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| AYE > SEC Filings for AYE > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
The following discussion and analysis should be read in conjunction with the Financial Statements and Notes to Financial Statements included in this report, as well as the Financial Statements and Supplementary Data and Management's Discussion and Analysis of Financial Condition and Results of Operations included in Allegheny's Annual Report on Form 10-K for the year ended December 31, 2008 (the "2008 Annual Report on Form 10-K").
Forward-Looking Statements
In addition to historical information, this report 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:
• regulatory matters, including but not limited to environmental regulation, state rate regulation, and the status of retail generation service supply competition in states served by the Distribution Companies;
• financing plans;
• market demand and prices for energy and capacity;
• the cost and availability of raw materials, including coal, and Allegheny's ability to enter into and enforce long-term fuel purchase agreements;
• 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;
• changes in technology and their effects on the competitiveness of Allegheny's generation facilities;
• work stoppages by Allegheny's unionized employees; and
• capacity purchase commitments.
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 differ materially 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:
• the results of regulatory proceedings, including proceedings related to rates;
• plant performance and unplanned outages;
• volatility and changes in the price and demand for energy and capacity and changes in the value of financial transmission rights ("FTRs");
• volatility and changes in the price of coal, natural gas and other energy-related commodities and Allegheny's ability to enter into and enforce supplier performance under long-term fuel purchase agreements;
• changes in the weather and other natural phenomena;
• changes in market rules, including changes to the participant rules and tariffs for PJM Interconnection, L.L.C. ("PJM");
• the loss of any significant customers or suppliers;
• changes in customer switching behavior and their resulting effects on existing and future PLR load requirements;
• dependence on other electric transmission and gas transportation systems and their constraints on availability;
• environmental regulations;
• changes in other laws and regulations applicable to Allegheny, its markets or its activities;
• changes in the underlying inputs and assumptions, including market conditions, used to estimate the fair values of commodity contracts;
• complications or other factors that make it difficult or impossible to obtain necessary lender consents or regulatory authorizations on a timely basis;
• changes in access to capital markets, the availability of credit and actions of rating agencies;
• inflationary and deflationary trends and interest rate trends;
• the effect of accounting pronouncements issued periodically by accounting standard-setting bodies;
• entry into, any failure to consummate, or any delay in the consummation of, contemplated asset sales or other strategic transactions;
• general economic and business conditions; and
• other risks, including the effects of global instability, terrorism and war.
A detailed discussion of certain factors affecting Allegheny's risk profile is provided under Item 1A, "Risk Factors," in the 2008 Annual Report on Form 10-K.
Overview
Allegheny is an integrated energy business that owns and operates electric generation facilities and delivers electric services to customers in Pennsylvania, West Virginia, Maryland and Virginia. Allegheny operates its business primarily through AE's various directly and indirectly owned subsidiaries. These operations are aligned in two operating segments, the Delivery and Services segment and the Generation and Marketing segment. The information for the Delivery and Services segment includes the operations of the Virginia distribution business. Revenues of the Virginia distribution business were approximately $149 million for the six months ended June 30, 2009. See Note 3, "Assets Held for Sale," for additional information.
RESULTS OF OPERATIONS
Income Summary
Three Months Ended Three Months Ended
June 30, 2009 June 30, 2008
Delivery Generation Delivery Generation
and and and and
(In millions) Services Marketing Eliminations Total Services Marketing Eliminations Total
Operating revenues $ 741.3 $ 494.5 $ (421.1 ) $ 814.7 $ 672.3 $ 684.5 $ (403.3 ) $ 953.5
Fuel - 216.8 - 216.8 - 245.3 - 245.3
Purchased power and transmission 500.5 30.9 (419.2 ) 112.2 474.1 24.4 (401.3 ) 97.2
Deferred energy costs, net 3.1 (10.7 ) - (7.6 ) 3.3 (2.1 ) - 1.2
Operations and maintenance 90.7 111.7 (1.9 ) 200.5 91.8 100.1 (2.0 ) 189.9
Depreciation and amortization 38.5 28.7 - 67.2 40.7 28.1 - 68.8
Taxes other than income taxes 35.7 10.8 - 46.5 34.3 18.5 - 52.8
Total operating expenses 668.5 388.2 (421.1 ) 635.6 644.2 414.3 (403.3 ) 655.2
Operating income 72.8 106.3 - 179.1 28.1 270.2 - 298.3
Other income (expense), net 1.2 0.6 - 1.8 3.6 1.9 (0.8 ) 4.7
Interest expense 26.3 32.8 - 59.1 23.9 35.6 (0.8 ) 58.7
Income before income taxes 47.7 74.1 - 121.8 7.8 236.5 - 244.3
Income tax expense 19.8 29.1 - 48.9 2.9 86.9 - 89.8
Net income 27.9 45.0 - 72.9 4.9 149.6 - 154.5
Less: net income attributable to
noncontrolling interest (0.3 ) - - (0.3 ) (0.4 ) - - (0.4 )
Net income attributable to Allegheny
Energy, Inc. $ 27.6 $ 45.0 $ - $ 72.6 $ 4.5 $ 149.6 $ - $ 154.1
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Six Months Ended Six Months Ended
June 30, 2009 June 30, 2008
Delivery Generation Delivery Generation
and and and and
(In millions) Services Marketing Eliminations Total Services Marketing Eliminations Total
Operating revenues $ 1,634.0 $ 1,081.5 $ (943.6 ) $ 1,771.9 $ 1,446.8 $ 1,252.8 $ (871.0 ) $ 1,828.6
Fuel - 475.7 - 475.7 - 495.1 - 495.1
Purchased power and transmission 1,126.0 60.0 (939.9 ) 246.1 1,009.6 51.9 (866.9 ) 194.6
Deferred energy costs, net (0.9 ) (23.7 ) - (24.6 ) 6.4 (15.7 ) - (9.3 )
Operations and maintenance 177.8 193.7 (3.7 ) 367.8 183.7 179.0 (4.1 ) 358.6
Depreciation and amortization 78.4 57.3 - 135.7 83.4 55.7 - 139.1
Taxes other than income taxes 73.7 28.6 - 102.3 70.4 34.9 - 105.3
Total operating expenses 1,455.0 791.6 (943.6 ) 1,303.0 1,353.5 800.9 (871.0 ) 1,283.4
Operating income 179.0 289.9 - 468.9 93.3 451.9 - 545.2
Other income (expense), net 2.6 1.6 - 4.2 7.0 6.1 (2.2 ) 10.9
Interest expense 52.7 63.6 - 116.3 45.8 73.5 (2.2 ) 117.1
Income before income taxes 128.9 227.9 - 356.8 54.5 384.5 - 439.0
Income tax expense 54.6 95.2 - 149.8 15.7 132.4 - 148.1
Net income 74.3 132.7 - 207.0 38.8 252.1 - 290.9
Less: net income attributable to
noncontrolling interest (0.5 ) - - (0.5 ) (0.6 ) - - (0.6 )
Net income attributable to
Allegheny Energy, Inc. $ 73.8 $ 132.7 $ - $ 206.5 $ 38.2 $ 252.1 $ - $ 290.3
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CONSOLIDATED RESULTS
This section is an overview of AE's consolidated results of operations, which are discussed in greater detail by segment under the heading "Allegheny Energy, Inc.-Discussion of Segment Results of Operations."
The following tables reconcile income before income taxes for the three and six months ended June 30, 2008 to income before income taxes for the three and six months ended June 30, 2009.
(In millions) Income before income taxes for the three months ended June 30, 2008 $ 244.3 Decrease in operating revenues (138.8 ) Decreases (increases) in operating expenses: Fuel 28.5 Purchased power and transmission (15.0 ) Deferred energy costs, net 8.8 Operations and maintenance (10.6 ) Taxes other than income taxes 6.3 Other operating expenses 1.6 Operating expenses 19.6 Decrease in other income (expense), net (2.9 ) Increase in interest expense (0.4 ) Income before income taxes for the three months ended June 30, 2009 $ 121.8 |
(In millions) Income before income taxes for the six months ended June 30, 2008 $ 439.0 Decrease in operating revenues (56.7 ) Decreases (increases) in operating expenses: Fuel 19.4 Purchased power and transmission (51.5 ) Deferred energy costs, net 15.3 Operations and maintenance (9.2 ) Other operating expenses 6.4 Operating expenses (19.6 ) Decrease in other income (expense), net (6.7 ) Decrease in interest expense 0.8 Income before income taxes for the six months ended June 30, 2009 $ 356.8 |
Operating Revenues
Operating revenues decreased $138.8 million for the three months ended June 30, 2009 compared to the three months ended June 30, 2008, primarily due to:
• a $190.3 million decrease in unrealized gains relating to FTRs,
• a $93.5 million decrease due to a 21.7% decrease in total MWhs generated that resulted from lower plant availability and less demand,
• a $12.0 million decrease relating to lower prices for power, including marketing, hedging and trading activities and
• an $11.3 million decrease due to the expiration of an earnings benefit related to stranded cost recovery in Pennsylvania.
These operating revenue decreases were partially offset by:
• a $90.3 million increase resulting from increased rates charged to Pennsylvania customers, a rate settlement in Virginia and market-based generation pricing for Maryland residential customers,
• a $56.9 million increase resulting from decreased unrealized losses on economic power hedges that did not qualify for hedge accounting,
• a $22.9 million increase primarily due to increased sales of power to third parties and
• a $10.7 million increase resulting from decreased unrealized losses related to pipeline capacity economic hedges that did not qualify for hedge accounting.
Operating revenues decreased $56.7 million for the six months ended June 30, 2009 compared to the six months ended June 30, 2008, primarily due to:
• a $186.1 million decrease due to a 20.5% decrease in total MWhs generated that resulted from lower plant availability and less demand,
• a $173.5 million decrease in unrealized gains relating to FTRs and
• a $32.7 million decrease due to the expiration of an earnings benefit related to stranded cost recovery in Pennsylvania.
These operating revenue decreases were partially offset by:
• a $190.2 million increase resulting from increased rates charged to Pennsylvania customers, a rate settlement in Virginia and market-based generation pricing for Maryland residential customers,
• a $57.7 million increase primarily due to increased sales of power to third parties,
• a $54.7 million increase resulting from decreased unrealized losses on economic power hedges that did not qualify for hedge accounting and
• a $31.0 million increase resulting from decreased unrealized losses related to pipeline capacity economic hedges that did not qualify for hedge accounting.
See "Regulatory Matters" for additional rate information and Note 8, "Fair Value Measurements, Derivative Instruments and Hedging Activities," to the Consolidated Financial Statements for information regarding the recognition of unrealized gains and losses on FTRs and power sale hedges.
Operating Expenses
Fuel expense decreased $28.5 million and $19.4 million for the three and six months ended June 30, 2009, respectively, compared to the three and six months ended June 30, 2008, primarily due to decreased coal and natural gas expenses, partially offset by increased fuel handling and other fuel expenses as discussed in greater detail in "Discussion of Segment Results of Operations - Generation and Marketing Segment Results."
Purchased power and transmission expense increased $15.0 million and $51.5 million for the three and six months ended June 30, 2009, respectively, compared to the three and six months ended June 30, 2008, primarily due to increased purchases from third parties to serve customer load.
Deferred energy costs, net decreased $8.8 million and $15.3 million for the three and six months ended June 30, 2009, respectively, compared to the three and six months ended June 30, 2008, primarily due to the under-recovery of net costs related to the AES Warrior Run PURPA generation facility and the under-recovery of fuel and purchased power costs in West Virginia, which are permitted to be recovered in rates. See "Discussion of Segment Results of Operations" for additional information regarding changes in deferred energy costs, net.
Operations and maintenance expense increased $10.6 million for the three months ended June 30, 2009 compared to the three months ended June 30, 2008, primarily due to a $5.6 million increase in contract work resulting from the timing of plant maintenance and increased compensation and benefits expense.
Operations and maintenance expense increased $9.2 million for the six months ended June 30, 2009 compared to the six months ended June 30, 2008, primarily due to a $10.9 million increase in contract work resulting from the timing of plant maintenance and a $5.4 million increase in compensation and benefits expense, partially offset by decreased insurance expense related to reduced claims and cost control efforts.
Taxes other than income taxes decreased $6.3 million for the three months ended June 30, 2009 compared to the three months ended June 30, 2008, primarily due to tax credits recorded during 2009 related to the Fort Martin Scrubbers and favorable tax settlements.
Other Income (Expense), net
Other income (expense), net decreased $2.9 million for the three months ended June 30, 2009 compared to the three months ended June 30, 2008, primarily due to lower interest income resulting from decreased average investments at lower rates.
Other income (expense), net decreased $6.7 million for the six months ended June 30, 2009 compared to the six months ended June 30, 2008, primarily due to lower interest income resulting from decreased average investments at lower rates and cash received from a former trading executive during the first quarter of 2008.
Income Tax Expense
See Note 5, "Income Taxes," to the Consolidated Financial Statements for a reconciliation of income tax expense to income tax expense calculated at the federal statutory rate of 35%.
Key Indicators and Performance Factors-Delivery and Services Segment
Allegheny reviews the financial and operating performance of its Delivery and Services segment using a number of indicators and performance statistics, including the following:
Revenue per megawatt-hour ("MWh") sold. This measure is calculated by dividing total revenues from retail sales of electricity by retail electricity sales. Revenue per MWh sold during the three and six months ended June 30, 2009 and 2008 was as follows:
Three Months Ended Six Months Ended June 30, June 30, 2009 2008 2009 2008 Revenue per MWh sold $ 71.61 $ 59.74 $ 72.43 $ 60.85
Operations and maintenance costs ("O&M"). Management monitors and manages O&M in absolute terms, as well as in relation to total MWhs sold. This measure is calculated by dividing total O&M, excluding O&M related to transmission expansion, by retail electricity MWhs delivered. O&M per MWh sold during the three and six months ended June 30, 2009 and 2008 was as follows:
Three Months Ended Six Months Ended June 30, June 30, 2009 2008 2009 2008 O&M per MWh delivered $ 8.96 $ 8.47 $ 8.06 $ 8.05
Capital expenditures. Management prioritizes and manages capital expenditures to meet operational needs and regulatory requirements within available cash flow constraints.
Retail electricity sales. The following table provides retail electricity sales information:
Three Months Ended June 30, Six Months Ended June 30,
Normal 2009 2008 Change Normal 2009 2008 Change
Retail electricity sales
(million kWhs) N/A 9,725 10,478 (7.2 )% N/A 21,256 22,274 (4.6 )%
HDD (a) 639 529 541 (2.2 )% 3,439 3,289 3,255 1.0 %
CDD (a) 214 262 230 13.9 % 215 264 230 14.8 %
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(a) Heating degree-days ("HDD") and cooling degree-days ("CDD"). The operations of the Distribution Companies are weather sensitive. Weather conditions directly influence the volume of electricity delivered by the Distribution Companies, representing one of several factors that impact the volume of electricity delivered. Accordingly, deviations in weather from normal levels can affect Allegheny's financial performance. Degree-day data is used to estimate amounts of energy required to maintain comfortable indoor temperature levels based on each day's average temperature. HDD is the measure of the variation in the weather based on the extent to which the average daily temperature falls below 65° Fahrenheit, and CDD is the measure of the variation in the weather based on the extent to which the average daily temperature rises above 65° Fahrenheit. Each degree of temperature above 65° Fahrenheit is counted as one cooling degree-day, and each degree of temperature below 65° Fahrenheit is counted as one heating degree-day. HDD and CDD are most likely to impact the usage of Allegheny's residential and commercial customers. Industrial customers are less weather sensitive.
DISCUSSION OF SEGMENT RESULTS OF OPERATIONS
DELIVERY AND SERVICES
Operating Revenues
Operating revenues were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 2009 2008 2009 2008
Retail electric:
Generation $ 511.0 $ 432.2 $ 1,126.1 $ 933.1
Transmission 36.1 38.2 79.7 82.7
Distribution 149.3 155.6 333.8 339.6
Total retail electric 696.4 626.0 1,539.6 1,355.4
Transmission services and bulk power 31.3 35.3 68.2 70.0
Other affiliated and nonaffiliated energy
services 13.6 11.0 26.2 21.4
Total operating revenues $ 741.3 $ 672.3 $ 1,634.0 $ 1,446.8
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Total operating revenues increased $69.0 million for the three months ended June 30, 2009 compared to the three months ended June 30, 2008, primarily due to a $70.4 million increase in retail revenues, which resulted from:
• a $42.1 million increase resulting from higher generation rates charged to Pennsylvania customers,
• a $36.6 million increase primarily due to an ENEC-related rate increase in West Virginia that went into effect on January 1, 2009,
• a $30.8 million increase due to higher rates under a rate settlement agreement in Virginia and
• a $21.9 million increase in Maryland generation revenues primarily resulting from market-based generation pricing for residential customers effective January 1, 2009.
These operating revenue increases were partially offset by:
• a $34.8 million decrease in generation revenue related to customer consumption and
• an $11.3 million decrease due to the expiration of an earnings benefit related to stranded cost recovery in Pennsylvania.
Total operating revenues increased $187.2 million for the six months ended June 30, 2009 compared to the six months ended June 30, 2008, primarily due to a $184.2 million increase in retail revenues, which resulted from:
• an $87.0 million increase resulting from higher generation rates charged to Pennsylvania customers,
• a $76.2 million increase primarily due to an ENEC-related rate increase in West Virginia that went into effect on January 1, 2009,
. . .
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