ALLEGHENY POWER SYSTEM INC
10-Q, 1997-08-13
ELECTRIC SERVICES
Previous: ALLCITY INSURANCE CO /NY/, 10-Q, 1997-08-13
Next: ALLEN TELECOM INC, 10-Q, 1997-08-13



<PAGE>
                                      Page 1 of 18




                                        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 June 30, 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 August 13, 1997, 122,436,317 shares of the Common Stock ($1.25 par
value) of the registrant were outstanding.


<PAGE>


                                          - 2 -





                              ALLEGHENY POWER SYSTEM, INC.

                        Form 10-Q for Quarter Ended June 30, 1997



                                          Index


                                                                    Page
                                                                     No.

PART I--FINANCIAL INFORMATION:

  Consolidated statement of income -
    Three and six months ended June 30, 1997 and 1996                 3


  Consolidated balance sheet - June 30, 1997
    and December 31, 1996                                             4


  Consolidated statement of cash flows -
    Six months ended June 30, 1997 and 1996                           5


  Notes to consolidated financial statements                         6-9


  Management's discussion and analysis of financial
    condition and results of operations                             10-15



PART II--OTHER INFORMATION                                          16-18


<PAGE>


                                     - 3 -

                          ALLEGHENY POWER SYSTEM, INC.
                              Statement of Income
<TABLE>
<CAPTION>


                                                       Three Months Ended                   Six Months Ended
                                                            June 30                              June 30
                                                        1997            1996              1997              1996
                                                                       (Thousands of Dollars)

    ELECTRIC OPERATING REVENUES:
      <S>                                          <C>  <C>             <C>          <C>  <C>          <C>  <C>
      Residential                                  $    196,201         205,254      $    454,114      $    493,664
      Commercial                                        114,250         115,813           238,136           245,001
      Industrial                                        185,847         188,193           368,117           380,327
      Wholesale and other                                16,842          17,785            37,077            38,117
      Bulk power transactions, net                       29,610          23,900            60,286            41,854
                   Total Operating Revenues             542,750         550,945         1,157,730         1,198,963


    OPERATING EXPENSES:
      Operation:
          Fuel                                          133,277         126,401           273,742           262,748
          Purchased power and exchanges, net             43,766          44,875            94,349            94,673
          Deferred power costs, net                      (4,870)          5,788            (6,953)           22,218
          Other                                          71,863          68,813           144,688           142,738
      Maintenance                                        59,807          57,268           121,287           119,337
      Restructuring charges and asset write-off          -               -                 -                 64,181
      Depreciation                                       68,754          66,584           137,536           132,543
      Taxes other than income taxes                      47,192          46,299            95,848            94,770
      Federal and state income taxes                     27,488          34,026            77,666            67,272
                 Total Operating Expenses               447,277         450,054           938,163         1,000,480
                 Operating Income                        95,473         100,891           219,567           198,483

    OTHER INCOME AND DEDUCTIONS:
      Allowance for other than borrowed funds
          used during construction                        1,126             351             2,276               658
      Other income (expense), net                         3,684            (242)            4,580               487
                 Total Other Income and Deductions        4,810             109             6,856             1,145
                 Income Before Interest Charges and
                   Preferred Dividends                  100,283         101,000           226,423           199,628

    INTEREST CHARGES AND PREFERRED DIVIDENDS:
      Interest on long-term debt                         43,554          41,134            86,934            82,763
      Other interest                                      3,786           4,528             7,619             8,186
      Allowance for borrowed funds used during
          construction                                   (1,065)           (753)           (2,030)           (1,155)
      Dividends on preferred stock of subsidiaries        2,325           2,305             4,626             4,630
                 Total Interest Charges and
                   Preferred Dividends                   48,600          47,214            97,149            94,424

    CONSOLIDATED NET INCOME                        $     51,683    $     53,786      $    129,274      $    105,204

    COMMON STOCK SHARES OUTSTANDING (average)       122,114,920     120,999,400       121,979,881       120,854,868

    EARNINGS PER AVERAGE SHARE                     $      $0.42    $      $0.44             $1.06             $0.87

</TABLE>


    See accompanying notes to consolidated financial statements.


<PAGE>


                                              - 4 -

                                   ALLEGHENY POWER SYSTEM, INC.
                                    Consolidated Balance Sheet

<TABLE>
<CAPTION>


                                                           June 30,         December 31,
                                                             1997              1996
                                                             (Thousands of Dollars)
    ASSETS:
      <S>                                                <C>               <C>
      Property, Plant, and Equipment:
         At original cost, including $199,963,000
           and $202,259,000 under construction           $ 8,305,062       $ 8,206,213
         Accumulated depreciation                         (3,047,881)       (2,910,022)
                                                           5,257,181         5,296,191
      Investments and Other Assets:
         Subsidiaries consolidated--excess of cost
            over book equity at acquisition                   15,077            15,077
         Benefit plan's investments                           65,752            63,197
         Other                                                 4,573             4,359
                                                              85,402            82,633
      Current assets:
         Cash and temporary cash investments                  21,062            19,242
         Accounts receivable:
            Electric service, net of $14,402,000 and 
               $15,052,000 uncollectible allowance           265,088           280,154
            Other                                             15,033            22,188
         Materials and supplies--at average cost:
            Operating and construction                        84,587            82,057
            Fuel                                              78,135            60,755
         Prepaid taxes                                        56,891            62,110
         Deferred income taxes                                12,880            39,428
         Other                                                37,133            16,324
                                                             570,809           582,258
      Deferred Charges:
         Regulatory assets                                   549,977           565,185
         Unamortized loss on reacquired debt                  51,476            53,403
         Other                                                48,988            38,840
                                                             650,441           657,428

                Total Assets                             $ 6,563,833       $ 6,618,510

    CAPITALIZATION AND LIABILITIES:
      Capitalization:
         Common stock                                    $   153,021       $   152,300
         Other paid-in capital                             1,043,513         1,028,124
         Retained earnings                                 1,013,041           988,667
                                                           2,209,575         2,169,091
         Preferred stock                                     170,086           170,086
         Long-term debt and QUIDS                          2,205,455         2,397,149
                                                           4,585,116         4,736,326
      Current Liabilities:
         Short-term debt                                     161,570           156,430
         Long-term debt due within one year                  197,400            26,900
         Accounts payable                                    102,212           147,161
         Taxes accrued:
            Federal and state income                           1,206             7,173
            Other                                             45,484            62,361
         Interest accrued                                     40,616            40,630
         Restructuring liability                              31,780            56,101
         Other                                                80,926            80,281
                                                             661,194           577,037
      Deferred Credits and Other Liabilities:
         Unamortized investment credit                       137,417           141,519
         Deferred income taxes                               994,852         1,000,023
         Regulatory liabilities                              108,741            93,216
         Other                                                76,513            70,389
                                                           1,317,523         1,305,147

                Total Capitalization and Liabilities     $ 6,563,833       $ 6,618,510

</TABLE>


      See accompanying notes to consolidated financial statements.


<PAGE>


                                     - 5 -


                         ALLEGHENY POWER SYSTEM, INC.
                    Consolidated Statement of Cash Flows

<TABLE>
<CAPTION>


                                                                  Six Months Ended
                                                                       June 30
                                                              1997              1996
                                                              (Thousands of Dollars)

    CASH FLOWS FROM OPERATIONS:
         <S>                                              <C>               <C>
         Consolidated net income                          $  129,274        $  105,204
         Depreciation                                        137,536           132,543
         Deferred investment credit and income taxes, net     27,711           (17,901)
         Deferred power costs, net                            (6,953)           22,218
         Allowance for other than borrowed funds used
             during construction                              (2,276)             (658)
         Restructuring liability                             (24,321)           45,724
         Asset write-off                                       -                10,762
         Changes in certain current assets and
             liabilities:
                Accounts receivable, net                      22,221            38,950
                Materials and supplies                       (19,910)           18,810
                Accounts payable                             (44,949)          (41,750)
                Taxes accrued                                (22,844)          (10,994)
                Interest accrued                                 (14)            2,076
                Other current liabilities/assets               3,466            10,553
                Other deferred charges/credits                14,976            11,204
         Other, net                                           (4,238)            8,859
                                                             209,679           335,600


    CASH FLOWS FROM INVESTING:
         Utility construction expenditures (less allowance 
            for equity funds used during construction)      (100,065)         (105,893)
         Nonutility investment                                (2,253)           (1,482)
                                                            (102,318)         (107,375)


    CASH FLOWS FROM FINANCING:
         Sale of common stock                                 16,110            17,168
         Retirement of long-term debt                        (21,892)          (48,146)
         Short-term debt, net                                  5,140           (92,905)
         Cash dividends on common stock                     (104,899)         (101,510)
                                                            (105,541)         (225,393)

                                                            
    NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS          1,820             2,832
    Cash and Temporary Cash Investments at January 1          19,242             3,867
    Cash and Temporary Cash Investments at June 30        $   21,062        $    6,699


    SUPPLEMENTAL CASH FLOW INFORMATION:
         Cash paid during the period for:
             Interest (net of amount capitalized)            $89,401           $82,543
             Income taxes                                     59,960            74,555

</TABLE>


    See accompanying notes to consolidated financial statements.


<PAGE>

                                   - 6 -


                       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 June 30,
           1997, the results of operations for the three and six months
           ended June 30, 1997 and 1996, and cash flows for the six months
           ended June 30, 1997 and 1996.


2.         The Company owns all of the outstanding common stock of its
           subsidiaries.  The consolidated financial statements include
           the accounts of the Company and all subsidiary companies after
           elimination of intercompany transactions.  Allegheny Generating
           Company is jointly (100%) owned by the Company's operating
           subsidiaries and thus is among the subsidiaries fully
           consolidated into the financial statements of the System.


3.         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.


4.         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, Inc. (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, including DQE, Inc.

           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 by May 1, 1998.  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.  In late
           June, the S-4 became effective allowing the Company and DQE,
           Inc. to pursue shareholder approval for the proposed merger
           that would create Allegheny Energy.  The Company and DQE, Inc.
           each held separate


<PAGE>


                                   - 7 -


           shareholder meetings on August 7, 1997, at which the
           combination of the two companies was approved by the necessary
           number of shareholders of both companies.  At the Company's
           meeting, the necessary number of shareholders also approved the
           change in the Company's name to Allegheny Energy, Inc. 


5.         In preparation for retail competition in Pennsylvania, West
           Penn Power Company (West Penn) filed a petition on February 28,
           1997 with the Pennsylvania Public Utility Commission (PUC)
           asking for permission to set to zero its Energy Cost Rate (ECR)
           and state tax surcharge tariffs and 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 but
           denied an additional 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 (Customer Choice Act),
           which capped electric rates in Pennsylvania as of January 1,
           1997.  Prior to May 1, 1997, changes in West Penn's costs of
           fuel, purchased power, and certain other costs, and changes in
           revenues from sales to other utilities, including transmission
           services, were passed on to customers by adjustment to customer
           bills through the ECR with the result that such changes had no
           effect on net income.  Effective May 1, 1997, such changes in
           costs and revenues will affect West Penn's earnings.


6.         On August 1, 1997, the Company's Pennsylvania subsidiary, West
           Penn, filed with the PUC a comprehensive restructuring plan to
           implement full customer choice of electric generation suppliers
           as required by the Customer Choice Act.  The filing included an
           unbundling of West Penn's electric service rates into its
           generation, transmission and distribution components, a plan
           for eventual termination of the existing Power Supply Agreement
           (PSA) under which the Company's existing three utility
           subsidiaries share capacity, energy, capacity reserves and
           transmission resources, (and replacement with a more efficient
           structure) and a plan for recovery of stranded costs through a
           Competitive Transition Charge (CTC).

           Recovery of stranded costs is the key issue.  West Penn has
           determined its stranded costs exposure to be about $2 billion,
           composed of $1.1 billion for generation plant investment in
           excess of estimated market prices, $730 million of existing and
           potential non-utility generator (NUG) contracts in excess of
           market prices, and $270 million of regulatory assets and
           transition costs.  In accordance with West Penn's
           interpretation of the legislation, the $2 billion estimate is
           based on a forecast of future revenue requirements, market
           prices and assumptions about future costs to be incurred.  To
           avoid the problems associated with estimating future market
           prices, West Penn included as part of its restructuring plan a
           proposal to reset the CTC on a year-to-year basis based on
           actual market prices of electricity sales in its area.

           The PUC is required to issue an order on the filing by May,
           1998.  This order will include a determination of West Penn's
           rates for transmission and distribution services beginning
           January 1, 1999, generation rates for customers to take
           generation service during the transition period (potentially
           1999 through 2005 if they so choose), and the CTC West Penn
           will be allowed to charge, through the transition period, to
           those


<PAGE>

                                   - 8 -


           customers who choose another generation supplier.  While West
           Penn cannot predict the outcome of the restructuring
           proceedings and the transition process, it believes that, as
           the lowest cost utility in the state, recovery of stranded
           costs should be allowed to maintain its financial viability, as
           provided by the Customer Choice Act.

           Nevertheless, depending upon the outcome of the proceeding and
           future events affecting actual stranded costs, West Penn's
           future earnings could be adversely affected.  Such adverse
           effects could be avoided through further action of the PUC as
           allowed by the Customer Choice Act, or by mitigation of future
           costs.


7.         In July, 1997, the Emerging Issues Task Force (EITF) of the
           Financial Accounting Standards Board (FASB) concluded that
           utilities should discontinue application of Statement of
           Financial Accounting Standards (SFAS) 71 for the generation
           portion of their business when a deregulation plan is in place
           and its terms are known.  Since the Customer Choice Act
           establishes such a process, West Penn has determined that it
           will be required to discontinue use of SFAS 71 for the
           generation portion of its business on or before May, 1998, the
           date by which the PUC must issue its order on West Penn's
           comprehensive restructuring plan.  One of the conclusions of
           the EITF is that after discontinuing SFAS 71, utilities should
           continue to carry on their books the assets and liabilities
           recorded under SFAS 71 if the regulatory cash flows to settle
           them will be derived from the continuing regulated transmission
           and distribution business.  Additionally, continuing costs and
           obligations of the deregulated generation business which are
           similarly covered by the cash flows from the continuing
           regulated business will meet the criteria as regulatory assets
           and liabilities.

           The Customer Choice Act establishes a definitive process for
           transition to deregulation and market-based pricing for
           electric generation in Pennsylvania, which includes continuing
           cost of service based ratemaking for transmission and
           distribution services, subject to a rate cap.  The Act provides
           for a non-bypassable CTC to give utilities the opportunity to
           recover their stranded costs over the transition period.

           Because of these circumstances, West Penn believes that
           discontinuance of the application of SFAS 71 to the generation
           portion of its business will not have a material adverse effect
           on its financial condition, and that it will not be required to
           write off any material assets, subject to recovery through a
           CTC.


8.         Other paid-in capital increased $15,389,000 in the six months
           ended June 30, 1997, representing the excess of amounts
           received over par value, less related expenses, from the
           issuance of 576,309 shares of common stock pursuant to the
           Company's Dividend Reinvestment and Stock Purchase Plan and
           Employee Stock Ownership and Savings Plan.


<PAGE>


                                   - 9 -
 
           
9.         Common stock dividends per share declared during the periods
           for which income statements are included are as follows:

<TABLE>
<CAPTION>

                                                 1997                                  1996         
                                            1st                 2nd                 1st                 2nd
                                         Quarter             Quarter              Quarter            Quarter

           <S>                         <C>                 <C>                 <C>                <C>
           Number of Shares            121,840,327         122,111,567         120,700,809        120,989,831
           Amount per Share                 $.43                $.43                $.42                $.42

</TABLE>


10.        Restructuring charges and an asset write-off in the first six
           months of 1996 ($38.7 million, net of tax) include expenses
           associated with the reorganization, which is essentially
           complete.


11.        For the most part, regulatory assets and liabilities are not
           included in rate base.  Income tax regulatory assets/
           liabilities, net of $425 million at June 30, 1997, are
           primarily related to investments in electric facilities and
           will be recovered over a period of from 20 to 40 years.  The
           remaining recovery period for items other than income taxes, is
           from three to seven years.


<PAGE>


                                  - 10 -


                       ALLEGHENY POWER SYSTEM, INC.

        Management's Discussion and Analysis of Financial Condition
                         and Results of Operations                 


     COMPARISON OF SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1997 
          WITH SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1996


Review of Operations

EARNINGS

                   Earnings for the second quarter and first six months of
1997 and 1996, and the after tax restructuring charges and asset write-off
included in the 1996 periods are shown below.

<TABLE>
<CAPTION>

                                                            Consolidated Net Income          
                                                   Three Months Ended                  Six Months Ended
                                                        June 30                             June 30    
                                                    1997             1996              1997             1996
                                                                 (Millions of Dollars)     

Consolidated Net
  <S>                                              <C>              <C>               <C>              <C>
  Income as Reported                               $51.7            $53.8             $129.3           $105.2

Restructuring Charges and
  Asset Write-Off                                    -                -                  -               38.7    
Consolidated Net
  Income Adjusted                                  $51.7            $53.8             $129.3           $143.9   


                                                                  Cents Per Share                      
                                                   Three Months Ended                  Six Months Ended     
                                                        June 30                             June 30    
                                                    1997             1996              1997             1996

Cents per Share
  as Reported                                       $.42             $.44             $1.06            $ .87

Restructuring Charges and
  Asset Write-Off                                     -                -                -                .32    
Cents per Share
  Adjusted                                          $.42             $.44             $1.06            $1.19   

</TABLE>


                   The decrease in second quarter consolidated net income,
was due primarily to a 3% decrease in kilowatt-hour (kWh) sales to
residential customers largely due to second quarter 1997 cooling degree
days (air conditioning weather) which were 27% below normal and 44% less
than the corresponding 1996 period.


<PAGE>


                                  - 11 -


                   The decrease in year-to-date adjusted consolidated net
income, before restructuring charges and asset write-off, was primarily
due to a decrease in kWh sales.  Residential kWh sales decreased 7% due to
mild first quarter winter weather (heating degree days 9% below normal and
15% below the first quarter of 1996) and the cooler than normal second
quarter weather.  Commercial and industrial kWh sales were also down
slightly for the period. 

                   Also contributing to the earnings decreases in the
quarter and year-to-date June 1997 were anticipated start-up losses of a
new unregulated subsidiary, AYP Energy, Inc. (AYP Energy), which commenced
operations in late 1996.  AYP Energy, a subsidiary of the Company's
nonutility subsidiary, AYP Capital, Inc. in October 1996 purchased a 50%
interest (276 MW's) in Unit No. 1 of the Fort Martin power station, and
began then incurring depreciation, operating and other expenses.  As
anticipated, revenues to date have been less than the expenses resulting
in losses for AYP Energy of $2.7 million in the second quarter of 1997 and
$5.2 million in the six months ended June 1997.


SALES AND REVENUES

                   Retail kWh sales to residential customers decreased 3%,
and to commercial and industrial customers increased .2% and 1%,
respectively, in the second quarter, for a net decrease of .4%, and in the
first six months decreased 7%, 1%, and .4%, respectively, for a net
decrease of 3%.  As discussed above, residential kWh sales, which are more
weather sensitive than the commercial and industrial classes, decreased in
the second quarter and in the first six months due to the mild weather. 
In the first six months, commercial kWh sales also decreased primarily
because of the mild weather. Industrial kWh sales increased for the second
quarter due primarily to increased sales to lumber products and chemical
customers groups.  Despite increased sales in the second quarter,
industrial kWh sales were down slightly in the first six months of 1997
for a variety of reasons, primarily in the iron and steel customer groups. 
 
                   The decrease in revenues from sales to residential,
commercial, and industrial customers resulted from the following:

<TABLE>
<CAPTION>

                                                                         Decrease from Prior Periods
                                                                         Quarter                 Six Months
                                                                             (Millions of Dollars)

<S>                                                                      <C>                       <C>
Fuel and energy cost adjustment clauses*                                 $(11.4)                   $(32.9) 
Net decreased kWh sales                                                    (1.4)                    (24.8)
Other                                                                       (.2)                      (.9)
           Decrease in retail revenues                                   $(13.0)                   $(58.6)

</TABLE>


  *        Changes in revenues from fuel and energy cost adjustment
           clauses have little effect on consolidated net income.  Changes
           in the costs of fuel, purchased power, and certain other costs,
           and changes in revenues from sales to other utilities,
           including transmission services, have had little effect on net
           income because such changes have been passed on to customers by
           adjustment of customer bills through fuel and energy cost
           adjustment clauses.  However, effective May 1, 1997, one of the
           Company's subsidiaries, West Penn Power Company (West Penn) as
           a result of 


<PAGE>


                                  - 12 -


           legislation in Pennsylvania to begin deregulation of electric
           generation, rolled its fuel and energy costs into base rates
           and set to zero its fuel and energy cost adjustment clause. 
           Thereafter, West Penn assumes the risks of increases in the
           costs of fuel and purchased power and any declines in bulk
           power transaction sales and retains the benefits of decreases
           in such costs and increases in such sales.  West Penn fuel and
           energy cost revenues are approximately 50% of total System fuel
           and energy cost revenues.     


                   The decrease in wholesale and other revenues was due
primarily to The Potomac Edison Company's (Potomac Edison) decreased sales
to a wholesale customer.  In the second quarter, the largest customer of
that particular wholesale customer suspended production and shut down its
paper recycling plant.  All of the Company's wholesale customers have
signed contracts to remain as customers for periods ranging from one year
to four and one-half years.

                   Revenues from bulk power transactions consist of the
following items:

<TABLE>
<CAPTION>
 
                                                         Three Months Ended            Six Months Ended
                                                               June 30                      June 30    
                                                         1997               1996         1997            1996
                                                                      (Millions of Dollars)
Revenues:
  Utility operations:
    <S>                                                 <C>                <C>          <C>             <C>
    From transmission services                          $ 8.8              $13.7        $21.6           $28.3
    From sale of subsidiaries' 
      generation                                          9.4               10.2         15.2            13.6
  Nonutility operations                                  11.4                 -          23.5              - 
                Total                                   $29.6              $23.9        $60.3           $41.9

</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.  Revenues
from utility operations transmission services decreased primarily due to
reduced demand, primarily because of mild weather both for the quarter and
year to date.  The aggregate benefits from utility bulk power transactions
are passed on to retail customers through fuel and energy adjustment
clauses (described above) and have had little effect on consolidated net
income.  On May 1, 1997, due to the elimination of West Penn's fuel and
energy adjustment clause (referred to by West Penn as ECR for Energy Cost
Rate), changes in these revenues for West Penn, which are approximately
50% of System revenues, will have a direct effect on consolidated net
income.


OPERATING EXPENSES

                   Fuel expenses for the second quarter and first six
months of 1997 increased 5% and 4%, respectively.  The increases in fuel
expenses in both periods resulted from increases in kWh's generated due
primarily to the operation of 50% of Unit No. 1 of the Fort Martin Power
Station which was purchased by the Company's nonutility subsidiary (AYP
Energy, Inc.) in late 1996.  Fuel expenses for the regulated subsidiaries,
except for West Penn beginning May 1, 1997, are primarily subject to
deferred power cost accounting


<PAGE>


                                  - 13 -


procedures to match fuel and energy cost adjustment clause revenues, 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 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            Six Months Ended
                                                               June 30                      June 30    
                                                         1997               1996         1997            1996
                                                                      (Millions of Dollars)
Purchased power:              
  Utility operations:
    <S>                                                 <C>                <C>         <C>              <C>
    From PURPA generation*                              $35.2              $33.4       $69.8            $65.6
    Other                                                 7.7               11.7        16.2             25.8
             Total purchased power                       42.9               45.1        86.0             91.4
    Power exchanges, net                                 (1.3)               (.2)        2.8              3.3
  Nonutility operations                                   2.2                -           5.5              -  
    Purchased power and 
      exchanges, net                                    $43.8              $44.9       $94.3            $94.7

* PURPA cost per kWh                                    $.057              $.056       $.057            $.055 

</TABLE>


                   Nonutility operations purchases were the result of
power replacement requirements and transaction opportunities by AYP
Energy, which began operations in late 1996.  Other purchased power
decreased because of decreased need due to decreased sales to retail
customers.  The cost of utility purchased power and exchanges, including
power from PURPA generation, except for West Penn, is mostly recovered
from customers currently through the regular fuel and energy cost recovery
procedures followed by the other subsidiaries' regulatory commissions, and
is primarily subject to deferred power cost accounting procedures with the
result that changes in such costs have little effect on consolidated net
income.  

                   The increases in other operation expense for the three
and six months ended June 1997, were due primarily to expenses associated
with AYP Energy, which began operations in late 1996.

                   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.  Maintenance
expenses increased $2.5 million and $2.0 million for the second quarter
and first six months of 1997, respectively, due primarily to additional
routine maintenance expenses associated with AYP Energy's ownership in the
Fort Martin power station, which it acquired from another utility in late
1996.


<PAGE>


                                  - 14 -


                   Restructuring charges and an asset write-off in the
first six months of 1996 include expenses associated with the
reorganization, which is essentially complete.

                   The increases in depreciation expense for the second
quarter and first six months of 1997 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.  

                   Taxes other than income taxes increased $.9 million and
$1.1 million in the second quarter and first six months, respectively, due
to increased West Virginia Business and Occupation taxes (B & O) resulting
from AYP Energy's purchase of an ownership interest in the Fort Martin
power station, and increased property taxes.  The B & O tax is based on
generating capacity.  These increases were offset in part by decreases in
gross receipts taxes resulting from lower revenues from retail customers
and lower FICA taxes due to the Company's recent restructuring.
 
                   The net decrease in federal and state income taxes in
the second quarter resulted primarily from a decrease in income before
taxes.  The net increase in the six month period resulted primarily from
an increase in income before taxes, which was primarily related to
restructuring charges recorded in 1996.

                   The increases in allowance for other than borrowed
funds used during construction (AOFDC) of $.8 million and $1.6 million for
the three and six month periods ended June 1997 resulted primarily from
application of the Federal Energy Regulatory Commission AOFDC formula
under which in 1997 a larger percentage of construction was financed by
more expensive equity funds rather than less expensive short-term debt
funds.
  
                   The increase in other income, net, of $3.9 million in
the second quarter was primarily due to the deferral of merger related
expenditures.  The increase of $4.1 million for the six months ended June
1997 was due primarily to the sale of land and timber by West Virginia
Power and Transmission Company, a subsidiary of West Penn.   
                   
                   Interest on long-term debt increased $2.4 million in
the second quarter and $4.2 million for the first six months due to the
October 1996 issuance of $160 million of five-year notes by AYP Energy
related to its purchase of an ownership interest in the Fort Martin power
station.  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.


Financial Condition and Requirements

                   The Company's discussion on Financial Condition and
Requirements, Competition in Core Business, and Nonutility Business 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 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,


<PAGE>


                                  - 15 -


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 expects to use exchange-traded and over-
the-counter futures, options, and swap contracts both to hedge its
exposure to changes in electric power prices and for trading purposes. 
The risks to which the Company is exposed include underlying price
volatility, credit risk, and variations in cash flows, among others.  The
Company has implemented risk management policies and procedures consistent
with industry practices and Company goals. 
 
                   At the end of February, all electric utilities in
Pennsylvania, including West Penn, were required to and have filed
proposals to establish retail access pilot programs, which will allow
customers in 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.  Near the end of 1997 or early
in 1998, by order of the PUC, all electric utilities in Pennsylvania must
offer a sufficient number of customers the ability to choose another
energy supplier so that electric consumers representing 5% of load in each
rate class in Pennsylvania do choose another supplier.  On July 23, 1997,
the Company formed a new unregulated subsidiary, Allegheny Energy
Solutions, Inc. (Allegheny Solutions), to provide a platform from which
unregulated marketing business will be developed.  Allegheny Solutions
will begin by marketing unregulated energy to selected customers in
Pennsylvania who are among the 5% of all utilities customers permitted to
choose their supplier under the pilot, including the 5% of West Penn's
customers who are permitted to choose.

                   West Penn's pilot is slated to begin late this year or
early next 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>


                                     - 16 -


                       ALLEGHENY POWER SYSTEM, INC.

                 Part II - Other Information to Form 10-Q
                      for Quarter Ended June 30, 1997    


ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS  

           (a)    Date and kind of meeting:

                  At the annual meeting of stockholders held on May 8,
1997, votes were taken for the election of directors to serve until the
next annual meeting of stockholders and for the approval of the
appointment of Price Waterhouse LLP as independent accountants.  The total
number of votes cast was 96,452,742 with the following results:

<TABLE>
<CAPTION>

                                                                                          Broker
Nominees for Director                    Votes For            Votes Withheld             Non-Votes

<S>                                      <C>                      <C>                        <S>
Eleanor Baum                             95,210,823               1,241,919                  None
William L. Bennett                       95,211,724               1,241,018                    "
Wendell F. Holland                       95,164,346               1,288,396                    "
Phillip E. Lint                          95,140,849               1,311,893                    "
Frank A. Metz, Jr.                       95,225,227               1,227,515                    "
Alan J. Noia                             95,226,877               1,225,865                    "
Steven H. Rice                           95,232,111               1,220,631                    "
Gunnar E. Sarsten                        95,252,652               1,200,090                    "
Peter L. Shea                            95,263,986               1,188,756                    "


</TABLE>

<TABLE>
<CAPTION>
                                                                                                    Broker
                                         Votes For        Votes Against        Abstentions       Non-Votes

Approval of Independent
  <S>                                    <C>                    <C>              <C>                <S>
  Accountants                            91,715,470             528,161          4,209,111          None  
 
Proposal to refrain 
  from providing
  pension/retirement
  benefits to Board     
  of Directors                           14,366,074          62,203,647          6,056,240       13,826,781

Proposal for the Board 
  to have 90% of its
  Directors independent                   8,892,133          66,150,801          7,780,801       13,629,007

</TABLE>


                  The stockholders did not approve the stockholder
proposal that in the future the Board refrain from providing pensions or
other retirement benefits to independent Directors.  The stockholders also
did not approve the stockholder proposal for the Board to have 90% of its
Directors independent.


<PAGE>

                                  - 17 -


ITEM 5.     OTHER INFORMATION

                  In late June, the S-4 registration statement filed by
the Company became effective, allowing the Company and DQE, Inc., parent
company of Duquesne Light Company, to pursue shareholder approval for the
proposed merger and a change of the company name to Allegheny Energy, Inc.
(Allegheny Energy). The Company and DQE, Inc. held shareholder meetings on
August 7, 1997, at which the combination of the two companies and the name
change were approved by a vote of shareholders. 

                  On August 1, 1997, the Company and DQE, Inc. filed
applications for several major approvals related to the proposed merger of
the two companies. In filings with the Federal Energy Regulatory
Commission (FERC), Pennsylvania Public Utility Commission (PA PUC), and 
Maryland Public Service Commission (MD PSC), the Company and DQE, Inc.
outlined their restructuring and merger plans as discussed below.

                  The FERC filing includes commitments concerning rate
freezes, rate reductions, and electrical system access options that will
spread the positive effects of the merger to many stakeholders.  The
filing includes the offering of a single transmission rate which is less
than the stand-alone rate for the two companies, offers partial rate
freezes to wholesale customers which have contracts expiring after 1998,
and includes a commitment to join or form an  independent system operator
(ISO).            
 
                  The Company's Pennsylvania subsidiary, West Penn, and
DQE, Inc. filed individual restructuring plans with the PA PUC and, as
part of a joint restructuring plan, have also filed their merger
application.  The filings address unbundled rates for generation,
transmission, and distribution services; stranded costs; merger synergy
benefits; and other issues as required by Pennsylvania's Electricity
Generation Customer Choice and Competition Act.  Among other benefits,
West Penn's restructuring filing unbundles its rates and tariffs separate
from those of DQE's utility subsidiary, Duquesne Light.  DQE's
restructuring filing includes a redesign of rates and provides for other
benefits.  The merger filing offers additional detail on the expected
synergy benefits of the merger and an allocation of the benefits to
customers and shareholders of the two companies. 

                  The Company filed with the MD PSC requesting approval
for the issuance of stock to exchange for DQE stock upon merger approval. 
The Company is a Maryland Corporation.  The filing also discussed the
benefits of the merger to Maryland including lower rates for customers and
improved operating efficiencies over time.

                  On July 23, 1997, a new unregulated subsidiary,
Allegheny Energy Solutions, Inc. was formed to provide a platform from
which unregulated marketing businesses will be developed.


<PAGE>


                                  - 18 -


ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

   (a)     Exhibits:
           (3)  (ii)  By-laws of the Company, as amended, dated June 5,    
                      1997.
                  
           (27)  Financial Data Schedule

   (b)     On July 29, 1997, the Company filed a Form 8-K concerning the
           press release/second quarter earnings of the Company.





                                 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)


August 13, 1997 

    

<PAGE>

                              

                              

                              

                              

                              

____________________________________________________________

                              

                              

                              

                              

                              

                           By-Laws

                             OF

                ALLEGHENY POWER SYSTEM, INC.













                 As Amended to June 5, 1997

<PAGE>


                           BY-LAWS

                             OF

                ALLEGHENY POWER SYSTEM, INC.

                    _____________________

                         ARTICLE I.

                   STOCKHOLDERS' MEETINGS.


SECTION 1.     Place of Meetings.

  Every  meeting of the stockholders shall be  held  in  New
York, N. Y., or at such other place within the United States
as  shall  be  determined  by the  Board  of  Directors  and
specified in the notice thereof.

SECTION 2.      Annual Meetings.

  An  annual meeting of the stockholders of this Corporation
shall be held on the second Thursday in May in each year (or
if  that  be  a  legal holiday, then on the next  succeeding
business day) for the purpose of electing Directors for  the
ensuing  year and for the transaction of such other business
as may properly be brought before the meeting.

SECTION 3.     Special Meetings.

  Special  meetings of the stockholders for any  purpose  or
purposes,  unless otherwise prescribed by  statute,  may  be
called  by  the  Chairman of the Board, the  President,  the
Board of Directors or the Executive Committee, and shall  be
called  by  the President or Secretary or any Director  upon
the request in writing of stockholders holding a majority in
amount  of  the entire capital stock issued and  outstanding
entitled  to  vote thereat.  Such request  shall  state  the
purpose  or  purposes of the proposed meeting.   Unless  the
Board  of  Directors  or the Executive Committee  determines
otherwise,  the  business of any special  meeting  shall  be
limited  to  the purpose or purposes for which such  special
meeting is called and no other proposals or matters shall be
considered.

SECTION 4.     Notice of Meetings of Stockholders.

  Written or printed notice of every meeting of
stockholders, stating the time and place thereof (and the
business proposed to be transacted at any special meeting),
shall be served personally upon, left at the residence or
usual place of business of or mailed, postage prepaid, to

                              2

<PAGE>
each stockholder, entitled to vote, of record on the record
date fixed by the Board of Directors therefor, at such
address as appears upon the books of the Corporation, at
least ten days before such meeting.  No business shall be
transacted at any special meeting except that specially
named in the notice of such meeting.
  

  Notice of the time, place and/or purpose of any meeting of
stockholders  may  be  dispensed with if  every  stockholder
entitled to vote, shall attend either in person or by proxy,
or  if  every absent stockholder entitled to vote  shall  in
writing,  filed  with  the records of  the  meeting,  either
before or after the holding thereof, waive such notice.

  No  stockholder shall be entitled to notice of any meeting
of stockholders unless entitled to vote thereat.

SECTION 5.     Quorum at Stockholders' Meetings.

  The  presence  in  person or by proxy of  the  holders  of
record  of a majority of the shares of the capital stock  of
the  Corporation issued and outstanding, entitled  to  vote,
shall   constitute  a  quorum  at  all   meetings   of   the
stockholders except as otherwise provided by law or these By-
Laws.   If,  however, such majority shall not be present  or
represented at any meeting of the stockholders, the  holders
of  a  majority of the stock present in person or  by  proxy
shall  have power to adjourn the meeting from time to  time,
without notice other than announcement at the meeting, until
the  requisite amount of voting stock shall be present.   At
such  adjourned  meeting at which the  requisite  amount  of
voting  stock  shall  be represented, any  business  may  be
transacted  which might have been transacted at the  meeting
as originally notified.

SECTION 6.     Voting and Inspectors.

  At all meetings of stockholders every stockholder shall be
entitled to vote all shares of voting stock standing in  his
name  on  the books of the Corporation on the date  for  the
determination  of  stockholders entitled  to  vote  at  such
meeting,   either  in  person  or  by  proxy  appointed   by
instrument in writing subscribed by such stockholder or  his
duly  authorized  attorney and bearing date  not  more  than
three  months prior to said meeting, unless said  instrument
shall  on its face provide for a longer period for which  it
is to remain in force.

  All elections shall be had and all questions decided by  a
majority  of  the votes cast at a duly constituted  meeting,
except  as otherwise provided by law, in the Charter  or  in
these By-Laws.

                                3


<PAGE>


  At  any  election of Directors, upon the  request  of  the
holders of ten percent. (10%) of the stock entitled to  vote
at  such election, the Chairman of the meeting shall appoint
two  Inspectors  of Election, who shall first  subscribe  an
oath  or  affirmation to execute faithfully  the  duties  of
Inspectors  at  such election with strict  impartiality  and
according  to  the best of their ability, and shall  make  a
certificate  of the result of the vote taken;  no  candidate
for   the  office  of  Director  shall  be  appointed   such
Inspector.


  A  vote  by  ballot shall be taken upon  any  election  or
matter,  upon  the request of the holders of ten  per  cent.
(10%)  of  the  stock entitled to vote on such  election  or
matter.
  
SECTION 7.      Conduct of Stockholders' Meetings.

  The meetings of the stockholders shall be presided over by
the  Chairman of the Board, or if he is not present  by  the
President,  or if he is not present by a Vice-President,  or
if neither the Chairman of the Board nor the President nor a
Vice-President is present, by a Chairman to  be  elected  at
the  meeting.  The Secretary of the Corporation, if present,
shall  act  as  Secretary of such meetings; if  neither  the
Secretary  nor any Assistant Secretary is present  then  the
meeting shall elect its Secretary.

  The  order  of business at each such meeting shall  be  as
determined by the Chairman of the meeting.  The Chairman  of
the  meeting shall have the right and authority to prescribe
such  rules, regulations and procedures and to do  all  such
acts and things as are necessary or desirable for the proper
conduct  of the meeting, including, without limitation,  the
establishment of procedures for the maintenance of order and
safety,  limitations on the time allotted  to  questions  or
comments on the affairs of the Corporation, restrictions  on
entry  to  such  meeting after the time prescribed  for  the
commencement  thereof and the opening  and  closing  of  the
voting polls.

SECTION 8.      Advance Notice of Stockholder Proposals  and
Nominations.

  At   any   annual  or  special  meeting  of  stockholders,
proposals made by stockholders and nominations for  election
as  directors made by stockholders shall be considered  only
if  advance notice thereof has been timely given as provided
herein  and  such  proposals  or nominations  are  otherwise
proper  for  consideration  under  applicable  law  and  the
Charter  and  these By-Laws.  Notice of any proposal  to  be
presented by any stockholder or of the name of any person to
be  nominated by any stockholder for election as a  director


                              4


<PAGE>

of  the Corporation at any meeting of stockholders shall  be
delivered  to  the  Secretary  of  the  Corporation  at  its
principal executive office not less than 60 nor more than 90
days  prior  to the date of the meeting; provided,  however,
that  if the date of the meeting is first publicly announced
or  disclosed (in a public filing or otherwise) less than 70
days  prior to the date of the meeting, such advance  notice
shall  be  given not more than ten days after such  date  is
first  so  announced or disclosed.  Public notice  shall  be
deemed  to  have been given more than 70 days in advance  of
the  annual meeting if the Corporation shall have previously
disclosed,  in these By-Laws or otherwise, that  the  annual
meeting  in each year is to be held on a determinable  date,
unless  and until the Board of Directors determines to  hold
the  meeting on a different date.  Any stockholder who gives
notice of any such proposal shall deliver therewith the text
of  the  proposal  to  be  presented  and  a  brief  written
statement  of  the reasons why such stockholder  favors  the
proposal  and  setting  forth such  stockholder's  name  and
address, the number and class of all shares of each class of
stock   of  the  Corporation  beneficially  owned  by   such
stockholder and any material interest of such stockholder in
the proposal (other than as a stockholder).  Any stockholder
desiring  to nominate any person for election as a  director
of  the  Corporation  shall  deliver  with  such  notice   a
statement in writing setting forth the name of the person to
be  nominated,  the number and class of all shares  of  each
class of stock of the Corporation beneficially owned by such
person,  the  information regarding such person required  by
paragraphs  (a), (e) and (f) of Item 401 of  Regulation  S-K
adopted  by the Securities and Exchange Commission  (or  the
corresponding  provisions  of  any  regulation  subsequently
adopted by the Securities and Exchange Commission applicable
to  the Corporation), such person's signed consent to  serve
as   a   director  of  the  Corporation  if  elected,   such
stockholder's name and address and the number and  class  of
all  shares  of  each  class  of stock  of  the  Corporation
beneficially  owned by such stockholder.   As  used  herein,
shares  "beneficially owned" shall mean  all  shares  as  to
which  such  person, together with such person's  affiliates
and   associates  (as  defined  in  Rule  12b-2  under   the
Securities Exchange Act of 1934, as amended), may be  deemed
to  beneficially own pursuant to Rules 13d-3 and 13d-5 under
the Securities Exchange Act of 1934, as amended, as well  as
all  shares  as  to  which such person, together  with  such
person's affiliates and associates, has the right to  become
the   beneficial   owner  pursuant  to  any   agreement   or
understanding, or upon the exercise of warrants, options  or
rights  to  convert  or exchange (whether  such  rights  are
execrable immediately or only after the passage of  time  or
the occurrence of conditions).  The Chairman of the meeting,
in  addition to making any other determinations that may  be
appropriate  to the conduct of the meeting, shall  determine
whether  such  notice has been duly given and  shall  direct

                                5


<PAGE>

that proposals and nominees not be considered if such notice
has not been given.


ARTICLE II.

BOARD OF DIRECTORS.

SECTION I.       Number and Tenure of Office.

  The  business  and  property of the Corporation  shall  be
managed by a Board of Directors.  The number of Directors of
the  Corporation  shall be not more than  fifteen,  but  the
number  of  directors may from time to time be increased  or
decreased  as  provided in Section 2  of  this  Article  11.
Directors  need not be stockholders.  Directors  shall  hold
office  until  the  next annual meeting of stockholders  and
until their successors are duly chosen and qualified.

SECTION 2.     Increase and Decrease in Number of Directors.

  The  Board  of  Directors by the  affirmative  vote  of  a
majority  of the entire Board may from time to time increase
the  number of Directors to any number not exceeding fifteen
and  may  from time to time decrease the number of Directors
to any number not less than three.

SECTION 3.      Vacancies.

  Except as otherwise provided by law, any vacancy occurring
in the Board of Directors for any cause other than by reason
of an increase in the number of Directors may be filled by a
majority  of the Directors remaining in office,  whether  or
not  they  constitute  a quorum.  Any vacancy  occurring  by
reason  of  an  increase in the number of Directors  may  be
filled by a majority of the entire Board of Directors.

SECTION 4.     Place of Meetings.

  Every  meeting of the Board of Directors shall be held  in
New  York,  N. Y., or at such other place in or out  of  the
State  of  Maryland  as  the Board may  from  time  to  time
determine or shall be specified in the notice thereof.

SECTION 5.     Regular Meetings.

  Regular  meetings of the Board of Directors shall be  held
at  such  time and on such notice as the Directors may  from
time to time determine.

  The annual meeting of the Board of Directors shall be held
as  soon as practicable after the adjournment of the  annual
meeting of the stockholders for the election of Directors.

                                6


<PAGE>


SECTION 6.     Special Meetings.

  Special meetings of the Board of Directors may be held  at
any  time  upon  call  of the Chairman  of  the  Board,  the
President, the Executive Committee, or of a majority of  the
Directors,  by  oral or telegraphic or written  notice  duly
served  on or sent or mailed to each Director not less  than
two  days  before such meeting.  Meetings of  the  Board  of
Directors may be held at any time without notice, if all the
Directors  are present or if those not present waive  notice
of  the  meeting in writing, filed with the records  of  the
meeting before or after the holding thereof.

SECTION7.  ActionbyWrittenConsentTelephonicor0therSimilarCom
            munications Equipment.

  Any  action required or permitted to be taken at a meeting
of the Board may be taken without a meeting if the action is
taken  by  the whole Board and is evidenced by one  or  more
written consents describing the action taken, signed by  all
Directors  on  the  Board, and filed  with  the  minutes  or
corporate  records  of Board proceedings.   Members  of  the
Board may participate in a regular or special meeting of the
Board   by   means  of  conference  telephone   or   similar
communications equipment by which all persons  participating
can  simultaneously  hear each other.   Participation  in  a
meeting  by these communications means constitutes  presence
in person at the meeting.

SECTION 8.      Quorum.

  One-third of the whole number of Directors, but in no case
less  than two Directors, shall constitute a quorum for  the
transaction  of business.  If, at any meeting of  the  Board
there  shall  be less than a quorum present, a  majority  of
those  present  may adjourn the meeting from  time  to  time
until a quorum shall have been obtained.


SECTION 9.     Executive Committee and Other Committees.

  The  Board,  by  resolution adopted by a majority  of  the
whole  Board,  may  elect  from  its  members  an  Executive
Committee  and one or more other committees, each consisting
of two or more Directors.  The President and the Chairman of
the  Board shall be a member and the Chairman, respectively,
of  the  Executive  Committee.  Unless  otherwise  expressly
provided  by law or by the Charter or by resolution  of  the
Board, the Executive Committee shall have all the powers  @f
the Board (except the power to appoint or remove a member of
the   Executive  Committee  or  other  committee;  to   fill
vacancies  on  the  Board or its committees;  to  remove  an
officer  appointed by the Board; to adopt, amend  or  repeal

                               7


<PAGE>

these By-Laws or the Company's Charter; to declare dividends
or  distributions OD stock; to issue stock; to  approve  any
merger  or share exchange not requiring stockholder approval
or   to  recommend  to  stockholders  any  action  requiring
stockholders'  approval) when the Board is not  in  session,
and each other committee shall have such powers as the Board
shall  confer.   In the absence of any member  of  any  such
committee,  the  members  thereof present  at  any  meeting,
whether  or  not  they constitute a quorum,  may  appoint  a
member  of  the  Board to act in the place  of  such  absent
member.   Each  such  committee may fix  its  own  rules  of
procedure,  and may meet when and as provided by such  rules
or  by  resolution of the Board of Directors; but  in  every
case  the  presence  of  a majority shall  be  necessary  to
constitute a quorum.  Insofar as the rights of third parties
shall  not  be affected thereby, all action by any committee
shall  be  subject to revision and alteration by the  Board.
Any action required or permitted to be taken at a meeting of
the  members of the Executive or any other committee may  be
taken  without a meeting if the action is taken by the whole
committee  and is evidenced by one or more written  consents
describing  the action taken, signed by all members  of  the
committee,  and filed with the minutes or corporate  records
of  committee  proceedings.  Members of  any  committee  may
participate  in  a  regular  or  special  meeting  of   such
committee  by  means  of  conference  telephone  or  similar
communications equipment by which all persons  participating
can  simultaneously  hear each other.   Participation  in  a
meeting  by these communications means constitutes  presence
in  person at the meeting.  The majority of the whole  Board
of  Directors shall have the power at any time to change the
members  of  the  Executive Committee, except  the  Chairman
thereof,  and  to change, at any time, the  members  of  the
other  committees,  to fill vacancies in  any  committee  by
election  from the Directors, and to discharge  any  of  the
other committees.

SECTION 10.     Remuneration.

  In  addition  to reimbursement of his reasonable  expenses
incurred  in  attending meetings or otherwise in  connection
with  his  attention  to the affairs of  the  Company,  each
Director as such, and as a member of the Executive Committee
or of any other committee of the Board, shall be entitled to
receive such remuneration as may be fixed from time to  time
by  the Board of Directors, in the form either of payment at
the  rate of a fixed sum per month or of fees for attendance
at meetings of the Board and committees thereof.

                               8


<PAGE>





                        ARTICLE III.

                          OFFICERS.

SECTION 1.     Executive Officers.

  The Executive Officers of the Corporation shall be elected
by the Board of Directors as soon as may be after the annual
meeting of the stockholders, and shall be a Chairman of  the
Board (who shall be a Director), a President (who shall be a
Director), one or more Vice-Presidents, a Secretary, one  or
more  Assistant  Secretaries, a Treasurer and  one  or  more
Assistant  Treasurers.   The Board  of  Directors  may  also
appoint such other officers, agents and employees as to  the
Board  may  seem proper.  Any two offices, except  those  of
President  and  Vice-President, may  be  held  by  the  same
person, but no officer shall execute, acknowledge or  verify
any instrument in more than one capacity, if such instrument
is  required  by  law  or  these  By-Laws  to  be  executed,
acknowledged or verified by any two or more officers.

SECTION 2.      Term of Office.

  The  term of office of all officers shall be one year  and
until  their  respective successors  are  elected,  subject,
however,  to  the  provision for removal  contained  in  the
Charter.

SECTION 3.      Powers and Duties.

   The officers of the Corporation shall have such powers
   and duties as generally
   pertain  to their offices, respectively, as well as  such
   powers and duties as from time to time shall be conferred
   by the Board of Directors or the Executive Committee.

SECTION 4.     Checks, Notes, Etc.

  All  checks and drafts on the Corporation's bank  accounts
and  all  bills  of exchange and promissory notes,  and  all
acceptances,  obligations  and  other  intruments  for   the
payment  of  money,  shall  be signed  by  such  officer  or
officers,  agent or agents, as shall be thereunto authorized
from time to time by the Board of Directors or the Executive
Committee.


                         ARTICLE IV.

                       CAPITAL STOCK.

SECTION 1.     Certificate of Shares.

                                  9


<PAGE>


   Certificates representing shares in the capital stock  of
the  Corporation  shall be in such  form  as  the  Board  of
Directors  may  from  time to time prescribe  and  shall  be
signed  by  the  President or a Vice-President  and  by  the
Secretary or an  Assistant Secretary or the Treasurer or  an
Assistant Treasurer of the Corporation and sealed  with  its
seal.   A  certificate shall be deemed to be so  signed  and
sealed   whether  the  signatures  be  manual  or  facsimile
signatures and whether the seal be a facsimile seal  or  any
other form of seal.

SECTION 2.     Transfer of Shares.

  Shares  in the capital stock of the Corporation  shall  be
transferred  on the books of the Corporation by  the  holder
thereof  in person or by his duly authorized attorney,  upon
surrender  and  cancellation of certificates  for  the  same
number  of  shares, duly endorsed or accompanied  by  proper
instruments of assignment and transfer, with such  proof  of
the  authenticity of the signature as the Corporation or its
agents may reasonably require.

SECTION 3.     Record Dates.

  The  Directors may fix, in advance, a date as  the  record
date for the purpose of determining stockholders entitled to
notice  of,  or to vote at, any meeting of stockholders,  or
stockholders entitled to receive payment of any dividend  or
the  allotment  of  any  rights,  or  in  order  to  make  a
determination of stockholders for any other proper  purpose.
Such date in any case shall be not more than forty days, and
in  case  of  a meeting of stockholders, not less  then  ten
days,  prior  to  the  date on which the particular  action,
requiring  such  determination of  stockholders,  is  to  be
taken.

SECTION 4.     Seal.

  The  Board of Directors shall provide a suitable corporate
seal, in such form and bearing such inscriptions as they may
determine.

SECTION 5.     Stock Ledgers.

  Original or duplicate stock ledgers, containing the  names
and addresses of the stockholders of the Corporation and the
number  of  shares of each class held by them  respectively,
shall  be kept at an office or agency of the Corporation  in
such  city or town as may be designated in an additional  or
supplementary by-law adopted by the Board of Directors.   If
no  other place is so designated, such original or duplicate
stock  ledgers shall be kept at an office or agency  of  the
Corporation in New York, NY

                               10


<PAGE>

  
  
  
                         ARTICLE V.

                        FISCAL YEAR.

  The  fiscal  year of the Corporation shall  begin  on  the
first  day  of  January and end on the thirty-first  day  of
December following.
  
                         ARTICLE VI.

                      INDEMNIFICATION.

SECTION 1.



  The Corporation shall indemnify any person who was or is a
party  or  is  threatened with being made  a  party  to  any
threatened, pending or completed action, suit or proceeding,
whether  civil,  criminal, administrative or  investigative,
including  all  appeals  (other  than  an  action,  suit  or
proceeding by or in the right of the Corporation) by  reason
of  the  fact  that  he  is or was a  director,  officer  or
employee  of  the Corporation, or is or was serving  at  the
request  of  the  Corporation  as  a  director,  officer  or
employee of another corporation, partnership, joint venture,
trust  or  other  enterprise,  against  expenses  (including
attorneys'  fees), judgments, decrees, fines, penalties  and
amounts  paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if
he  acted  in  good  faith  and in a  manner  he  reasonably
believed  to  be in or not opposed to the best interests  of
the Corporation, and, with respect to any criminal action or
proceeding,  had no reasonable cause to believe his  conduct
was  unlawful.   The  termination of  any  action,  suit  or
proceeding  by  judgment, order, settlement, conviction,  or
upon a plea of nolo contenders or its equivalent, shall  not
of  itself create a presumption that the person did not  act
in good faith or in a manner which he reasonably believed to
be   in  or  not  opposed  to  the  best  interests  of  the
Corporation or, with respect to any criminal action, suit or
proceeding, that he had reasonable cause to believe that his
conduct was unlawful.

SECTION 2.

  The Corporation shall indemnify any person who was or is a
party  or  is  threatened with being made  a  party  to  any
threatened, pending or completed action, suit or proceeding,
including all appeals, by or in the right of the Corporation
to  procure  a judgment in its favor by reason of  the  fact
that  he  is or was a director, officer or employee  of  the

                               11


<PAGE>

Corporation,  or  is or was serving at the  request  of  the
Corporation  as a director, officer or employee  of  another
corporation,  partnership, joint  venture,  trust  or  other
enterprise,  against  expenses (including  attorneys'  fees)
actually  and reasonably incurred by him in connection  with
the   defense  or  settlement  of  such  action,   suit   or
proceeding.  The Corporation shall also indemnify  any  such
person  against amounts paid in settlement of  such  action,
suit  or  proceeding up to the amount that would  reasonably
have  been expended in his defense (determined in the manner
provided  for  in  Section  4)  if  such  action,  suit   or
proceeding  bad  been prosecuted to a conclusion.   However,
indemnification under this Section shall be made only if the
person to be indemnified acted in good faith and in a manner
he  reasonably believed to be in or not opposed to the  best
interests  of  the  Corporation and no such  indemnification
shall be made in respect of any claim, issue or matter as to
which  such  person shall have been finally adjudged  to  be
liable  for  negligence or misconduct in the performance  of
his  duty to the Corporation unless, and only to the  extent
that, the court or body in or before which such action, suit
or  proceeding  was  finally determined,  or  any  court  of
competent  jurisdiction,  shall determine  upon  application
that,  despite the adjudication of liability but in view  of
all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses or  other
amounts paid as such court or body shall deem proper.

SECTION 3.

  Without  limiting  the right of any director,  officer  or
employee  of  the Corporation to indemnification  under  any
other  Section hereof, if such person has been substantially
and finally successful on the merits or otherwise in defense
of any action, suit or proceeding referred to in Sections  1
and  2 or in defense of any claim, issue, or matter therein,
he   shall   be  indemnified  against  expenses   (including
attorneys' fees) actually and reasonably incurred by him  in
connection therewith.

SECTION 4.

  Any indemnification under Sections 1 and 2 (unless ordered
by  a  court)  shall  be  made by the  Corporation  only  as
authorized  in  the specific case upon a determination  that
indemnification  of  the director, officer  or  employee  is
proper   in  the  circumstances  because  he  has  met   the
applicable standard of conduct set forth in Sections  I  and
2.  Such  determination shall be made (1) by  the  Board  of
Directors  by  a  majority vote of a  quorum  consisting  of
directors who are or were not parties to or threatened  with
such action, suit or proceeding, or (2) if such a quorum  is
not  obtainable, or even if obtainable, if a majority  of  a
quorum of disinterested directors so directs, by independent

                               12


<PAGE>

legal  counsel (compensated by the Corporation) in a written
opinion,  or (3) if there be no disinterested directors,  or
if a majority of the disinterested directors, whether or not
a  quorum, so directs, by the holders of a majority  of  the
shares entitled to vote in the election of directors without
reference  to default or contingency which would permit  the
holders  of  one or more classes of shares to vote  for  the
election of one or more directors.

SECTION 5.

  Expenses of each person indemnified hereunder incurred  in
defending a civil, criminal, administrative or investigative
action,  suit,  or  proceeding (including  all  appeals)  or
threat thereof, may be paid by the Corporation in advance of
the final disposition of such action, suit or proceeding  as
authorized   by   the   Board  of   Directors,   whether   a
disinterested  quorum  exists or not,  upon  receipt  of  an
undertaking  by  or  on behalf of the director,  officer  or
employee  to repay such expenses unless it shall  ultimately
be  determined that he is entitled to be indemnified by  the
Corporation.

SECTION 6.

  The indemnification provided by this Article shall not  be
deemed  exclusive of or in any way to limit any other rights
to  which  any  person  indemnified may  be  or  may  become
entitled  as  a matter of law, by the articles, regulations,
agreements,  insurance, vote of shareholders  or  otherwise,
with  respect  to action in his official capacity  and  with
respect  to  action in another capacity while  holding  such
office  and shall continue as to a person who has ceased  to
be  a director, officer, or employee and shall inure to  the
benefit  of the heirs, executors, administrators  and  other
legal representatives of such person.

SECTION 7.

  Sections  I through 6 of this Article shall also apply  to
such  other agents of the Corporation as are designated  for
such purpose at any time by the Board of Directors.

SECTION 8.

  If any part of this Article shall be found, in any action,
suit  or  proceeding,  to  be invalid  or  ineffective,  the
validity and the effect of the remaining parts shall not  be
affected.
  
SECTION 9.

  The  provisions  of this Article shall  be  applicable  to
claims,  actions,  suits or proceedings  made  or  commenced

                               13


<PAGE>

after  the  adoption hereof, whether arising  from  acts  or
omissions  to  act  occurring before or after  the  adoption
hereof.

                   ARTICLE VII.

                   AMENDMENTS.

  The  power  to make, alter and repeal the By-Laws  of  the
Corporation is vested in the Board of Directors and  may  be
exercised by a majority of the whole Board; except that  the
power  to alter the By-Laws to divide the Board into classes
having  different  tenures  of office  is  reserved  in  the
Charter to the stockholders.


                   ARTICLE VIII.

                   MISCELLAENOUS.

  The  Corporation  shall  not,  as  a  common  or  contract
carrier,  engage  in  the transportation  of  passengers  or
property  by railroad or motor vehicle; but this restriction
shall not limit the exercise by the Corporation of its other
powers as contained in this Charter.  The provisions of this
Article  VlII  shall  not be altered,  amended  or  repealed
except by the stockholders.

                                14






<TABLE> <S> <C>

<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
       
<S>                             <C>
<PERIOD-TYPE>                   6-MOS
<FISCAL-YEAR-END>                          DEC-31-1996
<PERIOD-START>                             JAN-01-1997
<PERIOD-END>                               JUN-30-1997
<EXCHANGE-RATE>                                      1
<CASH>                                          15,955
<SECURITIES>                                     5,107
<RECEIVABLES>                                  294,523
<ALLOWANCES>                                    14,402
<INVENTORY>                                    162,722
<CURRENT-ASSETS>                               570,809
<PP&E>                                       8,305,062
<DEPRECIATION>                               3,047,881
<TOTAL-ASSETS>                               6,563,833
<CURRENT-LIABILITIES>                          661,194
<BONDS>                                      2,205,455
                                0
                                    170,086
<COMMON>                                       153,021
<OTHER-SE>                                   2,056,554
<TOTAL-LIABILITY-AND-EQUITY>                 6,563,833
<SALES>                                      1,157,730
<TOTAL-REVENUES>                             1,157,730
<CGS>                                          627,113
<TOTAL-COSTS>                                  860,497
<OTHER-EXPENSES>                                 4,626
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                              92,523
<INCOME-PRETAX>                                206,940
<INCOME-TAX>                                    77,666
<INCOME-CONTINUING>                            129,274
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                   129,274
<EPS-PRIMARY>                                     1.06
<EPS-DILUTED>                                     1.06
        

</TABLE>


© 2022 IncJournal is not affiliated with or endorsed by the U.S. Securities and Exchange Commission