<PAGE>
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, 1997
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.)
10435 Downsville Pike, Hagerstown, Maryland 21740-1766
Telephone Number - 301-790-3400
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, 1997, 122,111,567 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, 1997
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Consolidated statement of income -
Three months ended March 31, 1997 and 1996 3
Consolidated balance sheet - March 31, 1997
and December 31, 1996 4
Consolidated statement of cash flows -
Three months ended March 31, 1997 and 1996 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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ALLEGHENY POWER SYSTEM, INC.
Statement of Income
<TABLE>
<CAPTION>
Three Months Ended
March 31
1997 1996
(Thousands of Dollars)
<S> <C> <C> <C> <C>
ELECTRIC OPERATING REVENUES:
Residential $ 257,913 $ 288,410
Commercial 123,886 129,188
Industrial 182,270 192,134
Wholesale and other 20,235 20,332
Bulk power transactions, net 30,676 17,954
Total Operating Revenues 614,980 648,018
OPERATING EXPENSES:
Operation:
Fuel 140,465 136,347
Purchased power and exchanges, net 50,583 49,798
Deferred power costs, net (2,083) 16,430
Other 72,825 72,053
Maintenance 61,480 63,251
Restructuring charges - 64,865
Depreciation 68,782 65,959
Taxes other than income taxes 48,656 48,477
Federal and state income taxes 50,178 33,246
Total Operating Expenses 490,886 550,426
Operating Income 124,094 97,592
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 1,150 307
Other income, net 896 729
Total Other Income and Deductions 2,046 1,036
Income Before Interest Charges and
Preferred Dividends 126,140 98,628
INTEREST CHARGES AND PREFERRED DIVIDENDS:
Interest on long-term debt 43,380 41,629
Other interest 3,833 3,658
Allowance for borrowed funds used during
construction (965) (402)
Dividends on preferred stock of subsidiaries 2,301 2,325
Total Interest Charges and
Preferred Dividends 48,549 47,210
CONSOLIDATED NET INCOME $ 77,591 $ 51,418
COMMON STOCK SHARES OUTSTANDING (average) 121,843,341 120,710,337
EARNINGS PER AVERAGE SHARE $0.64 $0.43
</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,
1997 1996
(Thousands of Dollars)
<S> <C> <C>
ASSETS:
Property, Plant, and Equipment:
At original cost, including $205,378,000
and $202,259,000 under construction $ 8,243,825 $ 8,206,213
Accumulated depreciation (2,976,531) (2,910,022)
5,267,294 5,296,191
Investments and Other Assets:
Subsidiaries consolidated--excess of cost
over book equity at acquisition 15,077 15,077
Benefit plans' investments 65,670 63,197
Other 4,448 4,359
85,195 82,633
Current assets:
Cash and temporary cash investments 24,804 19,242
Accounts receivable:
Electric service, net of $15,526,000 and
$15,052,000 uncollectible allowance 290,237 280,154
Other 14,692 22,188
Materials and supplies--at average cost:
Operating and construction 83,744 82,057
Fuel 73,289 60,755
Prepaid taxes 68,119 62,110
Deferred income taxes 52,129 39,428
Other 14,840 16,324
621,854 582,258
Deferred Charges:
Regulatory assets 551,674 565,185
Unamortized loss on reacquired debt 52,440 53,403
Other 39,128 38,840
643,242 657,428
Total Assets $ 6,617,585 $ 6,618,510
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 152,639 $ 152,300
Other paid-in capital 1,035,825 1,028,124
Retained earnings 1,013,866 988,667
2,202,330 2,169,091
Preferred stock 170,086 170,086
Long-term debt and QUIDS 2,307,107 2,397,149
4,679,523 4,736,326
Current Liabilities:
Short-term debt 133,746 156,430
Long-term debt due within one year 95,400 26,900
Accounts payable 123,745 147,161
Taxes accrued:
Federal and state income 46,182 7,173
Other 41,909 62,361
Deferred power costs 23,937 22,845
Interest accrued 43,441 40,630
Restructuring liability 39,296 56,101
Other 69,674 57,436
617,330 577,037
Deferred Credits and Other Liabilities:
Unamortized investment credit 139,468 141,519
Deferred income taxes 1,013,995 1,000,023
Regulatory liabilities 92,093 93,216
Other 75,176 70,389
1,320,732 1,305,147
Total Capitalization and Liabilities $ 6,617,585 $ 6,618,510
</TABLE>
<PAGE>
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
1997 1996
(Thousands of Dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Consolidated net income $ 77,591 $ 51,418
Depreciation 68,782 65,959
Deferred investment credit and income taxes, net 11,652 (22,330)
Deferred power costs, net (2,083) 16,430
Allowance for other than borrowed funds used
during construction (1,150) (307)
Restructuring liability - 61,254
Changes in certain current assets and
liabilities:
Accounts receivable, net (2,587) 4,262
Materials and supplies (14,221) (3,042)
Accounts payable (23,416) (38,728)
Taxes accrued 18,557 39,052
Interest accrued 2,811 5,246
Other, net 802 3,789
136,738 183,003
CASH FLOWS FROM INVESTING:
Utility construction expenditures (43,319) (45,676)
Nonutility investments (81) (280)
Allowance for other than borrowed funds used
during construction 1,150 307
(42,250) (45,649)
CASH FLOWS FROM FINANCING:
Sale of common stock 8,041 8,649
Retirement of long-term debt (21,892) (32,954)
Short-term debt, net (22,684) (61,885)
Cash dividends on common stock (52,391) (50,694)
(88,926) (136,884)
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS 5,562 470
Cash and Temporary Cash Investments at January 1 19,242 3,867
Cash and Temporary Cash Investments at March 31 $ 24,804 $ 4,337
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $42,508 $35,422
Income taxes - 2,564
</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, 1996, should be read
with the accompanying financial statements and the following
notes. With the exception of the December 31, 1996,
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 contain all adjustments (which
consist only of normal recurring adjustments) necessary to
present fairly the Company's financial position as of March 31,
1997, and the results of operations and cash flows for the
three months ended March 31, 1997 and 1996.
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. Other paid-in capital increased $7,701,000 in the three months
ended March 31, 1997, representing the excess of amounts
received over par value, less related expenses, from the
issuance of 271,240 shares of common stock pursuant to the
Company's Dividend Reinvestment and Stock Purchase Plan and
Employee Stock Ownership and Savings Plan.
4. Common stock dividends per share declared during the periods
for which income statements are included are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Number of Shares 121,840,327 120,700,809
Amount per Share $.43 $.42
</TABLE>
5. Restructuring charges in the first quarter of 1996 ($39.2
million, net of tax) include expenses associated with the
reorganization, which is essentially complete.
6. On April 7, 1997, the Company and DQE, Inc., parent company of
Duquesne Light Company, announced that they have agreed to
merge in a tax-free, stock-for-stock transaction. The combined
company will be called Allegheny Energy. It is expected that
Allegheny Energy will continue
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to be operated as an integrated electric utility holding
company and that the regulated electric utility companies will
continue to exist as separate legal entities.
The merger is conditioned, among other things, upon the
approval of each company's shareholders and the necessary
approvals of various state and federal regulatory agencies,
including the public utility commissions in Pennsylvania and
Maryland, the Securities and Exchange Commission, the Federal
Energy Regulatory Commission, and the Nuclear Regulatory
Commission. The companies are hopeful that the required
approvals can be obtained within 12 to 18 months. On May 2,
1997, the Company filed a registration statement on Form S-4
containing a joint proxy statement/
prospectus with DQE, Inc. concerning the merger and the
transactions contemplated thereby.
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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 1997 WITH FIRST QUARTER OF 1996
Review of Operations
EARNINGS
Earnings for the first quarter of 1997 and 1996, and
the after tax restructuring charges included in the 1996 period are shown
below.
<TABLE>
<CAPTION>
Consolidated Net Income Cents Per Share
Three Months Ended Three Months Ended
March 31 March 31
1997 1996 1997 1996
(Millions of Dollars)
<S> <C> <C> <C> <C>
Consolidated Net
Income as Reported $77.6 $51.4 $.64 $.43
Restructuring Charges - 39.2 - .33
Consolidated Net
Income Adjusted $77.6 $90.6 $.64 $.76
</TABLE>
Mild weather during the first quarter of 1997 was the
primary reason for the decrease in the adjusted consolidated net income
before restructuring charges.
SALES AND REVENUES
In the first quarter of 1997, retail kilowatt-hour
(kWh) sales to residential, commercial, and industrial customers decreased
9%, 3%, and 2%, respectively. Residential kWh sales, which are more
weather sensitive than the commercial and industrial classes, decreased
due to heating degree days that were more than 15% below the corresponding
1996 period and 9% below normal. Commercial kWh sales also decreased
primarily because of the mild weather. Industrial kWh sales decreased for
a variety of reasons, primarily in the iron and steel and chemical
customers groups.
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The decrease in revenues from sales to residential,
commercial, and industrial customers resulted from the following:
<TABLE>
<CAPTION>
Decrease from Prior Period
(Millions of Dollars)
<S> <C>
Decreased kWh sales $(23.4)
Fuel and energy cost adjustment clauses* (21.5)
Other (.8)
Decrease in retail revenues $(45.7)
</TABLE>
* Changes in revenues from fuel and energy cost adjustment
clauses have little effect on consolidated net income.
However, beginning May 1, 1997, one of the Company's
subsidiaries, West Penn Power Company (West Penn), will roll
its fuel and energy cost adjustment clause (energy cost rate or
ECR) into base rates and will discontinue deferred fuel
accounting. West Penn will then assume the risks of increases
in the costs of fuel and purchased power and any declines in
bulk power transaction sales. However, West Penn will also
retain the benefits of decreases in such costs and increases in
such sales. West Penn fuel revenues are approximately 50% of
total System fuel and energy cost revenues.
Revenues from bulk power transactions consist of the
following items:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1997 1996
(Millions of Dollars)
<S> <C> <C>
Revenues:
Utility operations:
From transmission services $12.9 $14.6
From sale of subsidiaries' generation 5.8 3.4
Nonutility operations 12.0 -
Total $30.7 $18.0
</TABLE>
Revenues from nonutility operations were the result of
sales by the Company's nonutility exempt wholesale generator and power
marketer, AYP Energy, Inc., which began operations in late 1996. About
95% of the aggregate benefits from utility bulk power transactions are
passed on to retail customers through fuel cost adjustment clauses and
have little effect on consolidated net income. However, beginning May 1,
1997, due to the elimination of West Penn's ECR, West Penn will retain the
aggregate benefits from bulk power transactions. See page 11 for more
information.
OPERATING EXPENSES
Fuel expenses increased 3% due to an increase in kWh
generated. Fuel expenses for the regulated subsidiaries are primarily
subject to deferred power cost accounting procedures with the result that
changes in fuel expenses have little effect on consolidated net income.
See page 11 for information regarding the May 1, 1997 change in the ECR in
Pennsylvania.
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"Purchased Power and Exchanges, Net" represents power
purchases from and exchanges with other companies and purchases from
qualified facilities under the Public Utility Regulatory Policies Act of
1978 (PURPA), and consists of the following items:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1997 1996
(Millions of Dollars)
<S> <C> <C>
Purchased power:
Utility operations:
From PURPA generation $34.7 $32.2
Other 8.5 14.1
Total purchased power 43.2 46.3
Power exchanges, net 4.1 3.5
Nonutility operations 3.3 -
Purchased power and exchanges, net $50.6 $49.8
</TABLE>
Nonutility purchases were the result of replacement
power requirements and transaction opportunities. Other purchased power
decreased because of decreased sales to retail customers. The cost of
utility 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. See page 11 for information
regarding the May 1, 1997 change in the ECR in Pennsylvania.
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. 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.
Restructuring charges in the first quarter of 1996
include expenses associated with the reorganization, which is essentially
complete.
The depreciation expense increase resulted from
additions to electric plant, the largest portion of which was depreciation
related to AYP Energy's ownership in the Fort Martin power station.
Future depreciation expense increases for utility operations are expected
to be less than historical increases because of reduced levels of planned
capital expenditures.
The increase in federal and state income taxes resulted
primarily from an increase in income before taxes.
Interest on long-term debt increased $1.8 million due
to the October 1996 issuance of $160 million of five-year notes by AYP
Energy. Other interest expense reflects changes in the levels of short-
term debt maintained by the companies throughout the year, as well as the
associated rates.
<PAGE>
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Financial Condition and Requirements
The Company's discussion on Financial Condition and
Requirements, Competition in Core Business, and Nonutility Business in the
Allegheny Power companies' combined Annual Report on Form 10-K for the
year ended December 31, 1996, 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, to the restructuring of the electric utility
industry and the Pennsylvania restructuring legislation, merger
activities, and legal actions.
The Company continues to advocate true competition in
the electric utility industry. Speaking on behalf of the Partnership for
Customer Choice (PCC), a group of utilities established in 1996 to push
for the enactment of federal legislation to bring real choice to electric
consumers by a date certain, the Company's President and CEO continues to
deliver a strong, clear message to lawmakers and others that federal
legislation is needed to advance fair and equal competition in the
electric utility industry that would eliminate a patchwork of state-by-
state customer choice plans.
In preparation for retail competition in Pennsylvania,
West Penn filed a petition on February 28, 1997 with the Pennsylvania
Public Utility Commission (PUC) asking for permission to roll energy costs
and state tax adjustments into base rates, effective May 1, 1997. On
April 24, 1997, the PUC approved West Penn's request to roll the above
items into base rates but denied the request to defer the difference
between the level of energy costs rolled into base rates and an
anticipated future level of such costs. West Penn's petition was
necessitated by the passage of the Electric Generation Customer Choice and
Competition Act, which capped electric rates in Pennsylvania as of January
1, 1997, and marks a major ratemaking change for the Company. Effective
May 1, 1997, West Penn's cost of fuel and costs for energy purchased from
other companies will no longer be protected by deferred fuel accounting,
so fuel purchases and purchased power operations will begin to affect West
Penn's earnings. The move will not only simplify West Penn's rate
structure, but will provide additional incentive to keep the costs of fuel
and associated expenses down, moving West Penn one step closer to full
retail choice.
At the end of February, all electric utilities in
Pennsylvania, including West Penn, filed proposals to establish retail
access pilot programs, which will allow customers in part of Pennsylvania
to purchase electric generation from their existing utility or an
alternative supplier. The existing utility, however, will continue to
provide these customers with transmission and distribution, as well as
related services. Before the end of 1997, about 5% of all electric
consumers in Pennsylvania will have the opportunity to choose their
electric supplier.
West Penn's pilot is slated to begin late this year and
will continue until January 1, 1999, when one-third of electric consumers
in Pennsylvania will be allowed to choose their electricity providers.
Another one-third of customers will be allowed to choose on January 1,
2000, and the final one-third will have the opportunity to choose on
January 1, 2001. Required under the Electric Generation Customer Choice
and Competition Act, the pilot must be approved by the Pennsylvania Public
Utility Commission before its implementation.
<PAGE>
ALLEGHENY POWER SYSTEM, INC.
Part II - Other Information to Form 10-Q
for Quarter Ended March 31, 1997
ITEM 5. OTHER INFORMATION
On April 7, 1997, the Company and DQE, Inc., parent
company of Duquesne Light Company, announced that they have agreed to
merge in a tax-free, stock-for-stock transaction. The combined company
will be called Allegheny Energy. It is expected that Allegheny Energy
will continue to be operated as an integrated electric utility holding
company and that the regulated electric utility companies will continue to
exist as separate legal entities.
The merger is conditioned, among other things, upon the
approval of each company's shareholders and the necessary approvals of
various state and federal regulatory agencies, including the public
utility commissions in Pennsylvania and Maryland, the Securities and
Exchange Commission, the Federal Energy Regulatory Commission, and the
Nuclear Regulatory Commission. The companies are hopeful that the
required approvals can be obtained within 12 to 18 months. On May 2,
1997, the Company filed a registration statement on Form S-4 containing a
joint proxy statement/prospectus with DQE, Inc. concerning the merger and
the transactions contemplated thereby.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) (27) Financial Data Schedule
(b) On April 9, 1997, the Company filed a Form 8-K
concerning the proposed merger with DQE, Inc.
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 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 19,185
<SECURITIES> 5,619
<RECEIVABLES> 320,455
<ALLOWANCES> 15,526
<INVENTORY> 157,033
<CURRENT-ASSETS> 621,854
<PP&E> 8,243,825
<DEPRECIATION> 2,976,531
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<CURRENT-LIABILITIES> 617,330
<BONDS> 2,307,107
0
170,086
<COMMON> 152,639
<OTHER-SE> 2,049,691
<TOTAL-LIABILITY-AND-EQUITY> 6,617,585
<SALES> 614,980
<TOTAL-REVENUES> 614,980
<CGS> 323,270
<TOTAL-COSTS> 440,708
<OTHER-EXPENSES> 2,301
<LOSS-PROVISION> 0
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<INCOME-TAX> 50,178
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