Page 1 of 11
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 2001
Commission File Number 0-14688
ALLEGHENY GENERATING COMPANY
(Exact name of registrant as specified in its charter)
Virginia | 13-3079675 |
(State of Incorporation) | (I.R.S. Employer Identification No.) |
10435 Downsville Pike, Hagerstown, Maryland 21740-1766
Telephone Number - 301-790-3400
The registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
At August 14, 2001, 1,000 shares of the Common Stock ($1.00 par value) of the registrant were outstanding.
- 2 -
ALLEGHENY GENERATING COMPANY
Form 10-Q for Quarter Ended June 30, 2001
Index
Page No.
PART I - FINANCIAL INFORMATION: | |
| |
Statement of Operations - Three and six months ended June 30, 2001 and 2000 | 3 |
| |
Statement of Cash Flows - Six months ended June 30, 2001 and 2000 | 4 |
| |
Balance Sheet - June 30, 2001 and December 31, 2000 | 5 |
| |
Notes to Financial Statements | 6 |
| |
Management's Discussion and Analysis of Financial Condition and Results of Operations | 7-10 |
| |
PART II - OTHER INFORMATION | 11 |
- 3 -
Allegheny Generating Company
STATEMENT OF OPERATIONS
(Thousands of Dollars)
| Unaudited |
| Three Months Ended | Six Months Ended |
| June 30 | June 30 |
| 2001 | 2000 | 2001 | 2000 |
| | | | |
Affiliated Operating Revenues | $16,738 | $17,359 | $34,510 | $34,514 |
| | | | |
Operating Expenses: | | | | |
Operation and maintenance expense | 1,442 | 958 | 3,067 | 2,324 |
Depreciation | 4,242 | 4,242 | 8,485 | 8,486 |
Taxes other than income taxes | 866 | 1,081 | 1,757 | 2,214 |
Federal and state income taxes | 2,340 | 2,139 | 4,556 | 3,968 |
Total Operating Expenses | 8,890 | 8,420 | 17,865 | 16,992 |
Operating Income | 7,848 | 8,939 | 16,645 | 17,522 |
Other income, net | 2 | 3 | 4 | 3 |
Income Before Interest Charges | 7,850 | 8,942 | 16,649 | 17,525 |
Interest Charges: | | | | |
Interest on long-term debt | 2,407 | 2,420 | 4,814 | 4,847 |
Other interest | 770 | 929 | 1,652 | 1,807 |
Total Interest Charges | 3,177 | 3,349 | 6,466 | 6,654 |
| | | | |
Consolidated Net Income | $ 4,673 | $ 5,593 | $10,183 | $10,871 |
See accompanying notes to financial statements.
- 4 -
Allegheny Generating Company
STATEMENT OF CASH FLOWS
(Thousands of Dollars) | Unaudited |
| | Six Months Ended |
| | June 30 |
| | | |
| | 2001 | 2000 |
Cash Flows from Operations: | | |
Net income | $ 10,183 | $ 10,871 |
Depreciation | 8,485 | 8,486 |
Deferred investment credit and income taxes, net | (3,023) | (3,346) |
Unamortized loss on reacquired debt | 300 | |
Changes in certain current assets and | | |
liabilities: | | |
Materials and supplies | (56) | 49 |
Accounts payable | (392) | 2,533 |
Accounts receivable from parents and affiliates | | (2,163) |
Accounts payable from parents and affiliates | 7,204 | |
Taxes accrued | (2,613) | (1,030) |
Interest accrued | (18) | |
Prepaids | (73) | |
Other, net | 397 | 661 |
| | 20,394 | 16,061 |
Cash Flows used in Investing: | | |
Construction expenditures | (895) | (162) |
| | |
Cash Flows used in Financing: | | |
Issuance of long-term debt | 57 | |
Notes payable to affiliate | (41,000) | 100 |
Notes payable to parent | (7,400) | |
Notes payable | 44,841 | |
Cash dividends paid on common stock | (16,000) | (16,000) |
| | (19,502) | (15,900) |
| | |
Net Change in Cash and Temporary Cash | | |
Investments | (3) | (1) |
Cash and temporary cash investments at January 1 | 50 | 16 |
Cash and temporary cash investments at June 30 | $ 47 | $ 15 |
| | |
Supplemental Cash Flow Information | | |
Cash paid during the period for: | | |
Interest | $ 6,120 | $ 6,284 |
Income taxes | 10,198 | 8,488 |
| | |
See accompanying notes to financial statements. | | |
| |
- 5 -
Allegheny Generating Company | | |
BALANCE SHEET | Unaudited |
(Thousands of Dollars) | June 30 | December 31 |
| 2001 | 2000* |
ASSETS | | |
Property, Plant, and Equipment: | | |
Unregulated generation | $829,433 | $828,342 |
Construction work in progress | 1,334 | 1,530 |
| 830,767 | 829,872 |
Accumulated depreciation | (252,623) | (244,138) |
| 578,144 | 585,734 |
Current Assets: | | |
Cash and temporary cash investments | 47 | 50 |
Materials and supplies-at average cost | 2,210 | 2,154 |
Other | 200 | 253 |
| 2,457 | 2,457 |
Deferred Charges: | | |
Regulatory assets | 7,132 | 7,132 |
Unamortized loss on reacquired debt | 6,268 | 6,568 |
Other | 159 | 154 |
| 13,559 | 13,854 |
Total Assets | $594,160 | $602,045 |
| | |
CAPITALIZATION AND LIABILITIES | | |
Capitalization: | | |
Common stock - $1.00 par value per share, authorized | | |
5,000 shares, outstanding 1,000 shares | $ 1 | $ 1 |
Other paid-in capital | 138,552 | 144,370 |
| 139,553 | 144,371 |
Long-term debt | 149,102 | 149,045 |
| 287,655 | 293,416 |
Current Liabilities: | | |
Notes payable to affiliate | | 41,000 |
Notes payable to parent | 4,850 | 12,250 |
Notes payable | 44,841 | |
Accounts payable | | 392 |
Accounts payable to parents/affiliates, net | 8,415 | 1,211 |
Federal and state income taxes accrued | 1,119 | 3,736 |
Other taxes accrued | 55 | 51 |
Interest accrued | 3,196 | 3,214 |
Other | 1,283 | 1,006 |
| 63,759 | 62,860 |
Deferred Credits: | | |
Unamortized investment credit | 43,214 | 43,876 |
Deferred income taxes | 175,906 | 178,267 |
Regulatory liabilities | 23,626 | 23,626 |
| 242,746 | 245,769 |
Total Capitalization and Liabilities | $594,160 | $602,045 |
See accompanying notes to financial statements. | | |
*Certain amounts have been reclassified for comparative purposes. | | |
- 6 -
ALLEGHENY GENERATING COMPANY
Notes to Financial Statements
1. Allegheny Generating Company (the Company) was incorporated in Virginia in 1981. Its common stock is owned by Monongahela Power Company (Monongahela Power) - 22.97% and Allegheny Energy Supply Company, LLC (Allegheny Energy Supply) - 77.03%. Both Monongahela Power and Allegheny Energy Supply are wholly-owned subsidiaries of Allegheny Energy, Inc. (Allegheny Energy) and are part of the Allegheny Energy integrated electric utility system. The Notes to Financial Statements for the Company's Annual Report on Form 10-K for the year ended December 31, 2000, should be read with the accompanying financial statements and the following notes. The accompanying financial statements appearing on pages 3 through 5 and these notes to financial statements are unaudited. In our opinion, such financial statements together with these notes contain all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the Company's financial position as of June 30, 2001, the results of operations for the three and six months ended June 30, 2001, and 2000, and cash flows for the six months ended June 30, 2001, and 2000.
2. All of the employees of Allegheny Energy Inc. (Allegheny Energy) are employed by Allegheny Energy Service Corporation (AESC), which performs services at cost for the Company and its affiliates in accordance with the Public Utility Holding Company Act of 1935 (PUHCA). Through AESC, the Company is responsible for its proportionate share of services provided by AESC. The total billings by AESC (including capital) to the Company were $.1 million for the second quarter of 2001 and $.2 million for the first six months of 2001. Total billings were $.06 million and $.1 million for the second quarter and six months ended June 30, 2000.The Company has various operating transactions with its affiliates. It is the Company's policy that the affiliated receivable and payable balances outstanding from these transactions are presented net on the balance sheet and statement of cash flows. At June 30, 2001, net payable to parents and affiliates was $6.8 million. At December 31, 2000, net payable to parents and affiliates was $1.2 million.
3. The Company systematically reduces capitalization each year as its
assets depreciate. This results in the payment of dividends in excess of current earnings. The Securities and Exchange Commission (SEC) approved the Company's request to pay common dividends out of capital. Common dividends were paid from retained earnings, reducing the account balance to zero, and from other paid-in capital as follows:
| | Six Months Ended |
| | June 30, |
| 2001 | 2000 |
| | (Thousands of Dollars) |
| | | |
Retained earnings | $11,198 | $10,871 |
Other paid-in capital | 4,802 | 5,129 |
Total | $16,000 | $16,000 |
4. Regulatory liabilities, net of regulatory assets of $16.5 million at June 30, 2001 and December 31, 2000, relate to income taxes.
- 7 -
ALLEGHENY GENERATING COMPANY
Management's Discussion and Analysis of Financial Condition
And Results of Operations
COMPARISON OF SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 2001 WITH SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 2000
The Notes to Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report on Form 10-K for Allegheny Generating Company (the Company) for the year ended December 31, 2000, should be read with the following Management's Discussion and Analysis information.
Factors That May Affect Future Results
Certain statements within constitute forward-looking statements with respect to the Company. Such forward-looking statements include statements with respect to, results of operations, capital expenditures, regulatory matters, liquidity and capital resources, resolution and impact of litigation, and accounting matters. All such forward-looking information is necessarily only estimated. There can be no assurance that the Company's actual results will not materially differ from expectations. Actual results have varied materially and unpredictably from past expectations.
Factors that could cause the Company's actual results to differ materially include, among others, the following: general and economic and business conditions; industry capacity; changes in technology; changes in political, social and economic conditions; changes in the price of power and fuel for electric generation; regulatory matters; litigation involving the Company; regulatory conditions applicable to the Company; the loss of any significant customers; and changes in business strategy or development plans.
SIGNIFICANT EVENTS IN THE FIRST SIX MONTHS OF 2001
Allegheny Energy, Inc. (Allegheny Energy) Seeks Approval for Initial Public Offering (IPO) of Allegheny Energy Supply Company, LLC (Allegheny Energy Supply)
On July 23, 2001, Allegheny Energy filed a U-1 application with the SEC, seeking approval of an IPO of up to 18 percent of the common stock in a new holding company, which would own 100 percent of its unregulated generating subsidiary, Allegheny Energy Supply. Allegheny Energy also announced that it expects, subject to market and other conditions, to distribute to the holders of its common stock its remaining equity ownership of the Allegheny Energy Supply holding company during 2002 in a tax-free distribution.
Allegheny Generating Company
- 8-
The U-1 application seeks the authorizations required under the Public Utility Holding Company Act (PUHCA). The purpose of the IPO and distribution is to permit Allegheny Energy's regulated utility operations and Allegheny Energy Supply to focus on their respective businesses and market opportunities and, in particular, to allow Allegheny Energy Supply to pursue its growth strategy for the electric generation business.
These transactions would create two independent companies, strategically positioned to capitalize on the opportunities in the rapidly evolving energy marketplace:
- Allegheny Energy will include its utility operating subsidiaries, Monongahela Power Company (Monongahela Power), The Potomac Edison Company (Potomac Edison),and West Penn Power Company (West Penn), doing business as Allegheny Power, as well as its Allegheny Ventures, Inc. (Allegheny Ventures). Allegheny Power is a diversified energy and energy services company that delivers electric energy and natural gas to about three million people in parts of Maryland, Ohio, Pennsylvania, Virginia, and West Virginia. Allegheny Ventures is a growing business development company that invests in and develops telecommunications and energy-related projects; and
- A new holding company, which will own the businesses of Allegheny Energy Supply, an unregulated energy company that develops, owns, and operates electric generating facilities and supplies and trades energy and energy-related commodities in selected domestic retail and wholesale markets.
For tax efficiency, the new holding company proposes formation of a Virginia limited liability company subsidiary ("Allegheny Generating Company, LLC") into which its interest in the Company will be merged pursuant to Sections 9(a) and 10 of the PUHCA of 1935 (the Act).
The filing of the U-1 application marks Allegheny Energy's first official step in the IPO process. Allegheny Energy expects to file an S-1 Registration Statement with the SEC by the end of the third quarter.
OTHER EVENTS
New Accounting Standards
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations." This standard requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred with a corresponding increase in the carrying amount of the related long-lived asset. Over time, the liability will be accreted to its present value each period, and the capitalized cost will be depreciated over the useful life of the asset. Upon settlement of the liability, an entity either will settle the obligation for its recorded amount or incur a gain or loss upon settlement. The Company will be evaluating the effect of adopting SFAS No. 143 on its results of operations and
Allegheny Generating Company
- 9-
financial position prior to the Company's adoption of the standard on January 1, 2003.
Review of Operations
As described underLiquidity and Capital Requirements, revenues are determined under a cost of service formula rate schedule. Revenues are expected to decrease each year due to a normal continuing reduction in the Company's net investment in the Bath County station and its connecting transmission facilities upon which the return on investment is determined.
The net investment (primarily net plant less deferred income taxes) decreases to the extent that provisions for depreciation and deferred income taxes exceed net plant additions. Annual revenues are expected to decrease due to a normal continuing reduction in the Company's net investment.
The increase in operating expenses in the second quarter and first six months of 2001 resulted from increases in operation and maintenance expenses, and federal and state income taxes, slightly offset by a decrease in taxes other than income taxes.
Liquidity and Capital Requirements
The Company's discussion on Liquidity and Capital Requirements and Review of Operations in its Annual Report on Form 10-K for the year ended December 31, 2000, should be read with the following information.
Pursuant to an agreement, the Parents buy all of the Company's capacity in the station which is priced under a "cost-of-service formula" wholesale rate schedule approved by the Federal Energy Regulatory Commission (FERC). Under this arrangement, the Company recovers, in revenues, all of its operation and maintenance expenses, depreciation, taxes, and a return on its investment. On December 29, 1998, the FERC issued an Order accepting a proposed amendment to the Parents' Power Supply Agreement with the Company effective January 1, 1999. The amendment sets the generation demand for each Parent proportional to its ownership in the Company. Previously, demand for each Parent fluctuated based on customer usage.
The Company's rates are set by a formula filed with and accepted by the FERC. The only component that changes is the return on equity (ROE). Pursuant to a settlement agreement filed with and approved by the FERC, the Company's ROE is set at 11% and will continue at that rate unless any affected party seeks a change.
As previously reported, the Company has received authority from the Securities and Exchange Commission (SEC) to pay common dividends from time to time through December 31, 2001, out of capital to the extent permitted under applicable corporation law and any applicable financing agreements which restrict distributions to shareholders. Due to the nature of being a single asset company with declining
Allegheny Generating Company
- 10 -
capital needs, the Company systematically reduces capitalization each year as its asset depreciates. This has resulted in the payment of dividends in excess of current earnings out of other paid-in capital and the reduction of retained earnings to zero. The Company's goal is to retire debt and pay dividends in amounts necessary to maintain a common equity position of about 45% including short-term debt. The payment of dividends out of capital surplus will not be detrimental to the financial integrity or working capital of either the Company or its Parents, nor will it adversely affect the protections due debt security holders.
Financings
The Company and its affiliates use an Allegheny Energy, Inc. (Allegheny Energy) internal money pool as a facility to accommodate intercompany short-term borrowing needs, to the extent that certain companies have funds available. The Company had $4.9 million in money pool borrowings outstanding at June 30, 2001, compared to $53.3 million outstanding at December 31, 2000.
For the period ended June 30, 2001, the availability of funds invested in the internal money pool were not sufficient to meet the Company's borrowing requirements, therefore requiring the Company to issue short-term debt in the form of commercial paper and bank loans with an average interest rate of 4.8%. The balance of short-term debt was $44.8 million at June 30, 2001. No short-term debt was outstanding at December 31, 2000.
Total short-term borrowings at June 30, 2001, were $49.7 million, compared to $53.3 million at December 31, 2000.
- 11 -
ALLEGHENY GENERATING COMPANY
Part II - Other Information to Form 10-Q
for Quarter Ended June 30, 2001
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K
(a) No reports on Form 8-K were filed on behalf of the Company
for the quarter ended June 30, 2001.
(b) Exhibit 12 Ratio of Earnings to Fixed Charges
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ALLEGHENY GENERATING COMPANY |
| |
/s/ T. J. KLOC |
| |
T. J. Kloc, Vice President |
and Controller |
(Chief Accounting Officer) |
August 14, 2001
