<PAGE>
Page 1 of 21
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 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 November 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.
<PAGE>
2
WEST PENN POWER COMPANY AND SUBSIDIARIES
Form 10-Q for Quarter Ended September 30, 2000
Index
PART I-FINANCIAL INFORMATION: Page
No.
Consolidated Statement of Operations - 3
Three and nine months ended September 30, 2000 and 1999
Consolidated Balance Sheet - September 30, 2000 4
and December 31, 1999
Consolidated Statement of Cash Flows - 5
Nine months ended September 30, 2000 and 1999
Notes to Consolidated Financial Statements 6-9
Management's Discussion and Analysis of Financial 10-20
Condition and Results of Operations
PART II-OTHER INFORMATION 21
<PAGE>
- 3 -
WEST PENN POWER COMPANY AND SUBSIDIARIES
Consolidated Statement of Operations
(Thousands of Dollars)
<TABLE>
<CAPTION>
Unaudited Unaudited
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
OPERATING REVENUES:
<S> <C> <C> <C> <C> <C> <C>
Regulated operations $ 266,528 $ 249,062 $774,635 $ 730,577
Unregulated generation - 146,600 - 310,084
Total Operating Revenues 266,528 395,662 774,635 1,040,661
OPERATING EXPENSES:
Operation:
Fuel - 62,962 176 178,855
Purchased power and exchanges, net 141,644 156,415 409,048 286,947
Other 29,277 45,620 88,512 132,921
Maintenance 9,432 23,111 27,287 71,729
Depreciation and amortization 15,063 31,239 45,596 94,142
Taxes other than income taxes 12,091 19,611 33,116 63,483
Federal and state income taxes 16,102 14,409 47,557 64,526
Total Operating Expenses 223,609 353,367 651,292 892,603
Operating Income 42,919 42,295 123,343 148,058
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction (11) 41 103 126
Other income, net 3,735 3,934 10,373 8,571
Total Other Income and Deductions 3,724 3,975 10,476 8,697
Income Before Interest Charges 46,643 46,270 133,819 156,755
INTEREST CHARGES:
Interest on long-term debt 15,942 13,605 48,422 44,168
Other interest 764 2,064 2,210 4,291
Allowance for borrowed funds used during
construction and interest capitalized (35) (906) (427) (2,359)
Total Interest Charges 16,671 14,763 50,205 46,100
CONSOLIDATED NET INCOME $ 29,972 $ 31,507 $ 83,614 $ 110,655
</TABLE>
See accompanying notes to consolidated financial statements.
Certain amounts have been reclassified for comparative purposes.
<PAGE>
- 4 -
WEST PENN POWER COMPANY AND SUBSIDIARIES
Consolidated Balance Sheet
(Thousands of Dollars)
<TABLE>
<CAPTION>
Unaudited Audited
September 30, December 31,
ASSETS: 2000 1999
Property, Plant, and Equipment:
<S> <C> <C>
Regulated operations $ 1,605,368 $ 1,552,034
Construction work in progress 25,345 45,450
1,630,713 1,597,484
Accumulated depreciation (534,954) (506,416)
1,095,759 1,091,068
Investments and Other Assets 475 525
Current Assets:
Cash and temporary cash investments 3,402 19,288
Accounts receivable:
Electric service 134,459 132,691
Affiliated and other 35,030 16,299
Allowance for uncollectible accounts (17,357) (16,077)
Notes receivable from affiliates 83,350 80,800
Materials and supplies - at average cost:
Operating and construction 17,057 16,200
Deferred income taxes - 15,571
Prepaid taxes - 1,628
Regulatory assets 22,460 23,957
Other 9,612 1,531
288,013 291,888
Deferred Charges:
Regulatory assets 469,236 467,982
Unamortized loss on reacquired debt 3,282 3,621
Other 7,996 9,681
480,514 481,284
Total Assets $ 1,864,761 $ 1,864,765
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 65,842 $ 70,021
Other paid-in capital 9,775 -
Retained earnings 93,251 9,637
168,868 79,658
Long-term debt and QUIDS 922,700 966,026
1,091,568 1,045,684
Current Liabilities:
Long-term debt due within one year 60,005 49,734
Accounts payable 23,164 55,267
Accounts payable to affiliates 96,608 97,847
Taxes accrued:
Federal and state income 10,829 5,276
Other 1,074 10,674
Interest accrued 6,788 10,017
Deferred income taxes 620 -
Adverse power purchase commitments 25,246 24,895
Other 3,871 5,925
228,205 259,635
Deferred Credits and Other Liabilities:
Unamortized investment credit 21,136 21,847
Deferred income taxes 215,516 211,369
Regulatory liabilities 14,633 15,126
Adverse power purchase commitments 284,344 303,935
Other 9,359 7,169
544,988 559,446
Total Capitalization and Liabilities $ 1,864,761 $ 1,864,765
</TABLE>
See accompanying notes to consolidated financial statements.
Certain amounts have been reclassified for comparative purposes.
<PAGE>
- 5 -
WEST PENN POWER COMPANY AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Thousands of Dollars)
<TABLE>
<CAPTION>
Unaudited
Nine Months Ended
September 30
2000 1999
CASH FLOWS FROM OPERATIONS:
<S> <C> <C> <C>
Consolidated net income $ 83,614 $ 110,655
Depreciation and amortization 45,596 94,142
Amortization of adverse purchase power contract (19,240) (35,379)
Deferred investment credit and income taxes, net (1,096) 20,952
Unconsolidated subsidiaries' dividends in excess of earnings 51 3,735
Allowance for other than borrowed funds used
during construction (103) (126)
Changes in certain assets and liabilities:
Accounts receivable, net (19,219) (67,399)
Materials and supplies (857) (2,169)
Prepaid taxes 1,628 4,910
Accounts payable (33,342) 38,743
Taxes accrued (4,047) (390)
Interest accrued (3,229) (4,799)
Restructuring settlement rate refund (18,940)
Other, net 5,214 (5,487)
54,970 138,448
CASH FLOWS FROM INVESTING:
Regulated operations construction expenditures (less allowance for
other than borrowed funds used during construction) (37,909) (61,786)
Unregulated generation construction expenditures (18,913)
(37,909) (80,699)
CASH FLOWS FROM FINANCING:
Retirement of preferred stock (82,964)
Issuance of long-term debt 97,830
Retirement of long-term debt (33,177) (99,031)
Funds on deposit with trustees and restricted funds 2,780 -
Short-term debt, net 76,121
Notes payable to affiliates 39,100
Notes receivable from affiliates (2,550) -
Dividends on capital stock:
Preferred stock (1,600)
Common stock (83,804)
(32,947) (54,348)
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (15,886) 3,401
Cash and temporary cash investments at January 1 19,288 4,523
Cash and temporary cash investments at September 30 $ 3,402 $ 7,924
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amount capitalized) $42,544 $49,870
Income taxes 39,442 30,608
</TABLE>
See accompanying notes to consolidated financial statements.
Certain amounts have been reclassified for comparative purposes.
<PAGE>
6
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 (Allegheny Energy). 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 September 30, 2000, the results of operations for the
three and nine months ended September 30, 2000 and 1999, and cash
flows for the nine months ended September 30, 2000 and 1999. Certain
prior period amounts in these financial statements and notes have
been reclassified for comparative purposes.
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 Company, LLC (Allegheny Energy Supply) at book value as
allowed by the final settlement in the Pennsylvania restructuring
case. An affiliate of the Company (Monongahela Power Company) owns
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.
<PAGE>
7
Following is a summary of statement of operations information for
AGC for the three and nine months ended September 30, 1999:
Three Months Ended Nine Months Ended
September 30 September 30
1999 1999
(Thousands of Dollars)
Electric operating revenues: $18,072 $53,739
Operation and maintenance 1,207 4,122
expense
Depreciation 4,245 12,735
Taxes other than income taxes 1,137 3,398
Federal income taxes 2,662 7,622
Interest charges 3,305 9,993
Other income, net - (2)
Net income $ 5,516 $15,871
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 third quarter and nine months ended
September 30, 2000. The Company's share of the equity in earnings
was $2.5 million and $7.1 million for the three months and nine
months ended September 30, 1999, respectively, and is included in
other income, net, on the Company's Consolidated Statement of
Operations.
4.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 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 (PURPA).
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 September
30, 2000.
<PAGE>
8
5.The Company's principal operating segments are regulated
operations and unregulated generation. Prior to the first 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.
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 Nine Months Ended
September 30 September 30
2000 1999 2000 1999
(Thousands of Dollars)
Operating revenues:
Regulated operations $266,528 $256,651 $774,635 $752,004
Unregulated generation 260,345 573,271
Eliminations (121,334) (284,614)
Depreciation and
amortization:
Regulated operations 18,161 45,596 55,063
15,063
Unregulated generation 13,078 39,079
Federal and State Income
Taxes:
Regulated operations 7,510 47,557 41,184
16,102
Unregulated generation 6,899 23,342
Operating Income:
Regulated operations 18,610 123,343 93,094
42,919
Unregulated generation 23,685 54,964
Interest Charges:
Regulated operations 8,823 50,205 28,266
16,671
Unregulated generation 5,940 17,834
Consolidated Net Income:
Regulated operations 12,835 83,614 72,626
29,972
Unregulated generation 18,672 38,029
apital Expenditures:
Regulated operations 7,040 23,455 38,012 61,912
Unregulated generation 11,510 18,913
September 30 December 31
2000 1999
Identifiable Assets:
Regulated operations $1,864,761 $1,864,746
Unregulated generation 19
6.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 (PUHCA). Through AESC,
the Company is responsible for its proportionate share of services
provided by AESC. The total billings by AESC (including capital) to
<PAGE>
9
the Company for the third quarter of 2000 and 1999 were $39.3 million
and $54.3 million, respectively. The total billings by AESC
(including capital) to the Company for each of the nine months ended
September 30, 2000 and 1999 were $106.3 million and $154.7 million,
respectively. The Company purchases power from its affiliate,
Allegheny Energy Supply, under fixed price multi year contracts.
7.On September 30, 2000, the Company's reserve for adverse power
purchase commitments was $309.6 million based on the Company's
forecast of future energy revenues and other factors. A change in
the estimated energy revenues or other factors could have a material
effect on the amount of the reserve for adverse power purchases.
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
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
September 30, 2000.
9.A Securities and Exchange Commission (SEC) announcement at the
March 16, 2000 Emerging Issues Task Force (EITF) 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.
<PAGE>
10
WEST PENN POWER COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations
COMPARISON OF THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2000
WITH THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 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.
<PAGE>
11
Allegheny Power Forms New Independent Transmission Affiliation
Allegheny Energy's regulated subsidiaries, Monongahela Power
Company (Monongahela Power), The Potomac Edison Company (Potomac
Edison), and the Company, collectively doing business as Allegheny
Power, announced on October 5, 2000, that it signed a Memorandum of
Agreement with Pennsylvania-New Jersey-Maryland Interconnection, LCC
(PJM) to develop a new affiliation. The alliance was outlined in a
filing submitted to the Federal Energy Regulatory Commission (FERC)
on October 16, 2000, in order to meet the requirements of FERC's
Order 2000.
FERC's Order 2000 requires all electric utilities, not currently
in an independent system operator (ISO), to file a plan on how they
would participate in a regional transmission organization (RTO),
those entities that oversee and control the power grid. Although PJM
is an ISO, Allegheny Power will not join PJM, but will pursue the
development of an independent transmission company, working within
the PJM framework.
Allegheny Power will lead the new initiative, known as PJM West,
which will allow transmission service to all market participants
while simultaneously expanding the PJM market. Allegheny Energy's
subsidiary Allegheny Energy Supply will benefit from the PJM West
initiative by having its generation within PJM, opening markets, and
making the generation more competitive in the current PJM region.
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, 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
(EPA) 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
Earnings for the third quarter and the first nine months of 2000
were $30.0 and $83.6 million, respectively, compared with $31.5 and
$110.7 million, respectively, for the corresponding 1999 periods.
Earnings for each of the 2000 periods was affected by the settlement
agreement in Pennsylvania which permitted the Company to transfer its
3,778 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. Current earnings are
supported by the beneficial effects of transition cost recovery as
authorized in the Company's Pennsylvania restructuring settlement.
<PAGE>
12
Consolidated net income for the third quarter and first nine
months of 2000 decreased due to the transfer of generating assets to
Allegheny Energy Supply as discussed above.
SALES AND REVENUES
Total operating revenues for the third quarter and first nine
months of 2000 and 1999 were as follows:
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
(Millions of Dollars)
Operating revenues:
Regulated operations:
Regulated $255.5 $240.4 $732.6 $ 705.0
Choice 3.6 8.3 24.0 24.2
Bulk power .1 3.2 .3 6.7
Transmission and
other energy services 7.3 4.7 17.7 16.1
Total regulated operations 266.5 256.6 774.6 752.0
Unregulated generation revenues - 260.4 - 573.3
Elimination between regulated
operations and unregulated
generation - (121.3) - (284.6)
Total operating revenues $266.5 $395.7 $774.6 $1,040.7
Regulated revenues include revenues from all the Company's
customers eligible to choose an alternate energy supplier but
electing not to do so. The increases in regulated operations for the
three and nine months ended September 30, 2000 reflect the reporting
of the revenue received for the service obligation on the debt issued
in the fourth quarter 1999 to securitize transition costs.
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 nine months of 1999, two-
thirds of the Company's customers had the ability to choose. At
September 30, 2000, less than 2% of the Company's customers have
chosen alternate energy suppliers. The decrease in choice revenues
in the third quarter of 2000 reflects customers returning to the
Company as their energy supplier.
As a result of the transfer of the Company's generation to
Allegheny Energy Supply revenues from regulated operations bulk power
sales and unregulated generation sales have decreased due to the
Company no longer having generation available for sale.
Transmission and other energy services revenues increased
primarily due to the fact that in 2000 all of the Company's regulated
customers had the ability to choose another energy supplier and in
the first nine months of 1999, only two-thirds of the Company's
customers had the ability to choose. The increase in transmission
and other energy services for the three months ended September 30,
2000 reflects a third quarter 1999 transmission refund to the
Company's customers.
<PAGE>
13
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 third quarter and first nine months of
2000 and 1999 were as follows:
Fuel Expenses
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
(Millions of Dollars)
Regulated operations $ - $19.3 $.2 $ 55.6
Unregulated generation - 43.7 - 123.3
Total fuel expenses $ - $63.0 $.2 $178.9
Total fuel expenses for the third quarter and nine months ended
September 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 Nine Months Ended
September 30 September 30
2000 1999 2000 1999
(Millions of Dollars)
Regulated operations:
Purchased power:
From PURPA generation* $ 6.9 $ 8.5 $ 27.9 $ 27.4
Other 134.7 6.2 379.7 25.3
Power exchanges, net - (.7) 1.5 .4
AGC capacity charges - 3.3 - 9.7
Total regulated operations
purchased power 141.6 17.3 409.1 62.8
Unregulated generation purchased
Power - 144.2 - 242.7
Elimination - (5.1) - (18.6)
Purchased power and exchanges, net $141.6 $156.4 $409.1 $286.9
*PURPA cost (cents per kWh) 4.5 4.8 4.7 4.5
The increases in other regulated operations purchased power in
the third quarter and nine months ended September 30, 2000 were due
primarily to the Company's purchase of power from Allegheny Energy
<PAGE>
14
Supply in order to provide energy to its customers eligible to choose
an alternate energy supplier, but electing not to do so.
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 third quarter and nine months
ended September 30, 2000 and 1999 were as follows:
Other Operation Expenses
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
(Millions of Dollars)
Regulated operations $29.3 $33.6 $88.5 $ 96.8
Unregulated generation - 13.6 - 42.3
Elimination - (1.6) - (6.2)
Total other operation $29.3 $45.6 $88.5 $132.9
expenses
Regulated operations other expenses decreased $8.3 million for
the nine months ended September 30, 2000 primarily due to reductions
in salaries and benefits expenses and lower provisions for uninsured
claims, partially offset by increases in transmission by others
expenses. The decreases in total other operation expenses for the
third quarter and nine months ended September 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 third quarter and nine months ended
September 30, 2000 and 1999 were as follows:
Maintenance Expenses
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
(Millions of Dollars)
Regulated operations $9.4 $13.9 $27.3 $43.4
Unregulated generation - 9.2 - 28.3
Total maintenance expenses $9.4 $23.1 $27.3 $71.7
The decreases in total maintenance expenses of $13.7 million and
$44.4 million for the third quarter and nine months ended September
30, 2000, respectively, were primarily due to the transfer of the
Company's generation to Allegheny Energy Supply. In 1999,
<PAGE>
15
maintenance expenses represented costs incurred to maintain the power
stations, the transmission and distribution (T&D) system, 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.
Depreciation and amortization expenses for the third quarter and
the first nine months of 2000 and 1999 were as follows:
Depreciation and Amortization Expenses
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
(Millions of Dollars)
Regulated operations $15.1 $18.1 $45.6 $55.0
Unregulated generation - 13.1 - 39.1
Total depreciation and
amortization expenses $15.1 $31.2 $45.6 $94.1
Total depreciation and amortization expenses in the third
quarter and first nine months of 2000 decreased $16.1 million and
$48.5 million, respectively, primarily due to the transfer of
generation assets to Allegheny Energy Supply.
Taxes other than income taxes for the third quarter and first
nine months of 2000 and 1999 were as follows:
Taxes Other Than Income Taxes
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
(Millions of Dollars)
Regulated operations $12.1 $13.6 $33.1 $44.2
Unregulated generation - 6.0 - 19.3
Total taxes other than income
taxes $12.1 $19.6 $33.1 $63.5
Total taxes other than income taxes decreased $7.5 million and
$30.4 million in the third quarter and the first nine months of 2000,
respectively, due primarily to the transfer of generation assets to
Allegheny Energy Supply.
The decrease in federal and state income taxes for the nine
months ended September 2000 was primarily due to reduced taxable
income.
The increase in other income, net for the nine months ended
September 30, 2000 was primarily due to increased interest income and
a litigation settlement.
<PAGE>
16
Interest on long-term debt and other interest for the third
quarter and first nine months of 2000 and 1999 were as follows:
Interest Expense
Three Months Nine Months
Ended Ended
September 30 September 30
2000 1999 2000 1999
(Millions of Dollars)
Interest on long-term debt:
Regulated operations $15.9 $ 8.6 $48.4 $28.2
Unregulated generation - 5.0 - 16.0
Total interest on long-term debt 15.9 13.6 48.4 44.2
Other Interest:
Regulated operations .8 .8 2.2 1.6
Unregulated generation - 1.3 - 2.7
Total other interest expense .8 2.1 2.2 4.3
Total $16.7 $15.7 $50.6 $48.5
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 $.9 million and $1.9 million in the
third quarter and first nine 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.
<PAGE>
17
Financing
In March, June, and September of 2000, the Company redeemed $8.6
million, $11.0 million, and $13.6 million, respectively, of class A-1
6.32% transition bonds.
The Company currently anticipates that there will be sufficient
liquidity to pay interest and scheduled principal payments on 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 three months ended
December 31, 2000.
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 FERC to compel
electric utilities to allow third parties to sell electricity to
wholesale customers over their transmission systems. Allegheny
Energy continues to be an advocate of federal legislation to remove
artificial barriers to competition in electricity markets, avoid
regional dislocations and ensure level playing fields.
In addition, to the wholesale electricity market becoming more
competitive, the majority of states have taken active steps toward
allowing retail customers the right to choose their electricity
supplier.
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. West Virginia's
legislature has approved a deregulation plan for Monongahela Power
pending additional legislation regarding tax revenues for state and
local governments. Virginia, Ohio, and West Virginia are in the
process of developing rules to implement choice.
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
<PAGE>
18
on Energy and Power. While the bill does not mandate a certain date
for customer choice, several key provisions favored by the Allegheny
Energy 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. Initial momentum on the issue was not sufficient
to achieve passage of restructuring legislation this year. A new
congress and administration are expected to take up the issue early
next year.
On December 15, 1999, the FERC issued Order 2000, which requires
all electric utilities not currently in an ISO to file a plan on how
they would participate in a RTO. RTOs are intended to oversee and
control the power grid in a more competitive marketplace. Allegheny
Power and other transmission-owning entities were required to file
with the FERC their plans for joining an RTO by October 16, 2000. On
October 5, 2000, Allegheny Power and the PJM announced that they had
signed a Memorandum of Agreement to develop a new affiliation. The
alliance was outlined in a filing submitted on October 16 to the FERC
in order to meet the requirements of FERC's Order 2000. Although PJM
is an ISO, Allegheny Power will not join PJM, but will pursue the
development of an independent transmission company, working within
the PJM framework. (See additional discussion on page 11.)
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
so far. The Company has retained over 98% of its Pennsylvania
customers as of September 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 Maryland, Ohio,
Virginia, and West Virginia in which affiliates of the Company serve
are as follows:
Maryland Activities
On June 7, 2000, the Maryland Public Service Commission
(Maryland PSC) approved the transfer of the generating assets of
Potomac Edison to Allegheny Energy Supply. The transfer was made on
August 1, 2000. Maryland customers of Potomac Edison had the right
to choose an alternative electric provider on July 1, 2000, although
the Maryland PSC has not yet finalized all of the rules that will
govern customer choice in the state. As of October 1, 2000, only 23
customers had switched to an alternate provider in Allegheny Energy's
service territory.
On July 1, 2000, the Maryland PSC issued a restrictive order on
affiliated transactions and codes of conduct. Allegheny Energy filed
an appeal in court on July 31, 2000, which included a request for a
stay of the Maryland PSC's order. Allegheny Energy's awaiting a
ruling from the court. The Maryland PSC is developing rules on
<PAGE>
19
emissions disclosure and is also examining whether and how to require
renewable portfolio standards for retail suppliers in the state.
Ohio Activities
The Ohio General Assembly passed legislation in 1999 to
restructure its electric utility industry. 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.
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 Public Utility Commission (Ohio PUC).
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 approved by the Ohio PUC on
October 5, 2000. The restructuring plan allows Allegheny Energy to
transfer its Ohio generating assets to Allegheny Energy Supply at net
book value on January 1, 2001.
Virginia Activities
The Virginia Electric Utility Restructuring Act (Restructuring
Act) became law on March 25, 1999. 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 to direct the Virginia State Corporation
Commission (Virginia SCC) 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.
On July 11, 2000, the Virginia SCC issued an order approving
Allegheny Energy's separation plan permitting the transfers of
Potomac Edison's generating assets and the provision of the Phase I
application.
Various rulemaking proceedings to implement customer choice are
ongoing before the Virginia SCC.
West Virginia Activities
In March 1998, the West Virginia Legislature passed legislation
that directed the West Virginia Public Service Commission (W.Va. PSC)
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. 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
<PAGE>
20
and approved by the legislature. Allegheny Energy expects 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 Allegheny Energy's request to transfer
Potomac Edison's generating assets to Allegheny Energy Supply on or
after July 1, 2000 and established a process for obtaining approval
of transfer of the Monongahela Power assets on or before the starting
date for customer choice. In accordance with the restructuring
agreement Potomac Edison and Monongahela Power implemented a
commercial and industrial rate reduction program on July 1, 2000.
The W.Va. PSC is expected to rule on Potomac Edison and Monongahela
Power's July 12, 2000 unbundled tariffs filing before year-end.
Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 was
subsequently amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 - an amendment of FASB Statement No. 133"
and SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities an amendment of FASB Statement No. 133."
Effective January 1, 2001, the Company will implement the
requirements of these accounting standards.
These Statements establish accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. They require that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. The Statements require that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement or other
comprehensive income, and requires that a company formally document,
designate, and assess the effectiveness of transactions that receive
hedge accounting.
Allegheny Energy has organized a cross-functional project team
for implementing SFAS No. 133. The team has substantially completed
the Company's inventory of financial instruments, commodity
contracts, and other commitments for the purpose of identifying and
assessing all of the Company's derivatives. The Company will record
an asset or liability on its balance sheet based on the fair value of
any contracts that meet the derivative criteria in SFAS No. 133 at
the adoption date. The fair values of these contracts will
fluctuate over time due to changes in the underlying commodity prices
which are influenced by various market factors, including weather and
availability of regional electric generation and transmission
capacity. It is anticipated that any contracts meeting SFAS No.
133's derivative criteria will increase the volatility in reported
earnings and other comprehensive income.
<PAGE>
21
WEST PENN POWER COMPANY AND SUBSIDIARIES
Part II - Other Information to Form 10-Q
for Quarter Ended September 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 September 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)
November 14, 2000
