<PAGE>
Page 1 of 11
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1998
Commission File Number 0-14688
ALLEGHENY GENERATING COMPANY
(Exact name of registrant as specified in its charter)
Virginia 13-3079675
(State of Incorporation) (I.R.S. Employer Identification No.)
10435 Downsville Pike, Hagerstown, Maryland 21740-1766
Telephone Number - 301-790-3400
The registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days.
At May 15, 1998, 1,000 shares of the Common Stock ($1.00 par
value) of the registrant were outstanding.
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ALLEGHENY GENERATING COMPANY
Form 10-Q for Quarter Ended March 31, 1998
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Statement of income - Three months ended
March 31, 1998 and 1997 3
Balance sheet - March 31, 1998
and December 31, 1997 4
Statement of cash flows - Three months ended
March 31, 1998 and 1997 5
Notes to financial statements 6-7
Management's discussion and analysis of financial
condition and results of operations 8-10
PART II--OTHER INFORMATION 11
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ALLEGHENY GENERATING COMPANY
Statement of Income
Three Months Ended
March 31
1998 1997
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES $ 18,604 $ 20,216
OPERATING EXPENSES:
Operation and maintenance expense 953 1,285
Depreciation 4,226 4,284
Taxes other than income taxes 1,160 1,195
Federal income taxes 2,865 3,124
Total Operating Expenses 9,204 9,888
Operating Income 9,400 10,328
OTHER INCOME, NET 50 -
Income Before Interest Charges 9,450 10,328
INTEREST CHARGES:
Interest on long-term debt 3,187 3,728
Other interest 326 232
Total Interest Charges 3,513 3,960
NET INCOME $ 5,937 $ 6,368
See accompanying notes to financial statements.
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ALLEGHENY GENERATING COMPANY
Balance Sheet
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
ASSETS: (Thousands of Dollars)
Property, Plant, and Equipment:
<S> <C> <C>
At original cost, including $926,000
and $906,000 under construction $ 828,691 $ 828,658
Accumulated depreciation (197,399) (193,173)
631,292 635,485
Current Assets:
Cash and temporary cash investments 32 5,359
Materials and supplies - at average cost 2,033 1,832
Prepaid taxes 2,746 4,442
Other 42 243
4,853 11,876
Deferred Charges:
Regulatory assets 7,979 7,979
Unamortized loss on reacquired debt 8,218 8,393
Other 178 187
16,375 16,559
Total Assets $ 652,520 $ 663,920
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock - $1.00 par value per share,
authorized 5,000 shares, outstanding
1,000 shares $ 1 $ 1
Other paid-in capital 197,459 199,522
197,460 199,523
Long-term debt 148,759 148,735
346,219 348,258
Current Liabilities:
Long-term debt due within one year 10,000 60,000
Notes payable to affiliates 42,450 -
Accounts payable to affiliates 5,332 6,135
Interest accrued 826 4,404
Taxes accrued 1,019 -
Other 150 1
59,777 70,540
Deferred Credits:
Unamortized investment credit 48,012 48,342
Deferred income taxes 172,658 169,325
Regulatory liabilities 25,854 27,455
246,524 245,122
Total Capitalization and Liabilities $ 652,520 $ 663,920
</TABLE>
See accompanying notes to financial statements.
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ALLEGHENY GENERATING COMPANY
Statement of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
March 31
1998 1997
(Thousands of Dollars)
CASH FLOWS FROM OPERATIONS:
<S> <C> <C> <C> <C>
Net income $ 5,937 $ 6,368
Depreciation 4,226 4,284
Deferred investment credit and income taxes, net 1,401 1,648
Changes in certain current assets and
liabilities:
Accounts receivable - 405
Materials and supplies (201) (35)
Accounts payable (803) (124)
Taxes accrued 1,019 1,121
Interest accrued (3,578) (3,548)
Other, net 2,256 2,093
10,257 12,212
CASH FLOWS FROM INVESTING:
Construction expenditures (34) (124)
CASH FLOWS FROM FINANCING:
Retirement of long-term debt (50,000) (3,267)
Notes payable to affiliates 42,450 -
Cash dividends on common stock (8,000) (8,925)
(15,550) (12,192)
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (5,327) (104)
Cash and temporary cash investments at January 1 5,359 131
Cash at March 31 $ 32 $ 27
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $6,877 $7,277
Income taxes - 21
See accompanying notes to financial statements.
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ALLEGHENY GENERATING COMPANY
Notes to Financial Statements
1. The Company's Notes to Financial Statements in its Annual
Report on Form 10-K for the year ended December 31, 1997,
should be read with the accompanying financial statements and
the following notes. With the exception of the December 31,
1997, balance sheet in the aforementioned annual report on
Form 10-K, the accompanying financial statements appearing on
pages 3 through 5 and these notes to financial statements are
unaudited. In the opinion of the Company, such financial
statements together with these notes contain all adjustments
(which consist only of normal recurring adjustments)
necessary to present fairly the Company's financial position
as of March 31, 1998, and the results of operations and cash
flows for the three months ended March 31, 1998 and 1997.
2. The Statement of Income reflects the results of past
operations and is not intended as any representation as to
future results. For purposes of the Balance Sheet and
Statement of Cash Flows, temporary cash investments with
original maturities of three months or less, generally in the
form of repurchase agreements, are considered to be the
equivalent of cash.
3. The Company systematically reduces capitalization each year
as its asset depreciates, resulting in the payment of
dividends in excess of current earnings. The Securities and
Exchange Commission has approved the Company's request to pay
common dividends out of capital. In the first quarter of
1998, common dividends of $5,937,0000 were paid from retained
earnings, reducing the account balance to zero, and common
dividends of $2,063,000 were paid from other paid-in capital.
The payment of dividends out of capital surplus will not be
detrimental to the financial integrity or working capital of
either the Company or its Parents (Monongahela Power Company,
The Potomac Edison Company, and West Penn Power Company), nor
will it adversely affect the protections due debt security
holders.
4. On April 7, 1997, Allegheny Power System, Inc. and DQE, Inc.
(DQE), parent company of Duquesne Light Company in
Pittsburgh, Pennsylvania, announced that they had agreed to
merge in a tax-free, stock-for-stock transaction. The
combined company will be called Allegheny Energy, Inc.
(Allegheny Energy).
On March 25, 1998, the Maryland Public Service Commission
(PSC) approved a settlement agreement between Allegheny
Energy and various parties, in which the PSC indicated its
approval of the merger. This action was requested in
connection with the proposed issuance of Allegheny Energy
stock to exchange for DQE stock to complete the merger.
On April 30, 1998, the Pennsylvania Public Utility Commission
(PUC) adopted a motion (the "Order") approving the merger
subject to a condition precedent that the merged entity joins
a Federal Energy Regulatory Commission (FERC) approved, fully
functioning Independent System Operator (ISO). The Order
specifically approved the Midwest ISO as satisfying the
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condition precedent provided it was FERC approved and fully
functioning. Allegheny Energy has joined the Midwest ISO,
contingent only on merger consummation, but it is not
projected to be FERC approved and fully functioning until on
or after January 1, 2000. The Order also noted that the
Pennsylvania, New Jersey, Maryland, L.L.C. ISO (PJM ISO)
might also satisfy the pre-condition but that it would
require an updated study and analysis be submitted to the
PUC. The PJM ISO is FERC approved and fully functioning.
The PUC Order noted that the merger would produce substantial
savings and further noted that an 18-month delay recommended
by two Administrative Law Judges (ALJs) in their recommended
decision of March 25, 1998, was not in the public interest.
Allegheny Energy is dismayed that the PUC nevertheless
imposed a condition precedent that could impose a delay
likely to be as long or longer than recommended by the ALJs.
Upon official entry of the PUC's Order, Allegheny Energy is
likely to file a motion for reconsideration to allow the
merger to go forward immediately as it has already joined the
Midwest ISO and has already pledged sufficient interim
mitigation measures until the Midwest ISO is functioning,
including temporary relinquishment of control of 570
megawatts of generation to mitigate market power concerns.
Allegheny Energy may also propose additional interim
mitigation measures. Allegheny Energy is also exploring
further the PJM ISO. Allegheny Energy believes the merger is
unlikely to be completed if the pre-condition in the Order
actually imposes significant delay.
The Nuclear Regulatory Commission (NRC) has approved the
transfer of control of the operating licenses for DQE's
nuclear plants. While Duquesne Light Company (Duquesne),
principal subsidiary of DQE, will continue to be the
licensee, this approval was necessary since control of
Duquesne will pass from DQE to Allegheny Energy after the
merger.
Merger-related decisions are expected by the end of the
second quarter from the FERC, the Department of
Justice/Federal Trade Commission, and the Securities and
Exchange Commission. Allegheny Energy is also filing for
review of certain merger-related activities with the Public
Service Commission of West Virginia and the Virginia State
Corporation Commission.
5. Income tax regulatory assets/(liabilities), net of ($18)
million at March 31, 1998, are primarily related to
investments in electric facilities.
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ALLEGHENY GENERATING COMPANY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
COMPARISON OF FIRST QUARTER OF 1998 WITH FIRST QUARTER OF 1997
The Notes to Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of
Operations in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, 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. 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; future economic conditions; earnings retention;
developments in the legislative, regulatory, and competitive
environments in which the Company operates; environmental
legislative and regulatory changes; and other circumstances that
could affect anticipated revenues and costs, such as unscheduled
maintenance or repair requirements and compliance with laws and
regulations.
Significant Events in the First Quarter of 1998
On March 25, 1998, the Maryland Public Service Commission
(PSC) approved a settlement agreement between Allegheny Energy,
Inc. (Allegheny Energy) and various parties, in which the PSC
indicated its approval of the issuance of stock for the merger
with DQE, Inc. (DQE). This action was requested in connection
with the proposed issuance of Allegheny Energy stock to exchange
for DQE stock to complete the merger. Thereafter, the Nuclear
Regulatory Commission approved the transfer of control of the
operating licenses for Duquesne Light Company's (Duquesne) Beaver
Valley Unit No.'s 1 and 2 and Perry Unit No. 1 nuclear plants as
required for the proposed merger between Allegheny Power System,
Inc. and DQE, parent company of Duquesne. Duquesne will still be
the licensee, but the approval was necessary since control of
Duquesne after the merger will pass from DQE to Allegheny Energy.
<PAGE>
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On April 30, 1998, the Pennsylvania Public Utility
Commission (PUC) adopted a motion (the "Order") approving the
merger subject to a condition precedent that the merged entity
joins a Federal Energy Regulatory Commission (FERC) approved,
fully functioning Independent System Operator (ISO). The Order
specifically approved the Midwest ISO as satisfying the condition
precedent provided it was FERC approved and fully functioning.
Allegheny Energy has joined the Midwest ISO, contingent only on
merger consummation, but it is not projected to be FERC approved
and fully functioning until on or after January 1, 2000. The
Order also noted that the Pennsylvania, New Jersey, Maryland,
L.L.C. ISO (PJM ISO) might also satisfy the pre-condition but
that it would require an updated study and analysis be submitted
to the PUC. The PJM ISO is FERC approved and fully functioning.
The PUC Order noted that the merger would produce substantial
savings and further noted that an 18-month delay recommended by
two Administrative Law Judges (ALJs) in their recommended
decision of March 25, 1998, was not in the public interest.
Allegheny Energy is dismayed that the PUC nevertheless imposed a
condition precedent that could impose a delay likely to be as
long or longer than recommended by the ALJs. Upon official entry
of the PUC's Order, Allegheny Energy is likely to file a motion
for reconsideration to allow the merger to go forward immediately
as it has already joined the Midwest ISO and has already pledged
sufficient interim mitigation measures until the Midwest ISO is
functioning, including temporary relinquishment of control of 570
megawatts of generation to mitigate market power concerns.
Allegheny Energy may also propose additional interim mitigation
measures. Allegheny Energy is also exploring further the PJM
ISO. Allegheny Energy believes the merger is unlikely to be
completed if the pre-condition in the Order actually imposes
significant delay.
Review of Operations
As described under Liquidity and Capital Requirements,
revenues are determined under a cost of service formula rate
schedule. Therefore, if all other factors remain equal, revenues
are expected to decrease each year due to a normal continuing
reduction in the Company's net investment in the Bath County
station and its connecting transmission facilities upon which the
return on investment is determined. The net investment
(primarily net plant less deferred income taxes) decreases to the
extent that provisions for depreciation and deferred income taxes
exceed net plant additions. Revenues for the first quarter of
1998 decreased due to a reduction in net investment and reduced
operating expenses.
The decrease in operating expenses in the first quarter
of 1998 resulted from reduced operation and maintenance expense
and a decrease in federal income taxes due to a decrease in
operating income before taxes.
The decrease in interest on long-term debt in 1998 was
primarily the result of a decrease in the average amount of long-
term debt outstanding.
Liquidity and Capital Requirements
The Company's discussion on Liquidity and Capital
Requirements and Review of Operations in its Annual Report on
Form 10-K for the year ended December 31, 1997, should be read
with the following information.
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Pursuant to an agreement, the Parents of the Company buy
all of the Company's capacity in the Bath County station priced
under a "cost of service formula" wholesale rate schedule
approved by the FERC. Under this arrangement, the Company
recovers in revenues all of its operation and maintenance
expenses, depreciation, taxes, and a return on its investment.
The Company's rates are set forth by a formula filed with
and previously accepted by the FERC. The only component which
changes is the Return on Equity (ROE). The ROE authorized for
the Company was 11.2% in 1995. Pursuant to a settlement
agreement filed with and approved by the FERC, the Company's ROE
was set at 11% for 1996 and will continue at that rate until the
time any affected party seeks renegotiation of the ROE. Notice
of such intent to seek a revision in ROE must be filed during a
notice period each year between November 1 and November 15. No
requests for change were filed during the 1997 notice period.
Therefore, the Company's ROE will remain at 11% in 1998.
As previously reported, the Company has received
authority from the Securities and Exchange Commission (SEC) to
pay common dividends from time to time through December 31, 2001,
out of capital to the extent permitted under applicable
corporation law and any applicable financing agreements which
restrict distributions to shareholders. Due to the nature of
being a single asset company with declining capital needs, the
Company systematically reduces capitalization each year as its
asset depreciates. This has resulted in the payment of dividends
in excess of current earnings and the reduction of retained
earnings. The Company's goal is to retire debt and pay dividends
in amounts necessary to maintain a common equity position of
about 45%. The payment of dividends out of capital surplus will
not be detrimental to the financial integrity or working capital
of either the Company or its Parents, nor will it adversely
affect the protections due debt security holders.
The Company and its Parents have spent considerable time
and effort over the past several years on the issue of the year
2000 software compliance, and the effort is continuing. Certain
software has already been made year 2000 compliant by upgrades
and replacement, and analysis is continuing on others, in
accordance with a schedule planned to permit the Company and its
Parents to process information in the year 2000 and beyond
without significant problems. Expenditures for year 2000
compliance are not expected to have a material effect on the
Company's results of operations or financial position.
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ALLEGHENY GENERATING COMPANY
Part II - Other Information to Form 10-Q
for Quarter Ended March 31, 1998
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) (27) Financial Data Schedule
(b) No reports on Form 8-K were filed on behalf of the
Company for the quarter ended March 31, 1998.
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 GENERATING COMPANY
/s/ T. J. KLOC
T. J. Kloc, Controller
(Chief Accounting Officer)
May 15, 1998
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 32
<SECURITIES> 0
<RECEIVABLES> 6
<ALLOWANCES> 0
<INVENTORY> 2,033
<CURRENT-ASSETS> 4,853
<PP&E> 828,691
<DEPRECIATION> 197,399
<TOTAL-ASSETS> 652,520
<CURRENT-LIABILITIES> 59,777
<BONDS> 148,759
0
0
<COMMON> 1
<OTHER-SE> 197,459
<TOTAL-LIABILITY-AND-EQUITY> 652,520
<SALES> 18,604
<TOTAL-REVENUES> 18,604
<CGS> 953
<TOTAL-COSTS> 6,339
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,513
<INCOME-PRETAX> 8,802
<INCOME-TAX> 2,865
<INCOME-CONTINUING> 5,937
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,937
<EPS-PRIMARY> 0.00<F1>
<EPS-DILUTED> 0.00<F1>
<FN>
<F1>*All common stock is owned by parent, no EPS required.
</FN>
</TABLE>
