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| AYE > SEC Filings for AYE > Form 10-Q on 6-Nov-2008 | All Recent SEC Filings |
6-Nov-2008
Quarterly Report
• 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 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 industry capacity, development and other activities by Allegheny's competitors;
• changes in market rules, including changes to PJM's participant rules and tariffs;
• 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 interest rate trends;
• the effect of accounting pronouncements issued periodically by accounting standard-setting bodies and accounting issues facing Allegheny;
• 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 the caption Item 1A, "Risk Factors," in the 2007 Annual Report
on Form 10-K. Additionally, certain risk factors with respect to which material
changes have occurred since their disclosure in the 2007 Annual Report on Form
10-K are discussed under Item 1A, "Risk Factors," below.
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.
Additional information regarding the composition and activities of these
segments is included in the 2007 Annual Report on Form 10-K.
Key Indicators and Performance Factors
The Delivery and Services Segment
Allegheny monitors 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 total MWhs sold to
retail customers. Revenue per MWh sold during the three and nine months ended
September 30, 2008 and 2007 was as follows:
Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 Revenue per MWh sold $ 60.09 $ 59.56 $ 60.60 $ 59.80
Operations and maintenance costs ("O&M"). Management closely monitors and manages O&M in absolute terms, as well as in relation to total MWhs sold. O&M per MWh sold during the three and nine months ended September 30, 2008 and 2007 was as follows:
Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 O&M per MWh sold $ 7.78 $ 7.68 $ 8.10 $ 7.65
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 September 30, Nine Months Ended September 30,
Normal 2008 2007 Change Normal 2008 2007 Change
Delivery and
Services:
Retail electricity
sales (million
kWhs) N/A 10,749 11,164 (3.7 )% N/A 33,023 33,540 (1.5 )%
HDD (a) 95 37 60 (38.3 )% 3,570 3,292 3,397 (3.1 )%
CDD (a) 585 537 686 (21.7 )% 798 767 968 (20.8 )%
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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.
The Generation and Marketing Segment
Allegheny monitors the financial and operating performance of its Generation
and Marketing segment using a number of indicators and performance statistics,
including the following:
kWhs generated. This is a measure of the total physical quantity of
electricity generated and is monitored at the individual generating unit level,
as well as by various unit groupings.
Equivalent Availability Factor ("EAF"). The EAF measures the percentage of
time that a given amount of MWs from a generation unit is available to generate
electricity if called upon in the marketplace. A unit's availability is commonly
less than 100%, primarily as a result of scheduled outages for planned
maintenance or unplanned outages and derates. The EAF is calculated based upon
availability data reported to NERC and PJM. Allegheny monitors the EAF by
individual unit, as well as by various unit groupings. One such grouping is all
"supercritical" units. A supercritical unit utilizes steam pressure in excess of
3,200 pounds per square inch, which enables these units to be larger and more
efficient than other generation units. Fort Martin, Harrison, Hatfield's Ferry
and Pleasants are supercritical generation facilities that have supercritical
units. These units generally operate at high capacity for extended periods of
time.
Station operations and maintenance costs ("Station O&M"). Station O&M
includes base, operations and special maintenance costs. Base and operations
costs consist of normal recurring expenses related to the on-going operation of
the generation facility. Special maintenance costs include costs associated with
outage-related maintenance and projects that relate to all of the generation
facilities.
kWhs generated and Station O&M. The following table shows kWhs generated,
excluding kWhs consumed by pumping at the Bath County, Virginia hydroelectric
station, EAFs and Station O&M related to the Generation and Marketing segment:
Three Months Ended Nine Months Ended
September 30, 2008 September 30, 2008
2008 2007 Change 2008 2007 Change
Supercritical Units:
kWhs generated (in
millions) 10,115 10,226 (1.1 )% 29,303 30,285 (3.2 )%
EAF 90.2 % 87.5 % 2.7 % 86.1 % 85.5 % 0.6 %
Station O&M (in
millions):
Base and operations $ 26.3 $ 23.5 11.9 % $ 81.0 $ 78.1 3.7 %
Special maintenance 8.4 14.9 (43.6 )% 43.6 57.0 (23.5 )%
Total Station O&M $ 34.7 $ 38.4 (9.6 )% $ 124.6 $ 135.1 (7.8 )%
All Generation Units:
kWhs generated (in
millions) 11,904 12,640 (5.8 )% 35,049 37,491 (6.5 )%
EAF 90.7 % 86.5 % 4.2 % 86.5 % 85.9 % 0.6 %
Station O&M (in
millions):
Base and operations $ 40.2 $ 36.7 9.5 % $ 123.8 $ 120.1 3.1 %
Special maintenance 9.8 16.5 (40.6 )% 57.1 65.8 (13.2 )%
Total Station O&M $ 50.0 $ 53.2 (6.0 )% $ 180.9 $ 185.9 (2.7 )%
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RESULTS OF OPERATIONS
Income Summary
Three Months Ended Three Months Ended
September 30, 2008 September 30, 2007
Delivery Generation Delivery Generation
and and and and
(In millions) Services Marketing Eliminations Total Services Marketing Eliminations Total
Operating revenues $ 692.7 $ 589.3 $ (432.4 ) $ 849.6 $ 692.4 $ 581.1 $ (426.9 ) $ 846.6
Fuel - 299.2 - 299.2 - 245.5 - 245.5
Purchased power and
transmission 512.9 25.7 (430.5 ) 108.1 493.0 25.6 (424.7 ) 93.9
Deferred energy
costs, net 1.5 (20.2 ) - (18.7 ) 2.3 1.3 - 3.6
Operations and
maintenance 83.6 70.6 (1.9 ) 152.3 85.7 71.3 (2.2 ) 154.8
Depreciation and
amortization 39.2 28.2 - 67.4 40.4 26.3 - 66.7
Taxes other than
income taxes 35.0 19.4 - 54.4 33.9 19.7 - 53.6
Total operating
expenses 672.2 422.9 (432.4 ) 662.7 655.3 389.7 (426.9 ) 618.1
Operating income 20.5 166.4 - 186.9 37.1 191.4 - 228.5
Other income
(expense), net 3.1 1.6 (0.2 ) 4.5 3.0 13.6 (1.8 ) 14.8
Interest expense and
preferred dividends
of subsidiary 24.8 33.3 (0.2 ) 57.9 18.2 43.3 (1.8 ) 59.7
Income (loss) before
income taxes and
minority interest (1.2 ) 134.7 - 133.5 21.9 161.7 - 183.6
Income tax expense
(benefit) (5.7 ) 50.0 - 44.3 9.1 58.1 - 67.2
Minority interest 0.2 - - 0.2 - 1.4 - 1.4
Net income $ 4.3 $ 84.7 $ - $ 89.0 $ 12.8 $ 102.2 $ - $ 115.0
Nine Months Ended Nine Months Ended
September 30, 2008 September 30, 2007
Delivery Generation Delivery Generation
and and and and
(In millions) Services Marketing Eliminations Total Services Marketing Eliminations Total
Operating revenues $ 2,139.6 $ 1,842.0 $ (1,303.5 ) $ 2,678.1 $ 2,128.8 $ 1,630.9 $ (1,239.0 ) $ 2,520.7
Fuel - 794.2 - 794.2 - 709.1 - 709.1
Purchased power and
transmission 1,522.5 77.7 (1,297.5 ) 302.7 1,447.9 77.2 (1,231.5 ) 293.6
Deferred energy
costs, net 7.8 (35.9 ) - (28.1 ) (0.5 ) (5.6 ) - (6.1 )
Operations and
maintenance 267.4 249.6 (6.0 ) 511.0 256.6 256.8 (7.5 ) 505.9
Depreciation and
amortization 122.6 83.9 - 206.5 121.7 87.7 - 209.4
Taxes other than
income taxes 105.5 54.2 - 159.7 99.5 58.8 - 158.3
Total operating
expenses 2,025.8 1,223.7 (1,303.5 ) 1,946.0 1,925.2 1,184.0 (1,239.0 ) 1,870.2
Operating income 113.8 618.3 - 732.1 203.6 446.9 - 650.5
Other income
(expense), net 10.1 7.6 (2.4 ) 15.3 10.4 21.8 (4.6 ) 27.6
Interest expense and
preferred dividends
of subsidiary 70.7 106.7 (2.4 ) 175.0 55.4 131.6 (4.6 ) 182.4
Income before income
taxes and minority
interest 53.2 519.2 - 572.4 158.6 337.1 - 495.7
Income tax expense 10.0 182.5 - 192.5 66.9 124.6 - 191.5
Minority interest 0.7 - - 0.7 - 2.4 - 2.4
Net income $ 42.5 $ 336.7 $ - $ 379.2 $ 91.7 $ 210.1 $ - $ 301.8
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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" below. The following tables reconcile "Income before income taxes and minority interest" for the three and nine months ended September 30, 2007 to the three and nine months ended September 30, 2008. (In millions) Income before income taxes and minority interest for the three months ended September 30, 2007 $ 183.6 Increase in operating revenues 3.0 Decreases (increases) in operating expenses: Fuel (53.7 ) Purchased power and transmission (14.2 ) Deferred energy costs, net 22.3 Other operating expenses 1.0 Operating expenses (44.6 ) Decrease in other income (expense), net (10.3 ) Decrease in interest expense and preferred dividends of subsidiary 1.8 Income before income taxes and minority interest for the three months ended September 30, 2008 $ 133.5 (In millions) Income before income taxes and minority interest for the nine months ended September 30, 2007 $ 495.7 Increase in operating revenues 157.4 Decreases (increases) in operating expenses: Fuel (85.1 ) Purchased power and transmission (9.1 ) Deferred energy costs, net 22.0 Operations and maintenance (5.1 ) Other operating expenses 1.5 Operating expenses (75.8 ) Decrease in other income (expense), net (12.3 ) Decrease in interest expense and preferred dividends of subsidiary 7.4 Income before income taxes and minority interest for the nine months ended September 30, 2008 $ 572.4 |
Operating Revenues
Operating revenues increased $3.0 million for the three months ended
September 30, 2008 compared to the three months ended September 30, 2007,
primarily due to:
• an $81.1 million increase resulting primarily from increased unrealized
gains on economic power sale hedges that did not qualify for hedge
accounting,
• a $21.5 million increase resulting from unrealized gains related to pipeline capacity economic hedges that did not qualify for hedge accounting,
• a $15.8 million increase due to higher generation rates charged to Pennsylvania customers,
• an $18.6 million increase, relating to higher market prices, including marketing, hedging and trading activities,
• an $11.0 million increase due to increased sales of power to third parties and
• a $6.2 million increase due to increased recoverable expenses and return on investment that are related to transmission expansion.
These operating revenue increases were partially offset by:
• $106.6 million in unrealized losses relating to financial transmission
rights ("FTRs"),
• a $19.4 million decrease due to a 5.8% decrease in total MWhs generated and
• an $18.1 million decrease due to the expiration of an earnings benefit related to stranded cost recovery.
Additionally, milder weather and reduced customer consumption negatively
impacted operating revenues.
Operating revenues increased $157.4 million for the nine months ended
September 30, 2008 compared to the nine months ended September 30, 2007,
primarily due to:
• a $94.4 million increase in unrealized gains relating to FTRs,
• a $70.8 million increase, relating to higher market prices, including marketing, hedging and trading activities,
• a $48.1 million increase due to higher generation rates charged to Pennsylvania customers,
• a $21.5 million increase due to increased recoverable expenses and return on investment that are related to transmission expansion,
• an $18.0 million increase resulting primarily from increased unrealized gains on economic power sale hedges that did not qualify for hedge accounting and
• an $8.4 million increase resulting from unrealized gains related to pipeline capacity economic hedges that did not qualify for hedge accounting.
These operating revenue increases were partially offset by:
• a $92.6 million decrease due to a 6.5% decrease in total MWhs generated and
• a $26.1 million decrease due to the expiration of an earnings benefit related to stranded cost recovery.
Additionally, milder weather and reduced customer consumption negatively
impacted operating revenues.
See Note 10, "Fair Value Measurements, Derivative Instruments and Hedging
Activities," for information regarding the recognition of unrealized gains and
losses on FTRs and economic power sale hedges. The majority of the unrealized
gains (losses) are associated with FTRs and power sale hedges entered into
during the second half of 2007 and the first quarter of 2008.
Operating Expenses
Fuel expense increased $53.7 million for the three months ended September 30,
2008 compared to the three months ended September 30, 2007, primarily due to a
$42.6 million increase in coal expense, which is discussed in greater detail in
"Discussion of Segment Results of Operations - Generation and Marketing Segment
Results" below.
Fuel expense increased $85.1 million for the nine months ended September 30,
2008 compared to the nine months ended September 30, 2007, primarily due to a
$91.6 million increase in coal expense and a $7.6 million increase in emission
allowance expense, partially offset by a $25.5 million decrease in natural gas
expense, which are discussed in greater detail in "Discussion of Segment Results
of Operations - Generation and Marketing Segment Results" below.
Purchased power and transmission expense increased $14.2 million for the
three months ended September 30, 2008 compared to the three months ended
September 30, 2007, primarily due to increased purchases from third parties.
Purchased power and transmission expense increased $9.1 million for the nine
months ended September 30, 2008 compared to the nine months ended September 30,
2007, primarily due to increased purchases from third parties, partially offset
by the expiration in May 2007 of a fixed price supply agreement to serve
Monongahela's former Ohio service territory.
Deferred energy costs, net decreased $22.3 million and $22.0 million for the
three and nine months ended September 30, 2008, respectively, compared to the
three and nine months ended September 30, 2007, primarily due to the Expanded
Net Energy Cost ("ENEC") method of recovering net power supply costs in West
Virginia, which is discussed in greater detail in the Generation and Marketing
segment results under "Regulated Results - Deferred Energy Costs, Net" below.
Operations and maintenance expense increased $5.1 million for the nine months
ended September 30, 2008 compared to the nine months ended September 30, 2007,
primarily due to increased maintenance activities.
Other Income (Expense), net
Other income (expense), net decreased $10.3 million and $12.3 million for the
three and nine months ended September 30, 2008, respectively, compared to the
three and nine months ended September 30, 2007, primarily due to an $8.4 million
. . .
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