TOP CONTRIBUTORS

Zachary Kinloch

Avinash Gandhi

AYE AT A GLANCE

P/E ► 14.1 AVG EV/EBITDA ► 8.20 AVG ROA ► 5.1% AVG ROE ► 10.8% AVG Debt to Equity ► 2.63 AVG Current Ratio ► 1.52 AVG Interest Coverage Ratio ► 3.24 AVG

 

 

 

 

 

 

This article is about the electric utility. For other uses of Allegheny, see Allegheny (disambiguation).

Allegheny Energy (AYE) is an electric utility company that owns and operates electric generation facilities and delivers electric services to customers in Pennsylvania, West Virginia, Maryland and Virginia. Allegheny Energy generates in excess of $3 billion annually and serves 1.5 million customers with approximately 9,670 megawatts (MW) of electrical generating capacity, enough to power around 7.5 million homes.^{[1] [2]}

Electric utility companies are under increasing pressure, in the form of government legislation, to adopt cleaner electricity generation methods while maintaining competitive prices. AYE, with its easy access to cheap coal in Pennsylvania, West Virginia and Ohio, derives over 95%^[3] of its energy from burning coal and will invest over $1 billion over the next several years to retrofit its coal powerplants with technology to reduce toxic emissions. AYE currently does not have plans to substantially diversify its electricity generation base by making forays into nuclear, wind and solar power projects. Beyond the 1090MW derived from hydroelectric power currently, AYE is in the process of pursuing permits for a limited use of bio-mass and waste-tire derived fuel at two of its coal power plants in West Virginia.

Business Financials

Allegheny Energy has demonstrated steady revenue and net income growth over the past three years, recovering quickly from a loss in 2004 to a strong 10% after-tax profit margin in 2006. In 2006, revenues increased due to a larger amount of electricity sold at high market prices compared to 2005.

Net income for the first quarter of 2008 was $136.1 million, up from $109.7 million in the first quarter of 2006. Most of this growth came from the company's Generation and Marketing segment, which grew nearly $40 million year-on-year; overall income gains were offset by the Delivery and Services segment, which lost $12 million. Growth was driven by rising energy prices but was offset by rising coal prices.

In the second quarter of 2008, GAAP earnings were $154 million, doubling year-on-year.^[4] The company saw a favorable rate increase in Virginia that took effect in July 2008. 2Q08 was 18% cooler than 2Q07, causing a decrease in potential revenue of approximately $4 million.^[4] The company has contracted for 40% of its coal needs, hedging slightly against future price increases and shortages.^[4]

^[5]

^[6]

AYE has two business segments. The Delivery and Services Segment operates Allegheny Energy's regulated electric public utility systems which delivers power to 1.7 retail customers. The Generation and Marketing owns, operates, and controls 9,670 MWs^[7] of electric generation capacity from power plants and other generation assets (hydroelectric damns, etc.). The electricity is sold on the wholesale markets to customers in the mid-Atlantic and Midwest regions.

Key Trends/Forces

AYE especially vulnerable to rising coal prices

Prices for fossil fuels, the key energy input for greater than 95% of AYE’s electrical output, have been volatile over the past couple of years. During 2006, AYE experienced an $98.3 million increase in coal costs due ^[8]. The increase in coal expense was due to an increase in the average price of coal and amount of coal burned. Coal expenses were partially offset by savings in natural gas. Natural gas expenses decreased by $20.8 million resulting from the commodities lower average selling price throughout 2006 compared to 2005.^[9] Overall, for 2006, total fuel expense increased by $83.6 million^[10]

On April 30th, 2008, Allegheny filed for recovery of purchased power costs with the Virginia State Corporation Commission for at least $73 million for the twelve months beginning July 1st, 2008. The company expects to lose out on $100 million of potential income, thanks to rising fuel prices driving up the cost of purchased power, and they are desperate for regulators to allow them to pass the cost on to consumers. Whether this will happen or not, however, is up in the air, as the company's requested recovery would raise consumer rates by 29%.^[11]

More vulnerable than its peers to caps on greenhouse gases

Growing political awareness of the risks of global warming is resulting in increasing governmental pressure for utility companies to reduce emissions. In 2008 three major investment banks, predicted that the U.S. government would cap CO2 emissions in the next three years. AYE which generates more than 90% of its energy using coal, and 0% from nuclear power is particularly vulnerable to "greener legislation. The company has announced no plans to increase its nuclear capacity although AYE is pursuing permits to allow for the use of bio-mass (wood chips and saw dust) and waste-tire derived fuel at two of its coal-fired power plants in West Virginia.

Mild weather takes its toll on AYE

Weather fluctuations can impact AYE's business. Warmer than expected winters can lead to lower demand for heating energy, whereas a cooler than expected summer can lead to lower energy demand for cooling. According to AYE's 2006 annual report, the weather in 2006 was relatively milder than in 2005 leading weaker electricity demand. The exact figures are as follows: a combination of a 28.2% decrease in cooling degree days and an 8.9% decrease in heating degree days led to a 10.6% decrease in electricity sold during 2006. ^[12]

AYE needs permission of state agencies to recover costs

• Public utilities are highly regulated. State governments,set the companies's rates, and determine, how and if each company can pass on increased expenses to its customers in the form of rate hikes. In December of 2007, the State Corporation Commission of Virginia issued an order granting partial recovery of increased purchased power costs, allowing the company to collect an additional $9.5 million on an annualized basis through June 30, 2008^[13].

Competition

Electrical Generation Fleet Mix

The above table encapsulates the utilities' current electrical generation fleet broken down by power source (e.g. coal, natural gas, oil etc.). It is worth noting that these percentages do not necessarily reflect the actual source percentages for electricity generated as power-plants are used at various capacities depending on the market demand and price of electricity.

To further clarify, if each one of Allegheny Energy's power plants were operating at 100% capacity, coal would power 80% of the generated electricity. However, since coal plants were cheaper to operate than their natural gas power plants during 2006, Allegheny Energy tended to utilize its coal power-plants more-so than natural gas plants. This explains why 95% of electricity generated from Allegheny in 2006 was from coal.

References

1. ↑ AYE - About US
2. ↑ Power of Electricity
3. ↑ AYE - About US
4. ↑ ^{4.0 4.1 4.2} "Allegheny Energy, Inc. Q2 2008 Earnings Call"
5. ↑ AYE's 2006 10-k (Pg 52)
6. ↑ AYE's 2006 10-k (Pg 52)
7. ↑ Generating Facilities
8. ↑ AYE's 2006 10-k (Pg 81)
9. ↑ AYE's 2006 10-k (Pg 81)
10. ↑ AYE's 2006 10-k (Pg 81)
11. ↑ BusinessWire: "Allegheny Files Request to Recover Purchased Power Costs in Virginia"
12. ↑ AYE Global Climate Change Report 2007
13. ↑ Allegheny Announces Virginia Rate Decision
14. ↑ AYE's 2006 10-k (Pg 52)
15. ↑ EIX's 2006 Annual Report (Pg 7)
16. ↑ AEP's 2006 10-k (Pg A-45)
17. ↑ DUK's 2006 10-k (Pg 40)
18. ↑ AYE - About Us
19. ↑ EIX's 2006 Annual Report (Pg 18 & 29)
20. ↑ AEP's Investor Page)
21. ↑ DUK's Energy Business Segments
22. ↑ AYE's About Us
23. ↑ EIX's 2006 Annual Report (Pg 17)
24. ↑ AEP's Investor Page)
25. ↑ DUK's Energy Business Segments
26. ↑ AYE's 2006 10-k (Pg 52)
27. ↑ EIX's 2006 Annual Report (Page 15)
28. ↑ AEP's 2006 10-k (Pg A-45)
29. ↑ DUK's 2006 10-k (Pg 40)
30. ↑ AYE's Generation Facilities
31. ↑ EIX's 2006 Annual Report (Pg 19)
32. ↑ AEP's Power Plants and other assets
33. ↑ DUK's 2006 10-k (Pg 34)
34. ↑ Entergy's 2006 10-k (Pg 173)
35. ↑ Exelon's 2006 10-k - Properties
36. ↑ PSEG's 2006 10-k (Pg 41)