Page 1 of 12
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, 1996
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 14, 1996, 120,989,831 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, 1996
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Consolidated statement of income -
Three months ended March 31, 1996 and 1995 3
Consolidated balance sheet - March 31, 1996
and December 31, 1995 4
Consolidated statement of cash flows -
Three months ended March 31, 1996 and 1995 5
Notes to consolidated financial statements 6-7
Management's discussion and analysis of financial
condition and results of operations 8-11
PART II--OTHER INFORMATION 12
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<TABLE>
<CAPTION>
- 3 -
ALLEGHENY POWER SYSTEM, INC.
Consolidated Statement of Income
Three Months Ended
March 31
1996** 1995
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES:
<S> <C> <C>
Residential $ 288,410 $ 264,118
Commercial 129,188 125,884
Industrial 192,134 193,994
Wholesale and other * 20,332 16,602*
Bulk power transactions, net * 17,954 15,206*
Total Operating Revenues 648,018 615,804
OPERATING EXPENSES:
Operation:
Fuel 136,347 135,045
Purchased power and exchanges * 49,798 46,451*
Deferred power costs, net 16,430 18,935
Other 136,137 70,064
Maintenance 64,013 62,083
Depreciation 65,959 64,697
Taxes other than income taxes 48,496 47,371
Federal and state income taxes 33,246 48,919
Total Operating Expenses 550,426 493,565
Operating Income 97,592 122,239
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 307 1,522
Other income, net 729 452
Total Other Income and Deductions 1,036 1,974
Income Before Interest Charges and
Preferred Dividends 98,628 124,213
INTEREST CHARGES AND PREFERRED DIVIDENDS:
Interest on long-term debt 41,629 40,364
Other interest 3,658 3,482
Allowance for borrowed funds used during
construction (402) (1,171)
Dividends on preferred stock of subsidiaries 2,325 5,409
Total Interest Charges and
Preferred Dividends 47,210 48,084
CONSOLIDATED NET INCOME $ 51,418 $ 76,129
COMMON STOCK SHARES OUTSTANDING (average) 120,710,337 119,297,229
EARNINGS PER AVERAGE SHARE $0.43 $0.64
* Prior period amounts have been reclassified for comparative purposes to reflect
a change in 1996 in reporting certain bulk power transmission transactions with
nonaffiliated utilities. See Note 3 on page 6.
**The 1996 period includes restructuring charges of $39.2 million, net of taxes,
($.33 per share). See Note 4 on page 6.
See accompanying notes to consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
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ALLEGHENY POWER SYSTEM, INC.
Consolidated Balance Sheet
March 31, December 31,
1996 1995
(Thousands of Dollars)
ASSETS:
Property, Plant, and Equipment:
At original cost, including $122,064,000
<S> <C> <C>
and $147,467,000 under construction $ 7,844,115 $ 7,812,670
Accumulated depreciation (2,756,261) (2,700,077)
5,087,854 5,112,593
Investments and Other Assets:
Subsidiaries consolidated--excess of cost
over book equity at acquisition 15,077 15,077
Benefit plans' investments 48,199 47,545
Other 3,880 2,981
67,156 65,603
Current Assets:
Cash and temporary cash investments 4,337 3,867
Accounts receivable:
Electric service, net of $13,080,000 and
$13,047,000 uncollectible allowance 305,522 305,988
Other 12,128 15,924
Materials and supplies--at average cost:
Operating and construction 85,144 86,421
Fuel 76,217 71,898
Prepaid taxes 62,751 45,404
Deferred income taxes 39,868 28,655
Other 11,490 13,164
597,457 571,321
Deferred Charges:
Regulatory assets 601,235 602,360
Unamortized loss on reacquired debt 56,292 57,255
Other 40,525 38,183
698,052 697,798
Total Assets $ 6,450,519 $ 6,447,315
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 151,237 $ 150,876
Other paid-in capital 1,003,989 995,701
Retained earnings 984,064 983,340
2,139,290 2,129,917
Preferred stock 170,086 170,086
Long-term debt and QUIDS 2,260,293 2,273,226
4,569,669 4,573,229
Current Liabilities:
Short-term debt 138,533 200,418
Long-term debt due within one year 23,900 43,575
Accounts payable 106,694 145,422
Taxes accrued:
Federal and state income 68,910 15,599
Other 39,857 54,116
Interest accrued 44,998 39,752
Deferred power costs 43,128 26,735
Restructuring liabilities 41,409 14,435
Other 66,132 56,477
573,561 596,529
Deferred Credits and Other Liabilities:
Unamortized investment credit 147,699 149,759
Deferred income taxes 977,845 985,804
Regulatory liabilities 96,884 97,970
Restructuring liabilities 22,469 -
Other 62,392 44,024
1,307,289 1,277,557
Total Capitalization and Liabilities $ 6,450,519 $ 6,447,315
See accompanying notes to consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
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ALLEGHENY POWER SYSTEM, INC.
Consolidated Statement of Cash Flows
Three Months Ended
March 31
1996 1995
(Thousands of Dollars)
CASH FLOWS FROM OPERATIONS:
<S> <C> <C>
Consolidated net income $ 51,418 $ 76,129
Depreciation 65,959 64,697
Deferred investment credit and income taxes, net (22,330) 5,621
Deferred power costs, net 16,430 18,935
Allowance for other than borrowed funds used
during construction (307) (1,522)
Restructuring charges 61,254 -
Changes in certain current assets and
liabilities:
Accounts receivable, net 4,262 (11,889)
Materials and supplies (3,042) (6,230)
Accounts payable (38,728) (49,744)
Taxes accrued 39,052 41,666
Interest accrued 5,246 (1,569)
Other, net 3,789 (11,897)
183,003 124,197
CASH FLOWS FROM INVESTING:
Construction expenditures (45,676) (72,054)
Nonutility investments (280) -
Allowance for other than borrowed funds used
during construction 307 1,522
(45,649) (70,532)
CASH FLOWS FROM FINANCING:
Sale of common stock 8,649 8,596
Retirement of preferred stock - (910)
Retirement of long-term debt (32,954) (14,630)
Short-term debt, net (61,885) 1,954
Cash dividends on common stock (50,694) (48,910)
(136,884) (53,900)
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS 470 (235)
Cash and Temporary Cash Investments at January 1 3,867 2,765
Cash and Temporary Cash Investments at March 31 $ 4,337 $ 2,530
Supplemental cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $35,422 $43,802
Income taxes 2,564 -
See accompanying notes to consolidated financial statements.
</TABLE>
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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, 1995, should be read
with the accompanying financial statements and the following
notes. With the exception of the December 31, 1995,
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, 1996, and the results of operations and cash flows for the
three months ended March 31, 1996 and 1995.
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. Effective in 1996 the Company's subsidiaries changed their
method of reporting certain bulk power transmission
transactions with nonaffiliated utilities, and reclassified
prior year's bulk power revenues and operation expenses to
achieve a consistent presentation. In prior years, some use of
the subsidiaries' transmission system was recorded as purchased
power from selling utilities and as sales of power to buying
utilities. The benefit to the subsidiaries was the difference
between the two. Because of new Federal Energy Regulatory
Commission requirements, the subsidiaries predominantly do not
"buy" and "sell" such energy, but rather a transmission fee is
charged.
Under the new reporting method all such transactions are
recorded on a net revenue basis. The effect of the
reclassification was to reduce amounts reported for bulk power
transaction revenues and operation expenses by $44.7 million
and $84.2 million for the three months ended March 31, 1996 and
1995, respectively, with no change in operating income or
consolidated net income.
4. As previously announced, the System is undergoing a
reorganization and reengineering process (restructuring) to
simplify its management structure and to increase efficiency.
On March 12, 1996, the subsidiaries announced additional
restructuring plans which include consolidating operating
divisions, and centralizing and changing many accounting,
customer services, and other functions. As a consequence of
this process, an additional work force reduction of
approximately 1,000 employees will occur. It is expected that
approximately 50% of the positions will be eliminated by July
1996 with the remaining positions eliminated by 1998.
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Reductions will be accomplished through an enhanced separation
plan, attrition, and, in the union workforce, pursuant to
appropriate contract.
Additional restructuring charges which reflect estimated
liabilities for severance and other employee termination costs
are estimated to be about $100 million ($60 million after tax)
of which $64.8 million ($39.2 million after tax) was recorded
in the first quarter of 1996. The remaining charges will be
recorded later, primarily in the third quarter of 1996, as
required by applicable accounting rules. A summary of
restructuring liabilities is provided below:
<TABLE>
<CAPTION>
First Quarter 1996
(Millions of Dollars)
Restructuring Liability (before tax):
<S> <C>
Balance at beginning of quarter $14.4
Add first quarter accrual 64.8
Less benefit plans curtailment
liabilities (11.8)*
Less first quarter payments (3.5)
Balance at end of quarter $63.9
</TABLE>
*Primarily recorded in other deferred credits.
5. Other paid-in capital increased $8,288,000 in the three months
ended March 31, 1996, representing the excess of amounts
received over par value, less related expenses, from the
issuance of 289,022 shares of common stock pursuant to the
Company's Dividend Reinvestment and Stock Purchase Plan and
Employee Stock Ownership and Savings Plan.
6. 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
1996 1995
<S> <C> <C>
Number of Shares 120,700,809 119,292,954
Amount per Share $.42 $.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 1996 WITH FIRST QUARTER OF 1995
Review of Utility Operations
EARNINGS
Consolidated net income for the first quarter of 1996
was $51.4 million or $.43 per average share, after reflecting a
restructuring charge net of taxes of $39.2 million ($.33 per share),
compared with $76.1 million or $.64 per average share, for the
corresponding 1995 period. The restructuring charge reflects estimated
liabilities for severance and other employee termination costs incurred to
date for continuing restructuring activities which commenced during the
last half of 1995. The 19% increase in earnings, excluding the
restructuring charge, resulted primarily from increased sales to retail
customers.
SALES AND REVENUES
Retail kilowatt-hour (kWh) sales to residential,
commercial, and industrial customers increased 12%, 7%, and 2%,
respectively. The increase in kWh sales to residential customers was
primarily due to an increase in weather-related sales. Colder
temperatures in the first quarter of 1996 as compared to milder first
quarter 1995 weather, resulted in heating degree days 8% above normal and
12% above the 1995 first quarter. The increase in commercial sales
reflects both increased usage and growth in the number of customers. 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)
<S> <C>
Increased kWh sales $31.4
Fuel and energy cost adjustment clauses* (3.3)
Rate changes .9
Other (3.3)
$25.7
</TABLE>
*Changes in revenues from fuel and energy cost adjustment
clauses have little effect on consolidated net income.
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The increase in wholesale and other revenues reflects
increased revenues from wholesale customers due to a rate increase for
Potomac Edison customers effective in June 1995, increased weather-related
sales, and load additions to the wholesale customers' systems.
KWh deliveries to and revenues from bulk power
transactions are comprised of the following items:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1996 1995*
KWh deliveries (in billions):
<S> <C> <C>
From transmission services 5.1 3.4
From sale of subsidiaries' generation .1 .1
5.2 3.5
Revenues (in millions):
From transmission services $14.6 $11.0
From sale of subsidiaries' generation 3.4 4.2
$18.0 $15.2
</TABLE>
Increased transmission services resulted primarily from
increased demand from power marketers. About 95% of the aggregate
benefits from bulk power transactions are passed on to retail customers
and have little effect on consolidated net income.
OPERATING EXPENSES
Fuel expenses increased 1%, the net result of a 5%
increase related to kWh generated and a 4% decrease in average coal
prices. 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" represents power
purchases from and exchanges with other utilities and purchases from
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
1996 1995*
(Millions of Dollars)
Purchased power:
<S> <C> <C>
From PURPA generation $32.2 $33.5
Other 14.1 10.4
Total power purchased 46.3 43.9
Power exchanges 3.5 2.6
$49.8 $46.5
</TABLE>
*Prior period amounts have been reclassified for comparative
purposes to reflect a change in the method of reporting
certain bulk power transmission transactions with
nonaffiliated utilities. See Note 3 to the Consolidated
Financial Statements for further information.
<PAGE>
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Other purchased power increased because of increased
sales to retail customers and the availability of more economic energy.
The cost of purchased power and exchanges, 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 restructuring charges which are discussed in Note 4 to the
Consolidated Financial Statements.
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 the equipment is dismantled.
The decrease in federal and state income taxes resulted
primarily from a decrease in income before taxes.
The combined decrease of $2 million in allowance for
funds used during construction (AFUDC) reflects a decrease in capital
expenditures.
Interest on long-term debt increased $1.3 million and
dividends on preferred stock of subsidiaries decreased $3.1 million due
primarily to the redemption of preferred stock issues refinanced with
Quarterly Income Debt Securities during 1995.
Financial Condition and Requirements
The Company's discussion on Financial Condition and
Requirements and Changes in the Electric Utility Industry in the Allegheny
Power System companies' combined Annual Report on Form 10-K for the year
ended December 31, 1995, should be read with the following information.
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.
The final rules on open transmission access were
released by the Federal Energy Regulatory Commission (FERC) on April 24
and the Company is in the process of reviewing the document. The first
rule, Order No. 888, requires utilities with transmission capacity to file
open access tariffs that offer to others transmission service that is
comparable to service they provide themselves. In addition, utilities
must apply the same tariffs offered to others to their own wholesale
energy sales and purchases. The
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subsidiaries have had an open access transmission tariff on file with the
FERC since December 1995. The Order also provides for full recovery of
stranded costs--those costs that were prudently incurred to serve power
customers and that could go unrecovered if those customers use open access
to move to another supplier.
Order No. 889, which is also included in the rules,
requires utilities to establish electronic systems to share information
about available transmission capacity for wholesale transactions.
The FERC also proposed that each public utility would
replace the network and point-to-point tariffs in the open access rule
with a single capacity reservation tariff by the end of 1997.
Nonutility Business
AYP Capital, Inc. and others in the Latin America
Energy and Electricity Fund submitted the highest bid for a distribution
company that provides electric service to about one million customers in
Argentina. AYP Capital's investment is $1.2 million of a $160 million bid
and is the second venture for the subsidiary in Latin America.
A new System subsidiary, Allegheny Communications
Connect, Inc. (ACC), has applied to the Federal Communications Commission
for Exempt Telecommunications Company (ETC) status. The
Telecommunications Act of 1996 permits registered utility holding
companies to form ETCs. ACC will be permitted to offer a variety of
telecommunications services. Initially, ACC will offer sites and services
to personal communications companies, but may also offer mobile
communication services that could enhance the reliability of System
electric service, read meters remotely, control electric load, and perform
similar functions.
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ALLEGHENY POWER SYSTEM, INC.
Part II - Other Information to Form 10-Q
for Quarter Ended March 31, 1996
ITEM 5. OTHER INFORMATION
On April 1, 1996, Champion Industries, Inc., North
Branch Energy Inc., and Air Products and Chemicals, Inc., entities
claiming involvement or potential involvement in 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, 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. This case is related to a suit filed on May 2, 1995, in
federal court in the same district by Washington Power, LP, the developer
of the Burgettstown PURPA project, against the same defendants alleging
essentially the same causes of action.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) (27) Financial Data Schedule
(b) On March 13, 1996, the Company filed a Form 8-K
for the restructuring of its organization.
On April 11, 1996, 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.
K. M. JONES
K. M. Jones, Vice President
(Chief Accounting Officer)
May 14, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 4,185
<SECURITIES> 152
<RECEIVABLES> 330,730
<ALLOWANCES> 13,080
<INVENTORY> 161,361
<CURRENT-ASSETS> 597,457
<PP&E> 7,844,115
<DEPRECIATION> 2,756,261
<TOTAL-ASSETS> 6,450,519
<CURRENT-LIABILITIES> 573,561
<BONDS> 2,260,293
151,237
0
<COMMON> 170,086
<OTHER-SE> 1,988,053
<TOTAL-LIABILITY-AND-EQUITY> 6,450,519
<SALES> 648,018
<TOTAL-REVENUES> 648,018
<CGS> 402,725
<TOTAL-COSTS> 517,180
<OTHER-EXPENSES> 2,325
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,885
<INCOME-PRETAX> 84,664
<INCOME-TAX> 33,246
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<DISCONTINUED> 0
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