SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period from October 1, 1993 to
December 31, 1993
Commission File Number 0-10618
____________________________________________________________________
ALLEGHENY & WESTERN ENERGY CORPORATION
Exact name of registrant as specified in its charter
West Virginia 55-0612692
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 Capitol Street, Suite 1600, Charleston, WV 25301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (304) 343-4567
____________________________________________________________________
Indicate by check mark whether 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
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
As of February 10, 1994, 7,697,460 shares of registrant's Common
Stock, par value $.01 per share, were outstanding.
ALLEGHENY & WESTERN ENERGY CORPORATION
AND SUBSIDIARIES
INDEX
Page
Part I - Financial Information
Item I - Financial Statements:
Condensed Consolidated Balance Sheets
as of December 31, 1993 and June 30, 1993 1-2
Condensed Consolidated Statements of Income for the
Three and Six Month Periods Ended December 31, 1993
and 1992 3
Condensed Consolidated Statements of Cash Flows
for the Six Month Periods Ended December 31,
1993 and 1992 4
Notes to Condensed Consolidated Financial
Statements 5-11
Management's Discussion and Analysis of
Financial Condition and Results of Operations
and Liquidity and Capital Resources 12-16
Part II - Other Information 17
Signatures 18
ALLEGHENY & WESTERN ENERGY CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(IN THOUSANDS)
December 31, June 30,
1993 1993
(Unaudited)
----------- -----------
Cash & equivalents $7,451 $10,931
Accounts receivable, less
allowance for doubtful accounts 43,481 21,976
Inventory 18,482 5,097
Prepayments 1,038 5,790
Deferred income taxes 1,031 2,727
Other 61 55
-------- --------
Total current assets 71,544 46,576
-------- --------
Property, plant and equipment-at cost:
Utility plant 141,873 137,737
Oil and gas properties (successful
efforts method) 56,728 56,655
Transmission plant 4,738 4,737
Other 7,433 7,295
-------- --------
210,772 206,424
Less accumulated depletion, depreciation
and amortization (64,225) (62,105)
-------- --------
Net property, plant and equipment 146,547 144,319
-------- --------
Other 12,274 4,785
-------- --------
Total assets $230,365 $195,680
<FN>
The accompanying notes are an integral part of these financial statements.
ALLEGHENY & WESTERN ENERGY CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(IN THOUSANDS)
December 31, June 30,
1993 1993
(Unaudited)
----------- ----------
Liabilities
Current maturities of long-term debt $6,750 $6,750
Short-term borrowings 36,205 7,639
Accounts payable 20,635 20,717
Overrecovered gas costs 864 6,498
Accrued liabilities and other 13,445 7,976
-------- --------
Total current liabilities 77,899 49,580
Long-term debt, net of current maturities 31,680 32,430
Deferred income taxes 19,104 13,841
Other 4,397 3,786
-------- --------
Total liabilities 133,080 99,637
-------- --------
Commitments and contingencies -- --
Stockholders' equity
Preferred stock, without par value;
authorized 5,000,000 shares; no
shares issued -- --
Common stock, $.01 par value; authorized
20,000,000 shares; 8,108,802 shares issued;
7,697,460 and 7,867,338 shares outstanding,
respectively 81 81
Additional paid-in capital 36,788 36,788
Retained earnings 63,814 61,072
-------- --------
Total 100,683 97,941
Less treasury stock, at cost, 411,342 and
241,464 shares, respectively (3,398) (1,898)
-------- --------
Total stockholders' equity 97,285 96,043
-------- --------
Total liabilities and stockholders' equity $230,365 $195,680
<FN>
The accompanying notes are an integral part of these financial statements.
ALLEGHENY & WESTERN ENERGY CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
UNAUDITED
Three Months Ended Six Months Ended
December 31, December 31,
1993 1992 1993 1992
Revenues
Gas distribution and marketing $67,660 $56,127 $88,511 $73,910
Oil and gas sales 1,485 745 2,834 1,384
Field services 515 542 1,033 1,066
Investment and other income (51) 67 37 229
------- ------- ------- -------
Total revenues 69,609 57,481 92,415 76,589
------- ------- ------- -------
Costs and expenses
Costs of gas distributed/marketed 47,292 37,931 60,039 48,347
Exploration, lease operating and
production 883 602 1,745 1,123
Distribution, general and
administratitive 13,635 12,206 22,875 20,567
Depletion, depreciation and
amortization 2,566 2,171 3,956 3,314
Interest 1,114 1,082 2,227 2,005
------- ------- ------- -------
Total costs and expenses 65,490 53,992 90,842 75,356
------- ------- ------- -------
Income before income taxes and
cumulative effect of change in
accounting principle 4,119 3,489 1,573 1,233
Provision for income taxes (Note 3) 1,257 1,047 393 370
------- ------- ------- -------
Income before cumulative effect of
change in accounting principle 2,862 2,442 1,180 863
Cumulative effect prior to July 1,
1993 of change in method
of accounting for income
taxes (Note 3) -- -- 1,562 --
------- ------- ------- -------
Net income $2,862 $2,442 $2,742 $863
Income per share:
Income before cumulative effect of
change in accounting principle $0.37 $0.30 $0.15 $0.11
Cumulative effect prior to July 1,
1993 of change in method
of accounting for income
taxes (Note 3) -- -- 0.20 --
------- ------- ------- -------
Net income $0.37 $0.30 $0.35 $0.11
Average number of common shares
outstanding 7,699,759 8,040,309 7,757,750 8,061,747
<FN>
The accompanying notes are an integral part of these financial statements.
ALLEGHENY & WESTERN ENERGY CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
Six Months Ended
December 31,
1993 1992
----------- ---------
Cash flows from operating activities
Net income $2,742 $863
Cumulative effect prior to July 1, 1993 of
adopting SFAS No. 109 (Note 3) (1,562) --
Depletion, depreciation and amortization 3,956 3,314
Deferred income taxes 2,046 204
Other 1,084 544
Change in working capital, net (31,611) (23,398)
-------- --------
Net cash used in operating activities (23,345) (18,473)
-------- --------
Cash flows from investing activities
Capital expenditures, net (6,451) (9,461)
-------- --------
Cash flows from financing activities
Debt repayments (750) (15,750)
Issuance of long-term debt -- 15,000
Short-term borrowings, net 28,566 6,259
Purchases of treasury stock (169,878 and
75,800 shares, respectively) (1,500) (515)
-------- --------
Net cash provided by financing activities 26,316 4,994
-------- --------
Net change in cash and equivalents (3,480) (22,940)
Cash and equivalents, beginning of period 10,931 28,906
-------- --------
Cash and equivalents, end of period $7,451 $5,966
<FN>
The accompanying notes are an integral part of these financial statements.
ALLEGHENY & WESTERN ENERGY CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
Allegheny & Western Energy Corporation (Allegheny or the Company) is a
West Virginia corporation which was incorporated in 1981. The Company is a
diversified natural gas company whose principal subsidiary, Mountaineer Gas
Company (Mountaineer), is the largest natural gas distribution utility in West
Virginia. Allegheny is also engaged in non-utility enterprises directly and
through subsidiaries, including developmental drilling and production of
natural gas in West Virginia and the marketing of natural gas directly to
consumers in West Virginia. While no drilling activities have been performed
since fiscal 1992, the Company's past exploration and production activities
have been conducted for its own account and through joint ventures with third
parties and limited partnerships. Beginning in fiscal 1990, substantially all
of Allegheny's gas production was sold to either Mountaineer or Gas Access
Systems, Inc. (G.A.S.), both wholly-owned subsidiaries.
Mountaineer is a regulated gas distribution utility servicing
approximately 200,000 residential, commercial, industrial and wholesale
customers in the State of West Virginia. Mountaineer, a West Virginia
corporation, was acquired by Allegheny on June 21, 1984 from The Columbia Gas
System, Inc. A wholly-owned subsidiary of Mountaineer, Mountaineer Gas
Services, Inc. (MGS), owns and operates certain producing properties and
transmission plant assets acquired from Hallwood Energy Partners, L.P. and
Hallwood Consolidated Resources Corporation (Hallwood) in March of 1993.
Substantially all natural gas produced by MGS is sold to Mountaineer based on
prices approved by the Public Service Commission of West Virginia (PSCWV).
The Company markets natural gas directly to industrial, commercial and
municipal customers through G.A.S. G.A.S. was incorporated in West Virginia
in July 1987 to market the production of Allegheny. Since that time, G.A.S.
has expanded its business and also purchases supplies of natural gas for
resale from various producers and wholesalers in the Appalachian Basin of West
Virginia as well as elsewhere in the continental United States.
Allegheny has a 59.5% interest in petroleum prospecting licenses in the
North Island, New Zealand through a joint venture with a third party. The
Company's New Zealand subsidiary, A&W Exploration New Zealand, Limited
(AWENZ), holds the Company's interests in the petroleum prospecting licenses.
As of December 31, 1993, the Company had invested approximately $825,000 in
this arrangement, all of which has been charged to expense.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reference is hereby made to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1993 which contains a summary of major
accounting policies followed by the Company in the preparation of its
consolidated financial statements. These policies were also followed in
preparing the quarterly report included herein, with the exception of the
adoption of new methods of accounting for income taxes (see Note 3) and
postretirement benefits other than pensions (see Note 4) in accordance with
pronouncements issued by the Financial Accounting Standards Board (FASB) which
became effective for the Company on July 1, 1993.
The financial information included herein is unaudited; however, such
information reflects all adjustments which are, in the opinion of management,
necessary for a fair presentation of the results for the interim periods.
With the exception of the recording of the cumulative effect prior to July 1,
1993 of the change in the method of accounting for income taxes, all such
adjustments were of a normal recurring nature.
The results of operations for the three and six month periods ended
December 31, 1993 and 1992 are not necessarily indicative of the results to be
expected for the entire fiscal year. This is especially true for retail gas
distribution sales which are highly subject to the impact of weather.
(3) CHANGE IN METHOD OF ACCOUNTING FOR INCOME TAXES
Effective July 1, 1993, the Company adopted FASB Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". SFAS No.
109 utilizes the liability method to recognize deferred taxes. Under this
method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Deferred tax assets
and liabilities are adjusted for future changes in tax rates. Prior to the
adoption of SFAS No. 109, income tax expense was determined using the deferred
method. Under the former method, deferred tax expense was based on items of
income and expense that were reported in different years in the financial
statements and tax returns and were measured at the tax rate in effect in the
year the difference originated.
As permitted by SFAS No. 109, the Company has elected not to restate the
financial statements of any prior years. Pre-tax income from continuing
operations of the Company and its subsidiaries was not affected by the change
in accounting for income taxes; however, the cumulative effect of the change
increased net income by $1,562,000 or $.20 per share in the first quarter of
fiscal 1994. This was primarily the result of reduced currently enacted tax
rates compared to those in effect at the time the deferred taxes were
recognized on differences between financial reporting and tax bases of assets
and liabilities. The adoption of SFAS No. 109 by Mountaineer resulted in an
increase of $7,373,000 in accumulated deferred income taxes which was offset
by a corresponding increase in a regulatory asset account, which resulted from
the recording of certain deferred taxes which were not previously recognized
due to state ratemaking practices. This regulatory asset has been reflected
in other assets in the accompanying balance sheet as of December 31, 1993.
The Company records an interim provision (benefit) for income taxes based
upon its estimated annual effective rate. Differences between statutory rates
and the effective rate are caused primarily by amortization of an
acquisition adjustment, Federal nonconventional fuel credits and the treatment
of certain temporary differences for ratemaking purposes.
In August 1993, the Revenue Reconciliation Act of 1993 was enacted into
law which, among other changes, increased the top marginal tax rate for
corporations with taxable incomes in excess of $10 million to 35%. The
Company does not currently anticipate that it will be subject to the increased
marginal rate.
(4) CHANGE IN METHOD OF ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN
PENSIONS
Mountaineer sponsors plans which provide certain health care and life
insurance benefits for retired employees. The plans provide benefits for
employees who choose to retire early after reaching age 55 while working for
Mountaineer. Health care benefits are provided until age 65 at which time
these retirees become eligible for Medicare. Mountaineer does not pre-fund
this plan but rather pays claims as incurred.
Effective July 1, 1993, Mountaineer adopted the FASB's SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" (OPEB).
SFAS No. 106 significantly changes the accounting, measurement and disclosure
practices with respect to OPEB. SFAS No. 106 requires that the expected cost of
OPEB be charged to expense during the period of an employees' service rather
than expensing such costs as claims are incurred. Under SFAS No. 106, future
costs of providing postretirement benefits are recognized as an expense
and a liability during the employees' service periods. Under the plan,
the attribution period is equivalent to the 10-year period prior to the
employee reaching eligible retirement age. As permitted by SFAS No. 106,
Mountaineer has elected to amortize the accumulated postretirement benefit
obligation existing at the date of adoption ("transition obligation") over
a 20-year period. Prior to fiscal 1994, Mountaineer recognized postretirement
health care and life insurance benefits in the year the benefits were
paid. Postretirement health care and life insurance benefits charged to
expense in fiscal 1993 were $525,000.
The following table sets forth the plan's funded status, as determined by
an independent actuary, as of July 1, 1993 (in thousands of dollars):
Accumulated postretirement benefit obligation:
Retirees $ 2,871
Active participants 3,305
--------
Total accumulated postretirement benefit obligation 6,176
Plan assets at fair value --
--------
Accumulated postretirement benefit obligation
in excess of plan assets 6,176
Unrecognized transition obligation (6,176)
--------
Accrued postretirement benefit liability
at July 1, 1993 --
Net periodic postretirement benefit cost for the fiscal year ended
June 30, 1994, as determined by an independent actuary, includes the following
components (in thousands of dollars):
Service cost-benefits attributed to service during
the period $ 307
Interest cost on the accumulated postretirement
benefit obligation 500
Amortization of the transition obligation 310
--------
Net periodic postretirement benefit cost $1,117
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 12% in 1993, declining gradually to 5.5%
in 2005 and remaining at that level thereafter. The health care cost
trend rate assumption has a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rates by one percent
in each year would increase the accumulated postretirement benefit obligation
as of July 1, 1993 by $218,000 and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for fiscal 1994
by $49,000. The weighted average discount rate used in determining
the accumulated postretirement benefit obligation was 8%. The average assumed
annual rate of salary increase for the life insurance benefit plan was 5%.
On October 29, 1993, the PSCWV issued an order regarding Mountaineer's
request in January 1993 for increased base rates (see Note 5). As a part of
this order, the PSCWV ruled that the permitted rate recovery mechanism will
be a modified accrual method. The modified accrual method allows for the
recovery of current service costs on an accrual basis and recovery of the
transition obligation on a cash-basis. Accounting for the transition
obligation on a cash method is not an acceptable accounting method under
generally accepted accounting principles. Mountaineer is recording its other
postretirement benefit expense in accordance with SFAS No. 106, which is in
excess of the permitted rate recovery as a result of the PSCWV's ruling.
Mountaineer currently estimates that the amount of SFAS No. 106 expense (net
of those amounts expected to be capitalized) recorded for financial reporting
purposes in excess of the amounts recoverable for ratemaking purposes
will be approximately $340,000 in fiscal 1994 and will accumulate to
approximately $3,000,000 over the twenty-year transition period. These
amounts will be recovered through rates in future years when the cash basis of
prior service costs exceeds the accrual basis of such costs.
(5) MOUNTAINEER RATE MATTERS
On October 29, 1993, the PSCWV issued an order, effective November 1,
1993, regarding Mountaineer's request in January 1993 for increased base rates.
The order, among other matters, provides for a 10.1% return on equity and rate
increases which will generate additional annual revenues of approximately
$3,400,000 under normal operating conditions. In its original filing,
Mountaineer requested a return on equity of 12.3% and rate increases that would
result in increased annual revenues of $7,500,000. On November 8, 1993,
Mountaineer filed a petition for reconsideration of several issues contained in
the PSCWV order, including the granted rate of return on equity and the rate
recovery mechanism of OPEB costs. As of February 11, 1994, this
reconsideration is still under review at the PSCWV.
(6) COMMITMENTS AND CONTINGENCIES
Columbia Gas Transmission and The Columbia Gas System, Inc. Bankruptcy
Filing
On July 31, 1991, Columbia Gas Transmission Corporation and The Columbia
Gas System, Inc. (the Columbia Companies) filed for protection under Chapter
11 of the Bankruptcy Code. The Columbia Companies stated that the primary
basis for their filing was the failure of Columbia Gas Transmission
Corporation (Columbia Transmission) to acquire natural gas through existing
producer contracts under terms and conditions, including price, which would
permit Columbia Transmission to compete in the marketplace. Columbia
Transmission's filing could affect its relationship with Mountaineer, since
Mountaineer relies upon Columbia Transmission for the majority of gas deliveries
made into its distribution system.
On January 18, 1994, Columbia Transmission filed a proposed plan of
reorganization in the bankruptcy proceedings, but requested the Bankruptcy
Court to defer all further proceedings on such plan pending further
discussions with Columbia Transmission's major creditors and official
committees, including the official committee of customers which Mountaineer
chairs. The plan, if ultimately approved by the Bankruptcy Court and
accepted by Columbia Transmission's customers, would inter alia, (i) pay
Columbia Transmission's customers 100% of certain refund amounts ordered by
the Federal Energy Regulatory Commission (FERC), but at a lower interest rate
than provided by FERC, (ii) pay Columbia Transmission's customers 90% of
certain other refunds ordered by the FERC, and (iii) require any customer
accepting the plan to waive its entitlement to all other refund amounts and to
not oppose Columbia Transmission's recovery such customers of approximately
$250 million in certain costs to be filed with the FERC. Discussions on the
roposed plan are at a preliminary stage, and Columbia Transmission is in
the process of providing additional information necessary to evaluate the
proposal. However, at this stage, various aspects of the proposal appear
unacceptable to the official committee of customers. Mountaineer is vigorously
opposing Columbia Transmission's efforts to recover costs related to its
Chapter 11 bankruptcy proceedings. The outcome of these proceedings could
materially affect Mountaineer's prices to its customers. Mountaineer is
reviewing its options, including the level of Columbia Transmission's role
in providing service to Mountaineer in the future. Mountaineer's management
continues to be actively involved in this process in order to minimize any
adverse impact on the interests of Mountaineer or its customers.
FERC Orders 636 Et. Seq.
In 1992, the FERC issued Order No. 636 et. seq. (the 636 Orders). The 636
Orders require substantial restructuring of the service obligations of
interstate pipelines. Pipelines initiated proceedings with customers to
negotiate all elements of restructured tariffs to be in place by the 1993-1994
winter heating season. Among other things, the 636 Orders mandate "unbundling"
of existing pipeline gas sales services and replace current statutory
abandonment procedures, as applied to firm transportation contracts of more than
one year, with a right-of-first-refusal mechanism. Mandatory unbundling
requires pipelines to sell separately the various components of their
previous gas sales services (gathering, transportation and storage services,
and gas supply). These components were previously combined or "bundled" in
gas services such as those purchased by Mountaineer from Columbia Transmission
and other interstate pipelines. To address concerns raised by utilities
about reliability of service to their service territories, the 636 Orders
require pipelines to offer a no-notice transportation service in which firm
transporters can receive delivery of gas up to their contractual capacity
level on any day without prior scheduling. In addition, the 636 Orders provide
for a mechanism for pipelines to recover prudently incurred transition costs
associated with the restructuring process.
All of Mountaineer's pipeline suppliers have filed their restructuring
plans with the FERC. The FERC has reviewed these plans; however, there are
several issues which remain subject to further action by either FERC or
reviewing courts, including the ultimate sharing of transition costs, the
level of no-notice protection and the impact on service reliability,
and rate design implementation. Mountaineer's largest pipeline
supplier, Columbia Transmission, received orders from FERC which
approved its proposed restructuring filing with certain modifications.
One of the FERC modifications prohibited Columbia Transmission from
recovering contract rejection claims it may incur in its bankruptcy proceeding
as part of its transition costs. Columbia Transmission and others have filed
for appellate review of this disallowance. In addition, Columbia
Transmission filed a revised compliance plan with the FERC on October 22,
1993 which was placed into effect on November 1, 1993, subject to further
modification.
As a consequence of the November 1, 1993 restructuring, Mountaineer has
replaced the bundled firm sales service it previously received from Columbia
Transmission with gas purchase arrangements negotiated with unregulated
suppliers and firm transportation and storage agreements with Columbia
Transmission. Interim supply arrangements are in place, negotiations for
long-term supplies are underway and the Company is reviewing reviewing its
current level of firm service contracts to determine if additional capacity
is necessary to provide reliable service to its customers. Unresolved issues
include whether the new unbundled transportation and storage services provided
by Columbia Transmission, and the replacement natural gas supplies provided by
others, will result in the same degree of service reliability as the bundled
firm sales service Columbia Transmission has provided to Mountaineer in the
past. Because of these issues and others, Mountaineer has petitioned for
appellate review of both the 636 Orders and the orders approving the
implementation of Columbia Transmission's restructuring pursuant to the 636
Orders. Mountaineer's management continues to actively participate in Columbia
Transmission's compliance filings in order to protect Mountaineer's interests,
ensure the continued reliability of service to its customers and minimize
future transition costs.
Until Mountaineer's pipeline suppliers' rate filings to implement
restructuring, including subsequent filings to recover transition costs, are
fully approved by FERC, the ultimate amount of the costs associated with
restructuring cannot be ascertained. However, when the restructured
services and associated transition costs are finally approved, Mountaineer's
management estimates that the level of such restructuring costs passed through
to Mountaineer could be significant. Mountaineer will attempt to obtain
approval from the PSCWV to recover any such approved restructuring costs from
its customers. On the basis of previous state regulatory proceedings involving
the recovery of gas purchase costs and take-or-pay obligations, Mountaineer
believes that the costs passed through from its pipeline suppliers will be
recovered from ratepayers.
Legal
Cameron Gas Company and C. Richard Coleman, et al. vs. Allegheny & Western
Energy Corporation, Mountaineer Gas Company and Gas Access Systems, Inc. was
filed on December 31, 1992, in the Circuit Court of Marshall County, West
Virginia. Plaintiffs allege unlawful and/or tortious conduct and violations
of the Racketeer Influenced and Corrupt Organizations Act and the West Virginia
Anti-Trust Act, arising out of the termination of a gas sales agreement and
seek $30 million compensatory damages and $90 million punitive damages. Upon
the petition of the Company, the case has been removed to the United States
District Court for the Northern District of West Virginia. On February 19,
1993, the Company filed responsive dispositive pleadings to the complaint,
including a motion to dismiss. The pleadings remain pending before the Court
for disposition. Discovery has commenced. No trial date has been
established. The Company believes the claims are without merit and plans to
vigorously defend this matter and does not believe that this matter is
reasonably likely to have a material adverse effect on the financial position
and results of operations of the Company.
The Company is involved in various legal and other disputes which have
resulted in pending or threatened litigation. In management's opinion, the
outcome of such disputes or actions will not have a material effect on the
financial position of the Company.
Other
To obtain petroleum prospecting licenses in New Zealand, AWENZ and its
partner were required to obtain a performance bond of $500,000 NZ ($279,900
US as of December 31, 1993), which is a normal requirement of the Minister of
Energy. Should AWENZ and its partner not perform their commitments as required
by the licenses, the government of New Zealand could elect to call the bond,
which would require the payment by AWENZ of 59.5% of such amount. The Company
and its partner have requested an extension of the time period allowed for
the completion of certain geological and geophysical work required under
the licenses which has not yet been completed. While no formal response from
the Minister of Energy has been received, the Company and its partner believe
an acceptable agreement can be reached regarding these requirements. To the
best of management's knowledge, all other commitments required by the licenses
have been performed.
ALLEGHENY & WESTERN ENERGY CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES
Gas Distribution and Marketing
Gas distribution and marketing revenues are derived from Mountaineer Gas
Company (Mountaineer), a regulated utility, and Gas Access Systems, Inc.
(G.A.S.), a gas marketing company, as well as from Mountaineer's wholly-owned
subsidiary, Mountaineer Gas Services, Inc. (MGS), a producer and marketer of
natural gas.
Gas distribution revenues for Mountaineer increased approximately $8.6
million and $9.3 million during the current three and six month periods,
respectively, when compared to the corresponding periods of the previous year.
These increases were primarily related to increased volumes of gas sold due to
colder weather conditions in its service area and increased base and gas cost
recovery rates which became effective November 1, 1993. These increases
were partially offset by small commercial customers obtaining transportation
services in lieu of purchasing gas supplies from Mountaineer during the current
three and six month periods.
Gas distribution revenues of G.A.S. increased approximately $.7 million
and $1.7 million in the current three and six month periods, respectively, as
compared to the corresponding periods of fiscal 1993. These increases were
attributable to improved sales prices due to industry market conditions,
colder weather conditions in G.A.S.'s service area and higher sales volumes in
the current periods.
MGS began operating the assets purchased from Hallwood on April 1, 1993.
These assets included the assumption of several sales contracts with
large volume customers. These contracts generated sales revenues of
approximately $2.2 million and $3.6 million during the three and six month
periods ended December 31, 1993, respectively.
Oil and Gas Sales
Revenues relating to oil and gas sales are derived from the activities of
Allegheny and MGS, whose operations are located in the Appalachian Basin of
West Virginia.
Oil and gas sales increased approximately $.8 million and $1.5 million
during the current three and six month periods, respectively, as compared to
the corresponding periods of fiscal 1993. These increases were the result of
oil and gas sales of MGS in the current three and six month periods. Oil and
gas sales of Allegheny remained unchanged during the current three and six month
periods as reduced production volumes during the current periods were offset
by higher average sales prices resulting from industry market conditions.
Field Services
Field services revenues include amounts charged for the administration and
operation of producing properties, amounts charged for the operation of
pipeline systems and management of drilling operations.
Field services revenues remained unchanged during the current three and
six month periods as compared to the corresponding periods of the prior year.
Investment and Other Income
Investment income is earned primarily from investments in short-term
repurchase agreements and bond funds.
Investment and other income decreased approximately $.1 million and $.2
million during the current three and six month periods, respectively, when
compared to the corresponding periods of fiscal 1993. These decreases were
attributable to reduced cash available for investment by Mountaineer due to
capital expenditure and working capital requirements.
COSTS AND EXPENSES
Cost of Gas Distributed/Marketed
Cost of gas distributed/marketed includes the cost of gas recovered by
Mountaineer from its customers as permitted in its purchased gas adjustment
clause provided for by state regulatory provisions and the cost of gas purchased
by G.A.S. and MGS for resale to their respective customers.
Cost of gas distributed by Mountaineer during the current three and six
month periods increased approximately $6.4 million and $6.5 million,
respectively, when compared to the corresponding periods of the prior year.
These increases were primarily a result of increased volumes of gas sold due to
the colder weather conditions in Mountaineer's service area and increased
purchased gas adjustment rates which became effective November 1, 1993.
Cost of gas marketed by G.A.S. increased approximately $.9 million and
$1.9 million during the current three and six month periods, respectively.
These increases resulted from increased volumes of gas sold, colder weather
conditions in G.A.S.'s service area and higher prices as a result of
industry market conditions.
MGS incurred purchased gas costs of $2.1 million and $3.4 million during
the current three and six month periods, respectively, in connection with the
sales contracts acquired from Hallwood in March 1993.
Exploration, Lease Operating and Production
Exploration, lease operating and production expenses include costs
incurred by Allegheny and MGS both in conducting field operations for producing
properties and in exploring for potential new sources of oil and gas reserves.
Exploration, lease operating and production expenses increased
approximately $.3 million and $.6 million during the current three and six month
periods, respectively, as compared to the corresponding periods of the prior
year. These increases are attributable to MGS which incurred lease operating
and production costs of $.4 million and $.7 million during the current three
and six month periods, respectively. Exploration, lease operating and
production costs for Allegheny decreased slightly during the current three and
six month periods.
Distribution, General and Administrative
Distribution, general and administrative expenses increased approximately
$1.4 million and $2.3 million during the current three and six month periods,
respectively, as compared to the corresponding periods of the prior year.
These increases resulted primarily from increased labor and employee
benefits costs of Mountaineer. In addition, MGS incurred costs of
approximately $.1 million in the current six month period.
Depletion, Depreciation and Amortization
Depletion, depreciation and amortization expenses increased approximately
$.4 million and $.6 million during the current three and six month periods,
respectively, as compared to the corresponding periods of fiscal 1993. These
increases were primarily the result of depreciation on utility plant additions
of Mountaineer and depletion of $.2 million and $.4 million, respectively,
recorded by MGS during the current three and six month periods.
Interest
Interest expense increased approximately $.2 million during the current
six month period as compared to the corresponding period of the prior year
resulting from higher average outstanding short-term borrowings of Mountaineer
due to working capital and capital expenditure requirements. This increase
was partially offset by a reduction in long-term debt outstanding.
Provision for Income Taxes
The provision for income taxes increased approximately $.2 million during
the current three month period as compared to the corresponding period of fiscal
1993 as a result of higher pre-tax earnings, partially offset by a reduction
in the estimated effective rate for fiscal year 1994 as compared to fiscal year
1993. The provision for income taxes remained unchanged between the current
six month period and the corresponding period of the previous year as the
increase associated with higher pre-tax earnings was offset by a reduction
in the estimated effective rate for fiscal year 1994. The interim provision
for income taxes is based upon the Company's estimated annual effective rate
of approximately 25 percent.
Cumulative Effect of Change in Accounting Principle
Effective July 1, 1993, the Company changed its method of accounting for
income taxes as required by the Financial Accounting Standards Board's Statement
of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes". As permitted by SFAS No. 109, the Company recognized the cumulative
effect prior to July 1, 1993 of the change in the method of accounting for
income taxes in the period of adoption. Accordingly, the Company reflected
a credit of $1,562,000 in the first quarter of fiscal 1994. This amount was
primarily the result of reduced currently enacted tax rates compared to those
in effect at the time deferred taxes were recognized for differences between
financial reporting and tax bases of assets and liabilities.
LIQUIDITY AND CAPITAL RESOURCES
Short-Term Borrowings and Lines-of-Credit
At December 31, 1993 the Company had a working capital deficit of $6.4
million and a current ratio of .92 to 1. The deficiency in working capital is
attributable to Mountaineer's requirement of significant working capital funds
to finance its investment in MGS and capital expenditures. Management believes
it has sufficient lines-of-credit to meet current maturities of long-term debt
and working capital and capital expenditure requirements.
Mountaineer has unsecured lines-of-credit available for short-term
borrowings from several banks totalling $57.5 million which expire at various
dates during the next twelve months. Management expects all such
lines-of-credit to be renewed upon expiration. In addition, Mountaineer has a
$15 million revolving line-of-credit which is available for borrowing until
December 31, 1996. At December 31, 1993, Mountaineer had $36.2 million
outstanding under its short-term lines-of-credit.
Allegheny has lines-of-credit available for short-term borrowings from
two banks totalling $5.0 million. At December 31, 1993, Allegheny had no
borrowings outstanding under these lines-of-credit.
Mountaineer's and Allegheny's short-term lines-of-credit are typically in
effect for a period of one year and are renewed on a year-to-year basis.
Capital Expenditures
The Company has incurred approximately $6.5 million in capital
expenditures during the first six months of fiscal 1994, substantially all of
which was attributable to its gas distribution operations. All capital
expenditures were financed through the use of working capital and short-term
borrowings.
OTHER
Mountaineer Rate Case
On October 29, 1993, the Public Service Commission of West Virginia
(PSCWV) issued an order regarding Mountaineer's request in January 1993 for
increased base rates. The order, among other matters, provides for a 10.1%
return on equity and rate increases which will generate additional annual
revenues of approximately $3.4 million under normal operating conditions. In
its original filing, Mountaineer requested a return on equity of 12.3% and rate
increases that would result in increased annual revenues of $7.5 million.
The order also increased certain transportation rates which Mountaineer
charges to certain large volume users. Mountaineer and certain customers have
filed petitions for reconsideration by the PSCWV of the rate design for
large volume transportation service.
The PSCWV also indicated that in future rate proceedings it will adjust
Mountaineer's income tax recovery for consolidated tax savings based on any
losses and other tax benefits of the parent company and affiliates within the
corporate group. While no method was specifically adopted for the application
of consolidated tax savings, this decision could negatively impact future
recovery of Mountaineer income taxes. The Company is exploring its
alternatives and the potential impact that consolidated tax savings may have on
future Mountaineer rate cases.
On November 8, 1993, Mountaineer filed a petition for reconsideration of
the rate design and consolidated tax savings issues discussed above as well as
reconsideration of other matters including the approved rate of return on
equity and the recovery mechanism for certain postretirement benefits. The
ultimate outcome of the petition for reconsideration and the impact of the
PSCWV's order on Mountaineer's future results of operations is not known
at this date. Mountaineer is pursuing various alternatives to reduce or
mitigate any unfavorable impact on its future results of operations.
Common Stock Repurchase Program
On October 2, 1992, the Company announced a program whereby it would
purchase, from time to time, up to 1,000,000 shares of its outstanding common
stock on the open stock market or in negotiated transactions. Shares
repurchased will be used for general corporate purposes. As of February 11,
1994, the Company had acquired 385,728 shares of its common stock under this
program.
ALLEGHENY & WESTERN ENERGY CORPORATION
AND SUBSIDIARIES
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Cameron Gas Company and C. Richard Coleman, et al. vs. Allegheny & Western
Energy Corporation, Mountaineer Gas Company and Gas Access Systems, Inc. was
filed on December 31, 1992, in the Circuit Court of Marshall County, West
Virginia. Plaintiffs allege unlawful and/or tortious conduct and violations
of the Racketeer Influenced and Corrupt Organizations Act and the West Virginia
Anti- Trust Act, arising out of the termination of a gas sales agreement and
seek $30 million compensatory damages and $90 million punitive damages. Upon
the petition of the Company, the case has been removed to the United
States District Court for the Northern District of West Virginia. On
February 19, 1993, the Company filed responsive dispositive pleadings to the
complaint, including a motion to dismiss. The pleadings remain pending before
the Court for disposition. Discovery has commenced. No trial date
has been established. The Company believes the claims are without merit and
plans to vigorously defend this matter and does not believe that this
matter is reasonably likely to have a material adverse effect on the financial
position and results of operations of the Company.
The Company has been named as a defendant in various other legal actions
which arise primarily in the ordinary course of business. In management's
opinion, these outstanding claims are unlikely to result in a material adverse
effect on the Company's financial position and results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) Exhibits
10.22 Seventh Amendment, dated October 31, 1993, to Credit
Agreement, dated September 24, 1990, among Allegheny
& Western Energy Corporation, Pittsburgh National Bank and
One Valley Bank, N.A. and Pittsburgh National Bank as agent.
10.23 Employment Agreements with Richard L. Grant, Michael S.
Fletcher and W. Merwyn Pittman, individually.
10.24 Supplemental Retirement Benefit Plan Agreements between John
G. McMillian, Richard L. Grant, Michael S. Fletcher and W.
Merwyn Pittman, individually, and Allegheny & Western Energy
Corporation.
B) Reports on Form 8-K - None
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 & WESTERN ENERGY CORPORATION
Registrant
/s/ W. Merwyn Pittman
W. Merwyn Pittman
Vice President, Chief Financial
Officer and Treasurer
Date: February 11, 1994