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, 1994 to December 31,
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 February 13, 1995, 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
December 31, 1994 and June 30, 1994 1-2
Condensed Consolidated Statements of Income for
the Three and Six Month Periods Ended
December 31, 1994 and 1993 3
Condensed Consolidated Statements of Cash Flows for
the Six Month Periods Ended December 31, 1994
and 1993 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 12-17
PART II - OTHER INFORMATION 18-19
SIGNATURES 20
ALLEGHENY & WESTERN ENERGY CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(IN THOUSANDS)
DECEMBER 31, JUNE 30,
1994 1994
(UNAUDITED)
------------ ----------
CURRENT ASSETS
Cash & equivalents $ 6,979 $ 5,611
Short-term investments --- 3,142
Accounts receivable, less allowance for doubtful accounts 30,890 23,539
Inventory 21,619 16,468
Prepayments 2,471 1,288
Deferred income taxes 5,586 3,021
Other 63 51
TOTAL CURRENT ASSETS 67,608 53,120
PROPERTY, PLANT AND EQUIPMENT - AT COST:
Utility plant 156,572 149,246
Oil and gas properties (successful efforts method) 52,430 51,706
Transmission plant 4,529 4,523
Other 7,879 7,872
221,410 213,347
Less accumulated depletion, depreciation and amortization (69,658) (65,765)
NET PROPERTY, PLANT AND EQUIPMENT 151,752 147,582
OTHER 16,388 15,907
TOTAL ASSETS $ 235,748 $ 216,609
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,
1994 1994
(UNAUDITED)
------------ ----------
LIABILITIES
Current maturities of long-term debt $ 6,050 $ 6,750
Short-term borrowings 31,508 18,703
Accounts payable 14,242 19,126
Overrecovered gas costs 11,595 6,035
Accrued liabilities and other 18,184 13,486
TOTAL CURRENT LIABILITIES 81,579 64,100
Long-term debt, net of current maturities 25,805 25,680
Deferred income taxes 19,918 19,419
Other 6,638 5,750
Total liabilities 133,940 114,949
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 70,221 70,073
------- -------
Total 107,090 106,942
Less treasury stock, at cost, 629,442 shares (5,282) (5,282)
------- -------
TOTAL STOCKHOLDERS' EQUITY 101,808 101,660
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $235,748 $216,609
======== ========
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,
1994 1993 1994 1993
----------- ------------- ------------- --------------
REVENUES
Gas distribution and marketing $ 55,949 $ 67,660 $ 77,385 $ 88,511
Oil and gas sales 1,500 1,485 3,037 2,834
Field services 485 515 967 1,033
Investment and other income 97 (51) 170 37
----------- ------------- ------------- --------------
TOTAL REVENUES 58,031 69,609 81,559 92,415
----------- ------------- ------------- --------------
COSTS AND EXPENSES
Costs of gas distributed/marketed 37,704 47,292 50,566 60,039
Exploration, lease operating and production 974 883 1,939 1,745
Distribution, general and administrative 12,637 13,635 22,351 22,875
Depletion, depreciation and amortization 2,623 2,566 3,973 3,956
Interest 1,417 1,114 2,521 2,227
----------- ------------- ------------- --------------
TOTAL COSTS AND EXPENSES 55,355 65,490 81,350 90,842
------------ ------------- ------------- --------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 2,676 4,119 209 1,573
Provision for income taxes 777 1,257 61 393
------------ ------------- -------------- -------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 1,899 2,862 148 1,180
Cumulative effect prior to July 1, 1993 of change in
method of accounting for income taxes --- --- --- 1,562
----------- ------------- ------------- --------------
Net Income $ 1,899 $ 2,862 $ 148 $ 2,742
=========== ============= ============= ==============
INCOME PER SHARE:
Income before cumulative effect of change in
accounting principle $ 0.25 $ 0.37 $ 0.02 $ 0.15
Cumulative effect prior to July 1, 1993 of change
in method of accounting for income taxes --- --- --- 0.20
----------- ------------- ------------- --------------
NET INCOME $ 0.25 $ 0.37 $ 0.02 $ 0.35
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 7,479,360 7,699,759 7,479,360 7,757,750
=========== ============= ============= ==============
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,
1994 1993
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 148 $ 2,742
Cumulative effect prior to July 1, 1993 of adopting
SFAS No. 109 --- (1,562)
Depletion, depreciation and amortization 3,973 3,956
Deferred income taxes (1,815) 2,046
Other 1,190 1,084
Change in working capital, net (8,979) (31,611)
--------- ----------
Net cash used in operating activities (5,483) (23,345)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, net (8,521) (6,451)
Short-term investments, net 3,142 ---
NET CASH USED IN INVESTING ACTIVITIES (5,379) (6,451)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Debt repayments (575) (750)
Short-term borrowings, net 12,805 28,566
Purchases of treasury stock (0 and 169,878
shares, respectively) --- (1,500)
--------- ----------
NET CASH PROVIDED FROM FINANCING ACTIVITIES 12,230 26,316
--------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,368 (3,480)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,611 10,931
--------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,979 $ 7,451
========= ==========
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 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.
MGS was 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 December 31, 1994, the Company had expended
approximately $999,000 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, 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 six month periods
ended December 31, 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 December 31, 1994
presentation.
(3) AGREEMENT AND PLAN OF MERGER
On September 30, 1994, the Company announced that it
had entered into a definitive merger agreement with Energy
Corporation of America (ECA) and its wholly-owned
subsidiary, Eastern Systems Corporation (ESC). On February
3, 1995, the parties amended the original agreement.
Pursuant to the amended agreement, the Company will be the
surviving corporation in a merger with a wholly-owned
subsidiary of ESC, Appalachian Eastern Systems, Inc.
(AESI), 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. As a result, the Company
cannot presently determine the date on which the proposed merger
may be consummated.
(4) REVOLVING CREDIT AND TERM CREDIT FACILITIES
The Company and its banks agreed to extend the
Company's $5 million revolving credit facility to October
29, 1995 and to amend certain provisions of the Company's
term credit
facility including the rescheduling of the balance
outstanding thereunder. In accordance with the terms of
the Amended and Restated Credit Agreement dated October 31,
1994, the Company will make twenty quarterly installments
of $200,000 beginning December 31, 1994 and continuing
through September 30, 1999. The Company has classified the
maturities of its long-term debt in accordance with this
new agreement in the accompanying financial statements as
of December 31, 1994.
(5) 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 are workers' compensation benefits provided by
Mountaineer.
The adoption of SFAS No. 112 did not have a material
impact on the Company s results of operations.
(6) 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.
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.
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.
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
$160,000 each as of December 31, 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.
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.
On January 6, 1995, Mountaineer filed with the PSCWV a
request to increase its base rates by approximately $13.2
million. The PSCWV is currently reviewing Mountaineer's
filing but has indicated that any permitted increase will
not be made effective until November, 1995.
Costs Associated with Planned Merger
In the event the merger between the Company and AESI
is consummated as planned (see Note 3), certain executive
officers of the Company and Mountaineer would be entitled
to receive future compensation and benefits as defined in
their respective employment agreements. In addition, the
Company has entered into letter agreements with certain
other officers and key employees to help ensure stability
of operations in the event of a change in control. These
letter agreements provide for varying packages of benefits
in the event of a change in control; provided, in each
case, that such officer or employee continues his or her
employment with the Company until such change in control
becomes effective.
Additionally, employees participating in the Company's
Key Employee Supplemental Retirement Plan (SERP) become
entitled to receive a portion of their retirement benefits
for each year of participation in the SERP in the event of
a change in control of the Company.
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, 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. Total gas distribution and
marketing revenues for such subsidiaries decreased approximately
$11.7 million and $11.1 million during the current three and six
month periods, respectively, as compared to the corresponding
periods of the prior year.
Gas distribution revenues for Mountaineer decreased
approximately $10.0 million and $9.0 million during the current
three and six month periods, respectively, when compared to the
corresponding periods of the prior year. These decreases were
primarily related to decreased volumes of gas sold due to warmer
weather conditions in Mountaineer's service area and, to a
lesser extent, a reduced purchased gas adjustment rate which
went into effect on November 1, 1994.
Gas marketing revenues of G.A.S. decreased approximately
$1.4 million and $1.7 million during the current three and six
month periods, respectively, as compared to the comparable
periods of fiscal 1994. This decrease was primarily
attributable to reduced sales volumes during the current period
as a result of warmer weather conditions experienced in its
sales region and reduced selling prices as a result of lower
natural gas supply costs due to industry market conditions.
Gas marketing revenues of MGS decreased approximately $.3
million and $.4 million during the current three and six month
periods, respectively, when compared to the corresponding
periods of the prior year. These decreases were due primarily
to the expiration in March 1994 of a gas sales contract which
was obtained in connection with the purchase of assets from
Hallwood.
Oil and Gas Sales
Revenues relating to oil and gas sales are derived from the
production activities of Allegheny and MGS, whose operations are
located in the Appalachian Basin of West Virginia.
Oil and gas sales remained essentially unchanged during the
current three month period and increased approximately $.2
million during the current six month period as compared to the
corresponding periods of the prior year. Sales of MGS increased
approximately $.1 million and $.3 million during the three and
six month periods, respectively, primarily as a result of an
increase, effective January 1, 1994, in the price at which
volumes are sold pursuant to the sales contract with
Mountaineer. These increases were partially offset by lower
production volumes and reduced selling prices due to industry
market conditions by Allegheny.
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 and six month periods as compared to
the same periods of the prior year.
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 income and other increased approximately $.1
million during the current three and six month period as
compared to the corresponding periods of the prior year. These
increases were attributable to increased levels of cash
available for investment and increased interest rates in effect
for the periods.
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 decreased approximately $9.6 million and $9.5
million during the current three and six month periods,
respectively, as compared to the corresponding periods of the
previous year.
Cost of gas distributed by Mountaineer decreased
approximately $7.8 million and $7.2 million during the current
three and six month periods, respectively, when compared to the
corresponding periods of the prior year. These decreases were
primarily related to reduced volumes of gas sold due to warmer
weather conditions in Mountaineer's service area and, to a
lesser extent, lower purchased gas adjustment rates which went
into effect on November 1, 1994.
Cost of gas distributed by G.A.S. decreased approximately
$1.4 million and $1.8 million during the current three and six
month periods, respectively, as compared to the corresponding
periods of the prior year. These decreases resulted primarily
from reduced volumes of gas sold due to warmer weather
conditions experienced in G.A.S.'s sales region and reduced
market prices for natural gas due to industry market conditions.
Purchased gas costs of MGS decreased approximately $.4
million and $.5 million during the current three and six months
periods, respectively, when compared to the corresponding
periods of the prior year. These decreases were primarily
related to lower prices for natural gas supplies as a result of
industry market conditions and the expiration of certain sales
contracts during fiscal 1994.
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 the case of MGS, in
exploring for potential new sources of oil and gas reserves.
Exploration, lease operating and production expenses
increased approximately $.1 million and $.2 million during the
current three and six month periods, respectively, when compared
to the corresponding periods of the prior year. These increases
were primarily attributable to Allegheny's operations as a
result of normal increases in various categories of production
expenses. Exploration, lease operating and production costs for
MGS remained essentially unchanged during the current three and
six month periods.
Distribution, General and Administrative
Distribution, general and administrative expenses
decreased approximately $1.0 million and $.5 million during the
current three and six month periods, respectively, when compared
to the corresponding periods of the prior year. These decreases
resulted primarily from lower revenue-based taxes of Mountaineer
as a result of decreased gas distribution revenues during the
respective periods. This decrease was partially offset by
increased legal and other administrative expenses of Allegheny
as a result of the Company's planned merger with a subsidiary of
Energy Corporation of America.
Depletion, Depreciation and Amortization
Depletion, depreciation and amortization expenses increased
approximately $.1 million during the three month period and
remained essentially unchanged for the current six month period
when compared to the corresponding periods of the prior year.
The increase for the three month period was primarily the result
of depreciation on utility plant additions of Mountaineer.
Interest
Interest expense increased approximately $.3 million during
the current three and six month periods as compared to the
corresponding periods of the prior year. These increases were
the result of higher average outstanding short-term borrowings
by Mountaineer and higher interest rates in effect during the
period.
Provision for Income Taxes
The provision for income taxes decreased approximately $.3
million during the current three and six month periods as
compared to the corresponding periods of fiscal 1994. This
decrease is due primarily to reduced levels of income before
income taxes for the respective periods as compared to those of
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 $1.6 million
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.
LIQUIDITY AND CAPITAL RESOURCES
Short-Term Borrowings and Lines-of-Credit
At December 31, 1994, the Company had a working capital
deficit of $14.0 million and a current ratio of .83 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, to fund capital expenditures and to meet its
maturities
of long-term debt. 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 December 31, 1994, Mountaineer had $31.5
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, 1994, Allegheny had no borrowings outstanding under these
lines-of-credit.
The Company and its banks agreed to extend the Company's $5
million revolving credit facility to October 29, 1995 and amend
certain
provisions of the Company's term credit facility including the
rescheduling of the balance outstanding thereunder. In
accordance with the terms of the Amended and Restated Credit
Agreement dated October 31, 1994, the Company will make twenty
quarterly installments of $200,000 beginning December 31, 1994
and continuing through September 30, 1999.
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 $8.4 million in
capital expenditures during the first six months of fiscal 1995,
of which approximately $.7 million was expended by MGS and the
remainder was all attributable to Mountaineer's gas distribution
operations. All capital expenditures were financed through the
use of working capital and short-term borrowings.
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.
On January 6, 1995, Mountaineer filed with the PSCWV a
request to increase its base rates by approximately $13.2
million. The PSCWV is currently reviewing Mountaineer's filing
but has indicated that any permitted increase will not be made
effective until November, 1995.
Agreement and Plan of Merger
On September 30, 1994, the Company announced that it had
entered into a definitive merger agreement with Energy
Corporation of America (ECA) and its wholly-owned subsidiary,
Eastern Systems Corporation (ESC). On February 3, 1995, the
parties amended the original agreement. Pursuant to the amended
agreement, the Company will be the surviving corporation in a
merger with a wholly-owned subsidiary of ESC, Appalachian
Eastern Systems, Inc. (AESI), 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. On February
6, 1995, the Company filed a preliminary proxy statement with
the Securities and Exchange Commission. The Public Service
Commission of West Virginia (PSCWV) has scheduled a public
hearing with respect to the planned merger for April 25, 1995.
The parties to the transaction have made the required filings
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
(the "HSR Act"). On February 9, 1994, the parties received a
"second request" for additional information regarding the HSR
Act filings from the United States Department of Justice. As a
result of these and other matters, the Company cannot at this
time definitively determine the date on which the proposed
merger may be consummated.
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 13, 1995, 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, ESC and AESI, no additional
shares will be repurchased.
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 Gas
Company 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 Gas Company s customers and intended to be paid to
Mountaineer Gas Company 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 Amended and Restated Credit Agreement,
dated October 31, 1994, by and among
Allegheny & Western Energy Corporation, PNC
Bank, N.A. and One Valley Bank, N.A. and
PNC Bank, N.A. as agent.
27.1 Financial Data Schedule
B) Reports on Form 8-K
Financial
Date of Report Item Reported Statements Filed
- - - -------------------- ------------ ----------------
September 29, 1994 Item 5 No
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 14, 1995