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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, 1997
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.)
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 13, 1997, 122,436,317 shares of the Common Stock ($1.25 par
value) of the registrant were outstanding.
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ALLEGHENY POWER SYSTEM, INC.
Form 10-Q for Quarter Ended June 30, 1997
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Consolidated statement of income -
Three and six months ended June 30, 1997 and 1996 3
Consolidated balance sheet - June 30, 1997
and December 31, 1996 4
Consolidated statement of cash flows -
Six months ended June 30, 1997 and 1996 5
Notes to consolidated financial statements 6-9
Management's discussion and analysis of financial
condition and results of operations 10-15
PART II--OTHER INFORMATION 16-18
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ALLEGHENY POWER SYSTEM, INC.
Statement of Income
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES:
Residential $ 196,201 205,254 $ 454,114 $ 493,664
Commercial 114,250 115,813 238,136 245,001
Industrial 185,847 188,193 368,117 380,327
Wholesale and other 16,842 17,785 37,077 38,117
Bulk power transactions, net 29,610 23,900 60,286 41,854
Total Operating Revenues 542,750 550,945 1,157,730 1,198,963
OPERATING EXPENSES:
Operation:
Fuel 133,277 126,401 273,742 262,748
Purchased power and exchanges, net 43,766 44,875 94,349 94,673
Deferred power costs, net (4,870) 5,788 (6,953) 22,218
Other 71,863 68,813 144,688 142,738
Maintenance 59,807 57,268 121,287 119,337
Restructuring charges and asset write-off - - - 64,181
Depreciation 68,754 66,584 137,536 132,543
Taxes other than income taxes 47,192 46,299 95,848 94,770
Federal and state income taxes 27,488 34,026 77,666 67,272
Total Operating Expenses 447,277 450,054 938,163 1,000,480
Operating Income 95,473 100,891 219,567 198,483
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 1,126 351 2,276 658
Other income (expense), net 3,684 (242) 4,580 487
Total Other Income and Deductions 4,810 109 6,856 1,145
Income Before Interest Charges and
Preferred Dividends 100,283 101,000 226,423 199,628
INTEREST CHARGES AND PREFERRED DIVIDENDS:
Interest on long-term debt 43,554 41,134 86,934 82,763
Other interest 3,786 4,528 7,619 8,186
Allowance for borrowed funds used during
construction (1,065) (753) (2,030) (1,155)
Dividends on preferred stock of subsidiaries 2,325 2,305 4,626 4,630
Total Interest Charges and
Preferred Dividends 48,600 47,214 97,149 94,424
CONSOLIDATED NET INCOME $ 51,683 $ 53,786 $ 129,274 $ 105,204
COMMON STOCK SHARES OUTSTANDING (average) 122,114,920 120,999,400 121,979,881 120,854,868
EARNINGS PER AVERAGE SHARE $ $0.42 $ $0.44 $1.06 $0.87
See accompanying notes to consolidated financial statements.
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ALLEGHENY POWER SYSTEM, INC.
Consolidated Balance Sheet
June 30, December 31,
1997 1996
(Thousands of Dollars)
ASSETS:
Property, Plant, and Equipment:
At original cost, including $199,963,000
and $202,259,000 under construction $ 8,305,062 $ 8,206,213
Accumulated depreciation (3,047,881) (2,910,022)
5,257,181 5,296,191
Investments and Other Assets:
Subsidiaries consolidated--excess of cost
over book equity at acquisition 15,077 15,077
Benefit plan's investments 65,752 63,197
Other 4,573 4,359
85,402 82,633
Current assets:
Cash and temporary cash investments 21,062 19,242
Accounts receivable:
Electric service, net of $14,402,000 and
$15,052,000 uncollectible allowance 265,088 280,154
Other 15,033 22,188
Materials and supplies--at average cost:
Operating and construction 84,587 82,057
Fuel 78,135 60,755
Prepaid taxes 56,891 62,110
Deferred income taxes 12,880 39,428
Other 37,133 16,324
570,809 582,258
Deferred Charges:
Regulatory assets 549,977 565,185
Unamortized loss on reacquired debt 51,476 53,403
Other 48,988 38,840
650,441 657,428
Total Assets $ 6,563,833 $ 6,618,510
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 153,021 $ 152,300
Other paid-in capital 1,043,513 1,028,124
Retained earnings 1,013,041 988,667
2,209,575 2,169,091
Preferred stock 170,086 170,086
Long-term debt and QUIDS 2,205,455 2,397,149
4,585,116 4,736,326
Current Liabilities:
Short-term debt 161,570 156,430
Long-term debt due within one year 197,400 26,900
Accounts payable 102,212 147,161
Taxes accrued:
Federal and state income 1,206 7,173
Other 45,484 62,361
Interest accrued 40,616 40,630
Restructuring liability 31,780 56,101
Other 80,926 80,281
661,194 577,037
Deferred Credits and Other Liabilities:
Unamortized investment credit 137,417 141,519
Deferred income taxes 994,852 1,000,023
Regulatory liabilities 108,741 93,216
Other 76,513 70,389
1,317,523 1,305,147
Total Capitalization and Liabilities $ 6,563,833 $ 6,618,510
See accompanying notes to consolidated financial statements.
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ALLEGHENY POWER SYSTEM, INC.
Consolidated Statement of Cash Flows
Six Months Ended
June 30
1997 1996
(Thousands of Dollars)
CASH FLOWS FROM OPERATIONS:
Consolidated net income $ 129,274 $ 105,204
Depreciation 137,536 132,543
Deferred investment credit and income taxes, net 27,711 (17,901)
Deferred power costs, net (6,953) 22,218
Allowance for other than borrowed funds used
during construction (2,276) (658)
Restructuring liability (24,321) 45,724
Asset write-off - 10,762
Changes in certain current assets and
liabilities:
Accounts receivable, net 22,221 38,950
Materials and supplies (19,910) 18,810
Accounts payable (44,949) (41,750)
Taxes accrued (22,844) (10,994)
Interest accrued (14) 2,076
Other current liabilities/assets 3,466 10,553
Other deferred charges/credits 14,976 11,204
Other, net (4,238) 8,859
209,679 335,600
CASH FLOWS FROM INVESTING:
Utility construction expenditures (less allowance
for equity funds used during construction) (100,065) (105,893)
Nonutility investment (2,253) (1,482)
(102,318) (107,375)
CASH FLOWS FROM FINANCING:
Sale of common stock 16,110 17,168
Retirement of long-term debt (21,892) (48,146)
Short-term debt, net 5,140 (92,905)
Cash dividends on common stock (104,899) (101,510)
(105,541) (225,393)
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS 1,820 2,832
Cash and Temporary Cash Investments at January 1 19,242 3,867
Cash and Temporary Cash Investments at June 30 $ 21,062 $ 6,699
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $89,401 $82,543
Income taxes 59,960 74,555
See accompanying notes to consolidated financial statements.
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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, 1996, should be read
with the accompanying financial statements and the following
notes. With the exception of the December 31, 1996,
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 contain all adjustments (which
consist only of normal recurring adjustments) necessary to
present fairly the Company's financial position as of June 30,
1997, the results of operations for the three and six months
ended June 30, 1997 and 1996, and cash flows for the six months
ended June 30, 1997 and 1996.
2. The Company owns all of the outstanding common stock of its
subsidiaries. The consolidated financial statements include
the accounts of the Company and all subsidiary companies after
elimination of intercompany transactions. Allegheny Generating
Company is jointly (100%) owned by the Company's operating
subsidiaries and thus is among the subsidiaries fully
consolidated into the financial statements of the System.
3. 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.
4. On April 7, 1997, the Company and DQE, Inc., parent company of
Duquesne Light Company, announced that they have agreed to
merge in a tax-free, stock-for-stock transaction. The combined
company will be called Allegheny Energy, Inc. (Allegheny
Energy). It is expected that Allegheny Energy will continue to
be operated as an integrated electric utility holding company
and that the regulated electric utility companies will continue
to exist as separate legal entities, including DQE, Inc.
The merger is conditioned, among other things, upon the
approval of each company's shareholders and the necessary
approvals of various state and federal regulatory agencies,
including the public utility commissions in Pennsylvania and
Maryland, the Securities and Exchange Commission, the Federal
Energy Regulatory Commission, and the Nuclear Regulatory
Commission. The companies are hopeful that the required
approvals can be obtained by May 1, 1998. On May 2, 1997, the
Company filed a registration statement on Form S-4 containing a
joint proxy statement/prospectus with DQE, Inc. concerning the
merger and the transactions contemplated thereby. In late
June, the S-4 became effective allowing the Company and DQE,
Inc. to pursue shareholder approval for the proposed merger
that would create Allegheny Energy. The Company and DQE, Inc.
each held separate
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shareholder meetings on August 7, 1997, at which the
combination of the two companies was approved by the necessary
number of shareholders of both companies. At the Company's
meeting, the necessary number of shareholders also approved the
change in the Company's name to Allegheny Energy, Inc.
5. In preparation for retail competition in Pennsylvania, West
Penn Power Company (West Penn) filed a petition on February 28,
1997 with the Pennsylvania Public Utility Commission (PUC)
asking for permission to set to zero its Energy Cost Rate (ECR)
and state tax surcharge tariffs and to roll energy costs and
state tax adjustments into base rates, effective May 1, 1997.
On April 24, 1997, the PUC approved West Penn's request but
denied an additional request to defer the difference between
the level of energy costs rolled into base rates and an
anticipated future level of such costs. West Penn's petition
was necessitated by the passage of the Electric Generation
Customer Choice and Competition Act (Customer Choice Act),
which capped electric rates in Pennsylvania as of January 1,
1997. Prior to May 1, 1997, changes in West Penn's costs of
fuel, purchased power, and certain other costs, and changes in
revenues from sales to other utilities, including transmission
services, were passed on to customers by adjustment to customer
bills through the ECR with the result that such changes had no
effect on net income. Effective May 1, 1997, such changes in
costs and revenues will affect West Penn's earnings.
6. On August 1, 1997, the Company's Pennsylvania subsidiary, West
Penn, filed with the PUC a comprehensive restructuring plan to
implement full customer choice of electric generation suppliers
as required by the Customer Choice Act. The filing included an
unbundling of West Penn's electric service rates into its
generation, transmission and distribution components, a plan
for eventual termination of the existing Power Supply Agreement
(PSA) under which the Company's existing three utility
subsidiaries share capacity, energy, capacity reserves and
transmission resources, (and replacement with a more efficient
structure) and a plan for recovery of stranded costs through a
Competitive Transition Charge (CTC).
Recovery of stranded costs is the key issue. West Penn has
determined its stranded costs exposure to be about $2 billion,
composed of $1.1 billion for generation plant investment in
excess of estimated market prices, $730 million of existing and
potential non-utility generator (NUG) contracts in excess of
market prices, and $270 million of regulatory assets and
transition costs. In accordance with West Penn's
interpretation of the legislation, the $2 billion estimate is
based on a forecast of future revenue requirements, market
prices and assumptions about future costs to be incurred. To
avoid the problems associated with estimating future market
prices, West Penn included as part of its restructuring plan a
proposal to reset the CTC on a year-to-year basis based on
actual market prices of electricity sales in its area.
The PUC is required to issue an order on the filing by May,
1998. This order will include a determination of West Penn's
rates for transmission and distribution services beginning
January 1, 1999, generation rates for customers to take
generation service during the transition period (potentially
1999 through 2005 if they so choose), and the CTC West Penn
will be allowed to charge, through the transition period, to
those
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customers who choose another generation supplier. While West
Penn cannot predict the outcome of the restructuring
proceedings and the transition process, it believes that, as
the lowest cost utility in the state, recovery of stranded
costs should be allowed to maintain its financial viability, as
provided by the Customer Choice Act.
Nevertheless, depending upon the outcome of the proceeding and
future events affecting actual stranded costs, West Penn's
future earnings could be adversely affected. Such adverse
effects could be avoided through further action of the PUC as
allowed by the Customer Choice Act, or by mitigation of future
costs.
7. In July, 1997, the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board (FASB) concluded that
utilities should discontinue application of Statement of
Financial Accounting Standards (SFAS) 71 for the generation
portion of their business when a deregulation plan is in place
and its terms are known. Since the Customer Choice Act
establishes such a process, West Penn has determined that it
will be required to discontinue use of SFAS 71 for the
generation portion of its business on or before May, 1998, the
date by which the PUC must issue its order on West Penn's
comprehensive restructuring plan. One of the conclusions of
the EITF is that after discontinuing SFAS 71, utilities should
continue to carry on their books the assets and liabilities
recorded under SFAS 71 if the regulatory cash flows to settle
them will be derived from the continuing regulated transmission
and distribution business. Additionally, continuing costs and
obligations of the deregulated generation business which are
similarly covered by the cash flows from the continuing
regulated business will meet the criteria as regulatory assets
and liabilities.
The Customer Choice Act establishes a definitive process for
transition to deregulation and market-based pricing for
electric generation in Pennsylvania, which includes continuing
cost of service based ratemaking for transmission and
distribution services, subject to a rate cap. The Act provides
for a non-bypassable CTC to give utilities the opportunity to
recover their stranded costs over the transition period.
Because of these circumstances, West Penn believes that
discontinuance of the application of SFAS 71 to the generation
portion of its business will not have a material adverse effect
on its financial condition, and that it will not be required to
write off any material assets, subject to recovery through a
CTC.
8. Other paid-in capital increased $15,389,000 in the six months
ended June 30, 1997, representing the excess of amounts
received over par value, less related expenses, from the
issuance of 576,309 shares of common stock pursuant to the
Company's Dividend Reinvestment and Stock Purchase Plan and
Employee Stock Ownership and Savings Plan.
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9. Common stock dividends per share declared during the periods
for which income statements are included are as follows:
1997 1996
1st 2nd 1st 2nd
Quarter Quarter Quarter Quarter
Number of Shares 121,840,327 122,111,567 120,700,809 120,989,831
Amount per Share $.43 $.43 $.42 $.42
10. Restructuring charges and an asset write-off in the first six
months of 1996 ($38.7 million, net of tax) include expenses
associated with the reorganization, which is essentially
complete.
11. For the most part, regulatory assets and liabilities are not
included in rate base. Income tax regulatory assets/
liabilities, net of $425 million at June 30, 1997, are
primarily related to investments in electric facilities and
will be recovered over a period of from 20 to 40 years. The
remaining recovery period for items other than income taxes, is
from three to seven years.
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ALLEGHENY POWER SYSTEM, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
COMPARISON OF SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1997
WITH SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1996
Review of Operations
EARNINGS
Earnings for the second quarter and first six months of
1997 and 1996, and the after tax restructuring charges and asset write-off
included in the 1996 periods are shown below.
Consolidated Net Income
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
(Millions of Dollars)
Consolidated Net
Income as Reported $51.7 $53.8 $129.3 $105.2
Restructuring Charges and
Asset Write-Off - - - 38.7
Consolidated Net
Income Adjusted $51.7 $53.8 $129.3 $143.9
Cents Per Share
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
Cents per Share
as Reported $.42 $.44 $1.06 $ .87
Restructuring Charges and
Asset Write-Off - - - .32
Cents per Share
Adjusted $.42 $.44 $1.06 $1.19
The decrease in second quarter consolidated net income,
was due primarily to a 3% decrease in kilowatt-hour (kWh) sales to
residential customers largely due to second quarter 1997 cooling degree
days (air conditioning weather) which were 27% below normal and 44% less
than the corresponding 1996 period.
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The decrease in year-to-date adjusted consolidated net
income, before restructuring charges and asset write-off, was primarily
due to a decrease in kWh sales. Residential kWh sales decreased 7% due to
mild first quarter winter weather (heating degree days 9% below normal and
15% below the first quarter of 1996) and the cooler than normal second
quarter weather. Commercial and industrial kWh sales were also down
slightly for the period.
Also contributing to the earnings decreases in the
quarter and year-to-date June 1997 were anticipated start-up losses of a
new unregulated subsidiary, AYP Energy, Inc. (AYP Energy), which commenced
operations in late 1996. AYP Energy, a subsidiary of the Company's
nonutility subsidiary, AYP Capital, Inc. in October 1996 purchased a 50%
interest (276 MW's) in Unit No. 1 of the Fort Martin power station, and
began then incurring depreciation, operating and other expenses. As
anticipated, revenues to date have been less than the expenses resulting
in losses for AYP Energy of $2.7 million in the second quarter of 1997 and
$5.2 million in the six months ended June 1997.
SALES AND REVENUES
Retail kWh sales to residential customers decreased 3%,
and to commercial and industrial customers increased .2% and 1%,
respectively, in the second quarter, for a net decrease of .4%, and in the
first six months decreased 7%, 1%, and .4%, respectively, for a net
decrease of 3%. As discussed above, residential kWh sales, which are more
weather sensitive than the commercial and industrial classes, decreased in
the second quarter and in the first six months due to the mild weather.
In the first six months, commercial kWh sales also decreased primarily
because of the mild weather. Industrial kWh sales increased for the second
quarter due primarily to increased sales to lumber products and chemical
customers groups. Despite increased sales in the second quarter,
industrial kWh sales were down slightly in the first six months of 1997
for a variety of reasons, primarily in the iron and steel customer groups.
The decrease in revenues from sales to residential,
commercial, and industrial customers resulted from the following:
Decrease from Prior Periods
Quarter Six Months
(Millions of Dollars)
Fuel and energy cost adjustment clauses* $(11.4) $(32.9)
Net decreased kWh sales (1.4) (24.8)
Other (.2) (.9)
Decrease in retail revenues $(13.0) $(58.6)
* Changes in revenues from fuel and energy cost adjustment
clauses have little effect on consolidated net income. Changes
in the costs of fuel, purchased power, and certain other costs,
and changes in revenues from sales to other utilities,
including transmission services, have had little effect on net
income because such changes have been passed on to customers by
adjustment of customer bills through fuel and energy cost
adjustment clauses. However, effective May 1, 1997, one of the
Company's subsidiaries, West Penn Power Company (West Penn) as
a result of
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legislation in Pennsylvania to begin deregulation of electric
generation, rolled its fuel and energy costs into base rates
and set to zero its fuel and energy cost adjustment clause.
Thereafter, West Penn assumes the risks of increases in the
costs of fuel and purchased power and any declines in bulk
power transaction sales and retains the benefits of decreases
in such costs and increases in such sales. West Penn fuel and
energy cost revenues are approximately 50% of total System fuel
and energy cost revenues.
The decrease in wholesale and other revenues was due
primarily to The Potomac Edison Company's (Potomac Edison) decreased sales
to a wholesale customer. In the second quarter, the largest customer of
that particular wholesale customer suspended production and shut down its
paper recycling plant. All of the Company's wholesale customers have
signed contracts to remain as customers for periods ranging from one year
to four and one-half years.
Revenues from bulk power transactions consist of the
following items:
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
(Millions of Dollars)
Revenues:
Utility operations:
From transmission services $ 8.8 $13.7 $21.6 $28.3
From sale of subsidiaries'
generation 9.4 10.2 15.2 13.6
Nonutility operations 11.4 - 23.5 -
Total $29.6 $23.9 $60.3 $41.9
Revenues from nonutility operations were the result of
sales by the Company's nonutility exempt wholesale generator and power
marketer, AYP Energy, Inc., which began operations in late 1996. Revenues
from utility operations transmission services decreased primarily due to
reduced demand, primarily because of mild weather both for the quarter and
year to date. The aggregate benefits from utility bulk power transactions
are passed on to retail customers through fuel and energy adjustment
clauses (described above) and have had little effect on consolidated net
income. On May 1, 1997, due to the elimination of West Penn's fuel and
energy adjustment clause (referred to by West Penn as ECR for Energy Cost
Rate), changes in these revenues for West Penn, which are approximately
50% of System revenues, will have a direct effect on consolidated net
income.
OPERATING EXPENSES
Fuel expenses for the second quarter and first six
months of 1997 increased 5% and 4%, respectively. The increases in fuel
expenses in both periods resulted from increases in kWh's generated due
primarily to the operation of 50% of Unit No. 1 of the Fort Martin Power
Station which was purchased by the Company's nonutility subsidiary (AYP
Energy, Inc.) in late 1996. Fuel expenses for the regulated subsidiaries,
except for West Penn beginning May 1, 1997, are primarily subject to
deferred power cost accounting
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procedures to match fuel and energy cost adjustment clause revenues, 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 companies and purchases from
qualified facilities under the Public Utility Regulatory Policies Act of
1978 (PURPA), and consists of the following items:
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
(Millions of Dollars)
Purchased power:
Utility operations:
From PURPA generation* $35.2 $33.4 $69.8 $65.6
Other 7.7 11.7 16.2 25.8
Total purchased power 42.9 45.1 86.0 91.4
Power exchanges, net (1.3) (.2) 2.8 3.3
Nonutility operations 2.2 - 5.5 -
Purchased power and
exchanges, net $43.8 $44.9 $94.3 $94.7
* PURPA cost per kWh $.057 $.056 $.057 $.055
Nonutility operations purchases were the result of
power replacement requirements and transaction opportunities by AYP
Energy, which began operations in late 1996. Other purchased power
decreased because of decreased need due to decreased sales to retail
customers. The cost of utility purchased power and exchanges, including
power from PURPA generation, except for West Penn, is mostly recovered
from customers currently through the regular fuel and energy cost recovery
procedures followed by the other subsidiaries' regulatory commissions, and
is primarily subject to deferred power cost accounting procedures with the
result that changes in such costs have little effect on consolidated net
income.
The increases in other operation expense for the three
and six months ended June 1997, were due primarily to expenses associated
with AYP Energy, which began operations in late 1996.
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. 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 the equipment is dismantled. Maintenance
expenses increased $2.5 million and $2.0 million for the second quarter
and first six months of 1997, respectively, due primarily to additional
routine maintenance expenses associated with AYP Energy's ownership in the
Fort Martin power station, which it acquired from another utility in late
1996.
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Restructuring charges and an asset write-off in the
first six months of 1996 include expenses associated with the
reorganization, which is essentially complete.
The increases in depreciation expense for the second
quarter and first six months of 1997 resulted from additions to electric
plant, the largest portion of which was depreciation related to AYP
Energy's ownership in the Fort Martin power station. Future depreciation
expense increases for utility operations are expected to be less than
historical increases because of reduced levels of planned capital
expenditures.
Taxes other than income taxes increased $.9 million and
$1.1 million in the second quarter and first six months, respectively, due
to increased West Virginia Business and Occupation taxes (B & O) resulting
from AYP Energy's purchase of an ownership interest in the Fort Martin
power station, and increased property taxes. The B & O tax is based on
generating capacity. These increases were offset in part by decreases in
gross receipts taxes resulting from lower revenues from retail customers
and lower FICA taxes due to the Company's recent restructuring.
The net decrease in federal and state income taxes in
the second quarter resulted primarily from a decrease in income before
taxes. The net increase in the six month period resulted primarily from
an increase in income before taxes, which was primarily related to
restructuring charges recorded in 1996.
The increases in allowance for other than borrowed
funds used during construction (AOFDC) of $.8 million and $1.6 million for
the three and six month periods ended June 1997 resulted primarily from
application of the Federal Energy Regulatory Commission AOFDC formula
under which in 1997 a larger percentage of construction was financed by
more expensive equity funds rather than less expensive short-term debt
funds.
The increase in other income, net, of $3.9 million in
the second quarter was primarily due to the deferral of merger related
expenditures. The increase of $4.1 million for the six months ended June
1997 was due primarily to the sale of land and timber by West Virginia
Power and Transmission Company, a subsidiary of West Penn.
Interest on long-term debt increased $2.4 million in
the second quarter and $4.2 million for the first six months due to the
October 1996 issuance of $160 million of five-year notes by AYP Energy
related to its purchase of an ownership interest in the Fort Martin power
station. Other interest expense reflects changes in the levels of short-
term debt maintained by the companies throughout the year, as well as the
associated rates.
Financial Condition and Requirements
The Company's discussion on Financial Condition and
Requirements, Competition in Core Business, and Nonutility Business in the
Allegheny Power System companies' combined Annual Report on Form 10-K for
the year ended December 31, 1996, should be read with the following
information.
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,
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laws, regulations and uncertainties related to environmental matters, to
the restructuring of the electric utility industry and the Pennsylvania
restructuring legislation, merger activities, and legal actions.
The Company expects to use exchange-traded and over-
the-counter futures, options, and swap contracts both to hedge its
exposure to changes in electric power prices and for trading purposes.
The risks to which the Company is exposed include underlying price
volatility, credit risk, and variations in cash flows, among others. The
Company has implemented risk management policies and procedures consistent
with industry practices and Company goals.
At the end of February, all electric utilities in
Pennsylvania, including West Penn, were required to and have filed
proposals to establish retail access pilot programs, which will allow
customers in Pennsylvania to purchase electric generation from their
existing utility or an alternative supplier. The existing utility,
however, will continue to provide these customers with transmission and
distribution, as well as related services. Near the end of 1997 or early
in 1998, by order of the PUC, all electric utilities in Pennsylvania must
offer a sufficient number of customers the ability to choose another
energy supplier so that electric consumers representing 5% of load in each
rate class in Pennsylvania do choose another supplier. On July 23, 1997,
the Company formed a new unregulated subsidiary, Allegheny Energy
Solutions, Inc. (Allegheny Solutions), to provide a platform from which
unregulated marketing business will be developed. Allegheny Solutions
will begin by marketing unregulated energy to selected customers in
Pennsylvania who are among the 5% of all utilities customers permitted to
choose their supplier under the pilot, including the 5% of West Penn's
customers who are permitted to choose.
West Penn's pilot is slated to begin late this year or
early next year and will continue until January 1, 1999, when one-third of
electric consumers in Pennsylvania will be allowed to choose their
electricity providers. Another one-third of customers will be allowed to
choose on January 1, 2000, and the final one-third will have the
opportunity to choose on January 1, 2001. Required under the Electric
Generation Customer Choice and Competition Act, the pilot must be approved
by the Pennsylvania Public Utility Commission before its implementation.
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ALLEGHENY POWER SYSTEM, INC.
Part II - Other Information to Form 10-Q
for Quarter Ended June 30, 1997
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
(a) Date and kind of meeting:
At the annual meeting of stockholders held on May 8,
1997, votes were taken for the election of directors to serve until the
next annual meeting of stockholders and for the approval of the
appointment of Price Waterhouse LLP as independent accountants. The total
number of votes cast was 96,452,742 with the following results:
Broker
Nominees for Director Votes For Votes Withheld Non-Votes
Eleanor Baum 95,210,823 1,241,919 None
William L. Bennett 95,211,724 1,241,018 "
Wendell F. Holland 95,164,346 1,288,396 "
Phillip E. Lint 95,140,849 1,311,893 "
Frank A. Metz, Jr. 95,225,227 1,227,515 "
Alan J. Noia 95,226,877 1,225,865 "
Steven H. Rice 95,232,111 1,220,631 "
Gunnar E. Sarsten 95,252,652 1,200,090 "
Peter L. Shea 95,263,986 1,188,756 "
Broker
Votes For Votes Against Abstentions Non-Votes
Approval of Independent
Accountants 91,715,470 528,161 4,209,111 None
Proposal to refrain
from providing
pension/retirement
benefits to Board
of Directors 14,366,074 62,203,647 6,056,240 13,826,781
Proposal for the Board
to have 90% of its
Directors independent 8,892,133 66,150,801 7,780,801 13,629,007
The stockholders did not approve the stockholder
proposal that in the future the Board refrain from providing pensions or
other retirement benefits to independent Directors. The stockholders also
did not approve the stockholder proposal for the Board to have 90% of its
Directors independent.
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ITEM 5. OTHER INFORMATION
In late June, the S-4 registration statement filed by
the Company became effective, allowing the Company and DQE, Inc., parent
company of Duquesne Light Company, to pursue shareholder approval for the
proposed merger and a change of the company name to Allegheny Energy, Inc.
(Allegheny Energy). The Company and DQE, Inc. held shareholder meetings on
August 7, 1997, at which the combination of the two companies and the name
change were approved by a vote of shareholders.
On August 1, 1997, the Company and DQE, Inc. filed
applications for several major approvals related to the proposed merger of
the two companies. In filings with the Federal Energy Regulatory
Commission (FERC), Pennsylvania Public Utility Commission (PA PUC), and
Maryland Public Service Commission (MD PSC), the Company and DQE, Inc.
outlined their restructuring and merger plans as discussed below.
The FERC filing includes commitments concerning rate
freezes, rate reductions, and electrical system access options that will
spread the positive effects of the merger to many stakeholders. The
filing includes the offering of a single transmission rate which is less
than the stand-alone rate for the two companies, offers partial rate
freezes to wholesale customers which have contracts expiring after 1998,
and includes a commitment to join or form an independent system operator
(ISO).
The Company's Pennsylvania subsidiary, West Penn, and
DQE, Inc. filed individual restructuring plans with the PA PUC and, as
part of a joint restructuring plan, have also filed their merger
application. The filings address unbundled rates for generation,
transmission, and distribution services; stranded costs; merger synergy
benefits; and other issues as required by Pennsylvania's Electricity
Generation Customer Choice and Competition Act. Among other benefits,
West Penn's restructuring filing unbundles its rates and tariffs separate
from those of DQE's utility subsidiary, Duquesne Light. DQE's
restructuring filing includes a redesign of rates and provides for other
benefits. The merger filing offers additional detail on the expected
synergy benefits of the merger and an allocation of the benefits to
customers and shareholders of the two companies.
The Company filed with the MD PSC requesting approval
for the issuance of stock to exchange for DQE stock upon merger approval.
The Company is a Maryland Corporation. The filing also discussed the
benefits of the merger to Maryland including lower rates for customers and
improved operating efficiencies over time.
On July 23, 1997, a new unregulated subsidiary,
Allegheny Energy Solutions, Inc. was formed to provide a platform from
which unregulated marketing businesses will be developed.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(3) (ii) By-laws of the Company, as amended, dated June 5,
1997.
(27) Financial Data Schedule
(b) On July 29, 1997, the Company filed a Form 8-K concerning the
press release/second quarter earnings of the Company.
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.
/s/ K. M. JONES
K. M. Jones, Vice President
(Chief Accounting Officer)
August 13, 1997