Page 1 of 15
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 September 30, 1995
Commission File Number 1-267
ALLEGHENY POWER SYSTEM, INC.
(Exact name of registrant as specified in its charter)
Maryland 13-5531602
(State of Incorporation) (I.R.S. Employer Identification No.)
12 East 49th Street, New York, New York 10017-1028
Telephone Number - 212-752-2121
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 November 8, 1995, 120,397,198 shares of the Common Stock ($1.25 par
value) of the registrant were outstanding.
- 2 -
ALLEGHENY POWER SYSTEM, INC.
Form 10-Q for Quarter Ended September 30, 1995
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Consolidated statement of income -
Three and nine months ended September 30, 1995 and 1994 3
Consolidated balance sheet - September 30, 1995
and December 31, 1994 4
Consolidated statement of cash flows -
Nine months ended September 30, 1995 and 1994 5
Notes to consolidated financial statements 6-8
Management's discussion and analysis of financial
condition and results of operations 9-15
PART II--OTHER INFORMATION 15
- 3 -
ALLEGHENY POWER SYSTEM, INC.
Consolidated Statement of Income
Three Months Ended Nine Months Ended
September 30 September 30
1995 1994 1995 1994
(THOUSANDS OF DOLLARS)
ELECTRIC OPERATING REVENUES:
Residential $ 230,371 $ 199,865 $ 689,385 $ 656,799
Commercial 130,685 118,601 369,847 344,846
Industrial 189,151 181,250 574,589 537,173
Nonaffiliated utilities 101,659 75,627 287,838 261,943
Other 20,211 15,780 53,497 48,878
Total Operating Revenues 672,077 591,123 1,975,156 1,849,639
OPERATING EXPENSES:
Operation:
Fuel 136,563 136,531 384,844 424,336
Purchased power and exchanges, net 122,170 101,649 376,362 336,878
Deferred power costs, net 11,479 1,133 39,326 2,730
Restructuring charge 13,435 - 13,435 -
Other 72,732 69,496 214,840 206,901
Maintenance 61,765 59,941 182,938 184,162
Depreciation 64,586 55,722 194,682 167,855
Taxes other than income taxes 47,351 45,935 138,841 139,233
Federal and state income taxes 39,261 29,861 115,301 101,854
Total Operating Expenses 569,342 500,268 1,660,569 1,563,949
Operating Income 102,735 90,855 314,587 285,690
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 691 3,385 3,103 8,947
Other income, net 2,045 619 4,894 361
Total Other Income and Deductions 2,736 4,004 7,997 9,308
Income Before Interest Charges and
Preferred Dividends 105,471 94,859 322,584 294,998
INTEREST CHARGES AND PREFERRED DIVIDENDS:
Interest on long-term debt 42,133 39,452 124,861 113,604
Other interest 3,414 2,444 10,664 7,441
Allowance for borrowed funds used during
construction (603) (2,156) (2,879) (5,805)
Dividends on preferred stock of subsidiaries 2,291 5,312 12,880 14,719
Total Interest Charges and
Preferred Dividends 47,235 45,052 145,526 129,959
Consolidated Income Before Cumulative Effect
of Accounting Change 58,236 49,807 177,058 165,039
Cumulative Effect of Accounting Change, net - - - 43,446
CONSOLIDATED NET INCOME $ 58,236 $ 49,807 $ 177,058 $ 208,485
EARNINGS PER AVERAGE SHARE:
Consolidated income before cumulative effect
of accounting change $0.49 $0.42 $1.48 $1.40
Cumulative effect of accounting change, net - - - 0.37
Consolidated net income $0.49 $0.42 $1.48 $1.77
See accompanying notes to consolidated financial statements.
- 4 -
ALLEGHENY POWER SYSTEM, INC.
Consolidated Balance Sheet
September 30 December 31
1995 1994
(Thousands of Dollars)
ASSETS:
Property, Plant, and Equipment:
At original cost, including $200,761,000
and $215,756,000 under construction $ 7,762,350 $ 7,586,780
Accumulated depreciation (2,668,515) (2,529,354)
5,093,835 5,057,426
Investments and Other Assets:
Subsidiaries consolidated--excess of cost
over book equity at acquisition 15,077 15,077
Securities of associated company--at cost,
which approximates equity 1,250 1,250
Other 37,716 36,284
54,043 52,611
Current assets:
Cash and temporary cash investments 5,354 2,765
Accounts receivable:
Electric service, net of $11,617,000 and
$11,353,000 uncollectible allowance 269,438 250,367
Other 9,735 8,175
Materials and supplies--at average cost:
Operating and construction 96,872 94,478
Fuel 69,867 84,199
Prepaid taxes 50,687 43,880
Other 32,598 23,730
534,551 507,594
Deferred Charges:
Regulatory assets 653,940 643,791
Unamortized loss on reacquired debt 58,218 40,991
Other 43,074 59,812
755,232 744,594
Total Assets $ 6,437,661 $ 6,362,225
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 150,496 $ 149,116
Other paid-in capital 987,416 963,269
Retained earnings 971,322 946,919
2,109,234 2,059,304
Preferred stock:
Not subject to mandatory redemption 170,086 300,086
Subject to mandatory redemption - 25,200
Long-term debt 2,282,303 2,178,472
4,561,623 4,563,062
Current Liabilities:
Short-term debt 135,550 126,818
Long-term debt and preferred stock
due within one year 67,575 29,200
Accounts payable 128,410 190,809
Taxes accrued:
Federal and state income 29,065 13,873
Other 48,663 52,782
Interest accrued 45,085 42,078
Other 112,124 62,073
566,472 517,633
Deferred Credits and Other Liabilities:
Unamortized investment credit 151,815 158,018
Deferred income taxes 1,004,686 972,113
Regulatory liabilities 100,240 105,076
Other 52,825 46,323
1,309,566 1,281,530
Total Capitalization and Liabilities $ 6,437,661 $ 6,362,225
See accompanying notes to consolidated financial statements.
- 5 -
ALLEGHENY POWER SYSTEM, INC.
Consolidated Statement of Cash Flows
Nine Months Ended
September 30
1995 1994
(Thousands of Dollars)
CASH FLOWS FROM OPERATIONS:
Consolidated net income $ 177,058 $ 208,485
Depreciation 194,682 167,855
Deferred investment credit and income taxes, net 14,538 (13,384)
Deferred power costs, net 39,326 2,730
Allowance for other than borrowed funds used
during construction (3,103) (8,947)
Cumulative effect of accounting change before
income taxes - (72,333)
Changes in certain current assets and
liabilities:
Accounts receivable, net, excluding cumulative
effect of accounting change (20,631) 27,451
Materials and supplies 11,938 (15,930)
Accounts payable (62,399) (28,386)
Taxes accrued 11,073 30,421
Interest accrued 3,007 1,306
Other, net 12,996 20,339
378,485 319,607
CASH FLOWS FROM INVESTING:
Construction expenditures (225,400) (334,939)
Nonutility investment (197) -
Allowance for other than borrowed funds used
during construction 3,103 8,947
(222,494) (325,992)
CASH FLOWS FROM FINANCING:
Sale of common stock 25,849 26,082
Sale of preferred stock - 49,635
Retirement of preferred stock (162,170) (1,190)
Issuance of long-term debt 482,857 176,723
Retirement of long-term debt (361,473) (37,362)
Short-term debt, net 8,732 (62,387)
Cash dividends on common stock (147,197) (145,205)
(153,402) 6,296
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS 2,589 (89)
Cash and Temporary Cash Investments at January 1 2,765 2,417
Cash and Temporary Cash Investments at September 30 $ 5,354 $ 2,328
Supplemental cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 127,289 $ 110,420
Income taxes 85,573 93,910
See accompanying notes to consolidated financial statements.
- 6 -
ALLEGHENY POWER SYSTEM, INC.
Notes to Consolidated Financial Statements
1. The Company's Notes to Consolidated Financial Statements in the
Allegheny Power System companies' combined Annual Report on
Form 10-K for the year ended December 31, 1994, should be read
with the accompanying financial statements and the following
notes. With the exception of the December 31, 1994
consolidated balance sheet in the aforementioned annual report
on Form 10-K, the accompanying consolidated financial
statements appearing on pages 3 through 5 and these notes to
consolidated financial statements are unaudited. In the
opinion of the Company, such consolidated financial statements
together with these notes thereto contain all adjustments
(which consist only of normal recurring adjustments) necessary
to present fairly the Company's financial position as of
September 30, 1995, the results of operations for the three and
nine months ended September 30, 1995 and 1994, and cash flows
for the nine months ended September 30, 1995 and 1994.
2. The Consolidated Statement of Income reflects the results of
past operations and is not intended as any representation as to
future results. For purposes of the Consolidated Balance Sheet
and Consolidated Statement of Cash Flows, temporary cash
investments with original maturities of three months or less,
generally in the form of commercial paper, certificates of
deposit, and repurchase agreements, are considered to be the
equivalent of cash.
3. Earnings for the 1994 periods have been restated to reflect
retroactively the effect of an accounting change adopted as of
January 1994 to record unbilled revenues.
4. As previously announced, the System is undergoing a
reorganization and reengineering process (restructuring) to
simplify its management structure and to increase efficiency.
A workforce reduction will occur as departments are subjected
to the process.
The restructuring efforts completed to date, primarily for the
Bulk Power Supply Department of Allegheny Power Service
Corporation, will result in a workforce reduction of
approximately 210 employees, who will be offered an option of
immediate resignation under a Voluntary Separation Program
(VSP) or to remain employed subject to involuntary separation
(layoff) after one year, if during that year they have not
found other employment within the System. The VSP consists of
enhanced severance benefits and other incentives. In
connection with this workforce reduction, the subsidiaries
recorded, in the third quarter of 1995, a $13.4 million
restructuring charge for the estimated liabilities incurred to
date. The restructuring charge, net of income taxes, reduced
third quarter consolidated net income by about $8.1 million or
7 cents per share. Additional separation costs for these
employees will be recorded in 1996 depending upon those
employees who elect early separation under the VSP.
- 7 -
Additional restructuring costs will be incurred as the
restructuring process is completed by other departments, and
additional workforce reductions are identified. The costs
associated with any additional workforce reductions cannot be
estimated at this time. It is expected that the costs
associated with the restructuring program will be recovered
through cost savings in less than two years.
5. In June 1995, the Company's subsidiaries issued $77.5 million
of 6.15%, 20-year pollution control revenue notes, to refund
the following pollution control revenue notes: $11.5 million
of 6.95% Series B due 2003, $21 million of 7.30% Series B due
2008, $20 million of 7% Series B due 2008, and $25 million of
7.75% Series B due 2009.
Monongahela Power Company issued $70 million of 7.625%, 30-year
first mortgage bonds in May 1995 to refund $70 million of
8.875% series due 2019. Monongahela Power also issued $40
million of 8% Junior Subordinated Deferrable Interest
Debentures in June 1995 to replace the following issues of
preferred stock: $5 million of $7.36 Series E, $5 million of
$8.80 Series G, $5 million of $7.92 Series H, $10 million of
$7.92 Series I, and $15 million of $8.60 Series J.
The Potomac Edison Company issued $65 million of 7.75% and $80
million of 7.625% 30-year first mortgage bonds in May 1995 to
refund $65 million of 9.25% series due 2019 and $80 million of
9.625% series due 2020, respectively. Potomac Edison also
issued $45.5 million of 8% Junior Subordinated Deferrable
Interest Debentures in June 1995 to replace the following
issues of preferred stock: $5 million of $7.00 Series D, $5
million of $8.32 Series F, $10 million of $8.00 Series G, and
$25.5 million of $7.16 Series J.
West Penn Power Company issued $30 million of 7.75% Series MM,
30-year first mortgage bonds in May 1995 to refund $30 million
of 9% Series EE due 2019, and issued $15.4 million of 6.05%
Series G 19-year pollution control revenue notes in June 1995
to refund $15.4 million of 9.375% Series E due 2014. West Penn
also issued $70 million of 8% Junior Subordinated Deferrable
Interest Debentures in June 1995 to replace the following
issues of preferred stock: $10 million of $7.00 Series D, $10
million of $7.12 Series E, $10 million of $7.60 Series H, $10
million of $7.64 Series I, $10 million of $8.08 Series G, and
$20 million of $8.20 Series J.
6. Other paid-in capital increased $24,469,000 in the nine months
ended September 30, 1995, representing the excess of amounts
received over par value, less related expenses, from the
issuance of 1,104,244 shares of common stock pursuant to the
Company's Dividend Reinvestment and Stock Purchase Plan and
Employee Stock Ownership and Savings Plan. Additionally, other
paid-in capital decreased $322,000 as a result of subsidiary
companies' preferred stock transactions.
- 8 -
7. Common stock dividends per share declared during the periods
for which income statements are included are as follows:
1995 1994
Number Amount Number Amount
of Shares Per Share of Shares Per Share
First Quarter 119,292,954 $.41 117,663,582 $.41
Second Quarter 119,677,751 $.41 118,037,427 $.41
Third Quarter 120,046,969 $.41 118,456,542 $.41
- 9 -
ALLEGHENY POWER SYSTEM, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
COMPARISON OF THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1995
WITH THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1994
CONSOLIDATED NET INCOME
Consolidated net income for the third quarter of 1995
was $58.2 million or $.49 per average share, after reflecting a
restructuring charge net of taxes described below of about $8.1 million (7
cents per share), compared with $49.8 million or $.42 per average share
for the corresponding 1994 period. For the first nine months of 1995,
consolidated net income was $177.1 million or $1.48 per average share,
reflecting the restructuring charge, compared with $165.0 million or $1.40
per average share for the corresponding 1994 period, before the cumulative
effect of an accounting change to record unbilled revenues.
The restructuring charge reflects an estimate of the
liabilities incurred to date for separation costs of announced staff
reductions in connection with ongoing reorganization and reengineering
efforts (see Note 4 to Consolidated Financial Statements). The increase
in consolidated net income for the third quarter and in consolidated
income before the cumulative effect of accounting change for the first
nine months of 1995 reflects increased retail revenues resulting from
greater kilowatthour (kWh) sales to retail customers as described below
and from previously reported rate increases. The increased retail
revenues in the 1995 periods more than offset increases in depreciation,
interest, and other expenses.
SALES AND REVENUES
Retail kWh sales to residential, commercial, and
industrial customers increased 11%, 9%, and 3%, respectively, in the third
quarter. In the first nine months, retail kWh sales to commercial and
industrial customers increased 3% and 5%, respectively, and to residential
customers decreased .4%. The change in kWh sales to residential customers
was primarily due to variances in weather-related sales. Extremely hot
summer weather resulted in cooling degree days in the third quarter 42%
above normal and 50% above the moderate temperatures in the third quarter
of 1994. These increases in the third quarter were offset by milder
weather in the first six months of 1995 as compared to some of the coldest
temperatures ever recorded in much of the System's service territory
during the first quarter of 1994. The increase in commercial sales
reflects both increased usage and growth in the number of customers. The
increase in kWh sales to industrial customers resulted primarily from
increased sales to primary metals customers. KWh sales to primary metals
customers in the first nine months of 1994 were impacted by a 70-day
strike, ending June 9, 1994, at one of the System's largest industrial
customers.
- 10 -
The increases in revenues from retail customers
resulted from the following:
Change from Prior Periods
Quarter Nine Months
(Millions of Dollars)
Increased kWh sales $35.0 $32.3
Fuel and energy cost adjustment clauses (1) (.3) (2.7)
Rate changes (2):
Pennsylvania 12.5 37.8
Maryland 3.7 15.7
West Virginia 1.4 15.2
Virginia (1.9) (3.5)
15.7 65.2
Other .1 .2
$50.5 $95.0
(1) Changes in revenues from fuel and energy cost adjustment
clauses have little effect on consolidated net income.
(2) Reflects rate increases on an annual basis of about $55.5
million in Pennsylvania effective December 31, 1994, a $25
million annual increase in base rates in West Virginia
effective in mid-November 1994, an increased surcharge of $8.8
million in West Virginia effective July 1, 1994 for recovery
of carrying charges on costs to comply with the Clean Air Act
Amendments of 1990 (CAAA), and an annual increase of $19.6
million in Maryland effective November 11, 1994. These rate
increases include recovery of carrying charges on investment,
depreciation, and operating costs required to comply with
Phase I of the CAAA, and other increasing levels of expense.
See page 13 for further information on the West Virginia rate
case.
KWh sales to and revenues from nonaffiliated utilities
are comprised of the following items:
Three Months Ended Nine Months Ended
September 30 September 30
1995 1994 1995 1994
KWh sales (in billions):
From subsidiaries' generation .2 .2 .5 .9
From purchased power 3.5 1.8 9.5 6.8
3.7 2.0 10.0 7.7
Revenues (in millions):
From subsidiaries' generation $ 4.8 $ 5.1 $ 12.1 $ 25.0
From sales of purchased power 96.9 70.5 275.7 236.9
$101.7 $75.6 $287.8 $261.9
Sales from subsidiaries' generation in the first nine
months decreased because of growth of kWh sales to retail customers which
reduces the amount available for sale, and because of decreased demand and
continuing price competition. Sales of purchased power vary depending on
the availability of eastern utilities' generating equipment, demand for
energy,
- 11 -
and competition. About 95% of the aggregate benefits from sales to
nonaffiliated utilities is passed on to retail customers and has little
effect on consolidated net income.
The increase in other revenue in the third quarter and
the nine month periods resulted primarily from increased transmission
service revenues and revenue reductions in the 1994 periods for provisions
recorded for rate refunds which are no longer subject to refund.
OPERATING EXPENSES
Fuel expenses for the third quarter and first nine
months of 1995 reflect a 9% decrease in average coal prices. This
decrease in the third quarter was offset by an 8% increase in kWh
generated. The reduced average coal prices are primarily the result of
renegotiations of long-term fuel contracts which reduced fuel prices
effective January 1995. Fuel expenses are primarily subject to deferred
power cost accounting procedures with the result that changes in fuel
expenses have little effect on consolidated net income.
"Purchased power and exchanges, net" represents power
purchases from and exchanges with other utilities and purchases from
qualified facilities under the Public Utility Regulatory Policies Act of
1978 (PURPA), and is comprised of the following items:
Three Months Ended Nine Months Ended
September 30 September 30
1995 1994 1995 1994
(Millions of Dollars)
Purchased power:
For resale to other utilities $ 88.2 $ 62.7 $246.4 $209.6
From PURPA generation 29.6 33.4 98.4 98.2
Other 7.3 8.4 33.0 31.2
Total power purchased 125.1 104.5 377.8 339.0
Power exchanges, net (2.9) (2.9) (1.4) (2.1)
$122.2 $101.6 $376.4 $336.9
The amount of power purchased from other utilities for
use by subsidiaries and for resale to other utilities depends upon the
availability of subsidiaries' generating equipment, transmission capacity,
and fuel, and their cost of generation and the cost of operations of other
utilities from which such purchases are made. The decrease in purchases
from PURPA generation in the third quarter was due to a contractual
reduction in the energy rate effective June 10, 1995 for the Grant Town
PURPA project, and reduced hydro generation at another project which
resulted from lower than normal river flow. American Bituminous Power
Partners, L.P., the developer of the Grant Town project, has filed an
emergency petition with the Public Service Commission of West Virginia
(PSC) for interim relief to have its former energy rate reinstated.
Monongahela Power has filed objections to this petition. The cost of
power purchased for use by the subsidiaries, including power from PURPA
generation, is mostly recovered from customers currently through the
regular fuel and energy cost recovery procedures followed by the
subsidiaries' regulatory commissions and is primarily subject to deferred
power cost procedures with the result that changes in such costs have
little
- 12 -
effect on consolidated net income. The primary reason for the increases
in purchases for resale to other utilities is described under SALES AND
REVENUES above.
The increases in other operation expense, excluding the
restructuring charge which is discussed on pages 6 and 7, for the third
quarter and first nine month periods resulted primarily from increased
power station operating costs, including expenses related to the Harrison
scrubbers which became available for service in November 1994, increases
in salaries and wages and employee benefits, and from increased research
and development expenses in the nine month period. For the first nine
months, these increases were offset in part by environmental liabilities
recorded in the first quarter of 1994.
Maintenance expenses represent costs incurred to
maintain the power stations, the transmission and distribution (T&D)
system, and general plant, and reflect routine maintenance of equipment
and rights-of-way as well as planned major repairs and unplanned
expenditures, primarily from forced outages at the power stations and
periodic storm damage on the T&D system. The subsidiaries are also
experiencing, and expect to continue to experience,
increased expenditures due to the aging of their power stations.
Variations in maintenance expense result primarily from unplanned events
and planned major projects, which vary in timing and magnitude depending
upon the length of time equipment has been in service without a major
overhaul and the amount of work found necessary when equipment is
dismantled.
The increases in depreciation expense for the third
quarter and first nine months of 1995 resulted from additions to electric
plant, primarily because of the Harrison scrubbers which became available
for service in November 1994, offset in part by a decrease in depreciation
rates in West Virginia concurrent with the West Virginia base rate
increase effective in November 1994.
Taxes other than income taxes increased $1.4 million
for the quarter and decreased $.4 million for the first nine months. The
third quarter increase was primarily due to increases in gross receipts
taxes resulting from higher revenues from retail customers. The decrease
in the first nine months was primarily due to decreases in payroll taxes
($2.0 million), property taxes ($1.5 million), and West Virginia Business
and Occupation taxes (B&O taxes) due to an increase in the industrial
expansion credit ($1.0 million), offset in part by increases in gross
receipts taxes ($2.5 million) and capital stock taxes ($1.0 million). As
a result of an amendment in the B&O tax law effective June 1, 1995, which
changed the basis for this tax from generation to generating capacity,
this tax is expected to decrease effective February 1, 1996, because of a
rate reduction for scrubbed capacity.
The net increases of $9.4 million and $13.4 million in
federal and state income taxes for the third quarter and first nine month
periods, respectively, resulted primarily from increases in income before
income taxes.
The combined decreases of $4.2 million and $8.8 million
in allowance for funds used during construction (AFUDC) for the third
quarter and the first nine month periods, respectively, reflect decreases
in capital expenditures upon substantial completion of Phase I of the
CAAA.
The increase in other income, net for the third quarter
and first nine month periods was due primarily to income from demand-side
management
- 13 -
programs and in the nine-month period from an increase in interest income
earned on funds available as a result of the timing of the debt and
preferred stock refinancings in the second quarter of 1995.
Interest on long-term debt increased $2.7 million and
$11.3 million and dividends on preferred stock decreased $3.0 million and
$1.8 million for the third quarter and first nine month periods,
respectively, due primarily to the timing of the refinancing of the $245
million of first mortgage bonds and $92.9 million of pollution control
revenue notes, the redemption of preferred stock issues refinanced with
$155.5 million of Junior Subordinated Deferrable Interest Debentures, and
new security issues in 1994. Fluctuations in other interest expense
reflect changes in the level of short-term debt maintained by the
companies.
LIQUIDITY AND CAPITAL RESOURCES
The Company's discussion on Liquidity and Capital
Resources in the Allegheny Power System companies' combined Annual report
on Form 10-K for the year ended December 31, 1994, should be read with the
following information.
On August 29, 1995, Monongahela Power (MP) reached a
settlement agreement with the staff of the Public Utility Commission of
Ohio (PUCO) and the Ohio Consumers Counsel in its pending Ohio base rate
case. The agreement provides for a $6 million annual increase in rates
for Ohio customers. It is expected that the rates will become effective
in November 1995 upon approval of the stipulation agreement by the PUCO.
In March 1995, in response to requests for
reconsideration of rate orders in West Virginia to MP and Potomac Edison
(PE) in mid-November 1994, the PSC ordered a considerable number of
changes from the November order, including reallocations of the rate
increases among customer classes and that certain Harrison scrubber-
related expenses be reviewed as part of the annual Expanded Net Energy
Cost (ENEC) review procedure in June 1995. The PSC later agreed with its
staff to delay implementation of the March 1995 order until completion of
the ENEC review. Following the March 1995 order, the companies petitioned
the West Virginia Supreme Court of Appeals to review the PSC's order as to
various issues, including the low allowed return on equity of 10.85%.
Effective July 1, 1995, following the ENEC review, the PSC reduced the
companies' annual base rates by $1.6 million related to scrubber expenses
and stated that those items would be again reviewed in the 1996 ENEC
review. On July 10, 1995 the companies filed a petition for
reconsideration related to the scrubber expenses. This petition was
rejected by the PSC in August 1995.
The Virginia State Corporation Commission on March 9,
1995, issued an order in PE's rate case which authorized an increase in
revenues of about $3 million on an annual basis. PE had been collecting
higher rates, subject to refund, from its Virginia customers since
November 1994. A refund of revenues collected in excess of the amount
authorized was completed in May 1995, for which adequate reserves had been
provided.
The parties have agreed to settlements in PE's Federal
Energy Regulatory Commission (FERC) rate case filing for wholesale
customers, which resulted in an increase in annual revenues under three-
year contracts of about $2.3 million effective on June 25, 1995. With
these settlements, customers representing about 85% of the revenues from
wholesale full service customers
- 14 -
regulated by the FERC who have the ability to obtain their electricity
requirements from other suppliers have agreed to remain as customers under
contracts of from three to seven years.
In the normal course of business, the subsidiaries are
subject to various contingencies and uncertainties relating to their
operations and construction programs, including cost recovery in the
regulatory process, laws, regulations and uncertainties related to
environmental matters, and legal actions.
As previously reported, the subsidiaries are currently
named as defendants along with multiple other defendants in 5,001 pending
asbestos cases involving multiple plaintiffs, including 2,660 new cases
filed in 1995 to date. While the cumulative number of claims appears to
be significant, previous cases have been settled for an amount
substantially less than the anticipated cost of defense. Also as
previously reported, the subsidiaries and approximately 875 others have
been identified by the Environmental Protection Agency as potentially
responsible parties in a Superfund site subject to cleanup. The
subsidiaries believe that provisions for liabilities and insurance
recoveries are such that final resolution of these matters will not have a
material effect on their financial position.
In March 1995, the FERC published a Notice of Proposed
Rulemaking (NOPR) that would mandate sweeping changes to promote increased
competition in the wholesale electric industry. The proposals would
require that utilities file nondiscriminatory open access transmission
tariffs and offer comparable transmission services to eligible third
parties. It also would allow utilities the opportunity to recover
stranded costs. The Company has submitted comments to the FERC. The
Company filed open access transmission tariffs with the FERC that
generally are consistent with this NOPR.
The Securities and Exchange Commission in late October
approved a Supplemental Order that authorizes AYP Capital, Inc. to provide
energy management and demand-side management services to associate and
nonassociate companies, develop, buy, build, own, or operate foreign
utility companies (FUCOs) and invest in them through various types of
investment vehicles, purchase the accounts receivable of associate
companies and of nonassociate companies whose primary revenues are derived
from the sale of electric power, and manage the real estate portfolio of
the System, market excess real estate, and facilitate the exploitation of
timber, oil, gas, and coal on or in the System's real estate. The Order
also increases authorized investment in AYP Capital, Inc. to $100 million.
AYP Capital's first FUCO involvement occurred October 31 when it agreed to
invest nearly $5 million as a Limited Partner in the Latin America Energy
and Electricity Fund I, which will make investments in entities involved
in new or existing electric power projects in Latin America and the
Caribbean.
On May 31, 1995, AYP Capital, Inc. and EUA Cogenex
Corporation, a subsidiary of Eastern Utilities Associates, signed a one-
year letter of agreement facilitating the formation of a joint venture
energy services company named APS Cogenex Corporation. The energy
services company will promote energy-efficient products among major
companies and institutions in Maryland, Ohio, Pennsylvania, Virginia, West
Virginia, and the District of Columbia. The joint enterprise will finance
the equipment used for energy reduction, and customers will pay for it
through sharing the benefits of lower energy bills.
- 15 -
In April 1995, AYP Capital, Inc. became a limited
partner in EnviroTech Investment Fund I Limited Partnership, a venture
capital fund to offer utility investors the opportunity to achieve an
attractive financial return on investments in energy and the environment.
The initial investment of about $200,000 is expected to increase to a
maximum commitment of $5 million over the next several years.
ALLEGHENY POWER SYSTEM, INC.
Part II - Other Information to Form 10-Q
for Quarter Ended September 30, 1995
ITEM 5. OTHER INFORMATION
On September 6, 1995, MidAtlantic Energy, the developer
of the now defunct Marshall County PURPA project, filed a civil action
against MP, PE, Allegheny Power System, Inc. and its former development
partner Babcock & Wilcox, alleging that actions taken by the defendants
made it impossible for the company to continue with its 230-megawatt
cogeneration project and other projects contemplated with Babcock &
Wilcox. The companies are unable to predict the outcome of this
proceeding.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(3) (ii) By-laws of the Company, as amended, dated
November 2, 1995.
(27) Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed on behalf of the
Company for the quarter ended September 30, 1995.
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 POWER SYSTEM, INC.
K. M. JONES
K. M. Jones, Vice President
(Chief Accounting Officer)
November 8, 1995