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Original Source: FD (FAIR DISCLOSURE) WIRE
MAX KUNIANSKY, EXECUTIVE DIRECTOR OF IR AND CORPORATE COMMUNICATIONS, ALLEGHENY ENERGY, INC.: Well, welcome. Welcome to Western Pennsylvania. Thank you for coming all this way to see us. I think I know all of you. I'm Max Kuniansky, and I'm going to begin with a accelerated version of the obligatory Safe Harbor Statement.
Some of our statements today will be forward-looking. These statements involve risks and uncertainties, and are based on currently available information. Actual results may differ significantly from the results in the outlook we discuss today. Please refer to our SEC filings regarding factors that may cause actual results to differ from the forward-looking statements made today. We won't be talking about the third quarter today. We'll do that on our earnings conference call, which we'll hold in about a month's time, as we always do. So, we ask that you hold any questions about the third quarter until we have that conference call in about a month. When we get to the question-and-answer session -- hi Vic, good to see you.
When we get to the question-and-answer session, please wait until I can get to you with the hand-held microphone. The reason for that is so that the people on the webcast can hear your question and understand the answer. One other very important announcement is that we're going to be giving you all Allegheny Energy hard hats with your names on them, tomorrow, for the plant tour. You can take these hats home, and if you'd rather we mailed these hats to you, we'll do that too.
And with that, let me introduce Paul Evanson, Chairman, President and Chief Executive Officer of Allegheny Energy.
PAUL EVANSON, CHAIRMAN, PRESIDENT AND CEO, ALLEGHENY ENERGY, INC.: Thank you, Max. I'll add my welcome to everyone, delighted to have all of you here at this very understated resort. Great you all could find the room, so you kind of wander yourself through, but we're delighted to have so many of you here. I think we have basically all the sell side -- pretty much all the sell side analysts that cover the company and a number of our major investors, shareholders, who I like to think of as partners that help us in running the company. So, we have a -- I hope -- hopefully, will be a very informative, very enjoyable day and a half for all of you, particularly the tour tomorrow.
Let me first go through [off-mic] go through the program that we'll have. It's -- it will obviously focus primarily on generation and everything we're doing to try to improve that and give you a lot of background on it. Joe Richardson will start and give you kind of the overview of the Generation business. Joe as you know, for the last three years, ran our delivery business and just did an outstanding job doing that. And, many of you may know Joe from his days at Florida Power Corporation, not FTL, but Florida Power, where he was President there and ran Generation, the P&D.
Then, we'll get into kind of the details of the availability improvement program. Leo Rajter is our Vice President, Supply. Leo is right here. Leo will go into those details. And, Leo's had some great experiences, and I think will be very helpful in that. And then finally, we have a short little segment on quality improvement, which is an element of it, how we're using quality techniques and quality tools to kind of accelerate the Generation Improvement Program.
And Mike Adams, who's right up front here will be presenting that. Mike is a one-man show at the company. He [inaudible], he spent most of his career at FTL. That's how I got to know him where he was in charge of quality and then, spent two or three years at Microsoft before joining me here. And, we're like one-man shows, and as you'll see, Mike has done a lot in terms of stimulating activity throughout the whole company.
Then, we'll have time for Q&A. It does take us up to dinner, but dinner is actually like four minutes from here. It's on a little island. That's why we need a bus to get us there, but it's not a far distance. And then tomorrow, the bus leaves at 7:30. We'll have breakfast in one of the rooms down here. You ought to be checked out by then. 7:30, we'll have the full tour Hatfield and then Leo will be telling you a little bit more about that. We'll be back here at -- for lunch at noon, and then we'll have another little Q&A session after that. And, we should be done by 1:30. So, that's kind of the program.
Before Joe begins, you'll have to excuse me, I have a little -- getting over a little cold here. But before Joe begins, I wanted to make just a few comments to kind of put in context the company, since we're really talking primarily about the Generation side. And as you know, we've gone through a really very successful fundamental turnaround of the company over the last three years and now entering into the growth phase, a very high growth phase, perhaps higher -- more growth than any other utility, I think, in the industry.
And, it's coming from -- from the basic part of the business, the first three items and really the revenue side, primarily, rates, that is coming from the programs and POLR transitioning to market, plant availability increase, and so, it's rate and it's output. Cost, as you'll see, are well under control, those with the cash flows serve to further reduce interest expense. And then, we get into some of the expansion programs, the capital programs, principally the transmission expansion that we announced a few months ago. And then, I'll mention just very briefly a few other areas.
Just to go into two seconds on each of these. Pennsylvania, as you know, we were quite a bit ahead of the curve in terms of dealing with potential rate shock. So in 2004, we started discussions in Pennsylvania, 2005, finalized it. It gave us increases earlier, which helped cash flow earnings, got us to market a lot sooner. So by 2010, we'll have over $400 million more revenue from Juniper than we had last year. And, that's kind of programmed and locked in.
Similarly, we're going to market in Maryland and Ohio for another close to 5 million megawatt hours. And that transition to market should add about $90 million to this year's income. In 2009, we'll have Maryland. That's within one-year, Maryland will be going to market. As you know, we've been having discussions, informal discussions about how to deal with that. So, you probably will not see that in one year. It'll probably be over a period of years. And then obviously, 2011 is when Pennsylvania comes off of those POLR agreements and then, goes to market.
You're going to be hearing a lot about plant availability and how we plan to get to the 91%. Each percentage improvement is probably worth $10 million to $12 million, so there's another $120 million coming from just adding output -- [watts] -- to the plants. Cost, this shows our O&M costs since 2002, obviously been a very significant reduction. You're not going to see that level going forward, but I think we've stabilized at a level, and hopefully, will start drifting down from there. And 2006, we feel pretty good about all of that as the impact on the generation, on -- I'm sorry, on the financing, both reducing the volume of the debt and then the refinancings that we're able to do. So, that's another part.
Then, we have some new investments that we've been doing. And, the major one is the transmission system. It's building that transmission line from one end of our system, basically through the other projects that are preliminary. The number is $850 million with most of the spending coming in 2009 and 11. The target in service date is 2011. That would be an extraordinary accomplishment to get that done. And, to build a major transmission line in five years would really be striking. We're certainly making the effort to do it, and Dave Flitman will -- is in charge of that. And, I think we've got a good shot at it, especially when it comes out of our system into Dominion's system. And, Virginia has some other challenges in there also. But, we're pushing to get that done.
FERC, as you know, has improved all the incentive rates. We're looking for a very good rate of return on that, and we'll be getting returns during the construction period. So, it's about -- I think, about as good as it gets from a regulated return structure. And obviously, we'll change the Generation pricing, probably to the benefit of our plant. And the red is the line that we're going through, a planned line. You see it comes out of our territory here and goes into Dominion's in Loudoun. And there are a lot of wealthy gentlemen farmers right in this area, so nothing's going to be easy when we build transmission, wherever it is. But, we're actively now in the siting process.
And looking beyond what we already have announced, within our territory, within PJM, obviously, demand keeps growing, growing faster than capacity additions. All that means is reserve margins will be tightening. It means on the dispatch curve, we're going to be going up in terms of [reg] rates and pricing on the one side. On the other side, generation will be more gas, particularly within our region than it historically has been. So, that shift will continue to take place. And as you know, PJM has proposals in -- known relative to capacity pricing, which today for us, is virtually zero and, I think, can be a meaningful improvement as we start looking out, as capacity margins start shrinking and getting a little tighter.
And then the final item I'd wish to deal with, additional transmission investment. It's clearly our position that, to the extent anyone want to build transmission that goes through our system, that we have the right to build it. And, we certainly would intend to build it, solely, ourselves. There are some issues relative to that, but we -- frankly, I think the rules are reasonably clear that we have the right to do that.
So, those are just some quick items I wanted to mention. We, obviously, always are on the lookout for investments in anything that can add to growth of the company. We're all committed to growing shareholder value. There isn't a day goes by that we really don't start thinking of things we could do that would help grow that shareholder value. That's really what we think our job is all about. And hopefully, over time, we'll be adding other items in here that we think will continue to add to that value.
So that's just very quick overview, and I know it's not very new news for probably everyone in this room, but I thought it was kind of the background or the context in which we ought to now get into the details of the Generation side. So with that, I'll turn it over to Joe, and we'll start from there. Thank you.
Plenty of time, I think, at dinner and tomorrow on the bus and on the tour to ask questions for -- not only myself, but everybody else on the team. And, I should have mentioned the other members of the team who are here who won't be making presentations, our CFO, Phil Goulding, who you know, probably, very well. Dave Flitman, who many of you might not know, is the President of Allegheny Power, our Delivery business. He took Joe's place when Joe took over Generation. And David Cannon, David is our Vice President, Environmental, where he's very involved in the scrubbers. He's very involved in all the various Pennsylvania rules and federal rules [associated], et cetera. And then, Mike Herriott, Mike joined us four months ago, five months ago. When?
UNIDENTIFIED COMPANY REPRESENTATIVE: February.
PAUL EVANSON: February, I'm appraised. Mike -- and, Mike's job now is to -- is totally those scrubbers, getting all those scrubbers done. I wouldn't say we got off on the right foot just perfectly on that project, but I think we've got Mike in. And, Mike's got world-class experiences in other industries. And, I'm very confident now that we have that in place, and we'll kind of go from there. So with that, I don't think I've eliminated or missed anybody. So with that, Joe?
JOE RICHARDSON, PRESIDENT, ALLEGHENY POWER, ALLEGHENY ENERGY, INC.: Thank you. I'd like to spend a few minutes just doing a quick overview of our Generation fleet. And then, I'll spend the rest of my time talking about the priorities within the Allegheny Supply group. For those of you who may not know much about our fleet, I wanted to start off with a map. The dark blue is the Allegheny Power service territory. And then the very south, are the locations of our power plants. I've highlighted the supercritical plants in red because we'll be spending a lot of our time this afternoon and tomorrow talking about these units.
A couple of interesting things about where we're located, as you can see, most of those dots are concentrated on the northern end of the Appalachian coal fields. Secondly, all of our plants dispatch easily into the PJM market. In fact, if you can envision PJM, which runs from Illinois to New Jersey, we're more or less the bull's eye in it.
The third thing, and it's not depicted on the map, but there's kind of a space here where there's really no dots or anything like that. That's the Allegheny Mountain Range. And that is, in a lot of ways, the demarcation line for the congestion that the transmission line that Paul talked about a few minutes ago is going to relieve. Future generation is more likely to be built on the west side of the Allegheny Mountains, and this transmission line will certainly open up a lot of opportunity -- a lot of market opportunities to get to the east side of the mountains.
These two pie charts graphically show the mix of our fleet. This time, we have broken coal out into two categories, the supercritical and the sub-critical. And then, we also show gas, hydro and oil, which are very small in both categories. On the left, out of the 9,600 megawatts that the company has, over 63% of that is supercritical. But more importantly, on the right, which shows the mix by -- of output, the supercriticals make up 79% of our actual output. So, they clearly are a key important ingredient to our future activity and success.
So, a little bit more detail on this -- these supercritical units. By way of history, all of these units were built, there's actually ten units at four stations, and they were all built between '67 and 1980. Fort Martin was the oldest, and Pleasants is the newest. As you can see, they all have significant amounts of capacity. Two of them, Harrison and Pleasants, are already scrubbed and have SCRs, so we're in good environmental shape there. Hatfield and Fort Martin are the two that we are currently in the process of putting scrubbers on, and have no plans at this point on SCRs, but the scrubber activity has begun. And, I'm going to talk about that in a minute.
Just one comment on the heat rate, you'll notice there's a slight difference between Harrison and Pleasants and Fort Martin and Hatfield. That is really the result of the scrubbers. So, when Hatfield and Fort Martin get scrubbers, you'll see just a slight increase -- or, an increase in the heat …