exv99w1
Exhibit 99.1
ALLEGHENY ENERGY, INC.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2010 AND 2009, AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2010
|
|
|
Report of Independent Registered Public Accounting Firm |
|
2 |
Consolidated Statements of Income for each of the three years in the period ended December 31, 2010 |
|
3 |
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2010 |
|
4 |
Consolidated Balance Sheets as of December 31, 2010 and 2009 |
|
6 |
Consolidated Statement of Equity and Comprehensive Income for each of the three years in the period ended December 31, 2010 |
|
8 |
Notes to Consolidated Financial Statements |
|
11 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Allegheny Energy, Inc.
We have audited the accompanying consolidated balance sheets of Allegheny Energy, Inc. and
subsidiaries (the Company) as of December 31, 2010 and 2009, and the related consolidated
statements of income, equity and comprehensive income, and cash flows for each of the three years
in the period ended December 31, 2010. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on the financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Allegheny Energy, Inc. and subsidiaries as of December 31, 2010
and 2009, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2010 in conformity with accounting principles generally accepted in
the United States of America.
/s/ Deloitte & Touche LLP
Pittsburgh, PA
February 23, 2011
2
ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
(In millions, except per share amounts) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Operating revenues |
|
$ |
3,902.9 |
|
|
$ |
3,426.8 |
|
|
$ |
3,385.9 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Fuel |
|
|
1,192.6 |
|
|
|
886.6 |
|
|
|
1,080.9 |
|
Purchased power and transmission |
|
|
502.9 |
|
|
|
502.0 |
|
|
|
395.6 |
|
Deferred energy costs, net |
|
|
38.1 |
|
|
|
(64.4 |
) |
|
|
(63.7 |
) |
Gain on sale of Virginia distribution business |
|
|
(44.6 |
) |
|
|
0 |
|
|
|
0 |
|
Operations and maintenance |
|
|
732.9 |
|
|
|
687.1 |
|
|
|
674.8 |
|
Depreciation and amortization |
|
|
323.5 |
|
|
|
282.1 |
|
|
|
273.9 |
|
Taxes other than income taxes |
|
|
226.0 |
|
|
|
213.6 |
|
|
|
214.9 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
2,971.4 |
|
|
|
2,507.0 |
|
|
|
2,576.4 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
931.5 |
|
|
|
919.8 |
|
|
|
809.5 |
|
Other income (expense), net |
|
|
13.3 |
|
|
|
7.0 |
|
|
|
22.3 |
|
Interest expense |
|
|
316.4 |
|
|
|
291.1 |
|
|
|
231.9 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
628.4 |
|
|
|
635.7 |
|
|
|
599.9 |
|
Income tax expense |
|
|
216.7 |
|
|
|
241.6 |
|
|
|
204.1 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
411.7 |
|
|
|
394.1 |
|
|
|
395.8 |
|
Net income attributable to noncontrolling interests |
|
|
0 |
|
|
|
(1.3 |
) |
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
Net income attributable to Allegheny Energy, Inc |
|
$ |
411.7 |
|
|
$ |
392.8 |
|
|
$ |
395.4 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share attributable to Allegheny Energy, Inc.: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.42 |
|
|
$ |
2.32 |
|
|
$ |
2.35 |
|
Diluted |
|
$ |
2.42 |
|
|
$ |
2.31 |
|
|
$ |
2.33 |
|
Average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
169.8 |
|
|
|
169.5 |
|
|
|
168.5 |
|
Diluted |
|
|
170.3 |
|
|
|
170.0 |
|
|
|
170.0 |
|
See accompanying Notes to Consolidated Financial Statements.
3
ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
(In millions) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash Flows From Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
411.7 |
|
|
$ |
394.1 |
|
|
$ |
395.8 |
|
Adjustments for non-cash items included in income: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
323.5 |
|
|
|
282.1 |
|
|
|
273.9 |
|
Amortization of debt related costs |
|
|
25.6 |
|
|
|
15.4 |
|
|
|
10.9 |
|
Amortization of Pennsylvania transition assets and liabilities |
|
|
(17.9 |
) |
|
|
(17.5 |
) |
|
|
(8.1 |
) |
Gain on sale of Virginia distribution business |
|
|
(44.6 |
) |
|
|
0 |
|
|
|
0 |
|
Gain relating to the purchase of hydroelectric generation facilities |
|
|
0 |
|
|
|
(17.3 |
) |
|
|
0 |
|
Provision for uncollectible accounts |
|
|
16.8 |
|
|
|
16.4 |
|
|
|
16.5 |
|
Deferred income taxes and investment tax credit, net |
|
|
239.3 |
|
|
|
235.3 |
|
|
|
156.2 |
|
Deferred energy costs, net |
|
|
38.1 |
|
|
|
(64.4 |
) |
|
|
(63.7 |
) |
Unrealized losses (gains) on derivative contracts, net |
|
|
23.1 |
|
|
|
(23.4 |
) |
|
|
(18.8 |
) |
Employee benefit expenses |
|
|
73.3 |
|
|
|
55.7 |
|
|
|
45.2 |
|
Contributions to pension and other postretirement plans |
|
|
(82.3 |
) |
|
|
(48.6 |
) |
|
|
(49.3 |
) |
Deferred revenue-Fort Martin scrubber project |
|
|
(4.0 |
) |
|
|
11.0 |
|
|
|
10.8 |
|
Deferred revenue-Virginia |
|
|
0 |
|
|
|
(28.3 |
) |
|
|
28.3 |
|
Deferred revenue-energy efficiency programs |
|
|
16.5 |
|
|
|
0 |
|
|
|
0 |
|
Unbilled transmission expansion revenue |
|
|
(33.2 |
) |
|
|
(16.0 |
) |
|
|
(8.1 |
) |
Other, net |
|
|
(21.2 |
) |
|
|
8.0 |
|
|
|
17.3 |
|
Changes in certain assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
(64.7 |
) |
|
|
(42.9 |
) |
|
|
(26.2 |
) |
Materials, supplies and fuel |
|
|
60.8 |
|
|
|
(75.2 |
) |
|
|
(62.8 |
) |
Collateral deposits |
|
|
(37.1 |
) |
|
|
37.7 |
|
|
|
23.1 |
|
Accounts payable |
|
|
(40.2 |
) |
|
|
29.5 |
|
|
|
(36.7 |
) |
Accrued taxes |
|
|
(32.2 |
) |
|
|
(29.2 |
) |
|
|
43.1 |
|
Regulatory assets and liabilities |
|
|
(32.4 |
) |
|
|
32.9 |
|
|
|
111.7 |
|
Assets and liabilities related to the sale of ACC fiber |
|
|
0 |
|
|
|
21.3 |
|
|
|
0 |
|
Other operating assets and liabilities |
|
|
(2.9 |
) |
|
|
23.0 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
816.0 |
|
|
|
799.6 |
|
|
|
861.4 |
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(950.5 |
) |
|
|
(1,166.2 |
) |
|
|
(994.1 |
) |
Purchase of WV distribution business |
|
|
(14.5 |
) |
|
|
0 |
|
|
|
0 |
|
Purchase of hydroelectric generation facilities |
|
|
0 |
|
|
|
(2.0 |
) |
|
|
0 |
|
Proceeds from sale of Virginia distribution business |
|
|
317.2 |
|
|
|
0 |
|
|
|
0 |
|
Proceeds from asset sales |
|
|
0.2 |
|
|
|
3.0 |
|
|
|
1.1 |
|
Purchase of Merrill Lynch interest in subsidiary |
|
|
0 |
|
|
|
0 |
|
|
|
(50.0 |
) |
Decrease in restricted funds |
|
|
31.3 |
|
|
|
84.1 |
|
|
|
224.4 |
|
Deconsolidation of PATH-WV |
|
|
(3.4 |
) |
|
|
0 |
|
|
|
0 |
|
Other |
|
|
(5.9 |
) |
|
|
(3.7 |
) |
|
|
(3.7 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(625.6 |
) |
|
|
(1,084.8 |
) |
|
|
(822.3 |
) |
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
4
ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
(In millions) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash Flows From Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of long-term debt |
|
|
1,186.5 |
|
|
|
1,508.3 |
|
|
|
647.6 |
|
Repayment of long-term debt |
|
|
(1,061.4 |
) |
|
|
(1,177.2 |
) |
|
|
(493.1 |
) |
Costs associated with the AE Supply revolving credit facility refinancing |
|
|
(0.1 |
) |
|
|
(22.2 |
) |
|
|
0 |
|
Repayment of note payable |
|
|
0 |
|
|
|
0 |
|
|
|
(10.0 |
) |
Equity contribution to PATH, LLC by a joint venture partner |
|
|
0 |
|
|
|
8.7 |
|
|
|
4.5 |
|
Payments on capital lease obligations |
|
|
(11.2 |
) |
|
|
(8.5 |
) |
|
|
(9.0 |
) |
Proceeds from exercise of employee stock options |
|
|
1.3 |
|
|
|
2.3 |
|
|
|
25.3 |
|
Cash dividends paid on common stock |
|
|
(101.8 |
) |
|
|
(101.7 |
) |
|
|
(101.1 |
) |
Other |
|
|
(0.1 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
13.2 |
|
|
|
209.7 |
|
|
|
64.2 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
203.6 |
|
|
|
(75.5 |
) |
|
|
103.3 |
|
Cash and cash equivalents at beginning of period |
|
|
286.6 |
|
|
|
362.1 |
|
|
|
258.8 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
490.2 |
|
|
$ |
286.6 |
|
|
$ |
362.1 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest (net of amounts capitalized) |
|
$ |
286.9 |
|
|
$ |
264.8 |
|
|
$ |
228.2 |
|
Cash paid during the year for income taxes, net |
|
$ |
15.1 |
|
|
$ |
41.3 |
|
|
$ |
10.8 |
|
Accounts payable at December 31 relating to capital expenditures |
|
$ |
137.9 |
|
|
$ |
132.5 |
|
|
$ |
91.8 |
|
Non-cash investing activity relating to the purchase of hydroelectric
generation facilities |
|
$ |
0 |
|
|
$ |
17.3 |
|
|
$ |
0 |
|
Non-cash financing activity AE common stock dividends accrued but not paid |
|
$ |
25.5 |
|
|
$ |
0 |
|
|
$ |
0 |
|
See accompanying Notes to Consolidated Financial Statements.
5
ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
(In millions) |
|
2010 |
|
|
2009 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
490.2 |
|
|
$ |
286.6 |
|
Accounts receivable: |
|
|
|
|
|
|
|
|
Customer |
|
|
245.9 |
|
|
|
188.2 |
|
Unbilled utility revenue |
|
|
124.1 |
|
|
|
116.4 |
|
Wholesale and other |
|
|
53.7 |
|
|
|
64.4 |
|
Allowance for uncollectible accounts |
|
|
(15.7 |
) |
|
|
(14.0 |
) |
Materials and supplies |
|
|
108.4 |
|
|
|
110.6 |
|
Fuel |
|
|
151.3 |
|
|
|
206.4 |
|
Deferred income taxes |
|
|
0 |
|
|
|
81.5 |
|
Prepaid taxes |
|
|
48.9 |
|
|
|
48.4 |
|
Collateral deposits |
|
|
30.7 |
|
|
|
20.8 |
|
Derivative assets |
|
|
24.5 |
|
|
|
4.6 |
|
Restricted funds |
|
|
46.9 |
|
|
|
25.9 |
|
Regulatory assets |
|
|
177.5 |
|
|
|
132.7 |
|
Assets held for sale |
|
|
0 |
|
|
|
32.4 |
|
Other |
|
|
29.2 |
|
|
|
40.4 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,515.6 |
|
|
|
1,345.3 |
|
|
|
|
|
|
|
|
Property, Plant and Equipment: |
|
|
|
|
|
|
|
|
Generation |
|
|
7,623.2 |
|
|
|
7,469.4 |
|
Transmission |
|
|
1,421.1 |
|
|
|
1,313.2 |
|
Distribution |
|
|
3,937.5 |
|
|
|
3,784.4 |
|
Other |
|
|
515.0 |
|
|
|
440.7 |
|
Accumulated depreciation |
|
|
(5,362.9 |
) |
|
|
(5,104.9 |
) |
|
|
|
|
|
|
|
Subtotal |
|
|
8,133.9 |
|
|
|
7,902.8 |
|
Construction work in progress |
|
|
1,168.0 |
|
|
|
800.6 |
|
Property, plant and equipment held for sale, net |
|
|
0 |
|
|
|
253.7 |
|
|
|
|
|
|
|
|
Total property, plant and equipment, net |
|
|
9,301.9 |
|
|
|
8,957.1 |
|
|
|
|
|
|
|
|
Other Noncurrent Assets: |
|
|
|
|
|
|
|
|
Regulatory assets |
|
|
706.1 |
|
|
|
717.3 |
|
Goodwill |
|
|
367.3 |
|
|
|
367.3 |
|
Restricted funds |
|
|
29.4 |
|
|
|
60.2 |
|
Investments in unconsolidated affiliates |
|
|
49.8 |
|
|
|
26.7 |
|
Other |
|
|
105.7 |
|
|
|
115.2 |
|
|
|
|
|
|
|
|
Total other noncurrent assets |
|
|
1,258.3 |
|
|
|
1,286.7 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
12,075.8 |
|
|
$ |
11,589.1 |
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
6
ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
(In millions) |
|
2010 |
|
|
2009 |
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Long-term debt due within one year |
|
$ |
15.5 |
|
|
$ |
140.8 |
|
Accounts payable |
|
|
383.4 |
|
|
|
411.4 |
|
Accrued taxes |
|
|
99.5 |
|
|
|
87.3 |
|
Payable to PJM for FTRs, excluding portion netted against derivative assets |
|
|
0 |
|
|
|
31.7 |
|
Derivative liabilities |
|
|
6.0 |
|
|
|
24.4 |
|
Regulatory liabilities |
|
|
9.8 |
|
|
|
37.4 |
|
Accrued interest |
|
|
72.2 |
|
|
|
68.3 |
|
Security deposits |
|
|
55.6 |
|
|
|
51.0 |
|
Liabilities associated with assets held for sale |
|
|
0 |
|
|
|
10.1 |
|
Deferred income taxes |
|
|
26.1 |
|
|
|
0 |
|
Other |
|
|
122.8 |
|
|
|
123.2 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
790.9 |
|
|
|
985.6 |
|
|
|
|
|
|
|
|
Long-term Debt: |
|
|
|
|
|
|
|
|
Securitized debt-Environmental Control Bonds |
|
|
481.0 |
|
|
|
496.5 |
|
Other long-term debt |
|
|
4,205.0 |
|
|
|
3,920.5 |
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
4,686.0 |
|
|
|
4,417.0 |
|
|
|
|
|
|
|
|
Deferred Credits and Other Liabilities: |
|
|
|
|
|
|
|
|
Derivative liabilities |
|
|
7.4 |
|
|
|
6.7 |
|
Income taxes payable |
|
|
43.4 |
|
|
|
85.7 |
|
Investment tax credit |
|
|
58.3 |
|
|
|
61.6 |
|
Deferred income taxes |
|
|
1,653.6 |
|
|
|
1,501.3 |
|
Regulatory liabilities |
|
|
512.8 |
|
|
|
461.2 |
|
Pension and other postretirement employee benefit plan liabilities |
|
|
596.8 |
|
|
|
597.4 |
|
Adverse power purchase commitment |
|
|
96.3 |
|
|
|
114.4 |
|
Liabilities associated with assets held for sale |
|
|
0 |
|
|
|
53.1 |
|
Other |
|
|
188.6 |
|
|
|
177.0 |
|
|
|
|
|
|
|
|
Total deferred credits and other liabilities |
|
|
3,157.2 |
|
|
|
3,058.4 |
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 25)
Equity: |
|
|
|
|
|
|
|
|
Common stock$1.25 par value per share, 260,000,000 shares authorized and 170,028,499
and 169,620,917 shares issued at December 31, 2010 and 2009, respectively |
|
|
212.5 |
|
|
|
212.0 |
|
Other paid-in capital |
|
|
1,987.8 |
|
|
|
1,970.2 |
|
Retained earnings |
|
|
1,307.0 |
|
|
|
1,022.7 |
|
Treasury stock at cost54,955 and 51,313 shares at December 31, 2010 and 2009, respectively |
|
|
(1.9 |
) |
|
|
(1.8 |
) |
Accumulated other comprehensive loss |
|
|
(63.7 |
) |
|
|
(89.9 |
) |
|
|
|
|
|
|
|
Total Allegheny Energy, Inc. common stockholders equity |
|
|
3,441.7 |
|
|
|
3,113.2 |
|
Noncontrolling interest |
|
|
0 |
|
|
|
14.9 |
|
|
|
|
|
|
|
|
Total equity |
|
|
3,441.7 |
|
|
|
3,128.1 |
|
|
|
|
|
|
|
|
Total Liabilities and Equity |
|
$ |
12,075.8 |
|
|
$ |
11,589.1 |
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
7
ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allegheny |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Energy, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
other |
|
|
common |
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Common |
|
|
paid-in |
|
|
Retained |
|
|
Treasury |
|
|
comprehensive |
|
|
stockholders |
|
|
Noncontrolling |
|
|
Total |
|
|
Comprehensive |
|
(In millions, except shares) |
|
outstanding |
|
|
stock |
|
|
capital |
|
|
earnings |
|
|
stock |
|
|
loss |
|
|
equity |
|
|
interests |
|
|
equity |
|
|
income |
|
Balance at December 31,
2007 |
|
|
167,223,576 |
|
|
$ |
209.1 |
|
|
$ |
1,924.1 |
|
|
$ |
444.2 |
|
|
$ |
(1.8 |
) |
|
$ |
(40.2 |
) |
|
$ |
2,535.4 |
|
|
$ |
13.2 |
|
|
$ |
2,548.6 |
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
395.4 |
|
|
|
|
|
|
|
|
|
|
|
395.4 |
|
|
|
0.4 |
|
|
|
395.8 |
|
|
$ |
395.8 |
|
Defined benefit pension
and other benefit plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss during the
period, net of tax of
$26.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39.5 |
) |
|
|
(39.5 |
) |
|
|
|
|
|
|
(39.5 |
) |
|
|
(39.5 |
) |
Amortization, net of
tax of $1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.7 |
|
|
|
1.7 |
|
|
|
|
|
|
|
1.7 |
|
|
|
1.7 |
|
Cash flow hedges, net of
tax of $20.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.4 |
|
|
|
32.4 |
|
|
|
|
|
|
|
32.4 |
|
|
|
32.4 |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
390.4 |
|
|
|
|
Comprehensive income
attributable to
noncontrolling
interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.4 |
) |
|
|
|
Comprehensive
income attributable to
Allegheny Energy, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
390.0 |
|
|
|
|
Purchase of
noncontrolling interest
in AE Supply |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13.2 |
) |
|
|
(13.2 |
) |
|
|
|
|
Equity contribution to
PATH, LLC by the joint
venture partner |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.5 |
|
|
|
4.5 |
|
|
|
|
|
Adoption of measurement
date provisions for
pension and other benefit
plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost, interest
cost and expected return
on plan assets, net of
tax of $3.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.4 |
) |
|
|
|
|
|
|
|
|
|
|
(4.4 |
) |
|
|
|
|
|
|
(4.4 |
) |
|
|
|
|
Amortizations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss, net
of tax of $0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.0 |
) |
|
|
|
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net transition
obligation, net of tax of
$0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.9 |
) |
|
|
|
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net prior service cost,
net of tax of $0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.5 |
) |
|
|
|
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on common
stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(101.1 |
) |
|
|
|
|
|
|
|
|
|
|
(101.1 |
) |
|
|
|
|
|
|
(101.1 |
) |
|
|
|
|
Stock-based compensation
expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock units |
|
|
|
|
|
|
|
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.6 |
|
|
|
|
|
|
|
0.6 |
|
|
|
|
|
Non-employee director
stock awards |
|
|
20,869 |
|
|
|
|
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.1 |
|
|
|
|
|
|
|
1.1 |
|
|
|
|
|
Stock options |
|
|
|
|
|
|
|
|
|
|
9.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.3 |
|
|
|
|
|
|
|
9.3 |
|
|
|
|
|
Performance shares |
|
|
|
|
|
|
|
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.9 |
|
|
|
|
|
|
|
2.9 |
|
|
|
|
|
Exercise of stock options |
|
|
1,849,316 |
|
|
|
2.3 |
|
|
|
23.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.3 |
|
|
|
|
|
|
|
25.3 |
|
|
|
|
|
Settlement of stock units |
|
|
270,633 |
|
|
|
0.4 |
|
|
|
(8.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8.1 |
) |
|
|
|
|
|
|
(8.1 |
) |
|
|
|
|
Dividends on stock units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December
31, 2008 |
|
|
169,364,394 |
|
|
$ |
211.8 |
|
|
$ |
1,952.5 |
|
|
$ |
731.6 |
|
|
$ |
(1.8 |
) |
|
$ |
(43.3 |
) |
|
$ |
2,850.8 |
|
|
$ |
4.9 |
|
|
$ |
2,855.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
8
ALLEGHENY ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allegheny |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Energy, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
other |
|
|
common |
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Common |
|
|
paid-in |
|
|
Retained |
|
|
Treasury |
|
|
comprehensive |
|
|
stockholders |
|
|
Noncontrolling |
|
|
Total |
|
|
Comprehensive |
|
(In millions, except shares) |
|
outstanding |
|
|
stock |
|
|
capital |
|
|
earnings |
|
|
stock |
|
|
loss |
|
|
equity |
|
|
interests |
|
|
equity |
|
|
income |
|
Balance at December 31, 2008 |
|
|
169,364,394 |
|
|
$ |
211.8 |
|
|
$ |
1,952.5 |
|
|
$ |
731.6 |
|
|
$ |
(1.8 |
) |
|
$ |
(43.3 |
) |
|
$ |
2,850.8 |
|
|
$ |
4.9 |
|
|
$ |
2,855.7 |
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
392.8 |
|
|
|
|
|
|
|
|
|
|
|
392.8 |
|
|
|
1.3 |
|
|
|
394.1 |
|
|
$ |
394.1 |
|
Defined benefit pension and other
benefit plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss during the period,
net of tax of $3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.3 |
) |
|
|
(5.3 |
) |
|
|
|
|
|
|
(5.3 |
) |
|
|
(5.3 |
) |
Amortization, net of tax of
$2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.5 |
|
|
|
3.5 |
|
|
|
|
|
|
|
3.5 |
|
|
|
3.5 |
|
Cash flow hedges, net of tax of
$28.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44.8 |
) |
|
|
(44.8 |
) |
|
|
|
|
|
|
(44.8 |
) |
|
|
(44.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
347.5 |
|
Comprehensive income attributable
to noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable
to Allegheny Energy, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
346.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity contribution to PATH, LLC
by the joint venture partner |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.7 |
|
|
|
8.7 |
|
|
|
|
|
Dividends on common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(101.7 |
) |
|
|
|
|
|
|
|
|
|
|
(101.7 |
) |
|
|
|
|
|
|
(101.7 |
) |
|
|
|
|
Stock-based compensation expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-employee director stock
awards |
|
|
21,907 |
|
|
|
|
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.9 |
|
|
|
|
|
|
|
0.9 |
|
|
|
|
|
Stock options |
|
|
|
|
|
|
|
|
|
|
7.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.4 |
|
|
|
|
|
|
|
7.4 |
|
|
|
|
|
Performance shares |
|
|
|
|
|
|
|
|
|
|
7.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.2 |
|
|
|
|
|
|
|
7.2 |
|
|
|
|
|
Restricted shares |
|
|
17,850 |
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
Exercise of stock options |
|
|
163,700 |
|
|
|
0.2 |
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.3 |
|
|
|
|
|
|
|
2.3 |
|
|
|
|
|
Settlement of stock units |
|
|
3,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury shares |
|
|
(1,820 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
169,569,604 |
|
|
$ |
212.0 |
|
|
$ |
1,970.2 |
|
|
$ |
1,022.7 |
|
|
$ |
(1.8 |
) |
|
$ |
(89.9 |
) |
|
$ |
3,113.2 |
|
|
$ |
14.9 |
|
|
$ |
3,128.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
169,569,604 |
|
|
$ |
212.0 |
|
|
$ |
1,970.2 |
|
|
$ |
1,022.7 |
|
|
$ |
(1.8 |
) |
|
$ |
(89.9 |
) |
|
$ |
3,113.2 |
|
|
$ |
14.9 |
|
|
$ |
3,128.1 |
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
411.7 |
|
|
|
|
|
|
|
|
|
|
|
411.7 |
|
|
|
|
|
|
|
411.7 |
|
|
$ |
411.7 |
|
Defined benefit pension and other
benefit plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization and other, net
of tax of $2.9 million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.8 |
|
|
|
2.8 |
|
|
|
|
|
|
|
2.8 |
|
|
|
2.8 |
|
Net loss during the period,
net of tax of $(7.7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11.6 |
) |
|
|
(11.6 |
) |
|
|
|
|
|
|
(11.6 |
) |
|
|
(11.6 |
) |
Adjustment to unamortized
OPEB plan actuarial loss, net
of tax of $5.2
million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.8 |
|
|
|
7.8 |
|
|
|
|
|
|
|
7.8 |
|
|
|
7.8 |
|
Cash flow hedges, net of tax of
$17.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27.2 |
|
|
|
27.2 |
|
|
|
|
|
|
|
27.2 |
|
|
|
27.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
437.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deconsolidation of PATH- WV |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14.9 |
) |
|
|
(14.9 |
) |
|
|
|
|
Dividends on common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(127.3 |
) |
|
|
|
|
|
|
|
|
|
|
(127.3 |
) |
|
|
|
|
|
|
(127.3 |
) |
|
|
|
|
Stock-based compensation expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-employee director stock
awards |
|
|
12,000 |
|
|
|
|
|
|
|
0.9 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
0.8 |
|
|
|
|
|
|
|
0.8 |
|
|
|
|
|
Stock options |
|
|
|
|
|
|
|
|
|
|
6.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.5 |
|
|
|
|
|
|
|
6.5 |
|
|
|
|
|
Performance shares |
|
|
|
|
|
|
|
|
|
|
13.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.1 |
|
|
|
|
|
|
|
13.1 |
|
|
|
|
|
Restricted shares |
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
Exercise of stock options |
|
|
85,784 |
|
|
|
0.1 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.3 |
|
|
|
|
|
|
|
1.3 |
|
|
|
|
|
Issuance of performance shares |
|
|
309,798 |
|
|
|
0.4 |
|
|
|
(4.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.0 |
) |
|
|
|
|
|
|
(4.0 |
) |
|
|
|
|
Purchase of treasury shares |
|
|
(3,642 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
|
169,973,544 |
|
|
$ |
212.5 |
|
|
$ |
1,987.8 |
|
|
$ |
1,307.0 |
|
|
$ |
(1.9 |
) |
|
$ |
(63.7 |
) |
|
$ |
3,441.7 |
|
|
$ |
|
|
|
$ |
3,441.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
9
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page |
|
Note |
|
Number |
|
1 Business, Basis of Presentation and Significant Accounting Policies |
|
|
11 |
|
2 Merger Agreement |
|
|
17 |
|
3 Recently Adopted and Recently Issued Accounting Standards |
|
|
18 |
|
4 Sale of Virginia Distribution Business |
|
|
18 |
|
5 Rates and Regulation |
|
|
19 |
|
6 Transmission Expansion |
|
|
22 |
|
7 Regulatory Assets and Liabilities |
|
|
25 |
|
8 Income Taxes |
|
|
27 |
|
9 Capitalization and Debt |
|
|
30 |
|
10 Earnings per Share |
|
|
35 |
|
11 Stock-Based Compensation |
|
|
36 |
|
12 Pension Benefits and Postretirement Benefits Other Than Pensions |
|
|
41 |
|
13 Segment Information |
|
|
47 |
|
14 Fair Value Measurements, Derivative Instruments and Hedging Activities |
|
|
49 |
|
15 Purchase of Hydroelectric Generation Facilities |
|
|
55 |
|
16 Jointly Owned Bath County Generation Facility |
|
|
56 |
|
17 Fair Value of Financial Instruments |
|
|
56 |
|
18 Goodwill and Intangible Assets |
|
|
56 |
|
19 Asset Retirement Obligations (ARO) |
|
|
57 |
|
20 Adverse Power Purchase Commitment Liability |
|
|
57 |
|
21 Other Income (Expense), Net |
|
|
58 |
|
22 Guarantees and Letters of Credit |
|
|
58 |
|
23 Variable Interest Entities |
|
|
58 |
|
24 Acquisition of Noncontrolling Interest in AE Supply |
|
|
60 |
|
25 Commitments and Contingencies |
|
|
60 |
|
26 Quarterly Financial Information (Unaudited) |
|
|
68 |
|
10
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1: BUSINESS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Merger Agreement
On February 10, 2010, Allegheny Energy, Inc. (AE) entered into an Agreement and Plan of
Merger (as amended on June 4, 2010, the Merger Agreement) with FirstEnergy Corp. (FirstEnergy)
and Element Merger Sub, Inc. (Merger Sub), a wholly owned subsidiary of FirstEnergy. The
accompanying financial statements do not reflect potential impacts or changes in accounting
policies, basis of accounting, carrying values of assets and liabilities or other matters that may
result from the completion of AEs anticipated merger with FirstEnergy. See Note 2, Merger
Agreement for additional information.
Business Description
AE (and together with its subsidiaries, Allegheny) is an integrated energy business.
Allegheny owns and operates electric generation facilities primarily in Pennsylvania, West Virginia
and Maryland. Additionally, Allegheny owns transmission assets in Pennsylvania, West Virginia,
Maryland and Virginia and provides distribution services to customers in Pennsylvania, West
Virginia and Maryland. Allegheny manages its operations through two business segments: Merchant
Generation and Regulated Operations. These business segments are also referred to as reportable
segments.
The Merchant Generation segment includes Alleghenys unregulated electric generation
operations including Allegheny Energy Supply Company, LLC (AE Supply) and AE Supplys interest in
Allegheny Generating Company (AGC). AE Supply owns, operates and controls electric generation
capacity and supplies and trades energy and energy-related commodities. AGC owns and sells
generation capacity to AE Supply and Monongahela Power Company (Monongahela), which own
approximately 59% and 41% of AGC, respectively. The Merchant Generation segment is subject to
various federal and state regulations but, unlike the Regulated Operations segment, is not
generally subject to state regulation of rates.
The Regulated Operations segment includes the operations of Monongahela, The Potomac Edison
Company (Potomac Edison) and West Penn Power Company (West Penn and, together with Monongahela
and Potomac Edison, the Distribution Companies), which primarily operate electric transmission
and distribution (T&D) systems in Pennsylvania, West Virginia and Maryland, as well as
transmission in Virginia. Monongahela also owns and operates electric generation facilities in West
Virginia and has a 41% interest in AGC. The Distribution Companies are subject to various federal
and state regulations, including state regulation of rates.
The Regulated Operations segment also includes the operations of Trans-Allegheny Interstate
Line Company (TrAIL Company) and Alleghenys interests in Potomac-Appalachian Transmission
Highline, LLC (PATH, LLC). These entities were created to construct or facilitate the
construction of high voltage transmission lines and other transmission facilities, including the
Trans-Allegheny Interstate Line (TrAIL) and the Potomac-Appalachian Transmission Highline
(PATH). PATH, LLC is a series limited liability company that is comprised of multiple series,
each of which has separate rights, powers and duties regarding specified property and the series
profits and losses associated with such property. A subsidiary of AE owns 100% of the Allegheny
Series and 50% of the West Virginia Series (PATH-WV), which is a joint venture with a subsidiary
of American Electric Power Company, Inc. (AEP). Allegheny accounts for its interest in PATH-WV
using the equity method of accounting, effective January 1, 2010. TrAIL Company, PATH-Allegheny and
PATH-WV are subject to regulation by the Federal Energy Regulatory Commission (FERC). See Note 3,
Recently Adopted and Recently Issued Accounting Standards for additional information.
Allegheny Energy Service Corporation (AESC) is a wholly owned subsidiary of AE that employs
substantially all of Alleghenys personnel. As of December 31, 2010, AESC employed 4,211 employees,
1,197 of whom were subject to collective bargaining arrangements.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of AE and its
subsidiaries, as well as certain variable interest entities (See Note 23, Variable Interest
Entities, for additional information). These consolidated financial statements have been prepared
in conformity with U.S. generally accepted accounting principles (GAAP). All intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. These estimates include, but are not limited to, inventory valuation, allowance
for doubtful accounts, goodwill, intangible and long-lived asset impairment, unbilled electricity
revenue, valuation of derivative and energy contracts, asset retirement obligations, the effects of
regulation, long-lived asset recovery, the effects of contingencies and certain assumptions made in
accounting for pension and postretirement benefits. The estimates and
11
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
assumptions used are based upon managements evaluation of the relevant facts and
circumstances as of the date of the financial statements. Actual results could ultimately differ
from those estimates.
Regulatory Assets and Liabilities
Under cost-based regulation, regulated utility enterprises generally are permitted to recover
their operating expenses and earn a reasonable return on their utility investment.
Allegheny accounts for its regulated utility operations under regulated utility operations
industry specific accounting provisions. The economic effects of regulation can result in a
regulated company deferring costs or revenues that have been, or are expected to be, allowed in the
rate-setting process in a period different from the period in which the costs, revenues or other
comprehensive income would be recognized by an unregulated enterprise. Accordingly, Allegheny
records assets and liabilities that result from the regulated rate-making process that would not be
recorded under GAAP for non-regulated entities. These regulatory assets and liabilities are
classified in the Consolidated Balance Sheets as current and non-current Regulatory assets and
Regulatory liabilities. Allegheny periodically evaluates the applicability of regulated industry
specific accounting provisions and considers factors such as regulatory changes and the impact of
competition. If regulated industry specific accounting provisions would no longer apply to some
portion of Alleghenys operations, Allegheny would eliminate the related regulatory assets and
liabilities and record the impact as an extraordinary item in the statement of income. See Note 7,
Regulatory Assets and Liabilities, for additional information.
Revenues and Receivables
Revenues from the sale of generation are recorded in the period in which the electricity is
delivered.
PJM Interconnection, LLC (PJM) is a regional transmission organization that operates a
competitive wholesale energy market. To facilitate the economic dispatch of Alleghenys generation,
AE Supply and Monongahela sell the power they generate into the PJM market and purchase from the
PJM market the power needed to meet their contractual obligations to supply power. PJM power
purchases and sales are reported on a net basis.
Revenues from the sale of electricity to customers of the regulated utility subsidiaries are
recognized in the period that the electricity is delivered and consumed by customers, including an
estimate for unbilled revenues. Energy billings to individual customers are based on meter
readings, which are performed periodically on a systematic basis. At the end of each month, the
amount of energy delivered to each customer is estimated based in part on the most recent reading
of the customers meter, and the Distribution Companies recognize unbilled revenues that reflect
these estimates. The unbilled revenue estimates are based on daily generation, purchases of
electricity, estimated customer usage by customer type, weather effects, electric line losses and
the most recent consumer rates.
A provision for uncollectible accounts, which is determined based upon Alleghenys collection
experience with its customers, is recorded as a component of operations and maintenance expense.
Fair Value Measurements, Derivative Instruments and Hedging Activities
Derivative contracts are recorded in Alleghenys Consolidated Balance Sheets at fair value.
Changes in the fair value of the derivative contract are included in revenues on the Consolidated
Statements of Income unless the derivative falls within the normal purchases and normal sales
scope exception or is designated as a cash flow hedge for accounting purposes. The normal purchases
and normal sales scope exception requires, among other things, physical delivery in quantities
expected to be used or sold over a reasonable period in the normal course of business. Contracts
that are designated as normal purchases and normal sales are accounted for under accrual accounting
and, therefore, are not recorded on the balance sheet at fair value. For certain transactions that
are designed to hedge the cash flows of a forecasted transaction and that are designated in a
hedging relationship, the effective portion of the changes in fair value of the derivative contract
is recorded as a separate component of equity under the caption Accumulated other comprehensive
loss and subsequently reclassified into earnings when the forecasted transaction is settled and
impacts earnings. The ineffective portion of the hedge is immediately recognized in earnings.
Fair values for exchange-traded instruments, principally futures, are based on actively quoted
market prices. Fair values are subject to change in the near term and reflect managements best
estimate based on various factors. In establishing the fair value of commodity contracts that do
not have quoted prices, such as physical contracts, financial transmission rights (FTRs) and
swaps, management uses available market data and pricing models to estimate fair values. Estimating
the fair values of instruments that do not have quoted market prices requires managements judgment
in determining amounts that could reasonably be expected to be received from, or paid to, a third
party in settlement of the instruments. These amounts could be materially different from amounts
that might be realized in an actual sale transaction.
12
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Allegheny has netting agreements with various counterparties. These agreements provide the
right to set off amounts due from or to the counterparty. In cases in which these netting
agreements are in place, Allegheny records the fair value of derivative assets,
liabilities and cash collateral and accounts receivable and accounts payable with each
counterparty on a net basis. Cash flows associated with derivative contracts are recorded in cash
flows from operating activities. See Note 14, Fair Value Measurements, Derivative Instruments and
Hedging Activities, for additional details regarding energy transacting activities.
Deferred Energy Costs
Deferred energy costs represent the deferral of certain energy costs from the period in which
they were incurred to the period in which such costs are recovered in rates. Allegheny records
deferred energy costs relating to the following items:
Expanded Net Energy Cost (ENEC)
In May 2007, the Public Service Commission of West Virginia (the West Virginia PSC) issued
an order that re-established an annual ENEC method of recovering net power supply costs, including
fuel costs, purchased power costs, including purchased power costs associated with the Grant Town
PURPA generation facility and other related expenses, net of related revenue and interest earnings
on the Fort Martin Scrubber project escrow fund. Under the ENEC, actual costs and revenues are
tracked for under and/or over recoveries, and revised ENEC rate filings are made on an annual
basis. Any under and/or over recovery of costs, net of related revenues, is deferred, for
subsequent recovery or refund, as a regulatory asset or regulatory liability, with the
corresponding impact on the Consolidated Statements of Income reflected within Deferred energy
costs, net. See Note 5, Rates and Regulation, and Note 7, Regulatory Assets and Liabilities,
for additional information.
Market-based Generation Costs
Potomac Edison is authorized by the Public Service Commission of Maryland (the Maryland PSC)
to recover the costs of the generation component of power sold to certain residential, commercial
and industrial customers who did not choose a third-party alternative generation provider. A
regulatory asset or liability is recorded on Potomac Edisons balance sheet for any under-recovery
or over-recovery of the generation component of costs charged to these customers.
AES Warrior Run PURPA Generation Facility
To satisfy certain of its obligations under the Public Utility Regulatory Policies Act of 1978
(PURPA), Potomac Edison entered into a long-term contract beginning July 1, 2000 to purchase
capacity and energy from the AES Warrior Run PURPA generation facility through the beginning of
2030. Potomac Edison is authorized by the Maryland PSC to recover all contract costs from the AES
Warrior Run PURPA generation facility, net of any revenues received from the sale of AES Warrior
Run output into the wholesale energy market, by means of a retail revenue surcharge (the AES
Warrior Run Surcharge). Any under-recovery or over-recovery of net costs is being deferred pending
subsequent recovery from, or return to, customers through adjustments to the AES Warrior Run
Surcharge.
Debt Issuance Costs
Costs incurred to issue debt are recorded as deferred charges on the Consolidated Balance
Sheets. These costs are amortized over the term of the related debt instrument primarily using the
effective interest method.
Common Services and Intercompany Transactions
Common Services. Substantially all of Alleghenys personnel are employed by AESC, which
performs services at cost for other Allegheny entities and makes payments on behalf of Allegheny
entities. Each entity is responsible for its share of the cost of services provided by AESC and
payments made by AESC on behalf of the entities.
Income Taxes. AE and its subsidiaries file a consolidated federal income tax return. Federal
income tax expense (benefit) and tax assets and liabilities are allocated among AE and its
subsidiaries generally in proportion to the taxable income of each participant, except that no
subsidiary pays tax in excess of its separate return income tax liability.
Power Sales and Purchases. AE Supply provides power to Potomac Edison and West Penn to
satisfy a portion of the power necessary to meet their respective retail load. AE Supply and
Monongahela purchase all of AGCs capacity in the Bath County generation facility under a
cost-of-service formula wholesale rate schedule approved by FERC on a proportionate basis, based
on their respective equity ownership of AGC. Additionally, Monongahela sells Potomac Edison the
power necessary to service its West Virginia customers.
13
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Leases. West Penn and Monongahela own property, including buildings and software, that they
lease primarily to AESC for its use in providing services to AE and its affiliates.
Long-Lived Assets
Property, Plant and Equipment
Property, plant and equipment (property) is recorded at original cost. This cost includes
direct labor, materials and indirect costs, such as operation, maintenance and depreciation of
transportation and construction equipment, taxes, postretirement benefits and other benefits
related to employees to the extent they are engaged in construction. In addition, property subject
to rate regulation includes an allowance for funds used during construction on property for which
construction work in progress is not included in rate base. Property not subject to rate regulation
includes capitalized interest during the construction period.
Upon retirement of property, no gain or loss is generally recognized and the original cost of
the property less salvage is charged to accumulated depreciation. The cost of removal of regulated
property is charged to the related regulatory liability or regulatory asset, and the cost of
removal of unregulated property, for which no asset retirement obligation (ARO) has been
recorded, is expensed as incurred.
Allegheny capitalizes the cost of software developed for internal use. These costs are
amortized on a straight-line basis over the expected useful life of the software.
Depreciation and Maintenance
Depreciation expense is determined generally on a straight-line group method over the
estimated service lives of depreciable assets for unregulated operations. For regulated utility
operations, depreciation expense is determined using a straight-line group method in accordance
with currently enacted regulatory rates. Under the straight-line group method, plant components are
categorized as retirement units or minor items of property. As retirement units are replaced,
the cost of the replacement is capitalized and the original component is retired. Replacements of
minor items of property are expensed as maintenance. Depreciation expense was approximately 2.5% of
average depreciable property in 2010 and 2.3% of average depreciable property in 2009 and 2008.
Estimated service lives for generation, T&D and other property at December 31, 2010 were as
follows:
|
|
|
|
|
|
|
Years |
|
Generation property: |
|
|
|
|
Steam scrubbers and equipment |
|
|
43-65 |
|
Steam generator units |
|
|
45-80 |
|
Internal combustion units |
|
|
40-44 |
|
Hydroelectric dams and facilities |
|
|
50-152 |
|
Transmission and distribution property: |
|
|
|
|
Electric equipment |
|
|
10-100 |
|
Easements |
|
|
70-100 |
|
Other property: |
|
|
|
|
Office buildings and improvements |
|
|
42-60 |
|
General office and other equipment |
|
|
10-25 |
|
Vehicles and transportation |
|
|
7-25 |
|
Computers, software and information systems |
|
|
5-20 |
|
The cost of repairs, maintenance including planned major maintenance activities, and minor
replacements of property are charged to maintenance expense as incurred.
Capitalized Interest and Allowance for Funds Used During Construction (AFUDC)
For non-regulated companies, Allegheny capitalizes interest costs associated with construction
activities. The average interest capitalization rates in 2010, 2009, and 2008 were 6.9%, 6.0% and
6.6%, respectively. Allegheny capitalized $2.7 million, $25.9 million, and $34.6 million of
interest during 2010, 2009, and 2008, respectively.
AFUDC is a component of the construction of Property, Plant and Equipment defined in the
applicable regulatory uniform system of accounts as representing the net cost for the period of
construction of borrowed funds used for construction purposes and a reasonable rate on other funds
when so used. AFUDC is capitalized in those instances in which the related construction work in
progress is not included in rate base in the rate setting process and is reflected in the
Consolidated Statements of Income as a reduction to Interest expense and Other income (expense),
net to the extent it relates to borrowed funds and other funds used in construction, respectively.
Rates used by the regulated subsidiaries in computing AFUDC in 2010, 2009 and 2008 averaged 8.3%,
7.3% and 7.2%, respectively. Allegheny recorded AFUDC of $9.6 million in 2010, $8.3 million in 2009
and $6.6 million in 2008, of which $6.3
14
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
million, $5.0 million and $3.7 million was reflected in
Other income (expense), net and $3.3 million, $3.3 million and $2.9 million was reflected as a
reduction to Interest expense in 2010, 2009 and 2008, respectively.
Asset Impairment
Alleghenys long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable through
operations. If the carrying amount of the asset exceeds the expected undiscounted future cash flows
to be generated by the asset, an impairment loss is recognized, and the asset is written down to
its fair value. Allegheny did not record any impairment charges during 2010, 2009 or 2008.
Asset Retirement Obligations and Cost of Removal
A liability for the fair value of an asset retirement obligation (ARO) is recognized in the
period in which it is incurred if it can be reasonably estimated, with the offsetting associated
asset retirement costs capitalized as a part of the carrying amount of the long-lived assets. The
asset retirement cost is subsequently charged to expense over its useful life. Changes in the ARO
resulting from the passage of time are recognized as an increase in the carrying amount of the
liability and as accretion expense, or as an adjustment to the related regulatory asset or
regulatory liability. Changes resulting from revisions to the timing or amount of the original
estimate of cash flows are recognized as an increase or decrease in the asset retirement cost and
ARO. When settled, actual costs to retire the asset are charged against the recorded ARO liability.
In addition, the Distribution Companies and TrAIL Company recover cost of removal (COR) for
property, plant and equipment in their rates. In some jurisdictions, the recovery is provided prior
to the time of asset retirement, in which case, the amounts collected are recorded as a regulatory
liability. When incurred, COR costs are charged to the regulatory liability. In other
jurisdictions, the amounts are recovered only after being incurred, in which case, the COR costs
incurred are recorded as a regulatory asset until recovered.
Goodwill and Intangible Assets
Goodwill represents the acquisition cost of a business combination in excess of fair value of
tangible and intangible assets acquired, less liabilities assumed. Recorded goodwill is not
amortized, but is tested for impairment at least annually. Other intangible assets with finite
lives are amortized over their useful lives and tested for impairment when events or circumstances
warrant. See Note 18, Goodwill and Intangible Assets for additional information.
Investments in Unconsolidated Affiliates
Investments in unconsolidated affiliates are typically accounted for under the equity method
of accounting. The income or loss on such investments is recorded in Other income (expense), net
in the Consolidated Statements of Income. Investments in unconsolidated affiliates at December 31,
2010 primarily consisted of $23.6 million relating to PATH-WV, which Allegheny consolidated until
January 1, 2010, and Alleghenys investment of $23.7 million, through AE Supply, in Buchanan
Generation LLC. Investments in unconsolidated affiliates at December 31, 2009, primarily consisted
of Alleghenys investment, through AE Supply, in Buchanan Generation LLC of $24.1 million. See Note
23, Variable Interest Entities for information relating to variable interest entities.
Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows and Consolidated Balance Sheets,
investments in money market funds and highly liquid investments purchased with original maturities
of three months or less are considered to be the equivalent of cash.
Restricted Funds
At December 31, 2010 and 2009, Allegheny had current restricted funds of $46.9 million and
$25.9 million, respectively. Current restricted funds at December 31, 2010 included $25.0 million
of funds collected from West Virginia customers that will be used to service the environmental
control bonds issued in connection with the construction of the flue gas desulfurization equipment
(Scrubbers) at Fort Martin, $19.3 million of medical benefit trust assets and $2.6 million of
contractually restricted bid assurances. Current restricted funds at December 31, 2009 included
$20.6 million of funds collected from West Virginia customers that will be used to service the
environmental control bonds issued in connection with the construction of Scrubbers at the Fort
Martin generating facility and $5.3 million of intangible transition charges collected from West
Penn customers related to Pennsylvania transition costs. In addition, at December 31, 2010 and
2009, Allegheny had long-term restricted funds of $29.4 million and $60.2 million, respectively.
Long-term restricted funds at December 31, 2010 included $29.4 million of funds relating to
proceeds from the issuance of ratepayer obligation bonds issued in connection with the construction
of Scrubbers at the Fort Martin generating facility. Long-term restricted funds at December 31,
2009 included $10.3 million of funds remaining from the $235 million Pennsylvania Development
15
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financing Authority bond issued in connection with the construction and installation of Scrubbers
at the Hatfields Ferry generating facility, $49.6 million of funds relating to proceeds from the
issuance of ratepayer obligation bonds issued in connection with the construction of Scrubbers at
the Fort Martin generating facility and $0.3 million of escrow funds related to the Scrubber
construction projects.
Collateral Deposits
Allegheny posts collateral with counterparties, including PJM, for certain transactions and
transmission and transportation tariffs. Approximately $30.7 million and $20.8 million of cash
collateral deposits were included in current assets at December 31, 2010 and 2009, respectively.
Approximately $6.5 million and $3.1 million of cash collateral deposits were netted against
derivative liabilities on the Consolidated Balance Sheets at December 31, 2010 and 2009,
respectively.
In addition, no collateral deposits were netted against derivative assets on the Consolidated
Balance Sheets at December 31, 2010, and approximately $27.5 million of counterparty collateral
deposits were netted against derivative assets on the Consolidated Balance Sheets at December 31,
2009.
Inventory
Allegheny records materials, supplies and fuel inventory, including emission allowances, using
the average cost method.
Income Taxes
Allegheny computes income taxes under the liability method. Deferred income tax balances are
generally determined based on the difference between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect in the years in which the differences are
expected to reverse. Tax benefits are recognized in the financial statements when it is more likely
than not that a tax position will be sustained upon examination by the tax authorities based on the
technical merits of the position. Such tax positions are measured as the largest amount of tax
benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax
authority, assuming full knowledge of the position and all relevant facts.
Deferred income tax assets have also been recorded on the tax effects of net operating losses
that are more likely than not to be realized through future operations and through the reversal of
existing temporary differences. Allegheny has deferred investment tax credits associated with its
regulated business and assets previously held by its regulated business. These investment tax
credits are amortized to income on a straight-line basis over the life of the assets. See Note 8,
Income Taxes for additional information.
Taxes Collected from Customers and Remitted to Governmental Authorities
Allegheny records taxes collected from customers, which are directly imposed on a transaction
with that customer, on a net basis. That is, in instances in which Allegheny acts as a collection
agent for a taxing authority by collecting taxes that are the responsibility of the customer,
Allegheny records the amount collected as a liability and relieves such liability upon remittance
to the taxing authority without impacting revenues or expenses.
Pension and Other Postretirement Benefits
Allegheny sponsors a noncontributory, defined benefit pension plan covering substantially all
employees, including officers. Benefits are based on each employees years-of-service and
compensation. Allegheny also maintains a Supplemental Executive Retirement Plan for certain senior
executives. Allegheny also provides subsidies for medical and life insurance plans for eligible
retirees and dependents. Eligible retirees are charged premiums for medical coverage based on plan
provisions, including age and years-of-service.
Pension and other postretirement benefit expense is determined by an actuarial valuation,
based on assumptions that are evaluated annually.
See Note 12, Pension Benefits and Postretirement Benefits Other Than Pensions for additional
information.
Stock-Based Compensation
Share-based payments are generally measured at fair value on the date of grant and are
expensed over the requisite service period. For options, Allegheny is entitled to income tax
deductions in an amount equal to the fair value of shares on the date of the option exercise less
the option exercise price. To the extent that the income tax deduction exceeds the cumulative
compensation expense recorded for book purposes, the tax effect of the excess (referred to as a
windfall tax benefit) is recorded as a credit to stockholders equity when the tax benefit is
realized. See Note 11, Stock-Based Compensation for additional information.
16
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss, included in the shareholders equity
section of the Consolidated Balance Sheets, were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(In millions) |
|
2010 |
|
|
2009 |
|
Cash flow hedges, net of tax of $6.4 million and $(10.8) million, respectively |
|
$ |
10.4 |
|
|
$ |
(16.8 |
) |
Net unrecognized pension and other benefit plan costs, net of tax of $(49.3)
million and $(49.7) million, respectively |
|
|
(74.1 |
) |
|
|
(73.1 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
(63.7 |
) |
|
$ |
(89.9 |
) |
|
|
|
|
|
|
|
NOTE 2: MERGER AGREEMENT
Upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub
will merge with and into AE (the Merger), with AE continuing as the surviving corporation and
becoming a wholly owned subsidiary of FirstEnergy. The Merger is intended to qualify as a tax-free
reorganization under the Internal Revenue Code of 1986, as amended, and be tax-free to AE
stockholders. Pursuant to the Merger Agreement, upon completion of the Merger, each issued and
outstanding share of AEs common stock, including grants of restricted stock, would automatically
be converted into the right to receive 0.667 of a share of common stock of FirstEnergy. This ratio
is fixed, and the Merger Agreement does not provide for any adjustment to reflect stock price
changes prior to completion of the Merger.
Pursuant to the Merger Agreement, completion of the Merger is subject to various customary
conditions, including (i) approvals by shareholders of both companies; (ii) the SECs clearance of
a registration statement registering the FirstEnergy common stock to be issued in connection with
the merger; (iii) expiration or termination of the applicable waiting period under the
Hart-Scott-Rodino Anti-Trust Improvements Act of 1976; (iv) receipt of all required regulatory
approvals, including approvals by FERC and state public service and utility commissions in
Virginia, Maryland, Pennsylvania and West Virginia; (v) the absence of any governmental action
challenging or seeking to prohibit the Merger and (vi) the absence of any material adverse effect
with respect to either Allegheny or FirstEnergy.
Shareholder Approvals. On July 16, 2010, FirstEnergys registration statement on Form S-4
containing a joint proxy statement/prospectus relating to the proposed Merger was declared
effective by the SEC, and AE stockholders and FirstEnergy shareholders approved the various
proposals related to the Merger in separate shareholder meetings on September 14, 2010.
Hart-Scott-Rodino. On January 7, 2011, the U.S. Department of Justice (the DOJ) notified
AE and FirstEnergy that it had completed its review of the proposed Merger pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 and closed its investigation.
FERC. On December 16, 2010, FERC approved the proposed Merger.
Virginia SCC. The Virginia SCC issued a decision approving the proposed Merger on September
9, 2010.
West Virginia PSC. On November 3, 2010, AE and FirstEnergy filed a comprehensive settlement
with the West Virginia PSC that resolved all issues raised by the parties in the merger proceedings
in West Virginia. The settlement includes certain commitments that will apply if the proposed
Merger is completed, including: a commitment to maintain a regional headquarters for Alleghenys
West Virginia utility operations within Monongahelas service territory; $7.5 million in rate
reductions over a two-year period for Alleghenys West Virginia customers; a commitment to maintain
customer call center operations in Fairmont, West Virginia for at least five years; additional
funding totaling $500,000 over a four-year period for Dollar Energy Fund in West Virginia and an
agreement that certain merger-related costs will not be recoverable in customer rates. The West
Virginia PSC approved the settlement and the proposed Merger on December 16, 2010.
Maryland PSC. On December 1, 2010, AE and FirstEnergy filed a comprehensive settlement with
the Maryland PSC that addressed the issues raised by 10 parties to the merger proceedings in
Maryland. The settlement includes certain commitments that will apply if the proposed Merger is
completed, including a commitment to maintain a regional headquarters for Potomac Edisons Maryland
service territory, $6.5 million in rate reductions over a four-year period for Potomac Edisons
Maryland customers and an agreement that certain merger-related costs will not be recoverable in
customer rates. The Maryland PSC approved the settlement and the proposed Merger on January 18,
2011, subject to certain conditions, including crediting residential customers for the $6.5 million
rate reduction within the first three months following the Merger.
17
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pennsylvania PUC. On October 22, 2010, AE and FirstEnergy filed a comprehensive settlement
with the Pennsylvania PUC that addresses the issues raised by 18 parties to the merger proceedings
in Pennsylvania. The settlement includes certain commitments that will apply if the proposed Merger
is completed, including commitments related to employment levels, including a five-year commitment
to maintain certain minimum employment levels in Greensburg and Westmoreland County, an
approximately $11 million in distribution rate credits for West Penn customers, a $6.19 million
credit for certain West Penn customers for costs related to energy-efficiency and conservation
programs due to recently proposed changes in West Penns smart meter implementation plan and an
agreement that certain merger-related costs will not be recoverable in customer rates. The
settlement is subject to approval by the Pennsylvania PUC and does not resolve issues raised by
certain parties who did not join in the settlement.
AE and FirstEnergy currently anticipate completing the proposed Merger in the first quarter of
2011.
NOTE 3: RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS
Consolidations and Variable Interest Entities
Allegheny adopted Financial Accounting Standards Board (FASB) Accounting Standards Update
(ASU) 2009-17 (Consolidations Topic 810), Improvements to Financial Reporting by Enterprises
Involved with Variable Interest Entities, on January 1, 2010. Under this new guidance,
consolidation of a variable interest entity (VIE) is required by an enterprise (the primary
beneficiary), if any, that is determined qualitatively to have both the power to direct the
activities that most significantly impact the VIEs economic success and the obligation to absorb
losses or the right to receive benefits that could potentially be significant to the VIE. Under the
prior guidance, the primary beneficiary (consolidator) of a VIE was the party that absorbed a
majority of the expected losses or the majority of the expected residual returns of the VIE using a
quantitative analysis.
Through December 31, 2009, Allegheny consolidated PATH-WV for financial statement purposes,
because Allegheny determined that PATH-WV was a VIE and that Allegheny was its primary beneficiary
under the prior accounting standard. Under the new accounting standard, Allegheny determined that
it is not the primary beneficiary of PATH-WV, and therefore deconsolidated PATH-WV for financial
statement purposes, effective January 1, 2010. Allegheny did not retrospectively apply this new
guidance by deconsolidating PATH-WV in its financial statements for periods prior to January 1,
2010. The deconsolidation of PATH-WV did not impact retained earnings or net income attributable to
AE. See Note 23, Variable Interest Entities, for additional information.
Fair Value Measurements and Disclosures
Allegheny adopted the FASBs ASU No. 2010-06, Fair Value Measurements and Disclosures:
Improving Disclosures about Fair Value Measurements in January 2010. The ASU added new
requirements for disclosures about transfers into and out of fair value Levels 1 and 2 and separate
disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. The
ASU also clarified existing fair value disclosures about the level of disaggregation and about
inputs and valuation techniques used to measure fair value. Alleghenys adoption of this ASU did
not affect its results of operations or financial position.
NOTE 4: SALE OF VIRGINIA DISTRIBUTION BUSINESS
On June 1, 2010, Potomac Edison sold its electric distribution business in Virginia (the
Virginia distribution business) to Rappahannock Electric Cooperative and Shenandoah Valley
Electric Cooperative. Cash proceeds from the sale were approximately $317 million, resulting in a
pre-tax gain of approximately $45 million.
18
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Virginia distribution business was included in the Regulated Operations segment. Assets
and liabilities relating to the Virginia distribution business were classified as held for sale
in Alleghenys consolidated balance sheet, and depreciation expense on those assets ceased, as of
May 1, 2009. The operating results of the Virginia distribution business have not been reported as
discontinued operations, because AE Supply will continue to provide the majority of the power to
serve the customers of this business through June 30, 2011 under a power sales agreement. Assets
held for sale and liabilities associated with assets held for sale at December 31, 2009 were as
follows:
|
|
|
|
|
|
|
December 31, |
|
(In millions) |
|
2009 |
|
Current Assets: |
|
|
|
|
Accounts receivable |
|
$ |
31.2 |
|
Materials and supplies |
|
|
0.7 |
|
Regulatory assets |
|
|
0.5 |
|
|
|
|
|
Total current assets |
|
|
32.4 |
|
Property, Plant and Equipment: |
|
|
|
|
Distribution property, plant and equipment |
|
|
344.9 |
|
Accumulated depreciation |
|
|
(91.2 |
) |
|
|
|
|
Property, plant and equipment, net |
|
|
253.7 |
|
|
|
|
|
Total assets held for sale |
|
$ |
286.1 |
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
Customer deposits |
|
$ |
5.5 |
|
Regulatory liabilities |
|
|
3.7 |
|
Other |
|
|
0.9 |
|
|
|
|
|
Total current liabilities |
|
|
10.1 |
|
Deferred Credits and Other Liabilities: |
|
|
|
|
Regulatory liabilities |
|
|
51.8 |
|
Other |
|
|
1.3 |
|
|
|
|
|
Total deferred credits and other liabilities |
|
|
53.1 |
|
|
|
|
|
Total liabilities associated with assets held for sale |
|
$ |
63.2 |
|
|
|
|
|
In connection with the sale, Potomac Edison agreed to contribute $27.5 million between
July 1, 2011 and July 1, 2014 to reduce the impact of any future rate increases and the obligation
for such contributions was included in the calculation of the gain on the sale of this business. On
December 31, 2010, Potomac Edison purchased Shenandoah Valley Electric Cooperatives West Virginia
distribution business for approximately $14.5 million, subject to certain post-closing adjustments.
NOTE 5: RATES AND REGULATION
Pennsylvania
Rates. Rate caps on transmission services in Pennsylvania expired on December 31, 2005.
Distribution rate caps were also scheduled to expire on December 31, 2005 and generation rate caps
were scheduled to expire on December 31, 2008. By order entered May 11, 2005, the Pennsylvania
Public Utility Commission (the Pennsylvania PUC) approved an extension of generation rate caps
for West Penn customers from 2008 to 2010 and provided for increases in generation rates in 2007,
2009 and 2010, in addition to previously approved rate cap increases for 2006 and 2008. The order
also extended distribution rate caps from 2005 to 2007, with an additional rate cap in place for
2009 at the rate in effect on January 1, 2009. The intent of this transition plan was to gradually
move generation rates closer to market prices. T&D rates for all customers are subject to
traditional regulated utility ratemaking (i.e., cost-based rates). West Penns transition period
ended for the majority of its customers on December 31, 2010, when its generation rate caps
expired.
19
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Advanced Metering and Demand-Side Management Initiatives. In October 2008, Pennsylvania
adopted Act 129, which includes a number of measures relating to conservation, demand-side
management and power procurement processes. Act 129 requires each electric distribution company
(EDC) with more than 100,000 customers to adopt a plan, approved by the Pennsylvania PUC, to
reduce, by May 31, 2011, electric consumption by at least one percent of its expected consumption
for June 1, 2009 through May 31, 2010. By May 31, 2013, the total annual weather-normalized
consumption is to be reduced by a minimum of three percent, and peak demand is to be reduced by a
minimum of four and one-half percent of the EDCs annual system peak demand. Act 129 also:
|
|
|
directed the Pennsylvania PUC to adopt an energy conservation and efficiency program
to require EDCs to develop and file, by July 1, 2009, plans to reduce energy demand and
consumption; and |
|
|
|
|
required EDCs to file a plan for smart meter technology procurement and
installation in August 2009. |
West Penn expects to incur significant capital expenditures to comply with these requirements.
Act 129 also requires EDCs to obtain energy through a prudent mix of contracts, with an
emphasis on competitive procurement. The Act includes a grandfather provision for West Penns
procurement and rate mitigation plan, which was previously approved by the Pennsylvania PUC.
In June 2009, West Penn filed its Energy Efficiency and Conservation (EE&C) Plan containing
22 programs to meet its Act 129 demand and consumption reduction obligations. The proposed programs
cover most energy-consuming devices of residential, commercial and industrial customers. The EE&C
Plan also proposed a reconcilable surcharge mechanism to obtain full and current cost recovery of
the EE&C Plan costs as provided in Act 129. The EE&C Plan projected an aggregated cost of the
energy efficiency measures in the amount of approximately $94.3 million through mid 2013. A hearing
concerning West Penns EE&C Plan was held August 19, 2009.
The Pennsylvania PUC approved West Penns EE&C Plan, in large part, by Opinion and Order
entered October 23, 2009. The new programs approved by the Pennsylvania PUC include: rebates for
customers who purchase high efficiency appliances, lighting and heating and cooling systems;
residential home audits and rebates toward implementing audit recommendations; home audit,
weatherization and air conditioner replacement programs for low-income customers; new rate options
that will provide financial incentives for customers to lower their demand for electricity or shift
their usage to lower-priced times; incentives for customers who install in-home devices that reduce
electric usage when demand is highest; and various programs for commercial, industrial, government
and non-profit customers to increase energy efficiency and conservation. The Pennsylvania PUC also
approved West Penns proposal to recover its EE&C Plan costs on a full and current basis via an
automatic surcharge to customers bills, subject to an annual reconciliation mechanism.
The Pennsylvania PUC declined to approve West Penns proposed distributed generation program
and West Penns proposed contract demand response program and encouraged West Penn to submit
revisions to both programs. On December 21, 2009, West Penn filed an Amended EE&C Plan as directed
by the Pennsylvania PUC, in which it added a new customer resources demand response program
intended to replace the previously proposed distributed generation and contract demand programs.
The Pennsylvania PUC reviewed West Penns amended Plan at its public meeting on February 11, 2010
and ordered West Penn to file an amended plan within 60 days to include additional detail on the
costs associated with the previously approved customer load response program and the new customer
resources demand response program.
On August 14, 2009, West Penn filed its Smart Meter Technology Procurement and Installation
Plan. The Plan provided for extensive deployment of smart meter infrastructure with replacement of
all of West Penns approximately 725,000 meters by the end of 2014. On December 18, 2009, West Penn
filed a motion to reopen the evidentiary record to submit an alternative smart meter plan
proposing, among other things, a less rapid deployment of smart meters. On January 13, 2010, the
Pennsylvania PUC granted the motion to reopen the record and remanded the proceeding to the ALJ.
The Pennsylvania PUC also waived the late January 2010 deadline by which the ALJs recommended
decision would have been required. The hearing was held on March 16, 2010, and on May 6, 2010, the
ALJ issued a decision finding that West Penns alternative smart meter deployment plan, which
contemplated deployment of 375,000 smart meters by May 2012, complied with the requirements of Act
129 and recommended approval of the alternative plan, including West Penns proposed cost recovery
mechanism, by the Pennsylvania PUC.
However, in light of the significant expenditures that would be associated with its smart
meter deployment plans and related infrastructure upgrades as previously proposed, as well as its
evaluation of recent Pennsylvania PUC decisions approving less rapid deployment proposals by other
EDCs, West Penn undertook to re-evaluate its Act 129 compliance strategy, including both its plans
with respect to smart meter deployment and certain smart meter dependent aspects of the EE&C Plan.
On July 21, 2010, the Pennsylvania PUC issued an order, in response to West Penns request, to stay
West Penns smart meter implementation proceedings for a period of 90 days. On September 10, 2010,
West Penn filed an Amended EE&C Plan that is less reliant on smart meter deployment and emphasized
non-smart meter programs to meet the conservation and demand reduction requirements of Act 129.
20
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Additionally, on October 19, 2010, West Penn and Pennsylvanias Office of Consumer Advocate filed a
Joint Petition for Settlement addressing West Penns smart meter implementation plan with the
Pennsylvania PUC. Under the terms of the proposed Settlement, West Penn proposes to decelerate its
previously contemplated smart meter deployment schedule, targeting the installation of an estimated
25,000 smart meters, based on customer requests, by mid-2012, in support of its EE&C Plan.
Thereafter, West Penn proposes to install an additional 15,000 smart meters by 2013 and an
additional 60,000 smart meters between 2013 and 2016. The proposed Settlement also contemplates
that West Penn take advantage of the 30-month grace period authorized by the Pennsylvania PUC to
continue its efforts to re-evaluate its full-scale smart meter deployment plans, and that it file a
revised smart meter implementation plan reflecting those efforts, including its proposed plans for
full-scale deployment of smart meters, which West Penn currently anticipates filing in June 2012.
Under the terms of the proposed Settlement, West Penn would be permitted to recover certain
previously-incurred and anticipated smart-meter related expenditures through a levelized customer
surcharge, with certain
expenditures amortized over a ten-year period and other expenditures amortized through 2017,
in each case with interest on deferred amounts. Additionally, West Penn would be permitted to seek
recovery of certain other costs as part of its revised smart meter implementation plan for
full-scale deployment that it currently intends to file in June 2012 or in a future base
distribution rate case. On December 8, 2010, the Pennsylvania PUC directed that the smart meter
implementation proceeding be referred to the Administrative Law Judge for further proceedings to
ensure that the impact of the proposed merger with FirstEnergy is considered and that the Joint
Petition for Settlement filed in October 2010 had adequate support in the record.
On December 17, 2010, an Administrative Law Judge issued a Recommended Decision that the
Amended EE&C Plan filed by West Penn in September 2010 be approved. By order entered January 13,
2011, the Pennsylvania PUC approved West Penns Amended EE&C plan.
West Penns actual cost to implement smart meter infrastructure may vary from its previous
estimates as a result of changes in its procurement and installation plan as ultimately approved by
the Pennsylvania PUC and the timing of that approval, among other factors.
West Virginia
Rates. Rates in West Virginia are subject to traditional regulated utility ratemaking (i.e.,
cost-based rates).
Rate Case. On August 13, 2009, Monongahela and Potomac Edison filed with the West Virginia
PSC a request to increase retail rates by approximately $122.1 million annually, effective June 10,
2010. On January 12, 2010, Monongahela and Potomac Edison filed supplemental testimony discussing a
tax treatment change that would result in a revenue requirement that is approximately $7.7 million
lower than the requirement included in the original filing. In addition, in December 2009,
subsidiaries of Monongahela and Potomac Edison completed a securitization transaction to finance
certain costs associated with the installation of Scrubbers at the Fort Martin generating station,
which costs would otherwise have been included in the request for rate recovery. Consequently,
Monongahela and Potomac Edison ultimately requested an increase in retail rates of approximately
$95 million, rather than $122.1 million, annually. On April 2, 2010, Monongahela and Potomac Edison
filed with the West Virginia PSC a Joint Stipulation and Agreement of Settlement reached with the
other parties in the proceeding that provided for:
|
|
|
a $40 million annualized base rate increase effective June 29, 2010; |
|
|
|
|
a deferral of $9 million of February 2010 storm restoration expenses in West Virginia
over a maximum five-year period; |
|
|
|
|
an additional $20 million annualized base rate increase effective in January 2011; |
|
|
|
|
a decrease of $20 million in ENEC rates effective January 2011, which amount is
deferred for later recovery in 2012; and |
|
|
|
|
a moratorium on filing for further increases in base rates before December 1, 2011,
except under specified circumstances. |
The West Virginia PSC approved the Joint Petition and Agreement of Settlement on June 25,
2010.
Annual Adjustment of Fuel and Purchased Power Cost Rates. On August 29, 2008, Monongahela and
Potomac Edison filed with the West Virginia PSC a request to increase retail rates by approximately
$173 million annually to reflect expected increases in fuel and purchased power costs during 2009
and under-recovery of past costs through June 2008. The new rates, proposed to become effective
January 1, 2009, were submitted pursuant to the schedule for annual fuel and purchased power cost
reviews in connection with Monongahelas and Potomac Edisons purchased power cost recovery clause
in West Virginia. On December 29, 2008, the West Virginia PSC issued an order approving a
settlement agreement among Allegheny, the Consumer Advocate Division, the Staff of the West
Virginia PSC and the West Virginia Energy Users Group, pursuant to which Alleghenys rates in West
Virginia were increased by $142.5 million annually beginning on January 1, 2009.
On September 1, 2009, Monongahela and Potomac Edison filed their annual fuel adjustment
request with the West Virginia PSC, requesting a rate increase of $143.2 million to reflect
increases in their unrecovered balances of fuel and purchased power costs that have accrued through
June 2009 and projected increases through June 2010. The new rates were submitted pursuant to the
schedule for annual fuel and purchased power cost reviews. On December 2, 2009, the parties to the
proceeding filed a Joint
21
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stipulation providing that Monongahela and Potomac Edison would receive an
increase of $118 million, effective January 1, 2010, plus deferred recovery of an additional $23.1
million effective January 1, 2011, with carrying charges of 6% on the deferred amount. The West
Virginia PSC approved the Joint Stipulation on December 29, 2009.
Maryland
Rates. In 1999, Maryland adopted electric industry restructuring legislation, which gave
Potomac Edisons Maryland retail electric customers the right to choose their electricity
generation supplier. In 2000, Potomac Edison transferred its Maryland generation assets to AE
Supply but remained obligated to provide standard offer generation service, or SOS, at capped
rates to residential and non-residential customers for various periods. The longest such period,
for residential customers, expired on December 31, 2008. As discussed below, Potomac Edison has
implemented a rate stabilization plan to transition customers from capped
generation rates to rates based on market prices. T&D rates for all customers are subject to
traditional regulated utility ratemaking (i.e., cost-based rates).
Rate Stabilization. In special session on June 23, 2006, the Maryland legislature passed
emergency legislation, directing the Maryland PSC to, among other things, investigate options
available to Potomac Edison to implement a rate mitigation or rate stabilization plan for SOS to
protect its residential customers from rate shock in connection with the January 1, 2009 expiration
of generation rate caps.
In December 2006, Potomac Edison filed with the Maryland PSC a proposed Rate Stabilization
Ramp-Up Transition Plan designed to transition residential customers from capped generation rates
to rates based on market prices. Under the plan as approved by the Maryland PSC, residential
customers who did not elect to opt out of the program began paying a surcharge in June 2007. The
application of the surcharge resulted in an overall rate increase of approximately 15% in 2007 and
13% in 2008. With the expiration of the residential generation rate caps and the move to generation
rates based on market prices on January 1, 2009, the surcharge converted to a credit on customers
bills. Funds collected through the surcharge during 2007 and 2008, plus interest, were returned to
customers as a credit on their electric bills through December 2010, thereby reducing the effect of
the rate cap expiration. The resulting rate increase in 2009 was 11.3%, and the rate change
approved in 2009 for 2010 was actually a decrease of 2.5%. Of Potomac Edisons approximately
219,000 residential customers in Maryland, as of December 31, 2010, approximately 21.5% elected to
opt-out of, or are not eligible for, Potomac Edisons plan.
Advanced Metering and Demand Side Management Initiatives. On September 28, 2007, the Maryland
PSC issued an order in this case that required the utilities to file detailed plans for how they
will meet the EmPOWER Maryland proposal that in Maryland electric consumption be reduced by 10%
and electricity demand be reduced by 15%, in each case by 2015. On October 26, 2007, Potomac Edison
filed its initial report on energy efficiency, conservation and demand reduction plans in
connection with this order. The Maryland PSC conducted hearings on Potomac Edisons and other
utilities plans in November 2007 and further hearings on May 7, 2008.
In a related development, the Maryland legislature in 2008 adopted a statute codifying the
EmPOWER Maryland goals and setting a deadline of September 1, 2008 for the utilities to file
comprehensive plans for attempting to achieve those goals. Potomac Edison filed its proposals on
August 29, 2008, asking the Maryland PSC to approve seven programs for residential customers, five
programs for commercial, industrial, and governmental customers, a customer education program, and
a pilot deployment of Advanced Utility Infrastructure (AUI) that Allegheny has previously been
testing in West Virginia. On December 31, 2008, the Maryland PSC issued an order approving some of
Potomac Edisons programs and directing that others be redesigned. Potomac Edison filed its revised
programs on March 31, 2009, with new cost and benefit information. The Maryland PSC approved the
programs on August 6, 2009, and approved cost recovery for the programs on October 6, 2009.
Expenditures are expected to be approximately $101 million and will be recovered over the next six
years. Meanwhile, the AUI pilot was placed on a separate track and is currently being re-examined
after discussion with the Staff of the Maryland PSC and other stakeholders.
See Note 6, Transmission Expansion, for information regarding rates and regulation related
to the PATH and TrAIL projects.
NOTE 6: TRANSMISSION EXPANSION
Trans-Allegheny Interstate Line
TrAIL is a 500 kV high voltage line that is to extend from southwestern Pennsylvania through
West Virginia to a point of interconnection with Virginia Electric and Power Company (Dominion)
in northern Virginia. In addition, TrAIL Company and Dominion will jointly own an approximately
30-mile 500 kV line segment that Dominion will construct in Virginia. TrAIL is scheduled to be
completed and placed in service no later than June 2011.
In June 2006, the board of directors of PJM approved TrAIL and designated Allegheny to build
the Allegheny Power Zone (the AP Zone) portion of the line. PJM, which is a regional transmission
operator, is responsible for the operation of, and reliability
22
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
planning for, the transmission network in the PJM region and included the new line in its 2006
regional transmission expansion plan. In October 2006, Allegheny formed TrAIL Company as the entity
responsible for financing, constructing, owning, operating and maintaining the new line.
In addition to TrAIL, other TrAIL Company projects include a new static volt-ampere reactive
power compensator at the Black Oak substation, upgrades and/or replacements of transformers and/or
buses at other substations and the construction of a new transmission operations center located in
West Virginia, which was completed in 2010.
Potomac-Appalachian Transmission Highline
In June 2007, the board of PJM directed the construction of the PATH Project, a high-voltage
transmission line project. In September 2007, Allegheny and AEP formed PATH, LLC to construct and
operate PATH. PATH, LLC is a series limited liability company. The West Virginia Series is owned
equally by Allegheny and a subsidiary of AEP. The Allegheny Series is 100% owned by Allegheny.
The PATH Project is comprised of a 765 kV transmission line that is proposed to extend from
West Virginia through Virginia and into Maryland, modifications to an existing substation in Putnam
County, West Virginia, and the construction of new substations in Hardy County, West Virginia and
Frederick County, Maryland.
PJM initially authorized construction of PATH in June 2007 and, on June 17, 2010, requested
that PATH, LLC proceed with all efforts related to the PATH Project, including state regulatory
proceedings, assuming a required in-service date of June 2015. In December 2010, PJM advised that
its 2011 Load Forecast Report included load projections that are different from previous forecasts
and that may have an impact on the proposed in-service date for the PATH Project. If after further
analysis PJM determines that the PATH Project is not required by June 2015 to address potential
NERC reliability violations, it may delay the required in-service date for PATH to a later date or
indefinitely, or it may suspend or cancel the project.
Applications requesting authorization to construct the PATH Project are currently pending
before state commissions in West Virginia, Maryland and Virginia. Allegheny anticipates that
decisions by the state commissions on these applications will be issued in the third quarter of
2011 in Virginia and Maryland and in the first quarter of 2012 in West Virginia.
See Note 23, Variable Interest Entities, for additional information relating to PATH-WV.
Federal Regulation and Rate Matters
TrAIL. In July 2008, FERC approved a settlement that provides for an incentive return on
equity of 12.7% for TrAIL and the Black Oak SVC and a return on equity of 11.7% for any other
projects TrAIL Company may undertake for which no incentive return was requested. TrAIL Company was
also granted the following incentives:
|
|
|
a return on construction work in process prior to the in-service date of TrAIL and |
|
|
|
|
recovery of prudently incurred development and construction costs if TrAIL is
abandoned as a result of factors beyond its control. |
PATH Project. PATH, LLC submitted a filing to FERC under Section 205 of the FPA in December
2007 to implement a formula rate tariff effective March 1, 2008. The filing also included a request
for certain incentive rate treatments. In February 2008, FERC issued an order setting the cost of
service formula rate to calculate annual revenue requirements for the project and granting the
following incentives:
|
|
|
a return on equity of 14.3%; |
|
|
|
|
a return on CWIP; |
|
|
|
|
recovery of prudently incurred start-up business and administrative costs incurred
prior to the time the rates go into effect; and |
|
|
|
|
recovery of prudently incurred development and construction costs if the PATH Project
is abandoned as a result of factors beyond the control of PATH, LLC. |
In December 2008, PATH, LLC submitted to FERC a settlement of the formula rate and protocols
with the active parties that resolves all issues set for hearing. The return on equity was not
included in the settlement because it was authorized by the February 2008 order and not set for
hearing. On November 19, 2010, FERC approved the settlement, set the base return on equity for
hearing and reaffirmed its prior authorization of a return on CWIP, recovery of start-up costs and
recovery of abandonment costs. In the order, FERC also granted a 1.5% return on equity incentive
adder and 0.50% return on equity adder for RTO participation. These adders will be applied to the
base return on equity determined as a result of the hearing. PATH, LLC is currently engaged in
settlement
23
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
discussions with the staff of FERC and intervenors regarding resolution of the base
return on equity. Allegheny cannot predict the outcome of this proceeding or whether it will have a
material impact on its operating results.
State Regulation Matters
Pennsylvania
By order entered on December 12, 2008, the Pennsylvania PUC authorized TrAIL Company to
construct a 1.2 mile portion of TrAIL in Pennsylvania from the proposed 502 Junction Substation in
Greene County to the Pennsylvania-West Virginia state line. In the same order, the Pennsylvania PUC
also authorized TrAIL Company to engage in a collaborative process to identify possible solutions
to reliability problems in the Washington County, Pennsylvania area in lieu of the Prexy Facilities
that had been a part of the original TrAIL proposal. As a result of the collaborative process, a
settlement and an amendment to the application based on a consensus of the participants in the
collaborative process was approved by the Pennsylvania PUC on November 19, 2010.
West Virginia
On May 15, 2009, PATH-WV, PATH-Allegheny and certain other related entities filed an
application with the West Virginia PSC for authorization to construct the West Virginia portion of
the PATH Project.
Maryland
On December 21, 2009, Potomac Edison filed an application with the Maryland PSC for
authorization to construct the Maryland portions of the PATH Project. The project in Maryland will
be owned by PATH-Allegheny Maryland Transmission Company, LLC, which is owned by Potomac Edison and
PATH-Allegheny. Potomac Edison subsequently requested an extension of the procedural schedule. The
Hearing Examiner has not ruled on the request. Based on the current procedural schedule, a decision
on the application is expected in the third quarter of 2011.
Virginia
On September 20, 2010, PATH-Allegheny Virginia Transmission Corporation filed an application
with the Virginia SCC for authorization to construct the Virginia portions of the PATH Project. A
decision on the application is expected in the third quarter of 2011.
24
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7: REGULATORY ASSETS AND LIABILITIES
Alleghenys regulated utility operations are subject to industry-specific accounting
provisions. Regulatory assets represent probable future revenues associated with incurred costs
that are expected to be recovered in the future from customers through the rate-making process.
Regulatory liabilities represent probable future reductions in revenues associated with amounts
that are to be credited or refunded to customers through the rate-making process or amounts
collected for costs not yet incurred. Regulatory assets and regulatory liabilities reflected in the
Consolidated Balance Sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(In millions) |
|
2010 |
|
|
2009 |
|
Regulatory assets, including current portion: |
|
|
|
|
|
|
|
|
Income taxes (a)(b) |
|
$ |
232.3 |
|
|
$ |
234.9 |
|
Pension benefits and postretirement benefits other than pensions (a)(c) |
|
|
384.7 |
|
|
|
396.5 |
|
ENEC under recovery (a)(d) |
|
|
90.1 |
|
|
|
109.5 |
|
Transmission revenue requirement and recoverable costs (e) |
|
|
76.5 |
|
|
|
36.3 |
|
Unamortized loss on reacquired debt (a)(f) |
|
|
32.4 |
|
|
|
26.8 |
|
Market-based generation costs (a)(g) |
|
|
9.5 |
|
|
|
0.9 |
|
Unrealized loss on financial transmission rights (a) |
|
|
0 |
|
|
|
1.7 |
|
Other (h) |
|
|
58.1 |
|
|
|
43.4 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
883.6 |
|
|
|
850.0 |
|
Regulatory liabilities, including current portion: |
|
|
|
|
|
|
|
|
Net asset removal costs (i) |
|
|
388.3 |
|
|
|
374.2 |
|
Fort Martin Scrubber project-environmental control surcharge |
|
|
36.1 |
|
|
|
40.1 |
|
ENEC over recovery (d) |
|
|
30.3 |
|
|
|
0 |
|
Income taxes |
|
|
27.4 |
|
|
|
29.3 |
|
SO2 allowances |
|
|
12.3 |
|
|
|
12.8 |
|
Maryland rate stabilization and transition plan surcharge |
|
|
0 |
|
|
|
30.1 |
|
Unrealized gain on financial transmission rights |
|
|
9.8 |
|
|
|
0 |
|
Other |
|
|
18.4 |
|
|
|
12.1 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
522.6 |
|
|
|
498.6 |
|
|
|
|
|
|
|
|
Net regulatory assets |
|
$ |
361.0 |
|
|
$ |
351.4 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Does not earn a return. |
|
(b) |
|
Amount is being recovered over various periods associated with the remaining useful life of
related regulated utility property, plant and equipment. |
|
(c) |
|
Amount is being recovered over various periods up to 13 years. |
|
(d) |
|
Amounts include a current regulatory asset and a long-term regulatory liability. ENEC under
recovery is being recovered through 2012. |
|
(e) |
|
Amount earns interest at the approved FERC interest rate and will generally be recovered
through 2013. |
|
(f) |
|
Amount is being recovered over various periods through 2025, based upon the maturities of
reacquired debt. |
|
(g) |
|
Amount is being recovered over one year. |
|
(h) |
|
Includes amounts that do not earn a return with various recovery periods through 2027. |
|
(i) |
|
Net asset removal costs of $51.0 million are included in liabilities associated with assets
held for sale at December 31, 2009 in the consolidated balance sheet. |
See Note 5, Rates and Regulation, for additional information regarding regulatory
developments impacting regulatory assets and liabilities, Note 12, Pension Benefits and
Postretirement Benefits Other Than Pensions, for a discussion of regulatory assets relating to
pension and other postretirement benefits, and Note 14, Fair Value Measurements, Derivative
Instruments and Hedging Activities for information relating to regulatory assets relating to
unrealized gains and losses on FTRs. Other regulatory assets and liabilities reflected in the table
above relate to the following:
Income Taxes
In certain jurisdictions, deferred income tax expense is not permitted as a current cost in
the determination of rates charged to customers. In certain of these jurisdictions a deferred
income tax liability, or asset as appropriate, is recorded with an offsetting regulatory asset or
liability. These deferred income taxes primarily relate to temporary differences involving
regulated utility property,
25
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
plant and equipment and the related provision for depreciation. In
addition, deferred income tax assets are recorded with offsetting
regulatory liabilities related to deferred investment tax credits. The income tax regulatory
asset represents amounts that will be recovered from customers when the temporary differences are
reversed and the taxes paid. The income tax regulatory liability represents amounts that will be
returned to customers as the investment tax credits are amortized against taxes paid.
Pension Benefits and Postretirement Benefits Other Than Pensions
Allegheny recognizes the underfunded status of its defined benefit postretirement plans as a
liability on its consolidated balance sheet and recognizes changes in the funded status in other
comprehensive income. However, to the extent that the funded status relates to Alleghenys
rate-regulated subsidiaries and such amounts will be recovered through the rate-making process, the
funded status and changes in funded status are recognized as a regulatory asset rather than as a
charge to other comprehensive income.
Expanded Net Energy Cost
In May 2007, the West Virginia PSC issued a rate order that re-established an annual ENEC
method of recovering net power supply costs, including fuel costs, purchased power costs, including
purchased power costs associated with the Grant Town PURPA Generation Facility and other related
expenses, net of related revenue and interest earnings on the Fort Martin Scrubber project escrow
fund. Under the ENEC, actual costs and revenues are tracked for under and/or over recoveries, and
revised ENEC rate filings are generally made on an annual basis. Any under and/or over recovery of
costs, net of related revenues, is deferred, for subsequent recovery or refund, as a regulatory
asset or regulatory liability, with the corresponding impact on the Consolidated Statements of
Income reflected within Deferred energy costs, net. See Note 5, Rates and Regulation for
additional information.
Net Asset Removal Costs
In certain jurisdictions, depreciation rates include a factor representing the estimated costs
associated with removing an asset from service upon retirement. The accrual accumulates during the
assets service life and is reduced when the actual cost of removal is incurred. The accumulated
balance of such removal costs represents a regulatory liability. In other jurisdictions, retirement
costs are collected in rates only after they are incurred, in which case the costs are recorded as
a regulatory asset. See Note 19, Asset Retirement Obligations (ARO), for a description of asset
retirement obligations.
Fort Martin Scrubber Project
The Fort Martin scrubber project regulatory liability represents the difference between
amounts collected from customers under an environmental control surcharge and interest on the
Environmental Control Bonds and depreciation expense incurred on the Scrubbers. This liability will
decrease, over the remaining useful life of the Scrubbers, after the environmental control
surcharge ends and the Environmental Control Bonds have been repaid.
Transmission Revenue Requirement and Recoverable Costs
Under a formula rate mechanism approved by FERC, TrAIL Company, PATH-WV and PATH-Allegheny
make annual filings in order to recover incurred costs and an allowed return. An initial rate
filing is made for each calendar year using estimated costs, which is used to determine the
billings to customers. All prudently incurred allowable costs and return earned during each
calendar year are eventually recovered on a dollar-for-dollar basis through a true-up mechanism. As
such, TrAIL Company, PATH-WV and PATH-Allegheny recognize revenue as they incur recoverable costs
and earn the allowed return on a monthly basis. Any differences between revenues earned based on
actual costs and the amounts billed based on estimated costs are included in a regulatory asset or
liability and will be recovered or refunded, respectively, in subsequent periods.
Market-based Generation Costs
Potomac Edison is authorized by the Maryland PSC to recover the costs of the generation
component of power sold to certain residential, commercial and industrial customers that did not
choose a third-party alternative generation provider. A regulatory asset or liability is recorded
on Potomac Edisons balance sheet for any under-recovery or over-recovery of the generation
component of costs charged to these customers.
26
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8: INCOME TAXES
Components of federal and state income tax expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Income tax expense (benefit) current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
7.0 |
|
|
$ |
(12.0 |
) |
|
$ |
15.5 |
|
State |
|
|
9.5 |
|
|
|
11.0 |
|
|
|
24.5 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
16.5 |
|
|
|
(1.0 |
) |
|
|
40.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
238.0 |
|
|
|
232.7 |
|
|
|
170.2 |
|
State |
|
|
4.8 |
|
|
|
6.2 |
|
|
|
(10.4 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
242.8 |
|
|
|
238.9 |
|
|
|
159.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) non-current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(1.8 |
) |
|
|
(2.9 |
) |
|
|
(1.9 |
) |
State |
|
|
(37.2 |
) |
|
|
10.2 |
|
|
|
9.8 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(39.0 |
) |
|
|
7.3 |
|
|
|
7.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred investment tax credit |
|
|
(3.6 |
) |
|
|
(3.6 |
) |
|
|
(3.6 |
) |
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
$ |
216.7 |
|
|
$ |
241.6 |
|
|
$ |
204.1 |
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) non-current primarily relates to changes in uncertain tax
positions.
On March 31, 2008, West Virginia enacted a change in its income tax law that implemented
combined reporting and a reduction in its income tax rate that phases in from 2009 through 2014.
During 2008, Allegheny recognized a benefit of approximately $6.8 million, net of federal income
tax, representing an adjustment of its deferred tax assets and liabilities to reflect the effects
of this rate reduction.
The Commonwealth of Pennsylvania limited the amount of net operating loss carryforwards that
may be used to reduce current year taxable income to the greater of $3 million or 12.5% of
apportioned Pennsylvania taxable income per year through 2008. During 2008, an additional benefit
of $3.9 million, net of applicable federal income tax, was recorded to adjust the recorded
Pennsylvania net operating loss carryforward asset to reflect estimates of future Pennsylvania
taxable income during the carryforward period.
On October 9, 2009, Pennsylvania enacted H.B. 1531, which modified the corporate net operating
loss utilization rules and made minor modifications to apportionment provisions. Under H.B. 1531,
the annual net operating loss carryforward limitation was increased to 15% of taxable income for
2010 and 20% thereafter. During 2009, an additional benefit of $11.0 million, net of applicable
federal income tax, was recorded to reflect estimates of future Pennsylvania taxable income during
the carryforward period and to adjust the Pennsylvania net operating loss carryforward asset to
reflect estimated benefits resulting from the increased utilization caps under H.B. 1531.
27
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following is a reconciliation of reported income tax expense to income tax expense
calculated by applying the federal statutory rate of 35% to income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
(In millions, except percent) |
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
Income before income taxes |
|
$ |
628.4 |
|
|
|
|
|
|
$ |
635.7 |
|
|
|
|
|
|
$ |
599.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense calculated at the federal statutory rate of 35% |
|
|
220.0 |
|
|
|
35.0 |
|
|
|
222.5 |
|
|
|
35.0 |
|
|
|
210.0 |
|
|
|
35.0 |
|
Increases (reductions) resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate-making effects of depreciation differences |
|
|
3.1 |
|
|
|
0.5 |
|
|
|
(1.7 |
) |
|
|
(0.3 |
) |
|
|
5.3 |
|
|
|
0.9 |
|
AFUDC |
|
|
(2.5 |
) |
|
|
(0.4 |
) |
|
|
(2.0 |
) |
|
|
(0.3 |
) |
|
|
(1.8 |
) |
|
|
(0.3 |
) |
Change in estimated Pennsylvania net operating loss benefits,
net of federal income tax |
|
|
0 |
|
|
|
0 |
|
|
|
(11.0 |
) |
|
|
(1.7 |
) |
|
|
(3.9 |
) |
|
|
(0.7 |
) |
March 2008 West Virginia state income tax rate change, net of
federal income tax |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(6.8 |
) |
|
|
(1.1 |
) |
Other state income tax, net of federal income tax benefit |
|
|
26.4 |
|
|
|
4.2 |
|
|
|
29.1 |
|
|
|
4.6 |
|
|
|
12.7 |
|
|
|
2.1 |
|
Amortization of deferred investment tax credits |
|
|
(3.6 |
) |
|
|
(0.6 |
) |
|
|
(3.6 |
) |
|
|
(0.6 |
) |
|
|
(3.6 |
) |
|
|
(0.6 |
) |
Changes in tax reserves related to uncertain tax positions and
audit settlements |
|
|
(26.4 |
) |
|
|
(4.2 |
) |
|
|
3.5 |
|
|
|
0.6 |
|
|
|
(3.4 |
) |
|
|
(0.5 |
) |
Other, net |
|
|
(0.3 |
) |
|
|
(0.1 |
) |
|
|
4.8 |
|
|
|
0.7 |
|
|
|
(4.4 |
) |
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
$ |
216.7 |
|
|
|
34.4 |
|
|
$ |
241.6 |
|
|
|
38.0 |
|
|
$ |
204.1 |
|
|
|
34.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, deferred income tax assets and liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
(In millions) |
|
2010 |
|
|
2009 |
|
Deferred income tax assets: |
|
|
|
|
|
|
|
|
Recovery of transition costs |
|
$ |
46.8 |
|
|
$ |
42.4 |
|
Unamortized investment tax credits |
|
|
33.6 |
|
|
|
35.9 |
|
Postretirement benefits |
|
|
105.6 |
|
|
|
98.9 |
|
Tax effect of net operating loss carryforwards and credits |
|
|
190.4 |
|
|
|
247.8 |
|
Derivative contracts |
|
|
0 |
|
|
|
2.2 |
|
Valuation allowance on deferred tax assets |
|
|
0 |
|
|
|
(5.0 |
) |
Other |
|
|
121.2 |
|
|
|
46.2 |
|
|
|
|
|
|
|
|
Total deferred income tax assets |
|
|
497.6 |
|
|
|
468.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities: |
|
|
|
|
|
|
|
|
Plant asset basis differences, net |
|
|
2,012.3 |
|
|
|
1,816.6 |
|
Derivative contracts |
|
|
6.1 |
|
|
|
0 |
|
Other |
|
|
158.9 |
|
|
|
71.6 |
|
|
|
|
|
|
|
|
Total deferred income tax liabilities |
|
|
2,177.3 |
|
|
|
1,888.2 |
|
|
|
|
|
|
|
|
Total net deferred income tax liability |
|
|
1,679.7 |
|
|
|
1,419.8 |
|
Deferred income taxes included in current assets (liabilities) |
|
|
(26.1 |
) |
|
|
81.5 |
|
|
|
|
|
|
|
|
Total long-term net deferred income tax liability |
|
$ |
1,653.6 |
|
|
$ |
1,501.3 |
|
|
|
|
|
|
|
|
Allegheny has recorded as deferred income tax assets the effect of net operating losses
and tax credits that will more likely than not be realized through future operations and through
the reversal of existing temporary differences. The tax effected net operating loss carryforwards
consisted of $151.8 million of state net operating loss carryforwards that expire from 2019 through
2029 and $13.4 million of federal net operating loss carryforwards that expire from 2023 to 2029.
Federal Alternative Minimum Tax credits of $25.2 million have an indefinite carryforward period.
Alleghenys valuation allowance on deferred tax assets was reduced in 2009 primarily because
of a change in Pennsylvania tax law with respect to net operating loss carryforwards enacted in the
fourth quarter of 2009. This benefit was partially offset by a reduction in the expected
realization of carryforward amounts due to forecasted taxable income.
28
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Allegheny records interest and penalties associated with uncertain tax positions as a
component of income tax expense. Allegheny recognized interest expense (benefit) related to
uncertain tax positions, net of tax, of approximately $(2.1) million, $1.0 million and $1.8 million
during 2010, 2009 and 2008, respectively. Accrued interest, net of tax, related to uncertain tax
positions was $3.3 million and $5.4 million at December 31, 2010 and December 31, 2009,
respectively. The reduction in interest in 2010 compared to 2009 is due primarily to a change in
facts resulting in a remeasurement of existing uncertain tax positions.
The following represents an analysis of the changes in unrecognized tax benefits during 2010,
2009 and 2008, excluding accrued interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Balance at January 1 |
|
$ |
126.4 |
|
|
$ |
112.6 |
|
|
$ |
102.9 |
|
Additions based on tax positions related to the current year |
|
|
6.9 |
|
|
|
53.8 |
|
|
|
10.7 |
|
Additions for tax positions of prior years |
|
|
9.2 |
|
|
|
0.2 |
|
|
|
0 |
|
Reductions for tax positions of prior years |
|
|
(43.8 |
) |
|
|
(37.8 |
) |
|
|
(1.0 |
) |
Settlements |
|
|
(3.2 |
) |
|
|
(2.4 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31 |
|
$ |
95.5 |
|
|
$ |
126.4 |
|
|
$ |
112.6 |
|
|
|
|
|
|
|
|
|
|
|
If recognized, the portion of the unrecognized tax benefits that would reduce Alleghenys
effective tax rate was $28.8 million and $54.3 million at December 31, 2010 and December 31, 2009,
respectively ($46.2 million and $84.1 million, respectively, before the federal income tax effects
on state income tax positions). The reduction in unrecognized tax benefits in 2010 is due to
internal restructuring of subsidiary companies that reduced exposure to state liabilities.
At December 31, 2010, approximately $43.4 million of the reserve is not expected to be
resolved in the next 12 months and, therefore, has been classified as long term income taxes
payable on the accompanying Consolidated Balance Sheet.
The unrecognized tax benefit balance also included approximately $49.3 million and $42.4
million of tax positions at December 31, 2010 and December 31, 2009, respectively, for which the
ultimate deductibility is highly certain but for which there is uncertainty about the timing of
such deductibility. A change in the period of deductibility would not affect the effective tax rate
but would impact the timing of cash payments to the taxing authorities.
The major jurisdictions in which Allegheny is subject to income tax are U.S. Federal,
Pennsylvania, West Virginia, Maryland and Virginia. Allegheny files consolidated federal income tax
returns, and those returns are currently under audit by the Internal Revenue Service (IRS) for
the tax years 2007 and 2008. The 2009 federal return has been filed and is subject to review. State
tax returns are substantially complete through 2006, and returns for tax years 2007 through 2009
remain subject to review in Pennsylvania, West Virginia, Maryland and Virginia for certain of
Alleghenys subsidiaries that are subject to tax in those states.
The IRS audits of Alleghenys income tax returns for the tax years 2004 through 2006 have been
completed. During 2010, Allegheny reached a settlement with the IRS on substantially all issues and
recorded a benefit of $1.8 million due to the release of related uncertain tax position reserves.
The Joint Committee on Taxation reviewed these audits. Additionally, Allegheny has liabilities for
uncertain positions taken on various state income tax returns that it files. The statute of
limitations for some of these returns expired during 2010 and 2009 and resulted in a benefit of
approximately $10.8 million and $2.2 million, respectively. During 2011, additional state statute
of limitations will expire that may result in a net benefit of approximately $4.0 million.
In September 2010, President Obama signed into law the Small Business Jobs Act. That
legislation includes an extension of the bonus depreciation provision to 2010 and into 2011 for
certain qualified property, retroactive to the beginning of 2010. This provision will allow
Allegheny to accelerate its depreciation deductions on qualifying property for federal income tax
purposes. This provision also increases Alleghenys net operating loss carryforward into 2011 and
creates significant accelerated deductions in 2011.
29
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9: CAPITALIZATION AND DEBT
Common Stock
During 2010, 2009 and 2008, Allegheny paid the following dividends on its common stock:
|
|
|
|
|
|
|
Payment Date |
|
Record Date |
|
Dividend per Share |
December 27, 2010
|
|
December 13, 2010
|
|
$ |
0.15 |
|
September 27, 2010
|
|
September 13, 2010
|
|
$ |
0.15 |
|
June 21, 2010
|
|
June 7, 2010
|
|
$ |
0.15 |
|
March 22, 2010
|
|
March 8, 2010
|
|
$ |
0.15 |
|
December 28, 2009
|
|
December 14, 2009
|
|
$ |
0.15 |
|
September 28, 2009
|
|
September 14, 2009
|
|
$ |
0.15 |
|
June 22, 2009
|
|
June 8, 2009
|
|
$ |
0.15 |
|
March 23, 2009
|
|
March 9, 2009
|
|
$ |
0.15 |
|
December 29, 2008
|
|
December 15, 2008
|
|
$ |
0.15 |
|
September 29, 2008
|
|
September 15, 2008
|
|
$ |
0.15 |
|
June 23, 2008
|
|
June 9, 2008
|
|
$ |
0.15 |
|
March 24, 2008
|
|
March 10, 2008
|
|
$ |
0.15 |
|
In addition to the dividends listed above, on December 21, 2010, AEs Board of Directors
authorized a cash dividend on AEs common stock payable during the first quarter of 2011. If the
proposed Merger does not become effective on or before March 14, 2011, a dividend of $0.15 per
outstanding share of common stock will be payable on March 28, 2011 to stockholders of record at
the close of business of March 14, 2011. If the proposed Merger is completed on or before March 14,
2011, a prorated dividend will be payable 14 days after the effective date of the Merger to
stockholders of record at the close of business on the last business day prior to the Merger
effective date.
Dividends are declared at the discretion of AEs Board of Directors, and future dividends will
depend upon available earnings, cash flows and other relevant factors, provided, however, that
under the terms of its Merger Agreement with FirstEnergy, AE is prohibited from increasing its
quarterly cash dividend.
AE issued 0.4 million, 0.2 million and 2.1 million shares of common stock in 2010, 2009
and 2008, respectively, primarily in connection with stock option exercises and the settlement of
stock units and performance shares.
30
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Debt
Alleghenys long-term debt was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 |
|
|
As of December 31, |
|
(Dollar amounts in millions) |
|
Contractual Maturities |
|
|
Interest Rate % |
|
|
2010 |
|
|
2009 |
|
AE Supply: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-Term Notes |
|
|
2012-2039 |
|
|
|
5.750 8.250 |
|
|
$ |
1,103.2 |
|
|
$ |
1,253.7 |
|
Pollution Control Bonds |
|
|
2012-2037 |
|
|
|
5.050 6.875 |
|
|
|
268.5 |
|
|
|
268.5 |
|
Exempt Facilities Revenue Bonds |
|
|
2039 |
|
|
|
7.000 |
|
|
|
235.0 |
|
|
|
235.0 |
|
DebenturesAGC |
|
|
2023 |
|
|
|
6.875 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Revolving Credit FacilityAGC (a) |
|
|
2013 |
|
|
|
2.788 |
|
|
|
50.0 |
|
|
|
0 |
|
Unamortized debt discounts |
|
|
|
|
|
|
|
|
|
|
(3.5 |
) |
|
|
(4.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AE Supply long-term debt |
|
|
|
|
|
|
|
|
|
$ |
1,753.2 |
|
|
$ |
1,852.8 |
|
Monongahela: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Mortgage Bonds |
|
|
2013-2017 |
|
|
|
5.375 7.950 |
|
|
$ |
640.0 |
|
|
$ |
640.0 |
|
Environmental Control Bonds |
|
|
2016-2031 |
|
|
|
4.982 5.523 |
|
|
|
372.3 |
|
|
|
383.3 |
|
Pollution Control Bonds |
|
|
2012-2029 |
|
|
|
5.050 6.875 |
|
|
|
70.3 |
|
|
|
70.3 |
|
Medium-Term Notes |
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
110.0 |
|
Unamortized debt discounts |
|
|
|
|
|
|
|
|
|
|
(0.9 |
) |
|
|
(1.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Monongahela long-term debt |
|
|
|
|
|
|
|
|
|
$ |
1,081.7 |
|
|
$ |
1,202.6 |
|
West Penn: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Mortgage Bonds |
|
|
2016-2017 |
|
|
|
5.875 5.950 |
|
|
$ |
420.0 |
|
|
$ |
420.0 |
|
Medium-Term Notes |
|
|
2012 |
|
|
|
6.625 |
|
|
|
80.0 |
|
|
|
80.0 |
|
Transition Bonds |
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
16.0 |
|
Unamortized debt discounts |
|
|
|
|
|
|
|
|
|
|
(0.9 |
) |
|
|
(1.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total West Penn long-term debt |
|
|
|
|
|
|
|
|
|
$ |
499.1 |
|
|
$ |
515.0 |
|
Potomac Edison: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Mortgage Bonds |
|
|
2014-2016 |
|
|
|
5.125 5.800 |
|
|
$ |
420.0 |
|
|
$ |
420.0 |
|
Environmental Control Bonds |
|
|
2016-2031 |
|
|
|
4.982 5.523 |
|
|
|
124.3 |
|
|
|
128.0 |
|
Revolving Credit Facility (a) |
|
|
2013 |
|
|
|
4.006 |
|
|
|
20.0 |
|
|
|
0 |
|
Unamortized debt discounts |
|
|
|
|
|
|
|
|
|
|
(0.8 |
) |
|
|
(1.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Potomac Edison long-term debt |
|
|
|
|
|
|
|
|
|
$ |
563.5 |
|
|
$ |
547.0 |
|
TrAIL Company: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-Term Notes |
|
|
2015 |
|
|
|
4.000 |
|
|
$ |
450.0 |
|
|
$ |
0 |
|
Revolving Credit Facility (a) |
|
|
2013 |
|
|
|
3.287 |
|
|
|
370.0 |
|
|
|
20.0 |
|
Term Loan |
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
435.0 |
|
Unamortized debt discounts |
|
|
|
|
|
|
|
|
|
|
(1.4 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total TrAIL Company long-term debt |
|
|
|
|
|
|
|
|
|
$ |
818.6 |
|
|
$ |
455.0 |
|
Eliminations |
|
|
|
|
|
|
|
|
|
|
(14.6 |
) |
|
|
(14.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
$ |
4,701.5 |
|
|
$ |
4,557.8 |
|
Less amounts due within one year |
|
|
|
|
|
|
|
|
|
|
(15.5 |
) |
|
|
(140.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated long-term debt |
|
|
|
|
|
|
|
|
|
$ |
4,686.0 |
|
|
$ |
4,417.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Outstanding debt and scheduled debt repayments at December 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
Thereafter |
|
|
Total |
|
AE Supply: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-Term Notes |
|
$ |
0 |
|
|
$ |
503.2 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
600.0 |
|
|
$ |
1,103.2 |
|
Pollution Control Bonds |
|
|
0 |
|
|
|
1.3 |
|
|
|
0 |
|
|
|
15.4 |
|
|
|
7.1 |
|
|
|
244.7 |
|
|
|
268.5 |
|
Exempt Facilities Revenue Bonds |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
235.0 |
|
|
|
235.0 |
|
Debentures-AGC |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Revolving Credit Facility -AGC |
|
|
0 |
|
|
|
0 |
|
|
|
50.0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
50.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AE Supply |
|
|
0 |
|
|
|
504.5 |
|
|
|
50.0 |
|
|
|
15.4 |
|
|
|
7.1 |
|
|
|
1,179.7 |
|
|
|
1,756.7 |
|
Monongahela: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Mortgage Bonds |
|
|
0 |
|
|
|
0 |
|
|
|
300.0 |
|
|
|
120.0 |
|
|
|
70.0 |
|
|
|
150.0 |
|
|
|
640.0 |
|
Securitized Debt-Environmental Control Bonds (a) |
|
|
11.6 |
|
|
|
12.2 |
|
|
|
12.8 |
|
|
|
13.5 |
|
|
|
14.2 |
|
|
|
308.0 |
|
|
|
372.3 |
|
Pollution Control Bonds |
|
|
0 |
|
|
|
6.0 |
|
|
|
7.1 |
|
|
|
0 |
|
|
|
25.0 |
|
|
|
32.2 |
|
|
|
70.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Monongahela |
|
|
11.6 |
|
|
|
18.2 |
|
|
|
319.9 |
|
|
|
133.5 |
|
|
|
109.2 |
|
|
|
490.2 |
|
|
|
1,082.6 |
|
West Penn: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Mortgage Bonds |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
420.0 |
|
|
|
420.0 |
|
Medium-Term Notes |
|
|
0 |
|
|
|
80.0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
80.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total West Penn |
|
|
0 |
|
|
|
80.0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
420.0 |
|
|
|
500.0 |
|
Potomac Edison: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Mortgage Bonds |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
175.0 |
|
|
|
145.0 |
|
|
|
100.0 |
|
|
|
420.0 |
|
Securitized Debt-Environmental Control Bonds (a) |
|
|
3.9 |
|
|
|
4.1 |
|
|
|
4.3 |
|
|
|
4.5 |
|
|
|
4.7 |
|
|
|
102.8 |
|
|
|
124.3 |
|
Revolving Credit Facility |
|
|
0 |
|
|
|
0 |
|
|
|
20.0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
20.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Potomac Edison |
|
|
3.9 |
|
|
|
4.1 |
|
|
|
24.3 |
|
|
|
179.5 |
|
|
|
149.7 |
|
|
|
202.8 |
|
|
|
564.3 |
|
TrAIL Company: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-Term Notes |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
450.0 |
|
|
|
0 |
|
|
|
450.0 |
|
Revolving Credit Facility |
|
|
0 |
|
|
|
0 |
|
|
|
370.0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
370.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total TrAIL |
|
|
0 |
|
|
|
0 |
|
|
|
370.0 |
|
|
|
0 |
|
|
|
450.0 |
|
|
|
0 |
|
|
|
820.0 |
|
Unamortized debt discounts |
|
|
(1.5 |
) |
|
|
(1.2 |
) |
|
|
(1.1 |
) |
|
|
(0.9 |
) |
|
|
(0.5 |
) |
|
|
(2.3 |
) |
|
|
(7.5 |
) |
Eliminations (b) |
|
|
0 |
|
|
|
(1.3 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
(7.1 |
) |
|
|
(6.2 |
) |
|
|
(14.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated debt |
|
$ |
14.0 |
|
|
$ |
604.3 |
|
|
$ |
763.1 |
|
|
$ |
327.5 |
|
|
$ |
708.4 |
|
|
$ |
2,284.2 |
|
|
$ |
4,701.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Amounts represent repayments based upon estimated surcharge collections from customers. |
|
(b) |
|
Amounts represent the elimination of certain pollution control bonds, for which Monongahela
and AE Supply are co-obligors. |
The environmental control bonds shown in the table above were issued by two bankruptcy remote,
special purpose limited liability companies (the Funding Companies) that are indirect
subsidiaries of Monongahela and Potomac Edison, respectively. Proceeds from the bonds were used to
construct environmental control facilities. The Funding Companies own the irrevocable right to
collect non-bypassable environmental control charges (the Environmental Control Charge) from all
customers who receive electric delivery service in Monongahelas and Potomac Edisons West Virginia
service territories. Principal and interest owing on the environmental control bonds is secured by
and payable solely from the proceeds of the Environmental Control Charge. The right to collect
Environmental Control Charges is not included on Alleghenys consolidated balance sheets. Creditors
of AE and its subsidiaries other than the Funding Companies have no recourse to any assets or
revenues of the Funding Companies.
Certain of Alleghenys properties are subject to liens of various relative priorities securing
debt.
32
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Credit Facilities
At December 31, 2010, AE, AE Supply, Monongahela, Potomac Edison, West Penn, AGC and TrAIL
Company had in place revolving credit facilities as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Letters of |
|
|
Available |
|
(Dollar amounts in millions) |
|
Matures |
|
|
Capacity |
|
|
Borrowed |
|
|
Credit Issued |
|
|
Capacity |
|
AE |
|
|
2013 |
|
|
$ |
250.0 |
|
|
$ |
0 |
|
|
$ |
3.1 |
|
|
$ |
246.9 |
|
AE Supply |
|
|
2012 |
|
|
|
1,000.0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,000.0 |
|
Monongahela |
|
|
2012 |
|
|
|
110.0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
110.0 |
|
Potomac Edison |
|
|
2013 |
|
|
|
150.0 |
|
|
|
20.0 |
|
|
|
0 |
|
|
|
130.0 |
|
West Penn |
|
|
2013 |
|
|
|
200.0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
200.0 |
|
AGC |
|
|
2013 |
|
|
|
50.0 |
|
|
|
50.0 |
|
|
|
0 |
|
|
|
0 |
|
TrAIL Company |
|
|
2013 |
|
|
|
450.0 |
|
|
|
370.0 |
|
|
|
0 |
|
|
|
80.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
2,210.0 |
|
|
$ |
440.0 |
|
|
$ |
3.1 |
|
|
$ |
1,766.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under terms of their individual credit facilities, outstanding debt of AE Supply,
Monongahela, Potomac Edison, West Penn and AGC may not exceed 65% of the sum of their debt and
equity as of the last day of each calendar quarter. Outstanding debt of TrAIL Company may not
exceed 70% and 65% of the sum of its debt and equity as of the last day of each calendar quarter
through June 30, 2011 and December 31, 2012, respectively. These provisions limit debt levels of
these subsidiaries and also limit the net assets of each subsidiary that may be transferred to AE.
2010 Debt Activity
Borrowings and principal repayments on debt during the year ended December 31, 2010 were as
follows:
|
|
|
|
|
|
|
|
|
(In millions) |
|
Borrowings |
|
|
Repayments |
|
AE: |
|
|
|
|
|
|
|
|
AE Revolving Credit Facility |
|
$ |
130.1 |
|
|
$ |
130.1 |
|
AE Supply: |
|
|
|
|
|
|
|
|
Medium-Term Notes |
|
|
0 |
|
|
|
150.5 |
|
AGC Revolving Credit Facility |
|
|
50.0 |
|
|
|
0 |
|
TrAIL Company: |
|
|
|
|
|
|
|
|
Medium-Term Notes |
|
|
450.0 |
|
|
|
0 |
|
New TrAIL Company Credit Facility-Revolver |
|
|
370.0 |
|
|
|
0 |
|
TrAIL Company Credit Facility-Term Loan (a) |
|
|
30.0 |
|
|
|
465.0 |
|
TrAIL Company Credit Facility-Revolver (a) |
|
|
0 |
|
|
|
20.0 |
|
West Penn: |
|
|
|
|
|
|
|
|
Transition Bonds |
|
|
0 |
|
|
|
16.0 |
|
Revolving Credit Facility |
|
|
35.0 |
|
|
|
35.0 |
|
Monongahela: |
|
|
|
|
|
|
|
|
Medium-Term Notes |
|
|
0 |
|
|
|
110.0 |
|
Environmental Control Bonds |
|
|
0 |
|
|
|
11.1 |
|
Potomac Edison: |
|
|
|
|
|
|
|
|
Environmental Control Bonds |
|
|
0 |
|
|
|
3.7 |
|
Revolving Credit Facility |
|
|
140.0 |
|
|
|
120.0 |
|
|
|
|
|
|
|
|
Consolidated Total |
|
$ |
1,205.1 |
|
|
$ |
1,061.4 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents debt under TrAIL Companys previous credit facility, which was repaid and
replaced in January 2010 by a new revolving credit facility, as described below. |
|
|
|
On January 15, 2010, Monongahela repaid its $110 million in outstanding 7.36% medium-term
notes. |
33
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On January 25, 2010, TrAIL Company issued $450 million aggregate principal amount of 4.0%
senior unsecured notes due in 2015 and also entered into a $350 million senior unsecured revolving
credit facility with a three-year maturity. The revolving credit facility capacity was increased to
$450 million in August 2010. Borrowings under the new credit facility bear interest at a rate that
is calculated based on the London Interbank Offered Rate (LIBOR) plus a margin based on TrAIL
Companys senior unsecured credit rating. Currently, the margin is 3.0%. During 2010, TrAIL Company
borrowed $370.0 million under its senior unsecured credit facility. TrAIL Company used the net
proceeds from the sale of the notes, together with funds from the credit facility, to repay all
amounts outstanding under the $550 million senior unsecured credit facility that it entered into in
2008.
On May 3, 2010, Potomac Edison and West Penn entered into new $150 million and $200 million
senior unsecured revolving credit facilities, respectively. On May 4, 2010, AE entered into a new
$250 million senior unsecured revolving credit facility. The new AE revolving credit facility
replaced AEs previous $376 million revolving credit facility, which was scheduled to mature in May
2011. The AE, Potomac Edison and West Penn credit facilities mature on April 30, 2013. Loans under
all three credit facilities bear interest at a rate that is calculated based on LIBOR plus a margin
based on the borrowers senior unsecured credit rating. Currently, the margins are 3.0% for AE and
2.75% for Potomac Edison and West Penn. Allegheny capitalized approximately $5.6 million in debt
issuance costs related to the three credit facilities.
On July 16, 2010, AE Supply redeemed all $150.5 million of its outstanding 7.80% Medium Term
Notes due 2011 and expensed approximately $7.3 million in redemption premiums and unamortized costs
associated with the notes.
On October 22, 2010, AGC entered into a $50 million senior unsecured revolving credit facility
and borrowed $50 million under the credit facility to pay dividends and a return of capital of $30
million to AE Supply and $20 million to Monongahela. The credit facility matures on December 31,
2013. Loans under the credit facility bear interest at a rate that is calculated based on LIBOR
plus a margin based on AGCs senior unsecured credit rating. Currently, the margin is 2.50%.
2009 Debt Activity
Borrowings and principal repayments on debt during 2009 were as follows:
|
|
|
|
|
|
|
|
|
(In millions) |
|
Issuances |
|
|
Repayments |
|
AE: |
|
|
|
|
|
|
|
|
AE Revolving Credit Facility |
|
$ |
120.0 |
|
|
$ |
120.0 |
|
AE Supply: |
|
|
|
|
|
|
|
|
AE Supply Credit Facility-Revolving Loan (a) |
|
|
120.0 |
|
|
|
120.0 |
|
AE Supply Credit Facility-Term Loan (a) |
|
|
0 |
|
|
|
447.0 |
|
Exempt Facilities Revenue Bonds |
|
|
235.0 |
|
|
|
0 |
|
Medium-Term Notes |
|
|
600.0 |
|
|
|
396.3 |
|
TrAIL Company: |
|
|
|
|
|
|
|
|
TrAIL Company Credit Facility-Term Loan |
|
|
365.0 |
|
|
|
0 |
|
West Penn: |
|
|
|
|
|
|
|
|
Transition Bonds |
|
|
0 |
|
|
|
79.8 |
|
Monongahela: |
|
|
|
|
|
|
|
|
Environmental Control Bonds |
|
|
64.4 |
|
|
|
10.6 |
|
Potomac Edison: |
|
|
|
|
|
|
|
|
Environmental Control Bonds |
|
|
21.5 |
|
|
|
3.5 |
|
|
|
|
|
|
|
|
Consolidated Total |
|
$ |
1,525.9 |
|
|
$ |
1,177.2 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents debt activity under AE Supplys previous credit facility, which was replaced
with a new credit facility in September 2009. |
On July 6, 2009, the Pennsylvania Economic Development Financing Authority issued $235 million
of 7.0% tax-exempt bonds that mature in 2039 and loaned the proceeds from that issuance to AE
Supply to finance a portion of the cost of constructing and installing Scrubbers at its Hatfields
Ferry generation facility. AE Supply capitalized $2.4 million in debt issuance costs associated
with this transaction.
On September 4, 2009, AE Supply repurchased $97.5 million and $146.8 million, respectively, of
its 7.80% Notes due 2011 and its 8.25% Notes due 2012 pursuant to a cash tender offer, at an
aggregate premium of $18.1 million. AE Supply expensed the $18.1 million premium, $0.7 million in
unamortized debt costs, and $0.6 million in fees associated with the tender offer.
34
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On September 24, 2009, AE Supply entered into a new $1 billion senior unsecured revolving
credit facility with a three-year maturity. The new revolving credit facility replaced AE Supplys
previous $400 million revolving credit facility, which was scheduled to mature in May 2011. Loans
under the new facility bear interest that is calculated based on the LIBOR, plus a margin based on
AE Supplys senior unsecured credit rating. AE Supply capitalized $22.3 million in debt costs
related to this facility.
On October 1, 2009, AE Supply issued $600 million aggregate principal amount of senior
unsecured notes, consisting of $350 million of 5.75% Notes due 2019 and $250 million of 6.75% Notes
due 2039. AE Supply used a portion of the net proceeds from the sale of these notes to repay in
full its existing $447 million term loan on October 2, 2009. AE Supply capitalized $5.3 million in
debt issuance costs associated with this new debt issuance and expensed $0.6 million of unamortized
debt costs associated with the extinguished term loan.
On October 21, 2009, AE Supply used the remaining proceeds of its senior unsecured note
offering to repurchase approximately $152 million aggregate principal amount of its 7.80% Medium
Term Notes due 2011 pursuant to a cash tender offer at an aggregate premium of $12.7 million. AE
Supply expensed the $12.7 million premium, $0.3 million in unamortized debt costs, and $0.4 million
in fees related to this tender offer.
On December 18, 2009, Monongahela entered into a new $110 million senior unsecured revolving
credit facility with a three-year maturity. Loans under the new facility generally bear interest
that is calculated based on the LIBOR, plus a margin based on Monongahelas senior unsecured credit
rating. Monongahela capitalized approximately $1.4 million in debt costs related to this facility.
On December 23, 2009, MP Environmental Funding LLC, an indirect subsidiary of Monongahela, and
PE Environmental Funding LLC, an indirect subsidiary of Potomac Edison, issued $64.4 million and
$21.5 million, respectively, of Senior Secured Ratepayer Obligation Charge Environmental Control
Bonds, Series B. These bonds securitize the right to collect an environmental control surcharge
that Monongahela and Potomac Edison impose on their retail customers in West Virginia. The bonds
were issued with an interest rate of 5.1% and mature in January 2031. Net proceeds from the sale of
the bonds are restricted funds and are being used to fund certain costs incurred in connection with
the construction and installation of the Scrubbers at the Fort Martin generating facility.
Monongahela and Potomac Edison capitalized $1.9 million and $0.7 million, respectively, in debt
issuance costs associated with this transaction.
NOTE 10: EARNINGS PER SHARE
The reconciliation of the basic and diluted earnings per common share calculation is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except share and per share amounts) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Basic Income per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Allegheny Energy, Inc. |
|
$ |
411.7 |
|
|
$ |
392.8 |
|
|
$ |
395.4 |
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
169,792,703 |
|
|
|
169,537,642 |
|
|
|
168,458,909 |
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share attributable to Allegheny Energy, Inc. |
|
$ |
2.42 |
|
|
$ |
2.32 |
|
|
$ |
2.35 |
|
|
|
|
|
|
|
|
|
|
|
Diluted Income per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Allegheny Energy, Inc. |
|
$ |
411.7 |
|
|
$ |
392.8 |
|
|
$ |
395.4 |
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
169,792,703 |
|
|
|
169,537,642 |
|
|
|
168,458,909 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options (a) |
|
|
308,080 |
|
|
|
387,444 |
|
|
|
1,251,445 |
|
Performance shares |
|
|
151,308 |
|
|
|
34,017 |
|
|
|
14,056 |
|
Stock units |
|
|
0 |
|
|
|
2,697 |
|
|
|
209,342 |
|
Non-employee stock awards |
|
|
0 |
|
|
|
0 |
|
|
|
57,511 |
|
|
|
|
|
|
|
|
|
|
|
Total shares |
|
|
170,252,091 |
|
|
|
169,961,800 |
|
|
|
169,991,263 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share attributable to Allegheny Energy, Inc. |
|
$ |
2.42 |
|
|
$ |
2.31 |
|
|
$ |
2.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The diluted share calculations for 2010, 2009 and 2008 exclude 1,673,312 shares, 1,808,960
shares and 576,101 shares, respectively, under outstanding stock options because the inclusion of
these shares would have been antidilutive under the treasury stock method. |
35
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11: STOCK-BASED COMPENSATION
On May 15, 2008, AEs stockholders approved the Allegheny Energy, Inc. 2008 Long-Term
Incentive Plan (the 2008 LTIP). The 2008 LTIP authorized the grant of equity-based compensation
to AEs directors and to its executives and other key employees in the form of performance awards,
stock options and stock appreciation rights, restricted shares, and restricted stock units.
Allegheny records compensation expense for share-based payments to employees and non-employee
directors, including grants of employee stock options, performance shares, restricted shares and
stock units, over the requisite service period based on their estimated fair value on the date of
grant.
No stock-based compensation cost was capitalized in 2010, 2009 or 2008. The following table
summarizes stock-based compensation expense included in operations and maintenance expense during
2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Performance shares |
|
$ |
13.1 |
|
|
$ |
7.3 |
|
|
$ |
2.9 |
|
Stock options |
|
|
6.5 |
|
|
|
7.4 |
|
|
|
9.3 |
|
Non-employee director stock awards |
|
|
0.8 |
|
|
|
0.9 |
|
|
|
1.1 |
|
Restricted shares |
|
|
0.3 |
|
|
|
0.1 |
|
|
|
0 |
|
Stock units |
|
|
0 |
|
|
|
0 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
|
20.7 |
|
|
|
15.7 |
|
|
|
13.9 |
|
Income tax benefit |
|
|
8.3 |
|
|
|
6.4 |
|
|
|
5.7 |
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense, net of tax |
|
$ |
12.4 |
|
|
$ |
9.3 |
|
|
$ |
8.2 |
|
|
|
|
|
|
|
|
|
|
|
Employee stock options, performance shares and restricted share awards granted prior to
February 10, 2010 became fully vested and exercisable or payable upon the approval of the proposed
Merger with FirstEnergy by AEs stockholders at a special meeting held on September 14, 2010. The
remaining cost of approximately $4.5 million associated with these awards that previously was being
amortized over the original vesting period was accelerated and expensed during the third quarter of
2010. Stock-based compensation expense recognized in the Consolidated Statements of Income is based
on awards ultimately expected to vest, using an estimated annual forfeiture rate of 5%.
Stock Options
The exercise price, terms and other conditions applicable to stock option awards are generally
determined by the Management Compensation and Development Committee of AEs Board or the
independent directors of the Board. The exercise price per share for each award is equal to or
greater than the fair market value of a share of AEs common stock on the grant date. Stock options
vest in annual tranches on a pro-rata basis over the vesting period, which is typically two to five
years, and become fully vested and exercisable upon a change in control. Stock options typically
expire after 10 years. Stock option awards are expensed using the straight-line attribution method
over the requisite service period of the last separately vesting tranche of the award.
No stock options were granted in 2010. Allegheny records compensation expense for employee
stock options based on the estimated fair value of the options on the date of grant under the
Black-Scholes option-pricing model using the following weighted-average assumptions for stock
options granted in 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
Annual risk-free interest rate |
|
|
2.86 |
% |
|
|
3.18 |
% |
Expected term of the option (in years) |
|
|
6.00 |
|
|
|
6.06 |
|
Expected annual dividend yield |
|
|
2.53 |
% |
|
|
1.13 |
% |
Expected stock price volatility |
|
|
36.4 |
% |
|
|
27.5 |
% |
Grant date fair value per stock option |
|
$ |
7.14 |
|
|
$ |
15.18 |
|
36
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The annual risk-free interest rate is based on the United States Treasury yield curve at the
date of the grant for a period equal to the expected term of the options granted. The expected term
of the 2009 and 2008 stock option grants was calculated using the simplified method. AE used the
simplified method for its calculation of expected term due to its lack of sufficient historical
exercise data to provide a reasonable basis upon which to estimate expected term and because AE has
granted stock options in prior years with varying vesting terms, which also made it difficult to
evaluate historical exercise data. The expected annual dividend yield assumption was based on AEs
current dividend rate at the time of each grant. For stock options granted in 2009 and 2008, the
expected stock price volatility was based on both historical stock volatility and the volatility
levels implied on the grant date by actively traded option contracts on AEs common stock.
Stock option activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
Stock |
|
|
Exercise |
|
|
|
Options |
|
|
Price |
|
Outstanding at December 31, 2007 |
|
|
3,191,409 |
|
|
$ |
16.11 |
|
Granted |
|
|
628,763 |
|
|
$ |
52.36 |
|
Exercised |
|
|
(1,849,316 |
) |
|
$ |
13.71 |
|
Forfeited/Expired |
|
|
(100,347 |
) |
|
$ |
45.62 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
1,870,509 |
|
|
$ |
29.08 |
|
Granted |
|
|
1,204,965 |
|
|
$ |
23.68 |
|
Exercised |
|
|
(163,700 |
) |
|
$ |
14.20 |
|
Forfeited/Expired |
|
|
(58,832 |
) |
|
$ |
30.55 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
2,852,942 |
|
|
$ |
27.62 |
|
Exercised |
|
|
(85,784 |
) |
|
$ |
15.04 |
|
Forfeited/Expired |
|
|
(43,477 |
) |
|
$ |
40.55 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010 |
|
|
2,723,681 |
|
|
$ |
27.81 |
|
|
|
|
|
|
|
|
The grant-date fair value of stock options granted, the total pre-tax intrinsic value of
stock options exercised and exercisable, and the proceeds to AE from stock option exercises in
2010, 2009 and 2008 are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
2010 |
|
2009 |
|
2008 |
Grant-date fair value of stock options granted |
|
|
N/A |
|
|
$ |
8.6 |
|
|
$ |
9.6 |
|
Total pre-tax intrinsic value of stock options exercised (a) |
|
$ |
0.6 |
|
|
$ |
2.1 |
|
|
$ |
64.5 |
|
Total pre-tax intrinsic value of stock options exercisable at December 31 (b) |
|
$ |
8.5 |
|
|
$ |
7.9 |
|
|
$ |
14.9 |
|
Proceeds to AE from stock option exercises |
|
$ |
1.3 |
|
|
$ |
2.3 |
|
|
$ |
25.3 |
|
|
|
|
(a) |
|
Represents the total pre-tax intrinsic value based on the difference between the market
value of AEs common stock at exercise and the exercise price of the options. |
|
(b) |
|
Represents the total pre-tax intrinsic value based on the difference between the exercise
price of stock options exercisable (with an exercise price lower than AEs closing stock
price) and AEs closing stock price of $24.24, $23.48, and $33.86, on December 31, 2010, 2009,
and 2008, respectively. |
AE issued new shares of its common stock to satisfy these stock option exercises. No cash tax
benefit was realized from tax deductions on stock options exercised during 2010, 2009, and 2008
because of existing net operating loss carryforwards.
37
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes information about stock options outstanding and stock options
exercisable at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding and Exercisable |
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
As |
|
|
Remaining |
|
|
|
|
|
|
Aggregate |
|
|
|
of December 31, |
|
|
Contractual Term |
|
|
Exercise |
|
|
Intrinsic Value |
|
Range of Exercise Prices |
|
2010 |
|
|
(in Years) |
|
|
Price |
|
|
(in millions) (a) |
|
$10.00 - $14.99 |
|
|
680,754 |
|
|
|
3.2 |
|
|
$ |
13.55 |
|
|
$ |
7.3 |
|
$15.00 - $19.99 |
|
|
79,522 |
|
|
|
4.1 |
|
|
$ |
18.90 |
|
|
|
0.4 |
|
$20.00 - $24.99 |
|
|
1,199,745 |
|
|
|
7.9 |
|
|
$ |
23.54 |
|
|
|
0.8 |
|
$25.00 - $29.99 |
|
|
71,243 |
|
|
|
6.2 |
|
|
$ |
27.77 |
|
|
|
0 |
|
$30.00 - $34.99 |
|
|
10,200 |
|
|
|
1.0 |
|
|
$ |
34.56 |
|
|
|
0 |
|
$35.00 - $39.99 |
|
|
61,800 |
|
|
|
5.2 |
|
|
$ |
35.97 |
|
|
|
0 |
|
$40.00 - $44.99 |
|
|
33,557 |
|
|
|
5.3 |
|
|
$ |
42.65 |
|
|
|
0 |
|
$45.00 - $49.99 |
|
|
85,570 |
|
|
|
6.6 |
|
|
$ |
46.10 |
|
|
|
0 |
|
$50.00 - $54.99 |
|
|
489,290 |
|
|
|
7.1 |
|
|
$ |
53.52 |
|
|
|
0 |
|
$55.00 - $59.99 |
|
|
12,000 |
|
|
|
6.5 |
|
|
$ |
55.96 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,723,681 |
|
|
|
6.3 |
|
|
$ |
27.81 |
|
|
$ |
8.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents the total pre-tax intrinsic value based on stock options with an exercise price
less than AEs closing stock price of $24.24 as of December 31, 2010. |
As of December 31, 2010, Allegheny had no unrecognized compensation cost related to stock
options.
At December 31, 2010, Allegheny had approximately $64.3 million in excess tax benefits related
to share based awards that had not yet been credited to other paid-in capital because of
Alleghenys federal income tax net operating loss carryforward position.
Performance Shares
In 2008 and 2009, AE granted equity-based performance shares to key employees pursuant to
which award recipients could earn shares of AE common stock based on AEs Total Shareholder Return
(TSR) compared to the total return of the companies in the Dow Jones U.S. Electric Utilities
Index over a three-year performance period beginning on the date of each grant. Upon stockholder
approval of the proposed Merger with FirstEnergy, AE settled all 241,989 outstanding TSR
performance shares through the issuance of 155,027 shares of its common stock, representing 100% of
each participants target award less shares withheld to meet minimum income tax withholding
requirements. Activity in target performance shares linked to TSR was as follows:
|
|
|
|
|
|
|
Number of |
|
|
|
Shares |
|
TSR Performance shares outstanding at December 31, 2007 |
|
|
0 |
|
Granted |
|
|
83,653 |
|
Forfeited |
|
|
(8,098 |
) |
|
|
|
|
TSR Performance shares outstanding at December 31, 2008 |
|
|
75,555 |
|
Granted |
|
|
172,075 |
|
Forfeited |
|
|
(3,898 |
) |
|
|
|
|
TSR Performance shares outstanding at December 31, 2009 |
|
|
243,732 |
|
TSR performance shares settled |
|
|
(241,989 |
) |
Forfeited |
|
|
(1,743 |
) |
|
|
|
|
TSR Performance shares outstanding at December 31, 2010 |
|
|
0 |
|
|
|
|
|
The grant date fair value of performance shares linked to TSR granted during the twelve
months ended December 31, 2009 was $4.6 million. The fair value was determined using a Monte Carlo
simulation model, utilizing actual TSR information for the common shares of AE and its peers for
the period from January 1, 2009 to the February 27, 2009 grant date and estimated future stock
volatility and dividends of AE and its peers. The expected stock volatility assumptions for AE and
its peer group was based on three-year historic stock volatility, and the annual dividend yield
assumptions were based on current dividend yields at the grant date.
38
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2010, Allegheny had no unrecognized compensation cost related to
performance shares linked to TSR.
Also, in 2008, 2009 and 2010, AE granted equity-based performance shares to key employees
pursuant to which award recipients may earn shares of AE common stock based on AEs performance
over a three-year period compared to its Annual Incentive Plan (AIP) targets established at the
beginning of each year. Upon stockholder approval of the proposed Merger with FirstEnergy, AE
settled all 242,266 outstanding AIP performance shares awarded in 2008 and 2009 through the
issuance of 154,771 shares of its common stock, representing 100% of each participants target
award less shares withheld to meet minimum income tax withholding requirements.
For the 2010 performance shares linked to AIP targets, compensation expense is recognized over
the shorter of the remaining portion of the three-year performance period or retirement eligible
date in certain situations, as if the awards were separate annual awards each in the amount of
one-third of the total 2010 grant, using an estimated annual forfeiture rate of 5%. The percentage
of target shares earned can range from 0% to 200%. As of December 31, 2010, there was approximately
$5.7 million of unrecognized compensation cost related to the 2010 grant of AIP performance share
awards, which is expected to be recognized over a weighted average period of approximately 1 year.
Activity in target performance shares linked to the AIP was as follows:
|
|
|
|
|
|
|
Number of |
|
|
|
Shares |
|
AIP Performance shares outstanding at December 31, 2007 |
|
|
0 |
|
Granted |
|
|
83,796 |
|
Forfeited |
|
|
(8,103 |
) |
|
|
|
|
AIP Performance shares outstanding at December 31, 2008 |
|
|
75,693 |
|
Granted |
|
|
172,220 |
|
Forfeited |
|
|
(3,903 |
) |
|
|
|
|
AIP Performance shares outstanding at December 31, 2009 |
|
|
244,010 |
|
Granted |
|
|
764,049 |
|
AIP performance shares settled |
|
|
(242,417 |
) |
Forfeited |
|
|
(8,223 |
) |
|
|
|
|
AIP Performance shares outstanding at December 31, 2010 |
|
|
757,419 |
|
|
|
|
|
Stock Units
Alleghenys Stock Unit Plan permitted the grant to Alleghenys key executives, at the time of
hire, of stock units representing up to 4.5 million shares of AEs common stock. Upon vesting, each
stock unit converted into one share of AE common stock. These stock units vested in annual tranches
on a pro-rata basis over the vesting period. Stock unit awards granted prior to January 1, 2006
were expensed using the graded-vesting method. The fair value of each stock unit was equivalent to
the market price of Alleghenys stock on the date of grant. No stock units have been granted since
2005, and Allegheny had no unrecognized compensation cost related to stock units at December 31,
2010 and 2009.
Stock unit activity for the last three years was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
Aggregate |
|
|
|
Number of |
|
|
Grant Date |
|
|
Intrinsic Value (a) |
|
|
|
Stock Units |
|
|
Fair Value |
|
|
(in millions) |
|
Outstanding at December 31, 2007 |
|
|
451,055 |
|
|
$ |
15.40 |
|
|
$ |
28.7 |
|
Units converted into 270,633 common shares |
|
|
(447,640 |
) |
|
$ |
15.53 |
|
|
|
|
|
Dividends on unvested grants |
|
|
1,672 |
|
|
$ |
47.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
5,087 |
|
|
$ |
15.19 |
|
|
$ |
0.2 |
|
Units converted into 3,573 common shares |
|
|
(5,147 |
) |
|
$ |
15.31 |
|
|
|
|
|
Dividends on unvested grants |
|
|
60 |
|
|
$ |
25.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 and 2010 |
|
|
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents the total pre-tax intrinsic value based on stock units outstanding multiplied
by AEs closing stock price on each respective date. |
39
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The total pre-tax intrinsic value of stock units converted to shares of AE common stock during
2009 and 2008 was $0.1 million and $23.1 million, respectively. Allegheny issued new shares of its
common stock in connection with the stock unit conversions. The actual number of common shares
issued upon conversion of stock units was net of shares withheld to meet minimum income tax
withholding requirements.
Non-Employee Director Stock Awards
Under the Non-Employee Director Stock Plan, during 2010, 2009 and 2008, each non-employee
member of AEs Board of Directors received, on a quarterly basis, subject to his or her election to
defer his or her receipt, shares of AE common stock with a value equivalent to the lesser of 1,000
shares or $30,000 of AE common stock as determined based on the closing price of AE common stock on
the last business day of each calendar quarter for services performed. A maximum of 300,000 shares
of AEs common stock, subject to adjustments for stock splits, combinations, recapitalizations,
stock dividends or similar changes in stock, may be issued under this plan. The 2010, 2009 and 2008
compensation of each non-employee director was 4,000 shares, 4,000 shares and 2,895 shares,
respectively, of AEs common stock. The amount of expense relating to this plan for 2010, 2009 and
2008 was $0.8 million, $0.9 million and $1.1 million, respectively, representing the closing price
of AEs common stock on the date of grant multiplied by the number of shares granted.
Non-employee director stock awards activity in the last three years was as follows:
|
|
|
|
|
|
|
Number of |
|
|
|
Shares |
|
Shares earned but not issued at December 31, 2007 |
|
|
65,177 |
|
Granted |
|
|
26,055 |
|
Issued |
|
|
(20,869 |
) |
Dividends on earned but not issued shares |
|
|
858 |
|
|
|
|
|
Shares earned but not issued at December 31, 2008 |
|
|
71,221 |
|
Granted |
|
|
36,000 |
|
Issued |
|
|
(22,201 |
) |
Dividends on earned but not issued shares |
|
|
1,669 |
|
|
|
|
|
Shares earned but not issued at December 31, 2009 |
|
|
86,689 |
|
Granted |
|
|
36,000 |
|
Issued |
|
|
(12,000 |
) |
Dividends on earned but not issued shares |
|
|
2,460 |
|
|
|
|
|
Shares earned but not issued at December 31, 2010 |
|
|
113,149 |
|
|
|
|
|
Restricted Shares
In the first quarter of 2009, AE granted 17,850 restricted shares with an aggregate fair value
of $0.4 million and a three year vesting period.
|
|
|
|
|
|
|
Number of |
|
|
|
Shares |
|
Restricted shares outstanding at December 31, 2008 |
|
|
0 |
|
Granted |
|
|
17,850 |
|
Shares vested |
|
|
(5,950 |
) |
|
|
|
|
Restricted shares outstanding at December 31, 2009 |
|
|
11,900 |
|
Shares vested |
|
|
(11,900 |
) |
|
|
|
|
Restricted shares outstanding at December 31, 2010 |
|
|
0 |
|
|
|
|
|
Upon shareholder approval of the proposed Merger in September 2010, all 11,900
outstanding shares of restricted stock vested, of which 3,642 shares were purchased as treasury
stock to meet minimum income tax withholding requirements. As of December 31, 2010, Allegheny had
no unrecognized compensation cost related to restricted shares.
40
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12: PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Substantially all of Alleghenys personnel, including officers, are employed by AESC and are
covered by a noncontributory, defined benefit pension plan. Allegheny also maintains a Supplemental
Executive Retirement Plan (the SERP) for certain senior executives.
Allegheny also provides subsidies for medical and life insurance plans for eligible retirees
and dependents. Eligible retirees are charged premiums for medical coverage based on plan
provisions, including age and years-of-service. Subsidized medical coverage is not provided in
retirement to employees hired on or after January 1, 1993, with the exception of certain union
employees who were hired or became members before May 1, 2006. The provisions of the postretirement
health care plans and certain collective bargaining arrangements limit Alleghenys costs for
eligible retirees and dependents.
The components of the net periodic cost for pension benefits and for postretirement benefits
other than pensions (principally health care and life insurance) for employees and covered
dependents by Allegheny were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefits |
|
|
|
Pension Benefits |
|
|
Other Than Pensions |
|
(In millions) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Components of net periodic cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
26.2 |
|
|
$ |
22.3 |
|
|
$ |
21.2 |
|
|
$ |
4.2 |
|
|
$ |
4.4 |
|
|
$ |
4.4 |
|
Interest cost |
|
|
71.6 |
|
|
|
70.9 |
|
|
|
68.5 |
|
|
|
15.7 |
|
|
|
17.2 |
|
|
|
17.2 |
|
Expected return on plan assets |
|
|
(73.8 |
) |
|
|
(74.2 |
) |
|
|
(76.8 |
) |
|
|
(6.0 |
) |
|
|
(5.3 |
) |
|
|
(7.3 |
) |
Amortization of unrecognized transition obligation |
|
|
0.5 |
|
|
|
0.5 |
|
|
|
0.5 |
|
|
|
5.7 |
|
|
|
5.7 |
|
|
|
5.7 |
|
Amortization of prior service cost |
|
|
3.2 |
|
|
|
3.2 |
|
|
|
3.2 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Recognized actuarial loss |
|
|
18.2 |
|
|
|
11.1 |
|
|
|
7.2 |
|
|
|
0 |
|
|
|
1.9 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic cost |
|
$ |
45.9 |
|
|
$ |
33.8 |
|
|
$ |
23.8 |
|
|
$ |
19.6 |
|
|
$ |
23.9 |
|
|
$ |
20.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2010, 2009 and 2008, Allegheny capitalized $19.4
million, $17.7 million and $13.2 million, respectively, of the above net periodic cost amounts to
CWIP, a component of Property, plant and equipment, net.
During the first quarter of 2010, Allegheny determined that its benefit obligation of $264.2
million at December 31, 2009 for postretirement benefits other than pensions was understated by
approximately $14.9 million. As a result, Allegheny increased its recorded benefit obligation
during the first quarter of 2010, and recorded additional expense of approximately $10.4 million
and a charge to CWIP in the amount of approximately $4.5 million. Also, in the third quarter of
2010, Allegheny made an adjustment to reduce its accrued liability for medical benefits by
approximately $18.0 million, resulting in a credit to CWIP of approximately $1.5 million, a credit
to benefits expense of approximately $3.5 million and a credit to accumulated other comprehensive
income of approximately $13.0 million.
These adjustment amounts are not included in the preceding 2010 net periodic cost tables, but
are presented as other adjustments in the change in benefit obligation table disclosed later in
this note.
In 2008, as required by GAAP, Allegheny changed to a December 31 measurement date for its
pension plans, postretirement benefits other than pension plans and long-term disability plan.
Accordingly, Allegheny performed a measurement of plan assets and liabilities as of December 31,
2008. Alleghenys prior measurement date for these plans was September 30, 2007. Twelve fifteenths
of net periodic cost for the fifteen month period from September 30, 2007 to December 31, 2008 was
recorded as current year benefit costs and three fifteenths of the total cost was charged to
retained earnings as of December 31, 2008, net of tax. The adjustment to retained earnings in the
amount of $6.8 million was comprised of $6.0 million of pension benefit costs less income tax
effect of $2.4 million and $5.4 million of other benefit plan costs less income tax effect of $2.2
million.
Allegheny uses the market-related value of pension assets to determine the expected
return on pension plan assets, a component of net periodic pension cost. The market-related value
recognizes changes in fair value on a straight line basis over a five-year period. Changes in fair
value are measured as the difference between the expected and actual plan asset returns, including
dividends, interest and realized and unrealized investment gains and losses. Allegheny uses the
fair value of assets to determine the expected return on postretirement benefits other than pension
assets.
41
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The amounts in accumulated other comprehensive loss and regulatory assets that are
expected to be recognized as components of net periodic cost during the next fiscal year are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement |
|
|
|
Pension |
|
|
Benefits Other |
|
(In millions) |
|
Benefits |
|
|
Than Pensions |
|
Net actuarial loss |
|
$ |
25.6 |
|
|
$ |
0 |
|
Net prior service cost |
|
|
3.2 |
|
|
|
0 |
|
Net transition obligation |
|
|
0.5 |
|
|
|
5.7 |
|
|
|
|
|
|
|
|
Total to be recognized in net periodic cost |
|
$ |
29.3 |
|
|
$ |
5.7 |
|
|
|
|
|
|
|
|
The amounts accrued at December 31, using a measurement date of December 31, included the
following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement |
|
|
|
|
|
|
|
|
|
|
|
Benefits Other |
|
|
|
Pension Benefits |
|
|
Than Pensions |
|
(In millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligations at beginning of year |
|
$ |
1,226.4 |
|
|
$ |
1,124.9 |
|
|
$ |
264.2 |
|
|
$ |
269.8 |
|
Service cost |
|
|
26.2 |
|
|
|
22.3 |
|
|
|
4.2 |
|
|
|
4.4 |
|
Interest cost |
|
|
71.6 |
|
|
|
70.9 |
|
|
|
15.7 |
|
|
|
17.2 |
|
Plan participants contributions |
|
|
0 |
|
|
|
0 |
|
|
|
4.7 |
|
|
|
4.4 |
|
Actuarial (gain)/loss |
|
|
67.9 |
|
|
|
76.0 |
|
|
|
(11.4 |
) |
|
|
(9.3 |
) |
Benefits paid from plan assets |
|
|
(68.6 |
) |
|
|
(67.2 |
) |
|
|
(15.8 |
) |
|
|
(19.0 |
) |
Benefits paid from Allegheny assets |
|
|
(0.5 |
) |
|
|
(0.5 |
) |
|
|
(4.7 |
) |
|
|
(4.8 |
) |
Medicare Part D subsidy |
|
|
0 |
|
|
|
0 |
|
|
|
1.4 |
|
|
|
1.5 |
|
Other adjustments |
|
|
0 |
|
|
|
0 |
|
|
|
14.9 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year |
|
|
1,323.0 |
|
|
|
1,226.4 |
|
|
|
273.2 |
|
|
|
264.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
|
815.5 |
|
|
|
750.1 |
|
|
|
77.2 |
|
|
|
66.2 |
|
Actual return on plan assets |
|
|
99.7 |
|
|
|
95.1 |
|
|
|
7.2 |
|
|
|
18.3 |
|
Plan participants contributions |
|
|
0 |
|
|
|
0 |
|
|
|
4.7 |
|
|
|
4.4 |
|
Employer contribution |
|
|
77.5 |
|
|
|
38.0 |
|
|
|
2.0 |
|
|
|
7.3 |
|
Benefits paid |
|
|
(69.1 |
) |
|
|
(67.7 |
) |
|
|
(15.8 |
) |
|
|
(19.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
|
923.6 |
|
|
|
815.5 |
|
|
|
75.3 |
|
|
|
77.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at December 31 |
|
$ |
(399.4 |
) |
|
$ |
(410.9 |
) |
|
$ |
(197.9 |
) |
|
$ |
(187.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The SERP is a non-qualified pension plan, and Allegheny is therefore not obligated to
fund the SERP obligation. The SERP obligation, which is included as a component of the pension
benefit obligation shown in the table above, was $12.0 million and $10.1 million at December 31,
2010 and 2009, respectively.
Amounts recognized in the Consolidated Balance Sheets at December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement |
|
|
|
|
|
|
|
|
|
|
|
Benefits Other |
|
|
|
Pension Benefits |
|
|
Than Pensions |
|
(In millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Current liabilities |
|
$ |
(0.5 |
) |
|
$ |
(0.5 |
) |
|
$ |
0 |
|
|
$ |
0 |
|
Noncurrent liabilities |
|
|
(398.9 |
) |
|
|
(410.4 |
) |
|
|
(197.9 |
) |
|
|
(187.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts recognized at December 31 |
|
$ |
(399.4 |
) |
|
$ |
(410.9 |
) |
|
$ |
(197.9 |
) |
|
$ |
(187.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
42
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Amounts recognized in Accumulated other comprehensive loss, pre-tax, at December 31, that
have not yet been recognized as components of net periodic benefit cost, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement |
|
|
|
|
|
|
|
|
|
|
|
Benefits Other |
|
|
|
Pension Benefits |
|
|
Than Pensions |
|
(In millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net actuarial loss |
|
$ |
489.7 |
|
|
$ |
466.0 |
|
|
$ |
0.7 |
|
|
$ |
26.4 |
|
Net prior service cost |
|
|
8.0 |
|
|
|
11.2 |
|
|
|
0 |
|
|
|
0 |
|
Net transition obligation |
|
|
0.8 |
|
|
|
1.2 |
|
|
|
10.0 |
|
|
|
15.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts not yet recognized in net periodic benefit cost |
|
|
498.5 |
|
|
|
478.4 |
|
|
|
10.7 |
|
|
|
42.1 |
|
Regulatory asset |
|
|
(376.6 |
) |
|
|
(362.9 |
) |
|
|
(8.1 |
) |
|
|
(33.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss, pre-tax, at December 31 |
|
$ |
121.9 |
|
|
$ |
115.5 |
|
|
$ |
2.6 |
|
|
$ |
8.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allegheny has determined that a portion of the unfunded pension and postretirement
benefit obligations represents an incurred cost that qualifies for regulatory asset treatment under
GAAP. Because future recovery of these incurred costs are probable for certain of its state and
federal jurisdictions, Allegheny has recorded regulatory assets in the amounts of $376.6 million
and $362.9 million for pension benefits and $8.1 million and $33.6 million for postretirement
benefits other than pensions at December 31, 2010 and 2009, respectively.
The accumulated benefit obligation for all defined benefit pension plans was $1.22 billion and
$1.12 billion at December 31, 2010 and 2009, respectively. The portion of the total accumulated
benefit obligation related to the SERP was $11.1 million and $9.0 million at December 31, 2010 and
2009, respectively.
Information for pension plans with a projected benefit obligation and an accumulated benefit
obligation in excess of plan assets was as follows:
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
(In millions) |
|
2010 |
|
|
2009 |
|
Projected benefit obligation |
|
$ |
1,323.0 |
|
|
$ |
1,226.4 |
|
Accumulated benefit obligation |
|
$ |
1,221.6 |
|
|
$ |
1,122.4 |
|
Fair value of plan assets |
|
$ |
923.6 |
|
|
$ |
815.5 |
|
The assumptions used to determine net periodic benefit costs for the years ended December 31,
2010, 2009 and 2008 are shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Discount rate: |
|
|
|
|
|
|
|
|
|
|
|
|
Pension (Qualified Plan) |
|
|
6.00 |
% |
|
|
6.50 |
% |
|
|
6.40 |
% |
SERP |
|
|
6.00 |
% |
|
|
6.40 |
% |
|
|
6.40 |
% |
Postretirement benefits other than pension |
|
|
5.80 |
% |
|
|
6.60 |
% |
|
|
6.40 |
% |
Expected long-term rate of return on plan assets, net of administrative expenses |
|
|
8.00 |
% |
|
|
8.25 |
% |
|
|
8.25 |
% |
Rate of compensation increase (a) |
|
|
3.60 |
% |
|
|
3.60 |
% |
|
|
3.60 |
% |
|
|
|
(a) |
|
Weighted-average rate for age graded scale. |
The assumptions used to determine benefit obligations at December 31, 2010 and 2009 are shown
in the table below:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Discount rate: |
|
|
|
|
|
|
|
|
Pension (Qualified Plan) |
|
|
5.50 |
% |
|
|
6.00 |
% |
SERP |
|
|
5.50 |
% |
|
|
6.00 |
% |
Postretirement benefits other than pension |
|
|
5.20 |
% |
|
|
5.80 |
% |
Rate of compensation increase (a) |
|
|
3.35 |
% |
|
|
3.60 |
% |
|
|
|
(a) |
|
Weighted-average rate for age graded scale. |
43
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Allegheny determines its discount rate assumptions through the use of a cash flow matching
process in which the timing and amount of estimated benefit cash flows for each benefit plan are
matched with an interest rate curve applicable to the returns of high quality corporate bonds over
the expected benefit payment period to determine an overall effective discount rate.
Allegheny determines its expected long-term rate of return on plan assets based on historical
and expected future asset returns for each plan investment category as well as the current and
expected future allocation of plan assets by investment category. The expected long-term rates of
return on plan assets used to develop net periodic pension costs and postretirement benefit costs
other than pension costs for 2011 are 7.75% and 5.00%, respectively.
Assumed health care cost trend rates at December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Health care cost trend rate assumed for next year |
|
|
8.0 |
% |
|
|
8.5 |
% |
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) |
|
|
5.0 |
% |
|
|
5.0 |
% |
Year that the rate reaches the ultimate trend rate |
|
|
2017 |
|
|
|
2017 |
|
For measuring obligations related to postretirement benefits other than pensions, Allegheny
assumed a health care cost trend rate of 8.0% beginning in 2011 and decreasing by 0.5% each year
thereafter to an ultimate rate of 5.0% in 2017, and plan provisions that limit future medical and
life insurance benefits. Because of the plan provisions that limit future benefits, changes in the
assumed health care cost trend rate would have a limited effect on the amounts displayed in the
tables above. A one-percentage-point change in the assumed health care cost trend rate would have
the following effects:
|
|
|
|
|
|
|
|
|
|
|
1-Percentage-Point |
|
|
1-Percentage-Point |
|
(In millions) |
|
Increase |
|
|
Decrease |
|
Effect on total service and interest cost components |
|
$ |
0.8 |
|
|
$ |
(0.7 |
) |
Effect on accumulated postretirement benefit obligation |
|
$ |
11.3 |
|
|
$ |
(9.3 |
) |
Under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Medicare
Act), the federal government provides subsidies for certain drug costs to companies that provide
coverage that is actuarially equivalent to the drug coverage under Medicare Part D. The subsidy is
28% of eligible drug costs for retirees who are over age 65 and covered under Alleghenys
postretirement benefits other than pension plan.
In March 2010, the Patient Protection and Affordable Care Act and the Health Care and
Education Reconciliation Act were signed into law. The legislation effectively changes the tax
treatment of federal subsidies paid to sponsors of retiree health benefit plans that provide
prescription drug benefits that are at least actuarially equivalent to prescription drug benefits
provided under Medicare Part D. Beginning in 2013, an employers income tax deduction for the cost
of providing Medicare Part D equivalent prescription drug benefits will be reduced by the amount of
the federal subsidy. The impact of this change in tax treatment of the federal subsidy did not have
a significant impact on Alleghenys deferred income tax assets or income tax expense, because
Allegheny expects that the majority of the prescription drug benefits provided under its health
benefit plans will not be actuarially equivalent to Medicare Part D benefits for periods after
2012. Allegheny received a total subsidy of approximately $1.4 million for 2010, $1.5 million for
2009 and $1.6 million for 2008.
Plan Assets
The long-term target asset allocation of the defined benefit pension plan is 50% equity
securities and 50% fixed income securities. The long-term target for the assets associated with the
postretirement benefits other than pension plans vary based on the particular structure of each
plan and range from 55% to 75% equity securities and from 25% to 45% fixed income securities.
Equity securities primarily include investments in large-cap and mid-cap companies primarily
located in the United States (U.S.) and in international large-cap companies. Fixed income
securities include corporate bonds of companies from diversified industries. Under the plans
investment policies, the actual allocations may vary from the long-term objective within specified
ranges. Market shifts, changes in the plan dynamics or changes in economic conditions may cause the
asset mix to fall outside of the long-term policy range in a given period.
44
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table disaggregates by level within the fair value hierarchy described in Note
14, Fair Value Measurements, Derivative Investments and Hedging Activities, the fair value of the
pension plans investments by class as of December 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Fair Value Hierarchy Level |
|
|
2009 Fair Value Hierarchy Level |
|
(In millions) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Cash equivalents (a) |
|
$ |
0 |
|
|
$ |
31.5 |
|
|
$ |
0 |
|
|
$ |
31.5 |
|
|
$ |
0 |
|
|
$ |
3.3 |
|
|
$ |
0 |
|
|
$ |
3.3 |
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. large-cap (b) |
|
|
0 |
|
|
|
281.8 |
|
|
|
0 |
|
|
|
281.8 |
|
|
|
0 |
|
|
|
227.7 |
|
|
|
0 |
|
|
|
227.7 |
|
U.S. mid-cap growth (c) |
|
|
0 |
|
|
|
50.7 |
|
|
|
0 |
|
|
|
50.7 |
|
|
|
0 |
|
|
|
42.4 |
|
|
|
0 |
|
|
|
42.4 |
|
International large-cap (d) |
|
|
0 |
|
|
|
133.5 |
|
|
|
0 |
|
|
|
133.5 |
|
|
|
0 |
|
|
|
114.9 |
|
|
|
0 |
|
|
|
114.9 |
|
Domestic real estate (e) |
|
|
0 |
|
|
|
23.2 |
|
|
|
0 |
|
|
|
23.2 |
|
|
|
0 |
|
|
|
18.0 |
|
|
|
0 |
|
|
|
18.0 |
|
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds (f) |
|
|
0 |
|
|
|
53.4 |
|
|
|
0 |
|
|
|
53.4 |
|
|
|
0 |
|
|
|
24.9 |
|
|
|
0 |
|
|
|
24.9 |
|
Government securities (g) |
|
|
0 |
|
|
|
19.9 |
|
|
|
0 |
|
|
|
19.9 |
|
|
|
0 |
|
|
|
53.6 |
|
|
|
0 |
|
|
|
53.6 |
|
Group annuity contract (h) |
|
|
0 |
|
|
|
329.6 |
|
|
|
0 |
|
|
|
329.6 |
|
|
|
0 |
|
|
|
330.7 |
|
|
|
0 |
|
|
|
330.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
0 |
|
|
$ |
923.6 |
|
|
$ |
0 |
|
|
$ |
923.6 |
|
|
$ |
0 |
|
|
$ |
815.5 |
|
|
$ |
0 |
|
|
$ |
815.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
This class seeks to generate a reasonable rate of return by investing in securities that
are either issued or guaranteed by the U.S. Treasury and/or U.S. Government Agencies. |
|
(b) |
|
This class seeks to match the returns of the S&P 500 Index and the Russell 1000 Index.
Approximately 72% of these assets are invested to match the Russell 1000 index and 28% are
invested to match the S&P 500 Index. |
|
(c) |
|
This class seeks to match the return of the Russell 2000 Index. |
|
(d) |
|
This class seeks to match the performance of the Morgan Stanley Capital International EAFE
Index while providing low cost, broadly diversified, non-U.S. exposure. |
|
(e) |
|
This class seeks to match the return of the Dow Jones U.S. Select REIT Index. |
|
(f) |
|
Approximately one-half of the investment in this class seeks to match the return of the High
Yield $200 Million Very Liquid Index, a customized Barclays Capital Index. The other one-half
of the investment seeks a return that approximates the performance of the Barclays Capital
U.S. Long Credit Bond Index. |
|
(g) |
|
This class seeks to match the return of the Barclays Capital U.S. Long Government Bond Index. |
|
(h) |
|
An unallocated group annuity contract with Metropolitan Life Insurance Company. Valued at a
price per unit that is based upon the underlying value of the domestic fixed income
securities. |
The following table disaggregates by level within the fair value hierarchy the fair value of
the postretirement benefits other than pensions plans investments by asset class as of December
31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Fair Value Hierarchy Level |
|
|
2009 Fair Value Hierarchy Level |
|
(In millions) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Cash equivalents (a) |
|
$ |
0 |
|
|
$ |
0.8 |
|
|
$ |
0 |
|
|
$ |
0.8 |
|
|
$ |
0 |
|
|
$ |
1.4 |
|
|
$ |
0 |
|
|
$ |
1.4 |
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. large-cap (b) |
|
|
0 |
|
|
|
23.5 |
|
|
|
0 |
|
|
|
23.5 |
|
|
|
0 |
|
|
|
21.7 |
|
|
|
0 |
|
|
|
21.7 |
|
Trust owned life insurance (TOLI) (c) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
38.2 |
|
|
|
0 |
|
|
|
38.2 |
|
Fixed income securities (d) |
|
|
0 |
|
|
|
51.0 |
|
|
|
0 |
|
|
|
51.0 |
|
|
|
0 |
|
|
|
15.9 |
|
|
|
0 |
|
|
|
15.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
0 |
|
|
$ |
75.3 |
|
|
$ |
0 |
|
|
$ |
75.3 |
|
|
$ |
0 |
|
|
$ |
77.2 |
|
|
$ |
0 |
|
|
$ |
77.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
This class seeks to generate a reasonable rate of return by investing in high grade money
market instruments. |
|
(b) |
|
This class seeks to match the return of the S&P 500 Index. |
|
(c) |
|
The TOLI is an unallocated insurance contract that is valued based upon the underlying mutual
funds and pooled investments and at the value of investments made at a London Interbank
Offered Rate (LIBOR), which approximates the policys net cash surrender value. The underlying
investments in 2009 were comprised of approximately 60% equities and 40% U.S. fixed income
bonds. |
|
(d) |
|
In this class, $16.7 million of the investment in 2010 and all of the 2009 investment seeks
to match, as closely as possible, the performance of the Barclays Capital U.S. Aggregate Bond
Index, by investing primarily in collateralized mortgage obligations, |
45
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
corporate bonds, and U.S. Treasury obligations. In 2010, the remaining $34.3 million of
investment is allocated 53% to government securities and 47% to corporate bonds. |
In 2009, a portion of the pension plans assets were invested in collective trust funds that
participated in a securities lending program. These funds modified their withdrawal procedures as a
result of liquidity issues affecting the funds ability to liquidate their securities lending
collateral investment pools. At December 31, 2009, Alleghenys pension plan participation in the
collateral investment pool was approximately $56 million at cost, with a market value of
approximately $55 million. At December 31, 2010, none of the pension plans assets were invested in
collective trust funds that participate in a securities lending program.
Contributions
Allegheny makes cash contributions to its qualified pension plan to meet the minimum funding
requirements of employee benefit and tax laws and may include additional discretionary
contributions to increase the funded level of the plan. Allegheny has not yet determined the amount
of future contributions, but expects to contribute approximately $140 million to its pension plan
for the year 2011. The amount of future contributions to the plan will depend on the funded status
of the plan, asset performance and other factors. Allegheny currently anticipates that it will
contribute $2 million to $3 million during 2011 to fund postretirement benefits other than
pensions.
The Pension Protection Act of 2006 (the Pension Protection Act) may affect the manner in
which many companies, including Allegheny, administer their pension plans. Effective January 1,
2008, the Pension Protection Act will require many companies to more fully fund their pension plans
according to new funding targets, potentially resulting in greater annual contributions. Allegheny
has incorporated the Pension Protection Act funding targets and requirements into its future
pension funding determination.
Estimated Future Benefit Payments
The following table shows estimated benefit payments to be made by Allegheny, and the
estimated Medicare Part D subsidy to be received by Allegheny:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefits Other |
|
|
|
|
|
|
|
Than Pensions |
|
|
|
|
|
|
|
|
|
|
|
Medicare |
|
|
|
Pension |
|
|
Benefit |
|
|
Part D |
|
(In millions) |
|
Benefits |
|
|
Payments (a) |
|
|
Subsidy |
|
2011 |
|
$ |
68.2 |
|
|
$ |
18.0 |
|
|
$ |
1.6 |
|
2012 |
|
$ |
69.4 |
|
|
$ |
18.1 |
|
|
$ |
1.3 |
|
2013 |
|
$ |
70.9 |
|
|
$ |
18.8 |
|
|
$ |
0.1 |
|
2014 |
|
$ |
72.4 |
|
|
$ |
19.3 |
|
|
$ |
0.1 |
|
2015 |
|
$ |
74.6 |
|
|
$ |
19.5 |
|
|
$ |
0.2 |
|
2016 2020 |
|
$ |
421.7 |
|
|
$ |
103.5 |
|
|
$ |
0.8 |
|
|
|
|
(a) |
|
Benefit payments are net of Medicare Part D subsidy. |
ESOSP 401(k) Savings Plan
The Allegheny Energy Employee Stock Ownership and Savings Plan (ESOSP) was established as a
non-contributory stock ownership plan for all eligible employees, effective January 1, 1976, and
was amended in 1984 to include a savings program. All of Alleghenys employees, subject to meeting
eligibility requirements, may elect to participate in the ESOSP. Under the ESOSP, each eligible
employee may elect to have from 2% to 25% of his or her compensation contributed to the ESOSP on a
pre-tax basis. Starting July 1, 2007, participants have been able to elect to make all or a portion
of their respective contributions to a Roth 401(k). An additional 1% to 6% of compensation may be
contributed on a post-tax basis. Allegheny matches 50% of an employees first 6% of pre-tax salary
deferrals and Roth 401(k) contributions into the ESOSP. Participants direct the investment of all
contributions to specified mutual funds or AE common stock.
In 2010, 2009 and 2008, Allegheny made ESOSP matching contributions in cash in the amount of
$9.0 million, $9.0 million and $8.6 million, respectively. These contributions, less amounts
capitalized in CWIP, were expensed. The capitalized portions of these costs were $2.6 million, $2.9
million and $2.5 million in 2010, 2009 and 2008, respectively.
46
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Disability Benefits
Allegheny provides benefits to eligible employees who are unable to perform their work duties
due to an injury or illness. These benefits include income replacement under the Allegheny Energy
Long-Term Disability Plan and medical and life insurance benefits under Alleghenys medical and
life insurance plans. The benefits are paid in accordance with Alleghenys established benefit
practices and policies. The liability related to these disability benefits was $9.5 million at
December 31, 2010 and $8.9 million at December 31, 2009 and 2008, respectively.
NOTE 13: SEGMENT INFORMATION
The following tables summarize the results of operations for Alleghenys two reportable
segments, the Merchant Generation segment and the Regulated Operations segment. Significant
transactions between reportable segments are shown as eliminations to reconcile the segment
information to consolidated amounts. The information for the Regulated Operations segment includes
the operations of the Virginia distribution business through the date of its sale on June 1, 2010.
See Note 4, Sale of Virginia Distribution Business, for additional information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchant |
|
|
Regulated |
|
|
|
|
|
|
|
(In millions) |
|
Generation |
|
|
Operations |
|
|
Eliminations (a) |
|
|
Total |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External operating revenues |
|
$ |
467.9 |
|
|
$ |
3,435.0 |
|
|
$ |
0 |
|
|
$ |
3,902.9 |
|
Internal operating revenues |
|
|
1,290.7 |
|
|
|
5.3 |
|
|
|
(1,296.0 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
1,758.6 |
|
|
|
3,440.3 |
|
|
|
(1,296.0 |
) |
|
|
3,902.9 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel |
|
|
876.0 |
|
|
|
316.6 |
|
|
|
0 |
|
|
|
1,192.6 |
|
Purchased power and transmission |
|
|
38.4 |
|
|
|
1,755.2 |
|
|
|
(1,290.7 |
) |
|
|
502.9 |
|
Deferred energy costs, net |
|
|
0 |
|
|
|
38.1 |
|
|
|
0 |
|
|
|
38.1 |
|
Gain on sale of Virginia distribution business |
|
|
0 |
|
|
|
(44.6 |
) |
|
|
0 |
|
|
|
(44.6 |
) |
Operations and maintenance |
|
|
250.7 |
|
|
|
487.5 |
|
|
|
(5.3 |
) |
|
|
732.9 |
|
Depreciation and amortization |
|
|
129.7 |
|
|
|
195.5 |
|
|
|
(1.7 |
) |
|
|
323.5 |
|
Taxes other than income taxes |
|
|
51.2 |
|
|
|
174.8 |
|
|
|
0 |
|
|
|
226.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,346.0 |
|
|
|
2,923.1 |
|
|
|
(1,297.7 |
) |
|
|
2,971.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
412.6 |
|
|
|
517.2 |
|
|
|
1.7 |
|
|
|
931.5 |
|
Other income (expense), net |
|
|
3.6 |
|
|
|
22.2 |
|
|
|
(12.5 |
) |
|
|
13.3 |
|
Interest expense |
|
|
145.8 |
|
|
|
173.7 |
|
|
|
(3.1 |
) |
|
|
316.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
270.4 |
|
|
|
365.7 |
|
|
|
(7.7 |
) |
|
|
628.4 |
|
Income tax expense |
|
|
98.7 |
|
|
|
118.0 |
|
|
|
0 |
|
|
|
216.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
171.7 |
|
|
|
247.7 |
|
|
|
(7.7 |
) |
|
|
411.7 |
|
Net income attributable to noncontrolling interests |
|
|
(8.6 |
) |
|
|
0 |
|
|
|
8.6 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Allegheny Energy, Inc. |
|
$ |
163.1 |
|
|
$ |
247.7 |
|
|
$ |
0.9 |
|
|
$ |
411.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents elimination of transactions between reportable segments. |
47
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchant |
|
|
Regulated |
|
|
|
|
|
|
|
(In millions) |
|
Generation |
|
|
Operations |
|
|
Eliminations (a) |
|
|
Total |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External operating revenues |
|
$ |
383.1 |
|
|
$ |
3,043.7 |
|
|
$ |
0 |
|
|
$ |
3,426.8 |
|
Internal operating revenues |
|
|
1,225.5 |
|
|
|
7.5 |
|
|
|
(1,233.0 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
1,608.6 |
|
|
|
3,051.2 |
|
|
|
(1,233.0 |
) |
|
|
3,426.8 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel |
|
|
675.5 |
|
|
|
211.1 |
|
|
|
0 |
|
|
|
886.6 |
|
Purchased power and transmission |
|
|
26.4 |
|
|
|
1,702.8 |
|
|
|
(1,227.2 |
) |
|
|
502.0 |
|
Deferred energy costs, net |
|
|
0 |
|
|
|
(64.4 |
) |
|
|
0 |
|
|
|
(64.4 |
) |
Operations and maintenance |
|
|
247.0 |
|
|
|
445.9 |
|
|
|
(5.8 |
) |
|
|
687.1 |
|
Depreciation and amortization |
|
|
106.8 |
|
|
|
177.1 |
|
|
|
(1.8 |
) |
|
|
282.1 |
|
Taxes other than income taxes |
|
|
47.2 |
|
|
|
166.4 |
|
|
|
0 |
|
|
|
213.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,102.9 |
|
|
|
2,638.9 |
|
|
|
(1,234.8 |
) |
|
|
2,507.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
505.7 |
|
|
|
412.3 |
|
|
|
1.8 |
|
|
|
919.8 |
|
Other income (expense), net |
|
|
1.0 |
|
|
|
17.1 |
|
|
|
(11.1 |
) |
|
|
7.0 |
|
Interest expense |
|
|
134.9 |
|
|
|
157.4 |
|
|
|
(1.2 |
) |
|
|
291.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
371.8 |
|
|
|
272.0 |
|
|
|
(8.1 |
) |
|
|
635.7 |
|
Income tax expense |
|
|
128.8 |
|
|
|
112.8 |
|
|
|
0 |
|
|
|
241.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
243.0 |
|
|
|
159.2 |
|
|
|
(8.1 |
) |
|
|
394.1 |
|
Net income attributable to noncontrolling interests |
|
|
(9.0 |
) |
|
|
(1.3 |
) |
|
|
9.0 |
|
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Allegheny Energy, Inc. |
|
$ |
234.0 |
|
|
$ |
157.9 |
|
|
$ |
0.9 |
|
|
$ |
392.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External operating revenues |
|
$ |
554.9 |
|
|
$ |
2,831.0 |
|
|
$ |
0 |
|
|
$ |
3,385.9 |
|
Internal operating revenues |
|
|
1,238.0 |
|
|
|
24.3 |
|
|
|
(1,262.3 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
1,792.9 |
|
|
|
2,855.3 |
|
|
|
(1,262.3 |
) |
|
|
3,385.9 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel |
|
|
793.4 |
|
|
|
287.5 |
|
|
|
0 |
|
|
|
1,080.9 |
|
Purchased power and transmission |
|
|
30.3 |
|
|
|
1,622.3 |
|
|
|
(1,257.0 |
) |
|
|
395.6 |
|
Deferred energy costs, net |
|
|
0 |
|
|
|
(63.7 |
) |
|
|
0 |
|
|
|
(63.7 |
) |
Operations and maintenance |
|
|
222.1 |
|
|
|
458.0 |
|
|
|
(5.3 |
) |
|
|
674.8 |
|
Depreciation and amortization |
|
|
94.1 |
|
|
|
181.9 |
|
|
|
(2.1 |
) |
|
|
273.9 |
|
Taxes other than income taxes |
|
|
47.6 |
|
|
|
167.3 |
|
|
|
0 |
|
|
|
214.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,187.5 |
|
|
|
2,653.3 |
|
|
|
(1,264.4 |
) |
|
|
2,576.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
605.4 |
|
|
|
202.0 |
|
|
|
2.1 |
|
|
|
809.5 |
|
Other income (expense), net |
|
|
7.8 |
|
|
|
28.6 |
|
|
|
(14.1 |
) |
|
|
22.3 |
|
Interest expense |
|
|
99.7 |
|
|
|
135.6 |
|
|
|
(3.4 |
) |
|
|
231.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
513.5 |
|
|
|
95.0 |
|
|
|
(8.6 |
) |
|
|
599.9 |
|
Income tax expense |
|
|
179.7 |
|
|
|
24.4 |
|
|
|
0 |
|
|
|
204.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
333.8 |
|
|
|
70.6 |
|
|
|
(8.6 |
) |
|
|
395.8 |
|
Net income attributable to noncontrolling interests |
|
|
(9.5 |
) |
|
|
(0.4 |
) |
|
|
9.5 |
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Allegheny Energy, Inc. |
|
$ |
324.3 |
|
|
$ |
70.2 |
|
|
$ |
0.9 |
|
|
$ |
395.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents elimination of transactions between reportable segments. |
48
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Capital expenditures and identifiable assets by segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchant |
|
|
Regulated |
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Generation |
|
|
Operations |
|
|
Other (b) |
|
|
Eliminations (a) |
|
|
Total |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
141.6 |
|
|
$ |
808.9 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
950.5 |
|
Identifiable assets |
|
$ |
4,482.5 |
|
|
$ |
7,537.2 |
|
|
$ |
76.4 |
|
|
$ |
(6.8 |
) |
|
$ |
12,089.3 |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
233.4 |
|
|
$ |
932.8 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
1,166.2 |
|
Identifiable assets |
|
$ |
4,284.6 |
|
|
$ |
7,286.7 |
|
|
$ |
74.7 |
|
|
$ |
(56.9 |
) |
|
$ |
11,589.1 |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
347.2 |
|
|
$ |
646.9 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
994.1 |
|
Identifiable assets |
|
$ |
4,268.8 |
|
|
$ |
6,567.0 |
|
|
$ |
91.3 |
|
|
$ |
(116.1 |
) |
|
$ |
10,811.0 |
|
|
|
|
(a) |
|
Represents elimination transactions between reportable segments. |
|
(b) |
|
Represents identifiable assets not directly attributable to segments. |
NOTE 14: FAIR VALUE MEASUREMENTS, DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Allegheny determines the fair value of assets and liabilities based on the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction between market
participants and based on assumptions that market participants would use when pricing an asset or
liability, including assumptions about risk and the risks inherent in valuation techniques and the
inputs to valuations. This includes not only the credit standing of counterparties and the impact
of credit enhancements, but also the impact of Alleghenys own nonperformance risk on its
liabilities. Allegheny uses a fair value hierarchy based on whether the inputs to valuation
techniques are observable or unobservable. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect the Companys own assumptions about the
assumptions that market participants would use. The fair value hierarchy includes three levels of
inputs that may be used to measure fair value as described below.
|
|
|
Level 1
|
|
Quoted prices for identical instruments in active markets. |
Level 2
|
|
Quoted prices for similar instruments in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived valuations for which all significant inputs
are observable market data. |
Level 3
|
|
Unobservable inputs significant to the fair value measurement supported by little or no market activity. |
In some cases, the inputs used to measure fair value may meet the definition of more than one
level of fair value hierarchy. The lowest level input that is significant to the fair value
measurement in its totality determines the applicable level in the fair value hierarchy.
Alleghenys assets and liabilities measured at fair value on a recurring basis at December 31,
2010 and 2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
(In millions) |
|
Assets |
|
|
Liabilities |
|
|
Assets |
|
|
Liabilities |
|
Cash equivalents (a) |
|
$ |
338.8 |
|
|
$ |
0 |
|
|
$ |
194.2 |
|
|
$ |
0 |
|
Derivative instruments (b): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
134.3 |
|
|
|
(7.5 |
) |
|
|
128.3 |
|
|
|
(24.5 |
) |
Non-current |
|
|
0 |
|
|
|
(12.4 |
) |
|
|
0 |
|
|
|
(9.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative instruments |
|
|
134.3 |
|
|
|
(19.9 |
) |
|
|
128.3 |
|
|
|
(34.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recurring fair value measurements |
|
$ |
473.1 |
|
|
$ |
(19.9 |
) |
|
$ |
322.5 |
|
|
$ |
(34.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Cash equivalents represent amounts invested in money market mutual funds and are valued
using Level 1 inputs. |
|
(b) |
|
Before netting of cash collateral and FTR obligations. |
See Note 12, Pension Benefits and Postretirement Benefits Other Than Pensions, for
information related to fair value measurements of pension and other postretirement benefit plan
assets.
49
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All derivatives, except those for which an exception applies, are recorded in Alleghenys
Consolidated Balance Sheets at fair value. Derivative contracts that have been designated as normal
purchases or normal sales are not subject to mark to market accounting treatment, and their effects
are included in earnings at the time of contract performance.
Certain derivative contracts that hedge an exposure to variability in expected future cash
flows attributable to a particular risk or transaction have been designated as cash flow hedges.
Alleghenys hedge strategies include the use of derivative contracts to manage the variable price
risk related to forecasted sales and forecasted purchases of electricity. These contracts held at
December 31, 2010 expire at various dates through December 2012.
For cash flow hedges, changes in the fair value of the derivative contract are reported in
accumulated other comprehensive income (loss), to the extent they are effective at offsetting
changes in the hedged item, until earnings are affected by the hedged item. Changes in any
ineffective portion of the hedge are immediately recognized in earnings.
For derivative contracts that have not been designated as normal purchase or normal sales or
designated as part of a hedging relationship, any unrealized and realized gains and losses are
included in revenues or expenses on the Consolidated Statements of Income, depending on relevant
facts and circumstances.
The following table disaggregates the net fair values of derivative assets and liabilities by
class, before netting of cash collateral and FTR obligation, based on their level within the fair
value hierarchy at December 31, 2010. This table excludes derivatives that have been designated as
normal purchases or normal sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, 2010 |
|
(In millions) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Derivative assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power contracts |
|
$ |
1.5 |
|
|
$ |
15.5 |
|
|
$ |
0 |
|
|
$ |
17.0 |
|
FTRs |
|
|
0 |
|
|
|
0 |
|
|
|
117.3 |
|
|
|
117.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative assets |
|
|
1.5 |
|
|
|
15.5 |
|
|
|
117.3 |
|
|
|
134.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power contracts |
|
|
(8.3 |
) |
|
|
(9.5 |
) |
|
|
0 |
|
|
|
(17.8 |
) |
Interest rate swaps |
|
|
0 |
|
|
|
(2.1 |
) |
|
|
0 |
|
|
|
(2.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative liabilities |
|
|
(8.3 |
) |
|
|
(11.6 |
) |
|
|
0 |
|
|
|
(19.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative assets (liabilities) |
|
$ |
(6.8 |
) |
|
$ |
3.9 |
|
|
$ |
117.3 |
|
|
$ |
114.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table disaggregates the net fair values of derivative assets and
liabilities by class, before netting of cash collateral and FTR obligation, based on their level
within the fair value hierarchy at December 31, 2009. This table excludes derivatives that have
been designated as normal purchases or normal sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, 2009 |
|
(In millions) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Derivative assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power contracts |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Gas contracts |
|
|
31.9 |
|
|
|
0.2 |
|
|
|
0 |
|
|
|
32.1 |
|
FTRs |
|
|
0 |
|
|
|
0 |
|
|
|
96.2 |
|
|
|
96.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative assets |
|
|
31.9 |
|
|
|
0.2 |
|
|
|
96.2 |
|
|
|
128.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power contracts |
|
|
(4.7 |
) |
|
|
(21.3 |
) |
|
|
0 |
|
|
|
(26.0 |
) |
Gas contracts |
|
|
0 |
|
|
|
(0.1 |
) |
|
|
0 |
|
|
|
(0.1 |
) |
Interest rate swaps |
|
|
0 |
|
|
|
(8.1 |
) |
|
|
0 |
|
|
|
(8.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative liabilities |
|
|
(4.7 |
) |
|
|
(29.5 |
) |
|
|
0 |
|
|
|
(34.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative assets (liabilities) |
|
$ |
27.2 |
|
|
$ |
(29.3 |
) |
|
$ |
96.2 |
|
|
$ |
94.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Derivative assets and liabilities included in Level 1 primarily consist of
exchange-traded futures and other exchange-traded transactions that are valued using closing prices
for identical instruments in active markets. Derivative assets and liabilities included in Level 2
primarily consist of commodity forward contracts and interest rate swaps. Derivatives included in
Level 2 are valued using a pricing model with inputs that are observable in the market, such as
quoted forward prices of commodities, or that can be derived from or corroborated by observable
market data. Derivative assets included in Level 3 consist of FTRs and are valued using an internal
model based on data from PJM monthly and annual FTR auctions.
The following table shows the expected settlement year for derivative assets and liabilities
outstanding before netting of cash collateral and FTR obligation at December 31, 2010. This table
excludes derivatives that have been designated as normal purchases or normal sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2011 |
|
|
2012 |
|
|
Total |
|
Level 1 |
|
$ |
0 |
|
|
$ |
(6.8 |
) |
|
$ |
(6.8 |
) |
Level 2 |
|
|
9.5 |
|
|
|
(5.6 |
) |
|
|
3.9 |
|
Level 3 |
|
|
117.3 |
|
|
|
0 |
|
|
|
117.3 |
|
|
|
|
|
|
|
|
|
|
|
Net derivative assets (liabilities) |
|
$ |
126.8 |
|
|
$ |
(12.4 |
) |
|
$ |
114.4 |
|
|
|
|
|
|
|
|
|
|
|
The following table shows the expected settlement year for derivative assets and
liabilities outstanding before netting of cash collateral and FTR obligation at December 31, 2009.
This table excludes derivatives that have been designated as normal purchases or normal sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
Total |
|
Level 1 |
|
$ |
31.8 |
|
|
$ |
(1.0 |
) |
|
$ |
(3.6 |
) |
|
$ |
27.2 |
|
Level 2 |
|
|
(24.2 |
) |
|
|
(4.1 |
) |
|
|
(1.0 |
) |
|
|
(29.3 |
) |
Level 3 |
|
|
96.2 |
|
|
|
0 |
|
|
|
0 |
|
|
|
96.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative assets (liabilities) |
|
$ |
103.8 |
|
|
$ |
(5.1 |
) |
|
$ |
(4.6 |
) |
|
$ |
94.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables provide a reconciliation of the beginning and ending balance of FTR
derivative assets measured at fair value (Level 3):
|
|
|
|
|
|
|
|
|
(In millions) |
|
2010 |
|
|
2009 |
|
Balance at January 1 |
|
$ |
96.2 |
|
|
$ |
189.8 |
|
Total realized and unrealized gains (losses): |
|
|
|
|
|
|
|
|
Included in earnings, in operating revenues |
|
|
57.6 |
|
|
|
(164.2 |
) |
Included in regulatory assets or liabilities |
|
|
30.2 |
|
|
|
(82.9 |
) |
Purchases, issuances and settlements |
|
|
(66.7 |
) |
|
|
153.5 |
|
Transfers in / out of Level 3 |
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
Balance at December 31 |
|
$ |
117.3 |
|
|
$ |
96.2 |
|
|
|
|
|
|
|
|
Amount of total gains (losses) included in
earnings attributable to the change in unrealized gains
(losses) related to Level 3 assets held at December 31 |
|
$ |
18.3 |
|
|
$ |
(3.6 |
) |
|
|
|
|
|
|
|
There were no transfers between Level 1 and Level 2, and no transfers into or out of
Level 3, of the fair value hierarchy for the years ended December 31, 2010 and 2009. To the extent
that it has transfers between these levels, Allegheny accounts for the transfers at the end of the
reporting period.
The volume and expiration of Alleghenys derivative contracts at December 31, 2010 that did
not qualify for the normal purchase or normal sale exemption were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2011 |
|
|
2012 |
|
|
Total |
|
Electricity contracts (MWhs): |
|
|
|
|
|
|
|
|
|
|
|
|
Sales of power |
|
|
15.2 |
|
|
|
2.6 |
|
|
|
17.8 |
|
Purchases of power |
|
|
3.9 |
|
|
|
0.6 |
|
|
|
4.5 |
|
FTRs (MWhs) |
|
|
26.7 |
|
|
|
0 |
|
|
|
26.7 |
|
Gas contracts (decatherms): |
|
|
|
|
|
|
|
|
|
|
|
|
Sales of gas |
|
|
0.1 |
|
|
|
0 |
|
|
|
0.1 |
|
Purchases of gas |
|
|
0.1 |
|
|
|
0 |
|
|
|
0.1 |
|
51
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2011 |
|
|
2012 |
|
|
Total |
|
Interest rate swaps (notional dollars): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements (fixed rate to floating rate) |
|
$ |
200 |
|
|
$ |
0 |
|
|
$ |
200 |
|
Interest rate swap agreements (floating rate to fixed rate) |
|
$ |
200 |
|
|
$ |
0 |
|
|
$ |
200 |
|
Allegheny enters into derivative contracts for the sale or purchase of power to hedge the
variable price risks related to forecasted sales or purchases of power. To the extent that such
contracts qualify and are designated as cash flow hedging instruments, the effective portion of
unrealized gain or loss on the derivative contract is reported as a component of other
comprehensive income (OCI) and is subsequently reclassified into earnings in the period during
which the hedged forecasted transaction affects earnings. Allegheny had 7.2 million MWhs of
derivative electricity contracts that qualify and were designated as cash flow hedging instruments
at December 31, 2010. Changes in the fair value of derivative electricity contracts that are not
qualifying cash flow hedge instruments are reported in revenues on a mark-to-market basis.
Allegheny had 15.1 million MWhs of derivative electricity contracts that were not designated as
cash flow hedge instruments at December 31, 2010.
Allegheny entered into derivative contracts for the forward purchase and sale of gas to hedge
a portion of the value of a capacity contract related to the Kern River pipeline that did not
qualify for cash flow hedge accounting. The contracts settled in January 2011. Interest rate swaps
at December 31, 2010 include two interest rate swap agreements that expire during 2011 with an
aggregate notional value of $200 million that were entered into during 2003 to substantially offset
two existing interest rate swaps with the same counterparty. The 2003 agreements effectively locked
in a net liability and substantially eliminated future income volatility from the interest rate
swap positions but do not qualify for cash flow hedge accounting.
Allegheny also holds FTRs that generally represent an economic hedge of future congestion
charges that will be incurred in connection with its load obligations. These future obligations are
not reflected on Alleghenys Consolidated Balance Sheets, and the FTRs have not been designated as
cash flow hedge instruments. As a result, the timing of recognition of gains or losses on FTRs will
differ from the timing of power purchases, including incurred congestion charges. Allegheny
acquires its FTRs in an annual auction through a self-scheduling process involving the use of
auction revenue rights (ARRs) allocated to members of PJM that have load serving obligations.
Allegheny initially records FTRs and a FTR obligation payable to PJM at the annual FTR auction
price, and subsequently adjusts the carrying value of remaining FTRs to their estimated fair value
at the end of each accounting period prior to settlement. Changes in the fair value of FTRs held by
Alleghenys unregulated subsidiaries are included in operating revenues as unrealized gains or
losses. Unrealized gains or losses on FTRs held by Alleghenys regulated subsidiaries are recorded
as regulatory assets or liabilities.
Derivative contracts that have been designated as normal purchases or normal sales are not
subject to mark-to-market accounting treatment, and their effects are included in earnings at the
time of contract performance.
52
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The recorded fair values of derivatives at December 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power Contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FTR |
|
|
|
|
|
|
Balance |
|
|
|
|
|
|
|
|
|
|
|
Rate |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Obligation |
|
|
|
|
|
|
Sheet |
|
In millions |
|
Sales |
|
|
Purchases |
|
|
Swaps |
|
|
FTRs |
|
|
Derivatives |
|
|
Netting |
|
|
Derivatives |
|
|
(a) |
|
|
Collateral |
|
|
Derivatives |
|
Derivatives designated
as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
6.9 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
6.9 |
|
|
$ |
(6.9 |
) |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Long-term |
|
|
1.5 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1.5 |
|
|
|
(1.5 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivative
assets |
|
|
8.4 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
8.4 |
|
|
|
(8.4 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Derivative liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
(5.1 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(5.1 |
) |
|
|
5.1 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Long-term |
|
|
(0.4 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(0.4 |
) |
|
|
0.4 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivative
liabilities |
|
|
(5.5 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(5.5 |
) |
|
|
5.5 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
designated |
|
|
2.9 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
2.9 |
|
|
|
(2.9 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Derivatives not designated
as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
36.0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
117.3 |
|
|
|
153.3 |
|
|
|
(19.0 |
) |
|
|
134.3 |
|
|
|
(109.8 |
) |
|
|
0 |
|
|
|
24.5 |
|
Long-term |
|
|
(1.1 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(1.1 |
) |
|
|
1.1 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivative
assets |
|
|
34.9 |
|
|
|
0 |
|
|
|
0 |
|
|
|
117.3 |
|
|
|
152.2 |
|
|
|
(17.9 |
) |
|
|
134.3 |
|
|
|
(109.8 |
) |
|
|
0 |
|
|
|
24.5 |
|
Derivative liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
(23.5 |
) |
|
|
(2.7 |
) |
|
|
(2.1 |
) |
|
|
0 |
|
|
|
(28.3 |
) |
|
|
20.8 |
|
|
|
(7.5 |
) |
|
|
0 |
|
|
|
1.5 |
|
|
|
(6.0 |
) |
Long-term |
|
|
(4.2 |
) |
|
|
(8.2 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
(12.4 |
) |
|
|
0 |
|
|
|
(12.4 |
) |
|
|
0 |
|
|
|
5.0 |
|
|
|
(7.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivative
liabilities |
|
|
(27.7 |
) |
|
|
(10.9 |
) |
|
|
(2.1 |
) |
|
|
0 |
|
|
|
(40.7 |
) |
|
|
20.8 |
|
|
|
(19.9 |
) |
|
|
0 |
|
|
|
6.5 |
|
|
|
(13.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total not
designated |
|
|
7.2 |
|
|
|
(10.9 |
) |
|
|
(2.1 |
) |
|
|
117.3 |
|
|
|
111.5 |
|
|
|
2.9 |
|
|
|
114.4 |
|
|
|
(109.8 |
) |
|
|
6.5 |
|
|
|
11.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
$ |
10.1 |
|
|
$ |
(10.9 |
) |
|
$ |
(2.1 |
) |
|
$ |
117.3 |
|
|
$ |
114.4 |
|
|
$ |
0 |
|
|
$ |
114.4 |
|
|
$ |
(109.8 |
) |
|
$ |
6.5 |
|
|
$ |
11.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The FTR obligation at December 31, 2010 was $109.8 million and was payable to PJM in
approximately equal weekly amounts through the PJM planning year ending May 31, 2011. This
obligation has been netted against the FTR derivative asset balance on the consolidated
balance sheet. |
53
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The recorded fair values of derivatives at December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts |
|
|
Interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
|
|
|
|
|
|
|
|
|
-Kern |
|
|
Rate |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
FTR |
|
|
|
|
|
|
Sheet |
|
|
|
Power Contracts |
|
|
River |
|
|
Swaps |
|
|
FTRs |
|
|
Derivatives |
|
|
Netting |
|
|
Derivatives |
|
|
Obligation (a) |
|
|
Collateral |
|
|
Derivatives |
|
(In millions) |
|
Sales |
|
|
Purchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated
as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
0.3 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0.3 |
|
|
$ |
(0.3 |
) |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Long-term |
|
|
0.6 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0.6 |
|
|
|
(0.6 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivative
assets |
|
|
0.9 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0.9 |
|
|
|
(0.9 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Derivative liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
(12.1 |
) |
|
|
(4.8 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(16.9 |
) |
|
|
(1.4 |
) |
|
|
(18.3 |
) |
|
|
0 |
|
|
|
0.1 |
|
|
|
(18.2 |
) |
Long-term |
|
|
(1.5 |
) |
|
|
(5.9 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(7.4 |
) |
|
|
(0.3 |
) |
|
|
(7.7 |
) |
|
|
0 |
|
|
|
3.0 |
|
|
|
(4.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivative
liabilities |
|
|
(13.6 |
) |
|
|
(10.7 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(24.3 |
) |
|
|
(1.7 |
) |
|
|
(26.0 |
) |
|
|
0 |
|
|
|
3.1 |
|
|
|
(22.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
designated |
|
|
(12.7 |
) |
|
|
(10.7 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(23.4 |
) |
|
|
(2.6 |
) |
|
|
(26.0 |
) |
|
|
0 |
|
|
|
3.1 |
|
|
|
(22.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated
as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
0.9 |
|
|
|
0 |
|
|
|
44.4 |
|
|
|
0 |
|
|
|
96.2 |
|
|
|
141.5 |
|
|
|
(13.2 |
) |
|
|
128.3 |
|
|
|
(96.2 |
) |
|
|
(27.5 |
) |
|
|
4.6 |
|
Long-term |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivative
assets |
|
|
0.9 |
|
|
|
0 |
|
|
|
44.4 |
|
|
|
0 |
|
|
|
96.2 |
|
|
|
141.5 |
|
|
|
(13.2 |
) |
|
|
128.3 |
|
|
|
(96.2 |
) |
|
|
(27.5 |
) |
|
|
4.6 |
|
Derivative liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
(0.9 |
) |
|
|
(1.7 |
) |
|
|
(12.4 |
) |
|
|
(6.1 |
) |
|
|
0 |
|
|
|
(21.1 |
) |
|
|
14.9 |
|
|
|
(6.2 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
(6.2 |
) |
Long-term |
|
|
0 |
|
|
|
(0.9 |
) |
|
|
0 |
|
|
|
(2.0 |
) |
|
|
0 |
|
|
|
(2.9 |
) |
|
|
0.9 |
|
|
|
(2.0 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
(2.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivative
liabilities |
|
|
(0.9 |
) |
|
|
(2.6 |
) |
|
|
(12.4 |
) |
|
|
(8.1 |
) |
|
|
0 |
|
|
|
(24.0 |
) |
|
|
15.8 |
|
|
|
(8.2 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
(8.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
not
designated |
|
|
0 |
|
|
|
(2.6 |
) |
|
|
32.0 |
|
|
|
(8.1 |
) |
|
|
96.2 |
|
|
|
117.5 |
|
|
|
2.6 |
|
|
|
120.1 |
|
|
|
(96.2 |
) |
|
|
(27.5 |
) |
|
|
(3.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
$ |
(12.7 |
) |
|
$ |
(13.3 |
) |
|
$ |
32.0 |
|
|
$ |
(8.1 |
) |
|
$ |
96.2 |
|
|
$ |
94.1 |
|
|
$ |
0 |
|
|
$ |
94.1 |
|
|
$ |
(96.2 |
) |
|
$ |
(24.4 |
) |
|
$ |
(26.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The FTR obligation at December 31, 2009 was $127.9 million and was payable to PJM in
approximately equal weekly amounts through the PJM planning year ending May 31, 2010. Of this
obligation, $96.2 million has been netted against the FTR derivative asset balance and the
remaining $31.7 million is included in non-derivative current liabilities on the consolidated
balance sheet. |
The following table provides details on the changes in accumulated OCI relating to derivative
assets and liabilities that qualified for cash flow hedge accounting.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Accumulated OCI
derivative gain
(loss) at January 1
(before tax effect of
$(10.8) million,
$17.8 million and
$(2.7) million,
respectively) |
|
$ |
(27.6 |
) |
|
$ |
45.8 |
|
|
$ |
(7.0 |
) |
Effective portion of
changes in fair value
(before tax effect of
$13.6 million, $13.2
million and $14.7
million,
respectively) |
|
|
35.2 |
|
|
|
34.4 |
|
|
|
37.8 |
|
Reclassifications of
(gains) losses from
accumulated OCI to
earnings (before tax
effect of $3.6
million, $(41.8)
million and $5.8
million,
respectively) |
|
|
9.2 |
|
|
|
(107.8 |
) |
|
|
15.0 |
|
|
|
|
|
|
|
|
|
|
|
Accumulated OCI
derivative gain
(loss) at December 31
(before tax effect of
$6.5 million, $(10.8)
million and $17.8
million,
respectively) |
|
$ |
16.8 |
|
|
$ |
(27.6 |
) |
|
$ |
45.8 |
|
|
|
|
|
|
|
|
|
|
|
Derivative gains included in accumulated OCI in the amount of $18.1 million, before tax,
are expected to be reclassified to earnings over the next twelve months.
54
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table shows the location and amounts of gains (losses) on derivatives designated
as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Gain (loss) recognized in OCI (effective portion) |
|
$ |
35.2 |
|
|
$ |
34.4 |
|
|
$ |
37.8 |
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) reclassified from accumulated OCI into operating revenues (effective portion) |
|
$ |
(9.2 |
) |
|
$ |
107.8 |
|
|
$ |
(15.0 |
) |
|
|
|
|
|
|
|
|
|
|
Gain or (loss) recognized in operating revenues (ineffective portion) |
|
$ |
(13.9 |
) |
|
$ |
1.1 |
|
|
$ |
3.2 |
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on derivative instruments not designated or qualifying as cash
flow hedge instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Recorded in operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
6.1 |
|
|
$ |
6.0 |
|
|
$ |
5.1 |
|
Mark-to-market power contracts |
|
|
(5.2 |
) |
|
|
(12.1 |
) |
|
|
10.5 |
|
Gas contracts |
|
|
(32.0 |
) |
|
|
3.5 |
|
|
|
28.5 |
|
FTRs |
|
|
21.9 |
|
|
|
33.2 |
|
|
|
(36.8 |
) |
Recorded in fuel expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Coal purchase contractsPRB |
|
|
0 |
|
|
|
(8.2 |
) |
|
|
8.2 |
|
Recorded in regulatory liabilities (assets): |
|
|
|
|
|
|
|
|
|
|
|
|
FTRs |
|
|
11.5 |
|
|
|
15.9 |
|
|
|
(17.8 |
) |
Coal purchase contractsPRB |
|
|
0 |
|
|
|
(7.2 |
) |
|
|
7.2 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2.3 |
|
|
$ |
31.1 |
|
|
$ |
4.9 |
|
|
|
|
|
|
|
|
|
|
|
Credit Related Contingent Features
Certain of Alleghenys derivative contracts contain collateral posting requirements tied to
its credit ratings that would require posting of additional collateral in the event of a credit
rating downgrade. The aggregate fair value of these derivative contracts that were in a liability
position, disregarding any contractual netting arrangements, at December 31, 2010 was $4.6 million,
for which Allegheny had posted no collateral. A one level downgrade in AE Supplys senior unsecured
credit rating at December 31, 2010 would have required the posting of $1.3 million of collateral
for such derivative contracts in a liability position. A downgrade in AE Supplys senior unsecured
credit rating at December 31, 2010 to below Standard & Poors BB- or Moodys Ba3 would have
required the posting of $2.4 million of collateral for such derivative contracts in a liability
position.
Credit Exposure
Allegheny and its subsidiaries have credit exposure to energy trading counterparties. The
majority of these exposures are the fair value of multi-year contracts for energy sales and
purchases. If these counterparties fail to perform their obligations under such contracts,
Allegheny and its subsidiaries would experience lower revenues or higher costs to the extent that
replacement sales or purchases could not be made at the same prices as those under the defaulted
contracts.
Alleghenys wholesale credit risk is the replacement cost for outstanding contracts and
amounts owed to or due from counterparties for completed transactions. The replacement cost of open
positions represents unrealized gains, net of any unrealized losses in circumstances in which
Allegheny has a legally enforceable right of setoff. Allegheny and its subsidiaries have credit
policies to manage credit risk, including the use of an established credit approval process, daily
monitoring of counterparty positions and the use of master netting agreements. These agreements
include credit mitigation provisions, such as margin, prepayment or other form of collateral
acceptable to the counterparty. Allegheny may request additional credit assurance in the event that
a counterpartys credit ratings fall below investment grade or its exposures exceed an established
credit limit.
NOTE 15: PURCHASE OF HYDROELECTRIC GENERATION FACILITIES
In December 2009, Allegheny purchased two hydroelectric generation facilities located at
Allegheny Lock and Dam 5 and 6 in Freeport, Pennsylvania with a nominal maximum generation capacity
of 13 MW. This purchase effectively settled existing power purchase agreements under which
Allegheny purchased the power generated by these facilities through 2034. Accordingly, at the
transaction closing date, Allegheny recorded a credit to purchased power expense in the amount
of $10.6 million, representing the fair value of the power agreements at that date. The purchase of
the facilities was accounted for as a business combination for which the total consideration was
$12.6 million consisting of a cash payment of approximately $2.0 million plus the fair value of the
power purchase agreements. The fair value of the net assets acquired exceeded the total
consideration paid by $6.7 million, representing a bargain purchase that was credited to operations
and maintenance expense.
55
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 16: JOINTLY OWNED BATH COUNTY GENERATION FACILITY
AGCs sole asset is a 40% undivided interest in the Bath County, Virginia pumped-storage
hydroelectric generation facility and its connecting transmission facilities. All of AGCs revenues
are derived from sales of its 1,109 MW share of generation capacity from the Bath County generation
facility to AE Supply and Monongahela. AGC records a prorated share of all expenditures related to
its interest in the Bath County generation facility. AGC is consolidated with Allegheny through its
subsidiary, AE Supply. AGCs investment and accumulated depreciation in its 40% interest in the
Bath County generation facility, at December 31 were as follows:
|
|
|
|
|
|
|
|
|
(In millions) |
|
2010 |
|
|
2009 |
|
Property, plant and equipment |
|
$ |
834.0 |
|
|
$ |
833.3 |
|
Accumulated depreciation |
|
$ |
363.5 |
|
|
$ |
346.4 |
|
NOTE 17: FAIR VALUE OF FINANCIAL INSTRUMENTS
See Note 14, Fair Value Measurements, Derivative Instruments and Hedging Activities, for
information regarding assets and liabilities that are recorded at fair value on Alleghenys
consolidated balance sheets.
As of December 31, 2010 and 2009, the carrying amounts of accounts receivable and accounts
payable are representative of fair value because of their short-term nature. The carrying amounts
and estimated fair values of long-term debt, including long-term debt due within one year, net of
unamortized debt discounts of $7.5 million and $7.4 million at December 31, 2010 and 2009,
respectively were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
(In millions) |
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
Long-term debt |
|
$ |
4,701.5 |
|
|
$ |
4,873.2 |
|
|
$ |
4,557.8 |
|
|
$ |
4,729.1 |
|
The fair value of long-term debt was estimated based on actual market prices or market prices
of similar debt issues.
Allegheny also has certain assets and liabilities that are recorded at fair value relating to
pension plan assets and derivative instruments. See Note 12, Pension Benefits and Postretirement
Benefits Other Than Pensions and Note 14, Fair Value Measurements, Derivative Instruments and
Hedging Activities, for additional information.
NOTE 18: GOODWILL AND INTANGIBLE ASSETS
Alleghenys consolidated balance sheets at December 31, 2010 and 2009 included goodwill of
$367.3 million, which was attributable to the unregulated generation operations of AE Supply, a
reporting unit that substantially comprises Alleghenys Merchant Generation segment.
Allegheny tests goodwill for possible impairment on an annual basis as of August 31 of each
year and at any other time if events or changes in circumstances make it likely that the fair value
of the reporting unit has decreased below its carrying amount.
Goodwill is tested for impairment using a fair value based approach. The first step of the
test consists of comparing the reporting units fair value to its carrying value, including the
goodwill allocated to the reporting unit. If the reporting units fair value exceeds its carrying
amount, the reporting units goodwill is considered not impaired. If the carrying amount of the
reporting unit exceeds its fair value, a second step is performed to measure the amount of the
impairment loss, if any. The second step requires a calculation of the implied fair value of the
reporting units goodwill determined in the same manner as the amount of goodwill recorded in a
business combination. This implied fair value is then compared to the carrying amount of the
goodwill. If the carrying amount of the goodwill exceeds its implied fair value, an impairment loss
is recognized.
Allegheny performed its annual goodwill impairment test as of August 31, 2010. The estimated
fair value of the reporting unit exceeded its carrying amount by a significant amount and,
therefore, no goodwill impairment was indicated at that date. The fair value was estimated using a
combination of a discounted cash flow analysis approach and a market based approach that estimates
fair value
based on market multiples of earnings before interest, taxes, depreciation and amortization
for other merchant generators. Significant assumptions used in estimating the fair value of the
reporting unit include, among others, discount and growth rates, future energy and capacity prices,
plant performance, operating and capital expenditures, environmental regulations, and the selection
of comparable companies used in the market based approach.
56
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Intangible assets included in Property, plant and equipment, net on the Consolidated Balance
Sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
Accumulated |
|
(In millions) |
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amortization |
|
Land easements, amortized |
|
$ |
109.0 |
|
|
$ |
32.4 |
|
|
$ |
108.6 |
|
|
$ |
32.1 |
|
Land easements, unamortized |
|
|
30.7 |
|
|
|
0 |
|
|
|
32.3 |
|
|
|
0 |
|
Software |
|
|
70.1 |
|
|
|
38.7 |
|
|
|
70.3 |
|
|
|
31.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
209.8 |
|
|
$ |
71.1 |
|
|
$ |
211.2 |
|
|
$ |
63.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for intangible assets was $12.4 million in 2010, $12.6 million in
2009 and $12.2 million in 2008.
Future amortization expense for intangible assets at December 31, 2010 is estimated as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
Annual amortization expense |
|
$ |
12.1 |
|
|
$ |
11.1 |
|
|
$ |
9.6 |
|
|
$ |
3.2 |
|
|
$ |
2.0 |
|
NOTE 19: ASSET RETIREMENT OBLIGATIONS (ARO)
Allegheny has AROs primarily related to ash landfills, underground and aboveground storage
tanks, asbestos contained in its generation facilities, wastewater treatment lagoons and
transformers containing polychlorinated biphenyls (PCBs).
The following table provides a reconciliation of the beginning and ending ARO liability for
2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Balance at January 1 |
|
$ |
55.2 |
|
|
$ |
48.9 |
|
|
$ |
61.0 |
|
Accretion of ARO liability |
|
|
5.3 |
|
|
|
4.8 |
|
|
|
6.1 |
|
Liabilities incurred in the current period: |
|
|
|
|
|
|
|
|
|
|
|
|
Ash disposal sites |
|
|
6.1 |
|
|
|
3.5 |
|
|
|
0 |
|
Liabilities settled: |
|
|
|
|
|
|
|
|
|
|
|
|
Storage tanks |
|
|
(5.2 |
) |
|
|
0 |
|
|
|
0 |
|
Asbestos removal |
|
|
(2.1 |
) |
|
|
(1.8 |
) |
|
|
(0.5 |
) |
Ash disposal sites |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
Other |
|
|
0 |
|
|
|
0 |
|
|
|
(0.1 |
) |
Revision in estimated cash flows: |
|
|
|
|
|
|
|
|
|
|
|
|
Ash disposal sites |
|
|
0 |
|
|
|
0 |
|
|
|
(13.9 |
) |
Wastewater treatment lagoons |
|
|
0 |
|
|
|
0 |
|
|
|
(2.4 |
) |
Asbestos |
|
|
0 |
|
|
|
0 |
|
|
|
(1.2 |
) |
Liability associated with assets held for sale |
|
|
0 |
|
|
|
(0.1 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31 |
|
$ |
59.2 |
|
|
$ |
55.2 |
|
|
$ |
48.9 |
|
|
|
|
|
|
|
|
|
|
|
Allegheny believes it is probable that it will recover the ARO costs incurred by its
regulated companies in rates. Therefore, it records costs currently incurred for AROs as a
reduction to the recorded regulatory liability or it establishes a regulatory asset depending on
the rate recovery mechanism of the specific jurisdiction. See Note 7, Regulatory Assets and
Liabilities for a discussion of the regulatory assets and liabilities associated with asset
retirement and removal costs.
NOTE 20: ADVERSE POWER PURCHASE COMMITMENT LIABILITY
In May 1998, the Pennsylvania PUC issued an order approving a transition plan for West Penn.
This order was amended by a settlement agreement approved by the Pennsylvania PUC in November 1998.
West Penn recorded an extraordinary charge in 1998 to reflect the disallowances of certain costs in
the order. This charge included an estimated amount for an adverse power purchase commitment
reflecting the commitment to purchase power at above-market prices. The adverse power purchase
commitment liability is being amortized over the life of the commitment based on a schedule of
estimated electricity purchases used to determine the amount of the charge.
57
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2010, Alleghenys reserve for adverse power purchase commitments was $114.4
million, including a current liability of $18.1 million. Alleghenys liability for adverse power
purchase commitments decreased as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Amortization of liability for adverse power purchase commitments |
|
$ |
17.9 |
|
|
$ |
17.5 |
|
|
$ |
17.1 |
|
These decreases in the reserve for adverse power purchase commitments are recorded as expense
reductions in Purchased power and transmission on the Consolidated Statements of Income.
NOTE 21: OTHER INCOME (EXPENSE), NET
Other income (expense), net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Interest and dividend income |
|
$ |
2.3 |
|
|
$ |
1.8 |
|
|
$ |
7.3 |
|
Equity component of AFUDC |
|
|
6.3 |
|
|
|
5.0 |
|
|
|
3.7 |
|
Income from equity investments |
|
|
4.7 |
|
|
|
0.1 |
|
|
|
1.8 |
|
Cash received from a former trading executives forfeited assets |
|
|
0 |
|
|
|
0 |
|
|
|
1.6 |
|
Other |
|
|
0 |
|
|
|
0.1 |
|
|
|
7.9 |
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net |
|
$ |
13.3 |
|
|
$ |
7.0 |
|
|
$ |
22.3 |
|
|
|
|
|
|
|
|
|
|
|
NOTE 22: GUARANTEES AND LETTERS OF CREDIT
In connection with certain sales, acquisitions and financings, and in the normal course of
business, AE and its subsidiaries enter into various agreements that may include guarantees or
require the issuance of letters of credit. AE has a $250 million revolving credit facility, any
unutilized portion of which is available to AE for the issuance of letters of credit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
|
Amounts |
|
|
Total |
|
|
Amounts |
|
|
Total |
|
|
|
Recorded on |
|
|
Guarantees |
|
|
Recorded on |
|
|
Guarantees |
|
|
|
the Consolidated |
|
|
and Letters |
|
|
the Consolidated |
|
|
and Letters |
|
(In millions) |
|
Balance Sheet |
|
|
of Credit |
|
|
Balance Sheet |
|
|
of Credit |
|
Guarantees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase, sale, exchange or
transportation of wholesale natural gas,
electric power and related services (a) |
|
$ |
0 |
|
|
$ |
84.2 |
|
|
$ |
0 |
|
|
$ |
95.2 |
|
Loans and other financing-related matters |
|
|
0 |
|
|
|
5.9 |
|
|
|
0 |
|
|
|
6.4 |
|
Lease agreement (a) |
|
|
0 |
|
|
|
5.0 |
|
|
|
0 |
|
|
|
5.0 |
|
Other |
|
|
0 |
|
|
|
0 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Guarantees |
|
$ |
0 |
|
|
$ |
95.1 |
|
|
$ |
0.2 |
|
|
$ |
106.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of Credit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under AEs Revolving Facility (b) |
|
$ |
0 |
|
|
$ |
3.1 |
|
|
$ |
0 |
|
|
$ |
3.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Letters of Credit |
|
$ |
0 |
|
|
$ |
3.1 |
|
|
$ |
0 |
|
|
$ |
3.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Guarantees and Letters of Credit |
|
$ |
0 |
|
|
$ |
98.2 |
|
|
$ |
0.2 |
|
|
$ |
110.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Amounts represent AE guarantees on behalf of its subsidiaries. |
|
(b) |
|
These amounts were comprised of a letter of credit issued in connection with a contractual
obligation of Allegheny Ventures. |
NOTE 23: VARIABLE INTEREST ENTITIES
GAAP requires the primary beneficiary of a Variable Interest Entity (VIE) to
consolidate the entity and also requires majority and significant variable interest investors to
provide certain disclosures. A VIE is an entity in which the equity investors do not have
sufficient equity at risk for the entity to finance its activities without additional subordinated
financial support, or as a group, the holders of the equity investment at risk lack any one of the
following characteristics: a) the power, through voting rights or similar rights, to direct the
activities of an entity that most significantly impact the entitys economic performance, b) the
obligation to
absorb the expected losses of the entity or c) the right to receive the expected residual
returns of the entity.
58
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Independent Power Producer (IPP) contracts. Potomac Edison and West Penn each have a
long-term electricity purchase contract with unrelated IPPs. Allegheny periodically requests from
these IPPs the information necessary to determine whether these entities are VIEs and whether
Allegheny is the primary beneficiary. Allegheny has been unable to obtain the requested
information, which was determined by the IPPs to be proprietary.
Potomac Edison purchased power from an IPP in the amounts of $116.7 million, $96.4 million and
$113.3 million for the years ended December 31, 2010, 2009 and 2008, respectively. West Penn
purchased power from an IPP in the amounts of $42.7 million, $42.5 million and $40.8 million for
the years ended December 31, 2010, 2009 and 2008, respectively. Neither Potomac Edison nor West
Penn is subject to any risk of loss associated with the applicable potential VIE, because neither
has any obligation to the applicable IPP other than to purchase the power that the IPP produces
according to the terms of the applicable electricity purchase contract.
APS Constellation, LLC (APS Constellation). Allegheny Ventures, Inc., a non-utility
subsidiary of AE, formed a partnership in 1995 with an unregulated business of Constellation Energy
in a joint venture energy services company named APS Constellation. The business purpose of APS
Constellation is the marketing, development, and implementation of energy conservation projects.
APS Constellation, working under an Engineer/Procure/Construct agreement as a subcontractor for
Potomac Edison, completed multiple energy conservation projects for Potomac Edisons government
customers at Ft. Detrick, Maryland. The projects resulted in performance payments and other fees
remitted to APS Constellation. APS Constellation securitized the future revenue streams from the
projects through several financings and made a partnership distribution of the proceeds. Some of
the project financings required Potomac Edison to provide ongoing guarantees. In 2005, the joint
venture operating agreement was amended to limit Alleghenys obligations and participation in APS
Constellation. The accounts of APS Constellation are not included in Alleghenys Consolidated
Financial Statements because Allegheny does not have the power to direct activities that most
significantly impact APS Constellations economic performance.
At December 31 2010, Alleghenys maximum exposure to loss related to APS Constellation
consisted of a $0.7 million equity investment in APS Constellation, a letter of credit guarantee of
$3.1 million and recourse guarantees of $5.9 million. At December 31, 2009, Alleghenys maximum
exposure to loss related to APS Constellation consisted of a $0.7 million equity investment in APS
Constellation, a letter of credit guarantee of $3.2 million and recourse guarantees of $6.4
million. These guarantees are not recorded on Alleghenys Consolidated Balance Sheet.
PATH-WV. As described in Note 1, Business, Basis of Presentation and Significant Accounting
Policies, PATH-WV is owned equally by Allegheny and AEP. As described in Note 3, Recently Adopted
and Recently Issued Accounting Standards, Allegheny deconsolidated PATH-WV from its financial
statements effective January 1, 2010, and accounts for its investment in PATH-WV under the equity
method. Allegheny and AEP provide certain services to PATH-WV and make capital contributions to
PATH-WV as needed. At December 31, 2010, Alleghenys consolidated balance sheet included
Alleghenys investment in PATH-WV on the equity method of accounting in the amount of $23.6
million. At December 31, 2009, Alleghenys consolidated balance sheet included property, plant and
equipment of PATH-WV in the amount of approximately $35.8 million, cash and cash equivalents of
$3.4 million and noncontrolling interest related to AEPs ownership of approximately $14.9 million.
Alleghenys consolidated statement of income for the year ended December 31, 2010 included other
income of $3.5 million, representing Alleghenys 50% equity in the pre-tax earnings of PATH-WV.
Alleghenys consolidated statement of income for year ended December 31, 2009 included revenues of
$10.8 million, operating income of $4.4 million and net income attributable to noncontrolling
interest of $1.3 million.
Allegheny expects to make capital contributions to PATH-WV to support its construction
projects. Because of the nature of PATH-WVs operations and its FERC-approved rate mechanism,
Alleghenys maximum exposure to loss consists of its advances to, and investment in, PATH-WV, which
were $0.5 million and $23.6 million, respectively, at December 31, 2010.
Energy Insurance Services, Inc. Allegheny has entered into an insurance arrangement with
Energy Insurance Services, Inc. (EIS). EIS has multiple protected cells and writes policies for
Allegheny in one segregated cell, referred to as Mutual Business Program No. 2 (the Program).
Neither Allegheny nor its subsidiaries have an equity investment in EIS. The Program is governed by
a Participation Agreement that limits claims paid on policies that are not reinsured to premium
payments made by Allegheny, contributions to surplus and any investment returns on those premiums
less expenses. The accounts of EIS are included in Alleghenys Consolidated Financial Statements
because Allegheny has determined it has a controlling financial interest in EIS. Insurance premiums
for the Program were $8.7 million and $9.8 million for the years ended December 31, 2010 and 2009,
respectively. At December 31, 2010, total assets were $19.6 million, consisting primarily of
investments, and total liabilities were $14.8 million, consisting primarily of claim reserves. At
December 31, 2009, total assets were $18.5 million, consisting primarily of investments, and total
liabilities were $13.7 million, consisting primarily of claim reserves At December 31, 2010 and
2009, Alleghenys maximum exposure to loss related to EIS consisted of a $4.8 million equity
investment in EIS recorded on its Consolidated Balance Sheet.
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NOTE 24: ACQUISITION OF NONCONTROLLING INTEREST IN AE SUPPLY
On January 25, 2008, Allegheny and Merrill Lynch entered into a settlement agreement that
resolved litigation between the two parties related to a dispute regarding Alleghenys purchase of
Merrill Lynchs energy marketing and trading business in 2001. As a result of this settlement,
Allegheny reversed its previously recorded accrued interest liability of $54.7 million through a
credit to interest expense during the fourth quarter of 2007.
On March 31, 2008, in accordance with the settlement agreement, Allegheny made a cash payment
to Merrill Lynch in the amount of $50 million, and Merrill Lynch conveyed to Allegheny its
approximately 1.5% equity interest in AE Supply. Allegheny recorded the acquisition of Merrill
Lynchs noncontrolling interest in AE Supply using the purchase method of accounting. Under the
purchase method of accounting, the purchase price was allocated to individual assets acquired and
liabilities assumed based on the fair values of such assets and liabilities. The purchase
accounting adjustments will be amortized against income over the estimated lives of the individual
assets and liabilities, ranging from 3 years to 30 years. No goodwill was recorded. The effects of
the purchase accounting adjustments are not expected to materially impact Alleghenys financial
results for any period. Allegheny ceased recording expense relating to the noncontrolling interest
in AE Supply as of January 1, 2008.
NOTE 25: COMMITMENTS AND CONTINGENCIES
Allegheny is involved in a number of significant legal proceedings. In certain cases,
plaintiffs seek to recover large and sometimes unspecified damages, and some matters may be
unresolved for several years. Allegheny cannot currently determine the outcome of the proceedings
described below or the ultimate amount of potential losses. Management provides for estimated
losses to the extent that information becomes available indicating that losses are probable and
that the amounts are reasonably estimable. Additional losses may have an adverse effect on
Alleghenys results of operations, cash flows and financial condition.
Environmental Matters and Litigation
The operations of Alleghenys owned facilities, including its generation facilities, are
subject to various federal, state and local laws, rules and regulations as to air and water
quality, hazardous and solid waste disposal and other environmental matters, some of which may be
uncertain. Compliance may require Allegheny to incur substantial additional costs to modify or
replace existing and proposed equipment and facilities.
Global Climate Change. The United States relies on coal-fired power plants for more than 45%
of its energy. However, coal-fired power plants have come under scrutiny due to their emission of
gases implicated in climate change, primarily carbon dioxide, or CO2.
Allegheny produces approximately 95% of its electricity at coal-fired facilities and currently
produces approximately 45 million tons of CO2 annually through its energy
production. While there are many unknowns concerning the final regulation of greenhouse gases in
the United States, federal and/or state legislation and implementing regulations addressing climate
change, including limits on emissions of CO2, likely will be adopted some
time in the future. Thus, CO2 legislation and regulation, if not reasonably
designed, could have a significant impact on Alleghenys operations. To date Congress has not
passed any CO2 specific law.
The U.S. Environmental Protection Agency (the EPA) is moving to regulate greenhouse gas
emissions under the Clean Air Act of 1970 (the Clean Air Act). On December 7, 2009, the EPA
announced its Greenhouse Gas Endangerment Finding, stating that greenhouse gas emissions from cars
and light trucks, when mixed in the atmosphere, endanger public health. The finding provides the
EPA with a basis on which to regulate greenhouse gas emissions from vehicle tailpipes under the
provisions of the Clean Air Act. Once a pollutant is regulated under the Clean Air Act for one
source category, the EPA has authority to apply similar regulations to other source categories. On
April 1, 2010, the EPA and the Department of Transportations National Highway Traffic Safety
Administration (NHTSA) announced a joint final rule that applies to passenger cars, light-duty
trucks and medium-duty passenger vehicles, covering model years 2012 through 2016. Under the Clean
Air Act, regulation of greenhouse gas emissions from vehicles also triggers requirements for new
and modified stationary sources to control greenhouse gas emissions under the Prevention of
Significant Deterioration (PSD) program. Regulation of the stationary sources will be implemented
through the final version of the tailoring rule issued on June 3, 2010. The tailoring rule became
effective on January 2, 2011. For six months, only new and modified sources already required to
control emissions of other air pollutants will be required to control greenhouse gas emissions.
Beginning July 1, 2011, new sources above 100,000 tons per year and modified existing sources with
emissions increases above 75,000 tons per year (which may include Alleghenys facilities, but only
to the extent any modifications to those facilities triggers application of the rule) will be
required to control emissions.
There is a gap between the current capabilities of technology and the desired reduction levels
contemplated by past legislative proposals; no current commercial-scale technology exists to enable
many of the reduction levels discussed in past national, regional and state proposals. Such
technology may not become available within a timeframe consistent with the implementation of any
future
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ALLEGHENY ENERGY INC. AND SUBSIDIARIES
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climate control initiatives or at all. To the extent that such technology does become
available, Allegheny can provide no assurance that
it will be suitable for installation at Alleghenys generation facilities on a cost effective
basis or at all. Based on estimates from a 2007 Department of Energy National Electric Technology
Laboratory report and recently announced projects by other entities, it could cost in the range of
$4,800 to $5,500 per kW to replace existing coal-based power generation with fossil fuel stations
capable of capturing and sequestering CO2 emissions. However, exact estimates
are difficult because of the lack of distinctive rules and the current lack of deployable
technology.
Regardless of the eventual mechanism for limiting CO2 emissions,
compliance will be a major and costly challenge for Allegheny, its customers and the region in
which it operates. Most notable will be the potential impact on customer bills and disproportionate
increases in energy cost in areas that have built their energy and industrial infrastructure over
the past century based on coal-fired electric generation.
Because the regulatory/legislative process and applicable technology each is in its infancy,
it is difficult for Allegheny to aggressively implement greenhouse gas emission expenditures until
the exact nature and requirements of any regulation are known and the capabilities of control or
reduction technologies are more fully understood. Alleghenys current strategy in response to
climate change initiatives focuses on:
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maintaining an accurate CO2 emissions database; |
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improving the efficiency of its existing coal-burning generation facilities; |
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following developing technologies for clean-coal energy and for
CO2 emission controls at coal-fired power plants, including carbon
sequestration; |
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analyzing options for future energy investment (e.g., renewables, clean-coal, etc.);
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improving demand-side efficiency programs, as evidenced by customer conservation
outreach plans and Alleghenys Watt Watchers initiatives. |
Alleghenys energy portfolio also includes approximately 1,180 MWs of renewable hydroelectric
and pumped storage power generation. Allegheny obtained a permit to allow for a limited use of
bio-mass (wood chips and saw dust) at one of its coal-fired power stations in West Virginia and
currently has approval to use waste-tire derived fuel at another of its coal-based power stations
in West Virginia.
Allegheny is participating in the dialogue that will shape the regulatory landscape
surrounding CO2 emissions. Additionally, Allegheny intends to pursue proven
and cost-effective measures to manage its emissions while maintaining an affordable and reliable
supply of electricity for its customers.
Clean Air Act Compliance and State Air Quality Initiatives. Allegheny currently meets
applicable standards for particulate matter emissions at its generation facilities through the use
of high-efficiency electrostatic precipitators, cleaned coal, flue-gas conditioning, optimization
software, fuel combustion modifications and, at times, through other means. From time to time,
minor excursions of stack emission opacity that are normal to fossil fuel operations are
experienced and are accommodated by the regulatory process.
Alleghenys compliance with the Clean Air Act has required, and may require in the future,
that Allegheny install control technologies on many of its generation facilities at significant
cost. The proposed Clean Air Transport Rule (CATR) released by the EPA on July 6, 2010 may
accelerate the need to install this equipment by phasing out a portion of the currently available
allowances, limiting trading and accelerating federal emission reduction goals. The proposed CATR
replaces certain portions of the Clean Air Interstate Rule (CAIR). In June 2008, the U.S. Court
of Appeals for the District of Columbia vacated CAIR, which would have required reductions of
SO2 and NOX emissions in two phases beginning in 2010
and 2015. In December 2008, the Court reconsidered its prior ruling and allowed CAIR to remain in
effect until replaced by a new EPA rule.
Following the February 2008 vacature of EPAs 2005 Clean Air Mercury Rule (CAMR) by the U.S.
Court of Appeals for the District of Columbia, the EPA announced plans to propose a new maximum
achievable control technology rule for hazardous air pollutant emissions from electric utility
steam generating units in March 2011. The EPA plans to finalize the new rule by November 2011.
Allegheny is monitoring the EPAs efforts to promulgate hazardous air pollutant rules that will
include, but will not be limited to, mercury limits. To establish these standards, the EPA must
identify the best performing 12% of sources in each source category and, to that end, issued an
information request to members of the fossil fuel-fired generating industry requiring extensive
stack emissions testing on selected generating units. Allegheny completed stack testing for eight
of its generating units identified by EPA and submitted all results by September 2010. Depending on
the final hazardous air pollution limits set by the EPA, Allegheny could incur significant costs
for additional control equipment.
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ALLEGHENY ENERGY INC. AND SUBSIDIARIES
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Additionally, Maryland passed the Healthy Air Act in early 2006. This legislation imposes
state-wide emission caps on SO2 and NOX, requires
mercury emissions and mandates that Maryland join the Regional Greenhouse Gas Initiative (RGGI)
and participate in that coalitions regional efforts to reduce CO2 emissions.
On April 20, 2007, Marylands governor signed on to RGGI, as a result of which Maryland became the
10th state to join the Northeast regional climate change and energy efficiency program. The Healthy
Air Act provides a conditional exemption for the R. Paul Smith power station for
NOX, SO2 and mercury, based on a PJM declaration that
the station is vital to reliability in the Baltimore/Washington DC metropolitan area, which PJM
determined in 2006. Pursuant to the legislation, the Maryland Department of the Environment (the
MDE) passed alternate NOX and SO2 limits for R. Paul
Smith, which became effective in April 2009. However, R. Paul Smith is still required to meet the
Healthy Air Act mercury reductions of 80% beginning in 2010. The statutory exemption does not
extend to R. Paul Smiths CO2 emissions. Maryland issued final regulations to
implement RGGI requirements in February 2008. Ten RGGI auctions have been held through the end of
calendar year 2010. RGGI allowances are also readily available in the allowance markets, affording
another mechanism by which to secure necessary allowances.
AE Supply and Monongahela comply with current SO2 emission standards
through a system-wide plan, combining the use of emission controls, low sulfur fuel and emission
allowances. Allegheny continues to evaluate and implement options for compliance. It completed the
elimination of a partial bypass of Scrubbers at its Pleasants generation facility in December 2007
and the construction of Scrubbers at its Hatfields Ferry and Fort Martin generating facilities in
2009. Allegheny now has Scrubbers installed and operating on all ten of the units at its four
supercritical generating facilities and at Mitchell Unit 3.
Alleghenys NOX compliance plan functions on a system-wide basis,
similar to its SO2 compliance plan. Pending finalization of the CATR, AE
Supply and Monongahela also have the option, in some cases, to purchase alternate fuels or
NOX allowances, if needed, to supplement their compliance strategies.
Allegheny currently has installed selective non-catalytic reduction equipment at its Fort Martin
and Hatfields Ferry generating stations and selective catalytic reduction equipment at its
Harrison and Pleasants generating stations, together with other NOX controls
at these supercritical generating facilities, as well as its other generating facilities.
On January 8, 2010, the West Virginia Department of Environmental Protection (WVDEP) issued
a Notice of Violation for opacity emissions at Alleghenys Pleasants generating facility. Allegheny
will be installing a wet reagent injection system in 2011 to control the opacity.
Clean Water Act Compliance. In 2004, the EPA issued a final rule requiring all existing power
plants with once-through cooling water systems withdrawing more than 50 million gallons of water
per day to meet certain standards to reduce mortality of aquatic organisms pinned against the water
intake screens or, in some cases, drawn through the cooling water system. The standards varied
based on the type and size of the water bodies from which the plants draw their cooling water.
In January 2007, the Second Circuit Court of Appeals issued a decision on appeal that remanded
a significant portion of the rule to the EPA. As a result, the EPA suspended the rule, except for a
requirement, which existed prior to the EPAs adoption of the 2004 rule, that permitting agencies
use best professional judgment (BPJ) to determine the best technology available for minimizing
adverse environmental impacts for existing facility cooling water intakes. Pending re-issuance of
the 2004 rule by the EPA, permitting agencies thus will rely on BPJ determinations during permit
renewal at existing facilities.
On April 1, 2009, the U.S. Supreme Court reversed the appeals court decision and upheld the
EPAs authority to use cost/benefit analysis. EPA plans to issue a proposed rule addressing the
issues remanded by the Court in 2011 and to issue a final rule in 2012. Depending on the standards
set by the EPA when it reissues this rule, Allegheny could incur significant costs for additional
control equipment.
Monongahela River Water Quality. In late 2008, the PA DEP imposed water quality criteria for
certain effluents, including total dissolved solid (TDS) and sulfate concentrations in the
Monongahela River, on new and modified sources, including the Scrubber project at the Hatfields
Ferry generation facility. These criteria are reflected in the current PA DEP water discharge
permit for that project. AE Supply appealed the PA DEPs permitting decision, which would require
it to incur significant costs or negatively affect its ability to operate the Scrubbers as
designed. Preliminary studies indicate an initial capital investment of approximately $62 million
in order to install technology to meet the TDS and sulfate limits in the permit. The permit has
been independently appealed by Environmental Integrity Project and Citizens Coal Council who seek
to impose more stringent technology-based effluent limitations. Those same parties have intervened
in the appeal filed by AE Supply, and both appeals have been consolidated for discovery purposes.
An order has been entered that stays the permit limits that AE Supply has challenged while the
appeal is pending. The hearing is scheduled to begin on September 13, 2011. AE Supply intends to
vigorously pursue these issues, but cannot predict the outcome of these appeals.
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ALLEGHENY ENERGY INC. AND SUBSIDIARIES
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In parallel rulemaking, the PA DEP recommended an end-of-pipe limit TDS rule, and the
Pennsylvania Environmental Quality Board issued the final rule on August 21, 2010. Allegheny could
incur significant costs for additional control equipment to meet the requirements of this rule,
although its provisions do not apply to electric generating units until the end of 2018, and then
only if the EPA has not promulgated TDS effluent limitation guidelines applicable to such units.
On December 23, 2010, PA DEP submitted its Clean Water Act 303(d) list to EPA with a
recommended sulfate impairment designation for an approximately 68 mile stretch of the Monongahela
River north of the West Virginia border. EPA is reviewing PA DEPs recommendation. If the
designation is approved, Pennsylvania will then need to develop a Total Maximum Daily Load (TMDL)
limit for the river, a process that will take about five years. Based on the stringency of the
TMDL, Allegheny Energy may incur significant costs for controls on its national pollution discharge
elimination system, or NPDES, discharges to the Monongahela River from Hatfields Ferry and
Mitchell facilities in Pennsylvania and its Fort Martin facility in West Virginia. Allegheny
appealed the PA DEPs proposed 303(d) designation to the Pennsylvania Environmental Hearing Board
in January 2011 on the basis that the PA DEP failed to follow its own methodologies for concluding
the river segments are impaired.
In October 2009, the WVDEP issued the water discharge permit for the Fort Martin generation
facility. Similar to the Hatfields Ferry water discharge permit issued for the Scrubber project,
the Fort Martin permit imposes effluent limitations for TDS and sulfate concentrations. The permit
also imposes temperature limitations and other effluent limits for heavy metals that are not
contained in the Hatfields Ferry water permit. Concurrent with the issuance of the Fort Martin
permit, WVDEP also issued an administrative order that sets deadlines for Monongahela to meet
certain of the effluent limits that are effective immediately under the terms of the permit.
Monongahela appealed the Fort Martin permit and the administrative order. The appeal includes a
request to stay certain of the conditions of the permit and order while the appeal is pending. The
request to stay has been granted pending a final decision on appeal and subject to WVDEP moving to
dissolve the stay. The appeals have been consolidated. Monongahela moved to dismiss certain of the
permit conditions for the failure of the WVDEP to submit those conditions for public review and
comment during the permitting process. An agreed-upon order that suspends further action on this
appeal, pending WVDEPs release for public review and comment on those conditions, was entered on
August 11, 2010. The stay remains in effect during that process. The current terms of the Fort
Martin permit would require Monongahela to incur significant costs or negatively affect operations
at Fort Martin. Preliminary information indicates an initial capital investment in excess of the
capital investment that may be needed at Hatfields Ferry in order to install technology to meet
the TDS and sulfate limits in the Fort Martin permit, which technology may also meet certain of the
other effluent limits in the permit. Additional technology may be needed to meet certain other
limits in the permit. Monongahela intends to vigorously pursue these issues but cannot predict the
outcome of these appeals.
Solid Waste. The EPA is reviewing its waste regulations relating to coal combustion residuals
(CCR) partly in response to a Tennessee Valley Authority ash spill in Kingston, Tennessee in
December 2008. CCR includes bottom ash, boiler slag, fly ash and Scrubber byproducts including
gypsum. CCR has historically been designated and managed as a non-hazardous waste, and the EPA has
twice determined that it is not appropriate to regulate it as a hazardous waste under the Resource
Conservation and Recovery Act (RCRA). The EPA is reconsidering those earlier determinations and
intends to issue new regulations for the management and disposal of CCR in 2011. The EPA has not
yet reached a final decision on whether to regulate CCR as a hazardous or special waste (RCRA Title
C) or as a non-hazardous waste (RCRA Title D) and on May 4, 2010 released a draft proposed rule
which contained both options for public comment. Should the EPA elect to designate CCR as hazardous
or special waste at any point in its generation, storage, transportation or disposal cycle, it
could significantly increase Alleghenys cost of managing CCR materials and could also drive
additional monitoring and corrective action at legacy disposal sites. In addition to potential
additional management costs for CCR disposal, Allegheny might expect to see a reduction in options
for beneficial reuse of CCR in applications such as mine reclamation, cement manufacture and
agriculture, further increasing costs, as such materials will then enter landfills rather than
beneficial reuse. While EPAs proposed rule appears to attempt to protect beneficial CCR reuse
whatever the CCR designation, we are still reviewing the rule and assessing its effect on Allegheny
in that regard. The proposed rule also provides options for the management and closure of wet CCR
storage and disposal impoundments. Even if EPA elects the non-hazardous CCR option in a final rule,
reducing Alleghenys potential waste management exposure, closure of wet disposal impoundments
could be a source of significant costs. Allegheny is assessing the draft proposal and working with
various trade groups and associations to determine potential costs and effects under either CCR
option.
Potential Impact of Recent EPA and Climate Change Initiatives. Implementation of the EPAs
current proposals with regard to air quality, water quality and CCR, as described above, would,
together with potential climate change legislation, require extensive and costly changes to the
nations electric generation fleet, including the installation of new pollution controls,
retirement of many existing generating facilities and construction of new generating capacity.
Several industry and industry-related assessments, while varying in their estimates and
assumptions, estimate that if implementation of these initiatives proceeds according to currently
proposed schedules, the combined national cost through 2015 associated with required retrofitting
of existing facilities and construction of new facilities could be hundreds of billions of dollars.
Additionally, it is estimated that the cost of complying with these initiatives may not be
economically justified for many individual facilities and would therefore result in the retirement
of a
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ALLEGHENY ENERGY INC. AND SUBSIDIARIES
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significant portion of the nations existing coal-fired generation capacity. While specific
estimates involve complex models
incorporating many variables and assumptions that are subject to individual interpretation and
are highly subject to change, it is clear that timely compliance would be challenging and require
significant investment, both at the industry level and for Allegheny, which could be required to
install a variety of additional pollution controls at a number of its generating facilities and
could be compelled to retire certain of its subcritical facilities.
Clean Air Act Litigation. In August 2000, AE received a letter from the EPA requesting that
it provide information and documentation relevant to the operation and maintenance of the following
ten electric generation facilities, which collectively include 22 generation units: Albright,
Armstrong, Fort Martin, Harrison, Hatfields Ferry, Mitchell, Pleasants, Rivesville, R. Paul Smith
and Willow Island. AE Supply and/or Monongahela own these generation facilities. The letter
requested information under Section 114 of the Clean Air Act to determine compliance with the Clean
Air Act and related requirements, including potential application of the New Source Review (NSR)
standards under the Clean Air Act, which can require the installation of additional air emission
control equipment when the major modification of an existing facility results in an increase in
emissions. AE has provided responsive information to this and a subsequent request.
If NSR requirements are imposed on Alleghenys generation facilities, in addition to the
possible imposition of fines, compliance would entail significant capital investments in emission
control technology.
On May 20, 2004, AE, AE Supply, Monongahela and West Penn received a Notice of Intent to Sue
Pursuant to Clean Air Act §7604 (the Notice) from the Attorneys General of New York, New Jersey
and Connecticut and from the PA DEP. The Notice alleged that Allegheny made major modifications to
some of its West Virginia facilities in violation of the PSD provisions of the Clean Air Act at the
following coal-fired facilities: Albright Unit No. 3; Fort Martin Units No. 1 and 2; Harrison Units
No. 1, 2 and 3; Pleasants Units No. 1 and 2 and Willow Island Unit No. 2. The Notice also alleged
PSD violations at the Armstrong, Hatfields Ferry and Mitchell generation facilities in
Pennsylvania and identifies PA DEP as the lead agency regarding those facilities. On September 8,
2004, AE, AE Supply, Monongahela and West Penn received a separate Notice of Intent to Sue from the
Maryland Attorney General that essentially mirrored the previous Notice.
On January 6, 2005, AE Supply and Monongahela filed a declaratory judgment action against the
Attorneys General of New York, Connecticut and New Jersey in federal District Court in West
Virginia (West Virginia DJ Action). This action requests that the court declare that AE Supplys
and Monongahelas coal-fired generation facilities in Pennsylvania and West Virginia comply with
the Clean Air Act. The Attorneys General filed a motion to dismiss the West Virginia DJ Action. On
August 12, 2010, the Court granted the motion to dismiss, and the lawsuit has been concluded.
On June 28, 2005, the PA DEP and the Attorneys General of New York, New Jersey, Connecticut
and Maryland filed suit against AE, AE Supply and the Distribution Companies in the United States
District Court for the Western District of Pennsylvania (the PA Enforcement Action). This action
alleges NSR violations under the federal Clean Air Act and the Pennsylvania Air Pollution Control
Act at the Hatfields Ferry, Armstrong and Mitchell facilities in Pennsylvania. The PA Enforcement
Action appears to raise the same issues regarding Alleghenys Pennsylvania generation facilities
that are before the federal District Court in the West Virginia DJ Action, except that the PA
Enforcement Action also includes the PA DEP and the Maryland Attorney General. On January 17, 2006,
the PA DEP and the Attorneys General filed an amended complaint. On May 30, 2006, the District
Court denied Alleghenys motion to dismiss the amended complaint. On July 26, 2006, at a status
conference, the Court determined that discovery would proceed regarding liability issues, but not
remedies. Discovery on the liability phase closed on December 31, 2007, and summary judgment
briefing was completed during the first quarter of 2008. On November 18, 2008, the District Court
issued a Memorandum Order denying all motions for summary judgment and establishing certain legal
standards to govern at trial. In December 2009, a new trial judge was assigned to the case, who
then entered an order granting a motion to reconsider the rulings in the November 2008 Memorandum
Order. On April 18, 2010, the District Court issued an opinion, again denying all motions for
summary judgment and establishing certain legal standards to govern at trial. The non-jury trial on
liability only was held in September 2010. Plaintiffs filed their proposed findings of fact and
conclusions of law on December 23, 2010, and Allegheny must make its related filings on or before
February 28, 2011. The District Court will issue its rulings after those filings have been made.
In addition to this lawsuit, on September 21, 2007, Allegheny received a Notice of Violation
(NOV) from the EPA alleging NSR and PSD violations under the federal Clean Air Act, as well as
Pennsylvania and West Virginia state laws. The NOV, which was directed to AE, Monongahela and West
Penn, alleges violations at the Hatfields Ferry and Armstrong generation facilities in
Pennsylvania and the Fort Martin and Willow Island generation facilities in West Virginia. The
projects identified in the NOV are essentially the same as the projects at issue for these four
facilities in the May 20, 2004 Notice and the PA Enforcement Action.
Allegheny intends to vigorously pursue and defend against the Clean Air Act matters described
above but cannot predict their outcomes.
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ALLEGHENY ENERGY INC. AND SUBSIDIARIES
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Global Warming Class Action. On April 9, 2006, AE, along with numerous other companies with
coal-fired generation facilities and companies in other industries, was named as a defendant in a
class action lawsuit in the United States District Court for the Southern District of Mississippi.
On behalf of a purported class of residents and property owners in Mississippi who were harmed by
Hurricane Katrina, the named plaintiffs allege that the emission of greenhouse gases by the
defendants contributed to global warming, thereby causing Hurricane Katrina and plaintiffs
damages. The plaintiffs seek unspecified damages. On December 6, 2006, AE filed a motion to dismiss
plaintiffs complaint on jurisdictional grounds and then joined a motion filed by other defendants
to dismiss the complaint for failure to state a claim. At a hearing on August 30, 2007, the Court
granted the motion to dismiss that AE had joined and dismissed all of the plaintiffs claims
against all defendants. Plaintiffs appealed that ruling to the United States Court of Appeals for
the Fifth Circuit. On October 6, 2009, the assigned panel of the appellate court issued a written
opinion that reversed the judgment entered by the District Court in favor of the defendants with
respect to certain of the plaintiffs claims and remanded the case to the District Court for
further proceedings. On November 25, 2009, AE and others filed a petition to have all of the judges
of the Fifth Circuit rehear the issues addressed in the panels October 6, 2009 opinion. That
petition was granted and oral argument was set for May 24, 2010. However, the parties were notified
on April 30, 2010 that the Court was unable to empanel the necessary nine judges to hear the merits
of the appeal due to recusals. The Court then entered an order on May 28, 2010, reinstating the
ruling of the lower court that entered judgment in favor of the defendants and dismissing
plaintiffs appeal. Plaintiffs filed a Petition for Mandamus with the United States Supreme Court
on August 26, 2010, and Defendants subsequently filed their response to the petition. The Supreme
Court denied Plaintiffs petition on or about January 20, 2011.
Other Litigation and Contingencies
Shareholder Actions. In connection with AEs proposed Merger with a subsidiary of
FirstEnergy, purported AE shareholders filed in the first quarter of 2010 several separate putative
shareholder class action and/or derivative lawsuits in Pennsylvania and Maryland state courts, as
well as in the United States District Court for the Western District of Pennsylvania against AE,
its directors and certain of its officers (the AE Defendants), FirstEnergy and Merger Sub. The
lawsuits alleged, among other things, that the AE directors breached their fiduciary duties by
approving the Merger Agreement and that AE, FirstEnergy and Merger Sub aided and abetted in these
alleged breaches of fiduciary duty. The lawsuits also alleged that the Merger consideration was
unfair, that certain other terms in the Merger Agreement were unfair, and that certain individual
defendants were financially interested in the Merger. Among other remedies, the lawsuits sought to
enjoin the Merger, or in the event that an injunction was not awarded, money damages. While AE
believed the lawsuits were without merit and defended vigorously against the claims, in order to
avoid the costs associated with the litigation, the defendants agreed to a disclosure-based
settlement of the lawsuits.
In exchange for AEs agreement with plaintiffs counsel to include additional disclosure in
the joint proxy statement/prospectus mailed to AEs and FirstEnergys shareholders in connection
with the Merger, and subject to court approval, plaintiffs counsel agreed to, among other things,
the dismissal of all claims asserted in the lawsuits and a release of claims related to the Merger
on behalf of the putative class of AE shareholders. On December 13, 2010, the Maryland Circuit
Court for Baltimore City approved the settlement and signed an order dismissing all claims. The
Maryland courts approval of the settlement is final and no longer subject to appeal, and the
actions filed in Pennsylvania state court and the United States District Court for the Western
District of Pennsylvania were also dismissed.
PJM Calculation Error. In March 2010, the Midwest ISO filed two complaints at FERC against
PJM relating to a previously-reported modeling error in PJMs system that impacted the manner in
which market-to-market power flow calculations were made between PJM and the Midwest ISO since
April 2005. The Midwest ISO claimed that this error resulted in PJM underpaying the Midwest ISO by
approximately $130 million over the time period in question. Additionally, the Midwest ISO alleged
that PJM did not properly trigger market-to-market settlements between PJM and the Midwest ISO
during times when it was required to do so, which the Midwest ISO claimed may have cost it $5
million or more. As PJM market participants, AE Supply and Monongahela may be liable for a portion
of any refunds ordered in this case. PJM, Allegheny and other PJM market participants filed
responses to the Midwest ISO complaints and PJM filed a related complaint at FERC against the
Midwest ISO claiming that the Midwest ISO improperly called for market-to-market settlements
several times during the same time period covered by the two Midwest ISO complaints filed against
PJM, which PJM claimed may have cost PJM market participants $25 million or more. On January 4,
2011, an Offer of Settlement was filed at FERC that, if approved, would resolve all pending issues
in the dispute. The Offer of Settlement calls for the withdrawal of all pending complaints with no
payments being made by any parties. Initial comments on the Offer of Settlement were filed at FERC
on January 24, 2011.
Nevada Power Contracts. On December 7, 2001, Nevada Power Company (NPC) filed a complaint
with FERC against AE Supply seeking action by FERC to modify prices payable to AE Supply under
three trade confirmations between Merrill Lynch and NPC. NPCs claim was based, in part, on the
assertion that dysfunctional California spot markets had an adverse effect on the prices NPC was
able to negotiate with Merrill Lynch under the contracts. NPC filed substantially identical
complaints against a number of other energy suppliers. On December 19, 2002, the Administrative Law
Judge (ALJ) issued findings that no contract modification
65
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
was warranted. The ALJ determined in
favor of NPC that AE Supply, rather than Merrill Lynch, was a proper subject of NPCs
complaint. On June 26, 2003, FERC affirmed the ALJs decision upholding the long-term
contracts negotiated between NPC and Merrill Lynch, among others. FERC did not decide whether AE
Supply, rather than Merrill Lynch, was the real party in interest. On November 10, 2003, FERC
issued an order, on rehearing, affirming its conclusion that the long-term contracts should not be
modified. Snohomish County, NPC and other parties filed petitions for review of FERCs June 26,
2003 order with the United States Court of Appeals for the Ninth Circuit (the NPC Petitions). The
NPC Petitions were consolidated in the Ninth Circuit. On December 19, 2006, the Ninth Circuit
issued an opinion remanding the case to FERC to determine, in accordance with the guidance set
forth in the Ninth Circuits opinion, whether FERC utilized the appropriate standard of review in
deciding various claims, including NPCs complaint. On May 3, 2007, AE Supply and others filed a
petition to appeal the Ninth Circuits ruling to the United States Supreme Court. On June 26, 2008,
the United States Supreme Court issued an opinion that rejected the Ninth Circuits reasoning, with
instructions that the case be remanded to FERC for amplification or clarification of its findings
on two issues set forth in the opinion. The case was remanded to FERC, and FERC issued an order on
December 18, 2008 that provides for a paper hearing on the two issues identified by the United
States Supreme Court, with initial filings due within 90 days and reply submissions within 90 days
thereafter. However, the order holds those deadlines in abeyance, contingent upon settlement
discussions between the parties, and a subsequent order lifting that stay has not been entered. On
December 1, 2010, the parties filed with FERC a Joint Offer of Settlement that fully resolves all
claims against AE Supply in this matter in exchange for a payment made by Merrill Lynch. By order
dated January 31, 2011, FERC approved the settlement and terminated the docket.
Claims by California Parties. On October 5, 2006, several California governmental and utility
parties presented AE Supply with a settlement proposal to resolve alleged overcharges for power
sales by AE Supply to the California Energy Resource Scheduling division of the California
Department of Water Resources (CDWR) during 2001. The settlement proposal claims that CDWR is
owed approximately $190 million for these alleged overcharges. This proposal was made in the
context of mediation efforts by FERC and the United States Court of Appeals for the Ninth Circuit
in pending proceedings to resolve all outstanding refund and other claims, including claims of
alleged price manipulation in the California energy markets during 2000 and 2001. The Ninth Circuit
has since remanded one of those proceedings to FERC, which arises out of claims previously filed
with FERC by the California Attorney General on behalf of certain California parties against
various sellers in the California wholesale power market, including AE Supply (the Lockyer case).
AE Supply and several other sellers have filed motions to dismiss the Lockyer case. On March 18,
2010, the judge assigned to the case entered an opinion that granted the motions to dismiss filed
by AE Supply and other sellers and dismissed the claims of the California Parties. On April 19,
2010, the California parties filed exceptions to the judges ruling with FERC, and briefing is
complete on those exceptions. The parties are awaiting a ruling from FERC on the exceptions.
On June 2, 2009, the California Attorney General, on behalf of certain California parties,
filed a second lawsuit with FERC against various sellers, including AE Supply (the Brown case),
again seeking refunds for trades in the California energy markets during 2000 and 2001. The
above-noted trades with CDWR are the basis for the joining of AE Supply in this new lawsuit. AE
Supply has filed a motion to dismiss the Brown case that is pending before FERC. No scheduling
order has been entered in the Brown case. Allegheny intends to vigorously defend against these
claims but cannot predict their outcome.
Claims Related to Alleged Asbestos Exposure. The Distribution Companies have been named as
defendants, along with multiple other defendants, in pending asbestos cases alleging bodily injury
involving multiple plaintiffs and multiple sites. These suits have been brought mostly by seasonal
contractors employees and do not involve allegations of the manufacture, sale or distribution of
asbestos-containing products by Allegheny. These asbestos suits arise out of historical operations
and are related to the installation and removal of asbestos-containing materials at Alleghenys
generation facilities. Alleghenys historical operations were insured by various foreign and
domestic insurers, including Lloyds of London. Certain insurers have contested their obligations
to pay for the future defense and settlement costs relating to the asbestos suits. As of December
31, 2010, Allegheny is involved in three asbestos and/or environmental insurance-related actions,
Certain Underwriters at Lloyds, London et al. v. Allegheny Energy, Inc. et al., Case No.
21-C-03-16733 (Washington County, Md.), Monongahela Power Company et al. v. Certain Underwriters at
Lloyds London and London Market Companies, et al ., Civil Action No. 03-C-281 (Monongalia County,
W.Va.) and Allegheny Energy, Inc., et al. v. Hartford Accident & Indemnity Company, Civil Action
No. 10-CV-3142 WY (United States District Court, Eastern District of Pennsylvania). The parties are
seeking a declaration of coverage under the policies for asbestos-related and environmental claims.
Allegheny does not believe that the existence or pendency of either the asbestos suits or the
actions involving its insurance will have a material impact on its consolidated financial position,
results of operations or cash flows. As of December 31, 2010, Alleghenys total number of claims
alleging exposure to asbestos was 886 in West Virginia, 11 in Pennsylvania and two in Illinois.
Allegheny intends to vigorously pursue these matters but cannot predict their outcomes.
Ordinary Course of Business. AE and its subsidiaries are from time to time involved in
litigation and other legal disputes in the ordinary course of business.
66
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Leases
Allegheny has capital and operating lease agreements with various terms and expiration dates,
primarily for vehicles, computer equipment, communication lines and buildings.
Total capital and operating lease rent payments of $21.5 million, $18.6 million and $19.1
million were recorded as rent expense in 2010, 2009 and 2008, respectively. Alleghenys estimated
future minimum lease payments for capital and operating leases, with annual payments exceeding
$100,000 and initial or remaining lease terms in excess of one year are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: |
|
|
value of net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amount |
|
|
minimum |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
representing |
|
|
capital lease |
|
(In millions) |
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
Thereafter |
|
|
Total |
|
|
interest and fees |
|
|
payments |
|
Capital Leases |
|
$ |
14.8 |
|
|
$ |
11.7 |
|
|
$ |
10.3 |
|
|
$ |
8.4 |
|
|
$ |
6.5 |
|
|
$ |
7.9 |
|
|
$ |
59.6 |
|
|
$ |
14.4 |
|
|
$ |
45.2 |
|
Operating Leases |
|
$ |
6.4 |
|
|
$ |
5.7 |
|
|
$ |
5.5 |
|
|
$ |
5.4 |
|
|
$ |
5.3 |
|
|
$ |
3.2 |
|
|
$ |
31.5 |
|
|
$ |
0 |
|
|
$ |
0 |
|
The carrying amount of assets recorded under capitalized lease agreements included in
Property, plant and equipment, net at December 31, consisted of the following:
|
|
|
|
|
|
|
|
|
(In millions) |
|
2010 |
|
|
2009 |
|
Equipment |
|
$ |
45.0 |
|
|
$ |
40.6 |
|
Building |
|
|
0.2 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
Property held under capital leases |
|
$ |
45.2 |
|
|
$ |
40.8 |
|
|
|
|
|
|
|
|
PURPA
The Energy Policy Act of 2005 (the Energy Policy Act) amended PURPA significantly. Most
notably, as of the effective date of the Energy Policy Act on August 8, 2005, electric utilities
are no longer required to enter into any new contractual obligation to purchase energy from a
qualifying facility if FERC finds that the facility has non-discriminatory access to a functioning
wholesale market and open access transmission. This amendment has no impact on Alleghenys current
long-term power purchase agreements under PURPA.
Alleghenys regulated utilities are committed to purchasing the electrical output from 466 MWs
of qualifying PURPA capacity. PURPA expense pursuant to these contracts in 2010, 2009 and 2008 was
$223.0 million, $213.2 million and $222.2 million, respectively. The average cost of these power
purchases was approximately 7.2, 6.8 and 6.3 cents per kilowatt-hour (kWh) in 2010, 2009 and
2008, respectively.
The table below reflects Alleghenys estimated commitments for energy and capacity purchases
under PURPA contracts as of December 31, 2010. The commitments were calculated based on expected
PURPA purchased power prices at December 31, 2010, without giving effect to possible price changes
that could occur as a result of any future emissions regulation or legislation. Actual values can
vary substantially depending upon future conditions.
|
|
|
|
|
|
|
|
|
(In millions) |
|
kWhs |
|
|
Amount |
|
2011 |
|
|
3,564 |
|
|
|
257.0 |
|
2012 |
|
|
3,745 |
|
|
|
270.0 |
|
2013 |
|
|
3,735 |
|
|
|
275.3 |
|
2014 |
|
|
3,642 |
|
|
|
274.0 |
|
2015 |
|
|
3,735 |
|
|
|
286.6 |
|
Thereafter |
|
|
42,992 |
|
|
|
3,410.4 |
|
|
|
|
|
|
|
|
Total |
|
|
61,413 |
|
|
$ |
4,773.3 |
|
|
|
|
|
|
|
|
67
ALLEGHENY ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fuel Purchase and Transportation Commitments
Allegheny has entered into various long-term commitments for the procurement and
transportation of fuel (primarily coal) and lime to supply its generation facilities. In most
cases, these contracts contain provisions for price escalations, minimum purchase levels and other
financial commitments. Alleghenys fuel expense was $1,192.6 million, $886.6 million and $1,080.9
million in 2010, 2009 and 2008, respectively, of which, $1,062.7 million, $783.8 million and $958.9
million, respectively, related to coal and lime expense. In 2009, Allegheny purchased approximately
25.9% of its coal from one vendor. Total estimated long-term fuel purchase and transportation
commitments at December 31, 2010 were as follows:
|
|
|
|
|
(In millions) |
|
Total |
|
2011 |
|
$ |
1,069.1 |
|
2012 |
|
|
766.7 |
|
2013 |
|
|
715.1 |
|
2014 |
|
|
722.9 |
|
2015 |
|
|
392.0 |
|
Thereafter |
|
|
1,509.7 |
|
Total |
|
$ |
5,175.5 |
|
Other Purchase Obligations
AE has a Professional Service Agreement with Electronic Data Systems Corporation and EDS
Information Services, LLC related to certain of Alleghenys technology functions that will expire
on December 31, 2012. Expected cash payments relating to the Professional Service Agreement are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2011 |
|
|
2012 |
|
|
Total |
|
Other purchase obligations |
|
$ |
23.8 |
|
|
$ |
22.9 |
|
|
$ |
46.7 |
|
NOTE 26: QUARTERLY FINANCIAL INFORMATION (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share |
|
2010 Quarter Ended (a) |
|
|
2009 Quarter Ended (a) |
|
amounts) |
|
March 31 |
|
|
June 30 |
|
|
September 30 |
|
|
December 31 |
|
|
March 31 |
|
|
June 30 |
|
|
September 30 |
|
|
December 31 |
|
Operating revenues |
|
$ |
1,048.9 |
|
|
$ |
945.7 |
|
|
$ |
1,043.7 |
|
|
$ |
864.6 |
|
|
$ |
957.2 |
|
|
$ |
814.7 |
|
|
$ |
793.7 |
|
|
$ |
861.1 |
|
Gain on sale of Virginia
distribution business |
|
$ |
0 |
|
|
$ |
(45.1 |
) |
|
$ |
0 |
|
|
$ |
0.5 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Operating income |
|
$ |
218.5 |
|
|
$ |
270.7 |
|
|
$ |
252.6 |
|
|
$ |
189.8 |
|
|
$ |
289.8 |
|
|
$ |
179.1 |
|
|
$ |
205.9 |
|
|
$ |
245.0 |
|
Net income |
|
$ |
88.2 |
|
|
$ |
120.2 |
|
|
$ |
115.1 |
|
|
$ |
88.2 |
|
|
$ |
134.1 |
|
|
$ |
72.9 |
|
|
$ |
77.4 |
|
|
$ |
109.8 |
|
Net income attributable to
Allegheny Energy, Inc. |
|
$ |
88.2 |
|
|
$ |
120.2 |
|
|
$ |
115.1 |
|
|
$ |
88.2 |
|
|
$ |
133.9 |
|
|
$ |
72.6 |
|
|
$ |
77.0 |
|
|
$ |
109.3 |
|
Basic earnings per common share
attributable to Allegheny Energy,
Inc. |
|
$ |
0.52 |
|
|
$ |
0.71 |
|
|
$ |
0.68 |
|
|
$ |
0.52 |
|
|
$ |
0.79 |
|
|
$ |
0.43 |
|
|
$ |
0.45 |
|
|
$ |
0.64 |
|
Diluted earnings per common share
attributable to Allegheny Energy,
Inc. |
|
$ |
0.52 |
|
|
$ |
0.71 |
|
|
$ |
0.68 |
|
|
$ |
0.52 |
|
|
$ |
0.79 |
|
|
$ |
0.43 |
|
|
$ |
0.45 |
|
|
$ |
0.64 |
|
|
|
|
a) |
|
Quarterly amounts may not total to full-year results due to rounding. |
68