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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 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 November 13, 1997, 24,361,586 shares of the Common Stock
(no par value) of the registrant were outstanding, all of which
are held by Allegheny Energy, Inc., the Company's parent.
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WEST PENN POWER COMPANY AND SUBSIDIARIES
Form 10-Q for Quarter Ended September 30, 1997
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Consolidated statement of income -
Three and nine months ended September 30, 1997 and 1996 3
Consolidated balance sheet - September 30, 1997
and December 31, 1996 4
Consolidated statement of cash flows -
Nine months ended September 30, 1997 and 1996 5
Notes to consolidated financial statements 6-12
Management's discussion and analysis of financial
condition and results of operations 13-18
PART II--OTHER INFORMATION 19
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WEST PENN POWER COMPANY AND SUBSIDIARIES
Consolidated Statement of Income
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES:
<S> <C> <C> <C> <C>
Residential $ 90,923 $ 94,853 $ 287,256 $ 304,619
Commercial 57,614 57,411 165,929 169,446
Industrial 87,302 86,182 263,285 266,276
Wholesale and other, including affiliates 18,852 18,220 56,165 52,299
Bulk power transactions, net 12,055 7,016 29,372 25,918
Total Operating Revenues 266,746 263,682 802,007 818,558
OPERATING EXPENSES:
Operation:
Fuel 65,887 59,278 191,218 179,074
Purchased power and exchanges, net 26,815 28,382 88,381 93,572
Deferred power costs, net - 1,922 2,922 13,620
Other 40,461 38,148 113,260 110,768
Maintenance 20,608 25,216 73,161 77,934
Restructuring charges and asset write-off - 3,565 - 37,642
Depreciation 29,898 30,309 90,800 90,928
Taxes other than income taxes 22,072 22,178 67,359 68,493
Federal and state income taxes 17,140 14,772 48,109 37,308
Total Operating Expenses 222,881 223,770 675,210 709,339
Operating Income 43,865 39,912 126,797 109,219
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 209 85 1,472 144
Other income, net 7,112 3,712 15,842 9,437
Total Other Income and Deductions 7,321 3,797 17,314 9,581
Income Before Interest Charges 51,186 43,709 144,111 118,800
INTEREST CHARGES:
Interest on long-term debt 16,248 16,248 48,742 48,742
Other interest 1,179 1,788 3,766 5,139
Allowance for borrowed funds used during
construction (574) (657) (1,594) (1,252)
Total Interest Charges 16,853 17,379 50,914 52,629
CONSOLIDATED NET INCOME $ 34,333 $ 26,330 $ 93,197 $ 66,171
</TABLE>
See accompanying notes to consolidated financial statements.
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WEST PENN POWER COMPANY AND SUBSIDIARIES
Consolidated Balance Sheet
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
ASSETS: (Thousands of Dollars)
Property, Plant, and Equipment:
<S> <C> <C>
At original cost, including $106,719,000
and $102,003,000 under construction $ 3,249,446 $ 3,182,208
Accumulated depreciation (1,240,602) (1,152,383)
2,008,844 2,029,825
Investments and Other Assets:
Allegheny Generating Company - common stock at equity 89,667 91,330
Other 768 881
90,435 92,211
Current Assets:
Cash and temporary cash investments 2,031 5,160
Accounts receivable:
Electric service, net of $10,984,000 and $11,524,000
uncollectible allowance 97,839 117,240
Affiliated and other 11,729 20,251
Materials and supplies - at average cost:
Operating and construction 36,360 34,011
Fuel 31,315 26,247
Prepaid taxes 25,550 20,688
Deferred income taxes 7,239 29,003
Other 8,803 10,392
220,866 262,992
Deferred Charges:
Regulatory assets 285,512 284,099
Unamortized loss on reacquired debt 10,041 10,990
Other 25,562 19,620
321,115 314,709
Total Assets $ 2,641,260 $ 2,699,737
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 465,994 $ 465,994
Other paid-in capital 55,475 55,475
Retained earnings 434,948 441,283
956,417 962,752
Preferred stock 79,708 79,708
Long-term debt and QUIDS 803,675 905,243
1,839,800 1,947,703
Current Liabilities:
Short-term debt 27,695 33,387
Long-term debt due within one year 102,000 -
Accounts payable 55,838 74,229
Accounts payable to affiliates 12,170 7,985
Taxes accrued:
Federal and state income - 250
Other 13,655 28,649
Deferred power costs - 10,107
Interest accrued 14,141 15,741
Restructuring liability 6,222 27,134
Other 19,390 21,341
251,111 218,823
Deferred Credits and Other Liabilities:
Unamortized investment credit 45,851 47,786
Deferred income taxes 428,552 429,122
Regulatory liabilities 49,813 33,302
Other 26,133 23,001
550,349 533,211
Total Capitalization and Liabilities $ 2,641,260 $ 2,699,737
</TABLE>
See accompanying notes to consolidated financial statements
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WEST PENN POWER COMPANY AND SUBSIDIARIES
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1997 1996
(Thousands of Dollars)
CASH FLOWS FROM OPERATIONS:
<S> <C> <C>
Consolidated net income $ 93,197 $ 66,171
Depreciation 90,800 90,928
Deferred investment credit and income taxes, net 15,075 (12,867)
Deferred power costs, net 2,922 13,620
Unconsolidated subsidiaries' dividends in excess of earnings 1,772 1,940
Allowance for other than borrowed funds used
during construction (1,472) (144)
Restructuring liability (20,912) 16,191
Asset write-off - 10,762
Changes in certain current assets and
liabilities:
Accounts receivable, net 27,923 32,995
Materials and supplies (7,417) 7,572
Accounts payable (14,206) (24,905)
Taxes accrued (15,244) 3,758
Interest accrued (1,600) (1,829)
Other, net 2,457 (11,431)
173,295 192,761
CASH FLOWS FROM INVESTING:
Construction expenditures (less allowance for
equity funds used during construction) (74,100) (76,998)
CASH FLOWS FROM FINANCING:
Short-term debt, net (5,692) (37,919)
Notes receivable from affiliates 2,900 -
Dividends on capital stock:
Preferred stock (2,573) (2,575)
Common stock (96,959) (71,160)
(102,324) (111,654)
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (3,129) 4,109
Cash and Temporary Cash Investments at January 1 5,160 717
Cash and Temporary Cash Investments at September 30 $ 2,031 $ 4,826
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the quarter for:
Interest (net of amount capitalized) $50,146 $50,514
Income taxes 40,493 38,914
</TABLE>
See accompanying notes to consolidated financial statements.
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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 September 30, 1997, and the results of operations for
the three and nine months ended September 30, 1997 and 1996,
and cash flows for the nine months ended September 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:
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
(Thousands of Dollars)
Electric operating revenues $19,664 $20,825 $60,288 $62,757
Operation & maintenance expense 856 1,299 3,612 3,633
Depreciation 4,284 4,290 12,852 12,870
Taxes other than income taxes 1,185 1,174 3,581 3,582
Federal income taxes 3,109 3,296 9,374 10,002
Interest charges 3,888 4,081 11,765 12,490
Other income, net (9,054) (1) (9,055) (4)
Net income $15,396 $ 6,686 $28,159 $20,184
The Company's share of the equity in earnings above was $6.9
million and $3.0 million for the three months ended September
30, 1997 and 1996, respectively, and $12.7 million and $9.1
million for the nine months ended September 30, 1997 and 1996,
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and was included in other income, net, on the Consolidated
Statement of Income. The increases in other income, net,
and the resulting increases in net income for the 1997 periods
was due to an interest refund on a tax-related contract settlement.
4. On April 7, 1997, Allegheny Power System, Inc. (Allegheny
Power) and DQE, Inc. (DQE), parent company of Duquesne Light
Company in Pittsburgh, Pennsylvania, 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 regulated electric
utility companies will continue to exist as separate legal
entities, including the Company and Duquesne Light Company.
The merger is conditioned, among other things, upon the
approval of each company's shareholders, the Pennsylvania
Public Utility Commission (PUC), the Securities and Exchange
Commission (SEC), the Federal Energy Regulatory Commission
(FERC), the Nuclear Regulatory Commission (NRC), and the
Department of Justice/Federal Trade Commission under the
Hart, Scott, Rudino legislation. Additionally, Allegheny
Power has requested the Maryland Public Service Commission
(PSC) to indicate its approval of the issuance of additional
Allegheny Power stock to accomplish the transaction. The
companies have established a schedule to obtain all
regulatory approvals by June 1, 1998. On May 2, 1997,
Allegheny Power filed a registration statement with the SEC
on Form S-4 containing a joint proxy statement/prospectus
with DQE concerning the merger and the transactions
contemplated thereby. In late June, the S-4 became effective
allowing Allegheny Power and DQE to pursue shareholder
approval for the proposed merger that would create Allegheny
Energy. Allegheny Power and DQE each held a separate
shareholder meeting on August 7, 1997, at which the
combination of the two companies was decisively approved by
the shareholders of both companies. At Allegheny Power's
meeting, the shareholders also decisively approved the change
in Allegheny Power's name to Allegheny Energy, Inc.
(Allegheny Energy).
On August 1, 1997, Allegheny Power and DQE jointly filed
requests for merger approval with the PUC and FERC, DQE filed
the necessary approval requests with the NRC, and Allegheny
Power filed its request with the PSC for approval to issue
Allegheny Power stock. The PUC has established a schedule of
proceedings which is expected to result in an approval order
by the end of May 1998. The FERC has not scheduled hearings.
Absent such hearings, Allegheny Energy expects a FERC order
on or before the end of May 1998. The PSC instituted a
proceeding against The Potomac Edison Company, the Company's
Maryland public utility affiliate, to examine the effect of
the merger on Maryland customers for which a final
determination is expected by May 1, 1998.
On September 16, 1997, Allegheny Power officially changed its
name to Allegheny Energy, Inc. by filing the appropriate
papers in Maryland. Allegheny Energy began trading on the
New York Stock Exchange under its new symbol, AYE, on October
1, 1997.
On September 29, 1997, the City of Pittsburgh filed an
antitrust and conspiracy lawsuit in Federal District Court
for the Western District of
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Pennsylvania against Allegheny Power, the Company, DQE, and
Duquesne Light Company. The verified complaint alleges eight
counts, two of which are claimed violations of the federal antitrust
statutes and six are state law claims. The relief sought includes a
request that the proposed merger between Allegheny Power and DQE be
stopped, and request for unspecified monetary damages relating
to alleged collusion by the two companies in their actions
dealing with proposals to provide electric service to the
city's redevelopment zones. On October 27, 1997, Allegheny
Power, the Company, DQE, and Duquesne Light Company filed
motions to dismiss the complaint. While Allegheny Energy
cannot predict the outcome of this action, it believes the
suit is without merit.
5. In December 1996, Pennsylvania enacted the Electric
Generation Customer Choice and Competition Act (Customer
Choice Act) to restructure the electric industry in
Pennsylvania in order to create retail access to a
competitive electric energy market. Major provisions of the
legislation are:
- Customer choice for electric energy supply to be phased in
beginning with one-third of customers on January 1, 1999, two-
thirds the next year, and all customers beginning January 1,
2001.
- Transmission and distribution rates remain regulated and are
capped until July 1, 2001. Generation rates are capped until the
customer receives market-based energy service.
- Pennsylvania utilities will be permitted to recover the
amount of stranded costs approved by the PUC.
On August 1, 1997, in combination with Allegheny Power's
merger approval filing, the Company filed with the PUC a
comprehensive stand-alone 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 their
generation, transmission and distribution components, a plan
for eventual replacement of the existing Power Supply
Agreement (PSA) under which the Company and its two utility
affiliates share capacity, energy, capacity reserves and
transmission resources with a more efficient structure, and a
plan for recovery of stranded costs through a Competitive
Transition Charge (CTC).
Recovery of stranded costs is a key issue. The Company listed
its stranded costs exposure as about $2 billion (a
January 1, 1999 present value amount), composed of $1.1
billion for generation plant investment in excess of
estimated market prices, $760 million of existing and
potential nonutility generation (NUG) contracts in excess of
market prices, and $170 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.
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Because of the restrictions imposed by the capped rates, the
Company's stranded cost recovery could be restricted to
about $1.2 billion (in January 1, 1999 present value
dollars), absent further action by the PUC as allowed by the
Customer Choice Act. Based on the estimates and projections
supporting the stranded cost exposure of about $2 billion,
the remaining $800 million would be reflected as lower cash
flow to the Company after the year 2005 than would have
occurred with continued regulated rates.
The PUC has established a schedule of proceedings for the
restructuring plan concurrent with the merger proceedings,
under which it would issue an order on the filing by the end
of 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 who
take regulated generation service during the transition
period (potentially 1999 through 2005 if customers so
choose), and the CTC the Company will be allowed to charge
through the transition period. 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 proceedings
and future events affecting stranded costs and mitigation,
the Company's future earnings could be adversely affected.
Such adverse effects could be avoided through future action
of the PUC as allowed by the Customer Choice Act, or by
mitigation of future costs.
6. Pursuant to the Customer Choice Act, all electric utilities
in Pennsylvania are required to establish and administer
retail access pilot programs, under which customers
representing 5% of the load of each rate class must choose a
generation supplier other than their local franchise utility.
The pilot programs will begin on November 1, 1997 and will
continue until January 1, 1999. To accomplish the 5% pilot
requirement, the Company solicited customers to sign up for
the program and then, through a lottery, selected about
33,000 participants from those who responded.
As ordered by the PUC, participants will receive an energy
credit to their bills from their local utility (for example,
3.45 cents per kWh for residential customers in the Company's
case), and will reach agreement with an alternate supplier as
to their price for energy. The savings to the Company's
customers will be the difference between the alternate
supplier's price and the Company's credit. In order to
assure participation in the pilot program, the credit
established by the PUC is artificially high (greater than the
Company's energy costs) with the result that the Company has
estimated it could suffer a loss of up to about $30 million
for the 14-month pilot period. The Company will attempt to
mitigate the loss by competing for sales to pilot
participants of other utilities as an alternate supplier.
Because of the potential loss, the Company petitioned the PUC
to reconsider the amount of the credit and to modify its
pilot program order to include more specific language to make
clearer its intent to permit deferral of such net losses for
recovery through distribution rates at the end of the rate
cap period. Although the Commission has not ruled on this
petition, the Commission has approved the Company's pilot
compliance filing and thus has indicated its intent to
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treat the losses, offset by sales of energy freed up by
customers choosing another supplier, as a regulatory asset
subject to review and potential rate recovery. It should be
noted that the credit only applies to the pilot program
through December 31, 1998. Beginning January 1, 1999,
customers will no longer receive a credit. Rather, as they
move to competition, they will pay the generation billing
they negotiate with the energy supplier they choose as well
as the transmission and distribution charges and the CTC
charge from their franchise utility.
Under the PUC's pilot program procedures, all companies who
wish to compete as alternate electricity suppliers are
required to be approved by the PUC as licensed suppliers
through a filing and registration process. The Company filed
for and obtained PUC approval under the brand name of
Allegheny Power as an alternate supplier to the pilot
participating customers of all electric utilities in the
state other than its own. Under the pilot rules, the Company
is not permitted to sell energy to its own 33,000 customers
who chose to participate in the pilot. Accordingly, the
Company has created a sales force and is incurring
advertising and other expenditures in order to compete for
electricity sales in Pennsylvania to the 5% of Pennsylvania
customers of other utilities who have the right to choose
their supplier under the pilot program.
7. In July 1997, the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board (FASB) released Issue Number
97-4, Deregulation of the Pricing of Electricity - Issues Related
to the Application of FASB Statement Numbers 71 and 101, which
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 the end of 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.
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.
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8. In preparation for retail competition in Pennsylvania, the
Company filed a petition on February 28, 1997 with the PUC asking
for permission 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. The Company's
petition was necessitated by the passage of the 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 customer
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.
9. On August 26, 1997, the Company announced that it had agreed
to buy-out and settle a disputed obligation with the developers
of a proposed power plant to be built in Milesburg, Pennsylvania,
reducing costs to customers over the proposed 30-year life of the
project by an estimated $500 million. The disputed obligation
under the Public Utility Regulatory Policies Act (PURPA) would
have required the Company to buy 43 megawatts of capacity and
energy over a 30-year period at prices well above market price
estimates. Under the terms of the agreement, the Company agreed
to a one-time buy-out payment of $15 million, plus approximately
$.3 million of interest, subject to approval by the PUC to allow
the payment to be offset against a residual balance of deferred
fuel liabilities. In addition, the Company would take possession
of the proposed plant site. The PUC approved the transaction in
its opinion and order entered October 24, 1997. As a result, the
Company will remove the $185 million, present value, estimated
excess cost of capacity and energy of the Milesburg plant from
its PURPA-related stranded cost request.
10.Restructuring charges and an asset write-off in the first
nine months of 1996 ($22.2 million, net of tax) include
expenses associated with a reorganization, which is
essentially complete.
11.For the most part, regulatory assets and liabilities are not
included in rate base. Income tax regulatory
assets/(liabilities), net of $247 million at September 30, 1997,
are primarily related to investments in electric facilities. The
portion related to transmission and distribution facilities will
be recovered over periods of from 20 to 40 years under the
expected continuing regulated transmission and distribution
business. The portion related to generation business in
Pennsylvania has been included in the Company's stranded costs
for CTC recovery. The remaining recovery period for items other
than income taxes, is from three to seven years in businesses
that remain subject to regulation.
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12.The Company has spent considerable time and effort over the
past several years on the issue of the year 2000 software
compliance, and the effort is continuing. Certain software has
already been made year 2000 compliant by upgrades and
replacement, and analysis is continuing on others, in accordance
with a schedule planned to permit the Company to process
information in the year 2000 and beyond without significant
problems. Expenditures for the software modifications and
upgrades are not expected to have a material impact on the
Company's results of operations or financial position.
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WEST PENN POWER COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
COMPARISON OF THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1997
WITH THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1996
Review of Operations
CONSOLIDATED NET INCOME
Consolidated net income for the third quarter and first
nine months of 1997 and 1996, and the after-tax restructuring
charges and asset write-off included in the 1996 periods are
shown below.
Consolidated Net Income
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
(Millions of Dollars)
Consolidated Net
Income as Reported $34.3 $26.3 $93.2 $66.2
Restructuring Charges
and Asset Write-Off - 2.1 - 22.2
Consolidated Net
Income Adjusted $34.3 $28.4 $93.2 $88.4
The increase in third quarter consolidated net income,
before restructuring charges, was primarily due to an interest
refund on a tax-related contract settlement by the Company's 45%
owned subsidiary, Allegheny Generating Company (AGC), recorded in
other income as increased equity earnings of AGC and a reduction
of expenses achieved through restructuring efforts and other cost
controls.
The increase in year-to-date consolidated net income,
before restructuring charges and asset write-off, resulted from a
reduction of expenses achieved through restructuring efforts and
other cost controls, increased equity in earnings from AGC, and a
gain on a sale of land by a subsidiary, offset in part by a
decrease in retail kWh sales. Residential kWh sales decreased 5%
due to mild first quarter winter weather (heating degree days 8%
below normal and 12% below the first quarter of 1996) and the
mild summer weather. Commercial kWh sales were also down
slightly for the period.
SALES AND REVENUES
Retail kWh sales in the third quarter to residential
customers decreased 4%, and to commercial and industrial
customers increased 1% and 3%, respectively, for a net increase
of .1%. In the first nine months, kWh sales to residential and
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commercial customers decreased 5% and 1%, respectively, and to
industrial customers increased 1%, for a net decrease of 1%.
As discussed above, residential kWh sales, which are more weather
sensitive than the commercial and industrial classes, decreased
due to the mild weather. Increased commercial kWh sales during
the third quarter due to increased customers offset in part the
year-to-date decrease in commercial kWh sales due to the mild
weather. Industrial kWh sales increases for the third quarter
and first nine months were due primarily to increased sales to
glass, concrete, and coal mining customer groups.
The decrease in revenues from sales to residential,
commercial, and industrial customers resulted from the following:
Decrease from Prior Periods
Quarter Nine Months
(Millions of Dollars)
Fuel and energy cost adjustment clauses* $ (.6) $(12.1)
Net decreased kWh sales (1.9) (10.7)
Other (.1) (1.1)
Decrease in retail revenues $(2.6) $(23.9)
*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 third
quarter and first nine months of 1997 resulted primarily from
increases in sales of 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 years.
Revenues from bulk power transactions consist of the
following items:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
(Millions of Dollars)
Revenues:
<S> <C> <C> <C> <C>
From transmission services $ 4.4 $5.4 $13.7 $17.9
From sales of Company generation 7.7 1.6 15.7 8.0
Total $12.1 $7.0 $29.4 $25.9
</TABLE>
<PAGE>
- 15 -
Revenues from transmission services decreased primarily
due to reduced demand, primarily because of mild weather. The
increases in sales of Company generation resulted primarily from
increased sales to brokers and marketers. 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. Beginning 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 have a direct effect on consolidated net
income. The effect on consolidated net income from sales of
Company generation is offset by the cost of producing the sales,
primarily fuel, and the profit margins in this competitive
business are thin.
Pursuant to the Customer Choice Act, all electric
utilities in Pennsylvania are required to establish and
administer retail access pilot programs. In order to assure
participation in the pilot program, the credit established by the
PUC to the Company's customers participating in the pilot is
artificially high, with the result that the Company has estimated
it could suffer a loss of up to about $30 million for the 14-
month pilot period which ends December 31, 1998. In order to
mitigate this loss, the Company took action to become a licensed
energy supplier to the pilot customers of the other electric
utilities in Pennsylvania. Sales prices are low and margins are
thin. The Company believes it is unlikely that it will
completely offset its pilot losses with new revenues. Based upon
the PUC's approval of the Company's pilot compliance filing, the
Company plans to defer its net pilot revenue losses for later
potential recovery. See Notes 5 and 6 to the Consolidated
Financial Statements for additional information on the Customer
Choice Act.
Beginning January 1, 1999, one-third of the Company's
retail customers will have the ability to choose another energy
supplier, but will not be required to do so. The next year
another third, and beginning January 1, 2001, all of its
customers will have retail access to alternative generation. The
Company will continue to provide transmission and distribution
service, energy to those who choose the Company as their
supplier, and will bill a Competitive Transition Charge, which
the PUC has yet to approve, to those customers who choose another
supplier. The Company is planning to compete as an energy
supplier in Pennsylvania. See Note 5 to the Consolidated
Financial Statements for additional information concerning
Pennsylvania deregulation of electric generation.
OPERATING EXPENSES
Fuel expenses for the third quarter and first nine months
of 1997 increased 11% and 7%, respectively. The increases in
fuel expenses in both periods resulted from increases in kWh's
generated due primarily to increased bulk power sales from
Company generation to brokers and power marketers and increased
sales to affiliates. 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 until
then 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
AGC, an affiliate partially owned by the Company, and
<PAGE>
- 16 -
other transactions with affiliates made pursuant to a power
supply agreement whereby each company uses the most economical
generation available in the Allegheny Energy System at any given
time, and consists of the following items:
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
(Millions of Dollars)
Nonaffiliated transactions:
Purchased power:
From PURPA generation* $14.9 $15.1 $48.8 $46.6
Other 4.4 3.3 11.6 15.6
Power exchanges, net (1.2) - .1 .7
Affiliated transactions:
AGC capacity charges 7.9 9.1 25.5 27.3
Energy and spinning reserve
charges .8 .9 2.4 3.4
Purchased power and
exchanges, net $26.8 $28.4 $88.4 $93.6
*PURPA cost per kWh $.058 $.058 $.060 $.058
Other purchased power decreased for the nine months ended
September 30, 1997, 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 until then had little effect on
consolidated net income.
The increases in other operation expense for the three
and nine months ended September 1997, were due primarily to
litigation expenses related to a PURPA project and transmission
services purchased from affiliated companies. The Company has
applied for and obtained a license as an energy supplier to
Pennsylvania customers participating in Pennsylvania's retail
access pilot program. The Company expects to incur increased
advertising and other sales expenditures in order to enhance
sales and to build brand name recognition. See Notes 5 and 6 to
the Consolidated Financial Statements for additional information
regarding Pennsylvania deregulation of electric generation and
the Pennsylvania retail access pilot program.
Maintenance expenses 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. Maintenance expenses
decreased $4.6 million and $4.8 million for the third quarter and
first nine months of 1997, respectively, due primarily to reduced
expenses achieved through restructuring efforts and other cost
controls.
<PAGE>
- 17 -
Restructuring charges in the third quarter and first nine-
month periods of 1996, and an asset write-off in the first nine
months of 1996, include expenses associated with a
reorganization, which is essentially complete.
Taxes other than income taxes decreased $1.1 million for
the first nine months of 1997, due primarily to a decrease in
gross receipts taxes resulting from lower revenues from retail
customers.
The net increase in federal and state income taxes in the
third quarter and first nine months resulted primarily from an
increase in income before taxes. The increase in income before
taxes for the first nine months was primarily related to
restructuring charges recorded in 1996.
The increases in allowance for other than borrowed funds
used during construction (AOFDC) of $.1 million and $1.3 million
for the three and nine-month periods ended September 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 $3.4 million and $6.4
million for the third quarter and first nine months of 1997,
primarily due to an interest refund on a tax-related contract
settlement received by the Company's subsidiary, AGC, and in the
first nine months also due to a sale of land and timber by the
Company's subsidiary, West Virginia Power and 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.
Financial Condition and Requirements
The Company's discussion on Financial Condition and
Requirements and Competition in Core Business 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
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, legal actions, restructuring of
the electric utility industry, and, as described in Notes 4, 5,
and 6 to the Consolidated Financial Statements, the Pennsylvania
restructuring legislation and merger activities.
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.
<PAGE>
- 18 -
The Company believes that federal legislation is
necessary to ensure that electric restructuring is implemented
consistently across state and regional boundaries so that all
electric customers have an equal opportunity to benefit from
competition and customer choice by a date certain. Federal
legislation is also needed to remove barriers to competition,
including the Public Utility Holding Company Act of 1935 (PUHCA)
and PURPA.
<PAGE>
- 19 -
WEST PENN POWER COMPANY AND SUBSIDIARIES
Part II - Other Information to Form 10-Q
for Quarter Ended September 30, 1997
ITEM 1. LEGAL PROCEEDINGS
On September 29, 1997, the City of Pittsburgh filed an
antitrust and conspiracy lawsuit in Federal District Court for
the Western District of Pennsylvania against Allegheny Power, the
Company, DQE, Inc., and Duquesne Light Company. The verified
complaint alleges eight counts, two of which are claimed
violations of the federal antitrust statutes and six are state
law claims. The relief sought includes a request that the
proposed merger between Allegheny Power and DQE, Inc. be stopped,
and a request for unspecified monetary damages relating to
alleged collusion by the two companies in their actions dealing
with proposals to provide electric service to the city's
redevelopment zones. On October 27, 1997, Allegheny Power, the
Company, DQE, Inc., and Duquesne Light Company filed motions to
dismiss the complaint. While Allegheny Energy cannot predict the
outcome of this action, it believes the suit is without merit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) (27) Financial Data Schedule
(b) No reports on Form 8-K were filed on behalf of the
Company for the quarter ended September 30, 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)
November 13, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 407
<SECURITIES> 1,624
<RECEIVABLES> 120,552
<ALLOWANCES> 10,984
<INVENTORY> 67,675
<CURRENT-ASSETS> 220,866
<PP&E> 3,249,446
<DEPRECIATION> 1,240,602
<TOTAL-ASSETS> 2,641,260
<CURRENT-LIABILITIES> 251,111
<BONDS> 803,675
0
79,708
<COMMON> 465,994
<OTHER-SE> 490,423
<TOTAL-LIABILITY-AND-EQUITY> 2,641,260
<SALES> 802,007
<TOTAL-REVENUES> 802,007
<CGS> 468,942
<TOTAL-COSTS> 627,101
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,914
<INCOME-PRETAX> 141,306
<INCOME-TAX> 48,109
<INCOME-CONTINUING> 93,197
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 93,197
<EPS-PRIMARY> 0.00<F1>
<EPS-DILUTED> 0.00<F1>
<FN>
<F1>All common stock is owned by parent, no EPS required.
</FN>
</TABLE>
