SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(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, 1995 to March 31,
1995
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 15, 1995, 7,479,360 shares of registrant's Common
Stock, par value $.01 per share, were outstanding.
<PAGE>
ALLEGHENY & WESTERN ENERGY CORPORATION
AND SUBSIDIARIES
INDEX
Page
Statement of Amendment 1
Part I - Financial Information
Item I - Financial Statements:
Condensed Consolidated Balance Sheets as of
March 31, 1995 and June 30, 1994 2-3
Condensed Consolidated Statements of Income for the Three
and Nine Month Periods Ended March 31, 1995 and 1994 4
Condensed Consolidated Statements of Cash Flows for the
Nine Month Periods Ended March 31, 1995 and 1994 5
Notes to Condensed Consolidated Financial Statements 6-12
Management's Discussion and Analysis of Financial
Condition and Results of Operations and Liquidity
and Capital Resources 13-18
Part II - Other Information 19-20
Signatures 21
<PAGE>
STATEMENT OF AMENDMENT
Item 6. Exhibits and Reports on Form 8-K
Item 6 of Allegheny & Western Energy Corporation's (the
"Registrant") Quarterly Report on Form 10-Q for the period ended
March 31, 1995 (the "Report") is hereby amended in order to
correct the Registrant's stated earnings per share - primary
(the "EPS") as reported on the Financial Data Schedule attached
as Exhibit 27.1 thereto. The EPS was initially reported on the
Financial Data Schedule to be $0.60 and, as amended hereby, is
now reported to be $0.58. The Report is hereby restated in
full. No other change in the Report is being effected hereby.
<PAGE>
ALLEGHENY & WESTERN ENERGY CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, June 30,
1995 1994
(Unaudited)
<S> <C> <C>
Current Assets
Cash & equivalents $ 8,548 $ 5,611
Short-term investments --- 3,142
Accounts receivable, less allowance for doubtful accounts 42,041 23,539
Inventory 8,680 16,468
Prepayments 1,195 1,288
Deferred income taxes 9,712 3,021
Other 54 51
Total current assets 70,230 53,120
Property, plant and equipment - at cost:
Utility plant 160,193 149,246
Oil and gas properties (successful efforts method) 52,434 51,706
Transmission plant 4,533 4,523
Other 7,840 7,872
225,000 213,347
Less accumulated depletion, depreciation and amortization (73,173) (65,765)
Net property, plant and equipment 151,827 147,582
Other 17,274 15,907
Total assets $ 239,331 $ 216,609
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
ALLEGHENY & WESTERN ENERGY CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, June 30,
1995 1994
(Unaudited)
<S> <C> <C>
Liabilities
Current maturities of long-term debt $ 6,050 $ 6,750
Short-term borrowings 12,077 18,703
Accounts payable 17,097 19,126
Overrecovered gas costs 22,375 6,035
Accrued taxes 11,526 5,018
Accrued liabilities and other 12,566 8,468
Total current liabilities 81,691 64,100
Long-term debt, net of current maturities 25,605 25,680
Deferred income taxes 20,169 19,419
Other 5,707 5,750
Total liabilities 133,172 114,949
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 74,572 70,073
Total 111,441 106,942
Less treasury stock, at cost, 629,442 shares (5,282)
(5,282)
Total stockholders' equity 106,159
101,660
Total liabilities and stockholders' equity $ 239,331 $ 216,609
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
ALLEGHENY & WESTERN ENERGY CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenues
Gas distribution and marketing $ 79,196 $ 94,930 $ 156,581 $ 183,441
Oil and gas sales 1,536 1,595 4,572 4,429
Field services 473 492 1,440 1,525
Investment and other income 108 53 279 90
Total revenues 81,313 97,070 162,872 189,485
Costs and expenses
Costs of gas distributed/marketed 53,511 66,729 104,077 126,769
Exploration, lease operating and production 973 930 2,912 2,675
Distribution, general and administrative 16,450 16,728 38,802 39,602
Depletion, depreciation and amortization 3,191 3,050 7,164 7,006
Interest 1,061 1,116 3,581 3,343
Total costs and expenses 75,186 88,553 156,536 179,395
Income before income taxes and cumulative
effect of change in accounting principle 6,127 8,517 6,336 10,090
Provision for income taxes 1,777 2,432 1,837 2,825
Income before cumulative effect of change in
accounting principle 4,350 6,085 4,499 7,265
Cumulative effect prior to July 1, 1993 of change in
method of accounting for income taxes --- --- --- 1,562
Net Income $ 4,350 $ 6,085 $ 4,499 $ 8,827
Income per share:
Income before cumulative effect of change in
accounting principle $0.56 $0.79 $ 0.58 $ 0.94
Cumulative effect prior to July 1, 1993 of change
in method of accounting for income taxes --- --- --- 0.20
Net Income $ 0.56 $ 0.79 $ 0.58 $ 1.14
Weighted average number of common shares 7,786,390 7,693,280 7, 786 390 7,736,570
(See Note 2)
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
ALLEGHENY & WESTERN ENERGY CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
( IN THOUSANDS )
UNAUDITED
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1995 1994
<S> <C> <C>
Cash flows from operating activities
Net income $ 4,499 $ 8,827
Cumulative effect prior to July 1, 1993 of adopting
SFAS No. 109 --- (1,562)
Depletion, depreciation and amortization 7,164 7,006
Deferred income taxes (5,943) (93)
Other 505 (118)
Change in working capital, net 13,130 (15,657)
Net cash provided by (used in) operating activities 19,355 ( 1,597)
Cash flows from investing activities
Capital expenditures, net (12,159) (9,954)
Short-term investments, net 3,142 (5,117)
Net cash used in investing activities (9,017) (15,071)
Cash flows from financing activities
Debt repayments (775) (1,125)
Short-term borrowings, net (6,626) 13,585
Purchases of treasury stock (0 and 287,978
shares, respectively) --- (2,516)
Net cash provided by (used in) financing activities (7,401) 9,944
Net change in cash and cash equivalents 2,937 (6,724)
Cash and cash equivalents, beginning of period 5,611 10,931
Cash and cash equivalents, end of period $ 8,548 $ 4,207
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
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 participation with third parties and limited
partnerships. Allegheny has performed no drilling activities
(exclusive of MGS) 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 March 31, 1995, the Company had
expended approximately $1,025,000 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 nine month periods
ended March 31, 1995 and 1994 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.
The weighted average number of common shares outstanding
for earnings per share purposes is calculated using common
shares outstanding and common stock equivalents.
Certain previously reported amounts have been
reclassified to conform to the March 31, 1995 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 Company has scheduled a meeting of
its stockholders for May 16, 1995 at which they will be asked to
approve the proposed merger agreement. The Public Service
Commission of West Virginia (PSCWV) held a public hearing with
respect to the planned merger on April 25, 1995 and the Company
anticipates that the PSCWV will issue an order regarding the
proposed merger during the month of May 1995 which should become
final 30 days thereafter. The parties to the transaction 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; however, on April 4, 1995, the parties
were notified that the waiting period for the merger under the
HSR Act had been terminated. The Company cannot at this time
definitively 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 March 31, 1995.
(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) STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121,
"ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND LONG-LIVED ASSETS TO BE DISPOSED OF"
In March 1995, the FASB issued SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to
be Disposed of." This Statement imposes stricter criteria for
regulatory assets by requiring that regulatory assets which are
no longer probable of recovery through future revenues be
charged to earnings and also establishes criteria for measuring
any impairment losses on long-lived assets. The Company
anticipates adopting this standard on July 1, 1996 and does not
expect that adoption will have a material impact on the
financial position or results of operations of the Company based
on the Company's current operations and the regulatory
environment in which Mountaineer operates.
(7) 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.
As a consequence of the restructuring required by the
636 Orders, 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. 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. A recently filed settlement,
discussed below, would resolve many of these issues, if
approved. 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. Discussions have
been conducted 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 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) and in related FERC proceedings.
The negotiations among the parties led to Columbia
Transmission's filing an amended plan of reorganization on April
17, 1995. The amended plan includes (i) a settlement of various
customer claims and issues (supported by the majority of
Columbia Transmission's customers, including Mountaineer, and
interested state agencies) and (ii) a settlement of various
producer claims (supported by producers representing over 80
percent of the producer claims as filed). The amended plan
requires approval by the Bankruptcy Court, the FERC, the
Internal Revenue Service, and the Securities and Exchange
Commission. If approved, the customer settlement component of
the amended plan would resolve numerous refund and payment
issues between Columbia and its customers, including customer
liability for Order No. 636 transition costs and Columbia
Transmission's liability for pre-petition and other refunds.
The settlement terms provide for a net refund to Mountaineer of
over $3 million, exclusive of certain ongoing charges in
Columbia Transmission's rates. In addition, Mountaineer and
Columbia Transmission are discussing a potential resolution of
other issues not addressed in the customer settlement.
The amended plan contemplates Columbia Transmission's
emergence from bankruptcy by December 31, 1995, but is dependent
upon the various approvals noted above.
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 the Plaintiffs' 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 $164,000 each as of
March 31, 1995), 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 have completed 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 (other than those executive
officers referred to above) 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.
<PAGE>
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
$15.7 million and $26.9 million during the current three and
nine month periods, respectively, as compared to the
corresponding periods of the prior year.
Gas distribution revenues for Mountaineer decreased
approximately $13.7 million and $22.7 million during the current
three and nine 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 $1.5
million and $3.3 million during the current three and nine 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 for natural gas due to
industry market conditions.
Gas marketing revenues of MGS decreased approximately $.5
million and $.9 million during the current three and nine 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 decreased approximately $.1 million during
the current three month period and increased approximately $.1
million during the current nine month period as compared to the
corresponding periods of the prior year. Sales of MGS remained
essentially unchanged during the current three month period and
increased approximately $.3 million during the nine month period
primarily as a result of increases, effective January 1, 1994
and 1995, in the price at which volumes are sold pursuant to the
sales contract with Mountaineer and increased production volumes
resulting from the completion of a drilling program in the first
quarter of fiscal 1995. Sales of Allegheny decreased
approximately $.1 million and $.2 million during the current
three and nine month periods, respectively, resulting from
normal well production declines and reduced selling prices due
to industry market conditions.
Field Services
Field services revenues include amounts charged for the
administration and operation of producing properties and the
operation of pipeline systems.
Field services revenues remained essentially unchanged during
the current three month period and decreased approximately $.1
million during the current nine month period as compared to the
same periods of the prior year. The decrease for the nine month
period was due primarily to reduced pipeline transportation
revenues of Allegheny resulting from lower production throughput
volumes.
Investment and Other Income
Investment income is earned primarily from investments in
short-term repurchase agreements, short-term bond funds,
commercial paper and United States Treasury obligations.
Investment and other income increased approximately $.1
million and $.2 million during the current three and nine month
periods, respectively, 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 $13.2 million and $22.7
million during the current three and nine month periods,
respectively, as compared to the corresponding periods of the
previous year.
Cost of gas distributed by Mountaineer decreased
approximately $10.9 million and $18.1 million during the current
three and nine 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 $3.3 million during the current three and nine
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 $.9
million and $1.4 million during the current three and nine
months periods, respectively, when compared to the corresponding
periods of the prior year. These decreases were primarily
related to lower market prices for natural gas supplies
as a result of industry 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 remained
essentially unchanged during the current three month period and
increased approximately $.2 million during the current nine
month period 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 $.3 million and $.8 million during the current
three and nine 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 general and administrative expenses of
Allegheny which were primarily the result of costs incurred in
connection with 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 and $.2 million during the current
three and nine month periods, respectively, when compared to the
corresponding periods of the prior year. Depreciation of
utility plant of Mountaineer increased approximately $.2 million
and $.4 million during the current three and nine month periods,
respectively, as a result of plant additions. These increases
were partially offset by reduced depletion of Allegheny's oil
and gas producing properties as a result of lower production
volumes.
Interest
Interest expense decreased approximately $.1 million during
the current three month period and increased approximately $.2
million during the current nine month period when compared to
the corresponding periods of the prior year.
The decrease during the current three month period was a
result of reduced levels of short-term borrowings required by
Mountaineer, partially offset by higher borrowing rates in
effect for the period. The increase during the current nine
month period resulted primarily from increased short-term
borrowing rates in effect during the period.
Provision for Income Taxes
The provision for income taxes decreased approximately $.6
million and $1.0 million during the current three and nine month
periods, respectively, 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 an 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 July 1, 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.
Pronouncements Issued But Not Yet Effective
In March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of." This Statement imposes stricter criteria for
regulatory assets by requiring that regulatory assets which are
no longer probably of recovery through future revenues be
charged to earnings and also establishes criteria for measuring
any impairment losses on long-lived assets. The Company
anticipates adopting this standard on July 1, 1996 and does not
expect that adoption will have a material impact on the
financial position or results of operations of the Company based
on the Company's current operations and the regulatory
environment in which Mountaineer operates.
LIQUIDITY AND CAPITAL RESOURCES
Short-Term Borrowings and Lines-of-Credit
At March 31, 1995, the Company had a working capital deficit
of $11.5 million and a current ratio of .86 to 1. The
deficiency in working capital is attributable to Mountaineer's
requirement of significant working capital funds and short-term
borrowings 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 $60.0 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 March 31, 1995, Mountaineer had
approximately $12.1 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,
1995, 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 $12.2 million in
capital expenditures during the first nine months of fiscal
1995, of which approximately $.7 million was expended by MGS and
the remainder was primarily 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 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. The Company has scheduled a
meeting of its stockholders for May 16, 1995 at which they will
be asked to approve the proposed merger agreement. The Public
Service Commission of West Virginia (PSCWV) held a public
hearing with respect to the planned merger on April 25, 1995 and
the Company anticipates that the PSCWV will issue an order
regarding the proposed merger during the month of May 1995 which
should become final 30 days thereafter. The parties to the
transaction 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;
however, on April 4, 1995, the parties were notified that the
waiting period for the merger under the HSR Act had been
terminated. 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 would 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.
<PAGE>
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 the Plaintiffs' 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.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) Exhibits
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
February 3, 1995 Item 5 No
February 13, 1995 Item 5 No
April 4, 1995 Item 5 No
<PAGE>
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 18, 1995
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
APPENDIX E TO ITEM 601(C) OF REGULATION S-K
(FINANCIAL DATA SCHEDULE UT
PUBLIC UTILITY COMPANIES AND PUBLIC UTILITY HOLDING COMPANIES)
This schedule contains summary financial information extracted
from the Condensed Consolidated Balance Sheet as of March 31,
1995 and the Condensed Consolidated Statement of Income for the
Nine Month Period Ended March 31, 1995 and is qualified in its
entirety by reference to such financial statements. (All
numbers in 000's except for earnings per share)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> MAR-31-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 113,561
<OTHER-PROPERTY-AND-INVEST> 38,266
<TOTAL-CURRENT-ASSETS> 70,230
<TOTAL-DEFERRED-CHARGES> 16,135
<OTHER-ASSETS> 1,139
<TOTAL-ASSETS> 239,331
<COMMON> 81
<CAPITAL-SURPLUS-PAID-IN> 36,788
<RETAINED-EARNINGS> 74,572
<TOTAL-COMMON-STOCKHOLDERS-EQ> 106,159
0
0
<LONG-TERM-DEBT-NET> 25,605
<SHORT-TERM-NOTES> 12,077
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<OTHER-ITEMS-CAPITAL-AND-LIAB> 89,440
<TOT-CAPITALIZATION-AND-LIAB> 239,331
<GROSS-OPERATING-REVENUE> 162,593
<INCOME-TAX-EXPENSE> 1,837
<OTHER-OPERATING-EXPENSES> 152,955
<TOTAL-OPERATING-EXPENSES> 154,792
<OPERATING-INCOME-LOSS> 7,801
<OTHER-INCOME-NET> 279
<INCOME-BEFORE-INTEREST-EXPEN> 8,080
<TOTAL-INTEREST-EXPENSE> 3,581
<NET-INCOME> 4,499
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<EARNINGS-AVAILABLE-FOR-COMM> 4,499
<COMMON-STOCK-DIVIDENDS> 0
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