4 5
-5
-4
-3
-2
-1
0
1
2
3
4
5
M1H in Mils
M1V
in
Mil
s
Vibration Orbit Analysis
37
Hatfield Power Station:
Key Facts
In service 1969-1971
Coal delivery: barge
Coal: uses ~3.9 million tons/year
75% Northern Appalachian (primarily from PA, WV)
25% Powder River Basin
~170 employees
38
2003 2004 2005 2006 2007 2008
Outage Factor
Hatfield: Performance Improvement Opportunity
Unplanned
Planned
29%
33%
25%
18%
10%
15%
Goal
Coal Silo
Pulverizer
Water Heater
Condenser
Turbine Generator
Stack
Water Pump
Transformer
Lines
Boiler
Burner
Cooling System
Power Generation Process
Pre
cip
itat
ors
SC
Rs
Scr
ub
ber
s
Steam
40
Tour Stops and Safety Notes
Boiler
Control room
Turbine hall
Roof
Coal handling
Safety reminders:
Hardhats, safety glasses and ear protection are required inside the plant
41
Mike Adams
Vice President, Quality
42
Quality Approachand Improvement Focus
4
28
22
2004 2005 2006
Generation Improvement Teams
Reduced Planned Outages Reduce Frequency Reduce Duration
Reduced Unplanned Outages Reduce Frequency
Teams eliminating/mitigating root causes
Reduce Duration Teams with focus on reducing time
of outage
Practical application of tools and techniques
All levels of employees involved
Carefully selected/aligned teams to performance goals
Upper quartile performance in key measures
43
PrioritizingImprovement Opportunities
43%
70%
90%98% 100%
0
2
4
6
Boiler Turbine Generator Balance ofPlant
Other
0%
20%
40%
60%
80%
100%
Unplanned Outages: Cause Categories
2004 2005
Fo
rced
Ou
tag
e F
acto
r %
58%
74%
87%94%
100%
0
2
4
6
Boiler Generator Turbine Balance ofPlant
Other
0%
20%
40%
60%
80%
100%
Ou
tag
es E
xpla
ined
%
Priority: BoilerPriority: Boiler
44
PrioritizingImprovement Opportunities
Boiler: Cause Categories (2005)
60%
76%
91%96%
100%
0
1
2
3
Waterwall Superheater Reheater Other boilertube leaks
Economizer
0%
20%
40%
60%
80%
100%
Stratification and prioritization within boiler Stratification and prioritization within boiler
Fo
rced
Ou
tag
e F
acto
r %
Ou
tag
es E
xpla
ined
%
45
Reducing Durationof Tube Leak Outages
2004 2005Q1-Q2
2006
Unplanned Outages Due to Waterwall Tube Leaks
Ho
urs
per
occ
urr
ence
Reduced the average time of outage by 35%
Reducing the variation (increase predictability) of time per occurrence
Reduced the average time of outage by 35%
Reducing the variation (increase predictability) of time per occurrence
Average return time
35%
Occurrences
Q3
2006
46
Sustaining the Gains
Depth and breadth of leadership and employees Fact-based decision-making culture Robust performance management system End-to-end process management Persistent focus on continuous improvement
High performance, top performing utility Predictable upper quartile performance High performance, top performing utility Predictable upper quartile performance
Allegheny Energy