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 January 1, 1994 to March 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 May 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 March 31,
1994 and June 30, 1993 1-2
Condensed Consolidated Statements of Income for the Three
and Nine Month Periods Ended March 31, 1994 and 1993 3
Condensed Consolidated Statements of Cash Flows for the
Nine Month Periods Ended March 31, 1994 and 1993 4
Notes to Condensed Consolidated Financial Statements 5-12
Management's Discussion and Analysis of Financial
Condition and Results of Operations and Liquidity
and Capital Resources 13-17
Part II - Other Information 18
Signatures 19
<TABLE>
ALLEGHENY & WESTERN ENERGY CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(IN THOUSANDS)
<CAPTION>
March 31, June 30,
1994 1993
(Unaudited)
------------- -------------
<S> <C> <C>
Cash & equivalents $ 4,207 $ 10,931
Short-term investments 5,117 ---
Accounts receivable, less allowance
for doubtful accounts 56,553 21,976
Inventory 6,311 5,097
Prepayments 893 5,790
Deferred income taxes 3,709 2,727
Other 54 55
---------- ----------
Total current assets 76,844 46,576
---------- ----------
Property, plant and equipment - at cost:
Utility plant 145,060 137,737
Oil and gas properties
(successful efforts method) 56,754 56,655
Transmission plant 4,738 4,737
Other 7,475 7,295
---------- ----------
214,027 206,424
Less accumulated depletion,
depreciation and amortization (67,300) (62,105)
---------- ----------
Net property, plant and equipment 146,727 144,319
---------- ----------
Other 13,830 4,785
---------- ----------
Total assets $237,401 $195,680
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
1
<TABLE>
ALLEGHENY & WESTERN ENERGY CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<CAPTION>
March 31, June 30,
1994 1993
(Unaudited)
------------- -------------
<S> <C> <C>
Liabilities
Current maturities of long-term debt $ 6,750 $ 6,750
Short-term borrowings 21,224 7,639
Accounts payable 23,795 20,717
Overrecovered gas costs 7,585 6,498
Accrued liabilities and other 20,475 7,976
---------- ----------
Total current liabilities 79,829 49,580
Long-term debt, net of
current maturities 31,305 32,430
Deferred income taxes 19,643 13,841
Other 4,270 3,786
---------- ----------
Total liabilities 135,047 99,637
---------- ----------
Commitments and contingencies --- ---
Stockholders' equity
Preferred stock, without par value;
authorized 5,000,000
shares; no shares issued --- ---
Common stock, $.01 par value;
authorized 20,000,000;
8,108,802 shares issued; 7,579,360
and 7,867,338 shares
outstanding, respectively 81 81
Additional paid-in capital 36,788 36,788
Retained earnings 69,899 61,072
---------- ----------
Total 106,768 97,941
Less treasury stock, at cost,
529,442, and 241,464
shares, respectively (4,414) (1,898)
---------- ----------
Total stockholders' equity 102,354 96,043
---------- ----------
Total liabilities and
stockholders' equity $237,401 $195,680
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
2
<TABLE>
ALLEGHENY & WESTERN ENERGY CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
UNAUDITED
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Gas distribution and marketing $ 94,930 $ 76,182 $183,441 $150,092
Oil and gas sales 1,595 695 4,429 2,079
Field services 492 531 1,525 1,597
Investment and other income 53 68 90 298
-------- -------- -------- --------
Total revenues 97,070 77,476 189,485 154,066
-------- -------- -------- --------
Costs and expenses
Costs of gas distributed/marketed 66,729 52,424 126,769 100,770
Exploration, lease operating
and production 930 536 2,675 1,660
Distribution, general and
administrative 16,728 14,827 39,602 35,394
Depletion, depreciation and
amortization 3,050 2,810 7,006 6,124
Interest 1,116 1,182 3,343 3,188
-------- -------- -------- --------
Total costs and expenses 88,553 71,779 179,395 147,136
-------- -------- -------- --------
Income before income taxes and
cumulative effect of change in
accounting principle 8,517 5,697 10,090 6,930
Provision for income taxes (Note 3) 2,432 1,709 2,825 2,079
-------- -------- -------- --------
Income before cumulative effect of
change in accounting principle 6,085 3,988 7,265 4,851
Cumulative effect prior to
July 1, 1993 of change in method
of accounting for income
taxes (Note 3) --- --- 1,562 ---
-------- -------- -------- --------
Net income $ 6,085 $ 3,988 $ 8,827 $ 4,851
Income per share:
Income before cumulative effect
of change in accounting
principle $ 0.79 $ 0.50 $ 0.94 $ 0.60
Cumulative effect prior to
July 1, 1993 of change in method
of accounting for
income taxes (Note 3) --- --- 0.20 ---
-------- -------- -------- --------
Net income $ 0.79 $ 0.50 $ 1.14 $ 0.60
Average number of common shares
outstanding 7,693,280 7,997,888 7,736,570 8,040,772
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
3
<TABLE>
ALLEGHENY & WESTERN ENERGY CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
UNAUDITED
<CAPTION>
Nine Months Ended
March 31,
1994 1993
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 8,827 $ 4,851
Cumulative effect prior to July 1, 1993
of adopting SFAS No. 109 (Note 3) (1,562) ---
Depletion, depreciation and amortization 7,006 6,124
Deferred income taxes (93) 425
Other (118) 600
Change in working capital, net (15,657) (15,166)
-------- --------
Net cash used in operating activities (1,597) (3,166)
-------- --------
Cash flow from investing activities
Capital expenditures, net (9,954) (12,610)
Short-term investments, net (5,117) ---
Purchases of assets --- (7,046)
-------- --------
Net cash used in investing activities (15,071) (19,656)
-------- --------
Cash flows from financing activities
Debt repayments (1,125) (16,125)
Issuance of long-term debt --- 15,000
Short-term borrowings, net 13,585 6,891
Purchases of treasury stock, (287,978
and 91,450 shares, respectively) (2,516) (628)
-------- --------
Net cash provided from
financing activities 9,944 5,138
-------- --------
Net change in cash and cash equivalents (6,724) (17,684)
Cash and cash equivalents, beginning
of period 10,931 28,906
-------- --------
Cash and cash equivalents, end of period $ 4,207 $ 11,222
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
4
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 have been conducted for its own account and through
joint ventures with third parties and limited partnerships. No drilling
activities have been performed since fiscal 1992. Beginning in fiscal
1990, substantially all of Allegheny's gas production was sold to either
Mountaineer or Gas Access Systems, Inc. (G.A.S.), both wholly-owned
subsidiaries.
Mountaineer is a regulated gas distribution utility servicing
approximately 200,000 residential, commercial, industrial and wholesale
customers in the State of West Virginia. Mountaineer, a West Virginia
corporation, was acquired by Allegheny on June 21, 1984 from The Columbia
Gas System, Inc. A wholly-owned subsidiary of Mountaineer, Mountaineer Gas
Services, Inc. (MGS), owns and operates certain producing properties and
transmission plant assets acquired from Hallwood Energy Partners, L.P. and
Hallwood Consolidated Resources Corporation (Hallwood) in March of 1993.
Substantially all natural gas produced by MGS is sold to Mountaineer based
on prices approved by the Public Service Commission of West Virginia
(PSCWV).
The Company markets natural gas directly to industrial, commercial and
municipal customers through G.A.S. G.A.S. was incorporated in West
Virginia in July 1987 to market the production of Allegheny. Since that
time, G.A.S. has expanded its business and also purchases supplies of
natural gas for resale from various producers and wholesalers in the
Appalachian Basin of West Virginia as well as elsewhere in the continental
United States.
Allegheny has a 59.5% interest in petroleum prospecting licenses in
the North Island, New Zealand through a joint venture with a third party.
The Company's wholly-owned New Zealand subsidiary, A&W Exploration New
Zealand, Limited (AWENZ), holds the Company's interests in the petroleum
prospecting licenses. As of March 31, 1994, the Company had invested
approximately $893,000 in this arrangement, all of which has been charged
to expense.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reference is hereby made to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993 which contains a summary of major
accounting policies followed by the Company in the preparation of its
consolidated financial statements. These policies were also followed in
preparing the quarterly report included herein, with the exception of the
adoption of new methods of accounting for income taxes (see Note 3) and
5
postretirement benefits other than pensions (see Note 4) in accordance with
pronouncements issued by the Financial Accounting Standards Board (FASB)
which became effective for the Company on July 1, 1993.
The financial information included herein is unaudited; however, such
information reflects all adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the
interim periods. With the exception of the recording of the cumulative
effect prior to July 1, 1993 of the change in the method of accounting for
income taxes, all such adjustments were of a normal recurring nature.
The results of operations for the three and nine month periods ended
March 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.
(3) CHANGE IN METHOD OF ACCOUNTING FOR INCOME TAXES
Effective July 1, 1993, the Company adopted FASB Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes". SFAS No. 109 utilizes the liability method to recognize deferred
taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse.
Deferred tax assets and liabilities are adjusted for future changes in tax
rates. Prior to the adoption of SFAS No. 109, income tax expense was
determined using the deferred method. Under the former method, deferred
tax expense was based on items of income and expense that were reported in
different years in the financial statements and tax returns and were
measured at the tax rate in effect in the year the difference originated.
As permitted by SFAS No. 109, the Company has elected not to restate
the financial statements of any prior years. Pre-tax income from
continuing operations of the Company and its subsidiaries was not affected
by the change in accounting for income taxes; however, the cumulative
effect of the change increased net income by $1,562,000 or $.20 per share
in the first quarter of fiscal 1994. This was primarily the result of
reduced currently enacted tax rates compared to those in effect at the time
the deferred taxes were recognized on differences between financial
reporting and tax bases of assets and liabilities. The adoption of SFAS
No. 109 by Mountaineer resulted in an increase in accumulated deferred
income taxes which was offset by a corresponding increase in a regulatory
asset account, which resulted from the recording of certain deferred taxes
which were not previously recognized due to state ratemaking practices.
This amount ($8,389,000 as of March 31, 1994) has been reflected in other
assets in the accompanying balance sheet.
6
Significant components of the Company's deferred tax assets and
liabilities as of March 31, 1994 are as follows (in thousands of dollars):
<TABLE>
Deferred Deferred
income taxes - income taxes -
noncurrent Current
<S> <C> <C>
Deferred tax assets:
Alternative minimum tax credit
carryforwards $ 3,389 $ ---
Overrecovered gas costs --- 3,049
Foreign subsidiary losses 399 ---
Allowance for doubtful accounts --- 596
Other 119 1,358
------- -------
Total assets 3,907 5,003
Deferred tax liabilities:
Excess of tax over book
depreciation and fixed asset
basis differences (22,997) ---
Deferred charges (553) (703)
Partnership income recognition --- (136)
Other --- (455)
Valuation allowance --- ---
------- -------
Total liabilities (23,550) (1,294)
------- -------
Total deferred income
tax asset (liability) $(19,643) $ 3,709
</TABLE>
The Company records an interim provision (benefit) for income taxes
based upon its estimated annual effective rate. Differences between
statutory rates and the effective rate are caused primarily by amortization
of an acquisition adjustment, Federal nonconventional fuel credits and the
treatment of certain temporary differences for ratemaking purposes.
In August 1993, the Revenue Reconciliation Act of 1993 was enacted
into law which, among other changes, increased the top marginal tax rate
for corporations with taxable incomes in excess of $10 million to 35%. The
Company does not currently anticipate that it will be subject to the
increased marginal rate.
(4) CHANGE IN METHOD OF ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN
PENSIONS
Mountaineer sponsors plans which provide certain health care and life
insurance benefits for retired employees. The plans provide benefits for
employees who choose to retire early after reaching age 55 while working
for Mountaineer. Health care benefits are provided until age 65 at which
time these retirees become eligible for Medicare. Mountaineer does not
pre-fund this plan but rather pays claims as incurred.
7
Effective July 1, 1993, Mountaineer adopted the FASB's SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions"
(OPEB). SFAS No. 106 significantly changes the accounting, measurement and
disclosure practices with respect to OPEB. SFAS No. 106 requires that the
expected cost of OPEB be charged to expense during the period of an
employees' service rather than expensing such costs as claims are incurred.
Under SFAS No. 106, future costs of providing postretirement benefits are
recognized as an expense and a liability during the employees' service
periods. Under the plan, the attribution period is equivalent to the 10-
year period prior to the employee reaching eligible retirement age. As
permitted by SFAS No. 106, Mountaineer has elected to amortize the
accumulated postretirement benefit obligation existing at the date of
adoption ("transition obligation") over a 20-year period. Prior to fiscal
1994, Mountaineer recognized postretirement health care and life insurance
benefits in the year the benefits were paid. Postretirement health care
and life insurance benefits charged to expense in fiscal 1993 were
$525,000.
The following table sets forth the plan's funded status, as determined
by an independent actuary, as of July 1, 1993 (in thousands of dollars):
<TABLE>
<S> <C>
Accumulated postretirement benefit obligation:
Retirees $ 2,871
Active participants 3,305
-------
Total accumulated postretirement
benefit obligation 6,176
Plan assets at fair value ---
-------
Accumulated postretirement benefit obligation
in excess of plan assets 6,176
Unrecognized transition obligation (6,176)
-------
Accrued postretirement benefit liability
at July 1, 1993 ---
</TABLE>
Net periodic postretirement benefit cost for the fiscal year ended
June 30, 1994, as determined by an independent actuary, includes the
following components (in thousands of dollars):
<TABLE>
<S> <C>
Service cost-benefits attributed to service
during the period $ 307
Interest cost on the accumulated
postretirement benefit obligation 500
Amortization of the transition obligation 310
-------
Net periodic postretirement benefit cost $ 1,117
</TABLE>
The assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation was 12% in 1993, declining
gradually to 5.5% in 2005 and remaining at that level thereafter. The
health care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed health care cost
trend rates by one percent in each year would increase the accumulated
postretirement benefit obligation as of July 1, 1993 by $218,000 and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for fiscal 1994 by $49,000. The weighted
average discount rate used in determining the accumulated postretirement
benefit obligation was 8%. The average assumed annual rate of salary
increase for the life insurance benefit plan was 5%.
8
On October 29, 1993, the PSCWV issued an order regarding Mountaineer's
request in January 1993 for increased base rates (see Note 5). As a part
of this order, the PSCWV ruled that the permitted rate recovery mechanism
will be a modified accrual method. The modified accrual method allows for
the recovery of current service costs on an accrual basis and recovery of
the transition obligation on a cash-basis. Accounting for the transition
obligation on a cash method is not an acceptable accounting method under
generally accepted accounting principles. Mountaineer is recording its
other postretirement benefit expense in accordance with SFAS No. 106, which
is in excess of the permitted rate recovery as a result of the PSCWV's
ruling. Mountaineer currently estimates that the amount of SFAS No. 106
expense (net of those amounts expected to be capitalized) recorded for
financial reporting purposes in excess of the amounts recoverable for
ratemaking purposes will be approximately $340,000 in fiscal 1994 and will
accumulate to approximately $3,000,000 over the twenty-year transition
period. These amounts will be recovered through rates in future years when
the cash basis of prior service costs exceeds the accrual basis of such
costs.
(5) MOUNTAINEER RATE MATTERS
On October 29, 1993, the PSCWV issued an order, effective November 1,
1993, regarding Mountaineer's request in January 1993 for increased base
rates. The order, among other matters, provided for a 10.1% return on
equity and rate increases which would generate additional annual revenues
of approximately $3,400,000 under normal operating conditions. In its
original filing, Mountaineer requested a return on equity of 12.3% and rate
increases that would result in increased annual revenues of $7,500,000. On
November 8, 1993, Mountaineer filed a petition for reconsideration of
several issues contained in the PSCWV order, including the granted rate of
return on equity and the rate recovery mechanism of OPEB costs. On March
30, 1994, the PSCWV issued a final order in this rate case after
reconsidering several issues raised by various parties to the rate case.
In the final order the PSCWV granted an increase in the authorized return
on equity to 10.55% and established a tracking mechanism for certain OPEB
costs. The final order also 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 might have on Mountaineer's
future results of operations.
(6) COMMITMENTS AND CONTINGENCIES
Columbia Gas Transmission and The Columbia Gas System, Inc. Bankruptcy
Filing
On July 31, 1991, Columbia Gas Transmission Corporation and The
Columbia Gas System, Inc. (the Columbia Companies) filed for protection
under Chapter 11 of the Bankruptcy Code. The Columbia Companies stated
that the primary basis for their filing was the failure of Columbia Gas
Transmission Corporation (Columbia Transmission) to acquire natural gas
through existing producer contracts under terms and conditions, including
price, which would permit Columbia Transmission to compete in the
marketplace. Columbia Transmission's filing could affect its relationship
with Mountaineer, since Mountaineer relies upon Columbia Transmission for
the majority of gas deliveries made into its distribution system.
9
On January 18, 1994, Columbia Transmission filed a proposed plan of
reorganization in the bankruptcy proceedings, but requested the Bankruptcy
Court to defer all further proceedings on such plan pending further
discussions with Columbia Transmission's major creditors and official
committees, including the official committee of customers which Mountaineer
chairs. The plan, if ultimately approved by the Bankruptcy Court and
accepted by Columbia Transmission's customers, would inter alia, (i) pay
Columbia Transmission's customers 100% of certain refund amounts ordered by
the Federal Energy Regulatory Commission (FERC), but at a lower interest
rate than provided by FERC, (ii) pay Columbia Transmission's customers 90%
of certain other refunds ordered by the FERC, and (iii) require any
customer accepting the plan to waive its entitlement to all other refund
amounts and to not oppose Columbia Transmission's recovery from such
customers of approximately $250 million in certain costs to be filed with
the FERC. Discussions on the proposed plan are at a preliminary stage and
Columbia Transmission is in the process of providing additional information
necessary to evaluate the proposal. However, at this stage, various
aspects of the proposal appear unacceptable to the official committee of
customers. Mountaineer is vigorously opposing Columbia Transmission's
efforts to recover costs related to its Chapter 11 bankruptcy proceedings.
The outcome of these proceedings could materially affect Mountaineer's
prices to its customers. Mountaineer is reviewing its options, including
the level of Columbia Transmission's role in providing service to
Mountaineer in the future. Mountaineer's management continues to be
actively involved in this process in order to minimize any adverse impact
on the interests of Mountaineer or its customers.
FERC Orders 636 Et. Seq.
In 1992, the FERC issued Order No. 636 et. seq. (the 636 Orders). The
636 Orders require substantial restructuring of the service obligations of
interstate pipelines. Among other things, the 636 Orders mandate
"unbundling" of existing pipeline gas sales services and replace current
statutory abandonment procedures, as applied to firm transportation
contracts of more than one year, with a right-of-first-refusal mechanism.
Mandatory unbundling requires pipelines to sell separately the various
components of their previous gas sales services (gathering, transportation
and storage services, and gas supply). These components were previously
combined or "bundled" in gas services such as those purchased by
Mountaineer from Columbia Transmission and other interstate pipelines. To
address concerns raised by utilities about reliability of service to their
service territories, the 636 Orders require pipelines to offer a no-notice
transportation service in which firm transporters can receive delivery of
gas up to their contractual capacity level on any day without prior
scheduling. In addition, the 636 Orders provide for a mechanism for
pipelines to recover prudently incurred transition costs associated with
the restructuring process.
All of Mountaineer's pipeline suppliers have filed their restructuring
plans with the FERC. The FERC has reviewed these plans; however, there are
several issues which remain subject to further action by either FERC or
reviewing courts, including the ultimate sharing of transition costs, the
level of no-notice protection and the impact on service reliability, and
rate design implementation. Mountaineer's largest pipeline supplier,
Columbia Transmission, received orders from FERC which approved its
proposed restructuring filing with certain modifications. One of the FERC
modifications prohibited Columbia Transmission from recovering contract
rejection claims it may incur in its bankruptcy proceeding as part of its
10
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 FERC, the ultimate amount of the costs associated
with restructuring cannot be ascertained. However, when the restructured
services and associated transition costs are finally approved,
Mountaineer's management estimates that the level of such restructuring
costs passed through to Mountaineer could be significant. Mountaineer will
attempt to obtain approval from the PSCWV to recover any such approved
restructuring costs from its customers. On the basis of previous state
regulatory proceedings involving the recovery of gas purchase costs and
take-or-pay obligations, Mountaineer believes that the costs passed through
from its pipeline suppliers will be recovered from ratepayers.
Legal
Cameron Gas Company ("Cameron") and C. Richard Coleman, et al. vs.
Allegheny & Western Energy Corporation, Mountaineer Gas Company and Gas
Access Systems, Inc. was filed on December 31, 1992, in the Circuit Court
of Marshall County, West Virginia. Plaintiffs allege unlawful and/or
tortious conduct and violations of the Racketeer Influenced and Corrupt
Organizations Act and the West Virginia Anti-Trust Act, arising out of the
termination of a gas sales agreement and seek $30 million compensatory
damages and $90 million punitive damages. Upon the petition of the
Company, the case 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 anti-trust claim against Allegheny & Western Energy
Corporation, Mountaineer Gas Company and Gas Access Systems, Inc. was
dismissed 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
11
willful withholding by Cameron of monies collected by Cameron as agent for
certain of the Company's customers and intended to be paid to the Company
for services rendered by the Company. 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 its
counterclaim. The pleadings remain pending before the Court for
disposition. Discovery has commenced. No trial date has been established.
The Company believes Cameron's claims are without merit and plans to
vigorously defend this matter and does not believe that this matter is
reasonably likely to have a material adverse effect on the financial
position and results of operations of the Company.
The Company is involved in various legal and other disputes which have
resulted in pending or threatened litigation. In management's opinion, the
outcome of such disputes or actions will not have a material effect on the
financial position of the Company.
Other
To obtain petroleum prospecting licenses in New Zealand, AWENZ and its
partner were required to obtain a performance bond of $500,000 NZ ($281,300
US as of March 31, 1994), which is a normal requirement of the Minister of
Energy. Should AWENZ and its partner not perform their commitments as
required by the licenses, the government of New Zealand could elect to call
the bond, which would require the payment by AWENZ of 59.5% of such amount.
The Company and its partner have been granted an extension of the time
period allowed for the completion of certain geological and geophysical
work required under the licenses. To the best of management's knowledge,
all other commitments required by the licenses have been performed.
12
ALLEGHENY & WESTERN ENERGY CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES
Gas Distribution and Marketing
Gas distribution and marketing revenues are derived from Mountaineer Gas
Company (Mountaineer), a regulated utility, and Gas Access Systems, Inc.
(G.A.S.), a gas marketing company, as well as from Mountaineer's wholly-owned
subsidiary, Mountaineer Gas Services, Inc. (MGS), a producer and marketer of
natural gas.
Gas distribution revenues for Mountaineer increased approximately $16.0
million and $25.3 million during the current three and nine month periods,
respectively, when compared to the corresponding periods of the previous year.
These increases were primarily related to increased volumes of gas sold due to
colder weather conditions in its service area and increased base and purchased
gas adjustment rates which became effective November 1, 1993. These increases
were partially offset by small commercial customers obtaining transportation
services in lieu of purchasing gas supplies from Mountaineer during the current
three and nine month periods.
Gas distribution revenues of G.A.S. increased approximately $.2 million and
$1.9 million in the current three and nine month periods, respectively, as
compared to the corresponding periods of fiscal 1993. The increase in the
current three month period was attributable to improved sales prices due to
industry market conditions. The increase in the current nine month period was
attributable to improved sales prices due to industry market conditions and
higher sales volumes due to colder weather in G.A.S.'s service area.
On April 1, 1993, MGS began operating the assets purchased from Hallwood.
These assets included the assumption of several sales contracts with large
volume customers. These contracts generated sales revenues of approximately
$2.5 million and $6.2 million during the three and nine month periods ended
March 31, 1994, respectively.
Oil and Gas Sales
Revenues relating to oil and gas sales are derived from the activities of
Allegheny and MGS, whose operations are located in the Appalachian Basin of West
Virginia.
Oil and gas sales increased approximately $.9 million and $2.4 million
during the current three and nine month periods, respectively, as compared to
the corresponding periods of fiscal 1993. These increases were the result of
oil and gas sales of MGS in the current three and nine month periods. Oil and
gas sales of Allegheny remained unchanged during the current three and nine
month periods as reduced production volumes during the current periods were
offset by higher average sales prices resulting from industry market conditions.
13
Field Services
Field services revenues include amounts charged for the administration and
operation of producing properties, amounts charged for the operation of pipeline
systems and management of drilling operations.
Field services revenues remained unchanged during the current three and
nine month periods as compared to the corresponding periods of the prior year.
Investment and Other Income
Investment income is earned primarily from investments in short-term
repurchase agreements, bond funds, commercial paper and United States Treasury
obligations.
Investment and other income remained unchanged during the current three
month period as compared to the corresponding period of the prior year.
Investment and other income decreased approximately $.2 million during the
current nine month period when compared to the corresponding period of fiscal
1993. This decrease was attributable to reduced cash available for investment
by Mountaineer due to capital expenditure and working capital requirements.
COSTS AND EXPENSES
Cost of Gas Distributed/Marketed
Cost of gas distributed/marketed includes the cost of gas recovered by
Mountaineer from its customers as permitted in its purchased gas adjustment
clause provided for by state regulatory provisions and the cost of gas purchased
by G.A.S. and MGS for resale to their respective customers.
Cost of gas distributed by Mountaineer during the current three and nine
month periods increased approximately $11.9 million and $18.4 million,
respectively, when compared to the corresponding periods of the prior year.
These increases were primarily a result of increased volumes of gas sold due to
colder weather conditions in Mountaineer's service area and increased purchased
gas adjustment rates which became effective November 1, 1993.
Cost of gas marketed by G.A.S. remained unchanged during the current three
month period as compared to the corresponding period of the prior year and
increased approximately $1.9 million during the current nine month period. This
increase resulted from increased volumes of gas sold due to colder weather
conditions in G.A.S.'s service area and higher prices as a result of industry
market conditions.
MGS incurred purchased gas costs of $2.4 million and $5.9 million during
the current three and nine month periods, respectively, in connection with the
sales contracts acquired from Hallwood in March 1993.
14
Exploration, Lease Operating and Production
Exploration, lease operating and production expenses include costs incurred
by Allegheny and MGS both in conducting field operations for producing
properties and in exploring for potential new sources of oil and gas reserves.
Exploration, lease operating and production expenses increased
approximately $.4 million and $1.0 million during the current three and nine
month periods, respectively, as compared to the corresponding periods of the
prior year. These increases are attributable to lease operating and production
costs incurred by MGS during the current three and nine month periods,
respectively. Exploration, lease operating and production costs for Allegheny
remained unchanged during the current three and nine month periods.
Distribution, General and Administrative
Distribution, general and administrative expenses increased approximately
$1.9 million and $4.2 million during the current three and nine month periods,
respectively, as compared to the corresponding periods of the prior year. These
increases resulted primarily from increased labor and employee benefits costs of
Mountaineer. In addition, MGS incurred costs of approximately $.1 million in
the current nine month period.
Depletion, Depreciation and Amortization
Depletion, depreciation and amortization expenses increased approximately
$.2 million and $.9 million during the current three and nine month periods,
respectively, as compared to the corresponding periods of fiscal 1993. These
increases were primarily the result of depreciation on utility plant additions
of Mountaineer and depletion of $.1 million and $.5 million, respectively,
recorded by MGS during the current three and nine month periods.
Interest
Interest expense remained unchanged during the current three month period
as compared to the corresponding period of the prior year. Interest expense
increased approximately $.2 million during the current nine month period as
compared to the corresponding period of the prior year resulting from higher
average outstanding short-term borrowings of Mountaineer due to working capital
and capital expenditure requirements. This increase was partially offset by a
reduction in long-term debt outstanding.
Provision for Income Taxes
The provision for income taxes increased approximately $.7 million during
the current three and nine month periods as compared to the corresponding
periods of fiscal 1993 as a result of higher pre-tax earnings, partially offset
by a reduction in the estimated effective rate for fiscal year 1994 as compared
to fiscal year 1993. The interim provision for income taxes is based upon the
Company's current anticipated annual effective rate of approximately 28 percent.
15
Cumulative Effect of Change in Accounting Principle
Effective July 1, 1993, the Company changed its method of accounting for
income taxes as required by the Financial Accounting Standards Board's Statement
of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes".
As permitted by SFAS No. 109, the Company recognized the cumulative effect prior
to July 1, 1993 of the change in the method of accounting for income taxes in
the period of adoption. Accordingly, the Company reflected a credit of
$1,562,000 in the first quarter of fiscal 1994. This amount was primarily the
result of reduced currently enacted tax rates compared to those in effect at the
time deferred taxes were recognized for differences between financial reporting
and tax bases of assets and liabilities.
LIQUIDITY AND CAPITAL RESOURCES
Short-Term Borrowings and Lines-of-Credit
At March 31, 1994 the Company had a working capital deficit of $2.7 million
and a current ratio of .97 to 1. The deficiency in working capital is
attributable to Mountaineer's requirement of significant working capital funds
to finance its investment in MGS and capital expenditures. Management believes
it has sufficient lines-of-credit to meet current maturities of long-term debt
and working capital and capital expenditure requirements.
Mountaineer has unsecured lines-of-credit available for short-term
borrowings from several banks totalling $57.5 million which expire at various
dates during the next twelve months. Management expects all such lines-of-
credit to be renewed upon expiration. In addition, Mountaineer has a $15
million revolving line-of-credit which is available for borrowing until December
31, 1996. At March 31, 1994, Mountaineer had $21.2 million outstanding under
its short-term lines-of-credit.
Allegheny has lines-of-credit available for short-term borrowings from two
banks totalling $5.0 million. At March 31, 1994, Allegheny had no borrowings
outstanding under these lines-of-credit.
Mountaineer's and Allegheny's short-term lines-of-credit are typically in
effect for a period of one year and are renewed on a year-to-year basis.
Capital Expenditures
The Company has incurred approximately $10.0 million in capital
expenditures during the first nine months of fiscal 1994, substantially all of
which was attributable to its gas distribution operations. All capital
expenditures were financed through the use of working capital and short-term
borrowings.
16
OTHER
Mountaineer Rate Case
On October 29, 1993, the PSCWV issued an order, effective November 1, 1993,
regarding Mountaineer's request in January 1993 for increased base rates. The
order, among other matters, provided for a 10.1% return on equity and rate
increases which would generate additional annual revenues of approximately
$3,400,000 under normal operating conditions. In its original filing,
Mountaineer requested a return on equity of 12.3% and rate increases that would
result in increased annual revenues of $7,500,000. On November 8, 1993,
Mountaineer filed a petition for reconsideration of several issues contained in
the PSCWV order, including the granted rate of return on equity and the rate
recovery mechanism of OPEB costs. On March 30, 1994, the PSCWV issued a final
order in this rate case after reconsidering several issues raised by various
parties to the rate case. In the final order the PSCWV granted an increase in
the authorized return on equity to 10.55% and established a tracking mechanism
for certain OPEB costs. The final order also 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 might 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 May 11, 1994,
the Company had acquired 603,828 shares of its common stock under this program.
17
ALLEGHENY & WESTERN ENERGY CORPORATION
AND SUBSIDIARIES
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Cameron Gas Company ("Cameron") and C. Richard Coleman, et al. vs.
Allegheny & Western Energy Corporation, Mountaineer Gas Company and Gas Access
Systems, Inc. was filed on December 31, 1992, in the Circuit Court of Marshall
County, West Virginia. Plaintiffs allege unlawful and/or tortious conduct and
violations of the Racketeer Influenced and Corrupt Organizations Act and the
West Virginia Anti-Trust Act, arising out of the termination of a gas sales
agreement and seek $30 million compensatory damages and $90 million punitive
damages. Upon the petition of the Company, the case 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 anti-trust claim against Allegheny & Western
Energy Corporation, Mountaineer Gas Company and Gas Access Systems, Inc. was
dismissed 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 the Company's
customers and intended to be paid to the Company for services rendered by the
Company. 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 its counterclaim. The pleadings remain pending before
the Court for disposition. Discovery has commenced. No trial date has been
established. The Company believes Cameron's claims are without merit and plans
to vigorously defend this matter and does not believe that this matter is
reasonably likely to have a material adverse effect on the financial position
and results of operations of the Company.
The Company has been named as a defendant in various other legal actions
which arise primarily in the ordinary course of business. In management's
opinion, these outstanding claims are unlikely to result in a material adverse
effect on the Company's financial position and results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) Exhibits - None
B) Reports on Form 8-K - None
18
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: May 11, 1994
19
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________
QUARTERLY REPORT
ON
FORM 10-Q
FOR THE
QUARTERLY PERIOD ENDED
MARCH 31, 1994
________________________________________________
ALLEGHENY & WESTERN ENERGY CORPORATION
_____________________
EXHIBITS
_____________________
Exhibit Index
Exhibit
Number Exhibit Reference
3.1 Articles of Incorporation of Allegheny Incorporated by
and Western Energy Corporation dated reference to Exhibit
June 4, 1984. D to Form 8-K dated
July 3, 1984.
3.2 Amendment to Articles of Incorporation Incorporated by
of Allegheny & Western Energy Corporation, reference to Exhibit
dated August 2, 1990. 3.2 to Form 10-K for
the year ended June
30, 1990.
3.3 Bylaws of Allegheny & Western Energy Incorporated by
Corporation. reference to Exhibit
D to Form 8-K dated
July 3, 1984.
10.1 Appalachian Basin Pipeline Agreement. Incorporated by
reference to Exhibit
10.1.2 to Amendment
No.1 to Form S-1
Registration
Statement
No. 2-71252.
10.2 Columbia Gas Transmission Corporation Incorporated by
Gas Purchase Contract containing typical reference to Exhibit
"take or pay" contract provisions. 10.4 to Form S-1
Registration
Statement
No. 2-71252.
10.3 Revolving Credit and Term Loan Agreement, Incorporated by
dated as of June 13, 1989, between the reference to Exhibit
registrant and the First National Bank 10.3 to Form 10-K
of Boston. for the year ended
June 30, 1989.
10.4 Revolving Credit and Term Loan Agreement, Incorporated by
dated as of June 13, 1989, between reference to Exhibit
Mountaineer Gas Company and the First 10.5 to Form 10-K
National Bank of Boston. for the year ended
June 30, 1989.
10.5 Note Agreement, dated June 30, 1987, Incorporated by
between Mountaineer and Connecticut reference to Exhibit
General Life Insurance Company, Horace 10.5 to Form 10-K
Mann Life Insurance Company, INA Life for the year ended
Insurance Company of New York and Life June 30, 1990.
Insurance Company of North America.
10.6 Participation Agreement, dated March 8, Incorporated by
1990, among TEX-HEX Corporation, Louran reference to Exhibit
Oil & Gas, Inc., AHI Drilling, Inc., 10.6 to Form 10-K
SHIGO, Inc., Rush Moody, Jr., Peter W. for the year ended
Stevens, John Bielun, Andrew R. Fair, June 30, 1990.
Jonathan Conrad and Richard Grant.
<PAGE>
10.7 Credit Agreement, dated September 24, Incorporated by
24, 1990, among Allegheny & Western reference to Exhibit
Energy Corporation, Pittsburgh National 10.7 to Form 10-K
Bank, and One Valley Bank, N.A. and for the year ended
Pittsburgh National Bank as Agent. June 30, 1990.
10.8 1987 Stock Option Plan (including form Incorporated by
of Stock Option Agreement). reference to Exhibit
10.8 to Form 10-K
for the year ended
June 30, 1990.
10.9 Credit Agreement, dated June 27, 1991, Incorporated by
between Mountaineer Gas Company and reference to Exhibit
Pittsburgh National Bank. 10.9 to Form 10-K
for the year ended
June 30, 1991.
10.10 Credit Agreement, dated June 27, 1991, Incorporated by
between Mountaineer Gas Company and reference to Exhibit
Pittsburgh National Bank. 10.10 to Form 10-K
for the year ended
June 30, 1991.
10.11 Agreements for Gas Purchase and Transpor- Incorporated by
tation Service between Mountaineer Gas reference to Exhibit
Company and Columbia Gas Transmission Corp. 10.11 to Form 10-K
for the year ended
June 30, 1991.
10.12 Second Amendment, dated October 31, 1991, Incorporated by
to Credit Agreement, dated September 21, reference to Exhibit
1990 among Allegheny & Western Energy 10.12 to Form 10-Q
Corporation, Pittsburgh National Bank and for the quarter
One Valley Bank, N.A. and Pittsburgh ended September 30,
National Bank as agent. 1991.
10.13 Third Amendment dated November 30, 1991, Incorporated by
to Credit Agreement, dated September 24, reference to Exhibit
1990, among Allegheny & Western Energy 10.13 to Form 10-Q
Corporation, Pittsburgh National Bank for the quarter
and One Valley Bank, N.A. and Pittsburgh ended December 31,
National Bank as agent. 1991.
10.14 Note Purchase Agreement, dated July 15, Incorporated by
1992, between Mountaineer Gas Company and reference to Exhibit
Teachers Insurance and Annuity Association 10.14 to Form 10-K
of America. for the year ended
June 30, 1992.
10.15 Employment Agreement, dated June 13, 1990 Incorporated by
between Mr. Grant and Mountaineer Gas reference to Exhibit
Company. 10.15 to Form 10-K
for the year ended
June 30, 1992.
10.16 Employment Agreement, dated June 13, 1990 Incorporated by
between Mr. Fletcher and Mountaineer reference to Exhibit
Gas Company. 10.16 to Form 10-K
for the year ended
June 30, 1992.
10.17 Consulting Agreement, dated March 1, 1992 Incorporated by
between Mr. Lindley and the Company. reference to Exhibit
10.17 to Form 10-K
for the year ended
June 30, 1992.
10.18 Fourth Amendment, dated October 31, 1992, Incorporated by
to Credit Agreement, dated September 24, reference to Exhibit
1990, among Allegheny & Western Energy 10.18 to Form 10-Q
Corporation, Pittsburgh National Bank and for the quarter
One Valley Bank, N.A. and Pittsburgh ended March 31,
National Bank as agent. 1993.
10.19 Fifth Amendment, dated November 30, 1992, Incorporated by
to Credit Agreement dated September 24, reference to Exhibit
1990, among Allegheny & Western Energy 10.19 to Form 10-Q
Corporation, Pittsburgh National Bank for the quarter
and One Valley Bank, N.A. and Pittsburgh ended March 31,
National Bank as agent. 1993.
10.20 Purchase and Sales Agreement, dated Incorporated by
July 21, 1992 among Hallwood Energy reference to Exhibit
Partners, L.P. et. al and Mountaineer 10.20 to Form 10-Q
Gas Company. for the quarter
ended March 31,
1993.
10.21 Sixth Amendment, dated September 28, Incorporated by
1993, to Credit Agreement, dated reference to Exhibit
September 24, 1990, among Allegheny 10.21 to Form 10-Q
and Western Energy Corporation, for the quarter
Pittsburgh National Bank and One ended September 30,
Valley Bank, N.A. and Pittsburgh 1993.
National Bank as agent.
10.22 Seventh Amendment, dated October 31, Incorporated by
1993, to Credit Agreement, dated reference to Exhibit
September 24, 1990, among Allegheny 10.22 to Form 10-Q
and Western Energy Corporation, for the quarter
Pittsburgh National Bank and One ended December 31,
Valley Bank, N.A. and Pittsburgh 1993.
National Bank as agent.
10.23 Employment Agreements with Richard Incorporated by
L. Grant, Michael S. Fletcher and W. reference to Exhibit
Merwyn Pittman, individually. 10.23 to Form 10-Q
for the quarter
ended December 31,
1993.
10.24 Supplemental Retirement Benefit Plan Incorporated by
Agreements between John G. McMillian, reference to Exhibit
Richard L. Grant, Michael S. Fletcher 10.24 to Form 10-Q
and W. Merwyn Pittman, individually, and for the quarter
Allegheny & Western Energy Corporation. ended December 31,
1993.
21.1 Subsidiaries of the Company. Incorporated by
reference to Exhibit
22.1 to Form 10-Q
for the quarter
ended March 31,
1993.
