Allegheny Energy's Q4 net income drops 19% year-over-year to US$88.2M on costs for proposed merger with FirstEnergy, losses on economic hedges; revenues rise 0.5% to US$864.6M on transmission expansion, rate increase

Alison Gallant

GREENSBURG, Pennsylvania , February 23, 2011 (press release) – Allegheny Energy, Inc. (NYSE: AYE) today reported financial results for the fourth quarter and full year 2010.

Adjusted net income for the fourth quarter of 2010 excludes $3.2 million of pre-tax expense related to the proposed merger with FirstEnergy Corp. and unrealized pre-tax losses of $25.4 million from economic hedges that do not qualify for hedge accounting. Adjusted net income for the fourth quarter of 2009 excludes $13.4 million of pre-tax interest expense related to a debt tender offer and unrealized pre-tax gains of $7.9 million from economic hedges.

Adjusted net income is a non-GAAP financial measure. For information on the calculation of adjusted net income for all periods, see the attached reconciliations of non-GAAP financial measures.

“2010 marks our seventh consecutive year of earnings growth,” said Paul J. Evanson, Chairman, President and Chief Executive Officer of Allegheny Energy. “During the year, we again held O&M costs flat, substantially completed our TrAIL transmission line in record time, and charted a new future for Allegheny with our pending merger with FirstEnergy. We look forward to the opportunities created by joining a larger and more diversified energy company.”
 
Fourth Quarter Consolidated Results

Adjusted net income for the fourth quarter of 2010 decreased by $6.8 million compared with the same period in 2009. Adjusted results for 2009 included a $10.5 million after-tax benefit associated with the purchase of hydro generation facilities. Key positive factors contributing to results for the fourth quarter of 2010 include increased revenue from transmission expansion, a base rate increase in West Virginia, increased industrial sales and favorable weather.  These positive factors were offset by the effect of power hedges and the sale of the Virginia distribution business.

A reduction in tax provisions benefited adjusted net income from regulated operations by $18.8 million in the fourth quarter of 2010.  In the fourth quarter of the prior year, changes in Pennsylvania tax law benefited adjusted net income from merchant generation by $18.1 million.  

Adjusted EBITDA for the fourth quarter of 2010 was $304.2 million, a decrease of $8.2 million compared to the same quarter of the prior year. EBITDA and adjusted EBITDA are non-GAAP financial measures. Details on the calculation of EBITDA and adjusted EBITDA, as well as reconciliations of these financial measures to net income, are attached to this release.

Adjusted net income for both segments for 2010 excludes merger-related costs. Adjusted net income for the Merchant Generation segment in both 2010 and 2009 excludes net unrealized gains and losses from economic hedges that do not qualify for hedge accounting. Adjusted net income in the Merchant Generation business for 2009 also excludes expenses related to a debt tender offer. There were no adjustments in the Regulated Operations segment in 2009.

Twelve-Month Consolidated Results

Adjusted net income for the twelve months ended December 31, 2010 increased by $34.0 million compared to the same period in 2009. Key factors contributing to the improved results include increased generation output, higher energy and capacity prices, increased revenue from transmission expansion, higher retail electricity sales, and a base rate increase in West Virginia, partially offset by higher fuel costs, the effect of power hedges, the sale of the Virginia distribution business, and increased interest and depreciation expense reflecting the operation of new scrubbers.

Adjusted EBITDA for the twelve-month period increased by $111.7 million compared to the same period of the prior year. Details on the calculation of EBITDA and adjusted EBITDA, as well as reconciliations of these financial measures to net income, are attached to this release.

Adjusted net income for both segments for 2010 excludes merger-related costs. Adjusted net income in the Regulated Operations segment for 2010 excludes a gain from the sale of the company’s Virginia distribution business.  There were no adjustments in the Regulated Operations segment in 2009. Adjusted net income for the Merchant Generation segment for 2010 and 2009 excludes net unrealized gains and losses from economic hedges that do not qualify for hedge accounting, as well as interest expense related to debt tender offers.

Allegheny Energy: An Era of Accomplishments

“We’ve achieved a great deal since we refocused on our core business and began restoring the company’s financial health in 2003,” said Mr. Evanson. “Success would not have been possible without the dedication of our hard-working employees. Together, we’ve made great progress.”

Key accomplishments since 2003 include:

Restored Financial Condition
•    Reduced debt
•    Returned to profitability from brink of bankruptcy
•    Restored investment grade credit ratings
•    Reinstated dividend

Created a High-Performance Culture
•    Achieved high customer satisfaction ratings; ranked #1 among northeastern US utilities for six consecutive years by TQS Research (large commercial and industrial customer survey)
•    Improved  safety performance to record levels (see Exhibit 1)
•    Reduced operations and maintenance expense and held costs virtually unchanged for past five years  (see Exhibit 2)

Launched Transmission Expansion Business
•    Nearly completed multi-state Trans-Allegheny Interstate Line (TrAIL) in unprecedented 5-year period

Increased Profitability
•    Achieved growth in adjusted earnings per share each year since 2003 (see Exhibit 3)

Committed to Environmental Stewardship
•    Invested $1.3 billion to add scrubbers at two power plants
•    Completed scrubber projects on time, on budget

“As we move forward, Allegheny will become part of FirstEnergy, a much larger company with a strong balance sheet, a diversified generation fleet including nuclear plants, solid regulated operations, and better access to capital markets,” Mr. Evanson said.  “The new FirstEnergy will be positioned to prosper and grow well into the future.”

Merger Update

The companies have received approvals for their merger from the Virginia State Corporation Commission, the Public Service Commission of West Virginia, and the Maryland Public Service Commission, and have a comprehensive settlement with the majority of the parties to the merger application pending before the Pennsylvania Public Utility Commission.  The merger has received approval from the Federal Energy Regulatory Commission and completed the U.S. Department of Justice review process.  Shareholders of both FirstEnergy and Allegheny Energy overwhelmingly approved proposals related to the merger.

Investor Call Will Not Be Held

Due to the imminent merger with FirstEnergy, Allegheny Energy will not host an investor conference call to discuss its quarterly results.  The companies expect to complete the merger in the first quarter of this year.

Reconciliation of Non-GAAP Financial Measures

This news release includes presentation of adjusted net income, EBITDA, adjusted EBITDA and other non-GAAP financial measures as defined in the Securities and Exchange Commission’s Regulation G.

Management believes that presenting these additional financial measures provide investors with a more complete understanding of the core results and underlying trends from which to consider past performance and prospects for the future. These financial measures 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 a measure of operating performance or liquidity.
     
Pursuant to the requirements of Regulation G, tables are attached that reconcile non-GAAP financial measures in this document to the most directly comparable GAAP measure. Additional reconciliations are available at www.alleghenyenergy.com.


Allegheny Energy

Headquartered in Greensburg, Pa., Allegheny Energy is an investor-owned electric utility with total annual revenues of over $3 billion and more than 4,000 employees. The company owns and operates generating facilities and delivers low-cost, reliable electric service to 1.5 million customers in Pennsylvania, West Virginia and Maryland. For more information, visit www.alleghenyenergy.com.

Industry Intelligence Editor's Note: In an omitted table, the company reported Q4 net income of US$88.2 million versus US$109.3million prior year. The company also reported Q4 revenues of US$864.6 million versus US$861.1 million prior year.

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