Allegheny Energy Reports First Quarter 2005 Results

Allegheny Energy Reports First Quarter 2005 Results

    Business Editors/Energy Writers

    GREENSBURG, Pa.--(BUSINESS WIRE)--April 28, 2005--Allegheny Energy, Inc. (NYSE:AYE) today announced consolidated net income of $42.6 million, or $0.29 per diluted share, for the first quarter of 2005, compared with net income of $33.3 million, or $0.25 per diluted share, for the same period in 2004.
    To provide a better understanding of core results and trends, Allegheny Energy also reported adjusted financial results, which are non-GAAP financial measures. Adjusted net income from continuing operations was $58.7 million, or $0.39 per share, for the first quarter of 2005. The adjusted 2005 results exclude a $38.5 million (pre-tax) charge to interest expense associated with a court decision earlier this month in the Merrill Lynch matter and $8.2 million of after-tax income from discontinued operations.
    For the first quarter of 2004, adjusted net loss from continuing operations was $3.9 million, or $0.03 per diluted share. The 2004 adjusted results exclude a gain of $68.1 million (pre-tax) relating to the release from escrow of proceeds from the sale of the California energy supply contract and related hedges, a $14.1 million (pre-tax) write-off of 2003 financing costs, and other items. A reconciliation of these non-GAAP financial measures to results reported in accordance with GAAP is attached to this release.
    "We opened 2005 with strong first quarter core earnings stemming from increased revenues, lower operations and maintenance expense, and lower interest cost, as adjusted," said Paul J. Evanson, Chairman, President and Chief Executive Officer of Allegheny Energy. "Moreover, the recent approval of our Pennsylvania rate proposal and the successful tender offer for our convertible trust preferred securities should help build long-term shareholder value and strengthen our financial condition."

    First Quarter Results

    Income from continuing operations before income taxes and minority interest was $58.2 million for the first quarter of 2005, an increase of $2.7 million compared with the same period in 2004. Key factors contributing to the improved results include:

--	Operating revenues increased by $18.7 million compared to the same period in 2004. Revenues for 2004 included the $68.1 million gain from the California contract escrow release. Revenues for 2005 benefited from better performance at Allegheny's supercritical generating units, the inception of market-based rates in Maryland and customer growth.
--	Fuel, purchased power and transmission expenses increased by $36.0 million, reflecting higher coal prices and the cost of power purchased from third parties for Maryland customers.
--	Operations and maintenance expense decreased by $38.1 million, largely due to the timing and level of special maintenance spending at power plants, as well as lower costs for outside services, insurance and uncollectibles.
--	Interest expense increased by $6.0 million. 2005 results include the $38.5 million interest charge in the Merrill Lynch matter. 2004 results included the previously noted write-off of financing costs. Excluding these items, interest expense decreased by $18.4 million, reflecting the benefits of debt reduction and lower interest rates on debt outstanding.
--	Depreciation, amortization and taxes other than income taxes increased by $9.3 million.

    Adjusted earnings from continuing operations before interest, taxes, depreciation and amortization (adjusted EBITDA) for the first quarter of 2005 were $261.3 million, an $85.8 million increase from the first quarter of 2004. Adjusted EBITDA for 2004 excluded the gain on the California contract escrow release and other items. Adjusted EBITDA is a non-GAAP financial measure. For a reconciliation of EBITDA to GAAP financial measures and details on the calculation of EBITDA, see the reconciliation of non-GAAP financial measures attached to this release.

    2005 Interest Charge and 2004 Outages

    2005 Interest Charge: The $38.5 million charge represents estimated interest expense associated with a federal court's summary judgment in favor of Merrill Lynch & Co. with regard to a breach of contract claim against Allegheny. That claim involved Merrill Lynch's right to require Allegheny to purchase Merrill Lynch's equity stake in Allegheny's generation and marketing subsidiary, Allegheny Energy Supply, LLC, for $115 million plus interest. Generally accepted accounting principles require Allegheny to record a charge for the estimated interest, despite the court's finding that the amount owed to Merrill Lynch will be offset by whatever judgment Allegheny obtains, if any, in its counterclaims against Merrill Lynch. A trial on those counterclaims is scheduled to begin May 9, 2005.
    2004 Outages: Unplanned outages at the Hatfield's Ferry and Pleasants power stations negatively impacted Allegheny's results for the first quarter of 2004. The company estimates that these outages adversely affected its pre-tax income for the first quarter of 2004 by approximately $34.0 million, consisting primarily of lost revenues net of fuel cost savings. Both generating units returned to service in the second quarter of 2004.

    First Quarter Segment Results

    Delivery and Services: The Delivery and Services segment reported income from continuing operations of $49.7 million for the first quarter of 2005, an increase of $21.7 million compared to the same quarter of the prior year. Kilowatt-hour sales increased by 0.9 percent, and operating revenues increased by $18.1 million, reflecting customer growth and higher prices, partially offset by milder weather. Heating degree-days for the first quarter of 2005 were 5.4 percent lower than the prior year, and 4.4 percent below normal. Purchased power and transmission increased by $16.6 million. The inception of market-based rates in Maryland affected both purchased power and revenues. Operations and maintenance expense decreased by $21.3 million, driven by reduced costs for outside services, insurance and uncollectibles.
    Generation and Marketing: The Generation and Marketing segment reported a loss from continuing operations of $15.2 million for the first quarter of 2005, including the $38.5 million interest charge discussed above. For the same period in the prior year, the segment reported income from continuing operations of $2.6 million. Revenues for the first quarter of 2005 decreased by $5.4 million. 2004 revenues included the $68.1 million gain from the California contract escrow release mentioned above. The unplanned outages at Hatfield's Ferry and Pleasants affected both revenues and fuel costs for 2004. Fuel costs increased by $12.2 million in the first quarter of 2005, largely due to higher coal costs. Operations and maintenance expense decreased by $17.4 million for the first quarter of 2005, largely due to the timing and level of special maintenance spending at power plants. Depreciation, amortization and taxes other than income taxes increased $6.7 million. Interest increased by $9.4 million, reflecting the 2005 interest charge described above and the previously mentioned write-off of financing costs in 2004.
    Discontinued Operations: For the first quarter of 2005, Allegheny Energy reported income of $8.2 million on discontinued operations, compared to income of $2.6 million in the same quarter of the prior year. These results reflect the operating performance of the West Virginia natural gas operations and Allegheny Energy's Midwest generating facilities.

    Reconciliation of Non-GAAP Financial Measures

    This news release and the attached table include non-GAAP financial measures as defined in the Securities and Exchange Commission's Regulation G. Where noted, we present financial information on an adjusted basis to exclude the effect of certain items as described herein. By presenting 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. We also present EBITDA as an additional measure of our operating performance.
    Users of this financial information should consider the types of events and transactions for which adjustments have been made. Neither the adjusted information nor EBITDA should be considered in isolation or viewed as substitutes for or superior to net income or other data prepared in accordance with GAAP as measures of our operating performance or liquidity. In addition, neither the adjusted information nor EBITDA are necessarily comparable to similarly titled measures provided by other companies.
    Pursuant to the requirements of Regulation G, we have attached tables that reconcile non-GAAP financial measures, including those presented in this release, to the most directly comparable GAAP measures.

    Investor Conference Call

    Allegheny Energy will comment further on these results in an investor conference call at 9:30 a.m. Eastern Time on Friday, April 29, 2005. To listen to a live Internet broadcast of the call, visit www.alleghenyenergy.com. A taped replay of the call will be available after the live broadcast.

    Allegheny Energy

    Headquartered in Greensburg, Pa., Allegheny Energy is an investor-owned utility consisting of two major businesses. Allegheny Energy Supply owns and operates electric generating facilities, and Allegheny Power delivers low-cost, reliable electric service to customers in Pennsylvania, West Virginia, Maryland, Virginia and Ohio. For more information, visit our Web site at www.alleghenyenergy.com.

    Forward-Looking Statements

    In addition to historical information, this release 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 distribution business, Allegheny Power; 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 markets; 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 Energy'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 Energy, its markets or its activities; the loss of any significant customers or suppliers; dependence on other electric transmission and gas transportation systems and their constraints or availability; changes in PJM, including changes to participant 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 filed with the Securities and Exchange Commission.

ALLEGHENY ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

Three Months Ended March 31, ---------------------------- (In thousands) 2005 2004 ----------------------------------------- -------------- ------------- Operating revenues $754,030 $735,350

Operating expenses: Fuel consumed in electric generation 173,887 161,712 Purchased power and transmission 104,822 81,013 Deferred energy costs, net 1,186 914 Operations and maintenance 162,677 200,790 Depreciation and amortization 76,411 72,987 Taxes other than income taxes 55,058 49,185 -------------- -------------

Total operating expenses 574,041 566,601 -------------- -------------

Operating income 179,989 168,749

Other income and expenses, net 5,253 7,854

Interest expense and preferred dividends: Interest expense 125,794 119,830 Preferred dividend of subsidiary 1,259 1,259 -------------- -------------

Total interest expense and preferred dividends 127,053 121,089 -------------- -------------

Income from continuing operations before income taxes and minority interest 58,189 55,514

Income tax expense from continuing operations 23,376 23,018

Minority interest in net income of subsidiaries 415 1,859 -------------- -------------

Income from continuing operations 34,398 30,637

Income from discontinued operations, net of tax 8,244 2,641 -------------- -------------

Net income $42,642 $33,278 -------------- -------------

Basic weighted average common shares outstanding 137,417,964 126,969,238 Diluted weighted average common shares outstanding 165,674,343 152,941,183

Basic income per common share: Income from continuing operations $0.25 $0.24 Income from discontinued operations, net 0.06 0.02 -------------- ------------- Net income per common share $0.31 $0.26 -------------- -------------

Diluted income per common share: Income from continuing operations $0.24 $0.24 Income from discontinued operations, net 0.05 0.01 -------------- ------------- Net income per common share $0.29 $0.25 -------------- -------------

ALLEGHENY ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited)

March 31, December 31, (In thousands) 2005 2004 --------------------------------------------- ----------- ------------ ASSETS

Current Assets: Cash and cash equivalents $176,756 $189,482 Accounts receivable: Customer 211,728 164,666 Unbilled utility revenue 139,474 145,498 Wholesale and other 24,510 32,966 Allowance for uncollectible accounts (18,126) (19,854) Materials and supplies 102,557 100,054 Fuel, including stored gas 64,556 61,812 Deferred income taxes 62,434 44,590 Prepaid taxes 76,634 46,900 Assets held for sale 114,418 150,031 Collateral deposits 116,303 88,708 Commodity contracts 14,168 13,523 Restricted funds 20,003 228,857 Regulatory assets 39,106 37,626 Other 14,619 20,273 ----------- ------------ Total current assets 1,159,140 1,305,132 ----------- ------------

Property, Plant and Equipment, Net: Generation 5,702,559 5,695,851 Transmission 1,017,603 1,015,751 Distribution 3,399,220 3,366,217 Other 465,311 463,515 Accumulated depreciation (4,400,442) (4,341,282) ----------- ------------ Subtotal 6,184,251 6,200,052 Construction work in progress 103,043 102,966 ----------- ------------ Total property, plant and equipment, net 6,287,294 6,303,018 ----------- ------------

Investments and Other Assets: Assets held for sale 340,679 340,457 Goodwill 367,287 367,287 Investments in unconsolidated affiliates 29,663 29,991 Intangible assets 33,199 33,215 Other 46,980 46,628 ----------- ------------ Total investments and other assets 817,808 817,578 ----------- ------------

Deferred Charges: Commodity contracts 3,379 3,667 Regulatory assets 557,849 562,843 Other 51,913 52,902 ----------- ------------ Total deferred charges 613,141 619,412 ----------- ------------

Total Assets $8,877,383 $9,045,140 ----------- ------------

ALLEGHENY ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) (unaudited)

March 31, December 31, (In thousands) 2005 2004 -------------------------------------------- ----------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY:

Current Liabilities: Long-term debt due within one year $385,177 $385,142 Accounts payable 202,114 223,584 Accrued taxes 101,064 112,866 Commodity contracts 54,502 40,835 Accrued interest 123,083 61,726 Liabilities associated with assets held for sale 45,115 37,471 Other 137,636 144,082 ----------- ------------- Total current liabilities 1,048,691 1,005,706 ----------- -------------

Long-term Debt 4,273,321 4,540,764

Deferred Credits and Other Liabilities: Commodity contracts 54,994 56,501 Investment tax credit 81,722 83,307 Deferred income taxes 671,228 635,374 Obligations under capital leases 21,653 23,788 Regulatory liabilities 460,344 453,913 Adverse power purchase commitment 197,089 201,377 Liabilities associated with assets held for sale 89,505 89,356 Other 490,719 505,620 ----------- ------------- Total deferred credits and other liabilities 2,067,254 2,049,236 ----------- -------------

Minority Interest 22,032 21,618

Preferred Stock of Subsidiary 74,000 74,000

Common Stockholders' Equity: Common stock 171,965 171,788 Other paid-in capital 1,605,642 1,600,215 Retained deficit (265,047) (307,690) Treasury stock (1,756) (1,756) Accumulated other comprehensive loss (118,719) (108,741) ----------- ------------- Total common stockholders' equity 1,392,085 1,353,816 ----------- -------------

Total Liabilities and Stockholders' Equity $8,877,383 $9,045,140 ----------- -------------

ALLEGHENY ENERGY, INC. AND SUBSIDIARIES RESULTS BY BUSINESS SEGMENT (unaudited)

(In millions) ----------------------------- Delivery Generation Three months ended and and March 31, 2005 Services Marketing Eliminations Total ----------------------------- -------- ---------- ------------ ------- Operating revenues $739.4 $416.9 $(402.3) $754.0 Fuel consumed in electric generation -- (173.9) -- (173.9) Purchased power and transmission (485.1) (19.9) 400.1 (104.9) Deferred energy costs, net (1.2) -- -- (1.2) Operations and maintenance (84.5) (80.3) 2.2 (162.6) Depreciation and amortization (38.2) (38.2) -- (76.4) Taxes other than income taxes (34.5) (20.5) -- (55.0) -------- ---------- ------------ ------- Operating income 95.9 84.1 -- 180.0 Other income and (expenses), net 3.7 1.6 (0.1) 5.2 Interest expense and preferred dividends (29.7) (97.3) -- (127.0) -------- ---------- ------------ ------- Income (loss) from continuing operations before income taxes and minority interest 69.9 (11.6) (0.1) 58.2 Income tax expense from continuing operations (20.2) (3.2) -- (23.4) Minority interest -- (0.4) -- (0.4) -------- ---------- ------------ ------- Income (loss) from continuing operations 49.7 (15.2) (0.1) 34.4 Income (loss) from discontinued operations, net of tax 10.8 (2.7) 0.1 8.2 -------- ---------- ------------ ------- Net income (loss) $60.5 $(17.9) $-- $42.6 -------- ---------- ------------ -------

Three months ended March 31, 2004 ----------------------------- Operating revenues $721.3 $422.3 $(408.3) $735.3 Fuel consumed in electric generation -- (161.7) -- (161.7) Purchased power and transmission (468.5) (18.1) 405.6 (81.0) Deferred energy costs, net (0.9) -- -- (0.9) Operations and maintenance (105.8) (97.7) 2.7 (200.8) Depreciation and amortization (37.1) (35.9) -- (73.0) Taxes other than income taxes (33.1) (16.1) -- (49.2) -------- ---------- ------------ ------- Operating income 75.9 92.8 -- 168.7 Other income and expenses, net 7.2 0.7 -- 7.9 Interest expense and preferred dividends (33.2) (87.9) -- (121.1) -------- ---------- ------------ ------- Income from continuing operations before income taxes and minority interest 49.9 5.6 -- 55.5 Income tax expense from continuing operations (21.9) (1.1) -- (23.0) Minority interest -- (1.9) -- (1.9) -------- ---------- ------------ ------- Income from continuing operations 28.0 2.6 -- 30.6 Income (loss) from discontinued operations, net of tax 11.0 (8.3) -- 2.7 -------- ---------- ------------ ------- Net income (loss) $39.0 $(5.7) $-- $33.3 -------- ---------- ------------ -------

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (in millions, except per share data) (unaudited)

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES DILUTED AND MINORITY INCOME THREE MONTHS ENDED MARCH 31, 2005 INTEREST NET INCOME PER SHARE ---------------------------------------------------------------------- Calculation of Adjusted Income: Income - GAAP basis $58.2 $42.6 $0.29 =========

Adjustments: Income from discontinued operations (8.2) Interest expense related to Merrill Lynch summary judgment(1) 38.5 24.3 ------------------------------------------------------------- Adjusted Income $96.7 $58.7 $0.39 ======================================================================

Calculation of Adjusted EBITDA: Net Income - GAAP basis $42.6 Income from discontinued operations (8.2) Interest expense and preferred dividends 127.1 Income tax expense 23.4 Depreciation and amortization 76.4 ------------------------------------------------------------- EBITDA from continuing operations 261.3 No adjustments -- ------------------------------------------------------------- Adjusted EBITDA from continuing operations $261.3 =============================================================

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE DILUTED INCOME TAXES INCOME AND MINORITY NET INCOME (LOSS) THREE MONTHS ENDED MARCH 31, 2004 INTEREST (LOSS) PER SHARE ---------------------------------------------------------------------- Calculation of Adjusted Income: Income - GAAP basis $55.5 $33.3 $0.25 =========

Adjustments(2): Income from discontinued operations (2.6) Gain on California contract escrow release(3) (68.1) (40.5) Write-off of 2003 financing costs(1) 14.1 8.4 Gain on land sale, New York office space charge, net(4) (4.2) (2.5) ------------------------------------------------------------- Adjusted Income $(2.7) $(3.9) $(0.03) ======================================================================

Calculation of Adjusted EBITDA: Net Income - GAAP basis $33.3 Income from discontinued operations (2.6) Interest expense and preferred dividends 121.1 Income tax expense 23.0 Depreciation and amortization 73.0 ------------------------------------------------------------- EBITDA from continuing operations 247.8 Gain on California contract escrow release (68.1) Gain on land sale, New York office space charge, net (4.2) ------------------------------------------------------------- Adjusted EBITDA from continuing operations(2) $175.5 =============================================================

FOOTNOTES:

(1) These amounts are included in Interest expense on the Consolidated Statements of Operations.

(2) Not adjusted for $9.2 million of charges related to Allegheny Ventures for write-downs of inventory and discontinued product ($4.3 million), equity interests ($2.3 million) and adjustments in revenue recognition for a percentage of completion contract ($2.6 million).

(3) This amount is included in Operating revenues on the Consolidated Statement of Operations.

(4) These amounts are included in Operations and maintenance expense and Other income, net, on the Consolidated Statement of Operations.

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (in millions) (unaudited)

THREE MONTHS THREE MONTHS ADJUSTED INTEREST EXPENSE AND ENDED MARCH 31, ENDED MARCH 31, PREFERRED DIVIDENDS 2005 2004 ---------------------------------------------------------------------- Interest expense and preferred dividends of subsidiary: As reported $127.1 $121.1

Merrill Lynch summary judgment (38.5) Write-off of 2003 financing costs (14.1) ---------------------------------------------------------------------- As Adjusted $88.6 $107.0 ======================================================================

Allegheny Energy, Inc. and Subsidiaries Operating Statistics

Unaudited Three Months Ended March 31

2005 2004 Change -------- -------- ------ Delivery and Services: Electricity sales (million kWh) 12,502 12,387 +0.9% Usage per customer (kWh):

Residential 3,574 3,582 -0.2% Commercial 14,941 14,734 +1.4% Industrial 184,099 185,727 -0.9%

Natural gas sales (Mmcf) 12,655 14,291 -11.4%

Generation and Marketing: Generation (million kWh) 12,297 12,231 +0.5%

--30--JAM/cl*

CONTACT: Allegheny Energy, Inc. Media contact - Fred Solomon, 724-838-6650 Media Hotline: 1-888-233-3583 E-mail: fsolomo@alleghenyenergy.com Investor contact - Max Kuniansky, 724-838-6895 E-mail: mkunian@alleghenyenergy.com

KEYWORD: WEST VIRGINIA VIRGINIA MARYLAND PENNSYLVANIA OHIO INDUSTRY KEYWORD: ENERGY UTILITIES EARNINGS SOURCE: Allegheny Energy, Inc.

Copyright Business Wire 2005