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 July 1, 1994 to September 30, 1994
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 November 11, 1994, 7,479,360 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
September 30, 1994 and June 30, 1994 1-2
Condensed Consolidated Statements of
Income for the Three Month Periods Ended
September 30, 1994 and 1993 3
Condensed Consolidated Statements of Cash
Flows for the Three Month Periods Ended
September 30, 1994 and 1993 4
Notes to Condensed Consolidated Financial
Statements 5-10
Management's Discussion and Analysis of
Financial Condition and Results of
Operations and Liquidity and Capital
Resources 11-15
Part II - Other Information 16
Signatures 17
1
ALLEGHENY & WESTERN ENERGY CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(IN THOUSANDS)
September 30, June 30,
1994 1994
(Unaudited)
-------------- --------------
Current Assets
Cash & equivalents $ 6,843 $ 5,611
Short-term investments --- 3,142
Accounts receivable, less
allowance for doubtful
accounts 13,606 23,539
Inventory 28,315 16,468
Prepayments 1,860 1,288
Deferred income taxes 2,139 3,021
Other 73 51
------------- -------------
Total current assets 52,836 53,120
------------- -------------
Property, plant and equipment
- at cost:
Utility plant 152,493 149,246
Oil and gas properties
(successful efforts method) 52,521 51,881
Transmission plant 4,525 4,523
Other 7,863 7,872
------------- -------------
217,402 213,522
Less accumulated depletion,
depreciation and amortization (66,915) (65,765)
------------- -------------
Net property, plant and
equipment 150,487 147,757
------------- -------------
Other 16,038 15,732
------------- -------------
Total assets $ 219,361 $ 216,609
============= =============
<FN>
The accompanying notes are an integral part of these financial
statements.
</FN>
/TABLE
2
ALLEGHENY & WESTERN ENERGY CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(IN THOUSANDS)
September 30, June 30,
1994 1994
(Unaudited)
-------------- --------------
Liabilities
Current maturities of
long-term debt $ 6,050 $ 6,750
Short-term borrowings 31,304 18,703
Accounts payable 15,068 19,126
Overrecovered gas costs 4,004 6,035
Accrued liabilities and other 11,468 13,486
------------- -------------
Total current liabilities 67,894 64,100
Long-term debt, net of current
maturities 26,005 25,680
Deferred income taxes 19,481 19,419
Other 6,072 5,750
------------- -------------
Total liabilities 119,452 114,949
------------- -------------
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;
8,108,802 shares issued;
7,479,360 shares outstanding 81 81
Additional paid-in capital 36,788 36,788
Retained earnings 68,322 70,073
------------- -------------
Total 105,191 106,942
Less treasury stock, at cost,
629,442 shares (5,282) (5,282)
------------- -------------
Total stockholders' equity 99,909 101,660
------------- -------------
Total liabilities and
stockholders' equity $ 219,361 $ 216,609
============= =============
<FN>
The accompanying notes are an integral part of these financial
statements.
</FN>
/TABLE
3
ALLEGHENY & WESTERN ENERGY CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
UNAUDITED
Three Months Ended
September 30,
1994 1993
---------- ---------
Revenues
Gas distribution and marketing $ 21,436 $ 20,851
Oil and gas sales 1,537 1,349
Field services 482 518
Investment and other income 73 88
--------- ---------
Total revenues 23,528 22,806
--------- ---------
Costs and expenses
Costs of gas distributed/marketed 12,862 12,747
Exploration, lease operating and
production 965 862
Distribution, general and
administrative 9,714 9,240
Depletion, depreciation and
amortization 1,350 1,390
Interest 1,104 1,113
--------- ---------
Total costs and expenses 25,995 25,352
--------- ---------
Loss before income taxes and
cumulative effect of change in
accounting principle (2,467) (2,546)
Benefit for income taxes 716 864
--------- ---------
Loss before cumulative effect of
change in accounting principle (1,751) (1,682)
Cumulative effect prior to July 1,
1993 of change in method of
accounting for income taxes --- 1,562
--------- ---------
Net loss $ (1,751) $ (120)
========= =========
Loss per share:
Loss before cumulative effect of
change in accounting principle $ (0.23) $ (0.22)
Cumulative effect prior to July 1,
4
1993 of change in method of
accounting for income taxes --- 0.20
--------- ---------
Net loss $ (0.23) $ (0.02)
========= =========
Average number of common shares
outstanding 7,479,360 7,815,736
========= =========
<FN>
The accompanying notes are an integral part of these financial
statements.
</FN>
/TABLE
5
ALLEGHENY & WESTERN ENERGY CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
UNAUDITED
Three Months Ended
September 30,
1994 1993
---------- ----------
Cash flows from operating activities
Net loss $ (1,751) $ (120)
Cumulative effect prior to July 1,
1993 of adopting SFAS No. 109 --- (1,562)
Depletion, depreciation and
amortization 1,350 1,390
Deferred income taxes 944 929
Other 795 587
Change in working capital, net (11,330) (17,165)
--------- ---------
Net cash used in operating
activities (9,992) (15,941)
--------- ---------
Cash flow from investing activities
Capital expenditures, net (4,169) (3,097)
Short-term investments, net 3,167 ---
--------- ---------
Net cash used in investing
activities (1,002) (3,097)
--------- ---------
Cash flows from financing activities
Debt repayments (375) (375)
Short-term borrowings, net 12,601 18,538
Purchases of treasury stock (0 and
128,378 shares, respectively) --- (1,155)
--------- ---------
Net cash provided from financing
activities 12,226 17,008
--------- ---------
Net change in cash and cash equivalents 1,232 (2,030)
Cash and cash equivalents, beginning
of period 5,611 10,931
--------- ---------
Cash and cash equivalents, end of
period $ 6,843 $ 8,901
========= =========
<FN>
The accompanying notes are an integral part of these financial
statements.
</FN>
/TABLE
6
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. The Company's past exploration
and production activities in the Appalachian Basin of West
Virginia have been conducted for its own account and through
joint ventures and participations with third parties and
limited partnerships. Allegheny has performed no drilling
activities since fiscal 1992. Beginning in fiscal 1990,
principally 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 facilities
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 its non-regulated
subsidiary, G.A.S. G.A.S. was incorporated in West Virginia
in July 1987 and markets the production of Allegheny as well
as supplies of natural gas purchased from various producers
and wholesalers in the Appalachian Basin of West Virginia and
the continental United States.
Allegheny has a 59.5% interest in petroleum prospecting
licenses located on the North Island, New Zealand through a
joint venture with a third party. The Company's wholly-owned
New Zealand subsidiary, A&W Exploration New Zealand, Limited
(AWENZ), holds the Company's interests in the petroleum
prospecting licenses. As of September 30, 1994, the Company
had expended approximately $975,000 in this arrangement, all
of which has been charged to expense.
7
(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, 1994 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.
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. All such
adjustments were of a normal recurring nature.
The results of operations for the three month periods ended
September 30, 1994 and 1993 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.
Certain previously reported amounts have been reclassified
to conform to the September 30, 1994 presentation.
(3) AGREEMENT AND PLAN OF MERGER
On September 30, 1994, the Company announced that it had
entered into a definitive agreement with Energy Corporation
of America (ECA) and its wholly-owned subsidiary, Eastern
Systems Corporation (ESC). Pursuant to the agreement, the
Company will be merged with ESC and each share of the
Company s outstanding common stock will be converted into the
right to receive $12.00 in cash. The merger is subject to
customary conditions, including approval by the Company's
stockholders and satisfactory regulatory review. The date on
which such conditions will be satisfied cannot be determined
at the present time. As a result, the Company cannot
presently determine the date on which the proposed merger may
be consummated.
(4) STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 112,
"EMPLOYERS' ACCOUNTING FOR POSTEMPLOYMENT BENEFITS"
Effective July 1, 1994, the Company adopted the Financial
Accounting Standards Board Statement of Financial Accounting
Standards (SFAS) No. 112, "Employers Accounting for
Postemployment Benefits." This statement requires employers
to recognize any obligation which exists to provide benefits
to former or inactive employees after employment, but before
retirement. Such benefits include, but are not limited to,
salary continuations, supplemental unemployment, severance
disability (including workers' compensation), job training,
counseling and continuation of benefits such as health care
and life insurance. Currently, the only benefit provided by
the Company that would qualify as postemployment benefits
under this standard is workers' compensation benefits.
8
The adoption of SFAS No. 112 did not have a material impact
on the Company s results of operations.
(5) COMMITMENTS AND CONTINGENCIES
FERC Orders 636 Et. Seq.
In 1992, the FERC issued Order No. 636 et. seq., (the 636
Orders). The 636 Orders required substantial restructuring of
the service obligations of interstate pipelines. Among other
things, the 636 Orders mandated "unbundling" of existing
pipeline gas sales services and replaced existing statutory
abandonment procedures, as applied to firm transportation
contracts of more than one year, with a right-of-first-refusal
mechanism. Mandatory unbundling required pipelines to sell
separately the various components of their previous gas sales
services (gathering, transportation and storage services, and
gas supply). To address concerns raised by utilities about
reliability of service to their service territories, the 636
Orders required 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 provided for a
mechanism for pipelines to recover prudently incurred
transition costs associated with the restructuring process.
All of Mountaineer's pipeline suppliers have placed
restructuring plans into effect with FERC approval. However,
there are several issues which remain subject to further
action by either the FERC or reviewing courts, including the
ultimate sharing of transition costs, the level of no-notice
protection, the impact on service reliability and rate design
implementation. Mountaineer's largest pipeline supplier,
Columbia Transmission Corporation (Columbia Transmission),
received orders from the 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.
9
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 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 the FERC, the
ultimate amount of the costs associated with restructuring
cannot be ascertained; however, Mountaineer's management
anticipates that the amount of restructuring costs that will
be passed through to Mountaineer will be significant.
Mountaineer will attempt to obtain approval from the PSCWV to
recover from its customers any such FERC-approved
restructuring costs. 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, although there can be no assurance
that such approval will be obtained.
Columbia Gas Transmission and The Columbia Gas System, Inc.
Bankruptcy Filing
On July 31, 1991, Columbia Transmission 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 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. Although Mountaineer only purchased 1% of its
gas supplies from Columbia Transmission during fiscal 1994,
Mountaineer relies upon Columbia Transmission for the delivery
of a majority of Mountaineer s gas supplies.
10
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 of
which a member of Mountaineer's management is chairperson.
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 FERC, but at a lower
interest rate than provided by the 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 from such
customers of approximately $250 million in certain costs to be
filed with the FERC. Various aspects of the proposal are
unacceptable to the official committee of customers and other
interested parties. Discussions have been ongoing among
Columbia Transmission, its customers, and affected state
regulatory agencies to resolve the issues involved in the
proposed plan on a consensual basis. At the same time,
litigation has continued on certain major issues in the
bankruptcy proceedings, including the estimation of producer
contract rejection damages, customer recoupment and set-off
rights, and the intercompany claims of Columbia Transmission s
parent.
In addition, on June 24, 1994, the United States Court of
Appeals of the District of Columbia Circuit granted an appeal
filed by Mountaineer and others which challenged Columbia
Transmission's right to recover, through rates approved by the
FERC, over $120 million in take-or-pay costs from its
customers. The case has been remanded to the FERC for further
proceedings to determine the level of refunds owed to Columbia
Transmission's customers. The refund amount determined may
have a significant bearing on Columbia Transmission's proposed
plan of reorganization and any negotiated resolution thereof.
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.
11
Legal Matters
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 (RICO) 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 was
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. By Order issued March 31,
1994, and clarified by Order issued April 18, 1994, the West
Virginia anti-trust claim against Allegheny & Western Energy
Corporation, Mountaineer Gas Company and Gas Access Systems,
Inc. was dismissed with prejudice. In addition, the RICO
claim was dismissed against Allegheny & Western Energy
Corporation with prejudice. On April 14, 1994, Mountaineer
filed a general denial to plaintiffs' complaint and a
counterclaim seeking at least $150,000 in compensatory and
$2.0 million in punitive damages for the willful withholding
by Cameron of monies collected by Cameron as agent for certain
of Mountaineer's customers and intended to be paid to
Mountaineer for services rendered. In response to the April
18, 1994 order, the plaintiffs filed an amended complaint to
which the Company has filed responsive pleadings, including a
motion to dismiss, and a counterclaim. The pleadings remain
pending before the Court for disposition. Discovery has
commenced. No trial date has been set. The Company believes
Cameron's claims are without merit and plans to vigorously
defend this matter and does not believe that it 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.
Performance Bonds
In order to acquire the petroleum prospecting licenses in
New Zealand, AWENZ and its partner posted two performance
bonds in the amount of NZ $250,000 each (US $150,700 each as
of September 30, 1994), which is a normal requirement of the
Minister of Energy. Should AWENZ and its partner not carry
out the obligations required by the licenses, the government
of New Zealand could elect to call the bonds, which would
require the payment by AWENZ of 59.5% of the face amount of
such bonds. The initial geological and geophysical work has
been completed under one license and the parties are currently
in negotiations for an extension of the period of time
permitted for completion of the obligations required under the
second license.
12
Mountaineer Rate Matters
On March 30, 1994, the PSCWV issued a final order which put
Mountaineer on notice that in its next rate case, any savings
generated by Mountaineer's participation in a consolidated tax
return would be passed through to Mountaineer's ratepayers
unless persuasive legal or accounting arguments are presented
to the PSCWV to convince them to act otherwise. Management is
unable to determine what impact the consolidated tax savings
issue will have on Mountaineer's future results of operations.
(6) SUBSEQUENT EVENTS
Revolving Credit and Term Credit Facilities
The Company and its banks have agreed to extend the $5
million revolving credit facility to October 29, 1995.
Additionally, the Company and its banks have rescheduled the
dates for repayment of the outstanding balance under the
Company's term credit facility. The outstanding balance of $4
million under the term credit facility would have fully
matured under the terms of the former agreement on September
30, 1995. Under the terms of the new agreement, the Company
will pay twenty quarterly installments of $200,000 beginning
December 31, 1994. The Company has classified the maturities
of its long-term debt in accordance with this new agreement in
the accompanying financial statements as of September 30,
1994. The Company anticipates that the formal agreement will
be completed by December 31, 1994.
13
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 revenues are derived from
Allegheny's wholly-owned subsidiaries, Mountaineer Gas Company
(Mountaineer), a regulated utility, 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. Total gas distribution and
marketing revenues for such subsidiaries increased approximately
$.6 million during the current three month period as compared to
the corresponding period of the prior year.
Gas distribution revenues for Mountaineer increased
approximately $1.0 million during the current three month period
when compared to the corresponding period of the previous year.
The increase was primarily related to increased base and gas
cost recovery rates which went into effect on November 1, 1993.
Gas distribution revenues of G.A.S. decreased approximately
$.4 million in the current three month period as compared to the
first quarter of fiscal 1994. This decrease was primarily
attributable to reduced sales volumes in the current period.
Gas distribution revenues of MGS remained essentially
unchanged during the current three month period as compared to
the corresponding period of the prior year.
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 $.2 million during
the current three month period as compared to the corresponding
period of fiscal 1994. The increase was primarily attributable
to an increase, effective January 1, 1994, in the price at which
gas is sold by MGS to Mountaineer. Oil and gas sales of
Allegheny remained essentially unchanged during the period.
Field Services
Field services revenues include amounts charged for the
administration and operation of producing properties and the
operation of pipeline systems.
Field services revenues remained essentially unchanged during
the current three month period as compared to the corresponding
period of the prior year.
14
Investment and Other Income
Investment income is earned primarily from investments in
short-term repurchase agreements, short-term bond funds,
commercial paper and United States Treasury obligations.
Investment and other income remained essentially unchanged
during the current three month period when compared to the
corresponding period of fiscal 1994.
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. Total costs of gas
distributed/marketed by Allegheny's direct and indirect
subsidiaries increased approximately $.1 million during the
current three month period as compared to the corresponding
period of the previous year.
Cost of gas distributed by Mountaineer during the current
three month period increased approximately $.7 million when
compared to the corresponding period of the prior year. These
increases were primarily a result of increased purchased gas
adjustment rates which went into effect on November 1, 1993.
Cost of gas marketed by G.A.S. decreased approximately $.4
million during the current three month period. This decrease
resulted primarily from reduced volumes of gas sold.
Purchased gas costs of MGS decreased approximately $.2
million in the current three month period as compared to the
corresponding period of the prior year. MGS incurs gas purchase
costs to service large industrial customers. The decrease in the
current period was a result of decreased gas purchase prices.
Exploration, Lease Operating and Production
Exploration, lease operating and production expenses include
costs incurred by Allegheny and MGS 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 $.1 million during the current three month period
as compared to the corresponding period of the prior year.
Exploration, lease operating and production expenses of Allegheny
increased $.1 million as a result of increases in various
categories of production expenses. Exploration, lease operating
and production costs for MGS remained essentially unchanged
between the current three month period and the corresponding
period of the previous year.
15
Distribution, General and Administrative
Distribution, general and administrative expenses increased
approximately $.5 million during the current three month period
as compared to the corresponding period of the prior year. This
increase resulted primarily from normal increases in labor and
employee benefits costs of Mountaineer.
Depletion, Depreciation and Amortization
Depletion, depreciation and amortization expenses remained
essentially unchanged during the current three month period as
compared to the corresponding period of fiscal 1994.
Interest
Interest expense remained essentially unchanged during the
current three month period as compared to the corresponding
period of the prior year as Mountaineer's higher average
outstanding short-term borrowings during fiscal 1995 were offset
by a reduction in long-term debt outstanding during fiscal 1995.
Mountaineer's increase in short-term borrowings were due to
working capital and capital expenditure requirements.
Provision (Benefit) for Income Taxes
The benefit for income taxes decreased approximately $.1
million during the current three month period as compared to the
corresponding period of fiscal 1994 primarily as a result of a
reduced estimated effective tax rate for fiscal 1995 compared to
fiscal 1994. The interim provision for income taxes is based
upon the Company's estimated annual effective rate of 29% for
fiscal 1995.
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 has reflected a credit of $1,562,000 in
the accompanying financial statements as of September 30, 1993.
This amount is primarily the result of currently enacted tax
rates which are less than those in effect at the time deferred
taxes were recognized for differences between financial reporting
and tax bases of assets and liabilities.
16
LIQUIDITY AND CAPITAL RESOURCES
Short-Term Borrowings and Lines-of-Credit
At September 30, 1994 the Company had a working capital
deficit of $15.1 million and a current ratio of .78 to 1. The
deficiency in working capital is attributable to Mountaineer's
requirement of significant working capital funds to finance the
acquisition of the West Virginia assets of Hallwood by MGS in
fiscal 1993 and to fund capital expenditures. Management
believes it has sufficient lines-of-credit in place to meet
maturities of long-term debt and working capital requirements.
It is anticipated that Mountaineer will replace its short-term
borrowings through an offering of long-term debt during the
fourth quarter of fiscal 1995.
Mountaineer has unsecured lines-of-credit available for short-
term borrowings from several banks totalling $70.0 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, 1997. At September 30, 1994, Mountaineer had $31.3 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 September
30, 1994, Allegheny had no borrowings outstanding under these
lines-of-credit.
The Company and its banks have agreed to extend the $5
million revolving credit facility to October 29, 1995.
Additionally, the Company and its banks have rescheduled the
dates for repayment of the outstanding balance under the
Company's term credit facility. The outstanding balance of $4
million under the term credit facility would have fully matured
under the terms of the former agreement on September 30, 1995.
Under the terms of the new agreement, the Company will pay twenty
quarterly installments of $200,000 beginning December 31, 1994.
The Company has classified the maturities of its long-term debt
in accordance with this new agreement in the accompanying
financial statements as of September 30, 1994. The Company
anticipates that the formal agreement will be completed by
December 31, 1994.
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 $4.2 million in capital
expenditures during the quarter ended September 30, 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.
17
Seasonality of Business
Mountaineer's retail gas distribution sales are highly
seasonal and fluctuate significantly depending upon weather
conditions experienced in Mountaineer's service area. Typically,
the weather conditions result in higher operating revenues and
net income from October through March and lower operating
revenues and either net losses or reduced net income from April
through September. Weather conditions also have a significant
impact on Mountaineer s cash flow requirements. Typically, cash
expenditure requirements are greatest during May through January
in preparation for and during the winter heating season due to
gas purchase requirements. Cash inflows are at their highest
levels typically from January through April due to heating
requirements of Mountaineer's customers. Mountaineer utilizes
lines-of-credit and internally generated funds to meet its
seasonal capital requirements.
OTHER
Mountaineer Rate Matters
On March 30, 1994, the PSCWV issued a final order which, in
addition to granting a 10.55% increase in the authorized return
on equity, put Mountaineer on notice that in its next rate case
any savings generated by Mountaineer's participation in a
consolidated tax return would be passed through to Mountaineer's
ratepayers unless persuasive legal or accounting arguments are
presented to the PSCWV to convince them to act otherwise.
Management is unable to determine what impact the consolidated
tax savings issue will have on Mountaineer's 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 November 11, 1994, the Company
had acquired 603,828 shares of its common stock under this
program. The Company has not acquired any shares in connection
with this program since April 4, 1994. Pursuant to the
agreement among the Company, ECA and ESC, no additional shares
will be repurchased.
18
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 (RICO) 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 was 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. By Order issued March 31, 1994,
and clarified by Order issued April 18, 1994, the West Virginia
anti-trust claim against Allegheny & Western Energy Corporation,
Mountaineer Gas Company and Gas Access Systems, Inc. was
dismissed with prejudice. In addition, the RICO claim was
dismissed against Allegheny & Western Energy Corporation with
prejudice. On April 14, 1994, Mountaineer filed a general denial
to plaintiffs' complaint and a counterclaim seeking at least
$150,000 in compensatory and $2.0 million in punitive damages for
the willful withholding by Cameron of monies collected by Cameron
as agent for certain of Mountaineer's customers and intended to
be paid to Mountaineer for services rendered. In response to the
April 18, 1994 order, the plaintiffs filed an amended complaint
to which the Company has filed responsive pleadings, including a
motion to dismiss, and a counterclaim. The pleadings remain
pending before the Court for disposition. Discovery has
commenced. No trial date has been set. The Company believes
Cameron's claims are without merit and plans to vigorously defend
this matter and does not believe that it 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
10.25 Eighth Amendment, dated September 29, 1994, 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.
19
B) Reports on Form 8-K
Financial
Date of Report Item Reported Statements Filed
------------------- --------------- ----------------
September 29, 1994 Item 5 No
20
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: November 11, 1994