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 1-267
ALLEGHENY ENERGY, INC.
(Exact name of registrant as specified in its charter)
Maryland 13-5531602
(State of Incorporation) (I.R.S. Employer Identification No.)
10435 Downsville Pike, Hagerstown, Maryland 21740-1766
Telephone Number - 301-790-3400
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, 110,436,317 shares of the Common Stock
($1.25 par value) of the registrant were outstanding.
<PAGE>
ALLEGHENY ENERGY, INC.
Form 10-Q for Quarter Ended September 30, 2000
Index
Page No.
PART I - FINANCIAL INFORMATION:
Consolidated Statement of Operations - Three and nine
months ended September 30, 2000 and 1999 3
Consolidated Balance Sheet - September 30, 2000
and December 31, 1999 4
Consolidated Statement of Cash Flows - Nine months
ended 5
September 30, 2000 and 1999
Notes to Consolidated Financial Statements 6-13
Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-41
PART II -OTHER INFORMATION 42-43
<PAGE>
<TABLE>
<CAPTION>
ALLEGHENY ENERGY, INC.
Consolidated Statement of Operations
(Thousands of Dollars)
Unaudited Unaudited
Three Months Ended Nine Months Ended
September 30 September 30
_________________________ ________________________
2000 1999 2000 1999
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Regulated operations $ 606,389 $ 583,697 $ 1,802,902 $ 1,710,480
Unregulated generation 450,445 156,528 977,998 359,062
Other 1,624 1,134 9,671 5,208
____________ ____________ ___________ ___________
Total Operating Revenues 1,058,458 741,359 2,790,571 2,074,750
____________ ____________ ___________ ___________
OPERATING EXPENSES:
Operation:
Fuel for electric generation 147,232 145,220 412,646 413,164
Purchased power and exchanges,net 496,083 166,834 1,058,158 355,041
Gas purchases and production 5,437 - 13,757 -
Deferred power costs, net (13,271) 12,915 (8,403) 25,971
Other 91,745 90,032 281,830 259,963
Maintenance 51,825 54,165 167,742 165,031
Depreciation and amortization 58,817 65,559 185,271 196,411
Taxes other than income taxes 53,515 45,947 154,192 141,864
Federal and state income taxes 39,075 43,511 138,306 148,138
____________ ____________ ___________ ___________
Total Operating Expenses 930,458 624,183 2,403,499 1,705,583
____________ ____________ ___________ ___________
Operating Income 128,000 117,176 387,072 369,167
____________ ____________ ___________ ___________
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed
funds used during construction 151 662 721 1,438
Other income, net 4,614 2,149 9,855 1,109
____________ ____________ ___________ ___________
Total Other Income and Deductions 4,765 2,811 10,576 2,547
____________ ____________ ___________ ___________
Income Before Interest Charges,
Preferred Dividends, and
Extraordinary Charge, Net 132,765 119,987 397,648 371,714
____________ ____________ ___________ ___________
INTEREST CHARGES, PREFERRED
DIVIDENDS, AND PREFERRED
REDEMPTION PREMIUMS:
Interest on long-term debt 41,760 36,861 124,762 114,063
Other interest 15,588 8,060 40,803 18,175
Allowance for borrowed funds
used during construction and
interest capitalized (1,938) (1,446) (5,643) (3,848)
Dividends on preferred stock of
subsidiaries 1,260 1,400 3,780 5,923
Redemption premiums on preferred
stock of subsidiaries - 3,780 - 3,780
____________ ____________ ___________ ___________
Total Interest Charges,
Preferred Dividends, and
Preferred Redemption Premiums 56,670 48,655 163,702 138,093
____________ ____________ ___________ ___________
Consolidated Income Before
Extraordinary Charge 76,095 71,332 233,946 233,621
Extraordinary Charge, net (1) - - (70,505) -
____________ ____________ ___________ ___________
CONSOLIDATED NET INCOME $ 76,095 $ 71,332 $ 163,441 $ 233,621
============ ============ =========== ===========
COMMON STOCK SHARES OUTSTANDING
(average) 110,436,317 114,120,202 110,436,317 118,192,404
BASIC AND DILUTED EARNINGS PER
AVERAGE SHARE:
Consolidated income before
extraordinary charge $ 0.69 $ 0.63 $ 2.12 $ 1.98
Extraordinary charge, net (1) $ 0.00 $ 0.00 $ (0.64) $ 0.00
____________ ____________ ___________ ___________
Consolidated net income $ 0.69 $ 0.63 $ 1.48 $ 1.98
============ ============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
(1) See Note 4 in the notes to the consolidated financial statements.
Certain amounts have been reclassified for comparative purposes.
<PAGE>
<TABLE>
<CAPTION>
ALLEGHENY ENERGY, INC.
Consolidated Balance Sheet
(Thousands of Dollars)
Unaudited Audited
September 30, December 31,
2000 1999
____________ _______________
<S> <C> <C>
ASSETS:
Property, Plant, and Equipment:
Regulated operations $ 5,252,265 $ 6,547,533
Unregulated generation 3,834,079 2,051,298
Other 17,493 9,125
Construction work in progress 279,485 231,763
____________ ____________
9,383,322 8,839,719
Accumulated depreciation (3,918,549) (3,632,568)
____________ ____________
5,464,773 5,207,151
Investments and Other Assets:
Excess of cost over net assets acquired 203,594 42,584
Benefit plans' investments 95,151 94,168
Nonutility investments 16,518 15,252
Other 6,931 1,479
____________ _____________
322,194 153,483
Current Assets:
Cash and temporary cash investments 19,950 65,984
Accounts receivable:
Utility service 569,780 383,316
Gas 1,710 -
Other 17,795 12,273
Allowance for uncollectible accounts (31,555) (26,975)
Materials and supplies - at average cost:
Operating and construction 97,055 92,560
Fuel 44,477 62,280
Prepaid taxes 46,103 58,190
Deferred income taxes 6,095 30,477
Purchased options 4,793 9,158
Prepaid accounts 81,865 2,550
Other, including current portion of
regulatory assets 24,917 28,655
_____________ _____________
882,985 718,468
Deferred Charges:
Regulatory assets 616,616 663,847
Unamortized loss on reacquired debt 34,257 41,825
Other 84,838 67,667
_____________ _____________
735,711 773,339
_____________ _____________
Total Assets $ 7,405,663 $ 6,852,441
============= =============
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 153,045 $ 153,045
Other paid-in capital 1,044,085 1,044,085
Retained earnings 917,580 896,602
Treasury stock (at cost) (398,407) (398,407)
Other comprehensive income (1,801) -
_____________ _____________
1,714,502 1,695,325
Preferred stock 74,000 74,000
Long-term debt and QUIDS 2,566,783 2,254,463
_____________ _____________
4,355,285 4,023,788
Current Liabilities:
Short-term debt 766,665 641,095
Long-term debt due within one year 121,005 189,734
Accounts payable 375,763 233,331
Taxes accrued:
Federal and state income 25,794 20,699
Other 64,801 67,292
Adverse power purchase commitments 25,246 24,895
Other, including current portion of
regulatory liabilities 157,977 131,489
______________ _____________
1,537,251 1,308,535
Deferred Credits and Other Liabilities:
Unamortized investment credit 111,093 116,971
Deferred income taxes 878,816 920,943
Regulatory liabilities 129,441 78,743
Adverse power purchase commitments 284,344 303,935
Other 109,433 99,526
_______________ _____________
1,513,127 1,520,118
_______________ _____________
Total Capitalization and Liabilities $ 7,405,663 $ 6,852,441
=============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
Certain amounts have been reclassified for comparative purposes.
<PAGE>
<TABLE>
<CAPTION>
ALLEGHENY ENERGY, INC.
Consolidated Statement of Cash Flows
(Thousands of Dollars)
Unaudited
Nine Months Ended
September 30
__________________
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Consolidated net income $ 163,441 $ 233,621
Extraordinary charges, net of taxes 70,505 -
____________ ____________
Consolidated income before extraordinary charges 233,946 233,621
Depreciation and amortization 185,271 196,411
Amortization of adverse purchase power contract (19,240) (16,967)
Deferred investment credit and income taxes, net 6,833 15,255
Deferred power costs, net (8,403) 25,971
Allowance for other than borrowed funds used
during construction (721) (1,438)
Changes in certain assets and liabilities:
Accounts receivable, net (170,959) (26,772)
Materials and supplies 14,338 2,525
Prepayments (38,587) (15,633)
Purchased options 4,365 (1,714)
Accounts payable 125,821 1,909
Taxes accrued 3,256 13,437
Interest accrued 6,468 1,265
Restructuring settlement rate refund - (18,940)
Other, net 13,264 38,166
____________ ____________
355,652 447,096
CASH FLOWS FROM INVESTING:
Regulated operations construction expenditures
(less allowance for other than borrowed funds
used during construction) (149,675) (155,919)
Unregulated generation construction expenditures
and investments (131,424) (58,914)
Other construction expenditures and investments (5,782) (8,930)
Acquisition of business (226,998) -
_____________ ____________
(513,879) (223,763)
_____________ ____________
CASH FLOWS FROM FINANCING:
Repurchase of common stock - (398,407)
Retirement of preferred stock - (99,866)
Issuance of long-term debt 305,681 114,830
Retirement of long-term debt (173,177) (99,031)
Funds on deposit with trustees
and restricted funds 13,053 (21,532)
Short-term debt, net 109,099 438,555
Cash dividends paid on common stock (142,463) (151,089)
_____________ _____________
112,193 (216,540)
_____________ _____________
NET CHANGE IN CASH AND TEMPORARY CASH
INVESTMENTS (46,034) 6,793
Cash and temporary cash investments at January 1 65,984 17,559
_____________ _____________
Cash and temporary cash investments at
September 30 $ 19,950 $ 24,352
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amount capitalized) 190,556 123,159
Income taxes 147,003 113,704
</TABLE>
See accompanying notes to consolidated financial statements.
Certain amounts have been reclassified for comparative purposes.
<PAGE>
ALLEGHENY ENERGY, INC.
Notes to Consolidated Financial Statements
1. The Notes to Consolidated Financial Statements of Allegheny
Energy, Inc. (the Company) 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 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. The Company owns all of the outstanding common stock of its
subsidiaries. The consolidated financial statements include the
accounts of the Company and all subsidiary companies after
elimination of intercompany transactions.
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 West Virginia Legislature passed House Concurrent Resolution
27 on March 11, 2000, approving an electric deregulation plan
submitted by the Public Service Commission of West Virginia (W.Va.
PSC) with certain modifications. The need for further action by the
Legislature, including the enactment of certain tax changes regarding
preservation of tax revenues for state and local government, is
required prior to the implementation of the restructuring plan for
customer choice. The Company expects that implementation of the
deregulation plan will occur in mid-2001 if the Legislature approves
the necessary tax law changes during their next session in the first
quarter of 2001. Among the provisions of the plan are the following:
* Customer choice will begin for all customers when the plan is
implemented (expected in mid-2001).
* Rates for electricity service will be unbundled at current
levels and capped for four years, with power supply rates
transitioning to market rates over the next six years for the
residential and small commercial customers.
* After year 7, the power supply rate for large commercial and
industrial customers will no longer be regulated.
<PAGE>
* The Company is permitted to file a petition seeking W. Va. PSC
approval to transfer its West Virginia jurisdictional generating
assets of its Monongahela Power Company (Monongahela Power)
subsidiary (approximately 2,040 megawatts (MW))to its non-regulated
generation company, Allegheny Energy Supply Company, LLC (Allegheny
Energy Supply), at book value. Also, based on a final order issued
by the W.Va. PSC on June 23, 2000, the West Virginia jurisdictional
assets of the Company's subsidiary, The Potomac Edison Company
(Potomac Edison), were transferred to Allegheny Energy Supply at book
value on August 1, 2000, in conjunction with the Maryland law that
allows generating assets to be transferred to non-regulated
ownership.
* The Company will recover the cost of its non-utility generation
contracts through a series of surcharges applied to all customers
over 10 years.
* Large commercial and industrial customers received a 3% rate
reduction effective July 1, 2000.
* A special "Rate Stabilization" account of $56.7 million has been
established for residential and small business customers to mitigate
the impact of the market price of power as determined by the W.Va.
PSC.
In 1997, the Emerging Issues Task Force (EITF) issued EITF No. 97-
4, "Deregulation of the Pricing of Electricity-Issues Related to
the Application of FASB Statement Nos. 71 and 101." The EITF
agreed that, when a rate order that contains sufficient detail for
the enterprise to reasonably determine how the transition plan will
affect the separable portion of its business whose pricing is being
deregulated is issued, the entity should cease to apply the
Financial Accounting Standards Board's (FASB) Statement of
Financial Accounting Standards (SFAS) No. 71 to that separable
portion of its business.
As required by EITF 97-4, Monongahela Power and Potomac Edison
discontinued the application of SFAS No. 71 for their West Virginia
jurisdictions' electric generation operations in the first quarter
of 2000. Monongahela Power and Potomac Edison recorded under the
provisions of SFAS No. 101, "Accounting for the Discontinuation of
Application of FASB Statement No. 71," an extraordinary charge of
$70.5 million in March 2000 to reflect unrecoverable net regulatory
assets that will not be collected from customers and establishment
of a rate stabilization account for residential and small
commercial customers as required by the deregulation plan as shown
below:
Gross Net-of-Tax
(Millions of Dollars)
Unrecoverable regulatory assets $ 60.0 $36.2
Rate stabilization obligation 56.7 34.3
2000 extraordinary charge $116.7 $70.5
5. On October 5, 2000, the Public Utilities Commission of Ohio
(Ohio PUC) approved a settlement to implement a restructuring plan
for Monongahela Power subject to a 30 day appeal period. The plan
<PAGE>
will allow Monongahela Power's 28,000 Ohio customers to choose their
electricity supplier starting January 1, 2001. Below are the
highlights of the plan.
* Monongahela Power will be permitted to transfer approximately
325 MW of Ohio jurisdictional generating assets to its unregulated
affiliate, Allegheny Energy Supply, at net book value as of 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. These rates
will be frozen for the five years.
* For commercial and industrial customers, existing generation
rates will be frozen at the current rates for the market development
period, which begins on January 1, 2001. The market development
period is three years for large commercial and industrial customers
and five years for small commercial customers.
* Monongahela Power will collect from shopping customers a
regulatory transition charge of $0.0008 per kilowatt-hour (kWh) for
the market development period.
* Allegheny Energy Supply will be permitted to offer competitive
generation service throughout Ohio.
* Additional taxes resulting from the competition legislation will
be deferred for up to two years as a regulatory asset.
As a result of the Ohio PUC approval of the settlement, the Company
expects to record an extraordinary charge in the fourth quarter of
2000 under the provisions of SFAS No. 101 for the estimated amount
of unrecoverable net regulatory assets under the deregulation plan.
The Company estimates the extraordinary charge from the Ohio
deregulation plan to be $8.1 million before taxes ($4.9 million
after taxes).
6. On June 7, 2000, the Maryland Public Service Commission
(Maryland PSC) approved the transfer of the Maryland jurisdictional
share of the generating assets of Potomac Edison, to Allegheny Energy
Supply at net book value. On June 23, 2000, the W.Va. PSC issued an
order which, in part, authorized Potomac Edison to transfer at net
book value its West Virginia jurisdictional share of its generating
assets to an unregulated affiliate in conjunction with the Maryland
transfer. Also, on July 11, 2000, the Virginia State Corporation
Commission (Virginia SCC) authorized the transfer of the Virginia
jurisdictional share of Potomac Edison's generating assets, excluding
the hydroelectric assets located within the state of Virginia, to an
unregulated affiliate at net book value. On July 31, 2000, the
Securities and Exchange Commission (SEC) approved these transfers of
generating assets. As a result, approximately 2,100 MW of electric
generation facilities with an estimated net book value of $614
million was transferred to Allegheny Energy Supply in August 2000.
7. 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 West Penn Power Company (West Penn) during
<PAGE>
the years 1999 to 2002. No additional CTC Regulatory Asset was
recorded by West Penn as of September 30, 2000.
8. 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.
9. Comprehensive income consisting of unrealized losses on
available-for-sale securities net of tax is presented in the
consolidated financial statements as required by FASB Statement No.
130, "Reporting Comprehensive Income" (SFAS No. 130). The objective
of SFAS No. 130 is to report a measure of all changes in common stock
equity of an enterprise that result from transactions and other
economic events during the period other than transactions with
owners.
The components of consolidated comprehensive income for the nine
months ended September 30, 2000 are as follows:
(Millions of Dollars)
Consolidated net income $163.4
Other comprehensive income:
Unrealized holding (losses)
arising during the period on
available-for-sale securities,
net of tax ($1.2) (1.8)
Consolidated comprehensive income $161.6
On July 13, 2000, the Company sold its fifty percent ownership in
Allegheny Hyperion Telecommunications, LLC, to Adelphia Business
Solutions (Adelphia) for 330,000 shares of Adelphia's Class A
Common Stock. The 330,000 shares of common stock are classified as
available-for-sale marketable securities in accordance with FASB
Statement No. 115, "Accounting for Certain Investments in Debt and
Equity Securities."
10. The Consolidated Balance Sheet includes the amounts listed below
for generation assets not subject to SFAS No. 71, "Accounting for the
Effects of Certain Types of Regulation." The final one-third of West
Penn's generation assets were transferred to the Company's
unregulated generation segment on January 2, 2000. On August 1,
2000, the Company transferred 2,100 MW of generation assets of
Potomac Edison to the Company's unregulated generation segment.
September December
2000 1999
(Millions of Dollars)
Property, plant, and equipment $4,075.2 $2,678.4
Amounts under construction included 192.1 101.8
above
Accumulated depreciation (1,974.0) (1,238.3)
<PAGE>
11. The Company's principal operating segments are regulated
operations, unregulated generation, and other. Prior to the second
quarter of 2000, the Company reported operating segments consisting
of utility and nonutility operations. The Company has restated prior
period segment information.
The regulated operations segment, previously reported as the
utility segment, consists primarily of the subsidiaries Monongahela
Power, including West Virginia Power and Mountaineer Gas Company
(Mountaineer Gas), Potomac Edison, and West Penn. The regulated
operations segment operates electric transmission and distribution
systems and natural gas distribution systems and generates electric
energy in regulatory jurisdictions which have not yet implemented
deregulation of electric generation.
The unregulated generation segment, previously reported in the
nonutility segment, consists primarily of the Company's
subsidiaries Allegheny Energy Supply and its majority-owned
subsidiary Allegheny Generating Company. Allegheny Energy Supply
is an unregulated energy production and marketing subsidiary which
markets competitive wholesale electricity and retail electricity in
states where customer choice has been implemented. Allegheny
Generating Company owns and sells generating capacity to its
parents Allegheny Energy Supply and Monongahela Power.
The other segment, previously reported in the nonutility segment,
consists of Allegheny Ventures, Inc. (Allegheny Ventures), an
unregulated subsidiary which develops new business opportunities
including telecommunications.
<PAGE>
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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating Revenues:
Regulated operations $657,802 $593,983 $1,888,064 $1,737,130
Unregulated generation 711,196 270,275 1,497,565 623,938
Other 1,713 1,134 9,878 5,208
Eliminations (312,253) (124,033) (604,936) (291,526)
Depreciation and amortization:
Regulated operations 48,393 50,790 148,341 152,661
Unregulated generation 10,263 14,481 36,059 43,315
Other 161 288 871 435
Federal and State Income Taxes:
Regulated operations 27,339 35,886 114,352 125,530
Unregulated generation 11,962 7,750 23,563 22,926
Other (226) (125) 391 (318)
Operating Income:
Regulated operations 85,286 91,212 307,119 308,066
Unregulated generation 43,160 26,852 79,440 61,881
Other (446) (888) 513 (780)
Interest Charges, Preferred
Dividends, and Preferred
Redemption Premiums:
Regulated operations 44,121 40,612 148,656 113,172
Unregulated generation 18,001 8,043 28,223 24,892
Other 261 29
Eliminations (5,452) (13,438)
Consolidated Income Before
Extraordinary Charge:
Regulated operations 63,164 52,321 190,429 196,797
Unregulated generation 12,443 19,795 41,839 38,218
Other 488 (784) 1,678 (1,394)
Extraordinary Charge, Net:
Regulated operations 70,505
Capital Expenditures:
Regulated operations 41,422 67,810 150,396 157,357
Unregulated generation 33,773 26,075 131,424 58,914
Other 3,070 2,898 5,782 8,930
</TABLE>
<TABLE>
<S> <C> <C>
September 30 December 31
2000 1999
Identifiable Assets:
Regulated operations $4,768,528 $5,293,394
Unregulated generation 2,587,745 1,518,074
Other 49,390 40,973
See Note 4 for a discussion of extraordinary charge, net.
</TABLE>
<PAGE>
12. Common stock dividends per share declared during the periods for
which income statements are included are as follows:
2000 1999
Number of Amount per Number of Amount
Shares Share Shares per Share
First Quarter 110,436,317 $.43 122,436,317 $.43
Second Quarter 110,436,317 $.43 116,600,317 $.43
Third Quarter 110,436,317 $.43 112,333,817 $.43
13. On May 17, 2000, the United States Court of Appeals for the
Third Circuit affirmed the decision of the United States District
Court for the Western District of Pennsylvania which had found that
DQE, Inc. did not breach the April 1, 1997 Agreement and Plan of
Merger and had granted judgement in favor of DQE, Inc. on all claims
and all requests for injunctive relief.
14. A SEC announcement at the March 16, 2000 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 power stations, 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
forced outages at the power stations and periodic storm damage on the
T&D system. Maintenance costs are expensed in the year incurred.
Power station major maintenance costs are expensed within the year
based on estimated annual costs and estimated generation. T&D right-
of-way vegetation control costs are expensed within the year based on
estimated annual costs and estimated sales. Power station major
maintenance accruals and T&D right-of-way vegetation control accruals
are not intended to accrue for future years' costs.
15. On August 18, 2000, Monongahela Power completed the purchase of
Mountaineer Gas, a natural gas sales, transportation, and
distribution company serving southern West Virginia and the northern
and eastern panhandles of West Virginia, from Energy Corporation of
America (ECA). The acquisition included the assets of Mountaineer
Gas Services, which operates natural gas-producing properties,
natural gas-gathering facilities, and intrastate transmission
pipelines. The acquisition increased the Company's number of gas
customers in West Virginia by about 200,000 customers in a region
where the Company already provides energy services.
<PAGE>
The Company acquired Mountaineer Gas for $322.8 million, which
includes the assumption of $100.1 million of existing long-term
debt. In accordance with the purchase agreement, the Company
accrued a $2.9 million estimated liability for an additional
payment to ECA related to working capital and construction
expenditure adjustments to the purchase price. The acquisition has
been recorded using the purchase method of accounting. The table
below shows the allocation of the purchase price to assets and
liabilities acquired:
Millions of
Dollars
Purchase price $325.7
Direct costs of the acquisition 2.6
Total acquisition cost 328.3
Less assets acquired:
Utility plant 300.2
Accumulated depreciation (144.8)
Utility plant, net 155.4
Investments and other assets
Current assets 45.9
Deferred charges 23.8
Total assets acquired (excluding goodwill) 225.1
Add liabilities acquired:
Current liabilities 47.9
Deferred credits and other liabilities 10.9
Total liabilities acquired 58.8
Excess of cost over net assets acquired $162.0
The Company is amortizing the excess of cost over net assets
acquired on a straight-line basis over 40 years.
<PAGE>
ALLEGHENY ENERGY, INC.
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 the Allegheny Energy, Inc.'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 and movements toward competition in states
served by the Company, 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's subsidiaries; environmental, legislative,
and regulatory changes; future economic conditions; earnings
retention and dividend payout policies; 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 and fuel for
electric generation, unscheduled maintenance or repair requirements,
weather, and compliance with laws and regulations.
Overview
Starting in 1998, the Company has experienced significant
changes in its business as deregulation of electric generation has
been approved and implemented in states where the Company operates
its regulated utility business. As deregulation of generation has
been implemented state by state, the Company has transferred its
generating assets from its regulated utility business to its
unregulated generation business in accordance with approved
deregulation plans. It is the Company's goal that all of its
generating assets will be transferred to unregulated generation
business by 2001.
In 1999, the Company formed Allegheny Energy Supply, LLC
(Allegheny Energy Supply) in order to consolidate the Company's
unregulated generation assets into a single company. Allegheny
Energy Supply is an unregulated energy company that markets
competitive retail and wholesale electricity. Also, Allegheny Energy
<PAGE>
Supply operates regulated electric generation for its affiliates
until deregulation is implemented in all states where the regulated
utilities operate. The Company's goal is to grow Allegheny Energy
Supply into a national energy supply company.
In November 1998, the Pennsylvania Public Utility Commission
(Pennsylvania PUC) approved a settlement agreement between West Penn
Power Company (West Penn) and parties to West Penn's restructuring
proceeding. Under the terms of the settlement, two-thirds of West
Penn's customers were permitted to choose an alternate generation
supplier as of January 1, 1999. The remaining one-third of West
Penn's customers were permitted to do so starting January 1, 2000.
The settlement also allowed West Penn to transfer its 3,778 MW
generating assets at net book value to Allegheny Energy Supply, which
was completed in 1999.
Also in 1999, Allegheny Energy Supply purchased from AYP Energy,
Inc. (AYP Energy) its 276 MW of merchant capacity at Fort Martin Unit
No. 1.
In December 1999, the Maryland Public Service Commission
(Maryland PSC) approved a settlement agreement which allowed customer
choice of generation suppliers effective July 1, 2000, for all
Maryland customers of The Potomac Edison Company (Potomac Edison).
In June 2000, the Maryland PSC authorized Potomac Edison to transfer
the Maryland portion of its generation assets to Allegheny Energy
Supply on or after July 1, 2000. The Company also obtained the
necessary approvals from the Virginia State Corporation Commission
(Virginia SCC) and the Public Service Commission of West Virginia
(W.Va. PSC) to transfer the Virginia and West Virginia portions of
Potomac Edison's generation assets to Allegheny Energy Supply in
conjunction with the transfer of the Maryland portion of those
assets. On August 1, 2000, Potomac Edison transferred all of its
approximately 2,100 MW of generation assets to Allegheny Energy
Supply.
In March 2000, the West Virginia Legislature passed House
Resolution 27 approving an electric deregulation plan submitted by
the W.Va. PSC with certain modifications. Under the resolution, the
implementation of the West Virginia deregulation plan cannot occur
until the legislature enacts certain tax changes regarding the
preservation of tax revenues for state and local government. The
plan provides for customer choice of a generation supplier for all
customers and allows the Company to transfer the West Virginia
portion (approximately 2,040 MW) of generation assets of Monongahela
Power Company (Monongahela Power) to Allegheny Energy Supply. On
August 15, 2000 and supplemented on October 31, 2000, Monongahela
Power filed a petition with the W.Va. PSC for approval to transfer
its West Virginia portion of its generating assets to Allegheny
Energy Supply on or after January 1, 2001, contemporaneously with the
transfer of its Ohio generation assets (see Ohio discussion below).
In October 2000, the Public Utilities Commission of Ohio (Ohio
PUC) approved a settlement to implement a restructuring plan for
Monongahela Power. This restructuring plan allows Ohio customers of
Monongahela Power to choose their generation supplier starting
January 1, 2001. Also, Monongahela Power is permitted to transfer
its Ohio portion (approximately 325 MW) of its generation assets to
Allegheny Energy Supply at net book value on or after January 1,
2001.
<PAGE>
In addition to the assets transferred by the regulated
utilities, Allegheny Energy Supply has announced the construction of
a 1,080 MW natural-gas fired merchant generation plant in La Paz
County, Arizona, a 540 MW combined-cycle facility in Springdale,
Pennsylvania, and five 44 MW simple-cycle combustion turbines
throughout Pennsylvania. In May 2000, Allegheny Energy Supply
announced that it will acquire a 4.86 percent ownership share (83 MW)
of the 1,711 MW Conemaugh Generating Station from Potomac Electric
Power Company (PEPCO). Also, the Company completed construction of
two 44 MW simple-cycle combustion turbines in Pennsylvania during
1999 which are part of its unregulated generation fleet.
The Company's regulated utility business, Allegheny Power, has
expanded its service territory with the acquisition of West Virginia
Power in December 1999 for approximately $95 million. The
acquisition of West Virginia Power added approximately 26,000
electric distribution customers and 24,000 natural gas customers to
the Company's existing business in West Virginia. Also, the
regulated utility business acquired Mountaineer Gas Company
(Mountaineer Gas) in August 2000 for $322.8 million, which included
the assumption of existing long-term debt of $100.1 million. The
acquisition of Mountaineer Gas added approximately 200,000 natural
gas customers to the Company's West Virginia regulated utility
operations.
Acquisition of Mountaineer Gas Company
On August 18, 2000, Monongahela Power completed the purchase of
Mountaineer Gas, a natural gas sales, transportation, and
distribution company serving southern West Virginia and the northern
and eastern panhandles of West Virginia, from Energy Corporation of
America (ECA) for $322.8 million (which includes the assumption of
$100.1 million of existing long-term debt). In accordance with the
purchase agreement, the Company accrued a $2.9 million estimated
liability for an additional payment to ECA related to working capital
and construction expenditure adjustments to the purchase price. The
acquisition included the assets of Mountaineer Gas Services, which
operates natural gas-producing properties, natural gas-gathering
facilities, and intrastate transmission pipelines. The acquisition
increased the Company's number of gas customers in West Virginia by
about 200,000 customers in a region where the Company already
provides energy services. (See Note 15 to the consolidated financial
statements for additional information.)
Acquisition of West Virginia Power
In December 1999, Monongahela Power purchased from UtiliCorp
United Inc. the assets of West Virginia Power, an electric and
natural gas distribution company located in southern West Virginia,
for approximately $95 million. In conjunction with the acquisition of
West Virginia Power's assets, the Company purchased for $2.1 million
the assets of a heating, ventilation, and air conditioning business.
<PAGE>
Transfer of Generation Assets
Transfer of Potomac Edison Generation Assets to Allegheny Energy
Supply
On August 1, 2000, the Company transferred 2,100 MW of Potomac
Edison's Maryland, Virginia, and West Virginia jurisdictional
generating assets to Allegheny Energy Supply at net book value.
State utility commissions in Maryland, Virginia, and West Virginia
approved the transfer of these assets as part of deregulation
proceedings in those states. The Federal Energy Regulatory
Commission (FERC) and the Securities and Exchange Commission (SEC)
also approved the transfer.
Pursuant to a series of fixed priced contracts, Allegheny Energy
Supply supplies West Penn Power Company (West Penn) and Potomac
Edison with power through 2008. Under these contracts, Allegheny
Energy Supply provides these regulated electricity distribution
affiliates with the amount of electricity, up to their retail load,
that they may demand. These contracts represent approximately 90% of
the normal operating capacity of Allegheny Energy Supply's fleet of
generating assets and can be terminated by Allegheny Energy Supply
with 12 months' notice.
The Company is considering ways to maximize the value of its
generating assets, including by means of partnering, selling all or a
portion of the common stock of Allegheny Energy Supply through an
initial public offering, or combining a partial initial public
offering with a spin-off of the remaining stock to the Company's
shareholders. The Company will withhold any decision until
Monongahela Power's generating assets are transferred to Allegheny
Energy Supply. Monongahela Power has requested approval from the
W.Va. PSC to transfer its West Virginia generation assets to
Allegheny Energy Supply on or after January 1, 2001, in conjunction
with already authorized transfer of the Ohio portion of those assets.
Virginia Separation Plan
In connection with the transfer of generating assets discussed
above, on May 25, 2000, the Company filed an application with the
Virginia State Corporation Commission (Virginia SCC) to separate its
approximately 380 MW of generating assets, excluding the
hydroelectric assets located within the state of Virginia, from its
transmission and distribution assets effective July 1, 2000. On July
11, 2000, the Virginia SCC issued an order approving the Company's
separation plan permitting the transfer of the Company's Virginia
generating assets to its unregulated subsidiary, Allegheny Energy
Supply.
In conjunction with the separation plan, the Virginia SCC
approved a Memorandum of Understanding highlighted below:
* Effective with bills rendered on or after August 7, 2000, base
rates were reduced by $1 million.
* Potomac Edison will not file for a base rate increase prior to
January 1, 2001.
* Fuel rates were rolled into base rates with a decrease in annual
fuel revenues of $750,000 effective with bills rendered on or after
August 7, 2000. Effective August 2001, the annual fuel revenue
adjustment will drop to $250,000. Effective August 2002, the fuel
rate adjustment will be eliminated.
<PAGE>
* Termination of Potomac Edison's fuel factor in Virginia
effective for bills rendered on or after August 7, 2000.
* Potomac Edison's agreement to operate and maintain its
distribution system in Virginia at or above historic levels of
service quality and reliability.
* Potomac Edison's agreement during default service period to
contract for generation service to be provided to customers at the
same costs that it would incur to serve customers from the units it
owned prior to the transfer of generation assets to Allegheny Energy
Supply.
On August 10, 2000, the Company applied to the Virginia SCC to
transfer the hydroelectric assets located within the state of
Virginia to Green Valley Hydro, LLC (a subsidiary). Commission
action is pending.
West Virginia Transfer of Monongahela Power Generation Assets to
Allegheny Energy Supply
On June 23, 2000, the W.Va. PSC issued an order regarding the
transfer of the generation assets of Monongahela Power. In part, the
order requires, that after implementation of the deregulation plan,
Monongahela Power file with the W.Va. PSC a petition seeking a
Commission finding that a proposed transfer of generation assets
complies with the conditions of the deregulation plan. The June 23,
2000 order also permits Monongahela Power to submit a petition to the
Commission seeking approval to transfer its West Virginia generation
assets prior to the implementation of the deregulation plan. A
filing before the implementation of the deregulation plan is required
to include commitments to the consumer and other protections
contained in the deregulation plan. On August 15, 2000 and
supplemented on October 31, 2000, Monongahela Power filed a petition
seeking W.Va. PSC approval to transfer its West Virginia assets to
its unregulated affiliate, Allegheny Energy Supply, on or after
January 1, 2001 contemporaneously with the transfer of its Ohio
generation assets.
Ohio Transition Plan
Monongahela Power reached a stipulated agreement with major
parties on a transition plan to bring electric choice to its 29,000
Ohio customers. The stipulation was filed with the Ohio PUC on June
22, 2000. The following are the highlights of the agreement:
* Monongahela Power will be permitted to transfer approximately
325 MW of Ohio jurisdictional generating assets to its unregulated
affiliate, Allegheny Energy Supply, at net book value as of 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. These rates
will be frozen for the five years.
* For commercial and industrial customers, existing generation
rates will be frozen at the current rates for the market development
period, which begins on January 1, 2001. The market development
<PAGE>
period is three years for large commercial and industrial customers
and five years for small commercial customers.
* Monongahela Power will collect from shopping customers a
regulatory transition charge of $0.0008 per kilowatt-hour (kWh) for
the market development period.
* Allegheny Energy Supply will be permitted to offer competitive
generation service throughout Ohio.
* Additional taxes resulting from competition legislation will be
deferred for up to two years as a regulatory asset.
On October 5, 2000, the Ohio PUC approved the Company's plan
pending a 30 day appeal period.
Rate Matters
As previously reported, on February 26, 1999, the W.Va. PSC
entered an order to initiate a fuel review proceeding to establish a
fuel increment in rates for Potomac Edison and Monongahela Power to
be effective July 1, 1999, through June 30, 2000. If an agreement
was not reached, the proposed fuel rates which would increase
Monongahela Power's fuel rates by $10.9 million and decrease Potomac
Edison's fuel rates by $8.0 million was scheduled to become effective
March 15, 2000. On June 23, 2000, the W.Va. PSC approved a Joint
Stipulation and Agreement for Settlement, stating agreed-upon rates
designed to make the rates of Potomac Edison and Monongahela Power
consistent. Under the terms of the settlement, several tariff
schedules, notably those available to residential and small
commercial customers, will require several incremental steps to reach
the agreed-upon rate level. The settlement rates will result in a
revenue reduction of approximately $.3 million for 2000 increasing
over 8 years to an annual reduction of approximately $1.7 million.
Offsetting the decrease in rates, the settlement approved by the
W.Va. PSC directs the Company to amortize the existing overcollected
deferred fuel balance as of June 30, 2000 (approximately $16.0
million) as a reduction of expenses over a four and one-half year
period beginning July 1, 2000. Also, July 1, 2000, Potomac Edison
and Monongahela Power ceased their expanded net energy cost (fuel
clause) as part of the settlement.
On March 24, 2000, the Maryland PSC issued an order requiring
Potomac Edison to refund the 1999 deferred fuel balance overrecovery
of approximately $9.9 million to customers over a period of twelve
months that began April 30, 2000.
On October 4, 2000, the Maryland PSC approved Potomac Edison's
filing which represents the final reconciliation of its deferred fuel
balance. The filing will refund to customers the $3.2 million
overrecovery balance existing in the Maryland deferred fuel account
as of September 30, 2000. The deferred fuel credit to customers
began in October 2000 and will be effective until the balance falls
to zero, which is projected to take twelve months. The refund of the
overrecovered balance does not affect the Company's earnings since
the overrecovered amounts have been deferred.
<PAGE>
On April 12, 2000, the Maryland PSC approved the Power Sales
Agreement between the Company and Virginia Electric Power Company
covering the sale of the AES Warrior Run output to the wholesale
market for the period July 1, 2000 through December 31, 2000. The
AES Warrior Run cogeneration project was developed under the Public
Utility Regulatory Policies Act of 1978 (PURPA) and achieved
commercial operation on February 10, 2000. Under the terms of the
Maryland deregulation plan approved in 1999, the revenues from the
sale of the AES Warrior Run output are used to offset the capacity
and energy costs the Company pays to the AES Warrior Run cogeneration
project in determining amounts to be recovered from Maryland
customers.
As previously reported, Potomac Edison decreased the fuel
portion of Maryland customers' bills by about $6.4 million annually
effective with bills rendered on or after December 7, 1999, subject
to refund, based on the outcome of proceedings before the Maryland
PSC. A proposed order was issued on February 18, 2000, granting the
requested decrease in the Company's fuel rate, and on March 21, 2000
the proposed order became final. Effective July 1, 2000, coincident
with Customer Choice in Maryland, the fuel rates were rolled into
base rates.
On June 7, 2000, the Company's Maryland customers began
receiving an Earnings Sharing Credit on their electric bills. The
credit is the result of an agreement approved by the Maryland PSC
where the Company agreed to share one-half of its 1999 and 2000
earnings above an 11.4% return on equity with its customers. As a
result, 50 percent of the amount above the threshold earnings amount,
or $9.7 million, is being distributed to customers in the form of an
Earnings Sharing Credit. The credit will remain in affect through
April 30, 2001.
America's Fiber Network Partnership
The Company's unregulated subsidiary, Allegheny Communications
Connect, announced in March 2000 that it, along with five other
energy and telecommunications companies, are partnering to create
America's Fiber Network LLC (AFN), a super-regional high-speed
telecommunications company. The network will initially offer more
than 7,000 route miles, or 140,000 fiber miles, connecting major
markets in the eastern United States to secondary markets with a
growing need for broadband access. The initial footprint of fiber in
AFN puts the company in position to reach areas responsible for
roughly 35 percent of the national wholesale communications capacity
market.
By year-end 2000, AFN expects to expand its network from the
current 7,000 route miles to 10,000 route miles or 200,000 fiber
miles. AFN will reach this capacity by adding partners with existing
fiber, installing fiber in areas of opportunity, and acquiring
existing fiber from others or contracting long-term lease agreements
for existing fiber.
Other partners include AEP Communications, a subsidiary of
American Electric Power; GPU Telcom, a subsidiary of GPU, Inc.;
FirstEnergy Telecom, a subsidiary of FirstEnergy Corp.; CFW
Communications; and R&B Communications.
<PAGE>
Stockholder Protection Rights Agreement
The Company has adopted a Stockholder Protection Rights
Agreement (Rights Agreement). Under the Rights Agreement, rights
were distributed as a dividend at the rate of one right per each
share of the Company's common stock. The dividend was paid to
shareholders of record as of March 16, 2000. Under its principal
provision, if any person or group acquires 15 percent or more of the
Company's outstanding common stock, all other shareholders of the
Company would be entitled to buy, for the exercise price of $100 per
right, common stock of the Company having a market value equal to
twice the exercise price, thereby substantially diluting the
acquiring person's or group's investment.
The rights may cause substantial dilution to a person or group
that acquires 15 percent or more of the Company's common stock. The
rights should not interfere with a transaction that is in the best
interests of the Company and its shareholders, because the rights can
be redeemed prior to a triggering event for $0.01 per right.
The SEC previously issued an order pursuant to the Public
Utilities Holding Company Act (PUHCA), granting the Company authority
to adopt and implement the Rights Agreement.
Allegheny Energy Solutions Alliance
On May 15, 2000, one of the Company's unregulated subsidiaries,
Allegheny Energy Solutions, Inc. announced the formation of a
strategic alliance with Capstone Turbine Corporation (Capstone).
Capstone is the world's leading manufacturer of commercial, ultra-low
emission microturbine power systems. The alliance will help position
the Company as a local and national solutions provider for
distributed generation services.
Allegheny Power Forms New Independent Transmission Affiliation
The Company's regulated subsidiaries, Monongahela Power, Potomac
Edison, and West Penn, 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 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. The Company'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.
<PAGE>
Allegheny Energy Supply to Construct Power Plant in Arizona
Allegheny Energy Supply announced in October 2000 plans to
construct a 1,080 MW natural gas-fired merchant generating facility
in La Paz County, Arizona, approximately 75 miles west of Phoenix.
Construction is expected to begin on the $540 million combined cycle
facility in 2002. When completed in 2005, the facility will allow
Allegheny Energy Supply to sell generation into Arizona and other
states served by the Western System Power Pool, including all or
parts of California, western Canada, Colorado, Montana, Nevada, New
Mexico, Oregon, Utah, Washington, and Wyoming. The facility will be
accretive to earnings in the first year of operation and will give
the Company about 11,000 MW of total generating capacity.
Allegheny Energy Supply Enters Generation Venture
Allegheny Energy Supply announced on September 13, 2000, that it
along with partner UGI Development, a subsidiary of UGI, Corp. (UGI),
will expand and market generation output from facilities at UGI's
Hunlock Creek generating station near Wilkes-Barre in eastern
Pennsylvania. The venture will give Allegheny Energy Supply access
to 46 MW of generating capacity to sell into the PJM market.
In addition to sharing the 46 MW of existing coal-fired
generation at Hunlock Creek, the Allegheny Energy Supply will install
a 44 MW natural gas-fired combustion turbine (CT) on property owned
by UGI. Both UGI Development and Allegheny Energy Supply will
jointly share in the combined output of the coal-fired and combustion
turbine generating units. Allegheny Energy Supply will be
responsible for construction of the Hunlock Creek combustion turbine,
while UGI will operate the facility.
Allegheny Energy Supply Receives Grant for Biomass Project
Allegheny Energy Supply has been selected for award of a $2.4
million research and development cooperative agreement from the
United States Department of Energy (DOE) for a biomass project at its
Willow Island Power Station in Pleasants County, West Virginia. The
three year project, which broke-ground on October 19, 2000, will
adapt the 181 MW Willow Island No. 2 to co-fire sawdust with coal and
tire-derived fuel, reducing fuel costs and nitrogen oxide emissions.
Conemaugh Generating Station Acquisition
Allegheny Energy Supply announced on May 19, 2000 that it, along
with partner PPL Global, Inc., a subsidiary of PPL Corporation,
jointly acquired Pepco's 9.72 percent share in the 1,711 MW Conemaugh
Generating Station. The Company's share of the acquisition is 83 MW
at a cost of $76.25 million. Allegheny Energy Supply expects to
finance its $76.25 million share through the issuance of long-term
debt. The purchase strengthens the Company's presence in the PJM
power market. An application for approval has been filed with the
SEC. Approval is expected in the fourth quarter.
<PAGE>
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 releases were
provided to the media in the Company's area and posted on the
Company's web site. The 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.
DQE, Inc. Merger
On May 17, 2000, the United States Court of Appeals for the
Third Circuit affirmed the decision of the United States District
Court for the Western District of Pennsylvania which had found that
DQE, Inc. did not breach the April 1, 1997 Agreement and Plan of
Merger and had granted judgment in favor of DQE, Inc. on all claims
and all requests for injunctive relief.
Review of Operations
EARNINGS SUMMARY
<TABLE>
<CAPTION>
Consolidated Net Income
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
(Millions of Dollars)
<S> <C> <C> <C> <C>
Regulated operations $63.2 $52.3 $190.4 $196.8
Unregulated generation 12.4 19.8 41.8 38.2
Other .5 (.8) 1.7 (1.4)
Consolidated income before
Extraordinary charge 76.1 71.3 233.9 233.6
Extraordinary charge, net - - (70.5) -
Consolidated net income $76.1 $71.3 $163.4 $233.6
</TABLE>
<TABLE>
<CAPTION>
Earnings Per Share
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Regulated operations $.57 $.47 $1.72 $1.67
Unregulated generation .11 .17 .38 .32
Other .01 (.01) .02 (.01)
Consolidated income before
Extraordinary charge .69 .63 2.12 1.98
Extraordinary charge, net - - (.64) -
Consolidated net income $.69 $.63 $1.48 $1.98
</TABLE>
The increase in earnings for the third quarter of 2000 was
driven by improved performance by the Company's regulated business
and its recent acquisition of two energy distribution companies.
<PAGE>
Earnings for the Company's unregulated business decreased for
the third quarter of 2000 due to sales conditions in the Company's
region during the quarter reflecting much cooler summer weather as
compared to normal. Due to the mild weather conditions, the increase
in revenues net of fuel and purchase power were not adequate to
offset the increase in other operating expenses related to the
generation assets transferred to the unregulated generation business.
The increase in earnings per share in the first nine months of
2000, before the extraordinary charge, reflects higher net revenue in
the regulated operations business and a lower number of average
shares of common stock outstanding as a result of the Company's 1999
stock repurchase program.
The extraordinary charge of $70.5 million, net of taxes,
reflects write-offs by the Company's regulated West Virginia
subsidiaries, Monongahela Power and Potomac Edison, as a result of
West Virginia legislation requiring deregulation of electric
generation.
SALES AND REVENUES
Total operating revenues for the third quarter and first nine
months of 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
(Millions of Dollars)
<S> <C> <C> <C> <C>
Operating revenues:
Regulated operations:
Electric $ 562.1 $550.5 $1,700.1 $1,627.9
Gas 9.0 - 22.1 -
Choice 3.6 8.3 24.0 24.2
Bulk Power 60.7 16.1 88.6 36.8
Transmission and other
energy services 22.4 19.1 53.3 48.2
Total regulated 657.8 594.0 1,888.1 1,737.1
operations
Unregulated generation:
Retail and other 42.9 37.3 156.0 106.7
Bulk power 668.3 233.0 1,341.5 517.3
Total unregulated 711.2 270.3 1,497.5 624.0
generation
Other 1.7 1.1 9.9 5.2
Eliminations (312.2) (124.0) (604.9) (291.5)
Total operating revenues $1,058.5 $741.4 $2,790.6 $2,074.8
</TABLE>
The increase in regulated electric and gas revenues in the third
quarter and first nine months of 2000 was primarily due to increased
regulated electric revenues due to an increase in number of customers
and the acquisition of the assets of West Virginia Power purchased by
Monongahela Power in December 1999, and to a lesser extent by
Monongahela Power's acquisition of Mountaineer Gas in August 2000.
<PAGE>
Choice revenues represent transmission and distribution revenues
from customers in West Penn's distribution territory who chose
another supplier to provide their energy needs. Pennsylvania
deregulation gave West Penn's regulated customers the ability to
choose another energy supplier. In the nine month period of 2000,
all of West Penn's regulated customers had the ability to choose, and
in the nine month period of 1999, two-thirds of West Penn's customers
had the ability to choose. At September 30, 2000, less than 2% of
West Penn's customers chose alternate energy suppliers. The decrease
in choice revenues in the third quarter of 2000 was due to the
decline in the number of West Penn customers choosing alternate
energy suppliers.
The increases in regulated operations bulk power for the three
and nine months ended September 2000 were primarily due to increased
sales by Monongahela Power and Potomac Edison to the Company's
unregulated affiliate, Allegheny Energy Supply. In early 2000, a
dispatch arrangement was put in place between utility operations and
nonutility operations. With this arrangement, utility operations
sells its bulk power to nonutility operations to be dispatched in a
more efficient manner. In addition, $15.0 million in the third
quarter and year-to-date 2000 periods was due to the sale of the
output of the AES Warrior Run cogeneration facility located in
Potomac Edison's territory into the open wholesale market. This sale
of output was part of a Maryland PSC settlement agreement with
Potomac Edison.
In October 1998, the Maryland PSC approved a settlement
agreement for Potomac Edison. Under the terms of that agreement,
Potomac Edison increased its rates $13 million in 1999 and 2000 and
will increase its rates an additional $13 million in 2001 (a $79
million total revenue increase during 1999 through 2001). The
increases are designed to recover additional costs of about $131
million over the 1999 through 2001 period for capacity purchases from
the AES Warrior Run cogeneration project, net of alleged over-
earnings of $52 million for the same period. The net effect of these
changes over the 2000 through 2001 time frame results in pre-tax
income reductions of $21 million in 2000 and $19 million in 2001.
Also, Potomac Edison will share on a 50% customer, 50% shareholder
basis, earnings above a return on equity of 11.4% in Maryland for
1999 and 2000. This sharing occurs through an annual true-up.
Potomac Edison's revenues reflect an estimated obligation for shared
earnings above an 11.4% return on equity. Based on 1999 results, the
Company will return Maryland customers $9.7 million in earnings
sharing over the eleven month period beginning with bills rendered
June 7, 2000. An estimate of the earnings sharing for 1999 results
was accrued by the Company during 1999.
Total regulated operations revenues reflect not only changes in
kWh sales and base rate changes, but also any changes in revenues
from fuel and energy cost adjustment clauses (fuel clauses) through
June 30, 2000, which were applicable in all Company jurisdictions
served, except for Pennsylvania. Effective July 1, 2000, Potomac
Edison's Maryland jurisdiction ceased to have a fuel clause under the
terms of the September 23, 1999, settlement agreement. Also,
effective July 1, 2000 a fuel clause ceased to exist for the West
Virginia jurisdiction for Monongahela Power and Potomac Edison, and
effective August 2000, a fuel clause ceased to exist for Potomac
Edison's Virginia jurisdiction. Effective January 1, 2001, a fuel
clause will cease to exist for Monongahela Power's Ohio jurisdiction.
<PAGE>
Through September 30, 2000 changes in fuel revenues in
jurisdictions for which a fuel clause was in existence had no effect
on consolidated net income because increases and decreases in fuel
and purchased power costs and sales of transmission services and bulk
power were passed on to customers by adjustment of customers' bills
through fuel clauses.
The Company assumes the risks and benefits of changes in fuel
and purchased power costs and sales of transmission services and bulk
power in jurisdictions where a fuel clause has been eliminated.
Effective January 1, 1999, the Company assumed these risks in
Pennsylvania and effective July 1, 2000, the Company assumes similar
risks and benefits for its Maryland and West Virginia jurisdictions
and in August 2000 for its Virginia jurisdiction. The Company will
also assume this risk for the Ohio jurisdiction when the deregulation
plan is implemented on January 1, 2001.
The first nine months of 2000 also includes gas sales and
services and electric revenues from the assets of West Virginia Power
purchased by Monongahela Power in December 1999 and Mountaineer Gas
purchased by Monongahela Power in August 2000. Because a significant
portion of the gas sold by the Company's gas distribution operations
is ultimately used for space heating, both revenues and earnings are
subject to seasonal fluctuations. The Purchased Gas Adjustment
mechanism (fuel clause) continues to exist for West Virginia Power
and may come into effect for Mountaineer Gas following its current
three year moratorium which ends October 31, 2001.
The potential exists for significant volatility in the spot
prices for electricity at the wholesale level to significantly affect
the Company's operating results. The effect may be either positive
or negative, depending on whether the Company's subsidiaries are net
buyers or sellers of electricity during such periods, and the open
commitments which exist at such times.
The increase in unregulated generation revenues is a result of
increased buy-sell transactions to optimize the value of unregulated
generation assets of Allegheny Energy Supply in the unregulated
marketplace and is also due to having increased generation available
for sale. As a result of the Electricity Generation Customer Choice
and Competition Act (Customer Choice Act) in Pennsylvania, two-thirds
of West Penn's generation was freed up in the first quarter of 1999
and was available for sale into the unregulated marketplace by the
supply business, subject to Allegheny Energy Supply's obligations
under the full requirements contracts it entered into. In the first
quarter of 2000, the final one-third of West Penn's generation was
similarly freed up and became available for sale into the deregulated
marketplace. In addition, the Company transferred 2,100 MW of
Potomac Edison's Maryland, Virginia, and West Virginia jurisdictional
generating assets to Allegheny Energy Supply on August 1, 2000. As a
result, the unregulated generation segment had more generation
available for sale into the deregulated marketplace in the first nine
months of 2000.
The elimination between regulated operations, unregulated
generation, and other revenues is necessary to remove the effect of
affiliated revenues, primarily sales of power.
<PAGE>
OPERATING EXPENSES
Fuel expenses for the third quarter and first nine months of
2000 and 1999 were as follows:
<TABLE>
<CAPTION>
Fuel Expenses
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
(Millions of Dollars)
<S> <C> <C> <C> <C>
Regulated operations $ 53.3 $ 96.1 $194.5 $273.6
Unregulated generation 93.9 49.1 218.1 139.6
Total fuel expenses $147.2 $145.2 $412.6 $413.2
</TABLE>
Total fuel expenses increased in the third quarter of 2000
primarily due to an increase in average fuel prices.
Total fuel expenses for the first nine months of 2000 were
relatively flat with a decrease of less than .2%.
Purchased power and exchanges, net, includes purchases from
qualified facilities under the PURPA and consists of the following
items:
<TABLE>
<CAPTION>
Purchased Power and Exchanges, Net
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
(Millions of Dollars)
<S> <C> <C> <C> <C>
Regulated operations:
From PURPA generation* $ 48.7 $ 21.6 $145.1 $ 75.4
Other purchased power 274.6 (3.8) 530.5 27.0
Total purchased power for
regulated operations 323.3 17.8 675.6 102.4
Power exchanges, net (.2) (4.1) 7.0 (3.1)
Unregulated generation purchased
power 479.6 172.1 955.3 288.2
Eliminations (306.6) (19.0) (579.7) (32.5)
Purchased power and exchanges, $496.1 $166.8 $1,058.2 $355.0
*PURPA cost (cents per kWh) 5.5 4.8 5.5 4.9
</TABLE>
The increases of $27.1 million and $69.7 million in regulated
operations PURPA generation for the third quarter and first nine
months ended September 30, 2000, were due to the start of commercial
operations of the AES Warrior Run PURPA cogeneration project in
Potomac Edison's Maryland service territory. The Maryland PSC has
approved Potomac Edison's full recovery of the AES Warrior Run
purchased power costs as part of the September 23, 1999, settlement
agreement. Accordingly, the Company defers, as a component of other
operation expenses, the difference between revenues collected related
<PAGE>
to AES Warrior Run and the cost of the AES Warrior Run purchased
power.
The increases in other regulated operations purchased power in
the third quarter and nine months ended September 30, 2000, were due
primarily to West Penn and Potomac Edison's purchase of power from
their unregulated generation affiliate, Allegheny Energy Supply, in
order to provide energy to their 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 and
transferred to Allegheny Energy Supply. Also, unplanned generating
plant outages in the first quarter of 2000 caused the regulated
utility operations of Potomac Edison and Monongahela Power to make
purchases of higher-priced power on the open energy market.
The increases in unregulated generation purchased power in the
third quarter and first nine months ended September 30, 2000, were
for power to serve the provider of last resort load of West Penn and
Potomac Edison, unplanned first quarter generating plant outages
which caused the Company to make purchases of higher-priced power on
the open energy market, and increased buy-sell transactions to
optimize the value of unregulated generation assets.
The elimination between regulated operations and unregulated
generation purchased power is necessary to remove the effect of
affiliated purchased power expenses.
Gas purchases and production expenses for the third quarter and
first nine months of 2000 and 1999 were as follows:
Gas Purchases and Production
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
(Millions of Dollars)
Regulated operations $5.4 $- $13.8 $-
The gas purchases and gas production of $5.4 million and $13.8
million for the third quarter and nine months ended September 30,
2000, respectively, reflects the acquisition of West Virginia Power
in December 1999 and Mountaineer Gas in August 2000 by Monongahela
Power Company.
Other operation expenses for the third quarter and first nine
months of 2000 and 1999 were as follows:
<PAGE>
<TABLE>
<CAPTION>
Other Operation Expenses
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
(Millions of Dollars)
<S> <C> <C> <C> <C>
Regulated operations $75.4 $82.6 $215.7 $227.7
Unregulated generation 32.4 15.1 84.6 45.9
Other 2.1 1.8 7.8 4.4
Eliminations (18.2) (9.5) (26.3) (18.0)
Total other operation
expenses $91.7 $90.0 $281.8 $260.0
</TABLE>
The decreases in regulated operations expense of $7.2 million
and $12.0 million for the three and nine months ended September 30,
2000, reflects the transfer of generation assets from regulated
operations to unregulated generation during the year. These
decreases were offset in part by additional expenses related to West
Virginia Power and Mountaineer Gas.
The increases in unregulated generation other operation expenses
for the three and nine months ended September 30, 2000, were $17.3
million and $38.7 million, respectively. These increases were
primarily due to increased purchasing of transmission of electricity
for delivery of energy to customers and expenses related to the
transfer of generation assets during the current year.
The increases in other of $.3 million and $3.4 million for the
three and nine months ended September 30, 2000, respectively, were
due primarily to increased expenses related to the expanding
telecommunications business of Allegheny Communications Connect,
Inc., a subsidiary of Allegheny Ventures.
The elimination between regulated operations, unregulated
generation, and other operation expenses is primarily to remove the
effect of affiliated transmission purchases.
Maintenance expenses for the third quarter and first nine months
of 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
Maintenance Expenses
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
(Millions of Dollars)
<S> <C> <C> <C> <C>
Regulated operations $32.7 $44.1 $113.3 $134.0
Unregulated generation 19.1 10.1 54.4 31.0
Other - - - -
Total maintenance expense $51.8 $54.2 $167.7 $165.0
</TABLE>
Maintenance expenses represent costs incurred to maintain the
power stations, the T&D system, and general plant, and reflect
<PAGE>
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.
The decrease in total maintenance expenses for the third quarter
ended September 30, 2000, was primarily due to decreased power
station maintenance. The increase in total maintenance expenses for
the first nine months ended September 30, 2000, reflects increased
power station maintenance for the first six months of 2000.
The decreases in regulated operations maintenance and the
increases in unregulated generation maintenance were mainly due to
the transfer of generation assets.
Unregulated generation maintenance in the first nine months of
2000 reflects the capitalization policy for the Company's subsidiary,
Allegheny Energy Supply, which was formed in November 1999. The
capitalization policy of Allegheny Energy Supply is based on
operating generation assets in an unregulated environment in which
less costs are capitalized with more costs expensed as maintenance.
Depreciation and amortization expenses for the third quarter and
first nine months of 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
Depreciation and Amortization Expenses
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
(Millions of Dollars)
<S> <C> <C> <C> <C>
Regulated operations $48.3 $50.8 $148.3 $152.7
Unregulated generation 10.3 14.5 36.1 43.3
Other .2 .3 .9 .4
Total depreciation and
amortization expenses $58.8 $65.6 $185.3 $196.4
</TABLE>
Total depreciation and amortization expenses for the third
quarter and first nine months of 2000 decreased $6.8 million and
$11.1 million, respectively, reflecting the changes related to the
establishment of capital recovery policies of Allegheny Energy
Supply. The decreases in regulated operations depreciation and
amortization expenses reflects the transfer of generation assets from
regulated operations to unregulated generation during the year offset
by depreciation of new capital additions, including the acquisitions
of West Virginia Power and Mountaineer Gas.
Taxes other than income taxes for the third quarter and first
nine months of 2000 and 1999 were as follows:
<PAGE>
<TABLE>
<CAPTION>
Taxes Other than Income Taxes
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
(Millions of Dollars)
<S> <C> <C> <C> <C>
Regulated operations $32.9 $ 38.6 $107.9 $118.5
Unregulated generation 20.5 7.2 46.0 23.2
.1 .1 .3 .2
Total taxes other than
income taxes $53.5 45.9 $154.2 $141.9
</TABLE>
Total taxes other than income taxes increased $7.6 million and
$12.3 million in the third quarter and first nine months of 2000,
respectively, due primarily to increased gross receipts taxes
resulting from higher revenues from retail customers, increased
property taxes, and increased West Virginia Business and Occupation
taxes. The year-to-date increases were offset in part by reduced
franchise and capital stock taxes due to reduced tax rates and an
adjustment related to prior years.
Regulated operations and unregulated generation taxes other than
income taxes reflect the movement of taxes other than income taxes
associated with the transfer of generation assets during the year.
This decrease in regulated taxes other than income taxes is partially
offset by the acquisitions of West Virginia Power and Mountaineer
Gas.
Federal and state income taxes for the third quarter and first
nine months of 2000 decreased $4.4 million and $9.8 million,
respectively, due to a year-to-date decrease in taxable income and a
third quarter decrease in the Company's tax accrual related to plant
removal costs.
Other Income, Net
Other income, net increased $2.5 million and $8.7 million for
the three months and nine months ended September 30, 2000, due to
interest income on temporary cash investments and income related to
investments of the Company's unregulated subsidiary, Allegheny
Ventures, Inc. In addition, the nine months' ended increase was also
due to a litigation settlement.
Interest on long-term debt and other interest for the third
quarter and first nine months of 2000 and 1999 were as follows:
<PAGE>
<TABLE>
<CAPTION>
Interest Expense
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
(Millions of Dollars)
<S> <C> <C> <C> <C>
Interest on long-term debt:
Regulated operations $31.4 $29.8 $109.8 $ 91.1
Unregulated generation 14.6 7.1 25.5 23.0
Elimination (4.2) - (10.5) -
Total interest on
long-term debt 41.8 36.9 124.8 114.1
Other interest:
Regulated operations 12.0 6.8 36.9 15.5
Unregulated generation 4.9 1.3 6.6 2.7
Other - - .3 -
Elimination (1.3) - (3.0) -
Total other interest 15.6 8.1 40.8 18.2
Total interest expense $57.4 $45.0 $165.6 $132.3
</TABLE>
The increases in total interest on long-term debt in the third
quarter and nine months ended September 30, 2000 of $4.9 million and
$10.7 million, respectively, resulted from increased average long-
term debt outstanding.
The elimination between regulated operations and unregulated
generation on long-term debt is to remove the effect of pollution
control debt interest recorded by Allegheny Energy Supply and also by
West Penn and Potomac Edison. The service obligation for the
pollution control debt was assumed by Allegheny Energy Supply in
conjunction with the transfer of West Penn and Potomac Edison's
generating assets. West Penn and Potomac Edison continue to be co-
obligors with respect to the pollution control debt.
Other interest expense reflects changes in the levels of short-
term debt maintained by the companies throughout the year, as well as
the associated interest rates. The increase in other interest
expense of $7.5 million and $22.6 million for the third quarter and
first nine months ended September 30, 2000, respectively, resulted
primarily from the increase in short-term debt outstanding in
conjunction with the repurchase of the Company's common stock that
began late in the first quarter of 1999.
The elimination between regulated operations, unregulated
generation, and other is to remove the effect of affiliated interest
expense.
Dividends on the preferred stock of the subsidiaries decreased
due to the redemption by Potomac Edison and West Penn of their
cumulative preferred stock on September 30, 1999, and July 15, 1999,
respectively.
Extraordinary Charge
The extraordinary charge in the nine months ended September 30,
2000 of $116.7 million ($70.5 million, net of taxes) was required to
reflect a write-off by the Company's West Virginia subsidiaries,
Monongahela Power and Potomac Edison, of net regulatory assets
determined to be unrecoverable from customers and establishment of a
rate stabilization account for residential and small commercial
<PAGE>
customers as required by the deregulation plan. The extraordinary
charge was a result of West Virginia legislation requiring
deregulation of electric generation. See Note 4 to the consolidated
financial statements for additional information.
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 subsidiaries are subject
to various contingencies and uncertainties relating to their
operations and construction programs, including legal actions, and
regulations and uncertainties related to environmental matters.
Financing
In the first nine months of 2000 Potomac Edison redeemed $75
million of 5 7/8% series first mortgage bonds, Monongahela Power
redeemed $65 million of 5 5/8% series first mortgage bonds, and West
Penn Power redeemed $33.2 million of class A-1 6.32% transition
bonds.
On June 1, 2000, Potomac Edison issued $80 million London
Interbank Offer Rate (LIBOR) floating rate private placement notes
assumable by Allegheny Energy Supply upon its acquisition of Potomac
Edison's Maryland electric generating assets. On August 1, 2000,
after the Potomac Edison generating assets were transferred to
Allegheny Energy Supply, the notes were remarketed as Allegheny
Energy Supply floating rate notes with the same maturity date. No
additional proceeds were received.
On August 18, 2000, Monongahela Power borrowed $61.0 million
from a $100.0 million revolving credit facility. The facility is
priced off the LIBOR three-month floating rate. Monongahela Power
will borrow the remaining amount of the facility, on an as needed
basis, prior to the Monongahela Power generating asset transfer to
Allegheny Energy Supply. The facility will then be transferred to
Allegheny Energy Supply concurrent with the asset transfer.
On August 18, 2000, the Company issued $165.0 million aggregate
principal amount of its 7.75% notes due 2005. The Company
contributed $162.5 million of the proceeds from its financing to
Monongahela Power Company. Monongahela Power used the proceeds from
the Company, and the $61.0 million borrowed under the revolving
credit facility (as discussed above), in connection with the purchase
of Mountaineer Gas.
As part of the purchase of Mountaineer Gas on August 18, 2000,
Monongahela Power assumed $100 million of existing Mountaineer Gas
Company debt.
The Company also issued unsecured notes in an aggregate
principal amount of $135.0 million bearing an interest rate of 7.75%
due 2005 on November 7, 2000. These notes were a further issuance
<PAGE>
of, and form a single series with, the $165.0 million aggregate
principal amount of the Company's 7.75% notes issued on August 18,
2000, as discussed above.
On July 15, 1999, West Penn called or redeemed all outstanding
shares of its cumulative preferred stock with a combined par value of
$79.7 million plus redemption premiums of $3.3 million. Potomac
Edison called all outstanding shares of its cumulative preferred
stock with a par value $16.4 million plus redemption premiums of $.5
million on September 30, 1999.
Impact of Change in Short-term Interest Rate
A one percent increase in the short-term borrowing interest rate
would increase projected short-term interest expense by approximately
$2.1 million for the three months ended December 31, 2000, based on
projected short-term borrowings.
Unregulated Construction Expenditures and Investments
The increase in unregulated generation construction expenditures
and investments of $72.5 million in the nine months ended September
30, 2000, as compared to the nine months ended September 30, 1999, is
primarily due to expenditures related to the generation expansion
program of Allegheny Energy Supply.
Environmental Issues
As previously reported, the Environmental Protection Agency's
(EPA) nitrogen oxides (NOx) State Implementation Plan (SIP) call
regulation has been under litigation and on March 3, 2000, the
District of Columbia Circuit Court of Appeals issued a decision that
basically upheld the regulation. However, an appeal of that decision
was filed in April 2000 by the state and industry litigants. On June
23, 2000, the Court denied the request for the appeal. The Court
also granted the EPA's request to lift the previous court ordered
stay of the September 1999 SIP submittal deadline by which the States
must file their compliance plans to implement, the NOx SIP call
regulation. The new SIP submittal deadline was October 28, 2000 and
the compliance due date will remain May 1, 2003. The Company's
compliance with such stringent regulations will require the
installation of expensive post-combustion control technologies on
most of its power stations, with an estimated total capital cost of
$347.9 million. Of that amount, approximately $8.5 million was spent
in 1999.
On August 2, 2000, the Company received a letter from the EPA
requiring it to provide certain information on the following ten
electric generating stations: Albright, Armstrong, Fort Martin,
Harrison, Hatfield's Ferry, Mitchell, Pleasants, Rivesville, R. Paul
Smith, and Willow Island. These electric generating stations are now
owned by Allegheny Energy Supply and Monongahela Power. The letter
requested information under Section 114 of the federal Clean Air Act
to determine compliance with federal Clean Air Act and state
implementation plan requirements, including potential application of
federal New Source Performance Standards. In general, such standards
can require the installation of additional air pollution control
equipment upon the major modification of an existing facility.
<PAGE>
Similar inquiries have been made of other electric utilities and
have resulted in enforcement proceedings being brought in many cases.
The Company believes its generating facilities have been operating in
accordance with the Clean Air Act and the rules implementing the Act.
The experience of other utilities, however, suggests that, in recent
years, the EPA may well have revised its interpretation of the rules
regarding the determination of whether an action at a facility
constitutes routine maintenance, which would trigger the requirements
of the New Source Performance Standards, or a major modification of
the facility, which would require compliance with the New Service
Performance Standards. If federal New Source Performance Standards
were to be applied to these generating stations, in addition to the
possible imposition of fines, compliance would entail significant
expenditures. In connection with the deregulation of generation,
Allegheny Energy has agreed to rate caps in each of its
jurisdictions, and there are no provisions under those arrangements
to increase rates to cover such expenditures.
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. The Company
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.
The Company is at the forefront of state-implemented retail
competition, having successfully negotiated settlement agreements in
all of the states the Operating Subsidiaries (Monongahela Power,
Potomac Edison, and West Penn) 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
The Company 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 Company unless certain outmoded and anti-competitive laws,
specifically the PUHCA and Section 210 (Mandatory Purchase
Provisions) of PURPA, are repealed or significantly revised. The
Company 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
<PAGE>
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 certain date
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 Company 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 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 21.)
Maryland Activities
On June 7, 2000, the 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 Commission has not yet finalized all of
the rules that will govern customer choice in the state.
On July 1, 2000, the Maryland PSC issued a restrictive order
imposing standards of conduct for transactions between Maryland
utilities and their affiliates. Among other things, the order:
* restricts sharing of employees between utilities and affiliates,
* announces the Maryland PSC's intent to impose a royalty fee to
compensate the utility for the use by an affiliate of the utility's
name and/or logo and for other "intangible or unquantified benefits",
and
* requires asymmetric pricing for asset transfers between
utilities and their affiliates. Asymmetric pricing requires that
transfers of assets from the regulated utility to an affiliate be
recorded at the greater of book cost or market value while transfers
of assets from the affiliate to the regulated utility be at lesser of
book costs or market.
<PAGE>
Potomac Edison, along with substantially all of Maryland's gas and
electric utilities, filed a Circuit Court petition for judicial
review and a motion for stay of the order. The Circuit Court has
granted a partial stay of the Maryland PSC's Code of
Conduct/Affiliated Transactions Order. The Judge granted a stay on
the issues of employee sharing, royalties for the use of the name and
logo and for certain intangibles, and on the requirement to use a
disclaimer on advertising for non-core services.
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 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, pending a 30 day review period. The restructuring
plan allows the Company to transfer its Ohio generating assets to
Allegheny Energy Supply at net book value on January 1, 2001. See
highlights of the agreement on page 18 under Ohio Transition Plan.
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.
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 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 the
Company's separation plan permitting the transfers of Potomac
Edison's generating assets and the provision of the Phase I
application. See Virginia Functional Separation Plan on page 17 for
more information.
Various rulemaking proceedings to implement customer choice are
ongoing before the Virginia SCC.
<PAGE>
West Virginia Activities
In March 1998, the West Virginia Legislature passed legislation
that directed the 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 and approved by the legislature. The Company
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 the Company'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.
Accounting for the Effects of Price Deregulation
In July 1997, the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board (FASB) released Issue No. 97-4,
"Deregulation of the Pricing of Electricity - Issues Related to the
Application of FASB Statement Nos. 71 and 101," which concluded that
utilities should discontinue application of Statement of Financial
Accounting Standards (SFAS) No. 71 for the generation portion of
their business when a deregulation plan is in place and its terms are
known. In accordance with guidance of EITF Issue No. 97-4, the
Company has discontinued the application of SFAS No. 71 to its
electric generation business in Maryland, Pennsylvania, and West
Virginia.
On October 5, 2000, the Ohio PUC approved a deregulation plan
for Monongahela Power. As a result, the Company will discontinue
applying SFAS No. 71 to the Ohio portion of Monongahela Power's
operations in the fourth quarter of 2000. The Company estimates that
an extraordinary charge of $4.9 million after taxes ($8.1 million pre-
tax) will be recorded.
The Virginia legislation established a definitive process for
transition to deregulation and market-based pricing for electric
generation. However, the deregulation plan in Virginia will not be
known until certain regulatory proceedings occur with filings
scheduled for the fourth quarter of 2000. The Company estimates that
<PAGE>
a charge to earnings for Virginia deregulation would be $1.6 million
after taxes ($2.6 million before taxes).
Energy Risk Management
The Company is exposed to a variety of commodity driven risks
associated with the wholesale and retail marketing of electricity,
including the generation, procurement, and marketing of power. The
Company is mandated, by the Board of Directors of Allegheny Energy,
Inc., to engage in a program that systematically identifies,
measures, evaluates, and actively manages and reports on market-
driven risks.
The Company's wholesale and retail activities principally
consist of marketing, and buying and selling over-the-counter
contracts for the purchase and sale of electricity. The majority of
the forward contracts represent commitments to purchase or sell
electricity at fixed prices in the future. These contracts require
physical delivery of electricity.
The Company also uses option contracts to buy and sell
electricity at fixed prices in the future. The option contracts to
purchase electricity in the future are primarily entered into for
risk management purposes. The risk management activities focus on
management of volume risks (supply) and operational risks (plant
outages). The Company's principal intent and business objective for
the use of its capital assets and contracts is the same - provide it
with physical power supply to enable it to deliver electricity to
meet customer needs.
The Company has entered into long-term contractual obligations
for sales of electricity to other load-serving entities including
affiliated electric utilities, municipalities, and retail load
aggregators.
The Company has a Corporate Energy Risk Control Policy adopted
by the Board of Directors and monitored by an Exposure Management
Committee of senior management. An independent risk management
function is responsible for insuring compliance with the Policy.
Market risk arises from the potential for changes in the value of
energy related to price and volatility in the market. The Company
reduces these risks by using its generation assets to back positions
on physical transactions. A value at risk model is used to measure
the market exposure resulting from the wholesale and retail
activities. Value at risk is a statistical model that attempts to
predict risk of loss based on historical market price and volatility
data over a given period of time.
Credit risk is defined as the risk that a counterparty to a
transaction will be unable to fulfill its contractual obligations.
The credit standing of counterparties is established through the
evaluation of the prospective counterparty's financial condition,
specified collateral requirements where deemed necessary, and the use
of standardized agreements which facilitate netting of cash flows
associated with a single counterparty. Financial conditions of
existing counterparties are monitored on an ongoing basis. Market
exposure and credit risk have established aggregate and counterparty
limits that are monitored within the guidelines of Allegheny Energy's
Energy Risk Control Policy.
<PAGE>
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.
The Company 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 team is in the process of
estimating the fair value of the derivatives, designating certain
derivatives as hedges and assessing the effectiveness of those
derivatives as hedges. Although an assessment of all the effects of
SFAS No. 133 has not been completed, it is expected to increase the
volatility in reported earnings and other comprehensive income.
The Company has certain forward and option contracts for the
future purchase or sale of electricity that meet the derivative
criteria in SFAS No. 133. The Company also has entered into option
contracts for emission allowances that qualify as derivatives. The
Company will record an asset or liability on its balance sheet based
on the fair value of the contracts 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. The Company intends
to designate a portion of the electricity contracts as cash flow
hedges of the exposure to variability in expected future cash flows
relating to a forecasted transaction. The effective portion of the
change in fair value of these contracts will be recorded in other
comprehensive income and subsequently reclassified into earnings when
the forecasted transaction affects earnings. The ineffective portion
of these contracts, as well as the change in fair value of all other
derivatives, will be recognized in earnings in the period of change.
<PAGE>
The Company has identified a significant contract that will
require mark-to-market accounting under the Statement. The terms of
this three year contract entered into on January 1, 1999, provides a
counterparty with the right to purchase, at a fixed price, 270 MW of
electricity per hour until December 31, 2001. Based on the September
30, 2000 forward prices for electricity, the Company estimates that
the fair value of this contract will represent a liability of
approximately $33 million ($21 million, net of tax) on January 1,
2001. However, the fair value of this contract will fluctuate with
changes in the underlying commodity prices which are influenced by
various market factors, including weather and availability of
regional electric generation and transmission capacity. But the
liability will reduce to zero at December 31, 2001, with the
expiration of the contract. In accordance with SFAS No. 133, the
Company expects to record a charge against earnings net of the
related tax effect for this contract as a change in accounting
principle as of January 1, 2001.
<PAGE>
ALLEGHENY ENERGY, INC.
Part II - Other Information to Form 10-Q
for Quarter Ended September 30, 2000
ITEM 5. OTHER
On November 14, 2000 Allegheny Energy Supply Company, LLC, the
Company's unregulated generation subsidiary, and Enron Corp. signed a
definitive agreement under which Allegheny Energy Supply will
purchase 1,710 megawatts (MW) of merchant generating capacity at
three natural gas-fired generating facilities for $1.028 billion in
cash. The purchase includes the following Enron generating assets,
which have been in service since June 2000: the Gleason plant (546
MW) in Gleason, Tenn.; the Wheatlant plant (508 MW) in Wheatland,
Ind.; and the Lincoln Energy Center plant (656 MW) in Manhattan, Ill.
The purchase will be financed through a combination of debt and
equity. The completion of the transaction is conditioned upon, among
other things, the approvals of the Federal Energy Regulatory
Commission, the Securities and Exchange Commission, and the
Department of Justice and Federal Trade Commission. The companies
anticipate that regulatory procedures can be completed by the second
quarter of 2001.
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
(a) Exhibits:
(27) Financial Data Schedule
(10) Material Contracts
(b) Form 8-K Reporting Date - August 15, 2000.
Items reported: Other Events
Item 5 - The Company agreed to sell $165.0 million
aggregate principal amount of its 7.75% Notes due 2005.
Exhibit 1.1 - Underwriting Agreement dated as of
August 15, 2000.
Exhibit 1.2 - Pricing Agreement dated as of August 15,
2000.
Exhibit 4.1 - Indenture dated as of August 15, 2000.
Exhibit 4.2 - Form of 7.75% notes due August 1, 2005.
Form 8-K Reporting Date - August 18, 2000.
Items reported: Other Events
<PAGE>
Item 5 - Monongahela Power Company completed its
acquisition of Mountaineer Gas Company for approximately
$323 million.
Exhibit 2.1 - Stock Purchase Agreement dated as of
December 20, 1999.
Exhibit 99.1 - Press release issued August 24, 2000
relating to purchase.
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.
ALLEGHENY ENERGY, INC.
/s/ T. J. Kloc .
T. J. Kloc, Vice President
and Controller
(Chief Accounting Officer)
November 14, 2000
<PAGE>
Exhibit Index
Exhibit Description
Ex. 10 Purchase and Sale Agreement by and between Enron North
America Corp. and Allegheny Energy Supply Company, L.L.C.
(Dated November 13, 2000)
<PAGE>
