<PAGE>
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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 June 30, 2000
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 14, 2000, 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, 2000
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Consolidated Statement of Income -
Three and six months ended June 30, 2000 and 1999 3
Consolidated Balance Sheet - June 30, 2000
and December 31, 1999 4
Consolidated Statement of Cash Flows -
Six months ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-20
PART II--OTHER INFORMATION 21
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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
2000 1999 2000 1999
OPERATING REVENUES:
<S> <C> <C> <C> <C> <C> <C>
Regulated operations $ 250,563 $ 229,507 $508,107 $481,515
Unregulated generation - 97,762 - 163,484
Total Operating Revenues 250,563 327,269 508,107 644,999
OPERATING EXPENSES:
Operation:
Fuel - 54,880 176 115,893
Purchased power and exchanges, net 127,477 83,704 267,404 130,532
Other 28,999 42,423 59,235 87,301
Maintenance 8,711 23,905 17,855 48,618
Depreciation and amortization 14,942 31,215 30,533 62,903
Taxes other than income taxes 8,404 23,099 21,025 43,872
Federal and state income taxes 17,653 20,954 31,455 50,117
Total Operating Expenses 206,186 280,180 427,683 539,236
Operating Income 44,377 47,089 80,424 105,763
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 58 22 114 85
Other income, net 6,272 2,476 6,638 4,637
Total Other Income and Deductions 6,330 2,498 6,752 4,722
Income Before Interest Charges 50,707 49,587 87,176 110,485
INTEREST CHARGES:
Interest on long-term debt 16,569 15,455 32,480 30,563
Other interest 743 1,271 1,446 2,227
Allowance for borrowed funds used during
construction and interest capitalized (194) (788) (392) (1,453)
Total Interest Charges 17,118 15,938 33,534 31,337
CONSOLIDATED NET INCOME $ 33,589 $ 33,649 $ 53,642 $ 79,148
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Certain amounts have been reclassified for comparative purposes.
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WEST PENN POWER COMPANY AND SUBSIDIARIES
Consolidated Balance Sheet
(Thousands of Dollars)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS: 2000 1999
Property, Plant, and Equipment:
<S> <C> <C>
Utility plant $ 1,575,066 $ 1,537,962
Nonutility plant 14,071 14,072
Construction work in progress 33,393 45,450
1,622,530 1,597,484
Accumulated depreciation (525,786) (506,416)
1,096,744 1,091,068
Investments and Other Assets 516 525
Current Assets:
Cash and temporary cash investments 7,067 19,288
Accounts receivable:
Electric service 137,058 132,691
Affiliated and other 14,730 16,299
Allowance for uncollectible accounts (17,118) (16,077)
Notes receivable from affiliates 56,550 80,800
Materials and supplies - at average cost:
Operating and construction 17,825 16,200
Deferred income taxes - 15,571
Prepaid taxes 19,240 1,628
Regulatory assets 22,934 23,957
Other 1,878 1,531
260,164 291,888
Deferred Charges:
Regulatory assets 456,245 467,982
Unamortized loss on reacquired debt 3,395 3,621
Other 7,586 9,681
467,226 481,284
Total Assets $ 1,824,650 $ 1,864,765
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 65,842 $ 70,021
Other paid-in capital 6,330 -
Retained earnings 63,279 9,637
135,451 79,658
Long-term debt and QUIDS 936,090 966,026
1,071,541 1,045,684
Current Liabilities:
Long-term debt due within one year 60,083 49,734
Accounts payable 37,450 55,267
Accounts payable to affiliates 66,043 97,847
Taxes accrued:
Federal and state income 9,221 5,276
Other 1,200 10,674
Interest accrued 5,043 10,017
Deferred income taxes 12,651 -
Adverse power purchase commitments 25,246 24,895
Other 3,530 5,925
220,467 259,635
Deferred Credits and Other Liabilities:
Unamortized investment credit 21,373 21,847
Deferred income taxes 197,062 211,369
Regulatory liabilities 14,797 15,126
Adverse power purchase commitments 290,757 303,935
Other 8,653 7,169
532,642 559,446
Total Capitalization and Liabilities $ 1,824,650 $ 1,864,765
</TABLE>
See accompanying notes to consolidated financial statements.
Certain amounts have been reclassified for comparative purposes
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WEST PENN POWER COMPANY
Consolidated Statement of Cash Flows
(Thousands of Dollars)
<TABLE>
<CAPTION>
Six Months Ended
June 30
2000 1999
CASH FLOWS FROM OPERATIONS:
<S> <C> <C> <C> <C>
Consolidated net income $ 53,642 $ 79,148
Depreciation and amortization 30,533 62,903
Amortization of adverse purchase power contract (6,275) (15,016)
Deferred investment credit and income taxes, net 4,881 16,303
Unconsolidated subsidiaries' dividends in excess of earnings 10 2,590
Allowance for other than borrowed funds used
during construction (114) (85)
Changes in certain assets and liabilities:
Accounts receivable, net (1,757) (59,383)
Materials and supplies (1,625) (8,099)
Prepaid taxes (17,612) (9,118)
Accounts payable (49,621) 48,932
Restructuring settlement rate refund - (12,825)
Other, net (919) 5,039
11,143 110,389
CASH FLOWS FROM INVESTING:
Regulated operations construction expenditures (less allowance for
other than borrowed funds used during construction) (30,858) (38,372)
Unregulated generation construction expenditures - (7,403)
(30,858) (45,775)
CASH FLOWS FROM FINANCING:
Issuance of long-term debt - 97,830
Retirement of long-term debt (19,655) (51,714)
Funds on deposit with trustees and restricted funds 2,899 (11,844)
Short-term debt, net - (55,766)
Notes payable to affiliates - 20,100
Notes receivable from affiliates 24,250 -
Dividends on capital stock:
Preferred stock - (1,596)
Common stock - (57,006)
7,494 (59,996)
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (12,221) 4,618
Cash and temporary cash investments at January 1 19,288 4,523
Cash and temporary cash investments at June 30 $ 7,067 $ 9,141
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amount capitalized) $28,761 $30,997
Income taxes 26,986 17,098
</TABLE>
See accompanying notes to consolidated financial statements.
Certain amounts have been reclassified for comparative purposes.
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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 Company's Notes to
Consolidated Financial Statements in its Annual Report on Form 10-K
for the year ended December 31, 1999 should be read with the
accompanying consolidated financial statements and the following
notes. With the exception of the December 31, 1999 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, 2000, the
results of operations for the three and six months ended June 30, 2000
and 1999, and cash flows for the six months ended June 30, 2000 and
1999.
2. 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 owned 45% of the common stock of Allegheny Generating
Company (AGC) through November 17, 1999. On November 18, 1999, the
Company transferred its 45% ownership in AGC to Allegheny Energy
Supply, LLC (Allegheny Energy Supply) at book value as allowed by the
final settlement in the Pennsylvania restructuring case. Affiliates
of the Company (Monongahela Power Company and The Potomac Edison
Company) own the remainder. AGC was 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.
Following is a summary of income statement information for AGC for
the three and six months ended June 30, 1999:
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
(Thousands of Dollars)
Electric operating revenues $17,810 $35,667
Operation and maintenance expense 1,304 2,915
Depreciation 4,245 8,490
Taxes other than income taxes 1,129 2,261
Federal income taxes 2,546 4,960
Interest charges 3,285 6,688
Other income, net (1) (2)
Net income $ 5,302 $10,355
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Because of the transfer of the Company's ownership interest in
AGC to Allegheny Energy Supply, the Company had no share of the
earnings of AGC in the second quarter and six months ended June
30, 2000. The Company's share of the equity in earnings was $2.4
million and $4.7 million for the three months and six months
ended June 30, 1999, respectively, and is included in other
income, net, on the Company's Consolidated Statement of Income.
4. The Consolidated Balance Sheet includes the amounts listed
below for generation assets not subject to the Financial
Accounting Standards Board's (FASB) Statement of Financial
Standards (SFAS) No. 71, "Accounting for the Effects of Certain
Types of Regulation."
June December
2000 1999
(Millions of Dollars)
Property, plant and equipment at
original cost $ 9.1 $ 9.1
Amounts under construction included above - -
Accumulated depreciation (1.1) (1.1)
5. On November 18, 1999, the Company transferred its generating
capacity to Allegheny Energy Supply at book value as allowed by
the final settlement in the Company's Pennsylvania restructuring
case. The net assets transferred in 1999 to Allegheny Energy
Supply are shown below:
(Millions of Dollars)
Property, plant, and equipment, net
of accumulated depreciation $920.3
Investment in Allegheny Generating Company 71.5
Other assets 120.7
Liabilities 421.1
The Company paid a liquidating dividend to Allegheny Energy,
Inc. for its ownership interest in Allegheny Energy Supply. The
Company no longer has any ownership interest in generating
assets or contractual rights to generating capacity other than
those arising under the Public Utility Regulatory Policies Act
of 1978. The effect of this liquidating dividend was to reduce
the Company's common equity by $691.4 million.
An adjustment of $4.2 million to the initial amount transferred
in 1999 was recorded in the first quarter of 2000 based on a
determination of the final book value of the generation related
assets and liabilities and reduced the Company's common stock
from $70.0 million at December 31, 1999 to $65.8 million at June
30, 2000.
6. The Company's principal operating segments are regulated
operations and unregulated generation. Prior to the second
quarter of 2000, the Company reported operating segments
consisting of utility and nonutility operations. The Company's
regulated operations segment operates electric transmission and
distributions systems. Unregulated generation during 1999
consisted primarily of costs and revenues associated with the two-
thirds of generating capacity deregulated effective January 1,
1999 under the Customer Choice Act in Pennsylvania.
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Business segment information is summarized below. Significant
transactions between reportable segments are eliminated to
reconcile the segment information to consolidated amounts. The
identifiable assets information does not reflect the elimination
of intercompany balances or transactions, which are eliminated
in the Company's consolidated financial statements.
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
(Thousands of Dollars)
Operating Revenues:
Regulated operations $250,563 $241,569 $508,107 $495,353
Unregulated generation 177,029 312,926
Eliminations (91,329) (163,280)
Depreciation and amortization:
Regulated operations 14,942 18,566 30,533 36,902
Unregulated generation 12,649 26,001
Federal and State Income Taxes:
Regulated operations 17,653 15,862 31,455 33,674
Unregulated generation 5,092 16,443
Operating Income:
Regulated operations 44,377 37,302 80,424 74,484
Unregulated generation 9,787 31,279
Interest Charges:
Regulated operations 17,118 9,830 33,534 19,443
Unregulated generation 6,108 11,894
Consolidated Net Income:
Regulated operations 33,589 30,004 53,642 59,791
Unregulated generation 3,645 19,357
Capital Expenditures:
Regulated operations 16,325 23,044 30,972 38,457
Unregulated generation 6,148 7,403
June 30 December 31
2000 1999
Identifiable Assets:
Regulated operations $1,824,650 $1,864,746
Unregulated generation 19
7. All of the employees of Allegheny Energy are employed by
Allegheny Energy Service Corporation (AESC), which performs
services at cost for the Company and its affiliates in accordance
with the Public Utility Holding Company Act of 1935. Through
AESC, the Company is responsible for its proportionate share of
services provided by AESC. The total billings by AESC (including
capital) to the Company for the second quarter of 2000 and 1999
were $34.3 million and $53.1 million, respectively. The total
billings by AESC (including capital) to the Company for each of
the six months ended June 30, 2000 and 1999 were $67.1 million and
$100.4 million, respectively.
8. The 1998 Pennsylvania Public Utility Commission (Pennsylvania PUC)
order for restructuring authorized recognition of an additional
Competitive Transition Charge (CTC) regulatory asset
(Additional CTC
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Regulatory Asset) 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, 2000.
9. A Securities and Exchange Commission announcement at the
March 16, 2000 Emerging Issues Task Force (EITC) meeting requires
companies to disclose their accounting policy for repair and
maintenance costs incurred in connection with planned major
maintenance activities. For the Company, maintenance expenses
represent costs incurred to maintain the transmission and
distribution (T&D) system and general plant and reflect routine
maintenance of equipment and right-of-way, as well as planned
major repairs and unplanned expenditures, primarily from periodic
storm damage on the T&D system. Maintenance costs are expensed in
the year incurred. T&D right-of-way vegetation control costs are
expensed within the year based on estimated annual costs and
estimated sales. T&D right-of-way vegetation control accruals are
not intended to accrue for future years' costs.
10. The pollution control notes related to the energy supply
assets transferred to Allegheny Energy Supply are included as debt
in the Company's financial statements because the Company is a co-
obligor for the debt. The Company accrues interest expense on the
pollution control notes but Allegheny Energy Supply is responsible
for the payment of pollution control notes interest and principal.
Allegheny Energy Supply's payment of interest is reflected in the
Company's financial statements as a reduction in interest accrued
and an increase in other paid-in capital.
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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, 2000
WITH SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1999
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, 1999
should be read with the following Management's Discussion and
Analysis information.
Factors That May Affect Future Results
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 in Pennsylvania
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 ongoing state and federal activities; 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; the Company's
ability to compete in unregulated energy markets; 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.
Unregulated Generating Affiliate
During 1999, Allegheny Energy, Inc. (Allegheny Energy)
obtained the necessary regulatory approvals to form an unregulated
generating subsidiary, Allegheny Energy Supply Company, LLC
(Allegheny Energy Supply). On November 18, 1999, the Company
transferred its generating capacity, which totaled 3,778 megawatts
(MW), to Allegheny Energy Supply at book value as allowed by the
final settlement in the Company's Pennsylvania restructuring case.
The Company continued to be responsible for providing generation
to meet the regulated electric load of its retail customers who
did not have the right to choose their generation supplier until
January 2, 2000. On January 2, 2000, the final one-third of the
Company's regulated customers were permitted to choose an
alternate generation supplier.
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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. Packets of information about the
Company's Parent, Allegheny Energy, Inc., releases were provided
to the media in the Parent company's area and posted on the Parent
Company's web site. The Parent Company filed its 1999 TRI report
with the Environmental Protection Agency prior to the July 1, 2000
deadline date, reporting 27.5 million pounds of total releases for
calendar year 1999.
Review of Operations
EARNINGS SUMMARY
Consolidated net income for the second quarter and the first
six months of 2000 was $33.6 and $53.6 million, respectively,
compared with $33.6 and $79.1 million, respectively, for the
corresponding 1999 periods. Consolidated net income for each of
the 2000 periods was affected by the settlement agreement in
Pennsylvania which permitted the Company to transfer its 3,778
megawatts (MW) of generating capacity at book value to Allegheny
Energy Supply, an unregulated wholly owned subsidiary of Allegheny
Energy, the Company's Parent. As a result of the transfer, the
Company no longer has generation available for sale. The
Company's energy delivery or wires business will continue to be an
important part of the Company's business. Current earnings are
supported by the beneficial effects of transition cost recovery as
authorized in the Company's Pennsylvania restructuring settlement.
Consolidated net income for the second quarter of 2000
remained about the same as the second quarter of 1999. Favorable
income items related to lower Pennsylvania capital stock taxes, a
litigation settlement, and a reduction in provision for uninsured claims
in the second quarter of 2000 helped to offset a reduction in
consolidated net income as a result of the transfer of generating
assets.
Consolidated net income for the first six months of 2000
decreased due to the transfer of generating assets to Allegheny
Energy Supply as discussed above.
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SALES AND REVENUES
Total operating revenues for the second quarter and first six
months of 2000 and 1999 were as follows:
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
(Millions of Dollars)
Operating revenues:
Regulated operations:
Regulated $235.3 $224.8 $477.1 $464.6
Choice 9.6 9.1 20.4 15.9
Bulk power - 2.4 .2 3.5
Transmission and
other energy services 5.7 5.3 10.4 11.4
Total regulated operations 250.6 241.6 508.1 495.4
Unregulated generation revenues - 177.0 - 312.9
Elimination between regulated
operations and unregulated
generation - (91.3) - (163.3)
Total operating revenues $250.6 $327.3 $508.1 $645.0
Regulated revenues include revenues from all the Company's customers
eligible to choose an alternate energy supplier but electing not to do so.
Regulated operations choice revenues represent transmission and
distribution revenues from the Company's franchised customers (customers in
the Company's distribution territory) who chose another supplier to provide
their energy needs. Pennsylvania deregulation gave the Company's regulated
customers the ability to choose another energy supplier. In 2000 all of the
Company's regulated customers had the ability to choose, and in the first
six months of 1999, two-thirds of the Company's customers had the ability
to choose. At June 30, 2000, less than 2% of the Company's customers have
chosen alternate energy suppliers.
As a result of the transfer of the Company's generation to Allegheny
Energy Supply, an unregulated affiliate, revenues from regulated operations
bulk power sales and unregulated generation sales have decreased due to the
Company no longer having generation available for sale.
The 1999 eliminations between regulated operations and unregulated
generation revenues are necessary to remove the effect of affiliated
revenues.
OPERATING EXPENSES
Fuel expenses for the second quarter and first six months of 2000 and
1999 were as follows:
Fuel Expenses
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
(Millions of Dollars)
Regulated operations $ - $16.8 $.2 $36.3
Unregulated generation - 38.1 - 79.6
Total fuel expenses $ - $54.9 $.2 $115.9
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Total fuel expenses for the second quarter and six months ended June
30, 2000 decreased due to the transfer of the Company's generating
capacity to Allegheny Energy Supply.
Purchased power and exchanges, net, represents power purchases from
and exchanges with other companies, including affiliated companies, and
purchases from qualified facilities under the Public Utility Regulatory
Policies Act of 1978 (PURPA), and prior to November 18, 1999 capacity
charges paid to Allegheny Generating Company (AGC).
Purchased Power and Exchanges, Net
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
(Millions of Dollars)
Regulated operations:
Purchased power:
From PURPA generation* $ 11.0 $ 9.4 $ 21.0 $18.9
Other 114.7 2.3 242.4 17.0
Power exchanges, net - (1.4) 1.5 1.1
AGC capacity charges - 3.2 - 6.4
Energy and spinning reserve charges 1.8 .9 2.5 2.1
Total regulated operations
purchased power 127.5 14.4 267.4 45.5
Unregulated generation purchased power - 79.8 - 98.5
Elimination - (10.5) - (13.5)
Purchased power and exchanges, net $127.5 $83.7 $267.4 $130.5
*PURPA cost (cents per kWh) 4.9 4.4 4.7 4.4
The increases in other utility operations purchased power in the
second quarter and six months ended June 30, 2000 were due primarily to
the Company's purchase of power from Allegheny Energy Supply in order to
provide energy to 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 has been transferred by the Company to
Allegheny Energy Supply.
AGC capacity charges and unregulated generation purchased power
decreased due to the transfer of the Company's generation, including its
ownership interest in AGC, to Allegheny Energy Supply on November 18,
1999.
The 1999 eliminations between regulated operations purchased power
and unregulated generation purchased power is necessary to remove the
effect of affiliated purchased power expenses.
Other operation expenses for the second quarter and six months
ended June 30, 2000 and 1999 were as follows:
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Other Operation Expenses
Three MonthsEnded Six Months Ended
June 30 June 30
2000 1999 2000 1999
(Millions of Dollars)
Regulated operations $29.0 $29.3 $59.2 $63.2
Unregulated generation - 15.1 - 28.7
Elimination - (2.0) - (4.6)
Total other operation expenses $29.0 $42.4 $59.2 $87.3
The decreases in total other operation expenses for the second
quarter and six months ended June 30, 2000, were primarily due to the
transfer of the Company's generation to Allegheny Energy Supply.
The 1999 eliminations between regulated operations and
unregulated generation operation expenses are necessary to remove the
effect of affiliated transmission purchases.
Maintenance expenses for the second quarter and six months ended
June 30, 2000 and 1999 were as follows:
Maintenance Expenses
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
(Millions of Dollars)
Regulated operations $8.7 $14.2 $17.9 $29.4
Unregulated generation - 9.7 - 19.2
Total maintenance expenses $8.7 $23.9 $17.9 $48.6
The decreases in total maintenance expenses of $15.2 million and
$30.7 million for the second quarter and six months ended June 30,
2000, respectively, were primarily due to the transfer of the
Company's generation to Allegheny Energy Supply. In 1999, maintenance
expenses represented costs incurred to maintain the power stations,
the transmission and distribution (T&D) system, and general plant,
and reflected 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. Current and future maintenance expenses will be to
support the Company's delivery or wires business.
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Depreciation and amortization expenses for the second quarter
and the first six months of 2000 and 1999 were as follows:
Depreciation and Amortization Expenses
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
(Millions of Dollars)
Regulated operations $14.9 $18.6 $30.5 $36.9
Unregulated generation - 12.6 - 26.0
Total depreciation and
amortization expenses $14.9 $31.2 $30.5 $62.9
Total depreciation and amortization expenses in the second quarter and
first six months of 2000 decreased $16.3 million and $32.4 million,
respectively, primarily due to the transfer of generation assets to
Allegheny Energy Supply.
Taxes other than income taxes for the second quarter and first six
months of 2000 and 1999 were as follows:
Taxes Other Than Income Taxes
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
(Millions of Dollars)
Regulated operations $8.4 $16.2 $21.0 $30.6
Unregulated generation - 6.9 - 13.3
Total taxes other than income
taxes $8.4 $23.1 $21.0 $43.9
Total taxes other than income taxes decreased $14.7 million and $22.9
million in the second quarter and the first six months of 2000,
respectively, due primarily to the transfer of West Virginia Business and
Occupation taxes, certain property taxes, and capital stock and franchise
taxes to Allegheny Energy Supply.
The second quarter and the first six months of 2000 decreases in
federal and state income taxes of $3.3 million and $18.7 million,
respectively, were due to reduced taxable income.
Other income, net in the second quarter and the first six months of
2000 increased $3.8 million and $2.0 million, respectively. The second
quarter increase was primarily due to increased interest income and a
litigation settlement. The increase in other income for the six months
ended June 2000 increase was due to increased interest income and a
litigation settlement, offset in part by a loss on disposition of property.
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Interest on long-term debt and other interest for the second quarter
and first six months of 2000 and 1999 were as follows:
Interest Expense
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
(Millions of Dollars)
Interest on long-term debt:
Regulated operations $16.6 $10.0 $32.5 $19.6
Unregulated generation - 5.5 - 11.0
Total interest on long-term debt 16.6 15.5 32.5 30.6
Other interest:
Regulated operations .7 .4 1.4 .8
Unregulated generation - .8 - 1.4
Total other interest expense .7 1.2 1.4 2.2
Total $17.3 $16.7 $33.9 $32.8
In November 1999, the service obligation for $231 million of
pollution control debt was assumed by Allegheny Energy Supply in
conjunction with the transfer of the Company's generating assets to
Allegheny Energy Supply. However, the pollution control debt also
remains an obligation of the Company. Allegheny Energy Supply will
indemnify the Company for any debt service the Company may incur. The
Company receives credit for the pollution control debt, including
accrued interest expense, through equity accounting. 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.
Allowance for borrowed funds used during construction and
interest capitalized decreased $.6 million and $1.1 million in the
second quarter and first six months of 2000, respectively, due
primarily to the transfer of generation and generation related
construction activity to Allegheny Energy Supply.
Financial Condition and Requirements
The Company's discussion of Financial Condition, Requirements,
and Resources and Significant Continuing Issues in its Annual Report
on Form 10-K for the year ended December 31, 1999 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.
Financings
In the first six months of 2000, the Company redeemed $19.7
million of class A-1 6.32% transition bonds.
Impact of Change in Short-term Interest Rate
A one percent change in the short-term borrowing interest rate would
have no effect on the Company's interest expense. The Company has no
projected short-term borrowings for the six months ended December 31,
2000.
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Electric Energy Competition
The electricity supply segment of the electric industry in the
United States is becoming increasingly competitive. The national
Energy Policy Act of 1992 deregulated the wholesale exchange of power
within the electric industry by permitting the Federal Energy
Regulatory Commission 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 more
competitive as companies are engaging in nationwide power trading. In
addition, the majority of states have taken active steps toward
allowing retail customers the right to choose their electricity
supplier. The Company continues to be 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 of deregulation of electric generation is under way.
Allegheny Energy is at the forefront of state-implemented retail
competition, having successfully negotiated settlement agreements in
all of the states the Operating Subsidiaries (The Company, Monongahela
Power, and Potomac Edison) serve. Pennsylvania and Maryland have
retail choice programs in place, while Virginia, Ohio, and West
Virginia are in the process of developing rules to implement choice
over the next two years.
Activities at the Federal Level
Allegheny Energy 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 Allegheny Energy unless certain outmoded and anti-
competitive laws, specifically the Public Utility Holding Company Act
of 1935 (PUHCA) and Section 210 (Mandatory Purchase Provisions) of
PURPA, are repealed or significantly revised. Allegheny Energy
continues to advocate the repeal of PUHCA and Section 210 of PURPA on
the grounds that they are obsolete and anti-competitive and that PURPA
results in utility customers paying above-market prices for power.
H.R. 2944, which was sponsored by U.S. Representative Joe Barton, was
favorably reported out of the House Commerce Subcommittee on Energy
and Power. While the bill does not mandate a date certain for
customer choice, several key provisions favored by the Company are
included in the legislation, including an amendment that allows
existing state restructuring plans and agreements to remain in effect.
Other provisions address important Allegheny Energy priorities by
repealing PUHCA and the mandatory purchase provisions of PURPA.
Although there was considerable activity and discussion on this bill
and several other bills in the House and Senate, that activity fell
short of moving consensus legislation forward prior to the August
recess. While it is too early to tell whether initial momentum on the
issue will result in legislation this year, the upcoming presidential
elections in November pose a significant hurdle.
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Pennsylvania Activities
As of January 2, 2000, all electricity customers in Pennsylvania
had the right to choose their electric suppliers. The number of
customers who have switched suppliers and the amount of electrical
load transferred in Pennsylvania far exceed that of any other state s
o far. The Company has retained about 98% of its Pennsylvania customers
as of June 30, 2000. More than 100 electric generation suppliers have
been licensed to sell to retail customers in Pennsylvania.
The status of electric energy competition in Ohio, West Virginia,
Virginia, and Maryland in which affiliates of the Company serve are as
follows:
Ohio Activities
On June 22, 1999, the Ohio General Assembly passed legislation to
restructure its electric utility industry. Governor Taft added his
signature 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 Ohio
PUC. On January 3, 2000, The Company's affiliate, Monongahela Power,
filed a transition plan with the Ohio PUC, including its claim for
recovery of stranded costs of $21.3 million.
The Company's affiliate, Monongahela Power, reached a stipulated
agreement with major parties on a transition plan to bring electric
choice to its 28,000 Ohio customers. The stipulation was filed with
the Public Utilities Commission of Ohio (Ohio PUC) on June 22, 2000.
The following are the highlights of the agreement:
* Monongahela Power will be permitted to transfer approximately 325
megawatts (MW) of Ohio jurisdictional generating assets to a non-
regulated affiliate at book value on January 1, 2001.
* Residential customers will receive a five-percent reduction in
the generation portion of their electric bills during a five-year
market development period beginning on January 1, 2001. The rates
will be frozen for five years.
* Monongahela Power's, existing, low generation rates will be
frozen for a maximum of three years for large industrial and
commercial customers.
* Monongahela Power will collect a regulatory asset transition
charge through the respective market development periods.
* Monongahela Power's, unregulated affiliate Allegheny Energy
Supply, will be permitted to offer competitive generation service
throughout Ohio.
* All additional taxes resulting from competitive legislation will
be deferred for up to two years.
* Monongahela Power will participate with the Ohio PUC and Ohio
Consumer's Counsel in a statewide consumer education campaign
supplemented by a local education effort.
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Monongahela Power anticipates the Ohio PUC's approval during the
third quarter of 2000.
West Virginia Activities
In March 1998, legislation was passed by the West Virginia
Legislature that directed the Public Service Commission of West
Virginia (W. Va. PSC) to meet with all interested parties to develop a
restructuring plan which would meet the dictates and goals of the
legislation. In January 2000, the W.Va. PSC submitted a restructuring
plan to the legislature for approval that would open full retail
competition on January 1, 2001. Generation would be deregulated and
electricity rates initially would be reduced for large commercial and
industrial customers and then frozen for all customers for four years,
with power supply rates gradually transitioning to market rates over
the next six years. Other highlights of the plan include the ability
to transfer generation assets, the transfer of control of transmission
to a regional transmission organization by 2003, a utility-funded rate
stabilization deferral mechanism to offset residential and small
commercial rates in later years, a wires charge for customers who
shop, and a systems benefit charge to assist low income customers and
displaced employees in utility and related industries. The plan was
endorsed by virtually all of the interested parties, including The
Company's affiliates, Monongahela Power and Potomac Edison. On March
11, 2000, the West Virginia Legislature approved the Commission's
plan, but assigned the tax issues surrounding the plan to the 2000
Legislative Interim Committees to recommend the necessary tax changes
involved and come back to the Legislature in 2001 for approval of
those changes and authority to implement the plan. The start date of
competition is contingent upon the necessary tax changes being made
and approved by the legislature. It is expected that implementation
of the deregulation plan will occur in mid-2001 if the Legislature
approves the necessary tax law changes. The W. Va. PSC is currently
in the process of developing the rules under which competition will
occur. Associated rulemaking proceedings are scheduled for the
remainder of this year. The W. Va. PSC approved the Company's
affiliates, Potomac Edison and Monongahela Power, request to transfer
generating assets to Allegheny Energy Supply by July 1, 2000 and the
start of competition, respectively. In accordance with the
restructuring agreement the Company's affiliates implemented a
commercial and industrial rate reduction program on July 1, 2000. The
W. Va. PSC is expected to rule on the July 12, 2000 unbundled tariffs
filing before year end.
Virginia Activities
On March 25, 1999, Governor Gilmore signed the Virginia Electric
Utility Restructuring Act (Restructuring Act) passed by the Virginia
General Assembly. All utilities must submit a restructuring plan by
January 1, 2001, to be effective on January 1, 2002. Customer choice
will be phased in beginning on January 1, 2002, with full customer
choice by January 1, 2004. The Restructuring Act was amended during
the 2000 General Assembly legislative session. In addition to a
number of clarifying and technical changes, the amendments direct the
Virginia State Corporation Commission (Virginia SSC) to prepare for
legislative approval a plan for competitive metering and billing and
authorize the Commission to implement a consumer education program on
electric choice funded through the Commission's regulatory tax. Legislation
was also adopted in 2000 governing the ability of rural electric
cooperatives to engage in competitive businesses, including certain
restrictions on the competitive sale of electricity by cooperatives
<PAGE>
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and their affiliates.
On May 25, 2000, the Company's affiliate, Potomac Edison filed
Phase I of its functional separation plan with the Virginia SCC,
requesting approval to transfer ownership, at book value, of its
generation facilities with the exception of the Virginia hydro
stations and the Riverton power plant property to Allegheny Energy
Supply as of July 1, 2000. On July 11, 2000, the Virginia SCC issued
an order approving Potomac Edison's separation plan permitting the
transfers of the Company's generating assets and the following
provisions of the Phase I application.
* Agreement to reduce Virginia jurisdictional base rate revenues by
$1 million, effective July 1, 2000.
* Agreement not to file an application for a base rate increase
prior to January 1, 2001.
* Agreement to operate and maintain its distribution system in
Virginia at or above historic levels of service quality and
reliability.
* Agreement during default service period to contract for
generation services to be provided to customers at the same costs that
it would incur to serve customers from the units it now owns.
* A proposal to terminate the fuel factor mechanism and instead
recover fuel costs through base rates.
Various rulemaking proceedings to implement customer choice are
ongoing before the Virginia SCC.
Maryland Activities
On June 7, 2000, the Maryland Public Service Commission (PSC)
approved the transfer of the generating assets of The Company's
affiliate, Potomac Edison, to its unregulated affiliate, Allegheny
Energy Supply. The transfer of 2,100 MW was made on August 1, 2000.
State utility commissions in Maryland, West Virginia, and
Virginia approved the transfer of these assets as part of deregulation
proceedings in those states. The Federal Energy Regulatory Commission
and the Securities and Exchange Commission also approved the transfer.
Maryland customers of The Company's affiliate, Potomac Edison,
had the right to choose an alternative electric provider on July 1,
2000, although the Commission has not yet finalized all of the rules
that will govern customer choice in the state. To date, no customers
have switched in Potomac Edison's service territory. On July 1, 2000,
the Commission issued a restrictive order on affiliated transactions
and codes of conduct, which the Company plans to file an appeal in
court. The Commission is developing rules on emissions disclosure and
is also examining whether and how to require renewable portfolio
standards for retail suppliers in the state.
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WEST PENN POWER COMPANY AND SUBSIDIARIES
Part II - Other Information to Form 10-Q
for Quarter Ended June 30, 2000 .
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, 2000.
Signature
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
WEST PENN POWER COMPANY
/s/ T. J. KLOC
T. J. Kloc, Controller
(Chief Accounting Officer)
August 14, 2000
