<PAGE>
Page 1 of 27
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, 1999
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 - 724-837-3000
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 13, 1999, 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 June 30, 1999
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Consolidated Statement of Income -
Three and six months ended June 30, 1999 and 1998 3
Consolidated Balance Sheet - June 30, 1999
and December 31, 1998 4
Consolidated Statement of Cash Flows -
Six months ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-10
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-25
PART II--OTHER INFORMATION 26-27
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WEST PENN POWER COMPANY AND SUBSIDIARIES
Consolidated Statement of Income
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
ELECTRIC OPERATING REVENUES:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Utility $ 229,507 $ 263,023 $ 481,515 $ 543,726
Nonutility 97,762 - 163,484 -
Total Operating Revenues 327,269 263,023 644,999 543,726
OPERATING EXPENSES:
Operation:
Fuel 54,880 64,295 115,893 128,608
Purchased power and exchanges, net 83,704 27,714 130,532 58,431
Other 42,423 41,466 87,301 76,705
Maintenance 23,905 23,229 48,618 46,171
Depreciation 31,215 29,425 62,903 58,765
Taxes other than income taxes 23,099 21,740 43,872 44,865
Federal and state income taxes 20,954 14,527 50,117 36,935
Total Operating Expenses 280,180 222,396 539,236 450,480
Operating Income 47,089 40,627 105,763 93,246
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 22 127 85 745
Other income, net 2,476 2,894 4,637 5,560
Total Other Income and Deductions 2,498 3,021 4,722 6,305
Income Before Interest Charges 49,587 43,648 110,485 99,551
INTEREST CHARGES:
Interest on long-term debt 15,455 15,571 30,563 31,936
Other interest 1,271 1,968 2,227 2,846
Allowance for borrowed funds used during
construction (788) (199) (1,453) (540)
Total Interest Charges 15,938 17,340 31,337 34,242
Consolidated Income Before
Extraordinary Charge 33,649 26,308 79,148 65,309
Extraordinary Charge, net (1) - (265,446) - (265,446)
CONSOLIDATED NET INCOME (LOSS) $ 33,649 $ (239,138) $ 79,148 $ (200,137)
</TABLE>
See accompanying notes to consolidated financial statements.
(1) See Note 9 in the notes to the consolidated financial statements.
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WEST PENN POWER COMPANY AND SUBSIDIARIES
Consolidated Balance Sheet
(Thousands of Dollars)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS: 1999 1998
Property, Plant, and Equipment:
At original cost, including $91,749
<S> <C> <C>
and $75,725 under construction $ 3,402,111 $ 3,365,784
Accumulated depreciation (1,413,163) (1,362,413)
1,988,948 2,003,371
Investments and Other Assets:
Allegheny Generating Company - common stock at equity 71,834 74,374
Other 596 646
72,430 75,020
Current Assets:
Cash and temporary cash investments 9,141 4,523
Accounts receivable:
Electric service 182,351 132,386
Affiliated and other 39,176 26,381
Allowance for uncollectible accounts (18,137) (14,760)
Materials and supplies - at average cost:
Operating and construction 44,924 43,167
Fuel 30,705 24,363
Prepaid taxes 23,652 14,534
Regulatory assets 18,098 17,372
Other 13,735 2,261
343,645 250,227
Deferred Charges:
Regulatory assets 477,455 475,776
Unamortized loss on reacquired debt 3,848 4,065
Other 34,399 34,610
515,702 514,451
Total Assets $ 2,920,725 $ 2,843,069
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 465,994 $ 465,994
Other paid-in capital 55,475 55,475
Retained earnings 231,238 210,692
752,707 732,161
Preferred stock - 79,708
Long-term debt and QUIDS 858,986 837,725
Funds on deposit with trustees (11,844) -
1,599,849 1,649,594
Current Liabilities:
Short-term debt - 55,766
Notes payable to affiliates 29,400 9,300
Long-term debt and preferred stock due within one year 105,908 -
Accounts payable 109,911 77,815
Accounts payable to affiliates 50,695 33,859
Taxes accrued:
Federal and state income 10,263 1,002
Other 10,005 16,711
Interest accrued 15,359 15,681
Refunds payable 12,599 28,151
Adverse power purchase commitments-ST 48,514 47,173
Other 17,805 15,393
410,459 300,851
Deferred Credits and Other Liabilities:
Unamortized investment credit 41,336 42,630
Deferred income taxes 293,881 260,477
Regulatory liabilities 28,888 28,325
Adverse power purchase commitments-LT 513,817 538,745
Other 32,495 22,447
910,417 892,624
Total Capitalization and Liabilities $ 2,920,725 $ 2,843,069
</TABLE>
See accompanying notes to consolidated financial statements.
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WEST PENN POWER COMPANY
Consolidated Statement of Cash Flows
(Thousands of Dollars)
<TABLE>
<CAPTION>
Six Months Ended
June 30
1999 1998
CASH FLOWS FROM OPERATIONS:
<S> <C> <C> <C> <C>
Consolidated net income (loss) $ 79,148 $ (200,137)
Extraordinary charge, net of taxes - 265,446
Consolidated income before extraordinary charge 79,148 65,309
Depreciation 62,903 58,765
Deferred investment credit and income taxes, net 16,303 3,171
Unconsolidated subsidiaries' dividends in excess of earnings 2,590 16,307
Allowance for other than borrowed funds used
during construction (85) (745)
Internal restructuring liability - (4,082)
Adverse power purchase commitments (23,587) -
Restructuring settlement rate refund (12,825) -
Changes in certain current assets and
liabilities:
Accounts receivable, net (59,383) 2,404
Materials and supplies (8,099) (4,720)
Prepaid taxes (9,118) (18,440)
Accounts payable 48,932 9,000
Taxes accrued 2,555 (14,493)
Other, net (789) (4,460)
98,545 108,016
CASH FLOWS FROM INVESTING:
Utility construction expenditures (less allowance for
other than borrowed funds used during construction) (38,372) (36,455)
Nonutility construction expenditures (7,403) -
(45,775) (36,455)
CASH FLOWS FROM FINANCING:
Issuance of long-term debt 97,830 59,435
Retirement of long-term debt (51,714) (161,435)
Short-term debt, net (55,766) 88,806
Notes payable to affiliates 20,100 -
Dividends on capital stock:
Preferred stock (1,596) (1,683)
Common stock (57,006) (56,762)
(48,152) (71,639)
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS 4,618 (78)
Cash and temporary cash investments at January 1 4,523 4,056
Cash and temporary cash investments at June 30 $ 9,141 $ 3,978
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amount capitalized) $30,997 $32,622
Income taxes 17,098 40,551
</TABLE>
See accompanying notes to consolidated financial statements.
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WEST PENN POWER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. West Penn Power Company (the Company) is a wholly-owned
subsidiary of Allegheny Energy, Inc. (the Parent or Allegheny
Energy). The Company's Notes to Consolidated Financial
Statements in its Annual Report on Form 10-K for the year
ended December 31, 1998 should be read with the accompanying
consolidated financial statements and the following notes.
With the exception of the December 31, 1998 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, 1999, the results of operations for the three
and six months ended June 30, 1999 and 1998, and cash flows
for the six months ended June 30, 1999 and 1998.
2. Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," established standards for
reporting comprehensive income and its components (revenues,
expenses, gains, and losses) in the financial statements.
The Company does not have any elements of other comprehensive
income to report in accordance with SFAS No. 130.
3. 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.
4. The Company owns 45% of the common stock of Allegheny
Generating Company (AGC), and affiliates of the Company own
the remainder. AGC is reported by the Company in its
financial statements using the equity method of accounting.
AGC owns an undivided 40% interest, 840 megawatts (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.
AGC recovers from the Company and its affiliates all of its
operation and maintenance expenses, depreciation, taxes, and
a return on its investment under a wholesale rate schedule
approved by the Federal Energy Regulatory Commission (FERC).
AGC's rates are set by a formula filed with and previously
accepted by the FERC. The only component which changes is
the return on equity (ROE). Pursuant to a settlement
agreement filed April 4, 1996 with the FERC, AGC's ROE was
set at 11% for 1996 and will continue until the time any
affected party seeks renegotiation of the ROE.
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Following is a summary of income statement information for
AGC:
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
(Thousands of Dollars)
Electric operating revenues $17,810 $19,126 $35,667 $37,730
Operation and maintenance
expense 1,304 1,542 2,915 2,495
Depreciation 4,245 4,242 8,490 8,468
Taxes other than income taxes 1,129 1,177 2,261 2,337
Federal income taxes 2,546 2,907 4,960 5,772
Interest charges 3,285 3,298 6,688 6,811
Other income, net (1) (1) (2) (51)
Net income $ 5,302 $ 5,961 $10,355 $11,898
The Company's share of the equity in earnings above was $2.4
million and $2.7 million for the three months ended June 30,
1999 and 1998, respectively, and $4.7 million and $5.4
million for the six months ended June 30, 1999 and 1998,
respectively, and is included in other income, net, on the
Company's Consolidated Statement of Income.
5. As previously reported, on March 11, 1999, the United States
Court of Appeals for the Third Circuit vacated the United
States District Court for the Western District of
Pennsylvania's denial of Allegheny Energy's motion for
preliminary injunction, enjoining DQE, Inc. (DQE), parent
company of Duquesne Light Company in Pittsburgh, Pa., from
taking actions prohibited by the Merger Agreement. The
Circuit Court stated that if DQE breached the Merger
Agreement, Allegheny Energy may be entitled to specific
performance of the Merger Agreement. The Circuit Court also
stated that Allegheny Energy could be irreparably harmed if
DQE took actions that would prevent Allegheny Energy from
receiving the specific performance remedy. The Circuit Court
remanded the case to the District Court for further
proceedings consistent with its opinion.
In the District Court, DQE has filed a motion for summary
judgment which Allegheny Energy has opposed. The court has
not yet ruled. Allegheny Energy cannot predict the outcome
of this litigation. However, Allegheny Energy believes that
DQE's basis for seeking to terminate the merger is without
merit. Accordingly, Allegheny Energy continues to seek the
remaining regulatory approvals from the Department of Justice
and the Securities and Exchange Commission. It is not likely
either agency will act on the requests unless the Company
obtains judicial relief requiring DQE to move forward.
The $7.9 million deferred incremental costs of the merger
process recorded by the Company through March 31, 1999 were
transferred to the Parent company in the second quarter of
1999. The accumulated merger costs will be written off by
the Parent company when the merger occurs or if it is
determined that the merger will not occur.
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6. The Consolidated Balance Sheet includes the amounts listed
below for assets, primarily generation, not subject to SFAS
No. 71, "Accounting for the Effects of Certain Types of
Regulation."
June 30 December 31
1999 1998
(Thousands of Dollars)
Property, plant and equipment at
original cost $1,805,536 $1,798,838
Amounts under construction included above 42,509 39,227
Accumulated depreciation (891,703) (859,455)
7. The Company's principal business segments are utility and
nonutility operations. The Company's utility business
includes the generation, purchase, transmission,
distribution, and sale of electric energy and is subject to
federal and state regulation. Nonutility operations consists
of the Energy Supply Division (ESD) of the Supply Business of
the Company, acting under the name of Allegheny Energy
Supply. The ESD has the primary objective of selling the
Company's generation (approximately 2,570 megawatts) that has
been freed up by the Electricity Generation Customer Choice
and Competition Act (Customer Choice Act) in Pennsylvania and
is no longer regulated by the Pennsylvania Public Utility
Commission (Pennsylvania PUC). Nonutility operations may be
subject to federal regulation but are not subject to state
regulation of rates.
Business segment information is summarized below.
Significant transactions between reportable segments are
eliminated to reconcile the segment information to
consolidated amounts.
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
(Thousands of Dollars)
Operating Revenues:
Utility $229,507 $263,023 $481,515 $543,726
Nonutility 177,029* 312,926*
Eliminations (79,267) 149,442)
Depreciation:
Utility 18,566 29,425 36,902 58,765
Nonutility 12,649 26,001
Federal and State Income
Taxes:
Utility 15,862 14,527 33,674 36,935
Nonutility 5,092 16,443
Operating Income:
Utility 37,302 40,627 74,484 93,246
Nonutility 9,787 31,279
Interest Charges and
Preferred Dividends:
Utility 10,632 18,185 21,039 35,925
Nonutility 6,108 11,894
Consolidated Income
Before Extraordinary
Charge:
Utility 30,004 26,308 59,791 65,309
Nonutility 3,645 19,357
Extraordinary Charge, Net:
Utility 265,446 265,446
Nonutility
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Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
Capital Expenditures:
Utility 23,044 18,757 38,457 37,200
Nonutility 6,148 7,403
June 30 December 31
1999 1998
Identifiable Assets:
Utility $1,836,064 $2,843,069
Nonutility 1,084,661
*Nonutility operating revenues includes $14.8 million and
$33.5 million in the three months and six months ended
June 30, 1999 of allocated Competitive Transition Charge
(CTC) revenues to compensate for certain transition costs
transferred to nonutility operations.
8. The Company is authorized to collect a CTC from its
distribution customers over the period 1999 to 2008 as a
result of a 1998 Order of the Pennsylvania PUC.
The November 1998 Order of the Pennsylvania PUC authorizes
annual recovery of "transition costs" from distribution
customers as follows:
Year Amount Year Amount
(Millions of Dollars) (Millions of Dollars)
1999 $122 2004 $104
2000 121 2005 99
2001 115 2006 98
2002 113 2007 97
2003 112 2008 97
CTC revenues recorded in the three months and six months
ended June 30, 1999 totaled $29.7 million and $67.6 million,
respectively.
The Order also authorized recognition of an additional CTC
regulatory asset as follows:
Year Amount
(Millions of Dollars)
1999 $25
2000 45
2001 60
2002 50
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To the extent that the Company records any or all of the
Additional CTC Regulatory Asset, it will be amortized in 2005
through 2008. This Additional CTC Regulatory Asset was
approved by the Pennsylvania PUC to reduce the adverse
effects, if any, that competition will have on the Company
during the years 1999 to 2002.
No Additional CTC Regulatory Asset was recorded by the
Company as of June 30, 1999.
9. The 1998 periods include a previously reported extraordinary
charge of $450.6 million ($265.4 million, net of taxes) to
reflect a write-off by the Company of prudently incurred costs
determined to be unrecoverable as a result of the May 29, 1998
Order by the Pennsylvania PUC in connection with the deregulation
proceedings in Pennsylvania.
Subsequent Event
The Company redeemed all outstanding shares of its
cumulative preferred stock on July 15, 1999. The redemption was
funded with proceeds from new five-year unsecured medium-term
notes issued by the Company in the second quarter at a 6.375%
coupon rate.
The redemption of the preferred stock allowed the Company
to revise its Articles of Incorporation providing greater
financial flexibility in restructuring the Company's debt and
transferring the Company's generating facilities into a new
unregulated generating subsidiary.
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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, 1999
WITH SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1998
The Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations in West Penn Power Company's (the Company)
Annual Report on Form 10-K for the year ended December 31, 1998
should be read with the following Management's Discussion and
Analysis information.
Factors That May Affect Future Results
This management's discussion and analysis of financial
condition and results of operations contains forecast information
items that are "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. These include
statements with respect to deregulation activities and movements
toward competition in Pennsylvania, the proposed merger of
Allegheny Energy, Inc. (Allegheny Energy) and related litigation
against DQE, Inc. (DQE), parent company of Duquesne Light Company
in Pittsburgh, Pa., Year 2000 readiness disclosure, and results
of operations. All such forward-looking information is
necessarily only estimated. There can be no assurance that
actual results will not materially differ from expectations.
Actual results have varied materially and unpredictably from past
expectations.
Factors that could cause actual results to differ
materially include, among other matters, electric utility
restructuring, including the ongoing state and federal
activities; potential Year 2000 operation problems; developments
in the legislative, regulatory, and competitive environments in
which the Company operates, including regulatory proceedings
affecting rates charged by the Company; environmental,
legislative, and regulatory changes; future economic conditions;
developments relating to the proposed merger with DQE, including
expenses that may be incurred in litigation; and other
circumstances that could affect anticipated revenues and costs
such as significant volatility in the market price of wholesale
power, unscheduled maintenance or repair requirements, weather,
and compliance with laws and regulations.
Significant Events in the First Six Months of 1999
* Unregulated Generating Subsidiary
The Company, its parent, Allegheny Energy, and affiliate,
AYP Energy, Inc., filed a Form U-1 application on April 16, 1999
with the Securities and Exchange Commission (SEC) to form an
unregulated generating subsidiary. Regulatory approval must also
be obtained from the Federal Energy Regulatory Commission (FERC),
and the Pennsylvania Public Utility Commission (Pennsylvania PUC)
will review the proposed plan.
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Upon approval, the Company will transfer its deregulated
generating capacity, which after January 1, 2000 will total
approximately 3,700 megawatts (MW), at book value as allowed by
the final settlement in the Company's Pennsylvania restructuring
case to the new generating company or GENCO.
Initially, the Company will transfer to a new unregulated
subsidiary generating company all of its ownership interests in
generating assets and its contractual rights to generating
capacity other than those arising under the Public Utility
Regulatory Act of 1978 (PURPA). As consideration, the generating
subsidiary will pay the Company the book value of the generating
assets in a combination of cash and a note secured by a purchase
money mortgage on the generating assets. It is expected, in
order to obtain the release of the generating assets from the
lien of the first mortgage, to pay the cash and assign the note
and the purchase money mortgage to the trustee of the Company's
first mortgage bonds.
Thereafter, the Company will dividend up to Allegheny
Energy its ownership interest in the new generating subsidiary.
After this dividend, the Company will no longer have any
ownership interest in generating assets or contractual rights to
generating capacity.
It is expected that the necessary regulatory approvals to
commence these transfers and dividend will be received by the end
of 1999. It is expected that upon the receipt of these approvals
the Company will complete the transfers of generating assets and
the dividend to Allegheny Energy. Actual timing, however, will
depend on actions by various regulatory authorities that are
outside the control of the Company.
* Merger with DQE
See Note 5 to the consolidated financial statements for
information about the proposed merger of Allegheny Energy, Inc.,
the Company's parent, with DQE, Inc. (DQE), parent company of
Duquesne Light Company in Pittsburgh, Pa., and related
litigation.
* Toxics Release Inventory (TRI)
On Earth Day 1997, President Clinton announced the
expansion of Right-to-Know TRI reporting to include electric
utilities, limited to facilities that combust coal and/or oil for
the purpose of generating power for distribution in commerce.
The purpose of TRI is to provide site-specific information on
chemical releases to the air, land, and water. On June 4, 1999,
the Allegheny Energy companies (the System) joined with other
members of the Edison Electric Institute in reporting power
station releases to the public. Packets of information about the
System's releases were provided to media in the System's area and
posted on the Parent Company's web site. The System filed its
first TRI report with the Environmental Protection Agency prior
to the July 1, 1999 deadline date, reporting 18 million pounds of
total releases for calendar year 1998.
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Review of Operations
EARNINGS SUMMARY
Consolidated Net Income (Loss)
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
(Millions of Dollars)
Utility operations $30.0 $ 26.3 $59.7 $ 65.3
Nonutility operations 3.6 - 19.4 -
Consolidated income before
extraordinary charge 33.6 26.3 79.1 65.3
Extraordinary charge, net (265.4) (265.4)
Consolidated net income
(loss) $33.6 $(239.1) $79.1 $(200.1)
Consolidated net income for the second quarter and first
six months of 1998 includes a previously reported extraordinary
charge of $450.6 million ($265.4 million, net of taxes) to
reflect a write-off by the Company of prudently incurred costs
determined to be unrecoverable as a result of the May 29, 1998
Order by the Pennsylvania Public Utility Commission in connection
with the deregulation proceedings in Pennsylvania.
The increase in consolidated net income for the second
quarter of 1999 before the 1998 extraordinary charge was in part
attributed to increased earnings from nonutility sales of
electricity. The increase in consolidated net income for the
first six months of 1999 before the 1998 extraordinary charge was
primarily attributed to increased kilowatt-hour sales to
residential customers due to winter weather that was 24% cooler
than the relatively warm winter of 1998, and nonutility sales.
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SALES AND REVENUES
Total operating revenues for the second quarter and first
six months of 1999 and 1998 were as follows:
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
(Millions of Dollars)
Operating revenues:
Utility revenues:
Regulated $212.7 $238.8 $450.7 $502.2
Choice 9.1 2.3 15.9 5.9
Bulk power and trans-
mission services sales 7.7 21.9 14.9 35.6
Total utility revenues 229.5 263.0 481.5 543.7
Nonutility revenues 177.0* - 312.9* -
Elimination between utility
and nonutility (79.2) - (149.4) -
Total operating
revenues $327.3 $263.0 $645.0 $543.7
*Nonutility operating revenues include $14.8 million and $33.5
million in the three months and six months ended June 30, 1999
of allocated Competitive Transition Charge revenues to compensate
for certain transition costs transferred to nonutility operations.
The decreases in regulated revenues (regulated revenues
include revenues from the Company's customers eligible to choose
an alternate energy supplier but electing not to do so) in the
three and six months ended June 30, 1999 were due primarily to
the result of Pennsylvania competition which gave two-thirds of
the Company's regulated customers the ability to choose another
energy supplier. These decreases to regulated revenue were
offset in part in the six-month period by colder winter weather
in 1999 which led to increased residential kWh sales.
Utility choice revenues for 1999 represent transmission
and distribution revenues from the Company's franchised customers
(customers in the Company's territory) who chose another supplier
to provide their energy needs. In 1998 the choice revenues
represent the 5% of previously fully bundled customers (full
service customers) who participated in the Pennsylvania pilot and
were required to buy energy from an alternate supplier. The
Energy Supply Division (ESD) of the Company has the primary
objective of selling two-thirds of the Company's generation that
has been freed up by the Electricity Generation Customer Choice
and Competition Act (Customer Choice Act) in Pennsylvania. As a
result of the ESD selling to the nonutility market, utility bulk
power sales have decreased due to reduced regulated generation
available for sale.
Nonutility revenues increased for the second quarter and
six months ended June 30, 1999 due primarily to bulk power sales
to nonaffiliated companies and to new sales in Pennsylvania's
competitive marketplace by the ESD. The ESD officially began
supplying electricity to retail customers on January 1, 1999. It
uses the two-thirds of generation freed up by the Customer Choice
Act in Pennsylvania to sell electricity to both wholesale and
retail customers in the unregulated marketplace.
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The elimination between utility and nonutility revenues
is necessary to remove the effect of affiliated revenues.
See Note 8 to the Consolidated Financial statements for
information regarding the Competitive Transmission Charge.
OPERATING EXPENSES
Fuel expenses for the second quarter and first six months
of 1999 and 1998 were as follows:
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
(Millions of Dollars)
Utility operations $ 16.8 $64.3 $ 36.3 $128.6
Nonutility operations 38.1 - 79.6 -
Total fuel expenses $ 54.9 $64.3 $115.9 $128.6
Total fuel expenses for the second quarter and six months
ended June 30, 1999 decreased primarily due to a decrease in
kWh's generated and a decrease in average fuel costs. The
decrease in fuel expenses for utility operations and the increase
in fuel expenses for nonutility operations was due to the fuel
expenses associated with the two-thirds of the Company's freed up
generation now being marketed by the ESD as part of nonutility
operations.
Purchased power and exchanges, net, represents power
purchases from and exchanges with other 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 Energy System at
any given time, and consists of the following items:
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Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
(Millions of Dollars)
Utility:
Nonaffiliated transactions:
Purchased power:
From PURPA generation* $ 9.4 $16.3 $ 18.9 $32.8
Other 2.3 2.9 17.0 7.0
Power exchanges, net (1.4) (.7) 1.1 .7
Affiliated transactions:
AGC capacity charges 3.2 8.3 6.4 16.2
Energy and spinning
reserve charges .9 .9 2.1 1.7
Total utility pur-
chased power and
exchanges, net 14.4 27.7 45.5 58.4
Nonutility operations 79.8 - 98.5 -
Elimination (10.5) - (13.5) -
Purchased power and
exchanges, net $83.7 $27.7 $130.5 $58.4
*PURPA cost (cents per kWh) 4.4 5.7 4.4 5.8
The decrease of $6.9 million and $13.9 million in the
second quarter and six months ended June 30, 1999 in utility
purchased power from PURPA generation reflects a $2.7 million and
$5.4 million reduction in the second quarter and six months ended
June 30, 1999, respectively, related to the Company's purchase
commitment at costs in excess of the market value of the AES
Beaver Valley contract and also a decrease of $3.7 million and
$7.2 million in the second quarter and six months ended June 30,
1999, respectively, in the purchase price for that contract due
to a scheduled capacity rate decrease defined annually in the
contract. The reduction related to the purchase commitment in
excess of costs reflects the amortization of excess costs
accruals recorded in 1998 as an adverse power purchase commitment
net of the Competitive Transition Charge revenue recovery in
conjunction with deregulation proceedings in Pennsylvania.
The increase in other utility operations purchased power
in the six months ended June 30, 1999 was due primarily to the
Company's purchase of power from nonaffiliated companies and
marketers in order to provide energy to the two-thirds of its
customers eligible to choose an alternate supplier but electing
not to do so. The generation previously available to serve those
customers has been freed up by the Customer Choice Act in
Pennsylvania and is being marketed by the Energy Supply Division
(ESD) of the Company to the unregulated marketplace.
<PAGE>
- 17 -
The decreases in Allegheny Generating Company (AGC)
capacity charges was due to a $4.8 million and $9.6 million
reduction in purchased power expense related to the Company's
purchase commitments at costs in excess of the market value of
the AGC pumped storage capacity contract in the second quarter
and six months ended June 30, 1999, respectively. As reported
previously, the Company, in 1998, recorded an extraordinary
charge to reflect the cost of this and another adverse power
purchase commitment that is not recoverable from customers under
the Pennsylvania Public Utility Commission's 1998 Order and
settlement agreement.
The elimination between utility and nonutility purchased
power is necessary to remove the effect of affiliated purchased
power expenses.
Other operation expenses for the second quarter and first
six months of 1999 and 1998 were as follows:
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
(Millions of Dollars)
Utility operations $29.3 $41.5 $63.2 $76.7
Nonutility operations 15.1 - 28.7 -
Elimination (2.0) - (4.6) -
Total other operation
expenses $42.4 $41.5 $87.3 $76.7
Total other operating expenses for the second quarter of
1999 remained about the same as the second quarter of 1998.
Total other operating expenses for the six months ended June 30,
1999 increased $10.6 million when compared to the same period in
1998. This increase resulted primarily from increased salaries,
wages and employee benefits ($4.6 million), increased allowances
for uncollectible accounts ($2.4 million), and the reversal of a
restructuring liability in the 1998 period ($2.0 million), and
Year 2000 expenses ($1.6 million). Nonutility other operation
expenses reflect increased business activity.
The elimination between utility and nonutility operation
expenses is necessary to remove the effect of affiliated
transmission purchases.
Maintenance expenses for the second quarter and first six
months of 1999 and 1998 were as follows:
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
(Millions of Dollars)
Utility operations $14.2 $23.2 $29.4 $46.2
Nonutility operations 9.7 - 19.2 -
Total maintenance expenses $23.9 $23.2 $48.6 $46.2
<PAGE>
- 18 -
Total maintenance expenses for the second quarter of 1999
remained about the same as the second quarter of 1998. Total
maintenance expenses for the six months ended June 30, 1999
increased $2.4 million due primarily to increased power station
maintenance expenses. The decreases in utility maintenance and
the increases in nonutility maintenance were due primarily to the
maintenance associated with the two-thirds of the Company's
deregulated generation now being classified as nonutility
maintenance. 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.
Depreciation expenses for the second quarter and first
six months of 1999 and 1998 were as follows:
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
(Millions of Dollars)
Utility operations $18.6 $29.4 $36.9 $58.8
Nonutility operations 12.6 - 26.0 -
Total depreciation and
amortization expenses $31.2 $29.4 $62.9 $58.8
Depreciation expense in the second quarter and first six
months of 1999 increased $1.8 million and $4.1 million,
respectively, primarily due to increased investment. Utility and
nonutility depreciation expense reflects the movement of
depreciation expense associated with the two-thirds of freed up
generation from utility operations to nonutility operations.
Taxes other than income taxes for the second quarter and
first six months of 1999 and 1998 were as follows:
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
(Millions of Dollars)
Utility operations $16.2 $21.7 $30.6 $44.9
Nonutility operations 6.9 - 13.3 -
Total taxes other than
income taxes $23.1 $21.7 $43.9 $44.9
<PAGE>
- 19 -
Total taxes other than income taxes increased $1.4
million in the second quarter of 1999 due primarily to an
adjustment of a prior period to include FICA taxes in taxes other
than income taxes. Total taxes other than income taxes decreased
$1.0 million in the first six months ended June 30, 1999
primarily due to decreased property taxes which resulted from an
additional assessment included in a prior year. Utility and
nonutility taxes other than income taxes reflect the movement of
taxes other than income taxes associated with the two-thirds of
freed up generation from utility operations to nonutility
operations.
The increases in federal and state income taxes for the
second quarter and first six months ended June 30, 1999 were
primarily due to increased income before taxes.
Interest on long-term debt for the second quarter and
first six months of 1999 and 1998 was as follows:
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
(Millions of Dollars)
Utility operations $10.0 $15.6 $19.6 $31.9
Nonutility operations 5.5 - 11.0 -
Total interest on
long-term debt $15.5 $15.6 $30.6 $31.9
The decrease in interest on long-term debt for the six
months ended June 30, 1999 of $1.3 million resulted primarily
from a reduction in long-term debt outstanding in the first
quarter of 1999.
Other interest expense reflects changes in the levels of
short-term debt maintained by the Company as well as the
associated rates.
Financial Condition and Requirements
The Company's discussion on Financial Condition,
Requirements, and Resources and Significant Continuing Issues in
its Annual Report on Form 10-K for the year ended December 31,
1998 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 legal actions and
regulations and uncertainties related to environmental matters.
See Note 5 to the Consolidated Financial Statements for
information about merger activities.
* Market Risk
The Company supplies power in nonregulated power markets.
At June 30, 1999, the marketing books for such operations
consisted primarily of fixed-priced, forward-purchase and/or sale
contracts which require settlement by physical delivery of
electricity. These transactions result in market risk, which
occurs when the market price of a particular obligation or
entitlement varies from the contract price.
<PAGE>
- 20 -
* Transition Bonds
The Company plans to issue up to $670 million in
transition bonds in the third quarter of 1999 in accordance with
its 1998 restructuring settlement. That settlement, approved by
the Pennsylvania PUC, allows the Company to recover $670 million
in transition costs which might otherwise prove unrecoverable in
a competitive environment. The settlement also requires that a
portion of the benefits achieved from the bond sales be passed
through to customers by reducing the competitive transition
charge. This transition charge is a temporary per-kilowatt-hour
charge designed to collect a company's transition cost in a
competitive environment.
The Company filed a petition for a supplemental Qualified
Rate Order (QRO) with the Pennsylvania PUC on April 23, 1999 to
clarify the procedures and structure associated with the issuance
of Transition Bonds. The supplemental findings sought by the
Company relate primarily to the computation, design, and
reconciliation of the Intangible Transition Charges (ITC), a
portion of the CTC dedicated to the transition bonds. These
findings are expected to significantly improve the credit profile
of the Transition Bonds. On August 2, 1999, the Company entered
a settlement agreement with the other parties and requested
approval of the settlement from the Pennsylvania PUC. The
settlement agreement resolves annual reconciliation timing issues
and other issues and presents to the Pennsylvania PUC for
resolution a question as to the funding of the ITC in the event
of a revenue shortfall. On August 12, 1999, the PUC approved the
Company's petition as modified by the settlement agreement. The
approval provides that the shopping credit may be adjusted when
circumstances warrant.
The Company plans to reduce transition costs and related
capitalization with the proceeds from the transition bonds.
* Redemption of Preferred Stock
The Company redeemed all outstanding shares of its
cumulative preferred stock on July 15, 1999. The redemption was
funded with proceeds from new medium-term notes issued by the
Company in the second quarter at a 6.375% coupon rate.
The redemption of the preferred stock allowed the Company
to revise its Articles of Incorporation providing greater
financial flexibility in restructuring the Company's debt and
transferring the Company's generating facilities into a new
unregulated generating subsidiary.
* Repurchase of First Mortgage Bonds
During the second quarter and the early part of the third
quarter of 1999, the Company repurchased $96.4 million of first
mortgage bonds. This reduced that Company's outstanding first
mortgage bonds to $428.6 million. The Company expects to make
additional purchases in the second half of the year.
* Issuance of Notes
In April 1999, the Company issued $13.8 million of 5.50%
30-year pollution control revenue notes to Pleasants County, West
Virginia.
<PAGE>
- 21 -
In June 1999, the Company issued $84 million of five-year
unsecured medium-term notes at an interest rate of 6.375%.
* Year 2000 Readiness Disclosure
The transition from 1999 into the Year 2000 (Y2K) has the
potential to cause serious problems to most organizations,
including the Company, related to software and various equipment
with embedded chips which may not properly recognize calendar
dates. To minimize such problems, the Company and its affiliates
in the System have been working under a comprehensive Y2K program
to identify and remediate the problem areas in order to continue
operations without significant problems in 2000 and beyond. An
Executive Task Force is coordinating the efforts of 24 separate
Y2K Teams, representing all business and support units in the
System.
In May 1998, the North American Electric Reliability
Council (NERC), of which the System is a member, accepted a
request from the United States Department of Energy to coordinate
the industry's Y2K efforts. The electric utility industry and
the System have segmented the Y2K problem into the following
components:
* Computer hardware and software;
* Embedded chips in various equipment; and
* Vendors and other organizations on which the System relies
for critical materials and services.
The industry's and the System efforts for each of these
three components include inventory, assessment and, where
possible, remediation of the problem areas by repair, replacement
or removal, supplemented by confirmation testing and contingency
plans. Contingency plans include alternate methods of certain
operations to help avoid electric service or business
interruptions, and the review and update of restoration of
service plans to mitigate the severity and length of
interruptions in the unlikely event that any should occur.
Based on this work, the Company has determined that as of
June 30, 1999 all of its critical components and systems related
to safety and the production and distribution of electricity and
nearly all of its important business systems (accounting,
billing, etc.) are Y2K ready. The Company anticipates that the
remediation and testing work on the remaining business and non-
critical systems will be completed by September 30, 1999. The
Company has defined Y2K Ready to mean that a determination has
been made by testing or other means that a component or system
will be able to perform its critical functions, or that
contingency plans are in place to overcome any inability to do
so.
The Company's readiness program has been conducted in
accordance with time schedules recommended by state regulatory
commissions and by NERC. As is the case of most electric
utilities, the System is interconnected with neighboring
utilities, which provides added strength of supply diversity and
flexibility. But the interconnections also mean that any one
utility's Y2K readiness is related to the readiness of the group.
Integrated electric utilities are uniquely reliant on each other
to avoid, in a worst case situation, a cascading failure of the
entire electrical system. The System is working with the Edison
Electric Institute, the Electric Power Research Institute, the
NERC, and the East Central Area Reliability Agreement group
<PAGE>
- 22 -
(ECAR) to capitalize on industry-wide experiences and to
participate in industry-wide testing and contingency planning.
Since the Company and its neighboring utilities in the ECAR group
are all participants in the NERC Y2K effort (which had a target
completion date of June 30 for critical systems related to
production and delivery of electricity), the Company believes
that this worst case possibility has been reduced to an unlikely
event. The Company has recently re-tested its existing
contingency plans for restoration of service even if this
unlikely event were to occur.
As part of the on-going NERC program, the Company
participated in an industry-wide Y2K drill on April 9, 1999 and
will participate in a more extensive industry-wide drill planned
for September 9, 1999. While the electric utility industry is
aware of the extensive Y2K programs of the major
telecommunications companies, the industry has determined that
telecommunication facilities are so important to continued
operations that we must have contingency plans just in case some
of those facilities may not be available. The drills are dry
runs designed to test the ability of utilities to continue to
operate with less than normal telecommunication facilities.
During the April test, the Company was able to maintain adequate
communications under a simulated failure of selected systems and
obtained valuable information for improvement of its plans. NERC
has reported that the industry-wide tests produced similar
results. On December 31, 1999, the Company will have extra staff
in critical areas of the system to implement these and other
contingency plans if they are required.
The SEC requires that each company disclose its estimate
of the "most reasonably likely worst case scenario" of a negative
Y2K event. Since the Company and the industry are working
diligently to avoid any disruption of electric service, the
Company believes its customers will not experience any
significant long-term disruptions of electric service. It is the
Company's opinion that the "most reasonably likely worst case
scenario" is a Y2K event or series of events at Company
facilities or at the facilities of neighboring utilities that
escaped discovery that may cause isolated disruptions of service.
All utilities, including the Company, have experience in the
implementation of existing restoration of service plans. As
stated above, the Company's Y2K program includes a review and
update of these plans to respond quickly to any such events.
The Company is aware of the importance of electricity to
its customers and is using its best efforts to avoid any serious
Y2K problems. Despite the Company's best efforts, including
working with internal resources, external vendors, and industry
associations, the Company cannot guarantee that it will be able
to conduct all of its operations without Y2K interruptions. To
the extent that any Y2K problem may be encountered, the Company
is committed to resolution as expeditiously as possible to
minimize the effect of any such event.
Expenditures for Y2K readiness are not expected to have a
material effect on the Company's results of operations or
financial position primarily because of the significant time and
money expended over the past several years on upgrading and
replacing its large mainframe computer systems and software.
While the Y2K work has been and continues to be significant, it
primarily represents a labor-intensive effort of remediation,
component testing, multiple systems testing, documentation, and
contingency planning. While outside contractors and equipment
vendors have been employed for some of the work, the Company has
used its own employees for most of the effort because of their
experience with the Company's systems and equipment. The Company
<PAGE>
- 23 -
currently estimates that its total incremental expenditures for
the Y2K effort since it began identification of Y2K costs will be
within a range of $8 to about $10 million of which approximately
$7 million has been incurred through June 30, 1999. These
expenditures are financed by internal sources and primarily
result from the purchase of external expert assistance by the
Generation and Information Services departments. The
expenditures have not required a material reduction in the normal
budgets and work efforts of these departments.
The descriptions herein of the Company's Y2K effort are
made pursuant to the Year 2000 Information and Readiness
Disclosure Act. Forward-looking statements herein are made
pursuant to the Private Securities Litigation Reform Act of 1995.
There can be no assurance that actual results will not materially
differ from expectations.
* Electric Energy Competition
The electricity supply segment of the electric utility
industry in the United States is in the midst of becoming
competitive. The Energy Policy Act of 1992 began the process of
deregulating the wholesale exchange of power within the electric
industry by permitting the FERC to compel electric utilities to
allow third parties to sell electricity to wholesale customers
over their transmission systems. Since 1992, the wholesale
electricity market has become increasingly competitive as
companies began to engage in nationwide power trading. In
addition, an increasing number of states have taken active steps
toward allowing retail customers the right to choose their
electricity supplier. All of the states served by the utility
subsidiaries of Allegheny Energy have investigated or implemented
retail access to alternate electricity suppliers. The Company
has been an advocate of federal legislation to create competition
in the retail electricity markets to avoid regional dislocations
and ensure level playing fields.
In the absence of federal legislation, state-by-state
implementation has begun. All of the states served by the
utility subsidiaries of Allegheny Energy are at various stages of
implementation or investigation of programs that allow customers
to choose their electric supplier. Pennsylvania is furthest
along with a retail program in place, while Maryland, Virginia
and Ohio passed legislation this year to implement retail choice.
West Virginia continues to actively study this issue.
Activities at the Federal Level
The System is an advocate of federal legislation to
mandate competition in retail electricity markets nationwide to
avoid regional dislocations and ensure level playing fields. The
System continues to seek enactment of federal legislation to
bring choice to all retail electric customers, deregulate the
generation and sale of electricity on a national level, and
create a more liquid, free market for electric power. Fully
meeting challenges in the emerging competitive environment will
be difficult for the System unless certain outmoded and anti-
competitive laws, specifically the Public Utility Holding Company
Act of 1935 (PUHCA) and Section 210 of the Public Utility
Regulatory Policies Act of 1978 (PURPA), are repealed or
significantly revised. The System continues to advocate the
repeal of PUHCA and PURPA, on the grounds that they are obsolete
and anti-competitive, and that PURPA results in utility customers
paying above-market prices for power.
<PAGE>
- 24 -
In the U.S. Congress, a series of hearings on the competition
issue in both the House and Senate recently have been completed,
and committee staffs in both chambers are writing comprehensive
competition bills. Consensus remains elusive, however, with
significant hurdles remaining in both houses of Congress. While
it is too early to tell whether initial momentum on the issue
will result in legislation in the current Congress, the
competition issue has received more attention this year than ever
before.
The status of electric energy competition in Ohio, West
Virginia, Virginia, and Maryland in which affiliates of the
Company serve are as follows:
Ohio
The Ohio General Assembly passed legislation on June 22,
1999 to restructure the electric utility industry. Governor Taft
signed the bill soon thereafter, and all of the state's customers
will be able to choose their electricity supplier starting
January 1, 2001, beginning a five-year transition to market
rates. Total electric rates will be frozen over that period, and
residential customers are guaranteed a 5% cut in the generation
portion of their rate. The determination of stranded cost
recovery will be handled by The Public Utilities Commission of
Ohio. The bill stipulates that no entity shall own or control
transmission facilities after the start of competitive retail
electric service unless that entity is a member of and transfers
control of those facilities to one or more qualifying independent
transmission entities. The legislation provides for consumer
education, universal service, consolidation of Ohio's low income
customer assistance programs as well as incentives for
development of renewable resources and disclosure of the
environmental characteristics of power supplies.
West Virginia
In December 1996, the Public Service Commission of West
Virginia (W.Va. PSC) issued an Order initiating a general
investigation regarding the restructuring of the electric utility
industry. A Task Force was established to further investigate
restructuring issues. In December 1997, the Task Force approved
legislative language that would have given the W.Va. PSC broad
authority to implement retail choice. The proposed legislation
was substantially modified by the West Virginia Legislature and
passed in March 1998. The legislation directed the W.Va. PSC to
meet with all interested parties to develop a restructuring plan
which would meet the dictates and goals of the legislation.
Interested parties formed a new Task Force that met during 1998,
but the Task Force was unable to reach a consensus on a model for
restructuring. The W.Va. PSC issued an Order on December 23,
1998 setting hearings to begin on August 17, 1999 and August 24,
1999. The August 17 hearing will address certification,
licensing, bonding, reliability, universal service, consumer
protection, and code of conduct. The August 24 hearing will
address subsidies and stranded costs. Following these hearings,
the W.Va. PSC will make a determination whether restructuring is
in the public interest.
<PAGE>
- 25 -
Virginia
The Virginia Electric Utility Restructuring Act (the
Restructuring Act) was passed by the Virginia General Assembly
on March 25, 1999 and was signed by the Governor of
Virginia on March 29, 1999. The Legislative Transition Task
Force on Electric Utility Restructuring, which was established by
the Restructuring Act, is holding hearings this summer on a
number of issues concerning the implementation of retail
competition in Virginia. Working groups also continue to meet
with State Corporation Commission staff, comments were filed and
commission hearings have been held to discuss the proposed retail
pilot programs of other utilities in the state. Recommended
interim rules for retail pilot programs were issued August 6,
1999, subject to final approval by the commission. It is
anticipated that these interim rules will provide a framework for
rules and regulations applicable to full implementation of retail
choice beginning in 2002. The commission is seeking comments on
issues relating to the development of and participation in
regional transmission entities required by the Restructuring Act
to facilitate access to electric transmission systems.
Maryland
The Maryland General Assembly passed legislation to
restructure the electric utility industry on April 2, 1999, and
on April 8, 1999, the Governor of Maryland signed the legislation
that will bring competition to Maryland's electric generation
market. The Maryland Public Service Commission is in the process
of implementing the new law. Final Electric Restructuring
Roundtable reports were filed with the Commission on May 3, 1999.
Legislative style hearings have been scheduled this summer with
the commission expected to issue decisions by the end of the
year.
<PAGE>
- 26 -
WEST PENN POWER COMPANY AND SUBSIDIARIES
Part II - Other Information to Form 10-Q
for Quarter Ended June 30, 1999
ITEM 1. LEGAL PROCEEDINGS
As of August 9, 1999, Monongahela Power Company, an
affiliate of the Company, was named as a defendant along with
multiple other defendants in approximately 8,000 asbestos cases.
The Company and The Potomac Edison Company, also an affiliate of
the Company, were named as defendants along with multiple other
defendants in approximately one-half of those cases. As of June
30, 1999, a total of 721 cases have been settled and/or dismissed
against the Company, Monongahela Power Company, and The Potomac
Edison Company for reasonable settlement amounts. While the
Company, Monongahela Power Company, and The Potomac Edison
Company believe that all of the cases are without merit, they
cannot predict the outcome nor are they able to determine whether
additional cases will be filed.
As previously reported, on March 11, 1999, the United
States Court of Appeals for the Third Circuit vacated the United
States District Court for the Western District of Pennsylvania's
denial of Allegheny Energy's motion for preliminary injunction,
enjoining DQE, Inc. (DQE), parent company of Duquesne Light
Company in Pittsburgh, Pa., from taking actions prohibited by the
Merger Agreement. The Circuit Court stated that if DQE breached
the Merger Agreement, Allegheny Energy may be entitled to
specific performance of the Merger Agreement. The Circuit Court
also stated that Allegheny Energy could be irreparably harmed if
DQE took actions that would prevent Allegheny Energy from
receiving the specific performance remedy. The Circuit Court
remanded the case to the District Court for further proceedings
consistent with its opinion.
In the District Court, DQE has filed a motion for summary
judgment which Allegheny Energy has opposed. The court has not
yet ruled. Allegheny Energy cannot predict the outcome of this
litigation. However, Allegheny Energy believes that DQE's basis
for seeking to terminate the merger is without merit.
Accordingly, Allegheny Energy continues to seek the remaining
regulatory approvals from the Department of Justice and the
Securities and Exchange Commission. It is not likely either
agency will act on the requests unless Allegheny Energy obtains
judicial relief requiring DQE to move forward.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) No reports on Form 8-K were filed on behalf of the
Company for the quarter ended June 30, 1999.
<PAGE>
- 27 -
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 16, 1999
<PAGE>
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
WEST PENN POWER COMPANY
ARTICLE I
Section I.1. The name of the corporation is West
Penn Power Company (the "Corporation").
Section I.2. The address of the Corporation's
registered office in this Commonwealth is 800 Cabin Hill
Drive, Greensburg, Westmoreland County, Pennsylvania 15601.
ARTICLE II
Section II.1. The Corporation was incorporated
March 1, 1916 under "An Act authorizing the merger and
consolidation of certain corporations", approved May 3,
1909, P. L. 408, as amended and supplemented.
Section II.2. The Corporation is governed by the
provisions of the Pennsylvania Business Corporation Law of
1988, as amended.
ARTICLE III
Section III.1. The Corporation may engage in and
do any lawful act concerning any or all lawful business for
which corporations may be incorporated under the
Pennsylvania Business Corporation Law of 1988, as amended,
including, but not limited to, generating, purchasing,
transmitting, distributing and selling electricity;
manufacturing, processing, owning, using and dealing in
personal property of any nature whatsoever; engaging in
research and development; furnishing services; and
acquiring, owning, using and disposing of real property of
any nature whatsoever.
<PAGE>
ARTICLE IV
The aggregate number of shares of capital stock
which the Corporation shall have authority to issue is
64,000,000, which shall consist of 32,000,000 shares of
Common Stock and 32,000,000 shares of Preferred Stock. With
regard to Preferred Stock, the Board of Directors shall have
the full authority permitted by law to fix by resolution
full, limited, multiple or fractional, or no voting rights,
and such designations, preferences, qualifications,
privileges, limitations, restrictions, options, conversion
rights, and other special or relative rights of, and the
number of authorized shares of, Preferred Stock that may be
desired. The shares of the Preferred Stock may be divided
into and issued in series, from time to time, as provided in
this Article IV, each of such series to be distinctly
designated.
ARTICLE V
Section V.1. The Board of Directors may declare,
out of any funds legally available therefor, dividends upon
the then outstanding shares of any class of stock ranking
junior to the Preferred Stock, and no holders of shares of
Preferred Stock of any series shall be entitled to share
therein.
Section V.2. Except as may be mandatorily
required by law regardless of limitations contained in these
Restated Articles, at all meetings of the shareholders,
every registered holder of Common Stock shall be entitled to
vote and shall have one vote for each share standing in his
name on the books of the Corporation on any record date
fixed for such purpose or, if no such date be fixed, on the
date of such meeting. Except as expressly provided for each
series of Preferred Stock by the Board of Directors under
the authority of, and as provided in, Article IV, shares of
Preferred Stock shall have no voting rights.
Section V.3. Any Director may be removed from
office by vote of the holders of a majority of the shares of
the class of stock by which his successor would be elected.
A special meeting of the holders of shares of such class may
be called by a majority vote of the Board of Directors for
the purpose of removing a Director in accordance with the
provisions of this Section. The President of the
Corporation shall, in any event, within ten days after
delivery to the Corporation at its principal office of a
request to such effect signed by the holders of at least
five per cent (5%) of the outstanding shares of such class,
call a special meeting for such purpose to be held within
forty days after the delivery of such request.
Section V.4. The Corporation reserves the right
to amend or change any and all provisions of these Restated
Articles (including a change in the preferences given to any
one or more classes of stock by the Board of Directors under
the authority conferred thereto in Article IV of these
Restated Articles, or an increase or decrease in the amount
of the authorized stock of such class or classes or an
increase or decrease in the
2
<PAGE>
par value thereof) by the vote
in favor thereof, given in person or by proxy at any meeting
called for the purpose, of the holders of a majority of the
outstanding shares of Common Stock.
Section V.5. No holder of any shares of stock of
the Corporation of any series shall be entitled as such, as
a matter of right, to purchase or subscribe for any shares
of stock of the Corporation of any class, whether now or
hereafter authorized or whether issued for cash, property
or services or as a dividend or otherwise, or any securities
convertible into shares of stock of the Corporation.
Section V.6. Any shares of Preferred Stock which
are redeemed or retired, except shares retired through
conversion or through the operation of any sinking fund or
redemption or purchase account, shall thereafter have the
status of authorized but unissued shares of Preferred Stock
of the Corporation and may thereafter be reclassified and
reissued by the Board of Directors in the same manner as any
other authorized and unissued shares of Preferred Stock.
Section V.7. Subject to the limitations set
forth in this Section 5.6, all or any of the shares of stock
of the Corporation of any class and securities convertible
into stock of any class may be issued by the Corporation,
acting through its Board of Directors, without action by the
shareholders, from time to time, for such consideration, or
by way of dividend, in such manner and upon such terms as
may be determined and deemed advisable from time to time by
the Board of Directors. Such consideration may consist of
money, labor done, or money or property actually received.
For the purpose of determining whether shares, or
securities convertible into shares, have been fully paid
for, in order to fix the extent of the outstanding
obligation of the holders thereof to the Corporation with
respect thereto, the value placed by the Board of Directors,
upon the consideration, other than cash, shall be
conclusive. All shares of stock so issued, for which the
consideration determined by the Board of Directors has been
received by the Corporation, shall be deemed fully paid
stock and shall not be liable to any further calls or
assessments thereon.
ARTICLE VI
Section VI.1. The term for which the Corporation
is to exist is perpetual.
3
<PAGE>
ARTICLE VII
Section VII.1. Henceforth, these Restated Articles
restate and supersede the original Articles and all
amendments thereto.
Section VII.2. The Restated Articles may be
amended in the manner now or hereafter prescribed by
statute, and all rights conferred upon shareholders herein
are granted subject to this reservation.
Section VII.3. If authorized by the Board of
Directors of the Corporation, any or all classes or series
of shares, or any part thereof, may be uncertificated
shares, except that with respect to any outstanding shares
of the Corporation represented by a certificate, such shares
shall not be uncertificated shares until the certificate is
surrendered to the Corporation.
4
<PAGE>
Microfilm Number Filed with the Department of
State [____]
Entity Number /s/ ______________l
Secretary of the Commonwealth
ARTICLES OF AMENDMENT-DOMESTIC BUSINESS CORPORATION
DSCB:15-1915 (Rev 90)
In compliance with the requirements of 15 Pa.C.S.
section 1915 (relating to articles of amendment), the
undersigned business corporation, desiring to amend its
Articles, hereby states that:
l. The name of the corporation is:
West Penn Power Company
2. The (a) address of this corporation's current
registered office in this Commonwealth or (b) name of its
commercial registered office provider and the county of
venue is (the Department is hereby authorized to correct the
following information to conform to the records of the
Department):
(a) 800 Cabin Hill Drive Greensburg PA 15601
Westmoreland County
(b) c/o: Eileen Beck, Secretary
For a corporation represented by a commercial registered
office provider, the county in (b) shall be deemed the
county in which the corporation is located for venue and
official publication purposes.
3. The statute by or under which it was incorporated is:
Act of May 3, 1909 P.L. 408
4. The date of its incorporation is: March 1, 1916
5. (Check, and if appropriate complete, one of the
following):
X The amendment shall be effective upon filing these
Articles of Amendment in the Department of State.
The amendment shall be effective on: _________
5
<PAGE>
6. (Check one of the following):
X The amendment was adopted by the shareholders
(or members) pursuant to 15 Pa.C.S. section
1914(a) and (b).
The amendment was adopted by the board of
directors pursuant to 15 Pa.C.S. section 1914(c).
7. (Check, and if appropriate complete, one of the following):
The amendment adopted by the corporation, set forth in
full, is as follows:
X The amendment adopted by the corporation is set
forth in full in Exhibit A attached hereto and
made a part hereof.
8. (Check if the amendment restates the Articles):
X The restated Articles of Incorporation supersede
the original Articles and all amendments thereto.
IN TESTIMONY WHEREOF, the undersigned corporation has
caused these Articles of Amendment to be signed by a duly
authorized officer thereof this 15th day of July, 1999.
West Penn Power Company
BY: /s/ Eileen Beck
TITLE: Secretary
6
<PAGE>
Exhibit A
To Amended and
Restated Articles of
Incorporation of West
Penn Power Company
Consent of Shareholder
Pursuant to Section 1766 of the Pennsylvania Business
Corporation Law of 1988, the undersigned, Allegheny Energy,
Inc., a Maryland corporation, being the holder of all of the
outstanding shares of Common Stock of West Penn Power
Company, a Pennsylvania corporation, and the only
shareholder entitled to vote at a meeting of the
shareholders of West Penn Power Company held for the purpose
of adopting the Amended and Restated Articles, hereby votes
in the affirmative, and consents in writing, to the adoption
of the foregoing Articles.
Dated: July 15, 1999
Allegheny Energy, Inc.
ATTEST:
BY: /s/ Eileen M. Beck BY: /s/ Thomas K. Henderson
Secretary Vice President
7
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