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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1995
Commission File Number 1-267
Allegheny Power System, Inc.
(Exact name of registrant as specified in its charter)
Maryland 13-5531602
(State of Incorporation) (I.R.S. Employer Identification No.)
12 East 49th Street, New York, New York 10017-1028
Telephone Number - 212-752-2121
The registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
At May 12, 1995, 119,677,751 shares of the Common Stock ($1.25 par
value) of the registrant were outstanding.
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ALLEGHENY POWER SYSTEM, INC.
Form 10-Q for Quarter Ended March 31, 1995
Page
Index No.
PART I--FINANCIAL INFORMATION
Consolidated statement of income -
Three months ended March 31, 1995 and 1994 3
Consolidated balance sheet - March 31, 1995
and December 31, 1994 4
Consolidated statement of cash flows -
Three months ended March 31, 1995 and 1994 5
Notes to consolidated financial statements 6
Management's discussion and analysis of financial
condition and results of operations 7-10
PART II--OTHER INFORMATION 11
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ALLEGHENY POWER SYSTEM, INC.
Consolidated Statement of Income
<TABLE>
<CAPTION>
Three Months Ended
March 31
1995 1994
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES:
<S> <C> <C>
Residential $264 118 $269 232
Commercial 125 884 119 396
Industrial 193 994 178 674
Nonaffiliated utilities 98 511 111 612
Other 17 481 18 385
Total Operating Revenues 699 988 697 299
OPERATING EXPENSES:
Operation:
Fuel 135 045 155 719
Purchased power and exchanges, net 130 635 136 487
Deferred power costs, net 18 935 3 424
Other 70 064 68 961
Maintenance 62 083 63 902
Depreciation 64 697 55 872
Taxes other than income taxes 47 371 49 776
Federal and state income taxes 48 919 48 040
Total Operating Expenses 577 749 582 181
Operating Income 122 239 115 118
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 1 522 2 865
Other income, net 452 (299)
Total Other Income and Deductions 1 974 2 566
Income Before Interest Charges and
Preferred Dividends 124 213 117 684
INTEREST CHARGES AND PREFERRED DIVIDENDS:
Interest on long-term debt 40 364 36 921
Other interest 3 482 2 448
Allowance for borrowed funds used
during construction (1 171) (1 783)
Dividends on preferred stock of subsidiaries 5 409 4 233
Total Interest Charges and
Preferred Dividends 48 084 41 819
Consolidated Income Before Cumulative Effect
of Accounting Change 76 129 75 865
Cumulative Effect of Accounting Change, net - 43 446
CONSOLIDATED NET INCOME $ 76 129 $119 311
COMMON STOCK SHARES OUTSTANDING (average) 119 297 229 117 667 736
EARNINGS PER AVERAGE SHARE:
Consolidated income before cumulative effect
of accounting change $.64 $ .65
Cumulative effect of accounting change, net - .37
Consolidated net income $.64 $1.02
</TABLE>
See accompanying notes to consolidated financial statements.
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ALLEGHENY POWER SYSTEM, INC.
Consolidated Balance Sheet
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
(Thousands of Dollars)
ASSETS:
Property, Plant, and Equipment:
At original cost, including $225,023,000
<S> <C> <C>
and $215,756,000 under construction $7 639 708 $7 586 780
Accumulated depreciation (2 578 205) (2 529 354)
5 061 503 5 057 426
Investments and Other Assets:
Subsidiaries consolidated--excess of cost
over book equity at acquisition 15 077 15 077
Securities of associated company--at cost,
which approximates equity 1 250 1 250
Other 36 633 36 284
52 960 52 611
Current Assets:
Cash and temporary cash investments 2 530 2 765
Accounts receivable:
Electric service, net of $11,742,000 and $11,353,000
uncollectible allowance 261 502 250 367
Other 8 929 8 175
Materials and supplies--at average cost:
Operating and construction 98 625 94 478
Fuel 86 282 84 199
Prepaid taxes 60 817 43 880
Other 25 405 23 730
544 090 507 594
Deferred Charges:
Regulatory assets 650 475 643 791
Unamortized loss on reacquired debt 40 191 40 991
Other 54 575 59 812
745 241 744 594
Total Assets $6 403 794 $6 362 225
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 149 597 $ 149 116
Other paid-in capital 971 417 963 269
Retained earnings 974 138 946 919
2 095 152 2 059 304
Preferred stock:
Not subject to mandatory redemption 300 086 300 086
Subject to mandatory redemption 24 257 25 200
Long-term debt 2 142 555 2 178 472
4 562 050 4 563 062
Current Liabilities:
Short-term debt 128 772 126 818
Long-term debt and preferred stock
due within one year 50 775 29 200
Accounts payable 141 065 190 809
Taxes accrued:
Federal and state income 67 554 13 873
Other 40 767 52 782
Interest accrued 40 509 42 078
Other 77 168 62 073
546 610 517 633
Deferred Credits and Other Liabilities:
Unamortized investment credit 155 950 158 018
Deferred income taxes 985 693 972 113
Regulatory liabilities 103 113 105 076
Other 50 378 46 323
1 295 134 1 281 530
Total Capitalization and Liabilities $6 403 794 $6 362 225
</TABLE>
See accompanying notes to consolidated financial statements.
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ALLEGHENY POWER SYSTEM, INC.
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
March 31
1995 1994
(Thousands of Dollars)
CASH FLOWS FROM OPERATIONS:
<S> <C> <C>
Consolidated net income $ 76 129 $119 311
Depreciation 64 697 55 872
Deferred investment credit and income taxes, net 5 621 (6 176)
Deferred power costs, net 18 935 3 424
Allowance for other than borrowed funds used
during construction (1 522) (2 865)
Cumulative effect of accounting change before
income taxes - (72 333)
Changes in certain current assets and
liabilities:
Accounts receivable, net, excluding cumulative
effect of accounting change (11 889) (33 405)
Materials and supplies (6 230) (1 774)
Accounts payable (49 744) (10 128)
Taxes accrued 41 666 62 410
Interest accrued (1 569) (1 941)
Other, net (11 897) 8 912
124 197 121 307
CASH FLOWS FROM INVESTING:
Construction expenditures (72 054) (86 084)
Allowance for other than borrowed funds used
during construction 1 522 2 865
(70 532) (83 219)
CASH FLOWS FROM FINANCING:
Sale of common stock 8 596 8 829
Retirement of preferred stock (910) -
Issuance of long-term debt - 27 309
Retirement of long-term debt (14 630) (16 000)
Short-term debt, net 1 954 (8 132)
Cash dividends on common stock (48 910) (48 242)
(53 900) (36 236)
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (235) 1 852
Cash and Temporary Cash Investments at January 1 2 765 2 417
Cash and Temporary Cash Investments at March 31 $ 2 530 $ 4 269
Supplemental cash flow information:
Cash paid during the quarter for:
Interest (net of amount capitalized) $ 43 802 $ 38 240
Income taxes - -
</TABLE>
See accompanying notes to consolidated financial statements.
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ALLEGHENY POWER SYSTEM, INC.
Notes to Consolidated Financial Statements
1. The Company's Notes to Consolidated Financial Statements in the
Allegheny Power System companies' combined Annual Report on
Form 10-K for the year ended December 31, 1994, should be read
with the accompanying financial statements and the following
notes. With the exception of the December 31, 1994
consolidated balance sheet in the aforementioned annual report
on Form 10-K, the accompanying consolidated financial
statements appearing on pages 3 through 5 and these notes to
consolidated financial statements are unaudited. In the
opinion of the Company, such consolidated financial statements
together with these notes thereto contain all adjustments
(which consist only of normal recurring adjustments) necessary
to present fairly the Company's financial position as of March
31, 1995, and the results of operations and cash flows for the
three months ended March 31, 1995 and 1994.
2. The Consolidated Statement of Income reflects the results of
past operations and is not intended as any representation as to
future results. For purposes of the Consolidated Balance Sheet
and Consolidated Statement of Cash Flows, temporary cash
investments with original maturities of three months or less,
generally in the form of commercial paper, certificates of
deposit, and repurchase agreements, are considered to be the
equivalent of cash.
3. Earnings for the first quarter of 1994 have been restated to
reflect retroactively the cumulative effect of an accounting
change adopted in January 1994 to record unbilled revenues.
4. Other paid-in capital increased $8,115,000 in the three months
ended March 31, 1995, representing the excess of amounts
received over par value, less related expenses, from the
issuance of 384,797 shares of common stock pursuant to the
Company's Dividend Reinvestment and Stock Purchase Plan and
Employee Stock Ownership and Savings Plan. Additionally, other
paid-in capital increased $33,000 as a result of a subsidiary
company's preferred stock transaction.
5. Common stock dividends per share declared during the periods
for which income statements are included are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1995 1994
<S> <C> <C>
Number of Shares. . . . . . . . . . . . . . 119,292,954 117,663,582
Amount per Share. . . . . . . . . . . . . . $.41 $.41
</TABLE>
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ALLEGHENY POWER SYSTEM, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
COMPARISON OF FIRST QUARTER OF 1995 WITH FIRST QUARTER OF 1994
CONSOLIDATED NET INCOME
Consolidated net income for the first quarter of 1995
was $76.1 million or $.64 per average share, compared with $75.9 million
or $.65 per average share, for the corresponding 1994 period, before the
cumulative effect of an accounting change to record unbilled revenues.
Increased retail revenues in the first quarter of 1995, resulting from
previously reported rate increases, more than offset the effect of a
decrease in retail sales due to mild weather.
SALES AND REVENUES
Retail kilowatthour (kWh) sales to residential and
commercial customers decreased 8% and 1%, respectively, and sales to
industrial customers increased 5%. The decrease in kWh sales to
residential and commercial customers was primarily due to a decrease in
weather-related sales. Mild temperatures in the first quarter of 1995
resulted in heating degree days 5% below normal, as compared to some of
the coldest temperatures ever recorded in much of the System's service
territory during the first quarter of 1994. The increase in kWh sales to
industrial customers occurred in almost all industrial groups. The
increase in revenues from retail customers resulted from the following:
<TABLE>
<CAPTION>
Change from Prior Period
(Millions of Dollars)
<C> <C>
Decreased kWh sales $(11.0)
Fuel and energy cost adjustment
clauses (1) (2.4)
Rate increases (2):
Pennsylvania 13.6
West Virginia 9.2
Maryland 7.2
Virginia .3
30.3
Other (.2)
$ 16.7
</TABLE>
(1) Changes in revenues from fuel and energy cost adjustment
clauses have little effect on consolidated net income.
(2) Reflects rate increases on an annual basis of $55.5 million in
Pennsylvania effective December 31, 1994, a $25 million annual
increase in base rates in West Virginia effective in mid-
November 1994, an increased surcharge of $8.8 million in West
Virginia effective July 1, 1994 for recovery of carrying
charges on costs to comply with the Clean Air Act Amendments of
1990 (CAAA), and an annual increase of $19.6 million in
Maryland effective November 11, 1994. These rate increases
included recovery of carrying charges on investment,
depreciation, and operating costs required to comply with
Phase I of the CAAA, and other increasing levels of expense.
See page 10 for further information on the West Virginia rate
case.
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KWh sales to and revenues from nonaffiliated utilities
are comprised of the following items:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1995 1994
KWh sales (in billions):
<S> <C> <C>
From subsidiaries' generation .1 .4
From purchased power 3.2 3.3
3.3 3.7
Revenues (in millions):
From subsidiaries' generation $ 4.2 $ 10.4
From sales of purchased power 94.3 101.2
$98.5 $111.6
</TABLE>
Decreased sales to nonaffiliated utilities resulted
primarily from decreased demand, continuing price competition, and System
generating unit outages which reduced the amount available for sale.
About 95% of the aggregate benefits from sales to nonaffiliated utilities
is passed on to retail customers and has little effect on consolidated net
income.
OPERATING EXPENSES
Fuel expenses decreased 13%, the result of a 9%
decrease in average coal prices and a 4% decrease in kWh generated. The
reduced average coal prices are expected to continue as a result of
renegotiations of long-term fuel contracts which reduced fuel prices
effective January 1995. Fuel expenses are primarily subject to deferred
power cost accounting procedures with the result that changes in fuel
expenses have little effect on consolidated net income.
"Purchased power and exchanges, net" represents power
purchases from and exchanges with other utilities and qualified facilities
under the Public Utility Regulatory Policies Act of 1978 (PURPA) and is
comprised of the following items:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1995 1994
(Millions of Dollars)
Purchased power:
<S> <C> <C>
For resale to other utilities $ 82.9 $ 89.7
From PURPA generation 33.5 30.2
Other 10.4 13.3
Total power purchased 126.8 133.2
Power exchanges, net 3.8 3.3
$130.6 $136.5
</TABLE>
The amount of power purchased from other utilities for
use by subsidiaries and for resale to other utilities depends upon the
availability of the subsidiaries' generating equipment, transmission
capacity, and fuel, and their cost of generation and the cost of
operations of other utilities from which such purchases are made.
Purchases from PURPA generation may increase in future years if the
Pennsylvania Public Utility Commission (PUC) and the Pennsylvania courts
require West Penn Power Company to buy power from an
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independent developer, Washington Power Company, LP. West Penn's petition
to the Federal Energy Regulatory Commission (FERC) to prevent the PUC from
taking such action has been denied. The Company has joined with other
utilities to support efforts to repeal those sections of PURPA that
require the subsidiaries to purchase power from nonutility generators at
long-term, fixed prices. The cost of power purchased for use by the
subsidiaries, including power from PURPA generation, is mostly recovered
from customers currently through the regular fuel and energy cost recovery
procedures followed by the subsidiaries' regulatory commissions and is
primarily subject to deferred power cost procedures with the result that
changes in such costs have little effect on consolidated net income.
The increase in other operation expense resulted
primarily from increased power station operating costs, including expenses
related to the Harrison scrubbers which became available for service in
November 1994, and increases in salaries and wages and employee benefits,
offset in part by environmental liabilities recorded in the first quarter
of 1994.
Maintenance expenses represent costs incurred to
maintain the power stations, the transmission and distribution (T&D)
system, and general plant, and reflect routine maintenance of equipment
and rights-of-way as well as planned major repairs and unplanned
expenditures, primarily from forced outages at the power stations and
periodic storm damage on the T&D system. The subsidiaries are also
experiencing, and expect to continue to experience, increased expenditures
due to the aging of their power stations. Variations in maintenance
expense result primarily from unplanned events and planned major projects,
which vary in timing and magnitude depending upon the length of time
equipment has been in service without a major overhaul and the amount of
work found necessary when equipment is dismantled.
The increase in depreciation expense was due to
additions to electric plant, primarily because of the Harrison scrubbers
which became available for service in November 1994, offset in part by a
decrease in depreciation rates in West Virginia concurrent with the West
Virginia base rate increase effective in November 1994.
Taxes other than income taxes decreased $2.4 million
primarily from decreases in property taxes and West Virginia Business and
Occupation taxes (B&O taxes). West Virginia B&O taxes are expected to
continue to decrease in future years due to an amendment to the B&O tax
recently enacted by the State of West Virginia effective June 1, 1995,
which reduces the subsidiaries' tax liability.
The combined decrease of $2.0 million in allowance for
funds used during construction (AFUDC) reflects a decrease in capital
expenditures upon substantial completion of Phase I of the CAAA.
Interest on long-term debt increased $3.4 million and
dividends on preferred stock of subsidiaries increased $1.2 million due
primarily to new security issues in 1994. The subsidiaries used the
proceeds from these issues for general corporate purposes and to finance
capital expenditures for the CAAA. Fluctuations in other interest expense
as well as other income, net, reflect changes in the levels of temporary
investments and short-term debt maintained by the companies.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's discussion on Liquidity and Capital
Resources in the Allegheny Power System companies' combined Annual Report
on Form 10-K for the year ended December 31, 1994, should be read with the
following information.
In March 1995, the Public Service Commission of West
Virginia (PSC) issued an order in the rate cases filed by Monongahela
Power Company and The Potomac Edison Company that authorized the companies
to recover certain post-1994 costs associated with the scrubbers at the
Harrison Power Station through energy cost recovery procedures rather than
base rates, and upheld the recommendation by an Administrative Law Judge
that a 10.85% return on equity (ROE) was reasonable. The companies have
petitioned the West Virginia Supreme Court of Appeals to review the PSC's
order as to various issues, including the low ROE allowed.
The Virginia State Corporation Commission on March 9,
1995, issued an order in The Potomac Edison Company's rate case which
authorized an increase in revenues of about $3 million on an annual basis.
Potomac Edison has been collecting higher rates, subject to refund, from
its Virginia customers since November 1994. A refund is now required, for
which adequate reserves have been provided.
The parties have agreed to settlements, subject to FERC
approval, in The Potomac Edison Company's FERC rate case filing for
wholesale customers, which will result in an increase in annual revenues
of about $2.3 million effective on June 25, 1995.
On May 12, 1995, The Potomac Edison Company issued $65
million of 7.75% 30-year first mortgage bonds to refund a $65 million
9.25% series due in 2019.
In the normal course of business, the subsidiaries are
subject to various contingencies and uncertainties relating to their
operations and construction programs, including cost recovery in the
regulatory process, laws, regulations and uncertainties related to
environmental matters, and legal actions.
As previously reported, the subsidiaries are currently
named as defendants along with multiple other defendants in 2,766 pending
asbestos cases involving one or more plaintiffs, including 425 new cases
filed in 1995 to date. While the cumulative number of claims appears to
be significant, previous cases have been settled for an amount
substantially less than the anticipated cost of defense. Also as
previously reported, the subsidiaries and approximately 875 others have
been identified by the Environmental Protection Agency as potentially
responsible parties in a Superfund site subject to cleanup. The
subsidiaries believe that provisions for liabilities and insurance
recoveries are such that final resolution of these matters will not have a
material effect on their financial position.
In March 1995, the FERC published a Notice of Proposed
Rulemaking (NOPR) that would mandate sweeping changes to promote increased
competition in the wholesale electric industry. The proposals would
require that utilities file nondiscriminatory open access transmission
tariffs and offer comparable transmission services to eligible third
parties. It also would allow utilities the opportunity to recover
stranded costs. The Company is currently examining the effects of the
NOPR on the System and the entire electric utility industry, and plans to
submit comments to the FERC.
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In April 1995, AYP Capital, Inc. became a limited
partner in EnviroTech Investment Fund I Limited Partnership, a venture
capital fund to offer utility investors the opportunity to achieve an
attractive financial return on investments in energy and the environment.
The initial investment of $200,000 is expected to increase to a maximum
commitment of $5 million over the next several years.
ALLEGHENY POWER SYSTEM, INC.
Part II - Other Information to Form 10-Q
for Quarter Ended March 31, 1995
ITEM 5. OTHER INFORMATION
On May 2, 1995, Washington Power Company, LP, the
developer of the Burgettstown PURPA project, filed suit in federal court
in the Western District of Pennsylvania against the Company, West Penn
Power Company, and Allegheny Power Service Corporation alleging antitrust
violations, unfair competition, breach of contract and intentional
interference with a contract. The lawsuit seeks recovery of lost profits
and out-of-pocket costs as well as treble and punitive damages. The
companies cannot predict the outcome of this proceeding. In May 1995, the
complaint filed in November 1994 by Washington Power Company, LP against
West Penn in the Court of Common Pleas of Washington County, Pennsylvania,
was dismissed without prejudice.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 27 Financial Data Schedule
(b) On February 15, 1995, the Company filed a Form 8-K
containing a Form of Change in Control Employment
Contract.
Signature
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ALLEGHENY POWER SYSTEM, INC.
/s/ K. M. JONES
K. M. Jones, Vice President
(Chief Accounting Officer)
May 12, 1995
<TABLE> <S> <C>
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<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<EXCHANGE-RATE> 1
<CASH> 2,505
<SECURITIES> 25
<RECEIVABLES> 282,173
<ALLOWANCES> 11,742
<INVENTORY> 184,907
<CURRENT-ASSETS> 544,090
<PP&E> 7,639,708
<DEPRECIATION> 2,578,205
<TOTAL-ASSETS> 6,403,794
<CURRENT-LIABILITIES> 546,610
<BONDS> 2,142,555
<COMMON> 149,597
24,257
300,086
<OTHER-SE> 1,945,555
<TOTAL-LIABILITY-AND-EQUITY> 6,403,794
<SALES> 699,988
<TOTAL-REVENUES> 699,988
<CGS> 416,762
<TOTAL-COSTS> 528,830
<OTHER-EXPENSES> 5,409
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,675
<INCOME-PRETAX> 125,048
<INCOME-TAX> 48,919
<INCOME-CONTINUING> 76,129
<DISCONTINUED> 0
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<EPS-PRIMARY> 0.64
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