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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, 1998
Commission File Number 0-14688
ALLEGHENY GENERATING COMPANY
(Exact name of registrant as specified in its charter)
Virginia 13-3079675
(State of Incorporation) (I.R.S. Employer Identification No.)
10435 Downsville Pike, Hagerstown, Maryland 21740-1766
Telephone Number - 301-790-3400
The registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days.
At August 14, 1998, 1,000 shares of the Common Stock ($1.00
par value) of the registrant were outstanding.
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ALLEGHENY GENERATING COMPANY
Form 10-Q for Quarter Ended June 30, 1998
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Statement of income - Three and six months ended
June 30, 1998 and 1997 3
Balance sheet - June 30, 1998
and December 31, 1997 4
Statement of cash flows - Six months ended
June 30, 1998 and 1997 5
Notes to financial statements 6-8
Management's discussion and analysis of financial
condition and results of operations 9-11
PART II--OTHER INFORMATION 12
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ALLEGHENY GENERATING COMPANY
Statement of Income
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES $ 19,126 $ 20,408 $ 37,730 $ 40,624
OPERATING EXPENSES:
Operation and maintenance expense 1,542 1,471 2,495 2,756
Depreciation 4,242 4,284 8,468 8,568
Taxes other than income taxes 1,177 1,201 2,337 2,396
Federal income taxes 2,907 3,141 5,772 6,265
Total Operating Expenses 9,868 10,097 19,072 19,985
Operating Income 9,258 10,311 18,658 20,639
OTHER INCOME, NET 1 1 51 1
Income Before Interest Charges 9,259 10,312 18,709 20,640
INTEREST CHARGES:
Interest on long-term debt 2,619 3,685 5,806 7,413
Other interest 679 232 1,005 464
Total Interest Charges 3,298 3,917 6,811 7,877
NET INCOME $ 5,961 $ 6,395 $ 11,898 $ 12,763
See accompanying notes to financial statements.
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ALLEGHENY GENERATING COMPANY
Balance Sheet
June 30, December 31,
1998 1997
ASSETS: (Thousands of Dollars)
Property, Plant, and Equipment:
At original cost, including $962,000
and $906,000 under construction $ 828,755 $ 828,658
Accumulated depreciation (201,642) (193,173)
627,113 635,485
Current Assets:
Cash and temporary cash investments 40 5,359
Materials and supplies - at average cost 2,029 1,832
Prepaid taxes 4,346 4,442
Other 50 243
6,465 11,876
Deferred Charges:
Regulatory assets 7,979 7,979
Unamortized loss on reacquired debt 8,068 8,393
Other 173 187
16,220 16,559
Total Assets $ 649,798 $ 663,920
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock - $1.00 par value per share,
authorized 5,000 shares, outstanding
1,000 shares $ 1 $ 1
Other paid-in capital 163,420 199,522
163,421 199,523
Long-term debt 148,782 148,735
312,203 348,258
Current Liabilities:
Short-term debt 70,471 -
Long-term debt due within one year 10,000 60,000
Accounts payable to affiliates 5,448 6,135
Interest accrued 3,450 4,404
Other 301 1
89,670 70,540
Deferred Credits:
Unamortized investment credit 47,681 48,342
Deferred income taxes 174,390 169,325
Regulatory liabilities 25,854 27,455
247,925 245,122
Total Capitalization and Liabilities $ 649,798 $ 663,920
See accompanying notes to financial statements.
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ALLEGHENY GENERATING COMPANY
Statement of Cash Flows
Six Months Ended
June 30
1998 1997
(Thousands of Dollars)
CASH FLOWS FROM OPERATIONS:
Net income $ 11,898 $ 12,763
Depreciation 8,468 8,568
Deferred investment credit and income taxes, net 2,803 3,297
Changes in certain current assets and
liabilities:
Accounts receivable - (911)
Materials and supplies (197) 48
Accounts payable (687) (176)
Interest accrued (954) (20)
Other, net 976 372
22,307 23,941
CASH FLOWS FROM INVESTING:
Construction expenditures (97) (188)
CASH FLOWS FROM FINANCING:
Retirement of long-term debt (50,000) (5,992)
Short-term debt, net 70,471 -
Cash dividends on common stock (48,000) (17,850)
(27,529) (23,842)
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (5,319) (89)
Cash and temporary cash investments at January 1 5,359 131
Cash at June 30 $ 40 $ 42
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $7,377 $7,433
Income taxes 2,699 2,792
See accompanying notes to financial statements.
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ALLEGHENY GENERATING COMPANY
Notes to Financial Statements
1. The Company's Notes to Financial Statements in its Annual
Report on Form 10-K for the year ended December 31, 1997
should be read with the accompanying financial statements and
the following notes. With the exception of the December 31,
1997 balance sheet in the aforementioned annual report on
Form 10-K, the accompanying financial statements appearing on
pages 3 through 5 and these notes to financial statements are
unaudited. In the opinion of the Company, such financial
statements together with these notes contain all adjustments
necessary to present fairly the Company's financial position
as of June 30, 1998, the results of operations for the three
and six months ended June 30, 1998 and 1997, and cash flows
for the six months ended June 30, 1998 and 1997.
2. The Statement of Income reflects the results of past
operations and is not intended as any representation as to
future results. For purposes of the Balance Sheet and
Statement of Cash Flows, temporary cash investments with
original maturities of three months or less, generally in the
form of commercial paper, certificates of deposit, and
repurchase agreements, are considered to be the equivalent of
cash.
3. The Company systematically reduces capitalization each year
as its asset depreciates, resulting in the payment of
dividends in excess of current earnings. The Securities and
Exchange Commission has approved the Company's request to pay
common dividends out of capital. The Company has further
reduced capital through additional dividend payments in the
second quarter of 1998 as the Company's goal is to retire
debt and pay dividends in amounts necessary to maintain a
common equity position of about 45%. In the first six months
of 1998, common dividends of $11,898,132 were paid from
retained earnings, reducing the account balance to zero, and
common dividends of $36,101,868 were paid from other paid-in
capital. The payment of dividends out of capital surplus
will not be detrimental to the financial integrity or working
capital of either the Company or its Parents (Monongahela
Power Company, The Potomac Edison Company, and West Penn
Power Company), nor will it adversely affect the protections
due debt security holders.
4. On April 7, 1997, the Company's parent, Allegheny Power
System, Inc. (now renamed Allegheny Energy, Inc.) and DQE,
Inc. (DQE), parent company of Duquesne Light Company in
Pittsburgh, Pennsylvania, announced that they had agreed to
merge in a tax-free, stock-for-stock transaction.
On March 25, 1998, the Maryland Public Service Commission
(PSC) approved a settlement agreement between Allegheny
Energy, Inc. (Allegheny Energy) and various parties, in which
the PSC indicated its approval of the merger. This action
was requested in connection with the proposed issuance of
Allegheny Energy stock to exchange for DQE stock to complete
the merger.
On July 8, 1998, the City of Pittsburgh reached a settlement
agreement with Allegheny Energy and agreed to support the
merger.
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On July 16, 1998, the Public Utilities Commission of Ohio
(PUCO) found that the proposed merger would be in the public
interest. The PUCO also stated that the Midwest ISO is the
regional transmission entity that will best serve the
interests of the Ohio customers of Monongahela Power Company,
the Company's Ohio public utility parent, and will best
mitigate the market power issue.
The Nuclear Regulatory Commission has approved the transfer
of control of the operating licenses for DQE's nuclear
plants. While Duquesne Light Company (Duquesne), principal
subsidiary of DQE, will continue to be the licensee, this
approval was necessary since control of Duquesne will pass
from DQE to Allegheny Energy after the merger.
On July 23, 1998, the Pennsylvania Public Utility Commission
(PUC) approved the Allegheny Energy-DQE merger with
conditions acceptable to Allegheny Energy in response to a
Petition for Reconsideration filed by Allegheny Energy on
June 12, 1998. In its Petition for Reconsideration of a
previous PUC Order, Allegheny Energy reiterated its
commitment to staying in and supporting the Midwest ISO, and
also offered to relinquish some generation in order to
mitigate market power concerns. Allegheny Energy committed
to relinquishing control of the 570 megawatts (MW) Cheswick,
Pennsylvania, generating station through at least June 30,
2000 and, in the event that the Midwest ISO has not
eliminated pancaked transmission rates by June 30, 2000,
Allegheny Energy may be required to divest up to 2,500 MW of
generation, subject to a PUC Order.
In a letter dated July 28, 1998 to Allegheny Energy, DQE
stated that its Board of Directors determined that DQE was
not required to proceed with the merger under present
circumstances, referring to the PUC's Orders of July 23, 1998
(regarding the PUC's approval of the merger described above),
and May 29, 1998 (regarding the restructuring plan of the
Company's Pennsylvania utility parent, West Penn Power
Company (West Penn) described in Note 5 below). DQE took the
position that the findings of both Orders constitute a
material adverse effect under the Agreement and Plan of
Merger and invited Allegheny Energy to agree promptly to
terminate the merger agreement by mutual consent. DQE
asserted that the findings in the PUC Orders will result in a
failure of the conditions to DQE's obligation to consummate
the merger. DQE indicated that if Allegheny Energy was not
amenable to a consensual termination, DQE would terminate the
agreement unilaterally not later than October 5, 1998 if
circumstances did not change sufficiently to remedy the
adverse effects DQE stated were associated with the PUC
Orders. In a letter dated July 30, 1998, Allegheny Energy
informed DQE that DQE's allegations were incorrect, that the
Orders do not constitute a material adverse effect, that
Allegheny Energy remains committed to the merger, and that if
DQE prevents completion of the merger, Allegheny Energy will
pursue all remedies available to protect the legal and
financial interests of Allegheny Energy and its shareholders.
Allegheny Energy has also notified DQE that its letter and
other actions constitute a material breach of the merger
agreement by DQE.
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5. In December 1996, Pennsylvania enacted the Electricity
Generation Customer Choice and Competition Act (Customer
Choice Act) to restructure the electric industry in
Pennsylvania to create retail access to a competitive
electric energy generation market. The Company's parent,
West Penn, is subject to this Act. On August 1, 1997, 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 a plan for recovery of stranded costs through a
Competitive Transition Charge (CTC).
On May 29, 1998, West Penn received a final order from the
PUC denying full recovery of its stranded cost claim. The
Order authorized recovery of $524 million in stranded costs,
with return, over the 1999 through 2005 period, of the
approximately $1.2 billion available for recovery under the
capped rates mandated by the Customer Choice Act.
On June 26, 1998, the PUC denied a request by West Penn for
reconsideration of the May 29, 1998 PUC Order on West Penn's
restructuring plan. Under the reconsideration Order, West
Penn would be allowed to collect $525 million ($.5 million
more than the previous Order) in stranded costs, with a
return, over seven years, starting in January 1999, through
the CTC. Although in its restructuring application, West
Penn had listed $1.6 billion in stranded costs, because of
capped rates, West Penn would be limited to $1.2 billion in
stranded cost recovery under the Customer Choice Act.
Stranded costs are costs incurred under a regulated
environment, which are not expected to be recoverable in a
competitive market. Actual recovery of such costs will
depend upon the market prices for electricity in future
periods and the number of West Penn customers who choose
other generation suppliers. The PUC Order on West Penn's
restructuring plan assumed significantly higher electricity
prices in future years than Allegheny Energy believed were
appropriate.
Allegheny Energy believes that the $525 million of stranded
costs recommended for recovery is contrary to legal
requirements and does not adequately reflect the potential
effects of competition on West Penn. On June 26, 1998, West
Penn filed a formal appeal in state court and an action in
federal court challenging the PUC's restructuring Order. On
July 23, 1998, West Penn also filed in the Commonwealth Court
of Pennsylvania a petition for a stay of the two-thirds, one-
third phase-in schedule ordered by the PUC. On August 5,
1998, West Penn withdrew its petition for stay without
prejudice based on a PUC agreement to offer settlement
discussions on issues related to the PUC's restructuring
Order.
As a result of the PUC restructuring Order, West Penn has
determined that it is required to discontinue the application
of Statement of Financial Accounting Standards (SFAS) No. 71
for electric generation operations and to adopt SFAS No. 101,
"Accounting for the Discontinuation of Application of SFAS
No. 71." In doing so, West Penn has also determined that
under the provisions of SFAS No. 101 an extraordinary charge
of $450.6 million ($265.4 million after taxes) is required to
reflect a write-off of disallowances in the PUC's Order. The
write-off, recorded in June 1998 by West Penn, reflects
adverse power purchase commitments and deferred costs that
are not recoverable from customers under the PUC's Order.
West Penn's extraordinary charge of $177.2 million ($104.4
million after taxes) results from an above-market power
purchase commitment between West Penn and the Company. West
Penn's obligation to the Company under its power purchase
contract is not affected.
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ALLEGHENY GENERATING COMPANY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
COMPARISON OF SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1998
WITH SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1997
The Notes to Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of
Operations in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 should be read in conjunction with
the following Management's Discussion and Analysis information.
Factors That May Affect Future Results
This management's discussion and analysis of financial
condition and results of operations contains forecast information
items that are "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. These include
statements with respect to the DQE, Inc. (DQE) merger as well as
results of operations. All such forward-looking information is
necessarily only estimated. There can be no assurance that
actual results will not materially differ from expectations.
Actual results have varied materially and unpredictably from past
expectations.
Factors that could cause actual results to differ
materially include, among other matters, electric utility
restructuring, including the ongoing state and federal
activities; potential Year 2000 operation problems; developments
in the legislative, regulatory, and competitive environments in
which the Company operates, including regulatory proceedings
affecting rates charged by the Company; environmental legislative
and regulatory changes; future economic conditions; developments
relating to the proposed merger with DQE; and other circumstances
that could affect anticipated revenues and costs such as
unscheduled maintenance or repair requirements, and compliance
with laws and regulations.
Significant Events in the First Six Months of 1998
* Merger with DQE
In a letter dated July 28, 1998 to Allegheny Energy, DQE
stated that its Board of Directors determined that DQE was not
required to proceed with the merger under present circumstances,
referring to the Pennsylvania Public Utility Commission (PUC)
Orders of July 23, 1998 and May 29, 1998. See Notes 4 and 5 to
the financial statements for more information about these Orders.
DQE took the position that the findings of both Orders constitute
a material adverse effect under the Agreement and Plan of Merger,
and invited Allegheny Energy to agree promptly to terminate the
merger agreement by mutual consent. DQE asserted that the
findings in the PUC Orders will result in a failure of the
conditions to DQE's obligation to consummate the merger. DQE
indicated that if Allegheny Energy was not amenable to a
consensual termination, DQE would terminate the agreement
unilaterally not later than October 5, 1998 if
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circumstances did not change sufficiently to remedy the adverse
effects DQE stated were associated with the PUC Orders. In a letter
dated July 30, 1998, Allegheny Energy informed DQE that DQE's
allegations were incorrect, that the Orders do not constitute a
material adverse effect, that Allegheny Energy remains committed
to the merger, and that if DQE prevents completion of the merger,
Allegheny Energy will pursue all remedies available to protect
the legal and financial interests of Allegheny Energy and its
shareholders. Allegheny Energy has also notified DQE that its
letter and other actions constitute a material breach of the
merger agreement by DQE. Allegheny Energy believes that DQE's
basis for seeking to terminate the merger is without merit.
Accordingly, Allegheny Energy is continuing to seek the remaining
regulatory approvals from the Federal Energy Regulatory
Commission (FERC), the Department of Justice, and the Securities
and Exchange Commission. The Company cannot predict the outcome
of the requested approvals or of the differences between
Allegheny Energy and DQE.
Review of Operations
As described under Liquidity and Capital Requirements,
revenues are determined under a cost of service formula rate
schedule. Therefore, if all other factors remain equal, revenues
are expected to decrease each year due to a normal continuing
reduction in the Company's net investment in the Bath County
station and its connecting transmission facilities upon which the
return on investment is determined. The net investment
(primarily net plant less deferred income taxes) decreases to the
extent that provisions for depreciation and deferred income taxes
exceed net plant additions. Revenues for the second quarter and
six months ended June 30, 1998 decreased due to a reduction in
net investment and reduced operating expenses.
The decrease in operating expenses in the second quarter
and first six months of 1998 resulted from decreases in federal
income taxes due to decreases in income before taxes.
The decrease in interest on long-term debt in 1998 was
primarily the result of a decrease in the average amount of long-
term debt outstanding. Other interest increased in the second
quarter and six months ended June 30, 1998 due to an increased
level of short-term debt maintained by the Company upon
retirement of medium-term debt.
Liquidity and Capital Requirements
The Company's discussion on Liquidity and Capital
Requirements and Review of Operations in its Annual Report on
Form 10-K for the year ended December 31, 1997 should be read in
conjunction with the following information.
Pursuant to an agreement, the Parents of the Company buy
all of the Company's capacity in the Bath County station priced
under a "cost of service formula" wholesale rate schedule
approved by the FERC. Under this arrangement, the Company
recovers in revenues all of its operation and maintenance
expenses, depreciation, taxes, and a return on its investment.
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The Company's rates are set forth by a formula filed with
and previously accepted by the FERC. The only component which
changes is the Return on Equity (ROE). The ROE authorized for
the Company was 11.2% in 1995. Pursuant to a settlement
agreement filed with and approved by the FERC, the Company's ROE
was set at 11% for 1996 and will continue at that rate until the
time any affected party seeks renegotiation of the ROE. Notice
of such intent to seek a revision in ROE must be filed during a
notice period each year between November 1 and November 15. No
requests for change were filed during the 1997 notice period.
Therefore, the Company's ROE will remain at 11% in 1998.
As previously reported, the Company has received
authority from the Securities and Exchange Commission (SEC) to
pay common dividends from time to time through December 31, 2001,
out of capital to the extent permitted under applicable
corporation law and any applicable financing agreements which
restrict distributions to shareholders. Due to the nature of
being a single asset company with declining capital needs, the
Company systematically reduces capitalization each year as its
asset depreciates. This has resulted in the payment of dividends
in excess of current earnings and the reduction of retained
earnings. The Company's goal is to retire debt and pay dividends
in amounts necessary to maintain a common equity position of
about 45%. The payment of dividends out of capital surplus will
not be detrimental to the financial integrity or working capital
of either the Company or its Parents, nor will it adversely
affect the protections due debt security holders. See Note 3 of
the Notes to Financial Statements for additional information.
* Year 2000 Readiness
The Company and its Parents have spent considerable
time and effort over the past several years on the issue of the
year 2000 software compliance, and the effort is continuing.
Certain software has already been made year 2000 compliant by
upgrades and replacement, and analysis is continuing on others,
in accordance with a schedule planned to permit the Company and
its Parents to process information in the year 2000 and beyond
without significant problems. Expenditures for year 2000
compliance are not expected to have a material effect on the
Company's results of operations or financial position.
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ALLEGHENY GENERATING COMPANY
Part II - Other Information to Form 10-Q
for Quarter Ended June 30, 1998
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) (27) Financial Data Schedule
(b) No reports on Form 8-K were filed on behalf of the
Company for the quarter ended June 30, 1998.
Signature
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
ALLEGHENY GENERATING COMPANY
/s/ T. J. KLOC
T. J. Kloc, Controller
(Chief Accounting Officer)
August 14, 1998