<PAGE>
Page 1 of 12
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 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 November 11, 1998, 1,000 shares of the Common Stock ($1.00
par value) of the registrant were outstanding.
<PAGE>
- 2 -
ALLEGHENY GENERATING COMPANY
Form 10-Q for Quarter Ended September 30, 1998
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Statement of income - Three and nine months ended
September 30, 1998 and 1997 3
Balance sheet - September 30, 1998
and December 31, 1997 4
Statement of cash flows - Nine months ended
September 30, 1998 and 1997 5
Notes to financial statements 6-8
Management's discussion and analysis of financial
condition and results of operations 9-11
PART II--OTHER INFORMATION 12
<PAGE>
- 3 -
ALLEGHENY GENERATING COMPANY
Statement of Income
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
ELECTRIC OPERATING REVENUES $ 18,303 $ 19,664 $ 56,033 $ 60,288
OPERATING EXPENSES:
Operation and maintenance expense 888 856 3,383 3,612
Depreciation 4,242 4,284 12,710 12,852
Taxes other than income taxes 1,168 1,185 3,505 3,581
Federal income taxes 2,708 3,109 8,480 9,374
Total Operating Expenses 9,006 9,434 28,078 29,419
Operating Income 9,297 10,230 27,955 30,869
OTHER INCOME, NET 35 9,054 86 9,055
Income Before Interest Charges 9,332 19,284 28,041 39,924
INTEREST CHARGES:
Interest on long-term debt 2,621 3,624 8,427 11,037
Other interest 1,086 264 2,091 728
Total Interest Charges 3,707 3,888 10,518 11,765
NET INCOME $ 5,625 $ 15,396 $ 17,523 $ 28,159
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- 4 -
ALLEGHENY GENERATING COMPANY
Balance Sheet
(Thousands of Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
ASSETS:
<S> <C> <C> <C> <C>
Property, Plant, and Equipment:
At original cost, including $967
and $906 under construction $ 828,785 $ 828,658
Accumulated depreciation (205,960) (193,173)
622,825 635,485
Current Assets:
Cash and temporary cash investments 27 5,359
Materials and supplies - at average cost 2,130 1,832
Prepaid taxes 3,621 4,442
Other 306 243
6,084 11,876
Deferred Charges:
Regulatory assets 7,979 7,979
Unamortized loss on reacquired debt 7,918 8,393
Other 173 187
16,070 16,559
Total Assets $ 644,979 $ 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 161,045 199,522
161,046 199,523
Long-term debt 148,806 148,735
309,852 348,258
Current Liabilities:
Notes payable to parent 66,250 -
Long-term debt due within one year 10,000 60,000
Accounts payable to affiliates 7,583 6,135
Interest accrued 826 4,404
Other 1,142 1
85,801 70,540
Deferred Credits:
Unamortized investment credit 47,351 48,342
Deferred income taxes 176,122 169,325
Regulatory liabilities 25,853 27,455
249,326 245,122
Total Capitalization and Liabilities $ 644,979 $ 663,920
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- 5 -
ALLEGHENY GENERATING COMPANY
Statement of Cash Flows
(Thousands of Dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1998 1997
CASH FLOWS FROM OPERATIONS:
<S> <C> <C>
Net income $ 17,523 $ 28,159
Depreciation 12,710 12,852
Deferred investment credit and income taxes, net 4,204 4,945
Changes in certain current assets and
liabilities:
Accounts receivable (53) 1,337
Materials and supplies (298) 66
Accounts payable 1,448 22,150
Taxes accrued 691 797
Interest accrued (3,578) (3,548)
Other, net 1,898 5,772
34,545 72,530
CASH FLOWS FROM INVESTING:
Construction expenditures (127) (188)
CASH FLOWS FROM FINANCING:
Retirement of long-term debt (50,000) (20,592)
Notes payable to parent 66,250 -
Notes receivable - (23,644)
Cash dividends on common stock (56,000) (28,159)
(39,750) (72,395)
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (5,332) (53)
Cash and temporary cash investments at January 1 5,359 131
Cash at September 30 $ 27 $ 78
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $13,525 $14,617
Income taxes 3,523 9,108
See accompanying notes to financial statements.
<PAGE>
- 6 -
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
necessary to present fairly the Company's financial position
as of September 30, 1998, the results of operations for the
three and nine months ended September 30, 1998 and 1997, and
cash flows for the nine months ended September 30, 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. The Company's comprehensive income does not
differ from its net income. 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 commercial paper, certificates of deposit, and
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. The Company has further
reduced capital through dividend payments in the third
quarter of 1998 as the Company's goal is to retire debt and
pay dividends in amounts necessary to maintain a common
equity position of about 45%. In the first nine months of
1998, common dividends of $17,523,101 and $38,476,899 were
paid from retained earnings and other paid-in capital,
respectively.
4. On April 7, 1997, Allegheny Power System, Inc. (now renamed
Allegheny Energy, Inc.), parent company of Monongahela Power
Company, The Potomac Edison Company, and West Penn Power
Company, 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.
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 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 July 8, 1998, the City of Pittsburgh reached a settlement
agreement with Allegheny Energy and agreed to support the
merger.
<PAGE>
- 7 -
On July 16, 1998, the Public Utilities Commission of Ohio
(PUCO) found that the proposed merger would be in the public
interest. The PUCO also stated that the Midwest Independent
System Operator (ISO) is the regional transmission entity
that will best serve the interests of the Ohio customers of
Monongahela Power Company, the Company's Ohio public utility
parent, and will best mitigate any market power issues which
might exist.
The Nuclear Regulatory Commission 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.
On July 23, 1998, the Pennsylvania Public Utility Commission
(PUC) approved the Allegheny Energy-DQE merger with
conditions acceptable to Allegheny Energy in response to a
Petition for Reconsideration filed by Allegheny Energy on
June 12, 1998. In its Petition for Reconsideration of a
previous PUC Order, Allegheny Energy reiterated its
commitment to staying in and supporting the Midwest ISO
subject to merger consummation, and also offered to
relinquish some generation in order to mitigate market power
concerns. Allegheny Energy committed to relinquishing
control of the 570 megawatts (MW) Cheswick, Pennsylvania,
generating station through at least June 30, 2000 and, in the
event that the Midwest ISO has not eliminated pancaked
transmission rates by June 30, 2000, Allegheny Energy could
be required to divest up to 2,500 MW of generation, if the
PUC were to so order.
In a letter to Allegheny Energy dated July 28, 1998, DQE
stated that its Board of Directors determined that DQE was
not required to proceed with the merger under present
circumstances, referring to the PUC's Orders of July 23, 1998
(regarding the PUC's approval of the merger described above),
and May 29, 1998 (regarding the restructuring plan of the
Company's Pennsylvania utility parent, West Penn Power
Company (West Penn) described in Note 5 below). DQE took the
position that the findings of both Orders constitute a
material adverse effect under the Agreement and Plan of
Merger and invited Allegheny Energy to agree promptly to
terminate the merger agreement by mutual consent. DQE
asserted that the findings in the PUC Orders will result in a
failure of the conditions to DQE's obligation to consummate
the merger. DQE indicated that if Allegheny Energy was not
amenable to a consensual termination, DQE would terminate the
agreement unilaterally not later than October 5, 1998 if
circumstances did not change sufficiently to remedy the
adverse effects DQE stated were associated with the PUC
Orders. In a letter dated July 30, 1998, Allegheny Energy
informed DQE that DQE's allegations were incorrect, that the
Orders do not constitute a material adverse effect, that
Allegheny Energy remains committed to the merger, and that if
DQE prevents completion of the merger, Allegheny Energy would
pursue all remedies available to protect the legal and
financial interests of Allegheny Energy and its shareholders.
Allegheny Energy has also notified DQE that its letter and
other actions constitute a material breach of the merger
agreement by DQE.
On September 16, 1998, the Federal Energy Regulatory
Commission (FERC) approved Allegheny Energy's merger with DQE
with conditions that were acceptable to Allegheny Energy.
The principal condition is divestiture of the Cheswick
Generating Station which enhances the proposal initially made
by Allegheny Energy and DQE to mitigate market power
concerns.
<PAGE>
- 8 -
On October 5, 1998, DQE notified Allegheny Energy that it had
decided to terminate the merger. In response, Allegheny
Energy filed with the United States District Court for the
Western District of Pennsylvania on October 5, 1998, a
complaint for specific performance of the Merger Agreement
or, alternatively, damages and motions for a temporary
restraining order and preliminary injunction against DQE.
On October 28, 1998, the District Court denied Allegheny Energy's
motions for a temporary restraining order and preliminary
injunction. The District Court did not rule on the merits of the
complaint for specific performance or damages. On October
30, 1998, Allegheny Energy appealed the District Court's order to the
United States Court of Appeals for the Third Circuit. Allegheny
Energy cannot predict the outcome of the litigation between it and DQE.
<PAGE>
- 9 -
ALLEGHENY GENERATING COMPANY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
COMPARISON OF THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998
WITH THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 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 in conjunction 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 the DQE, Inc. (DQE) merger as well as
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; environmental legislative
and regulatory changes; future economic conditions; developments
relating to the proposed merger with DQE; 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 Nine Months of 1998
* Merger with DQE
In a letter to Allegheny Energy, dated October 5, 1998,
DQE stated that it had decided to terminate the merger. In
response, Allegheny Energy filed with the United States District
Court for the Western District of Pennsylvania on October 5, 1998
a complaint for specific performance of the Merger Agreement or,
in the alternative, damages and also filed a request for a
temporary restraining order and preliminary injunction against DQE.
See Note 4 to the Financial Statements for more information about
the merger. Allegheny Energy believes that DQE's basis for seeking to
terminate the merger is without merit.
<PAGE>
- 10 -
Accordingly, Allegheny Energy 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 Allegheny Energy obtains
judicial relief requiring DQE to move forward. Allegheny Energy
cannot predict the outcome of the litigation between it and DQE.
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 third quarter and
nine months ended September 30, 1998 decreased due to a reduction
in net investment and reduced operating expenses.
The decrease in federal income taxes was due to decreases
in income before taxes, exclusive of other income which is
reported net of taxes.
The decrease in interest on long-term debt in the third
quarter and nine months ended September 30, 1998 was primarily
the result of a decrease in the average amount of long-term debt
outstanding. Other interest increased in the third quarter and
nine months ended September 30, 1998 due to an increased level of
short-term debt maintained by the Company upon retirement of
medium-term debt.
In September 1997, the Company received a tax-related
contract settlement of $8.8 million of taxes related to the $12
million added to rate base in 1995. The 1997 settlement amount
was recorded as a reduction to plant and was removed from rate
base.
The decrease in other income, net, in the third quarter
and nine months ended September 30, 1998 was due to interest on
the refund on the tax-related contract settlement in the three
and nine months ended September 30, 1997.
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 in
conjunction with the following information.
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.
<PAGE>
- 11 -
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). Pursuant to a settlement
agreement filed with and approved by the FERC, the Company's ROE
is set at 11% and will continue at that rate unless any affected
party seeks a change.
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%.
* Year 2000 Readiness Disclosure
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.
<PAGE>
- 12 -
ALLEGHENY GENERATING COMPANY
Part II - Other Information to Form 10-Q
for Quarter Ended September 30, 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 September 30, 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)
November 16, 1998
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 27
<SECURITIES> 0
<RECEIVABLES> 59
<ALLOWANCES> 0
<INVENTORY> 2,130
<CURRENT-ASSETS> 6,084
<PP&E> 828,785
<DEPRECIATION> 205,960
<TOTAL-ASSETS> 644,979
<CURRENT-LIABILITIES> 85,801
<BONDS> 148,806
0
0
<COMMON> 1
<OTHER-SE> 161,045
<TOTAL-LIABILITY-AND-EQUITY> 644,979
<SALES> 56,033
<TOTAL-REVENUES> 56,033
<CGS> 3,383
<TOTAL-COSTS> 19,598
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,518
<INCOME-PRETAX> 26,003
<INCOME-TAX> 8,480
<INCOME-CONTINUING> 17,523
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,523
<EPS-PRIMARY> 0.00<F1>
<EPS-DILUTED> 0.00<F1>
<FN>
<F1>*All common stock is owned by parent, no EPS required.
</FN>
</TABLE>
