<PAGE>
Page 1 of 16
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1997
Commission File Number 1-255-2
WEST PENN POWER COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 13-5480882
(State of Incorporation) (I.R.S. Employer Identification No.)
800 Cabin Hill Drive, Greensburg, Pennsylvania 15601
Telephone Number - 412-837-3000
The registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months and (2) has been subject to such filing requirements for the past
90 days.
At August 14, 1997, 24,361,586 shares of the Common Stock (no par
value) of the registrant were outstanding, all of which are held by Allegheny
Power System, Inc., the Company's parent.
<PAGE>
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WEST PENN POWER COMPANY AND SUBSIDIARIES
Form 10-Q for Quarter Ended June 30, 1997
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Consolidated statement of income -
Three and six months ended June 30, 1997 and 1996 3
Consolidated balance sheet - June 30, 1997
and December 31, 1996 4
Consolidated statement of cash flows -
Six months ended June 30, 1997 and 1996 5
Notes to consolidated financial statements 6-9
Management's discussion and analysis of financial
condition and results of operations 10-14
PART II--OTHER INFORMATION 15-16
<PAGE>
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WEST PENN POWER COMPANY AND SUBSIDIARIES
Consolidated Statement of Income
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES:
<S> <C> <C> <C> <C>
Residential $ 86,022 $ 89,987 $ 196,333 $ 209,766
Commercial 52,178 53,176 108,315 112,035
Industrial 88,242 88,736 175,983 180,094
Wholesale and other, including affiliates 17,525 15,645 37,313 34,079
Bulk power transactions, net 8,764 10,887 17,317 18,902
Total Operating Revenues 252,731 258,431 535,261 554,876
OPERATING EXPENSES:
Operation:
Fuel 61,185 57,441 125,331 119,796
Purchased power and exchanges, net 29,651 32,225 61,566 65,190
Deferred power costs, net 874 2,936 2,922 11,698
Other 36,907 36,024 72,799 72,620
Maintenance 25,460 24,284 52,553 52,718
Restructuring charges and asset write-off - 6,706 - 34,077
Depreciation 30,448 30,739 60,902 60,619
Taxes other than income taxes 21,765 22,309 45,287 46,315
Federal and state income taxes 10,780 10,828 30,969 22,536
Total Operating Expenses 217,070 223,492 452,329 485,569
Operating Income 35,661 34,939 82,932 69,307
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 654 25 1,263 59
Other income, net 3,133 2,661 8,730 5,725
Total Other Income and Deductions 3,787 2,686 9,993 5,784
Income Before Interest Charges 39,448 37,625 92,925 75,091
INTEREST CHARGES:
Interest on long-term debt 16,247 16,247 32,494 32,494
Other interest 1,767 2,309 2,587 3,351
Allowance for borrowed funds used during
construction (529) (390) (1,020) (595)
Total Interest Charges 17,485 18,166 34,061 35,250
CONSOLIDATED NET INCOME $ 21,963 $ 19,459 $ 58,864 $ 39,841
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
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WEST PENN POWER COMPANY AND SUBSIDIARIES
Consolidated Balance Sheet
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
ASSETS: (Thousands of Dollars)
<S> <C> <C>
Property, Plant, and Equipment:
At original cost, including $110,356,000
and $102,003,000 under construction $ 3,226,648 $ 3,182,208
Accumulated depreciation (1,212,610) (1,152,383)
2,014,038 2,029,825
Investments and Other Assets:
Allegheny Generating Company - common stock at equity 89,039 91,330
Other 818 881
89,857 92,211
Current Assets:
Cash and temporary cash investments 7,562 5,160
Accounts receivable:
Electric service, net of $11,521,000 and $11,524,000
uncollectible allowance 109,013 117,240
Affiliated and other 14,238 20,251
Materials and supplies - at average cost:
Operating and construction 37,442 34,011
Fuel 33,275 26,247
Prepaid taxes 23,764 20,688
Deferred income taxes 12,802 29,003
Other 18,469 10,392
256,565 262,992
Deferred Charges:
Regulatory assets 286,639 284,099
Unamortized loss on reacquired debt 10,357 10,990
Other 22,670 19,620
319,666 314,709
Total Assets $ 2,680,126 $ 2,699,737
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 465,994 $ 465,994
Other paid-in capital 55,475 55,475
Retained earnings 401,486 441,283
922,955 962,752
Preferred stock 79,708 79,708
Long-term debt and QUIDS 803,532 905,243
1,806,195 1,947,703
Current Liabilities:
Short-term debt 83,239 33,387
Long-term debt due within one year 102,000 -
Accounts payable 55,985 74,229
Accounts payable to affiliates 24,885 7,985
Taxes accrued:
Federal and state income - 250
Other 10,347 28,649
Deferred power costs - 10,107
Interest accrued 15,743 15,741
Restructuring liability 17,050 27,134
Other 19,052 21,341
328,301 218,823
Deferred Credits and Other Liabilities:
Unamortized investment credit 46,496 47,786
Deferred income taxes 423,451 429,122
Regulatory liabilities 50,264 33,302
Other 25,419 23,001
545,630 533,211
Total Capitalization and Liabilities $ 2,680,126 $ 2,699,737
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
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WEST PENN POWER COMPANY AND SUBSIDIARIES
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
June 30
1997 1996
(Thousands of Dollars)
CASH FLOWS FROM OPERATIONS:
<S> <C> <C>
Consolidated net income $ 58,864 $ 39,841
Depreciation 60,902 60,619
Deferred investment credit and income taxes, net 5,506 (13,053)
Deferred power costs, net 2,922 11,698
Unconsolidated subsidiaries' dividends in excess of earnings 2,357 1,948
Allowance for other than borrowed funds used
during construction (1,263) (59)
Restructuring liability (10,084) 19,274
Asset write-off - 10,762
Changes in certain current assets and
liabilities:
Accounts receivable, net 14,240 31,279
Materials and supplies (10,459) 4,821
Accounts payable (1,344) (36,687)
Taxes accrued (18,552) (7,610)
Interest accrued 2 1,322
Other, net (8,167) 3,610
94,924 127,765
CASH FLOWS FROM INVESTING:
Construction expenditures (less allowance for
equity funds used during construction) (46,614) (46,452)
CASH FLOWS FROM FINANCING:
Short-term debt, net 49,852 (32,235)
Notes receivable from affiliates 2,900 -
Dividends on capital stock:
Preferred stock (1,701) (1,703)
Common stock (96,959) (47,749)
(45,908) (81,687)
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS 2,402 (374)
Cash and Temporary Cash Investments at January 1 5,160 717
Cash and Temporary Cash Investments at June 30 $ 7,562 $ 343
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $32,212 $31,394
Income taxes 29,538 32,631
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
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WEST PENN POWER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. The Company's Notes to Consolidated Financial Statements in the
Allegheny Power System companies' combined Annual Report on
Form 10-K for the year ended December 31, 1996, should be read
with the accompanying financial statements and the following
notes. With the exception of the December 31, 1996,
consolidated balance sheet in the aforementioned annual report
on Form 10-K, the accompanying consolidated financial
statements appearing on pages 3 through 5 and these notes to
consolidated financial statements are unaudited. In the
opinion of the Company, such consolidated financial statements
together with these notes contain all adjustments (which
consist only of normal recurring adjustments) necessary to
present fairly the Company's financial position as of June 30,
1997, and the results of operations for the three and six
months ended June 30, 1997 and 1996, and cash flows for the six
months ended June 30, 1997 and 1996.
2. The Consolidated Statement of Income reflects the results of
past operations and is not intended as any representation as to
future results. For purposes of the Consolidated Balance Sheet
and Consolidated Statement of Cash Flows, temporary cash
investments with original maturities of three months or less,
generally in the form of commercial paper, certificates of
deposit, and repurchase agreements, are considered to be the
equivalent of cash.
3. The Company owns 45% of the common stock of Allegheny
Generating Company (AGC), and affiliates of the Company own the
remainder. AGC owns an undivided 40% interest, 840 MW, in the
2,100-MW pumped-storage hydroelectric station in Bath County,
Virginia, operated by the 60% owner, Virginia Electric and
Power Company, a nonaffiliated utility. Following is a summary
of income statement information for AGC:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Electric operating revenues $20,408 $21,023 $40,624 $41,932
Operation & maintenance expense 1,471 1,215 2,756 2,334
Depreciation 4,284 4,290 8,568 8,580
Taxes other than income taxes 1,201 1,198 2,396 2,408
Federal income taxes 3,141 3,362 6,265 6,706
Interest charges 3,917 4,181 7,877 8,409
Other income, net (1) - (1) (3)
Net income $ 6,395 $ 6,777 $12,763 $13,498
</TABLE>
The Company's share of the equity in earnings above was $2.9
million and $3.0 million for the three months ended June 30,
1997 and 1996, respectively, and $5.7 million and $6.1 million
for the six months ended June 30, 1997 and 1996, and was
included in other income, net, on the Consolidated Statement of
Income.
<PAGE>
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4. On April 7, 1997, Allegheny Power System, Inc. (Allegheny
Power) and DQE, Inc., parent company of Duquesne Light Company,
announced that they have agreed to merge in a tax-free, stock-
for-stock transaction. The combined company will be called
Allegheny Energy, Inc. (Allegheny Energy). It is expected that
Allegheny Energy will continue to be operated as an integrated
electric utility holding company and that the Company and its
regulated electric utility affiliates will continue to exist as
separate legal entities, including DQE, Inc.
The merger is conditioned, among other things, upon the
approval of each company's shareholders and the necessary
approvals of various state and federal regulatory agencies,
including the public utility commissions in Pennsylvania and
Maryland, the Securities and Exchange Commission, the Federal
Energy Regulatory Commission, and the Nuclear Regulatory
Commission. The companies are hopeful that the required
approvals can be obtained by May 1, 1998. On May 2, 1997,
Allegheny Power filed a registration statement on Form S-4
containing a joint proxy statement/prospectus with DQE, Inc.
concerning the merger and the transactions contemplated
thereby. In late June, the S-4 became effective allowing
Allegheny Power and DQE, Inc. to pursue shareholder approval
for the proposed merger that would create Allegheny Energy.
Allegheny Power and DQE, Inc. each held separate shareholder
meetings on August 7, 1997, at which the combination of the two
companies was approved by the necessary number of shareholders
of both companies. At Allegheny Power's meeting, the necessary
number of shareholders also approved the change in Allegheny
Power's name to Allegheny Energy, Inc.
5. In preparation for retail competition in Pennsylvania, the
Company filed a petition on February 28, 1997 with the
Pennsylvania Public Utility Commission (PUC) asking for
permission to set to zero its Energy Cost Rate (ECR) and state
tax surcharge tariffs and to roll energy costs and state tax
adjustments into base rates, effective May 1, 1997. On April
24, 1997, the PUC approved the Company's request but denied an
additional request to defer the difference between the level of
energy costs rolled into base rates and an anticipated future
level of such costs. The Company's petition was necessitated
by the passage of the Electric Generation Customer Choice and
Competition Act (Customer Choice Act), which capped electric
rates in Pennsylvania as of January 1, 1997. Prior to May 1,
1997, changes in the Company's costs of fuel, purchased power,
and certain other costs, and changes in revenues from sales to
other utilities, including transmission services, were passed
on to customers by adjustment to customers' bills through the
ECR with the result that such changes had no effect on net
income. Effective May 1, 1997, such changes in costs and
revenues will affect the Company's earnings.
6. On August 1, 1997, the Company filed with the PUC a
comprehensive restructuring plan to implement full customer
choice of electric generation suppliers as required by the
Customer Choice Act. The filing included an unbundling of the
Company's electric service rates into its generation,
transmission and distribution components, a plan for eventual
termination of the existing Power Supply Agreement (PSA) under
which the Company and its two regulated affiliates share
capacity, energy, capacity reserves and transmission resources,
(and replacement with a more efficient structure) and a plan
for recovery of stranded costs through a Competitive Transition
Charge (CTC).
<PAGE>
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Recovery of stranded costs is the key issue. The Company has
determined its stranded costs exposure to be about $2 billion,
composed of $1.1 billion for generation plant investment in
excess of estimated market prices, $730 million of existing and
potential non-utility generator (NUG) contracts in excess of
market prices, and $270 million of regulatory assets and
transition costs. In accordance with the Company's
interpretation of the legislation, the $2 billion estimate is
based on a forecast of future revenue requirements, market
prices and assumptions about future costs to be incurred. To
avoid the problems associated with estimating future market
prices, the Company included as part of its restructuring plan
a proposal to reset the CTC on a year-to-year basis based on
actual market prices of electricity sales in its area.
The PUC is required to issue an order on the filing by May,
1998. This order will include a determination of the Company's
rates for transmission and distribution services beginning
January 1, 1999, generation rates for customers to take
generation service during the transition period (potentially
1999 through 2005 if they so choose), and the CTC the Company
will be allowed to charge, through the transition period, to
those customers who choose another generation supplier. While
the Company cannot predict the outcome of the restructuring
proceedings and the transition process, it believes that, as
the lowest cost utility in the state, recovery of stranded
costs should be allowed to maintain its financial viability, as
provided by the Customer Choice Act.
Nevertheless, depending upon the outcome of the proceeding and
future events affecting actual stranded costs, the Company's
future earnings could be adversely affected. Such adverse
effects could be avoided through further action of the PUC as
allowed by the Customer Choice Act, or by mitigation of future
costs.
7. In July, 1997, the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board (FASB) concluded that
utilities should discontinue application of Statement of
Financial Accounting Standards (SFAS) 71 for the generation
portion of their business when a deregulation plan is in place
and its terms are known. Since the Customer Choice Act
establishes such a process, the Company has determined that it
will be required to discontinue use of SFAS 71 for the
generation portion of its business on or before May, 1998, the
date by which the PUC must issue its order on the Company's
comprehensive restructuring plan. One of the conclusions of
the EITF is that after discontinuing SFAS 71, utilities should
continue to carry on their books the assets and liabilities
recorded under SFAS 71 if the regulatory cash flows to settle
them will be derived from the continuing regulated transmission
and distribution business. Additionally, continuing costs and
obligations of the deregulated generation business which are
similarly covered by the cash flows from the continuing
regulated business will meet the criteria as regulatory assets
and liabilities.
The Customer Choice Act establishes a definitive process for
transition to deregulation and market-based pricing for
electric generation in Pennsylvania, which includes continuing
cost of service based ratemaking for transmission and
distribution services, subject to a rate cap. The Act provides
for a non-bypassable CTC to give utilities the opportunity to
recover their stranded costs over the transition period.
<PAGE>
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Because of these circumstances, the Company believes that
discontinuance of the application of SFAS 71 to the generation
portion of its business will not have a material adverse effect
on its financial condition, and that it will not be required to
write off any material assets, subject to recovery through a
CTC.
8. Restructuring charges and an asset write-off in the first six
months of 1996 ($20.1 million, net of tax) include expenses
associated with the reorganization, which is essentially
complete.
9. For the most part, regulatory assets and liabilities are not
included in rate base. Income tax regulatory
assets/liabilities, net of $247 million at June 30, 1997, are
primarily related to investments in electric facilities and
will be recovered over a period of from 20 to 40 years. The
remaining recovery period for items other than income taxes, is
from three to seven years.
<PAGE>
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WEST PENN POWER COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
COMPARISON OF SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1997
WITH SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1996
Review of Operations
CONSOLIDATED NET INCOME
Consolidated net income for the second quarter and
first six months of 1997 and 1996, and the after tax restructuring charges
and asset write-off included in the 1996 periods are shown below.
<TABLE>
<CAPTION>
Consolidated Net Income
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
(Millions of Dollars)
Consolidated Net
<S> <C> <C> <C> <C>
Income as Reported $22.0 $19.5 $58.9 $39.8
Restructuring Charges
and Asset Write-Off - 4.0 - 20.1
Consolidated Net
Income Adjusted $22.0 $23.5 $58.9 $59.9
</TABLE>
The decrease in second quarter adjusted consolidated
net income, before restructuring charges and asset write-off, was due
primarily to a 4% decrease in kilowatt-hour (kWh) sales to residential
customers largely due to second quarter 1997 cooling degree days (air
conditioning weather) which were 32% below normal and 54% less than the
corresponding 1996 period.
The decrease in year-to-date adjusted consolidated net
income, before restructuring charges and asset write-off, was primarily
due to a decrease in kWh sales. Residential kWh sales decreased 6% due to
mild first quarter winter weather (heating degree days 8% below normal and
12% below the first quarter of 1996) and the cooler than normal second
quarter weather. Commercial kWh sales were also down slightly for the
period. A gain on a sale of land by a subsidiary partially offset the
decrease in kWh sales.
SALES AND REVENUES
Retail kWh sales to residential and commercial
customers decreased 4% and .3%, respectively, in the second quarter, and
in the first six months decreased 6% and 2%, respectively. As discussed
above, residential kWh sales, which are more weather sensitive than the
commercial and industrial classes, decreased in the second quarter and
first six months due to the mild weather. In the first six months,
commercial kWh sales also decreased primarily because
<PAGE>
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of the mild weather. Industrial kWh sales increased 2% for the second
quarter and .5% for the first six months of 1997. The second quarter
increase was due primarily to increased sales to glass, concrete, and coal
mining customers groups. This increase in sales helped to offset the
first quarter decrease in sales related to decreased sales in the iron and
steel customer groups. Retail kWh sales reflect net decreases of .2% for
the second quarter and 2% for the first six months of 1997.
The decrease in revenues from sales to residential,
commercial, and industrial customers resulted from the following:
<TABLE>
<CAPTION>
Decrease from Prior Periods
Quarter Six Months
(Millions of Dollars)
<S> <C> <C>
Fuel and energy cost adjustment clauses* $(3.9) $(11.5)
Net decreased kWh sales (1.3) (8.9)
Other (.3) (.9)
Decrease in retail revenues $(5.5) $(21.3)
</TABLE>
* Prior to May 1, 1997, changes in revenues from fuel and energy
cost adjustment clauses had little effect on consolidated net
income. Changes in the costs of fuel, purchased power, and
certain other costs, and changes in revenues from sales to
other utilities, including transmission services, have had
little effect on net income because such changes have been
passed on to customers by adjustment of customer bills through
fuel and energy cost adjustment clauses. However, effective
May 1, 1997, the Company, as a result of legislation in
Pennsylvania to begin deregulation of electric generation,
rolled its fuel and energy costs into base rates and set to
zero its fuel and energy cost adjustment clause. Thereafter,
the Company assumes the risks of increases in the costs of fuel
and purchased power and any declines in bulk power transaction
sales and retains the benefits of decreases in such costs and
increases in such sales.
The increase in wholesale and other revenues in the
second quarter and first six months of 1997 resulted primarily from
increases in sales of capacity, energy, and spinning reserve to affiliated
companies. All of the Company's wholesale customers have signed contracts
to remain as customers for the next four and one-half years.
Revenues from bulk power transactions consist of the
following items:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
(Millions of Dollars)
Revenues:
<S> <C> <C> <C> <C>
From transmission services $3.8 $ 6.0 $ 9.4 $12.4
From sale of Company generation 5.0 4.9 7.9 6.5
Total $8.8 $10.9 $17.3 $18.9
</TABLE>
<PAGE>
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Revenues from transmission services decreased primarily
due to reduced demand, primarily because of mild weather both for the
quarter and year to date. Prior to May 1, 1997, most of the aggregate
benefits from bulk power transactions were passed on to retail customers
through fuel and energy adjustment clauses (described above) and had
little effect on consolidated net income. On May 1, 1997, due to the
elimination of the Company's fuel and energy adjustment clause (referred
to by the Company as ECR for Energy Cost Rate), changes in these revenues
for the Company will have a direct affect on consolidated net income.
OPERATING EXPENSES
Fuel expenses for the second quarter and first six
months of 1997 increased 7% and 5%, respectively, due to increases in
kWh's generated. Prior to May 1, 1997, the Company's fuel expenses were
primarily subject to deferred power cost accounting procedures to match
fuel and energy cost adjustment clause revenues, with the result that
changes in fuel expenses had little effect on consolidated net income.
"Purchased power and exchanges, net" represents power
purchases from and exchanges with nonaffiliated companies and purchases
from qualified facilities under the Public Utility Regulatory Policies Act
of 1978 (PURPA), capacity charges paid to Allegheny Generating Company
(AGC), an affiliate partially owned by the Company, and other transactions
with affiliates made pursuant to a power supply agreement whereby each
company uses the most economical generation available in the Allegheny
Power System at any given time, and consists of the following items:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
(Millions of Dollars)
Nonaffiliated transactions:
Purchased power:
<S> <C> <C> <C> <C> <C>
From PURPA generation* $17.2 $16.3 $33.9 $31.4
Other 3.4 6.1 7.2 12.2
Power exchanges, net (.5) (.7) 1.3 .7
Affiliated transactions:
AGC capacity charges 8.8 9.2 17.6 18.3
Energy and spinning reserve
charges .8 1.3 1.6 2.6
Purchased power
and exchanges, net $29.7 $32.2 $61.6 $65.2
*PURPA cost per kWh $.060 $.058 $.060 $.058
</TABLE>
Other purchased power decreased because of decreased
need due to decreased sales to retail customers and increased generation
from Company owned power stations. Prior to May 1, 1997, the cost of
purchased power and exchanges, including power from PURPA generation and
affiliated transactions, was mostly recovered from customers through the
regular fuel and energy cost recovery procedures followed by the Company's
regulatory commission, and was primarily subject to deferred power cost
accounting procedures with the result that changes in such costs had
little effect on consolidated net income.
<PAGE>
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Maintenance expenses generally represent costs incurred
to maintain the power stations, the transmission and distribution (T&D)
system, and general plant, and reflect routine maintenance of equipment
and rights-of-way as well as planned major repairs and unplanned
expenditures, primarily from forced outages at the power stations and
periodic storm damage on the T&D system. Variations in maintenance
expense result primarily from unplanned events and planned major projects,
which vary in timing and magnitude, depending upon the length of time
equipment has been in service without a major overhaul and the amount of
work found necessary when the equipment is dismantled.
Restructuring charges and an asset write-off in the
second quarter and first six months of 1996 include expenses associated
with the reorganization, which is essentially complete.
The decrease in depreciation expense for the second
quarter was primarily due to net salvage adjustments. The depreciation
expense increase in the first six months of 1997 resulted from additions
to electric plant. Future depreciation expense increases are expected to
be less than historical increases because of reduced levels of planned
capital expenditures.
Taxes other than income taxes decreased $.5 million and
$1.0 million for the second quarter and first six months of 1997,
respectively, due primarily to decreases in gross receipts taxes resulting
from lower revenues from retail customers and a decrease in property taxes
in the second quarter.
The net increase in federal and state income taxes in
the six-month period resulted primarily from an increase in income before
taxes, which was primarily related to restructuring charges recorded in
1996.
The increases in allowance for other than borrowed
funds used during construction (AOFDC) of $.6 million and $1.2 million for
the three and six-month periods ended June 1997 resulted primarily from
application of the Federal Energy Regulatory Commission AOFDC formula
under which in 1997 a larger percentage of construction was financed by
more expensive equity funds rather than less expensive short-term debt
funds.
Other income, net increased $3.0 million for the first six
months of 1997 primarily due to the gain on a sale of land by the Company's
subsidiary, West Virginia Power & Transmission Company.
Other interest expense reflects changes in the levels
of short-term debt maintained by the Company throughout the year, as well
as the associated interest rates.
<PAGE>
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Financial Condition and Requirements
The Company's discussion on Financial Condition and
Requirements and Competition in Core Business in the Allegheny Power
companies' combined Annual Report on Form 10-K for the year ended December
31, 1996, should be read with the following information.
In the normal course of business, the Company is
subject to various contingencies and uncertainties relating to its
operations and construction programs, including cost recovery in the
regulatory process, laws, regulations and uncertainties related to
environmental matters, to the restructuring of the electric utility
industry and the Pennsylvania restructuring legislation, merger
activities, and legal actions.
The Company expects to use exchange-traded and over-
the-counter futures, options, and swap contracts both to hedge its
exposure to changes in electric power prices and for trading purposes.
The risks to which the Company is exposed include underlying price
volatility, credit risk, and variations in cash flows, among others. The
Company has implemented risk management policies and procedures consistent
with industry practices and Company goals.
At the end of February, all electric utilities in
Pennsylvania, including the Company, were required to and have filed
proposals to establish retail access pilot programs, which will allow
customers in Pennsylvania to purchase electric generation from their
existing utility or an alternative supplier. The existing utility,
however, will continue to provide these customers with transmission and
distribution, as well as related services. Near the end of 1997 or early
in 1998, by order of the PUC, all electric utilities in Pennsylvania must
offer a sufficient number of customers the ability to choose another
energy supplier so that electric consumers representing 5% of load in each
rate class in Pennsylvania do choose another supplier.
On July 23, 1997, Allegheny Power System, Inc. formed a
new unregulated subsidiary, Allegheny Energy Solutions, Inc. (Allegheny
Solutions), to provide a platform from which unregulated marketing
business will be developed. Allegheny Solutions will begin by marketing
unregulated energy to selected customers in Pennsylvania who are among the
5% of all utilities customers permitted to choose their supplier under the
pilot, including the 5% of the Company's customers who are permitted to
choose.
The Company's pilot is slated to begin late this or
early next year and will continue until January 1, 1999, when one-third of
electric consumers in Pennsylvania will be allowed to choose their
electricity providers. Another one-third of customers will be allowed to
choose on January 1, 2000, and the final one-third will have the
opportunity to choose on January 1, 2001. Required under the Electric
Generation Customer Choice and Competition Act, the pilot must be approved
by the Pennsylvania Public Utility Commission before its implementation.
<PAGE>
- 15 -
WEST PENN POWER COMPANY AND SUBSIDIARIES
Part II - Other Information to Form 10-Q
for Quarter Ended June 30, 1997
ITEM 5. OTHER INFORMATION
In late June, the S-4 registration statement filed by
Allegheny Power System, Inc. (Allegheny Power) became effective, allowing
Allegheny Power and DQE, Inc., parent company of Duquesne Light Company,
to pursue shareholder approval for the proposed merger and a change of the
company name to Allegheny Energy, Inc., (Allegheny Energy). Allegheny
Power and DQE, Inc. held shareholder meetings on August 7, 1997, at which
the combination of the two companies and the name change were approved by
a vote of shareholders.
On August 1, 1997, Allegheny Power and DQE, Inc. filed
applications for several major approvals related to the proposed merger of
the two companies. In filings with the Federal Energy Regulatory
Commission (FERC), Pennsylvania Public Utility Commission (PA PUC), and
Maryland Public Service Commission (MD PSC), Allegheny Power and DQE, Inc.
outlined their restructuring and merger plans as discussed below.
The FERC filing includes commitments concerning rate
freezes, rate reductions, and electrical system access options that will
spread the positive effects of the merger to many stakeholders. The
filing includes the offering of a single transmission rate which is less
than the stand-alone rate for the two companies, offers partial rate
freezes to wholesale customers which have contracts expiring after 1998,
and includes a commitment to join or form an independent system operator
(ISO).
The Company and DQE, Inc. filed individual restructuring
plans with the PA PUC and, as part of a joint restructuring plan, have
also filed their merger application. The filings address unbundled rates
for generation, transmission, and distribution services; stranded costs;
merger synergy benefits; and other issues as required by Pennsylvania's
Electricity Generation Customer Choice and Competition Act. Among other
benefits, the Company's restructuring filing unbundles its rates and
tariffs separate from those of DQE's utility subsidiary, Duquesne Light.
DQE's restructuring filing includes a redesign of rates and provides for
other benefits. The merger filing offers additional detail on the
expected synergy benefits of the merger and an allocation of the benefits
to customers and shareholders of the two companies.
Allegheny Power filed with the MD PSC requesting
approval for the issuance of stock to exchange for DQE stock upon merger
approval. Allegheny Power is a Maryland Corporation. The filing also
discussed the benefits of the merger to Maryland including lower rates for
customers and improved operating efficiencies over time.
<PAGE>
- 16 -
On July 9, 1997, the Commonwealth Court of Pennsylvania
affirmed the order of the PA PUC which granted the Company's motion for
summary judgement and dismissed South River Power Partner's complaint
filed against the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) (27) Financial Data Schedule
(b) No reports on Form 8-K were filed on behalf of the
Company for the quarter ended June 30, 1997.
Signature
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
WEST PENN POWER COMPANY
/s/ T. J. KLOC
T. J. Kloc
Controller
(Chief Accounting Officer)
August 14, 1997
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