Allegheny Energy, Inc. (AYE) reported adjusted income of 73 cents per share in third-quarter 2010, beating the Zacks Consensus Estimate of 53 cents by 20 cents. Results are substantially ahead of third-quarter 2009 adjusted earnings of 59 cents per share. Adjusted income was $124.9 million in the quarter, an increase of 24.8% from $100.1 million in third-quarter 2009.
The earnings beat may primarily be attributable to higher customer usage, transmission expansion and a rate increase in West Virginia.
Including pre-tax expenses of $19.1 million related to the proposed merger with FirstEnergy Corp, pre-tax interest expense of $7.3 million related to a debt tender offer and unrealized pre-tax gains of $10.5 million from economic hedges, the company reported net income of $115.1 million or 68 cents per share, compared with $77 million or 45 cents per share in the prior year quarter.
Operating revenues in the quarter under review were $1.04 billion, up 31.5% from $0.8 billion in third quarter 2009. The year-over-year improvement was mainly driven by increased generation output, higher power prices, increased customer usage transmission expansion and a rate increase in West Virginia.
However, lower third party sales and divesture of the Virginia distribution operations in the quarter were partial offsets. Operating revenue was however, slightly below the Zacks Consensus Estimate of $1.08 million.
Total operating expense in the third quarter of 2010 increased 34.6% year over year to $791.1 million. Higher fuel expenses and operations and maintenance expenses mainly drove the increase in operating expense.
Adjusted Earnings before Interest Tax Depreciation and Amortization was $346.8 million in the quarter, up from $297.0 million in the prior year quarter.
Allegheny Energy recorded an operating income of $252.6 million, up 22.9% over the prior year quarter.
Segment Update
Regulated Operations: Segment revenue increased 35.2% year over year to $484.5 million in the quarter under review.
Adjusted net income of $62.8 million was a substantial increase of 61.9% year over year. Higher usage, higher revenue from transmission expansion and a base rate increase in West Virginia drove the improvement. However, the improvement was muted to some extent due to higher service restoration costs and Virginia distribution operations disposal.
Merchant Generation: Segment revenue in the quarter was $878.0 million, up 20% over the prior year quarter.
The segment posted adjusted net income of $62.2 million, a slight increase of 1.5% over the prior year quarter. Higher output generation and power prices were partially offset by increased maintenance costs at power plants, depreciation and interest expense as well as adverse effects of power hedges.
Financial Update
Allegheny Energy ended the quarter with cash and cash equivalents of $463.6 million, up from $286.6 million at the end of fourth quarter 2009.
Long term debt increased to $4.6 billion from $4.4 billion in fourth quarter 2009.
The company continues to benefit from transmission expansions. We expect its focus on TrAIL and PATH transmission expansion projects will help generate increased revenue going forward. Also merger with FirstEnergy paves the way for a utility behemoth with ten regulated electric distribution companies providing electricity services to more than 6 million customers in 7 states.
However, increasing operating costs as well as debt levels make us cautious.
We maintain our “Neutral” recommendation on Allegheny Energy over the long term. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.
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