investor presentation august 16-18, 2006
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Investor Presentation August 16-18, 2006. Allegheny Energy. Forward-Looking Statements. - PowerPoint PPT PresentationTRANSCRIPT
Allegheny Energy
Investor Presentation
August 16-18, 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 and power supply contracts; results of litigation; results of operations; internal controls and procedures; capital expenditures; status and condition of plants and equipment; 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: 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 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 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 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 MeasuresThis 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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Allegheny Energy
AlleghenyEnergy
Generation
Coal-fired, PJM48.1 million MWH*
Delivery
1.5 million customers,PA-MD-WV-VA
* 12 months ended December 31, 2005
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Turnaround
• Restructured andreduced debt
• Strengthened financial reporting, internal controls
• Refocused on core business
• Launched high performance organization
• Returned to profitability
Turnaround
• Restructured andreduced debt
• Strengthened financial reporting, internal controls
• Refocused on core business
• Launched high performance organization
• Returned to profitability
Entering a Growth Phase
GrowthGrowth
6
Earnings Growth Drivers
Increase Pennsylvania POLR rates
Transition to market-based rates
Improve plant availability
Decrease O&M expense
Reduce interest expense
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$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
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$25
$30
$35
$40
$45
$50
$55
$60
$65
$70
$75
2005 2006 2007 2008
Growth Driver:Transition to Market-Based Rates
Market: Current*
POLR: Maryland, Ohio
Generation Rates$ per MWH
Assumption for 2006 Outlook
* As of July 10, 2006
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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
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Other Contracts
9%
Excess6%
POLR85%
Other Contracts
1%
Excess32%
POLR67%
Decreasing POLR Obligation
% of Total Projected Output(existing contracts only)
2006 2010
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83%
76%
82%
78%
83%
91%
83%79%
2002 2003 2004 2005
Growth Driver: Improve Plant Availability
2008Goal
Proforma*
Actual
* Excludes extended unplanned outages at Hatfield, Pleasants
Supercritical units
Each 1% improvement provides benefit >$10 million
2006Goal
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Achieving 91% Availability by 2008
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
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Power Plant Investment
$100 $105
$192
$165
2002 2003 2004 2005
Maintenance Spending(O&M and capital; $ millions)
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Coal Supply Under Contract
98%
85%
70%
2006 2007 2008
% of Total Requirements
100% 100%95%
2006 2007 2008
% of POLR Requirements
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Coal Costs and Usage
$35$37 $37 $38
2005 2006 2007 2008
Average Delivered Cost/Ton(Existing contracts only)
2005: 18 million
2006: >19 million
Usage(Tons)
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$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)
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Growth Driver:Reduce Interest Expense
Reduced debt by $2.1 billion (Dec. 1, 2003 – June 30, 2006)
Refinanced $1.5 billion in 2006
Projected reduction in interest expense: $65 million in 2006
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2006 Priorities
Strengthen financial condition; investment grade by year-end 2007
Strong earnings growth
Improve environmental performance
Expand transmission system
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Priority: Environmental Performance
ACTION STATUS
Low-sulfur PRB coal Began in 3rd quarter 2005
Close Pleasants bypass By early 2008
Fort Martin scrubbers (West Virginia)
Received regulatory approvals
Funded by securitized surcharge
In service 2009
Hatfield scrubbers (Pennsylvania)
Signed contracts In service 2009
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Exposure toSO2 Allowance Market
SO2 Emissionsin Excess of Allowances
(tons; estimated as of July 28, 2006)
* Approximately half of 2008 short position is at Allegheny Supply and half is at Monongahela Power.
2006 -0-
2007 0 - 40,000
2008 40,000 - 80,000*
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Priority: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
Other approvals needed
State regulatory commissions FERC (rate filing)
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Approved Transmission Line
MMtt.. SSttoorrmm
MMeeaaddooww BBrrooookk
LLoouuddoouunn
PPrreexxyy
550022 JJuunnccttiioonn
Existing Substation
New Substation
Existing Lines
New 500 kV Line
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Requested $100 million net increase
Fuel, purchased power: $126 million increase Base rates: $26 million decrease 10% net increase (residential)
Requested reinstatement of fuel cost adjustment
Proposed ROE: 11.75%
Probable effective date: late May 2007
West Virginia Rate Case Filing
Financial Review
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Improving Financial Results
As Reported
As AdjustedEarnings per Share
($2.80)
($1.83)
$0.40$0.86
$0.47$0.94
($0.37)
$0.90
2003 2004 2005 20066 mos.
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Increasing Free Cash Flow ($ millions)
Cash from Operations Free Cash Flow(adjusted cash from operations
net of capital expenditures)$507$486
$563*
$347*
2004 2005
$81
$257
>$200**
2004 2005 2006
As reported As adjusted
* 2004 excludes OVEC proceeds and California contract escrow release. 2005 excludes costs for St. Joe’s notes redemption and convertible trust preferred securities tender offer.
** Assumes $115 million of spending for Hatfield scrubbers.
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Strengthening the Balance Sheet
Debt Outstanding($ billions)
Equity Ratio
$5.7
$4.9
$4.1 $3.9
2003 2004 2005 2006 Q2
21% 21%
29%32%
2003 2004 2005 2006 Q2
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Improving Credit Statistics
8.5
6.1
<3.54.3
3.8
Dec-03 Dec-04 Dec-05 Jun-06 Target
Debt/EBITDA* EBITDA/Interest*
* Based on adjusted EBITDA and adjusted interest for 12-month periods. Excludes securitized debt and interest.
1.6
2.2
>4.0
3.0
3.5
Dec-03 Dec-04 Dec-05 Jun-06 Target
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2006 Earnings Growth:Key Drivers
CONTRIBUTION TO PRE-TAX INCOME*($ millions; estimates)
Pennsylvania rates $55Maryland contract expiration 55Ohio territory sale 45Market prices positive/negativeDecember 2005 adjustment 27Plant availability no impactTransmission contract (30)Higher coal costs (80)
SO2 allowance costs no impact
Lower O&M expense 50Lower depreciation 30Lower interest expense 65Other factors positive/negative
* 2006 vs. 2005 as adjusted
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Supplemental Information
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Earnings (Loss) Per Share
As Reported As Adjusted
2003: Q1 $ (0.46) $ (0.32)Q2 (1.82) (0.23)Q3 (0.40) 0.11Q4 (0.11) (0.14)
Year (2.80) (0.37)
2004: Q1 $ 0.25 $ (0.03)Q2 (0.31) (0.21)Q3 (2.40) 0.37Q4 0.48 0.22
Year (1.83) 0.47
2005: Q1 $ 0.29 $ 0.39Q2 (0.12) 0.08Q3 0.21 0.45Q4 0.02 0.02
Year 0.40 0.94
2006: Q1 $ 0.67 $ 0.68Q2 0.18 0.22
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EBITDA$ millions As Reported As Adjusted
2003: Q1 $ 77.6 $ 92.9Q2 (203.5) 150.1Q3 117.3 225.3Q4 197.4 185.6
Year 156.8 634.9
2004: Q1 $ 247.8 $ 175.5Q2 110.3 122.0Q3 243.2 243.2Q4 312.7 221.8
Year 914.0 762.5
2005: Q1 $ 261.3 $ 261.3Q2 210.6 192.7Q3 254.7 274.2Q4 162.1 162.1
Year 888.6 890.2
2006: Q1 $ 322.1 $ 322.1Q2 193.6 193.6
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$0
$100
$200
$300
$400
$500
7/1/2
003
9/1/2
003
11/1
/2003
1/1/2
004
3/1/2
004
5/1/2
004
7/1/2
004
9/1/2
004
11/1
/2004
1/1/2
005
3/1/2
005
5/1/2
005
7/1/2
005
9/1/2
005
11/1
/2005
1/1/2
006
3/1/2
006
5/1/2
006
7/1/2
006
AYE Dow Electric Utilities S&P 500
731/
2006
Stock Price Performance$100 Invested on July 1, 2003 AYE: $495
Dow Electrics: $155 S&P: $130
The Road to Growth
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Enhance Operating Performance
FinancialPerformance
EngagedEmployees
EnvironmentalStewardship
ShareholderValue
OperationalExcellence
VISION:
“To Be a Top Performing Utility by Year-End 2007”
CustomerSatisfaction
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Generation and Marketing:Overview
Capacity*
Coal96%
Gas1%
Hydro3%
* Excludes Gleason peaking unit (held for sale). Output for year ended December 31, 2005.
Capacity: over 9,600 MW* Primarily base load coal-fired plants Located in PJM (13 states)
Hydro11%
Gas9%
Coal79%
MWH Output*
Oil1%
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Low-Cost Generation FleetAllegheny has an advantaged dispatch in PJM
PJM Dispatch Cost (Ozone Season): $/MWh
Allegheny Supercritical Coal UnitsDispatch Cost Allegheny – Other Units
Assumptions: natural gas delivered at approximately $8.00/mmBTU; coal at approximately $2.75/mmBTU; SO 2 at $670/ton; NOx at $1,750/ton.
$0
$20
$40
$60
$80
$100
$120
$140
$160
0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000
Capacity in MW
Hydro Nuclear
Coal
Oil & Gas
2006 Average
2006 Peak
Allegheny58 MW
Allegheny7,604 MW
Allegheny973 MW
Pumped StorageAllegheny 1,035
MW
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World’s largest competitive power market
Over 51 million people 700 million MWH of energy annually 163,500 MW of capacity
Nation’s most liquid spot power market
Model for FERC’s proposed Standard Market Design
Provides transactional flexibility: contracts not required
Generation and Marketing:PJM -- An Attractive Market
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Only 15% of Coal Delivered by Rail
Note: Some barge coal originates on short line railroads.
Rail15%
Barge49%
Conveyor15%
Truck21%
Coal Delivery Methods
2006
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Delivery and Services:Overview
In 4 states (PA, WV, MD, VA)
1.5 million electric customers Load growth: 2.0% compounded
annually (1995-2005; retail)
Allegheny Power
West PennPower
Monongahela Power
Potomac Edison
VIRGINIA
CHARLESTON
OHIO
HARRISBURG
MARYLAND
KENTUCKY
PENNSYLVANIA
CLEVELAND
BALTIMORE
PITTSBURGH
WASHINGTON, DC
WEST
VIRGINIA
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PA43%
WV29%
MD20%
VA6%
OH2%
Delivery and Services: Retail Revenue Mix, 2005
By State By Customer Class
Residential43%
Industrial31%
Commercial25%
Other1%
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7.10 7.01 6.89 6.82
11.11
6.27
7.498.38
0.00
2.00
4.00
6.00
8.00
10.00
12.00
Pennsylvania West Virginia Maryland Virginia
Allegheny Power State Average
Delivery and Services: Competitive Rates
National Average = 10.62 ¢/kWh
Residential Rates¢/kWh as of January 1, 2006
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2006 2008 2009 2010
T&D
Generation
T&DGen. - Res.
Through 20072
Gen. - Com. & Ind.
T&DandGeneration
RegulatedCapped through 2008 Market-based
Market-based
RegulatedDistribution capped through 2007
Increases through 20101
2007
Through 20102
State
WV
T&DandGeneration
Regulated
PA
MD
VA
1 Generation rate caps include rate increases in each year, 2006-2010. 2 One-time T&D increase can be requested through 2007. After 2007, can
request recovery of purchased power and annual incremental T&D reliability and environmental costs, and one additional T&D cost increase.
Regulatory Timeline