10-Q 1 agc10q.htm ALLEGHENY GENERATING COMPANY FIRST QUARTER REPORTS Page 1 of 9

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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, 2002

 

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, 2002, 1,000 shares of the Common Stock ($1.00 par value) of the registrant were outstanding. All outstanding shares are owned by affiliated Companies.

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ALLEGHENY GENERATING COMPANY

Form 10-Q for Quarter Ended March 31, 2002

 

 

Index

                                                              Page No.

PART I - FINANCIAL INFORMATION:

Item 1. FINANCIAL STATEMENTS

Statement of Operations - Three months ended

  March 31, 2002 and 2001

3

Statement of Cash Flows - Three months ended

  March 31, 2002 and 2001

4

Balance Sheet - March 31, 2002

  and December 31, 2001

5-6

Notes to Financial Statements

7-8

Item 2. Management's Discussion and Analysis of

  Financial Condition and Results of Operations

9-12

PART II - OTHER INFORMATION

13

 

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Allegheny Generating Company

STATEMENT OF OPERATIONS

(Thousands of Dollars)

Unaudited

Three Months Ended

March 31,

2002

2001*

Affiliated Operating Revenues

  $15,574

  $17,772

Operating Expenses:

  Operating expense

    1,292

    1,625

  Depreciation

    4,247

    4,242

  Taxes other than income taxes

      907

      892

    Total Operating Expenses

    6,446

    6,759

    Operating Income

    9,128

   11,013

Other income and expenses

        

        2

Interest on long-term debt and

  other interest

 

    2,853

 

    3,289

Income Before Income Taxes

    6,275

    7,726

  Federal and state income taxes

    1,907

    2,216

Net Income

  $ 4,368

  $ 5,510

 

See accompanying notes to financial statements.

*Certain amounts have been reclassified for comparative purposes.

 

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Allegheny Generating Company

STATEMENT OF CASH FLOWS

(Thousands of Dollars)
 

Unaudited
 

Three Months Ended
 

March 31,
 

2002

2001*

Cash Flows from (used in) Operations:

    

 Net income

  $  4,368

  $  5,510

 Depreciation

     4,247

     4,242

 Deferred investment credit and income taxes, net

    (1,901)

    (1,511)

 Amortization of loss on reacquired debt

       150

       150

 Changes in certain current assets and liabilities:

    

   Materials and supplies

        68

       (18)

   Accounts payable

     1,022

      (392)

   Accounts receivable to parents and affiliates, net

     1,220

    (7,876)

   Taxes accrued

     3,579

     1,502

   Interest accrued

    (2,422)

    (2,437)

   Other, net

       242

       264
 

    10,573

      (566)
     

Cash Flows used in Investing:

    

 Construction expenditures

      (637)

      (800)

Cash Flows from (used in) Financing:

    

 Notes payable to affiliate

   

   (41,000)

 Notes payable to parent

    (9,900)

    12,450

 Notes payable

  

    37,900

 Cash dividends paid on common stock to parents

          

    (8,000)
 

    (9,900)

     1,350
     

Net Change in Cash and Temporary Cash Investments

        36

       (16)

 Cash and temporary cash investments at January 1

        11

        50

 Cash and temporary cash investments at March 31

  $     47

  $     34

Supplemental Cash Flow Information

    

Cash paid during the period for:

    

 Interest

  $  5,092

  $  5,544

 Income taxes

     1,128

     3,111

See accompanying notes to financial statements.

    

*Certain amounts have been reclassified for comparative purposes.

 

 

 

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Allegheny Generating Company

BALANCE SHEET

(Thousands of Dollars)

Unaudited

 

March 31,

December 31,

2002

2001

ASSETS

Property, Plant, and Equipment:

  Unregulated generation

  $ 829,447

  $ 829,438

  Construction work in progress

      3,267

      2,639

    832,714

    832,077

  Accumulated depreciation

   (265,358)

   (261,111)

    567,356

    570,966

Current Assets:

  Cash and temporary cash investments

         47

         11

  Account receivable from parents/affiliates, net

        940

      2,160

  Materials and supplies-at average cost

      2,146

      2,214

  Prepaid insurance

        234

        328

      3,367

      4,713

Deferred Charges:

  Regulatory assets

      9,849

      9,849

  Unamortized loss on reacquired debt

      5,818

      5,968

  Other

        133

        136

     15,800

     15,953

  Total Assets

  $ 586,523

  $ 591,632

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Allegheny Generating Company

BALANCE SHEET (continued)

(Thousands of Dollars)

Unaudited

March 31,

December 31,

2002

2001

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

    132,669

    132,669

  Retained earnings

     4,368

          

    137,038

    132,670

  Long-term debt

    149,188

    149,159

    286,226

    281,829

Current Liabilities:

  Notes payable to parent

     52,950 

     62,850

  Accounts payable

      1,029

          7

  Taxes accrued:

     Federal and state income

      3,661

        982

     Other

        900

 

  Interest accrued

        807

      3,229

  Other

        116

           

     59,463

     67,068

Deferred Credits:

  Unamortized investment credit

     42,223

     42,553

  Deferred income taxes

    175,697

    177,268

  Regulatory liabilities

     22,914

     22,914

    240,834

    242,735

  Total Capitalization and Liabilities

  $ 586,523

  $ 591,632

See accompanying notes to financial statements.

 

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ALLEGHENY GENERATING COMPANY

Notes to Financial Statements
  1. Basis of Interim Presentation
    2.

    Allegheny Generating Company (the Company) was incorporated in Virginia in 1981. The parents, Monongahela Power Company (Monongahela Power) - 22.97% and Allegheny Energy Supply Company, LLC (Allegheny Energy Supply) - 77.03% own the Company's common stock. Both Monongahela Power and Allegheny Energy Supply are wholly-owned subsidiaries of Allegheny Energy, Inc. (Allegheny Energy) and are part of the Allegheny Energy integrated electric utility system. The Notes to Financial Statements for the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2001, should be read with the accompanying financial statements and the following notes. The accompanying financial statements appearing on pages 3 through 6 and these notes to financial statements are unaudited. In our opinion, 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, 2002, and the results of operations and cash flows for the three months ended March 31, 2002, and 2001.

     

  2. Transfer of Generating Assets

    3. On June 1, 2001, Monongahela Power transferred its 352 megawatts (MW) of Ohio and the Federal Energy Regulatory Commission (FERC) jurisdictional generating assets to Allegheny Energy Supply, at book value. The transfer was approved by the Public Utilities Commission of Ohio (Ohio PUC) as part of a settlement that implemented a restructuring plan for Monongahela Power. This restructuring plan allowed Monongahela Power's Ohio customers to choose their generation supplier effective January 1, 2001. Accordingly, Monongahela Power's interest in the common stock of the Company decreased to 22.97% from 27% effective June 1, 2001. Allegheny Energy Supply owns the remaining shares.

     

  3. Related Party Information

    4. Substantially all of the employees of Allegheny Energy are employed by Allegheny Energy Service Corporation (AESC), which performs services at cost for the Company and its affiliates in accordance with the Public Utility Holding Company Act of 1935 (PUHCA). Through AESC, the Company is responsible for its proportionate share of services provided by AESC. The total billings by AESC (including capital) to the Company were $.03 million for the first quarter of 2002 and $.08 million for the first quarter of 2001.  The Company has various operating transactions with its affiliates. It is the Company's policy that the affiliated receivable and payable balances outstanding from these transactions are presented net on the balance sheet and statement of cash flows. At March 31, 2002, net

    Allegheny Generating Company

    -8-

    receivable to parents and affiliates was $.9 million. At December 31, 2001, net receivable to parents and affiliates was $2.2 million.

    The Company and its affiliates use an Allegheny Energy internal money pool as a facility to accommodate intercompany short-term borrowing needs, to the extent that certain companies have funds available. As of March 31, 2002 and December 31, 2001, the Company outstanding money pool borrowings of $53.0 million and $62.9 million, respectively. The total money pool borrowings outstanding at both March 31, 2002 and December 31, 2001 were borrowed from funds invested by one of the Company's parents, Monongahela Power.

    The Company joins with Allegheny Energy and its subsidiaries in filing a consolidated federal income tax return. The consolidated tax liability is allocated among the participants generally in proportion to the taxable income of each participant, except that no subsidiary pays tax in excess of its separate return tax liability. In the first quarter of 2002, the Company paid tax allocation payments to Allegheny Energy of $1.1 million. In the first quarter of 2001, the Company paid tax allocation payments to Allegheny Energy of $3.1 million.

  4. Capitalization
    5.

    The Company systematically reduces capitalization as its assets depreciate. In previous periods, this resulted in the payment of dividends in excess of current earnings. The Securities and

    Exchange Commission (SEC) granted approval to the Company to allow it 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. The approval granted to the Company expired on December 31, 2001. The Company has requested authorization to continue this practice and anticipates the SEC approval to be granted in the third quarter of 2002. Therefore, no dividends were paid for the quarter ended March 31, 2002. Common dividend payments for the first quarter ended March 31, 2001, totaled $8.0 million, $6.5 million from retained earnings and $1.5 million from other paid-in capital.
  5. Regulatory Assets and Liabilities
    6.

    Regulatory liabilities, net of regulatory assets of $13.1 million at March 31, 2002, and December 31, 2001, relate to income taxes.

  6. Long-Term Debt

The Company had long-term debt outstanding as follows:

(Thousands of Dollars)

Interest

March 31,

December 31,

Rate

2002

2001

Debentures due:

  September 1, 2003

  5.625%

   $ 50,000

    $ 50,000

  September 1, 2023

  6.875%

   $100,000

    $100,000

Unamortized debt discount

       (812)

        (841)

    Total

   $149,188

    $149,159

 

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ALLEGHENY GENERATING COMPANY

Management's Discussion and Analysis of Financial Condition

And Results of Operations

 

COMPARISON OF FIRST QUARTER ENDED MARCH 31, 2002

WITH FIRST QUARTER ENDED MARCH 31, 2001

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, as amended, for Allegheny Generating Company (the Company) for the year ended December 31, 2001, should be read with the following Management's Discussion and Analysis information.

Factors That May Affect Future Results

Certain statements within constitute forward-looking statements with respect to the Company. Such forward-looking statements include statements with respect to deregulated activities and movements towards competition in the states served by the Company, markets, products, services, prices, results of operations, capital expenditures, regulatory matters, liquidity and capital resources, resolution and impact of litigation, and accounting matters. All such forward-looking information is necessarily only estimated. There can be no assurance that actual results of the Company will not materially differ from expectations. Actual results have varied materially and unpredictably from past expectations.

Factors that could cause actual results of the Company to differ materially include, among others, the following: general and economic and business conditions; including the continuing impact on the economy and deregulation activity caused by the September 11, 2001, terrorists' attacks; industry capacity; changes in technology; changes in political, social and economic conditions; changes in the price of power and fuel for electric generation; environmental regulations; litigation involving the Company; regulatory conditions applicable to the Company; the loss of any significant customers; and changes in business strategy or development plans.

 

SIGNIFICANT EVENTS IN THE FIRST QUARTER OF 2002

 

New Accounting Standards

On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 eliminated the pooling-of-interests method and requires all business combinations initiated after June 30, 2001, to be accounted for under the purchase method of accounting. SFAS No. 141 also sets forth guidelines for applying the purchase method of accounting in the

Allegheny Generating Company

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determination of goodwill and other intangible assets. SFAS No. 142 eliminated amortization of goodwill and other intangible assets with indefinite lives effective January 1, 2002. Goodwill and other intangible assets with indefinite lives will now be tested at least annually for impairment, with impairment losses recognized in operating income. Other intangible assets with finite lives will continue to be amortized over their useful lives and tested for impairment when events or circumstances warrant. SFAS Nos. 141 and 142 did not have a material effect on the Company. As of March 31, 2002, the Company had no goodwill or other intangible assets subject to the reporting provisions of SFAS No. 142.

On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This standard established one accounting model for long-lived assets to be disposed of by sale, including discontinued operations, and carries forward the general impairment provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of." SFAS No. 144 does not have a material effect on the Company.

 

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.

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. Annual revenues are expected to decrease due to a normal continuing reduction in the Company's net investment.

Operating expenses primarily include salaries and wages, employee benefits, materials and supplies, contract work, outside services, and other expenses. The decrease in operating expenses for the first quarter of 2002 was primarily due to a reduction in salaries and wages and employee expenses, offset by an increase in taxes other than income.

The change in income tax expense is primarily due to the decrease in income, offset by lower consolidated income tax savings being assigned to the company in 2002 than was in 2001.

Interest on long-term debt and other interest expense decreased due to a decline in the interest rates for short-term borrowings and a reduction in the amount outstanding for short-term borrowings. The only short-term borrowings outstanding were from amounts borrowed from the money pool.

Allegheny Generating Company

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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, as amended, for the year ended December 31, 2001, should be read with the following information.

Pursuant to an agreement, the Parents buy all of the Company's capacity in the station which is 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 expenses, depreciation, taxes, and a return on its investment. On December 29, 1998, the FERC issued an Order accepting a proposed amendment to the Parents' Power Supply Agreement with the Company effective January 1, 1999. The amendment sets the generation demand for each Parent proportional to its ownership in the Company. Previously, demand for each Parent fluctuated based on customer usage.

The Company's rates are set by a formula filed with and accepted by the FERC. The only component that 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% for purposes of calculating billings to affiliates and will continue at that rate unless any affected party seeks a change.

The Company filed a request with the Securities and Exchange (SEC) on March 22, 2002, to obtain approval to continue to pay common dividends out of capital, to the extent permitted under applicable corporation law and any applicable financing agreements which restrict distributions to shareholders.

The Company's previous approval authorization with the SEC expired on December 31, 2001. Therefore, no dividends were paid for the first quarter of 2002. The Company expects the SEC approval to be issued in the third quarter of 2002.

Due to the nature of being a single asset company with declining capital needs, the Company, reduces capitalization as its asset depreciates. In prior years, this 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 payment of dividends out of capital surplus has not in the past and is not expected to be detrimental in the future 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.

To meet cash needs for operating expenses, the payment of interest, retirement of debt, and for its construction program, the Company has used internally generated funds, external financings, and debt instruments. The timing and amount of external financings depend primarily upon economic and financial market conditions, the Company's cash needs, and capital structure objectives of the Company. The availability and cost of external financings depend upon the financial condition of the companies seeking those funds and market conditions.

Allegheny Generating Company

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The Company's ability to meet its payment obligations under its indebtedness and to fund capital expenditures will depend on its future operations. The Company's future performance could affect its ability to maintain its investment grade credit rating.

On April 16, 2002, Fitch, Inc. (Fitch) changed the rating of the Allegheny Energy, Inc. (Allegheny Energy) senior unsecured debt to BBB+ from A- and the rating for commercial paper to F2 from F1. In addition, the rating on The Potomac Edison Company's (Potomac Edison) senior unsecured debt was changed to A from A+. The rating on West Penn Power Company's (West Penn) senior unsecured debt was changed to A from A+. The commercial paper ratings of both West Penn and Potomac Edison were affirmed at F1. Fitch's Rating Outlook is stable for Allegheny Energy, Potomac Edison and West Penn. Fitch is currently reviewing the credit ratings of Monongahela Power, one of the Company's parents.

On April 4, 2002, Standard & Poor's announced that it has equalized the corporate credit ratings of all rated Allegheny Energy companies at BBB+. This rating equalizes the Company, Allegheny Energy Supply Company, LLC (Allegheny Energy Supply), the Company's other parent, and Allegheny Energy's three regulated subsidiaries - Monongahela Power, Potomac Edison, and West Penn. Standard & Poor's unsecured debt ratings for the companies are now as follows: Allegheny Energy, BBB; Allegheny Energy Supply, BBB+; AGC, BBB+; Monongahela Power, BBB; Potomac Edison, BBB; and West Penn, BBB+. Standard & Poor's outlooks for all companies are stable.Standard & Poor's outlooks for all companies are stable.

 

Financings

The Company and its affiliates use an Allegheny Energy internal money pool as a facility to accommodate intercompany short-term borrowing needs, to the extent that certain companies have funds available. The Company had $53.0 million in money pool borrowings outstanding at March 31, 2002, compared to total money pool borrowings of $62.9 million at December 31, 2001. The total money pool borrowings outstanding at March 31, 2002, and at December 31, 2001, were borrowed from money pool funds invested by one of the Company's parent, Monongahela Power, recorded as notes payable to parent on the balance sheet.

 

Cash Flow Summary

Cash flows from operations increased $11.0 million in the first quarter of 2002 due primarily to the change in accounts receivable to parents and affiliates, net, and accrued taxes.

Cash flows used in investing activities decreased $.2 million in the first quarter of 2002 as a result of lower construction expenditures.

Cash flows used in financing activities decreased $11.3 million in the first quarter of 2002 primarily due to the absence of dividend payments on common stock to parents and a reduction in principal payments on short-term debt.

 

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ALLEGHENY GENERATING COMPANY

Part II - Other Information to Form 10-Q

for Quarter Ended March 31, 2002

 

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

1.  (a)   Date and kind of meeting:

The annual meeting of shareholders was held at Hagerstown, Maryland, on February 26, 2002. No proxies were solicited.

    (b)   Election of Directors:

The holders of all 1,000 shares of common stock voted to elect the following Directors of the Company to hold office until the next annual meeting of the shareholders and until their successors are duly chosen and qualified:

Paul M. Barbas              Thomas K. Henderson

Alan J. Noia                Victoria V. Schaff

Richard J. Gagliardi        Jay S. Pifer

Michael P. Morrell

Mrs. Schaff died on March 8, 2002.

 

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

     (a)  No reports on Form 8-K were filed on behalf of the Company

          for the quarter ended March 31, 2002.

     (b)  Exhibit 12 Ratio of Earnings to Fixed Charges

 

 

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)

 

 

May 15, 2002