4 th quarter financial results
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4 th Quarter Financial Results. February 10, 2006. Forward-Looking Statements.

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4 th Quarter Financial Results

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4 th quarter financial results

4th Quarter Financial Results

February 10, 2006


4 th quarter financial results

Forward-Looking Statements

In 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.


4 th quarter financial results

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.


4 th quarter financial results

Paul Evanson

Chairman, President and

Chief Executive Officer


4 th quarter financial results

Fourth Quarter Results

Earnings per Share

20052004

As reported$0.02$0.48

As adjusted0.020.22


Events in early december

Four large units off line

Heavy POLR demand

Very high PJM prices

Adverse impact: $0.10 per share

Events in Early December


4 th quarter financial results

Availability Improvement Program On Track

(supercritical units)

Proforma*

Actual

2008

Goal

2005

* Excludes extended unplanned outages at Hatfield, Pleasants


Power plant investment

Power Plant Investment

Maintenance Spending

($ millions)


4 th quarter financial results

Availability Improvement Program On Track

  • Over 30 improvement project teams

  • New vice president-operations, regional plant director

  • Expect lower unplanned outage rate in 2006


4 th quarter financial results

Achieving 91% Availability by 2008

Outage Rate

(supercritical units)

24%

22%

18%

17%

17%

15%

9%

Reduce planned outages

Reduce unplanned outages


4 th quarter financial results

2005 Accomplishments:Earnings Growth

Earnings per Share

20052004

As reported$0.40($1.83)

As adjusted0.940.47


4 th quarter financial results

2005 Accomplishments: Completed Asset Sales

  • West Virginia gas assets

  • Wheatland generating facility

  • Ohio service territory


4 th quarter financial results

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


4 th quarter financial results

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


4 th quarter financial results

2005 Accomplishments:Improved Service Reliability

Service Unavailability

(average minutes without power)


4 th quarter financial results

2005 Accomplishments:Managed Transition to Market

  • Pennsylvania rate cap extensions/increases approved

  • Won supply contracts in Pennsylvania, Maryland

  • Contracted 95% of 2006 generation


4 th quarter financial results

2005 Accomplishments:Contracted Coal Supplies

  • Contracted POLR requirements through 2008

  • Announced development of coal reserves


4 th quarter financial results

2005 Accomplishments:Environmental Stewardship

  • West Virginia securitization legislation approved

  • Expect PSC decision by early April


2006 priorities

Strong earnings growth

Environmental stewardship

2006 Priorities


2006 priorities1

Strong earnings growth

Environmental stewardship

Transmission investments

Strengthen financial condition; investment grade by year-end 2007

2006 Priorities


4 th quarter financial results

Jeffrey Serkes

Senior Vice President and

Chief Financial Officer


Financial results 3 months ended december 31

Financial Results3 Months Ended December 31

($ millions except EPS)


Financial results 3 months ended december 311

Financial Results3 Months Ended December 31

($ millions except EPS)


Adjustments 3 months ended december 31

Adjustments3 Months Ended December 31

($ millions, pre-tax)

2005 2004

OVEC gain---($95)

Financing costs---9

Severance---4


Adjusted income from continuing operations 3 months ended december 31

Adjusted Income FromContinuing Operations3 Months Ended December 31

$ millions

Diluted EPS


4 th quarter financial results

EBITDA From

Continuing Operations3 Months Ended December 31

($ millions)

As reported

As adjusted


4 th quarter financial results

EBITDA From

Continuing OperationsYear Ended December 31

($ millions)

As reported

As adjusted


Plant outage days december 1 16

Plant Outage DaysDecember 1-16


Pjm prices in 2005

PJM Prices in 2005

$ per MWH*

Outages at 4 units

* Daily average, round-the-clock, APS zone


Polr demand exceeded plant output

POLR Demand Exceeded Plant Output

Generation Shortfall and PJM Prices

December 1-16, 2005

PJM Price: Day-ahead APS Zone


4 th quarter financial results

($ millions)

Better

2005 2004(Worse)

Total operating revenues $724 $688$36

Financial Results

3 Months Ended December 31


Key drivers of revenue increase 3 months ended december 31

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 output18


4 th quarter financial results

2005

2004

Plant Output Up 2.6%

Despite Outages

(MWH millions)


4 th quarter financial results

2005

2004

Utility MWH Sales Up 2.6%

from 4th Quarter 2004

(MWH millions)


Key drivers of revenue increase 3 months ended december 311

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 output18

Customer growth9

PJM purchases, higher market prices(50)

All other (2)

TOTAL INCREASE IN REVENUES$36


4 th quarter financial results

($ millions)

Better

2005 2004(Worse)

Total operating revenues$724$688$36

Operating expenses650457(193)

Operating income$ 74$231($157)

Key factors - operating expenses:

OVEC gain($95)

Fuel, purchased power, deferred energy(80)

O&M(17)

Financial Results

3 Months Ended December 31


4 th quarter financial results

Operating Expense3 Months Ended December 31

($ millions)

Better

2005 2004(Worse)

Fuel and deferred

energy$188$147($41)

Key factors:

  • Higher coal costs($29)

  • Higher gas costs(6)


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

Increased Coal Costs


Coal plant output 3 months ended december 31

Coal Plant Output3 Months ended December 31

(MWH millions)


4 th quarter financial results

Operating Expense3 Months Ended December 31

($ millions)

Better

2005 2004(Worse)

Fuel and deferred

energy$188$147($41)

Purchased power12182(39)

TOTAL$309$229($80)

Key factors:

  • Higher coal costs($29)

  • Higher gas costs(6)

  • Purchased power, MD and OH(35)


4 th quarter financial results

O&M Expense

4th Quarter 2005

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


4 th quarter financial results

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 amortization7877(1)

Taxes other than income taxes5251(1)

Ohio/OVEC sales (1) (95) (94)

TOTAL OPERATING EXPENSE$650$457($193)


4 th quarter financial results

Reduced Interest Expense 3 Months Ended December 31

($ millions)

Better

2005 2004(Worse)

Operating income$74$231($157)

Interest expense:

As reported71100

Financing costs---(9)

As adjusted$71$91$20

Key factors – interest expense:

  • Lower debt balance

  • Lower rates


4 th quarter financial results

Strengthening the Balance Sheet

Debt Outstanding

($ billions; year end)

Equity Ratio

(year end)


Improving credit statistics

Improving Credit Statistics

Debt/EBITDA*

EBITDA/Interest*

9.0

>4.0

6.5

2.8

4.6

2.0

<3.5

1.5

Dec.

Dec.

Dec.

Target

Dec.

Dec.

Dec.

Target

2003

2004

2005

2003

2004

2005

* 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.


Income taxes q4 2005

Effective tax rate = 77%

Includes $7 million charge

Charge reduced EPS by $0.04

Income Taxes, Q4 2005


4 th quarter financial results

Income, Continuing Operations 3 Months Ended December 31

Better

2005 2004(Worse)

As reported:

- $ millions$3$81($78)

- Per share0.020.53(0.51)

As adjusted: per share0.020.22(0.20)


4 th quarter financial results

Cash FlowPeriods ending December 31, 2005

($ millions)

3 Months12 Months

Net cash from

operations:

As reported$153$486

As 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.


4 th quarter financial results

Increasing Free Cash Flow ($ millions)

Adjusted Cash from Operations

net of Capital Expenditures


2006 earnings growth key drivers

CONTRIBUTION TO PRE-TAX INCOME

($ millions; estimates*)

Pennsylvania rates$55

Maryland transition to market55

Ohio territory sale35

Market pricespositive/negative

December 2005 adjustment27

Plant availabilityno 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 factorspositive/negative

* 2006 vs. 2005 as adjusted

2006 Earnings Growth:Key Drivers


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