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Alan
J. Noia, |
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Dear Shareholder and Investor: Timing is everything. And, for Allegheny Energy, we are coming into our own at one of the most exciting times ever in the rapidly changing energy industry. We have delivered on our promises in 1999 and have solidly positioned our Company to create, sustain, and grow value for our shareholders in the coming years. Last year at this time, I outlined our growth strategy. We pledged to build upon a foundation of strength and focus on the very things that have made us such a great investment for many decades. Our strategy then and now is to grow our low-cost generating fleet regionally and then nationally, complement that expansion by broadening the reach of our customer-driven energy delivery business, and add to that a new dimension of earnings growth through a ventures business that creates opportunities related to our core businesses—supplying and delivering energy. TIME TO DELIVER ON OUR PROMISES In 1999, we made progress on all fronts and then some, thanks to the combined efforts and tenacity of our leadership team and dedicated employees. At Allegheny Energy, we achieved record earnings; retained more than 98 percent of our existing customers in choice markets; announced the planned addition of about 250,000 customers, including a natural gas delivery business; announced the addition of more than 800 megawatts (MW) to our generation portfolio; removed the uncertainty associated with deregulation in two of our five states; created our non-regulated energy supply company, which is now actively winning new customers using our more than 4,100 MW of unregulated generation; added to our superb management team; expanded our fiber optic network to about 600 total route miles; repurchased 12 million shares of our common stock; and positioned ourselves as one of the strongest energy companies in the Mid-Atlantic region. I will expand on these and other accomplishments later, but would
first like to mention our strong 1999 financial performance. |
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TIME FOR RECORD EARNINGS Allegheny Energy achieved record operating earnings of $2.64 per share or $307.2 million last year, excluding some one-time adjustments relating to regulatory restructuring and merger-related costs (see Financial Highlights). These earnings represent increases of about 13 percent in earnings per share and 7.2 percent in net income, $20.5 million over last year’s comparable results. During 1999, we achieved growth in total operating revenues of nine percent and are particularly proud of the earnings of our unregulated businesses of 42 cents per share, compared to a negative 17 cents per share in 1998. This positive movement reflects both a shift in earnings created by the onset of customer choice in one of our jurisdictions and improved performance in other unregulated ventures. At this point, the electric industry and other traditionally value-oriented sectors are out of favor with investors. Allegheny Energy, for example, experienced a 22 percent drop in our stock price in 1999. But, we did exceed the total return of most other electric industry stocks for the year, ending up 18th out of the 45 companies in the Dow Jones Electric Utility Index. We believe strongly that our stock price in 1999 does not reflect our solid operating performance, and we expect that it is just a matter of time before our stock is again recognized as the tremendous value that it is. THE RIGHT TIME—THE RIGHT PLACE We are in the right place to grow our earnings and add value through maintaining the momentum we have gained over the past few years. We have the assets, location, skills, and scale that will mean ongoing success, earnings growth, and value for shareholders. And, the timing couldn’t be better. All but one of the states in our franchised service territory have moved to customer choice, and most consumers in our region will have choice within the next several years. About half of all states in the nation are well on their way to customer choice. This nationwide movement opens the doors of opportunity for low-cost suppliers like Allegheny Energy. We also have the advantage of having one state—Pennsylvania—with its energy supply industry already deregulated, providing us with valuable experience and insights into newly opening markets. And, we continue to benefit from the reorganization of our business several years ago, which created the flexibility needed to grow and prosper. We have the lowest-cost generating fleet in our region, with competitive operating costs that place us in the top quartile of the nation’s major electric companies. We are strategically located in a growing region that sits on top of an abundant low-cost fuel—coal. We have added natural gas generation to diversify our fuel mix, help us meet changing environmental requirements, and provide further flexibility. We continue to expand our energy supply business regionally, with the goal of expanding nationally with our strong, well-recognized name. And, thousands of new energy delivery customers have been added to our energy delivery business since 1998. We have taken advantage of our position of strength and created three distinct businesses within Allegheny Energy, all of which are actively engaged in achieving our strategy. These businesses, which are profiled in more detail later in this report, are:
TIME FOR ALLEGHENY ENERGY SUPPLY We have been intent on implementing our strategy to increase the size of our generating portfolio and form a non-regulated energy supply company—Allegheny Energy Supply Company, LLC. We succeeded at both. We also appointed a veteran of our top-notch power generation operation, Peter J. Skrgic, as President of our new supply company. Pete is using his 36 years of experience managing all aspects of energy production to make Allegheny Energy Supply a strong competitor. As a result of a positive restructuring settlement in Pennsylvania, we transferred about 3,800 MW of generation to Allegheny Energy Supply at book value of $306 per kilowatt, which is substantially less than what others have paid for generation within our region. We also transferred 276 MW of merchant generation from our Fort Martin plant, placed into service 88 MW of new gas-fired generation at Springdale, Pa., and have placed orders for and plan to build an additional 800 MW soon. This year, we will transfer about 1,300 MW of low-cost generation to Allegheny Energy Supply as a result of a positive settlement in our Maryland restructuring proceeding and will shift additional generation over the next two years as our other jurisdictions—Ohio, West Virginia, and Virginia—move to customer choice. We continue to evaluate the purchase or construction of additional generating assets in regions that have been targeted for their growth potential; however, we continue a disciplined approach to buying appropriately valued properties that fit with our overall strategy. Our success in marketing our unregulated generation is evidenced by the fact that we gained nearly 31/2 times more load than we lost in the deregulated Pennsylvania market. Overall, we have gained about 80,000 customers, achieved a net increase in load of 1,000 MW, and continue to add new customers in Pennsylvania, New Jersey, and Delaware—states that have opened their doors to choice. We are also poised to capture more new customers outside of our franchised territory in Maryland, as that state moves to choice in July of this year. TIME FOR ALLEGHENY POWER Allegheny Power has a powerful reputation built on decades of operational excellence and superior customer service. Jay S. Pifer, Allegheny Power President, heads this world-class energy delivery business, which made great strides in 1999. Jay, who has 35 years of expertise in delivery operations, was instrumental in achieving the expansion of our regulated customer base by 15 percent as a result of the acquisition of West Virginia Power and the announced acquisition of Mountaineer Gas—two companies located within West Virginia. West Virginia Power added 50,000 customers, split between electric and gas operations, and was our first venture into the gas distribution business. The Mountaineer Gas purchase, which should close later this year, will add more than 200,000 gas customers throughout West Virginia. Both acquisitions are in line with our strategy of expanding our customer base within the region. Equally important, both will add to earnings in the first year. We are very proud, but not surprised, that we were singled out recently by a nationally recognized survey firm as one of the top energy delivery companies in the East for customer satisfaction—and among the top 20 nationwide. Our reputation will serve us well as we expand within our region. In addition, we received the Edison Electric Institute’s Emergency Response Assistance Award as a company that gets the job done when it counts. We are there for our own customers and ready to help others outside of our area when trouble strikes. TIME FOR ALLEGHENY VENTURES As was also promised last year, we have made great progress with our unregulated telecommunications and energy-related business, Allegheny Ventures. We continue to assemble a strong leadership team dedicated to growth and to shareholder value. The newest member of this team, Paul M. Barbas, joined us in mid-1999, coming to us from General Electric. As President of Allegheny Ventures, Paul is focused on leveraging investments already in place and developing new opportunities. From fiber optic lines that we own and lease to others, to distributed generation, to unused real estate holdings, Paul is busily discovering creative means of reaping the untapped earnings potential that is buried within these assets. We have about 600 route miles of fiber already in place and plan to add 1,000 more route miles this year. The possibilities are excellent for continued growth. Our goal is to grow Allegheny Ventures to provide at least 10 percent of our total earnings within five years. Expect to hear more good things from this exciting member of the Allegheny Energy family as we develop more growth businesses. TIME FOR ENVIRONMENTAL COMMITMENT Allegheny Energy is an exemplary environmental corporate citizen. We operate our facilities in compliance with all environmental regulations. We involve our employees in environmental initiatives and take our stewardship very seriously, as is evidenced by our Corporate Environmental Policy. We are proud that we use primarily coal—America’s fuel. Coal is the most abundant fuel source in our nation and one that is used to create electricity in an environmentally sound manner. Almost 60 percent of the electricity used in the United States is produced from coal. At Allegheny Energy, we burn more than 17 million tons of coal a year, all of it from the Mid-Atlantic region. It is this fuel that allows us to power homes, businesses, and industries from America’s Heartland to the Eastern Seaboard. We will continue to operate in a manner which protects and values the environment and are committed to making energy efficiently and cleanly. TIME FOR OUR EMPLOYEES TO SHINE The real gems of Allegheny Energy are our dedicated, hard-working employees who have made all of our successes possible. From managing the challenges of deregulation and turning them into a win for our Company and shareholders, to keeping the lights on for our customers when the year 2000 rolled around, to seeking new ways to grow our businesses, our employees are the best. They are committed to our Company, to our communities, and to serving our customers. It is their time to shine, and they continue to exceed all of our expectations as we take advantage of the many opportunities in our industry. PERFECT TIMING I am truly excited about our achievements in 1999. Although none of us underestimate the challenges ahead, I am confident in our ability to succeed and remain a solid investment. We have the assets in the right places, experience in deregulated markets, and an aggressive growth strategy. We are focused intently on the opportunities ahead. The new energy marketplace is full of promise. It is the perfect time for Allegheny Energy.
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