<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 September 30, 1999
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 12, 1999, 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 September 30, 1999
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Statement of Income - Three and nine months ended
September 30, 1999 and 1998 3
Balance Sheet - September 30, 1999
and December 31, 1998 4
Statement of Cash Flows - Nine months ended
September 30, 1999 and 1998 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
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ELECTRIC OPERATING REVENUES $ 18,072 $ 18,303 $ 53,739 $ 56,033
OPERATING EXPENSES:
Operation and maintenance expense 1,207 888 4,122 3,383
Depreciation 4,245 4,242 12,735 12,710
Taxes other than income taxes 1,137 1,168 3,398 3,505
Federal income taxes 2,662 2,708 7,622 8,480
Total Operating Expenses 9,251 9,006 27,877 28,078
Operating Income 8,821 9,297 25,862 27,955
OTHER INCOME, NET - 35 2 86
Income Before Interest Charges 8,821 9,332 25,864 28,041
INTEREST CHARGES:
Interest on long-term debt 2,421 2,621 7,339 8,427
Other interest 884 1,086 2,654 2,091
Total Interest Charges 3,305 3,707 9,993 10,518
NET INCOME $ 5,516 $ 5,625 $ 15,871 $ 17,523
</TABLE>
See accompanying notes to financial statements.
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ALLEGHENY GENERATING COMPANY
Balance Sheet
(Thousands of Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS: 1999 1998
<S> <C> <C> <C> <C>
Property, Plant, and Equipment:
At original cost, including $675
and $595 under construction $ 828,875 $ 828,806
Accumulated depreciation (222,931) (210,198)
605,944 618,608
Current Assets:
Cash 26 30
Materials and supplies - at average cost 2,058 2,093
Prepaid taxes 3,600 3,569
Other 439 165
6,123 5,857
Deferred Charges:
Regulatory assets 7,056 7,056
Unamortized loss on reacquired debt 7,318 7,768
Other 173 169
14,547 14,993
Total Assets $ 626,614 $ 639,458
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 157,145 165,275
157,146 165,276
Long-term debt 148,903 148,829
306,049 314,105
Current Liabilities:
Notes payable to parents 54,400 66,750
Accounts payable 918 -
Accounts payable to parents 9,867 5,795
Taxes accrued:
Other 617 75
Interest accrued 807 3,229
Other 342 -
66,951 75,849
Deferred Credits:
Unamortized investment credit 46,028 47,020
Deferred income taxes 182,268 177,166
Regulatory liabilities 25,318 25,318
253,614 249,504
Total Capitalization and Liabilities $ 626,614 $ 639,458
</TABLE>
See accompanying notes to financial statements.
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ALLEGHENY GENERATING COMPANY
Statement of Cash Flows
(Thousands of Dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1999 1998
CASH FLOWS FROM OPERATIONS:
<S> <C> <C> <C> <C>
Net income $ 15,871 $ 17,523
Depreciation 12,735 12,710
Deferred investment credit and income taxes, net 4,110 4,204
Changes in certain current assets and
liabilities:
Accounts receivable - (53)
Materials and supplies 35 (298)
Accounts payable 918 1,448
Accounts payable to parents 4,072 -
Taxes accrued 542 691
Interest accrued (2,422) (3,578)
Other, net 554 1,898
36,415 34,545
CASH FLOWS FROM INVESTING:
Construction expenditures (69) (127)
CASH FLOWS FROM FINANCING:
Retirement of long-term debt - (50,000)
Notes payable to parent (12,350) 66,250
Cash dividends on common stock (24,000) (56,000)
(36,350) (39,750)
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (4) (5,332)
Cash and temporary cash investments at January 1 30 5,359
Cash at September 30 $ 26 $ 27
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $11,802 $13,525
Income taxes 3,721 3,523
</TABLE>
See accompanying notes to financial statements.
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ALLEGHENY GENERATING COMPANY
Notes to Financial Statements
1. Allegheny Generating Company (the Company) was incorporated
in Virginia in 1981. Its common stock is owned by
Monongahela Power Company - 27%, The Potomac Edison Company -
28%, and West Penn Power Company - 45% (the Parents). The
Parents are wholly-owned subsidiaries of Allegheny Energy,
Inc. (Allegheny Energy) and are part of the Allegheny Energy
integrated electric utility system. The Company's Notes to
Financial Statements in its Annual Report on Form 10-K for
the year ended December 31, 1998, should be read with the
accompanying financial statements and the following notes.
With the exception of the December 31, 1998 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 September 30, 1999, the results of operations for the
three and nine months ended September 30, 1999 and 1998, and
cash flows for the nine months ended September 30, 1999 and
1998.
2. For purposes of the 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 (SEC) has approved the Company's request
to pay common dividends out of capital. Common dividends
were paid from retained earnings, reducing the account
balance to zero, and from other paid-in capital as follows:
Nine Months Ended
September 30
1999 1998
(Thousands of Dollars)
Retained earnings $15,870 $17,523
Other paid-in capital 8,130 38,477
Total $24,000 $56,000
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.
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4. As previously reported, on October 5, 1998 DQE, Inc. (DQE),
parent company of Duquesne Light Company in Pittsburgh, Pa.,
notified Allegheny Energy that it had unilaterally 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 lawsuit for
specific performance of the Merger Agreement or,
alternatively, damages. 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 Allegheny Energy's motion for
preliminary injunction, enjoining DQE from taking actions
prohibited by the Merger Agreement. The Circuit Court stated
that if DQE breached the Merger Agreement, Allegheny Energy
may be entitled to specific performance of the Merger
Agreement. The Circuit Court also stated that Allegheny
Energy could be irreparably harmed if DQE took actions that
would prevent Allegheny Energy from receiving the specific
performance remedy. The Circuit Court remanded the case to
the District Court for further proceedings consistent with
its opinion.
The District Court denied DQE's motion for summary judgment.
The District Court held a trial on October 18-28, 1999,
without a jury, on the issues of whether DQE's termination of
the Merger Agreement breached the agreement and whether
Allegheny Energy is entitled to specific performance. A
decision by the District Court is expected by the end of
1999. Allegheny Energy cannot predict the outcome of this
litigation. However, Allegheny Energy believes that DQE's
basis for terminating the merger is without merit.
Accordingly, Allegheny Energy continues to seek the necessary
regulatory approvals. It is not likely any agency will act
further on the merger unless Allegheny Energy obtains
judicial relief requiring DQE to move forward.
5. Regulatory liabilities, net of regulatory assets,
of $18.3 million at September 30, 1999 and
December 31, 1998 relate to income taxes.
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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, 1999
WITH THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998
The Notes to Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of
Operations in the Annual Report on Form 10-K for Allegheny
Generating Company (the Company) 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 the proposed merger of Allegheny
Energy, Inc. (Allegheny Energy), parent of Monongahela Power
Company, The Potomac Edison Company, and West Penn Power Company
(the Parents), and related litigation against DQE, Inc. (DQE),
parent company of Duquesne Light Company in Pittsburgh, Pa. 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; 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 1999
See Note 4 to the financial statements for information
about the proposed merger of Allegheny Energy with DQE and
related litigation.
Review of Operations
As described under Liquidity and Capital Requirements,
revenues are determined under a cost of service formula rate
schedule. 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.
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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, 1999
decreased primarily due to a reduction in net investment.
The increase in operating expenses in the third quarter
of 1999 resulted from increased operation and maintenance
expenses. The decrease in operating expenses for the nine months
ended September 30, 1999 resulted from a decrease in federal
income taxes due to decreased operating income before taxes,
which was partially offset by an increase in operation and
maintenance expense.
The decrease in interest on long-term debt in the third
quarter of 1999 for the nine months ended September 30, 1999 was
primarily the result of a decrease in the average amount of long-
term debt outstanding.
The decrease in other interest expense for the third
quarter of 1999 was due to a reduction of average short-term
indebtedness during the period. The increase in other interest
expense for the nine months ended September 30, 1999 was due to
an increased level of short-term debt maintained by the Company
upon retirement of medium-term debt.
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, 1998 should be read
with the following information.
Pursuant to an agreement, the Parents buy all of the
Company's capacity in the station priced under a "cost-of-service
formula" wholesale rate schedule approved by the Federal Energy
Regulatory Commission (FERC). Under this arrangement, the
Company recovers in revenues all of its operation and maintenance
expenses, depreciation, taxes, and a return on its investment.
On December 29, 1998, the FERC issued an Order accepting a
proposed amendment to the Parent's Power Supply Agreement for the
Company effective January 1, 1999. This amendment sets the
generation demand for each Parent proportional to its ownership
in the Company. Previously, demand for each Parent fluctuated
due to customer usage.
The Company's rates are set 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 out of other paid-in capital and
the reduction of retained earnings to zero. The Company's goal
is
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to retire debt and pay dividends in amounts necessary to maintain
a common equity position of about 45%, including short-term debt.
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.
Continuing Issues
* Proposed Merger with DQE
See Note 4 to the financial statements for information
about the proposed merger of Allegheny Energy, Inc., parent of
the Company's parents, with DQE, Inc. (DQE), parent company of
Duquesne Light Company in Pittsburgh, Pa., and proposed
litigation.
* Year 2000 Readiness Disclosure
As described in the second paragraph under Liquidity and
Capital Requirements above, the Company's results of operations
are related to recovery of fixed capital costs under contract
with its Parents and, therefore, are not affected by the
operation, or non-operation, of the Bath County station and
related transmission facilities. Based on the Company's
structure and nature of operations, the consequences of Year 2000
issues will not have any effect on the Company's business,
results of operations, or financial condition.
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ALLEGHENY GENERATING COMPANY
Part II - Other Information to Form 10-Q
for Quarter Ended September 30, 1999
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, 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 GENERATING COMPANY
/s/ T. J. KLOC
T. J. Kloc, Vice President
and Controller
(Chief Accounting Officer)
November 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 26
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 2,058
<CURRENT-ASSETS> 6,123
<PP&E> 828,875
<DEPRECIATION> (222,931)
<TOTAL-ASSETS> 626,614
<CURRENT-LIABILITIES> 66,951
<BONDS> 148,903
0
0
<COMMON> 1
<OTHER-SE> 157,145
<TOTAL-LIABILITY-AND-EQUITY> 626,614
<SALES> 18,072
<TOTAL-REVENUES> 18,072
<CGS> 1,207
<TOTAL-COSTS> 6,589
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,305
<INCOME-PRETAX> 8,178
<INCOME-TAX> 2,662
<INCOME-CONTINUING> 5,516
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,516
<EPS-BASIC> 0.00<F1>
<EPS-DILUTED> 0.00<F1>
<FN>
<F1>* All common stock is owned by parent, no EPS required.
</FN>
</TABLE>
