<PAGE>
Page 1 of 30
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, 1999
Commission File Number 1-267
ALLEGHENY ENERGY, 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, 1999, 114,856,617 shares of the Common Stock
($1.25 par value) of the registrant were outstanding.
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ALLEGHENY ENERGY, INC.
Form 10-Q for Quarter Ended June 30, 1999
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Consolidated Statement of Income -
Three and six months ended June 30, 1999 and 1998 3
Consolidated Balance Sheet - June 30, 1999
and December 31, 1998 4
Consolidated Statement of Cash Flows -
Six months ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-10
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-27
PART II--OTHER INFORMATION 28-30
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ALLEGHENY ENERGY, INC.
Consolidated Statement of Income
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
OPERATING REVENUES:
<S> <C> <C> <C> <C> <C> <C>
Utility $ 534,191 $ 564,005 $ 1,126,783 $ 1,160,383
Nonutility 109,213 63,645 206,608 112,739
Total Operating Revenues 643,404 627,650 1,333,391 1,273,122
OPERATING EXPENSES:
Operation:
Fuel 127,335 139,555 267,944 279,286
Purchased power and exchanges, net 97,372 95,688 188,207 182,455
Deferred power costs, net 9,370 4,386 13,056 (2,251)
Other 87,630 82,163 169,931 156,966
Maintenance 54,432 55,929 110,866 112,471
Depreciation and amortization 63,987 68,512 130,852 136,880
Taxes other than income taxes 48,023 47,037 95,917 97,463
Federal and state income taxes 43,510 34,315 104,627 85,080
Total Operating Expenses 531,659 527,585 1,081,400 1,048,350
Operating Income 111,745 100,065 251,991 224,772
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 440 249 776 1,316
Other income, net (2,048) 845 (1,040) 1,623
Total Other Income and Deductions (1,608) 1,094 (264) 2,939
Income Before Interest Charges and
Preferred Dividends 110,137 101,159 251,727 227,711
INTEREST CHARGES AND PREFERRED DIVIDENDS:
Interest on long-term debt 38,700 40,831 77,202 83,549
Other interest 5,890 4,631 10,115 8,649
Allowance for borrowed funds used during
construction (1,234) (504) (2,402) (1,226)
Dividends on preferred stock of subsidiaries 2,267 2,310 4,523 4,611
Total Interest Charges and
Preferred Dividends 45,623 47,268 89,438 95,583
Consolidated Income Before
Extraordinary Charge 64,514 53,891 162,289 132,128
Extraordinary Charge, net (1) - (265,446) - (265,446)
CONSOLIDATED NET INCOME (LOSS) $ 64,514 $ (211,555) $ 162,289 $ (133,318)
COMMON STOCK SHARES OUTSTANDING (average) 118,152,307 122,436,317 120,262,254 122,436,317
BASIC AND DILUTED EARNINGS PER AVERAGE SHARE:
Consolidated income before extraordinary charge $0.55 $0.44 $1.35 $1.08
Extraordinary charge, net (1) - ($2.17) - ($2.17)
Consolidated net income (loss) $0.55 ($1.73) $1.35 ($1.09)
</TABLE>
See accompanying notes to consolidated financial statements.
(1) See Note 12 in the notes to the consolidated financial statements.
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ALLEGHENY ENERGY, INC.
Consolidated Balance Sheet
(Thousands of Dollars)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS: 1999 1998
Property, Plant, and Equipment:
At original cost, including $183,674
<S> <C> <C>
and $166,330 under construction $ 8,511,430 $ 8,395,267
Accumulated depreciation (3,508,496) (3,395,603)
5,002,934 4,999,664
Investments and Other Assets:
Subsidiaries consolidated--excess of cost
over book equity at acquisition 15,077 15,077
Benefit plans' investments 88,735 87,468
Nonutility investments 10,977 9,361
Other 1,481 1,566
116,270 113,472
Current Assets:
Cash and temporary cash investments 29,112 17,559
Accounts receivable:
Electric service 341,446 294,877
Other 11,930 17,712
Allowance for uncollectible accounts (25,407) (19,560)
Materials and supplies - at average cost:
Operating and construction 101,240 99,439
Fuel 65,222 57,610
Prepaid taxes 53,463 56,658
Other, including current portion of regulatory assets 46,022 30,788
623,028 555,083
Deferred Charges:
Regulatory assets 701,422 704,506
Unamortized loss on reacquired debt 47,124 48,671
Other 102,906 91,931
851,452 845,108
Total Assets $ 6,593,684 $ 6,513,327
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 153,045 $ 153,045
Other paid-in capital 1,044,085 1,044,085
Retained earnings 896,262 836,759
Treasury stock (at cost) (191,450) -
1,901,942 2,033,889
Preferred stock 90,378 170,086
Long-term debt and QUIDS 2,217,962 2,179,288
Funds on deposit with trustees (26,453) -
4,183,829 4,383,263
Current Liabilities:
Short-term debt 373,984 258,837
Long-term debt and preferred stock due within one year 105,908 -
Accounts payable 168,943 153,107
Taxes accrued:
Federal and state income 42,146 17,442
Other 38,275 62,751
Interest accrued 38,119 35,945
Adverse power purchase commitments 24,138 22,622
Other 101,916 119,957
893,429 670,661
Deferred Credits and Other Liabilities:
Unamortized investment credit 121,432 125,396
Deferred income taxes 897,831 842,193
Regulatory liabilities 84,900 80,354
Adverse power purchase commitments 316,003 328,830
Other 96,260 82,630
1,516,426 1,459,403
Total Capitalization and Liabilities $ 6,593,684 $ 6,513,327
</TABLE>
See accompanying notes to consolidated financial statements.
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ALLEGHENY ENERGY, INC.
Consolidated Statement of Cash Flows
(Thousands of Dollars)
<TABLE>
<CAPTION>
Six Months Ended
June 30
1999 1998
CASH FLOWS FROM OPERATIONS:
<S> <C> <C> <C> <C>
Consolidated net income (loss) $ 162,289 $ (133,318)
Extraordinary charge, net of taxes - 265,446
Consolidated income before extraordinary charge 162,289 132,128
Depreciation and amortization 130,852 136,880
Deferred investment credit and income taxes, net 13,086 16,118
Deferred power costs, net 13,056 (2,251)
Allowance for other than borrowed funds used
during construction (776) (1,316)
Internal restructuring liability - (5,504)
Adverse power purchase commitments (11,311) -
Restructuring settlement rate refund (12,825) -
Changes in certain current assets and
liabilities:
Accounts receivable, net (34,940) (16,195)
Materials and supplies (9,413) (13,947)
Accounts payable 15,836 13,305
Taxes accrued 228 (21,499)
Other, net (10,914) 12,351
255,168 250,070
CASH FLOWS FROM INVESTING:
Utility construction expenditures (less allowance for
other than borrowed funds used during construction) (88,771) (98,245)
Nonutility construction expenditures and investments (38,871) (3,988)
(127,642) (102,233)
CASH FLOWS FROM FINANCING:
Purchase of common stock (191,450) -
Issuance of long-term debt 114,830 135,295
Retirement of long-term debt (51,714) (357,125)
Short-term debt, net 115,147 171,173
Cash dividends on common stock (102,786) (105,295)
(115,973) (155,952)
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS 11,553 (8,115)
Cash and temporary cash investments at January 1 17,559 26,374
Cash and temporary cash investments at June 30 $ 29,112 $ 18,259
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amount capitalized) $80,094 $87,794
Income taxes 63,096 86,214
</TABLE>
See accompanying notes to consolidated financial statements.
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ALLEGHENY ENERGY, INC.
Notes to Consolidated Financial Statements
1. The Notes to Consolidated Financial Statements of Allegheny
Energy, Inc. (the Company) in its Annual Report on Form 10-K
for the year ended December 31, 1998 should be read with the
accompanying consolidated financial statements and the
following notes. With the exception of the December 31, 1998
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, 1999, the results of operations for the three
and six months ended June 30, 1999 and 1998, and cash flows
for the six months ended June 30, 1999 and 1998. Certain
amounts in the December 31, 1998 consolidated balance sheet
have been reclassified for comparative purposes.
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
utility subsidiaries and thus is among the subsidiaries fully
consolidated into the financial statements of the Company.
3. Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," established standards for
reporting comprehensive income and its components (revenues,
expenses, gains, and losses) in the financial statements.
The Company does not have any elements of other comprehensive
income to report in accordance with SFAS No. 130.
4. 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.
5. As previously reported, on March 11, 1999, the United States
Court of Appeals for the Third Circuit vacated the United
States District Court for the Western District of
Pennsylvania's denial of the Company's motion for preliminary
injunction, enjoining DQE, Inc. (DQE), parent company of
Duquesne Light Company in Pittsburgh, Pa., from taking
actions prohibited by the Merger Agreement. The Circuit
Court stated that if DQE breached the Merger Agreement, the
Company may be entitled to specific performance of the Merger
Agreement. The Circuit Court also stated that the Company
could be irreparably harmed if DQE took actions that would
prevent the Company from receiving the specific performance
remedy. The Circuit Court remanded the case to the District
Court for further proceedings consistent with its opinion.
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In the District Court, DQE has filed a motion for summary
judgment which the Company has opposed. The court has not
yet ruled. The Company cannot predict the outcome of this
litigation. However, the Company believes that DQE's basis
for seeking to terminate the merger is without merit.
Accordingly, the Company continues to seek the remaining
regulatory approvals from the Department of Justice and the
Securities and Exchange Commission. It is not likely either
agency will act on the requests unless the Company obtains
judicial relief requiring DQE to move forward.
All of the Company's incremental costs of the merger process
($17.6 million through June 30, 1999) are deferred. The
accumulated merger costs will be written off by the combined
company when the merger occurs or by the Company if it is
determined that the merger will not occur.
6. The Consolidated Balance Sheet includes the amounts listed
below for assets, primarily generation, not subject to SFAS
No. 71, "Accounting for the Effects of Certain Types of
Regulation."
June 30 December 31
1999 1998
(Thousands of Dollars)
Property, plant and equipment at
original cost $2,006,185 $1,969,636
Amounts under construction included above 43,258 39,227
Accumulated depreciation (905,976) (870,777)
7. The Company began acquiring shares of its common stock in the
first quarter of 1999 in conjunction with a stock repurchase
program announced in March 1999. The program authorizes the
Company to repurchase common stock worth up to $500 million
from time to time at price levels the Company deems
attractive. The Company purchased 5,836,000 shares of its
common stock in the first six months of 1999 at an aggregate
cost of $191.5 million.
8. The Company's principal business segments are utility and
nonutility operations. The utility subsidiaries, doing
business as Allegheny Power, include the generation,
purchase, transmission, distribution, and sale of electric
energy and are subject to federal and state regulation. The
Company derives substantially all of its income from
operations of its utility subsidiaries, Monongahela Power
Company, The Potomac Edison Company, and West Penn Power
Company (West Penn). Nonutility operations consist of AYP
Capital, a wholly owned subsidiary, formed in an effort to
meet the challenges of the new competitive environment in the
electric industry, and the Allegheny Energy Supply Division
(ESD) of West Penn. The ESD has the primary objective of
selling the West Penn generation (approximately 2,570
megawatts) that has been freed up by the Electricity
Generation Customer Choice and Competition Act (Customer
Choice Act) in Pennsylvania and is no longer regulated by the
Pennsylvania Public Utility Commission (Pennsylvania PUC).
Nonutility operations may be subject to federal regulation
but are not subject to state regulation of rates.
Business segment information is summarized below.
Significant transactions between reportable segments are
eliminated to reconcile the segment information to
consolidated amounts.
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Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
(Thousands of Dollars)
Operating Revenues:
Utility $534,191 $564,107 $1,126,783 $1,160,829
Nonutility 188,480* 63,645 356,050* 112,739
Eliminations (79,267) (102) (149,442) (446)
Depreciation:
Utility 49,801 67,114 101,871 134,085
Nonutility 14,186 1,398 28,981 2,795
Federal and State Income
Taxes:
Utility 38,048 37,551 89,644 90,675
Nonutility 5,462 (3,236) 14,983 (5,595)
Operating Income:
Utility 96,991 103,339 216,854 229,785
Nonutility 14,754 (3,274) 35,137 (5,013)
Interest Charges and
Preferred Dividends:
Utility 36,938 44,752 72,560 90,509
Nonutility 8,685 2,516 16,878 5,074
Consolidated Income
Before Extraordinary
Charge:
Utility 60,318 59,244 144,476 141,410
Nonutility 4,196 (5,353) 17,813 (9,282)
Extraordinary Charge, Net:
Utility 265,446 265,446
Nonutility
Capital Expenditures:
Utility 55,163 58,953 89,547 99,561
Nonutility 31,102 3,848 38,871 3,988
June 30 December 31
1999 1998
Identifiable Assets:
Utility $5,273,489 $6,299,909
Nonutility 1,320,195 213,418
*Nonutility operating revenues include $14.8 million and
$33.5 million in the three months and six months ended
June 30, 1999 of allocated Competitive Transition Charge
(CTC) revenues to compensate for certain transition costs
transferred to nonutility operations.
9. Common stock dividends per share declared during the periods
for which income statements are included are as follows:
1999 1998
1st 2nd 1st 2nd
Quarter Quarter Quarter Quarter
Number of Shares 122,436,317 116,600,317 122,436,317 122,436,117
Amount per Share $.43 $.43 $.43 $.43
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10.The Company's Pennsylvania subsidiary, West Penn, is
authorized to collect a CTC from its distribution customers
over the period 1999 to 2008 as a result of a 1998 Order of
the Pennsylvania PUC.
The November 1998 Order of the Pennsylvania PUC authorizes
annual recovery of "transition costs" from distribution
customers as follows:
Year Amount Year Amount
(Millions of Dollars) (Millions of Dollars)
1999 $122 2004 $104
2000 121 2005 99
2001 115 2006 98
2002 113 2007 97
2003 112 2008 97
CTC revenues recorded in the three months and six months
ended June 30, 1999 totaled $29.7 million and $67.6 million,
respectively.
The Order also authorized recognition of an additional CTC
regulatory asset (Additional CTC Regulatory Asset) as
follows:
Year Amount
(Millions of Dollars)
1999 $25
2000 45
2001 60
2002 50
To the extent that West Penn records any or all of the
Additional CTC Regulatory Asset, it will be amortized in 2005
through 2008. This Additional CTC Regulatory Asset was
approved by the Pennsylvania PUC to reduce the adverse
effects, if any, that competition will have on West Penn
during the years 1999 to 2002.
No Additional CTC Regulatory Asset was recorded by West Penn
as of June 30, 1999.
11.In October 1996, AYP Energy, Inc., a subsidiary of AYP
Capital, borrowed $160 million for five years and also
entered into a floating-to-fixed interest rate swap to hedge
against fluctuations in interest rates. In January 1998, the
swap was refinanced in exchange for the counterparty's right
to exercise an option to extend the swap until 2006. During
the second quarter and first six months of 1999, the Company
recorded a mark-to-market gain of $.3 million and $2.3
million, respectively. The Company previously recorded in
1998 a mark-to-market loss of $2.3 million related to this
option. In June 1999, the swap and option were terminated at
a cost of $1.5 million. This termination will reduce
interest expense in 1999 through 2001.
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12.The 1998 periods include a previously reported extraordinary
charge of $450.6 million ($265.4 million, net of taxes, or
$2.17 per share) to reflect a write-off by West Penn of
prudently incurred costs determined to be unrecoverable as a
result of the May 29, 1998 Order by the Pennsylvania PUC in
connection with the deregulation proceedings in Pennsylvania.
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ALLEGHENY ENERGY, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
COMPARISON OF SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1999
WITH SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1998
The Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of
Operations in the Allegheny Energy, Inc. (the Company) Annual
Report on Form 10-K for the year ended December 31, 1998 should
be read with the following Management's Discussion and Analysis
information.
Factors That May Affect Future Results
This management's discussion and analysis of financial
condition and results of operations contains forecast information
items that are "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. These include
statements with respect to deregulation activities and movements
toward competition in states served by the Company, the proposed
merger with and related litigation against DQE, Inc. (DQE),
parent company of Duquesne Light Company in Pittsburgh, Pa., Year
2000 readiness disclosure, and results of operations. All such
forward-looking information is necessarily only estimated. There
can be no assurance that actual results will not materially
differ from expectations. Actual results have varied materially
and unpredictably from past expectations.
Factors that could cause actual results to differ
materially include, among other matters, electric utility
restructuring, including the ongoing state and federal
activities; potential Year 2000 operation problems; developments
in the legislative, regulatory, and competitive environments in
which the Company operates, including regulatory proceedings
affecting rates charged by the Company's subsidiaries;
environmental, legislative, and regulatory changes; future
economic conditions; earnings retention and dividend payout
policies; developments relating to the proposed merger with DQE,
including expenses that may be incurred in litigation; and other
circumstances that could affect anticipated revenues and costs
such as significant volatility in the market price of wholesale
power, unscheduled maintenance or repair requirements, weather,
and compliance with laws and regulations.
Significant Events in the First Six Months of 1999
* Unregulated Generating Subsidiary
The Company and two of its subsidiaries, West Penn Power
Company (West Penn) and AYP Energy, Inc., filed a Form U-1
application on April 16, 1999 with the Securities and Exchange
Commission (SEC) to form an unregulated generating subsidiary.
Regulatory approval must also be obtained from the Federal Energy
Regulatory Commission (FERC), and the Pennsylvania Public Utility
Commission (Pennsylvania PUC) will review the proposed plan.
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Upon approval, West Penn will transfer its deregulated
generating capacity, which after January 1, 2000 will total
approximately 3,700 megawatts (MW), at book value as allowed by
the final settlement in West Penn's Pennsylvania restructuring
case, and AYP Energy, Inc. will transfer its 276 MW merchant
capacity at Fort Martin Unit No. 1 to the new generating company
or GENCO.
Initially, West Penn will transfer to a new unregulated
subsidiary generating company all of its ownership interests in
generating assets and its contractual rights to generating
capacity other than those arising under the Public Utility
Regulatory Act of 1978 (PURPA). As consideration, the generating
subsidiary will pay West Penn the book value of the generating
assets in a combination of cash and a note secured by a purchase
money mortgage on the generating assets. It is expected, in
order to obtain the release of the generating assets from the
lien of the first mortgage, to pay the cash and assign the note
and the purchase money mortgage to the trustee of West Penn's
first mortgage bonds.
Thereafter, West Penn will dividend up to the Company its
ownership interest in the new generating subsidiary. After this
dividend, West Penn will no longer have any ownership interest in
generating assets or contractual rights to generating capacity.
It is expected that the necessary regulatory approvals to
commence these transfers and dividend will be received by the end
of 1999. It is expected that upon the receipt of these approvals
West Penn will complete the transfers of generating assets and
the dividend to the Company. Actual timing, however, will depend
on actions by various regulatory authorities that are outside the
control of the Company.
* Installation of Combustion Turbines
A new Company subsidiary, Allegheny Energy Unit No. 1 and
Unit No. 2, LLC, will be installing two 44-MW simple-cycle gas
combustion turbines at the Springdale power station in Allegheny
County, Pa. These units will be unregulated merchant plants.
The two units are expected to be in service by the end of 1999
and will be capable of running on either No. 2 diesel oil or
natural gas. As part of the installation, 500,000 gallons of oil
storage capacity will be built and existing gas lines will be
upgraded. Transmission facilities at the site and the nearby
interconnection with Duquesne Light Company will also be
upgraded.
The generation output will be sold into the competitive
power markets in the eastern United States.
* Merger with DQE
See Note 5 to the consolidated financial statements for
information about the proposed merger with DQE, parent company of
Duquesne Light Company in Pittsburgh, Pa., and related
litigation.
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* Virginia Rate Settlement and Agreement
On February 25, 1999, the Virginia State Corporation
Commission (Virginia SCC) approved the Company's rate reduction
request for its subsidiary, The Potomac Edison Company (Potomac
Edison), which will decrease the fuel portion of Virginia
customers' bills by approximately 7.6% from 1.278 cents per
kilowatt-hour (kWh) to 1.181 cents per kWh (a decrease in annual
fuel revenue of about $2.2 million). The decrease is primarily
due to refunding a prior overrecovery of fuel costs, coupled with
a small decrease in projected energy costs. The new rates were
effective with bills rendered on or after March 9, 1999.
On May 21, 1999, the Virginia SCC approved an agreement
reached between Potomac Edison and the staff of the Virginia SCC
which reduced base rates for Virginia customers effective June 1,
1999 by about $3 million annually. The review of rates is
required by an annual information filing in Virginia.
* West Virginia Fuel Review
On February 26, 1999, the Public Service Commission of
West Virginia (W.Va. PSC) entered an Order to initiate a fuel
review proceeding to establish a fuel increment in rates for
Potomac Edison and Monongahela Power Company (Monongahela Power)
to be effective July 1, 1999 through June 30, 2000. On June 29,
1999, the W.Va. PSC approved a joint stipulation and agreement
between Potomac Edison and Monongahela Power and the intervenors.
Under the agreement, the parties are to negotiate further in an
effort to more closely align Potomac Edison and Monongahela Power
rate schedules and to petition to reopen this case if they are
successful. Absent such agreement by October 15, 1999, the rates
will revert to the originally proposed rates in this case. This
change would be effective November 1, 1999 and would increase
Monongahela Power's fuel rates by $10.9 million and decrease
Potomac Edison's fuel rates by $8.0 million. These changes, if
implemented, will have no effect on the companies' net income.
* Shareholder Rights Plan
The Company filed a Form U-1 application on March 2, 1999
with the SEC for approval for the Board of Directors to adopt a
Shareholder Rights Plan. The SEC granted the application on July
23, 1999. If the plan is adopted by the Board of Directors, the
shareholder rights would be exercisable if any potential suitor
acquired 15% or more of the Company's outstanding common stock.
All shareholders, except the acquiring shareholder, would then be
given the right to protect the value of their investment by
purchasing Company common stock at a two-for-one price.
* Articles of Incorporation
As a result of the passage of Maryland legislation
affecting corporate governance of companies incorporated in the
state, the Board of Directors by resolution amended the Company's
Articles of Incorporation. The Board resolution adopted a
provision creating three classes of directors of nearly even
size, with the term of each director continuing for the full
initial term of the class to which he or she is designated, and a
provision that directors cannot be removed from the Board except
by a two-thirds vote of all votes entitled to be cast by
shareholders in an election, and that vacancies may be filled
only by the Board and for the full remainder of the term.
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* Maryland, Ohio, Virginia, and West Virginia Deregulation
See Electric Energy Competition on page 25 for ongoing
information regarding restructuring in Maryland, Ohio, Virginia,
and West Virginia.
* Toxics Release Inventory (TRI)
On Earth Day 1997, President Clinton announced the
expansion of Right-to-Know TRI reporting to include electric
utilities, limited to facilities that combust coal and/or oil for
the purpose of generating power for distribution in commerce.
The purpose of TRI is to provide site-specific information on
chemical releases to the air, land, and water. On June 4, 1999,
the Company joined with other members of the Edison Electric
Institute in reporting power station releases to the public.
Packets of information about the Company's releases were provided
to media in the Company's area and posted on the Company's web
site. The Company filed its first TRI report with the
Environmental Protection Agency prior to the July 1, 1999
deadline date, reporting 18 million pounds of total releases for
calendar year 1998.
Review of Operations
EARNINGS SUMMARY
Consolidated Net Income (Loss)
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
(Millions of Dollars)
Utility operations $60.3 $ 59.2 $144.5 $ 141.4
Nonutility operations 4.2 (5.4) 17.8 (9.3)
Consolidated income before
extraordinary charge 64.5 53.8 162.3 132.1
Extraordinary charge, net (265.4) (265.4)
Consolidated net income
(loss) $64.5 $(211.6) $162.3 $(133.3)
Cents Per Share
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
Utility operations $.51 $ .48 $1.20 $ 1.16
Nonutility operations .04 (.04) .15 (.08)
Cents per share before
extraordinary charge .55 .44 1.35 1.08
Extraordinary charge, net (2.17) (2.17)
Total cents per share $.55 $(1.73) $1.35 $(1.09)
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Earnings for the second quarter and first six months of
1998 include a previously reported extraordinary charge of $450.6
million ($265.4 million, net of taxes, or $2.17 per share) to
reflect a write-off by West Penn of prudently incurred costs
determined to be unrecoverable as a result of the May 29, 1998
Order by the Pennsylvania PUC in connection with the deregulation
proceedings in Pennsylvania. The increase in earnings in the
second quarter of 1999 before the 1998 extraordinary charge is
primarily attributed to increased earnings from nonutility sales
of electricity. The increase in earnings in the first six months
of 1999 before the 1998 extraordinary charge is primarily
attributed to increased kilowatt-hour sales, including increased
sales to residential customers due to winter weather that was 22%
colder than the relatively warm winter of 1998, and nonutility
sales.
SALES AND REVENUES
Total operating revenues for the second quarter and first
six months of 1999 and 1998 were as follows:
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
(Millions of Dollars)
Operating revenues:
Utility revenues:
Regulated $506.0 $523.6 $1,077.4 $1,096.9
Choice 9.1 2.3 15.9 5.9
Bulk power and trans-
mission services sales 19.1 38.2 33.5 58.0
Total utility revenues 534.2 564.1 1,126.8 1,160.8
Nonutility revenues 188.5* 63.7 356.0* 112.7
Elimination between utility
and nonutility (79.3) (.1) (149.4) (.4)
Total operating
revenues $643.4 $627.7 $1,333.4 $1,273.1
*Nonutility operating revenues include $14.8 million and $33.5
million in the three months and six months ended June 30, 1999
of allocated Competitive Transition Charge revenues to compensate
for certain transition costs transferred to nonutility operations.
The decreases in regulated revenues (regulated revenues
includes revenues from West Penn customers eligible to choose an
alternate energy supplier but electing not to do so) in the three
and six months ended June 1999 were due primarily to the result
of Pennsylvania competition which gave two-thirds of West Penn's
regulated customers the ability to choose another energy supplier
and a reduction in Potomac Edison's Maryland rates as part of a
settlement agreement. These decreases to regulated revenues were
offset in part in the six-month period by colder winter weather
in 1999 which led to increased residential and commercial kWh
sales.
<PAGE>
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Settlement agreement reductions in the three and six
months ended June 30, 1999 of $4.5 million and $9.0 million,
respectively, reflect a settlement agreement by Potomac Edison
settling the Maryland Office of People's Counsel's petition for a
reduction in Potomac Edison's Maryland rates. Of that amount, in
the three and six months ended June 30, 1999, $1.9 million and
$3.8 million, respectively, are related to Potomac Edison
creating a provision to share earnings above a return on equity
of 11.4% in Maryland as discussed below, and in the three and six
months ended June 30, 1999, $2.6 million and $5.2 million,
respectively, are related to a deferral of 1999 revenues per the
settlement agreement. The agreement, which includes recognition
of costs to be incurred from the AES Warrior Run cogeneration
project being developed under the PURPA, was approved by the
Maryland Public Service Commission (Maryland PSC) on October 27,
1998. Under the terms of that agreement, Potomac Edison will
increase its rates about 4% ($13 million) in each of the years
1999, 2000, and 2001 (a $39 million annual effect in 2001). The
increases are designed to recover additional costs of about $131
million over the period 1999-2001 for capacity purchases from the
AES Warrior Run cogeneration project, net of alleged over-
earnings of $52 million for the same period. The net effect of
these changes over the 1999-2001 time frame results in a pre-tax
income reduction of $12 million in 1999, $18 million in 2000, and
$22 million in 2001. In addition, the settlement requires that
Potomac Edison share, on a 50% customer, 50% shareholder basis,
earnings above a return on equity of 11.4% in Maryland for 1999-
2001. This sharing will occur through an annual true-up.
Utility choice revenues for 1999 represent transmission
and distribution revenues from West Penn franchised customers
(customers in West Penn's territory) who chose another supplier
to provide their energy needs. In 1998 the choice revenues
represent the 5% of previously fully bundled customers (full
service customers) who participated in the Pennsylvania pilot and
were required to buy energy from an alternate supplier. The
Energy Supply Division (ESD) of West Penn has the primary
objective of selling two-thirds of West Penn's generation that
has been freed up by the Electricity Generation Customer Choice
and Competition Act (Customer Choice Act) in Pennsylvania. As a
result of the ESD selling to the nonutility market, utility bulk
power sales have decreased due to reduced regulated generation
available for sale.
Nonutility revenues have increased due primarily to bulk
power sales to nonaffiliated companies and to new sales in
Pennsylvania's competitive marketplace by the ESD. The ESD
officially began supplying electricity to retail customers on
January 1, 1999. It uses the two-thirds of generation freed up
by the Customer Choice Act in Pennsylvania to sell electricity to
both wholesale and retail customers in the unregulated
marketplace.
The elimination between utility and nonutility revenues
is necessary to remove the effect of affiliated revenues.
See Note 10 to the consolidated financial statements for
information regarding the Competitive Transition Charge.
<PAGE>
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OPERATING EXPENSES
Fuel expenses for the second quarter and first six months
of 1999 and 1998 were as follows:
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
(Millions of Dollars)
Utility operations $ 83.7 $135.1 $177.4 $269.8
Nonutility operations 43.6 4.5 90.5 9.5
Total fuel expenses $127.3 $139.6 $267.9 $279.3
Total fuel expenses decreased primarily due to a decrease
in average fuel prices of 7% and 5% in the second quarter and six
months ended June 30, 1999, respectively. The decrease in fuel
expenses for utility operations and the increase in fuel expenses
for nonutility fuel expenses was due to the fuel expenses
associated with the two-thirds of West Penn's freed up generation
now being marketed by the ESD as part of nonutility operations.
Purchased power and exchanges, net, represent power
purchases from and exchanges with other companies and purchases
from qualified facilities under the PURPA, and consists of the
following items:
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
(Millions of Dollars)
Utility operations:
Purchased power:
From PURPA generation* $25.8 $33.7 $ 53.8 $ 67.9
Other 10.8 6.4 30.8 15.3
Total purchased power
for utility operations 36.6 40.1 84.6 83.2
Power exchanges, net (3.3) (1.7) 1.0 1.8
Nonutility operations
purchased power 74.6 57.3 116.1 97.5
Elimination (10.5) (13.5)
Purchased power and
exchanges, net $97.4 $95.7 $188.2 $182.5
*PURPA cost (cents per kWh) 4.8 5.4 4.9 5.5
The decrease of $7.9 million and $14.1 million in the
second quarter and six months ended June 30, 1999 in utility
purchased power from PURPA generation reflects a $2.7 million and
$5.4 million reduction in the second quarter and six months ended
June 30, 1999, respectively, related to West Penn's purchase
commitment at costs in excess of the market value of the AES
Beaver Valley contract and also a decrease of $3.7 million and
$7.2 million in
<PAGE>
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the second quarter and six months ended June 30, 1999,
respectively, in the purchase price for that contract due to a
scheduled capacity rate decrease defined annually in the
contract. The reduction related to the purchase commitment in
excess of costs reflects the amortization of excess costs
accruals recorded in 1998 as an adverse power purchase commitment
net of the Competitive Transition Charge revenue recovery in
conjunction with deregulation proceedings in Pennsylvania.
The increase in other utility operations purchased power
in the six months ended June 30, 1999 was due primarily to West
Penn's purchase of power from nonaffiliated companies and
marketers in order to provide energy to the two-thirds of its
customers eligible to choose an alternate supplier but electing
not to do so. The generation previously available to serve those
customers has been freed up by customer choice in Pennsylvania
and is being marketed by the Energy Supply Division of West Penn
to the unregulated marketplace.
The elimination between utility and nonutility purchased
power is necessary to remove the effect of affiliated purchase
power expenses.
The AES Warrior Run PURPA cogeneration contract in
Potomac Edison's Maryland service territory, scheduled to
commence operation in October 1999, will increase the cost of
power purchases $60 million or more annually. In 1999, utility
revenues will reflect a reduction for a settlement agreement with
various parties on the Maryland Office of People's Counsel's for
a reduction in Potomac Edison's Maryland rates. The net effect
of changes related to the settlement results in a pre-tax income
reduction of $12 million in 1999. See Sales and Revenues
starting on page 15 for more information on the settlement
agreement.
None of the subsidiaries' purchased power contracts are
capitalized since there are no minimum payment requirements
absent associated kWh generation.
Other operation expenses for the second quarter and first
six months of 1999 and 1998 were as follows:
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
(Millions of Dollars)
Utility operations $74.9 $78.7 $145.2 $149.8
Nonutility operations 17.1 3.5 33.4 7.2
Elimination (4.4) (8.7)
Total other operation
expenses $87.6 $82.2 $169.9 $157.0
The increase in total other operation expenses for the
second quarter of $5.4 million was due primarily to costs
associated with certain PURPA regulations, Year 2000 expenses,
and merger litigation expenses, partially offset by lower
transmission and distribution operation expenses.
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- 19 -
The increase in total other operation expenses in the six months
ended June 30, 1999 of $12.9 million was due primarily to costs
associated with certain PURPA regulations, increased allowances
for uncollectible accounts, Year 2000 expenses, and merger
litigation expenses. Nonutility other operation expenses reflect
increased business activity.
The elimination between utility and nonutility operation
expenses is necessary to remove the effect of affiliated
transmission purchases.
Maintenance expenses for the second quarter and first six
months of 1999 and 1998 were as follows:
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
(Millions of Dollars)
Utility operations $43.9 $54.2 $ 90.0 $109.6
Nonutility operations 10.5 1.7 20.9 2.9
Total maintenance expenses $54.4 $55.9 $110.9 $112.5
Total maintenance expenses for the second quarter and six
months ended June 30, 1999 remained about the same as the second
quarter and six months ended June 30, 1998. The decrease in
utility maintenance and the increase in nonutility maintenance
was due to the maintenance associated with the two-thirds of West
Penn generation deregulated and now being classified as
nonutility maintenance. 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.
Depreciation and amortization expenses for the second
quarter and first six months of 1999 and 1998 were as follows:
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
(Millions of Dollars)
Utility operations $49.8 $67.1 $101.9 $134.1
Nonutility operations 14.2 1.4 29.0 2.8
Total depreciation and
amortization expenses $64.0 $68.5 $130.9 $136.9
<PAGE>
- 20 -
Total depreciation and amortization expense in the second
quarter and six months ended June 30, 1999 decreased $4.5 million
and $6.0 million, respectively, due primarily to a $7.5 million
and $12.3 million reduction in the second quarter and six months
ended June 30, 1999, respectively, related to a 1998 write-down of
West Penn's share of costs in excess of the market value of
the AGC pumped storage project. Depreciation expense
will be reduced $234 million during the period 1999-2016 related
to the AGC contract as a result of the 1998 extraordinary charge
recorded by West Penn. The decreases were offset in part by
higher depreciation expense due to increased investment. Utility
and nonutility depreciation expense reflects the movement of
depreciation expense associated with the two-thirds of freed up
generation from utility operations to nonutility operations.
Taxes other than income taxes for the second quarter and
first six months of 1999 and 1998 were as follows:
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
(Millions of Dollars)
Utility operations $39.8 $45.3 $79.9 $94.1
Nonutility operations 8.2 1.7 16.0 3.4
Total taxes other than
income taxes $48.0 $47.0 $95.9 $97.5
Total taxes other than income taxes increased $1.0
million in the second quarter of 1999 due primarily to higher
FICA taxes. Total taxes other than income taxes decreased $1.6
million in the six months ended June 30, 1999 primarily due to
increased West Virginia Business and Occupation Taxes in the
first quarter of 1998 resulting from an adjustment of $1.4
million for a previous period and decreased gross receipts taxes,
partially offset by higher FICA taxes. Utility and nonutility
taxes other than income taxes reflect the movement of taxes other
than income taxes associated with the two-thirds of freed up
generation from utility operations to nonutility operations.
The increases in federal and state income taxes for the
three and six months ended June 30, 1999 were primarily due to
increased income before taxes.
The change in other income, net includes the reporting of
nonutility operations investments using the equity method of
accounting, changes in the level of contributions in aid of
construction, and the sale of timber.
Interest on long-term debt for the second quarter and
first six months of 1999 and 1998 was as follows:
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
(Millions of Dollars)
Utility operations $30.6 $38.2 $61.3 $78.4
Nonutility operations 8.1 2.6 15.9 5.1
Total interest on
long-term debt $38.7 $40.8 $77.2 $83.5
<PAGE>
- 21 -
The decreases in total interest on long-term debt in the
second quarter and six months ended June 30, 1999 of $2.1 million
and $6.3 million, respectively, resulted primarily from reduced
long-term debt and lower interest rates.
Other interest expense reflects changes in the levels of
short-term debt maintained by the companies, as well as the
associated rates.
Financial Condition and Requirements
The Company's discussion on Financial Condition,
Requirements, and Resources and Significant Continuing Issues in
its Annual Report on Form 10-K for the year ended December 31,
1998 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 legal
actions and regulations and uncertainties related to
environmental matters. See Note 5 to the Consolidated Financial
Statements for information about merger activities.
* Market Risk
The Company's utility subsidiaries and certain of the
Company's nonutility subsidiaries, supply power in nonregulated
power markets. At June 30, 1999, the marketing books for such
operations consisted primarily of fixed-priced, forward-purchase
and/or sale contracts which require settlement by physical
delivery of electricity. These transactions result in market
risk, which occurs when the market price of a particular
obligation or entitlement varies from the contract price.
* Transition Bonds
The Company's Pennsylvania subsidiary, West Penn, plans
to issue up to $670 million in transition bonds in the third
quarter of 1999 in accordance with its 1998 restructuring
settlement. That settlement, approved by the Pennsylvania PUC,
allows West Penn to recover up to $670 million in transition
costs which might otherwise prove unrecoverable in a competitive
environment. The settlement also requires that a portion of the
benefits achieved from the bond sales be passed through to
customers by reducing the competitive transition charge. This
transition charge is a temporary per-kilowatt-hour charge
designed to collect a company's transition cost in a competitive
environment.
West Penn filed a petition for a supplemental Qualified
Rate Order (QRO) with the Pennsylvania PUC on April 23, 1999 to
clarify the procedures and structure associated with the issuance
of Transition Bonds. The supplemental findings sought by West
Penn relate primarily to the computation, design, and
reconciliation of the Intangible Transition Charges (ITC), a
portion of the CTC dedicated to the transition bonds. These
findings are expected to significantly improve the credit profile
of the Transition Bonds. On August 2, 1999, West Penn entered a
settlement agreement with the other parties and requested
approval of the settlement from the Pennsylvania PUC. The
settlement agreement resolves annual reconciliation
<PAGE>
- 22 -
timing issues and other issues and presented to the Pennsylvania
PUC for resolution a question as to the funding of the ITC in the
event of a revenue shortfall. On August 12, 1999, the PUC
approved West Penn's petition as modified by the settlement
agreement. The approval provides that the shopping credit may
be adjusted when circumstances warrant.
The Company plans to reduce transition costs and related
capitalization with the proceeds from the transition bonds.
* Redemption of Preferred Stock
The Company's Pennsylvania subsidiary, West Penn,
redeemed all outstanding shares of its cumulative preferred stock
on July 15, 1999. The redemption was funded with proceeds from
new medium-term notes issued by West Penn in the second quarter
at a 6.375% coupon rate.
The redemption of the preferred stock allowed West Penn
to revise its Articles of Incorporation providing greater
financial flexibility in restructuring West Penn's debt and
transferring West Penn's generating facilities into a new
unregulated generating subsidiary.
* Repurchase of First Mortgage Bonds
During the second quarter and the early part of the third
quarter of 1999, West Penn repurchased $96.4 million of first
mortgage bonds. This reduced that Company's outstanding first
mortgage bonds to $428.6 million. West Penn expects to make
additional purchases in the second half of the year.
* Issuance of Notes
In April 1999, Monongahela Power, Potomac Edison, and
West Penn issued $7.7 million, $9.3 million, and $13.83 million,
respectively, of 5.50% 30-year pollution control revenue notes to
Pleasants County, West Virginia.
In June 1999, West Penn issued $84 million of five-year
unsecured medium-term notes at an interest rate of 6.375%.
* Year 2000 Readiness Disclosure
The transition from 1999 into the Year 2000 (Y2K) has the
potential to cause serious problems to most organizations,
including the Company, related to software and various equipment
with embedded chips which may not properly recognize calendar
dates. To minimize such problems, the Company has been working
under a comprehensive Y2K program to identify and remediate the
problem areas in order to continue operations without significant
problems in 2000 and beyond. An Executive Task Force is
coordinating the efforts of 24 separate Y2K Teams, representing
all business and support units in the Company.
In May 1998, the North American Electric Reliability
Council (NERC), of which the Company is a member, accepted a
request from the United States Department of Energy to coordinate
the industry's Y2K efforts. The electric utility industry and
the Company have segmented the Y2K problem into the following
components:
<PAGE>
- 23 -
* Computer hardware and software;
* Embedded chips in various equipment; and
* Vendors and other organizations on which the Company relies
for critical materials and services.
The industry's and the Company's efforts for each of
these three components include inventory, assessment and, where
possible, remediation of the problem areas by repair, replacement
or removal, supplemented by confirmation testing and contingency
plans. Contingency plans include alternate methods of certain
operations to help avoid electric service or business
interruptions, and the review and update of restoration of
service plans to mitigate the severity and length of
interruptions in the unlikely event that any should occur.
Based on this work, the Company has determined that as of
June 30, 1999 all of its critical components and systems related
to safety and the production and distribution of electricity and
nearly all of its important business systems (accounting,
billing, etc.) are Y2K ready. The Company anticipates that the
remediation and testing work on the remaining business and non-
critical systems will be completed by September 30, 1999. The
Company has defined Y2K Ready to mean that a determination has
been made by testing or other means that a component or system
will be able to perform its critical functions, or that
contingency plans are in place to overcome any inability to do
so.
The Company's readiness program has been conducted in
accordance with time schedules recommended by state regulatory
commissions and by NERC. As is the case of most electric
utilities, Allegheny is interconnected with neighboring
utilities, which provide added strength of supply diversity and
flexibility. But the interconnections also mean that any one
utility's Y2K readiness is related to the readiness of the group.
Integrated electric utilities are uniquely reliant on each other
to avoid, in a worst case situation, a cascading failure of the
entire electrical system. The Company is working with the Edison
Electric Institute, the Electric Power Research Institute, the
NERC, and the East Central Area Reliability Agreement group
(ECAR) to capitalize on industry-wide experiences and to
participate in industry-wide testing and contingency planning.
Since the Company and its neighboring utilities in the ECAR group
are all participants in the NERC Y2K effort (which had a target
completion date of June 30 for critical systems related to
production and delivery of electricity), the Company believes
that this worst case possibility has been reduced to an unlikely
event. The Company has recently re-tested its existing
contingency plans for restoration of service even if this
unlikely event were to occur.
As part of the on-going NERC program, the Company
participated in an industry-wide Y2K drill on April 9, 1999 and
will participate in a more extensive industry-wide drill planned
for September 9, 1999. While the electric utility industry is
aware of the extensive Y2K programs of the major
telecommunications companies, the industry has determined that
telecommunication facilities are so important to continued
operations that we must have contingency plans just in case some
of those facilities may not be available. The drills are dry
runs designed to test the ability of utilities to continue to
operate with less than normal telecommunication facilities.
During the April test, the Company was able to maintain adequate
communications under a simulated failure of selected systems, and
obtained
<PAGE>
- 24 -
valuable information for improvement of its plans. NERC has
reported that the industry-wide tests produced similar results.
On December 31, 1999, the Company will have extra staff in
critical areas of the system to implement these and other
contingency plans if they are required.
The SEC requires that each company disclose its estimate
of the "most reasonably likely worst case scenario" of a negative
Y2K event. Since the Company and the industry are working
diligently to avoid any disruption of electric service, the
Company believes its customers will not experience any
significant long-term disruptions of electric service. It is the
Company's opinion that the "most reasonably likely worst case
scenario" is a Y2K event or series of events at Company
facilities or at the facilities of neighboring utilities that
escaped discovery that may cause isolated disruptions of service.
All utilities, including the Company, have experience in the
implementation of existing restoration of service plans. As
stated above the Company's Y2K program includes a review and
update of these plans to respond quickly to any such events.
The Company is aware of the importance of electricity to
its customers and is using its best efforts to avoid any serious
Y2K problems. Despite the Company's best efforts, including
working with internal resources, external vendors, and industry
associations, the Company cannot guarantee that it will be able
to conduct all of its operations without Y2K interruptions. To
the extent that any Y2K problem may be encountered, the Company
is committed to resolution as expeditiously as possible to
minimize the effect of any such event.
Expenditures for Y2K readiness are not expected to have a
material effect on the Company's results of operations or
financial position primarily because of the significant time and
money expended over the past several years on upgrading and
replacing its large mainframe computer systems and software.
While the Y2K work has been and continues to be significant, it
primarily represents a labor-intensive effort of remediation,
component testing, multiple systems testing, documentation, and
contingency planning. While outside contractors and equipment
vendors have been employed for some of the work, the Company has
used its own employees for most of the effort because of their
experience with the Company's systems and equipment. The Company
currently estimates that its total incremental expenditures for
the Y2K effort since it began identification of Y2K costs will be
within a range of $15 to $20 million of which about $14 million
has been incurred through June 30, 1999. These expenditures are
financed by internal sources and primarily result from the
purchase of external expert assistance by the Generation and
Information Services departments. The expenditures have not
required a material reduction in the normal budgets and work
efforts of these departments.
The descriptions herein of the Company's Y2K effort are
made pursuant to the Year 2000 Information and Readiness
Disclosure Act. Forward-looking statements herein are made
pursuant to the Private Securities Litigation Reform Act of 1995.
There can be no assurance that actual results will not materially
differ from expectations.
<PAGE>
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* Electric Energy Competition
The electricity supply segment of the electric utility
industry in the United States is in the midst of becoming
competitive. The Energy Policy Act of 1992 began the process of
deregulating the wholesale exchange of power within the electric
industry by permitting the FERC to compel electric utilities to
allow third parties to sell electricity to wholesale customers
over their transmission systems. Since 1992, the wholesale
electricity market has become increasingly competitive as
companies began to engage in nationwide power trading. In
addition, an increasing number of states have taken active steps
toward allowing retail customers the right to choose their
electricity supplier. All of the states served by the utility
subsidiaries have investigated or implemented retail access to
alternate electricity suppliers. The Company has been an
advocate of federal legislation to create competition in the
retail electricity markets to avoid regional dislocations and
ensure level playing fields.
In the absence of federal legislation, state-by-state
implementation has begun. All of the states the operating
subsidiaries serve are at various stages of implementation or
investigation of programs that allow customers to choose their
electric supplier. Pennsylvania is furthest along with a retail
program in place, while Maryland, Virginia and Ohio passed
legislation this year to implement retail choice. West Virginia
continues to actively study this issue.
Activities at the Federal Level
The Company is an advocate of federal legislation to
mandate competition in retail electricity markets nationwide to
avoid regional dislocations and ensure level playing fields. The
Company continues to seek enactment of federal legislation to
bring choice to all retail electric customers, deregulate the
generation and sale of electricity on a national level, and
create a more liquid, free market for electric power. Fully
meeting challenges in the emerging competitive environment will
be difficult for the Company unless certain outmoded and anti-
competitive laws, specifically the Public Utility Holding Company
Act of 1935 (PUHCA) and Section 210 of the Public Utility
Regulatory Policies Act of 1978 (PURPA), are repealed or
significantly revised. The Company continues to advocate the
repeal of PUHCA and PURPA on the grounds that they are obsolete
and anti-competitive, and that PURPA results in utility customers
paying above-market prices for power. In the U.S. Congress, a
series of hearings on the competition issue in both the House and
Senate recently have been completed, and committee staffs in both
chambers are writing comprehensive competition bills. Consensus
remains elusive, however, with significant hurdles remaining in
both houses of Congress. While it is too early to tell whether
initial momentum on the issue will result in legislation in the
current Congress, the competition issue has received more
attention this year than ever before.
<PAGE>
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Virginia
The Virginia Electric Utility Restructuring Act (the
"Restructuring Act") was passed by the Virginia General Assembly
on March 25, 1999 and was signed by the Governor of
Virginia on March 29, 1999. The Legislative Transition Task
Force on Electric Utility Restructuring, which was established by
the Restructuring Act, is holding hearings this summer on a
number of issues concerning the implementation of retail
competition in Virginia. Working groups also continue to meet
with State Corporation Commission staff, comments were filed and
Commission hearings have been held to discuss the proposed retail
pilot programs of other utilities in the state. Recommended
interim rules for retail pilot programs were issued August 6,
1999, subject to final approval by the Commission. It is
anticipated that these interim rules will provide a framework for
rules and regulations applicable to full implementation of retail
choice beginning in 2002. The Commission is seeking comments on
issues relating to the development of and participation in
regional transmission entities required by the Restructuring Act
to facilitate access to electric transmission systems.
Maryland
The Maryland General Assembly passed legislation to
restructure the electric utility industry on April 2, 1999, and
on April 8, 1999, the Governor of Maryland signed the legislation
that will bring competition to Maryland's electric generation
market. The Maryland PSC is in the process of implementing the
new law. Final Electric Restructuring Roundtable reports were
filed with the commission on May 3, 1999. Legislative style
hearings have been scheduled this summer with the commission
expected to issue decisions by the end of the year.
As previously reported, Potomac Edison, the Company's
Maryland subsidiary, filed testimony in Maryland's investigation
into transition costs, price protection, and unbundled rates.
The filing requested recovery of transition costs and a surcharge
to recover the cost of the AES Warrior Run cogeneration project
beyond 2001. The staff of the Maryland PSC advised the
commission that a tentative settlement agreement was achieved
with the majority of the parties participating in the
negotiations. The parties are in the process of finalizing the
agreement, which should be filed by August 20, 1999.
Ohio
The Ohio General Assembly passed legislation on June 22,
1999 to restructure the electric utility industry. Governor Taft
signed the bill soon thereafter, and all of the state's customers
will be able to choose their electricity supplier starting
January 1, 2001, beginning a five-year transition to market
rates. Total electric rates will be frozen over that period, and
residential customers are guaranteed a 5% cut in the generation
portion of their rate. The determination of stranded cost
recovery will be handled by The Public Utilities Commission of
Ohio. The bill stipulates that no entity shall own or control
transmission facilities after the start of competitive retail
electric service unless that entity is a member of and transfers
control of those facilities to one or more qualifying independent
<PAGE>
- 27 -
transmission entities. The legislation provides for consumer
education, universal service, consolidation of Ohio's low income
customer assistance programs as well as incentives for
development of renewable resources and disclosure of the
environmental characteristics of power supplies.
West Virginia
In December 1996, the W.Va. PSC issued an Order
initiating a general investigation regarding the restructuring of
the electric utility industry. A Task Force was established to
further investigate restructuring issues. In December 1997, the
Task Force approved legislative language that would have given
the W.Va. PSC broad authority to implement retail choice. The
proposed legislation was substantially modified by the West
Virginia Legislature and passed in March 1998. The legislation
directed the W.Va. PSC to meet with all interested parties to
develop a restructuring plan which would meet the dictates and
goals of the legislation. Interested parties formed a new Task
Force that met during 1998, but the Task Force was unable to
reach a consensus on a model for restructuring. The W.Va. PSC
issued an Order on December 23, 1998 setting hearings to begin on
August 17, 1999 and August 24, 1999. The August 17 hearing will
address certification, licensing, bonding, reliability, universal
service, consumer protection, and code of conduct. The August 24
hearing will address subsidies and stranded costs. Following
these hearings, the W.Va. PSC will make a determination whether
restructuring is in the public interest.
Accounting for the Effects of Price Deregulation
In July 1997, the Emerging Issues Task Force (EITF) of
the Financial Accounting Standards Board (FASB) released Issue
No. 97-4, "Deregulation of the Pricing of Electricity - Issues
Related to the Application of FASB Statement Nos. 71 and 101,"
which concluded that utilities should discontinue application of
Statement of Financial Accounting Standards (SFAS) No. 71 for the
generation portion of their business when a deregulation plan is
in place and its terms are known. Because Maryland, Ohio, and
Virginia have passed legislation for a deregulation plan, the
Company has determined that it will be required to discontinue
use of SFAS No. 71 for the generation portion of its business
(the Maryland, Ohio, and Virginia portion) on an uncertain future
date. One of the conclusions of the EITF is that after
discontinuing SFAS No. 71, utilities should continue to carry on
their books the assets and liabilities recorded under SFAS No. 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 Maryland, Ohio, and
Virginia legislations establish definitive processes for
transition to deregulation and market-based pricing for electric
generation. Until relevant regulatory proceedings are complete
and final orders are received, the Company is unable to predict
the effect of discontinuing SFAS No. 71, but it may be required
to write off significant unrecoverable regulatory assets,
impaired assets, and uneconomic commitments.
<PAGE>
- 28 -
ALLEGHENY ENERGY, INC.
Part II - Other Information to Form 10-Q
for Quarter Ended June 30, 1999
ITEM 1. LEGAL PROCEEDINGS
The MidAtlantic case, previously reported as an ongoing
litigation matter, has been settled and an Order was entered on
July 9, 1999 dismissing the case with prejudice.
As of August 9, 1999, Monongahela Power Company has been
named as a defendant, along with multiple other defendants in a
total of approximately 8,000 asbestos cases. The Potomac Edison
Company and West Penn Power Company were named as defendants
along with multiple other defendants in approximately one-half of
those cases. As of June 30, 1999, a total of 721 cases have been
settled and/or dismissed against Monongahela Power Company, The
Potomac Edison Company, and West Penn Power Company for
reasonable settlement amounts. While the operating subsidiaries
believe that all of the cases are without merit, they cannot
predict the outcome nor are they able to determine whether
additional cases will be filed.
As previously reported, on March 11, 1999, the United
States Court of Appeals for the Third Circuit vacated the United
States District Court for the Western District of Pennsylvania's
denial of the Company's motion for preliminary injunction,
enjoining DQE, Inc. (DQE), parent company of Duquesne Light
Company in Pittsburgh, Pa., from taking actions prohibited by the
Merger Agreement. The Circuit Court stated that if DQE breached
the Merger Agreement, the Company may be entitled to specific
performance of the Merger Agreement. The Circuit Court also
stated that the Company could be irreparably harmed if DQE took
actions that would prevent the Company from receiving the
specific performance remedy. The Circuit Court remanded the case
to the District Court for further proceedings consistent with its
opinion.
In the District Court, DQE has filed a motion for
summary judgment which the Company has opposed. The court has
not yet ruled. The Company cannot predict the outcome of this
litigation. However, the Company believes that DQE's basis for
seeking to terminate the merger is without merit. Accordingly,
the Company continues to seek the remaining regulatory approvals
from the Department of Justice and the Securities and Exchange
Commission. It is not likely either agency will act on the
requests unless the Company obtains judicial relief requiring DQE
to move forward.
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 13,
1999, votes were taken for the election of directors to serve
until the next annual meeting of stockholders and the approval of
the appointment of Price Waterhouse LLP (now
PricewaterhouseCoopers LLP) as independent accountants. Votes
were also taken on shareholder proposals related to the issuance
of a report to shareholders on greenhouse gas emissions, the
approval by shareholders of golden parachutes above a certain
amount, and the nomination of two additional directors. The
total number of votes cast was 95,345,217 with the following
results:
<PAGE>
- 29 -
Nominees for Director Votes for Votes Withheld
Eleanor Baum 94,398,566 946,651
William L. Bennett 94,419,147 926,070
Wendell F. Holland 94,382,160 963,057
Phillip E. Lint 94,357,370 987,847
Frank A. Metz, Jr. 94,414,981 930,236
Alan J. Noia 94,446,638 898,579
Steven H. Rice 94,438,790 906,427
Gunnar E. Sarsten 94,447,344 897,873
Votes For Votes Against Abstentions
Approval of independent
accountants 94,067,371 776,103 501,743
Shareholder proposal regarding
the issuance of a report to
shareholders regarding
greenhouse gas emissions 5,505,912 68,601,720 6,316,617
Shareholder proposal regarding
the approval by shareholders
of golden parachutes above
a certain amount 27,736,298 47,776,733 4,911,213
Shareholder proposal regarding
the nomination of two
additional directors 5,792,285 72,555,288 2,076,671
The shareholders elected the directors and approved the
Company's independent accountants. The shareholders did not
approve the shareholder proposals regarding global warming,
golden parachutes, or the nomination of two additional directors.
<PAGE>
- 30 -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) The Company filed a Form 8-K on July 20, 1999.
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 ENERGY, INC.
/s/ T. J. KLOC
T. J. Kloc, Vice President
and Controller
(Chief Accounting Officer)
August 13, 1999
EXHIBIT-3.(ii)
<PAGE>
__________________________________________
By-Laws
OF
ALLEGHENY ENERGY, INC.
As Amended to July 15, 1999
___________________________________________
<PAGE>
1
BY-LAWS
OF
ALLEGHENY ENERGY, INC.
______________
ARTICLE 1.
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 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
<PAGE>
2
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.
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.
(PAGE>
3
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
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 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 stock-
holder 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 td be nominated, the number and
<PAGE>
4
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 under-
standing, or upon the exercise of warrants, options or rights to convert or
exchange (whether such rights are exercisable 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 that proposals and nominees not be considered if such notice
has not been given.
ARTICLE II.
BOARD OF DIRECTORS.
SECTION 1. 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 II. 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,
<PAGE>
5
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.
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.
SECTION 7. Action by Written Consent, Telephonic or Other Similar Commun-
ications 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 communica-
tions 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.
<PAGE>
6
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 of
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 these By-
Laws or the Company's Charter; to declare dividends or distributions on 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.
<PAGE>
7
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
instruments 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. Shares.
Evidence of ownership of shares of capital stock of the Corporation shall be
in such form or forms as the Board of Directors may from time to time prescribe,
including certificates and electronic registration of uncertificated shares.
Certificates shall be signed by the Chairman, 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
<PAGE>
8
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.
Electronic registration of uncertificated shares shall be in the form
maintained by the Corporation or its agents. Upon request, any holder of
uncertificated shares shall be entitled to receive a certificate therefor.
SECTION 2. Transfer of Shares.
Shares in the capital stock of the Corporation evidenced by certificates 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.
Uncertificated shares are transferrable on the books of the Corporation upon
receipt of the proper transfer documents, instructions and assignments as may
be reasonably required by the Corporation or its agents.
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, N. Y.
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.
<PAGE>
9
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, adminstrative or investiga-
tive, 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 contendere 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 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 had 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
<PAGE>
10
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 1 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
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.
<PAGE>
11
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 1 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 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.
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 VIII shall not be
altered, amended or repealed except by the stockholders.
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