<PAGE>
Page 1 of 13
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1997
Commission File Number 1-5164
MONONGAHELA POWER COMPANY
(Exact name of registrant as specified in its charter)
Ohio 13-5229392
(State of Incorporation) (I.R.S. Employer Identification No.)
1310 Fairmont Avenue, Fairmont, West Virginia 26554
Telephone Number - 304-366-3000
The registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months and (2) has been subject to such filing requirements for the past
90 days.
At August 14, 1997, 5,891,000 shares of the Common Stock ($50 par
value) of the registrant were outstanding, all of which are held by Allegheny
Power System, Inc., the Company's parent.
<PAGE>
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MONONGAHELA POWER COMPANY
Form 10-Q for Quarter Ended June 30, 1997
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Statement of income - Three and six months ended
June 30, 1997 and 1996 3
Balance sheet - June 30, 1997
and December 31, 1996 4
Statement of cash flows - Six months ended
June 30, 1997 and 1996 5
Notes to financial statements 6-7
Management's discussion and analysis of financial
condition and results of operations 8-11
PART II--OTHER INFORMATION 12-13
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MONONGAHELA POWER COMPANY
Statement of Income
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES:
<S> <C> <C> <C> <C>
Residential $ 43,923 $ 46,293 $ 99,963 $ 107,613
Commercial 27,705 28,800 57,958 60,306
Industrial 47,570 50,411 95,362 104,202
Wholesale and other, including affiliates 20,695 21,289 45,232 46,238
Bulk power transactions, net 4,185 5,333 8,366 9,384
Total Operating Revenues 144,078 152,126 306,881 327,743
OPERATING EXPENSES:
Operation:
Fuel 32,529 34,508 67,660 72,195
Purchased power and exchanges, net 24,350 24,340 50,197 51,076
Deferred power costs, net (5,076) 580 (8,883) 3,837
Other 17,383 19,360 35,761 37,573
Maintenance 17,851 18,360 35,809 37,881
Restructuring charges - (3,528) - 13,844
Depreciation 14,315 13,779 28,663 27,708
Taxes other than income taxes 9,732 10,041 20,049 20,459
Federal and state income taxes 9,293 9,951 23,444 17,535
Total Operating Expenses 120,377 127,391 252,700 282,108
Operating Income 23,701 24,735 54,181 45,635
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 153 79 289 88
Other income, net 1,695 1,382 3,353 3,310
Total Other Income and Deductions 1,848 1,461 3,642 3,398
Income Before Interest Charges 25,549 26,196 57,823 49,033
INTEREST CHARGES:
Interest on long-term debt 9,122 9,123 18,241 18,411
Other interest 436 448 1,195 1,022
Allowance for borrowed funds used during
construction (183) (87) (343) (101)
Total Interest Charges 9,375 9,484 19,093 19,332
NET INCOME $ 16,174 $ 16,712 $ 38,730 $ 29,701
</TABLE>
See accompanying notes to financial statements.
<PAGE>
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MONONGAHELA POWER COMPANY
Balance Sheet
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
ASSETS: (Thousands of Dollars)
Property, Plant, and Equipment:
<S> <C> <C>
At original cost, including $35,850,000
and $33,366,000 under construction $ 1,905,794 $ 1,879,622
Accumulated depreciation (818,172) (790,649)
1,087,622 1,088,973
Investments:
Allegheny Generating Company - common stock at equity 53,441 54,798
Other 313 346
53,754 55,144
Current Assets:
Cash 149 2,290
Accounts receivable:
Electric service, net of $1,767,000 and $1,949,000
uncollectible allowance 66,414 65,615
Affiliated and other 10,114 13,365
Materials and supplies - at average cost:
Operating and construction 18,857 19,785
Fuel 21,681 16,694
Prepaid taxes 11,993 18,331
Other 6,249 10,693
135,457 146,773
Deferred Charges:
Regulatory assets 165,761 171,692
Unamortized loss on reacquired debt 14,797 15,256
Other 13,565 8,917
194,123 195,865
Total Assets $ 1,470,956 $ 1,486,755
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 294,550 $ 294,550
Other paid-in capital 2,441 2,441
Retained earnings 245,777 215,221
542,768 512,212
Preferred stock 74,000 74,000
Long-term debt and QUIDS 455,415 474,841
1,072,183 1,061,053
Current Liabilities:
Short-term debt 17,347 31,139
Long-term debt due within one year 34,600 15,500
Accounts payable 3,851 12,997
Accounts payable to affiliates 16,042 10,170
Taxes accrued:
Federal and state income 901 3,788
Other 16,873 21,464
Deferred power costs 4,074 12,419
Interest accrued 8,268 8,234
Restructuring liability 6,771 13,997
Other 8,334 13,613
117,061 143,321
Deferred Credits and Other Liabilities:
Unamortized investment credit 19,371 20,445
Deferred income taxes 226,184 225,841
Regulatory liabilities 17,831 18,554
Other 18,326 17,541
281,712 282,381
Total Capitalization and Liabilities $ 1,470,956 $ 1,486,755
</TABLE>
See accompanying notes to financial statements.
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MONONGAHELA POWER COMPANY
Statement of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
June 30
1997 1996
(Thousands of Dollars)
CASH FLOWS FROM OPERATIONS:
<S> <C> <C>
Net income $38,730 $29,701
Depreciation 28,663 27,708
Deferred investment credit and income taxes, net 9,939 (3,133)
Deferred power costs, net (8,883) 3,837
Unconsolidated subsidiaries' dividends in excess of earnings 1,390 1,160
Allowance for other than borrowed funds used
during construction (289) (88)
Restructuring liability (7,226) 12,032
Changes in certain current assets and
liabilities:
Accounts receivable, net 2,452 10,678
Materials and supplies (4,059) 7,133
Other current assets 4,339 7,186
Accounts payable (3,274) (1,216)
Taxes accrued (7,478) (6,797)
Interest accrued 34 387
Other, net (6,674) 8,743
47,664 97,331
CASH FLOWS FROM INVESTING:
Construction expenditures (less allowance for
equity funds used during construction) (27,339) (26,741)
CASH FLOWS FROM FINANCING:
Retirement of long-term debt (500) (18,500)
Short-term debt, net (13,792) (22,172)
Dividends on capital stock:
Preferred stock (2,519) (2,519)
Common stock (5,655) (24,683)
(22,466) (67,874)
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (2,141) 2,716
Cash and Temporary Cash Investments at January 1 2,290 117
Cash and Temporary Cash Investments at June 30 $ 149 $ 2,833
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $18,331 $18,088
Income taxes 16,540 18,360
</TABLE>
See accompanying notes to financial statements.
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MONONGAHELA POWER COMPANY
Notes to Financial Statements
1. The Company's Notes to Financial Statements in the Allegheny
Power System companies' combined Annual Report on Form 10-K for
the year ended December 31, 1996, should be read with the
accompanying financial statements and the following notes.
With the exception of the December 31, 1996, balance sheet in
the aforementioned annual report on Form 10-K, the accompanying
financial statements appearing on pages 3 through 5 and these
notes to financial statements are unaudited. In the opinion of
the Company, such financial statements together with these
notes contain all adjustments (which consist only of normal
recurring adjustments) necessary to present fairly the
Company's financial position as of June 30, 1997, the results
of operations for the three and six months ended June 30, 1997
and 1996, and cash flows for the six months ended June 30, 1997
and 1996.
2. The Statement of Income reflects the results of past operations
and is not intended as any representation as to future results.
For purposes of the Balance Sheet and Statement of Cash Flows,
temporary cash investments with original maturities of three
months or less, generally in the form of commercial paper,
certificates of deposit, and repurchase agreements, are
considered to be the equivalent of cash.
3. The Company owns 27% of the common stock of Allegheny
Generating Company (AGC), and affiliates of the Company own the
remainder. AGC owns an undivided 40% interest, 840 MW, in the
2,100-MW pumped-storage hydroelectric station in Bath County,
Virginia, operated by the 60% owner, Virginia Electric and
Power Company, a nonaffiliated utility. Following is a summary
of income statement information for AGC:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Electric operating revenues $20,408 $21,023 $40,624 $41,932
Operation & maintenance expense 1,471 1,215 2,756 2,334
Depreciation 4,284 4,290 8,568 8,580
Taxes other than income taxes 1,201 1,198 2,396 2,408
Federal income taxes 3,141 3,362 6,265 6,706
Interest charges 3,917 4,181 7,877 8,409
Other income, net (1) - (1) (3)
Net income $ 6,395 $ 6,777 $12,763 $13,498
</TABLE>
The Company's share of the equity in earnings above was $1.7
million and $1.8 million for the three months ended June 30,
1997 and 1996, respectively, and $3.4 million and $3.6 million
for the six months ended June 30, 1997 and 1996, respectively,
and was included in other income, net, on the Statement of
Income.
<PAGE>
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4. On April 7, 1997, Allegheny Power System, Inc. (Allegheny
Power) and DQE, Inc., parent company of Duquesne Light Company,
announced that they have agreed to merge in a tax-free, stock-
for-stock transaction. The combined company will be called
Allegheny Energy, Inc. (Allegheny Energy). It is expected that
Allegheny Energy will continue to be operated as an integrated
electric utility holding company and that the Company and its
regulated electric utility affiliates will continue to exist as
separate legal entities, including DQE, Inc.
The merger is conditioned, among other things, upon the
approval of each company's shareholders and the necessary
approvals of various state and federal regulatory agencies,
including the public utility commissions in Pennsylvania and
Maryland, the Securities and Exchange Commission, the Federal
Energy Regulatory Commission, and the Nuclear Regulatory
Commission. The companies are hopeful that the required
approvals can be obtained by May 1, 1998. On May 2, 1997,
Allegheny Power filed a registration statement on Form S-4
containing a joint proxy statement/prospectus with DQE, Inc.
concerning the merger and the transactions contemplated
thereby. In late June, the S-4 became effective allowing
Allegheny Power and DQE, Inc. to pursue shareholder approval
for the proposed merger that would create Allegheny Energy.
Allegheny Power and DQE, Inc. each held separate shareholder
meetings on August 7, 1997, at which the combination of the two
companies was approved by the necessary number of shareholders
of both companies. At Allegheny Power's meeting, the necessary
number of shareholders also approved the change in Allegheny
Power's name to Allegheny Energy, Inc.
5. Restructuring charges in the first six months of 1996 ($8.3
million, net of tax) include expenses associated with the
reorganization, which is essentially complete.
6. For the most part, regulatory assets and liabilities are not
included in rate base. Income tax regulatory
assets/(liabilities), net of $139 million at June 30, 1997, are
primarily related to investments in electric facilities and
will be recovered over a period of from 20 to 40 years. The
remaining recovery period for items other than income taxes, is
from three to seven years.
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MONONGAHELA POWER COMPANY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
COMPARISON OF SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1997
WITH SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1996
Review of Operations
NET INCOME
Net income for the second quarter and first six months
of 1997 and 1996, and the after-tax restructuring charges included in the
1996 periods are shown below.
<TABLE>
<CAPTION>
Net Income
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
(Millions of Dollars)
<S> <C> <C> <C> <C>
Net Income as Reported $16.2 $16.7 $38.7 $29.7
Restructuring (Credits)
Charges - (2.1) - 8.3
Net Income Adjusted $16.2 $14.6 $38.7 $38.0
</TABLE>
The increase in second quarter adjusted net income,
before restructuring credits, was primarily due to a decrease in operation
and maintenance expenses and an increase in other miscellaneous income
which was partially offset by a decrease in kilowatt-hour (kWh) sales to
residential customers largely due to second quarter 1997 cooling degree
days (air conditioning weather) which were 33% below normal and 46% less
than the corresponding 1996 period.
The increase in year-to-date adjusted net income,
before restructuring charges, was primarily due to a decrease in operation
and maintenance expenses which was partially offset by a 5% decrease in
kWh sales to residential customers due to mild first quarter winter
weather (heating degree days 9% below normal and 16% below the first
quarter of 1996) and the cooler than normal second quarter weather.
Commercial and industrial kWh sales were also down for the second quarter
and first six months of 1997.
SALES AND REVENUES
In the second quarter of 1997, retail kilowatt-hour
(kWh) sales to residential, commercial, and industrial customers decreased
2%, 1%, and .5%, respectively, for a net decrease of 1%, and in the first
six months decreased 5%, 1% and 4%, respectively, for a net decrease of
4%. As discussed above, residential kWh sales, which are more weather
sensitive than the commercial and industrial classes, decreased in the
second quarter and in the first six
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months due to the mild weather. In the second quarter and in the first
six months, commercial kWh sales also decreased primarily because of the
mild weather. Industrial kWh sales decreased in the second quarter and
first six month periods for a variety of reasons, primarily in the iron
and steel customers groups.
The decrease in revenues from sales to residential,
commercial, and industrial customers resulted from the following:
<TABLE>
<CAPTION>
Decrease from Prior Periods
Quarter Six Months
(Millions of Dollars)
<S> <C> <C>
Fuel and energy cost adjustment clauses* $(4.9) $(12.5)
Net decreased kWh sales (1.3) (6.0)
Other (.1) (.3)
Decrease in retail revenues $(6.3) $(18.8)
</TABLE>
* Changes in revenues from fuel and energy cost adjustment
clauses have little effect on net income. Changes in the costs
of fuel, purchased power, and certain other costs, and changes
in revenues from sales to other utilities, including
transmission services, have had little effect on net income
because such changes have been passed on to customers by
adjustment of customer bills through fuel and energy cost
adjustment clauses.
The decrease in wholesale and other revenues for the
second quarter and first six months of 1997 was due primarily to a
decrease in sales of energy and spinning reserve to affiliated companies,
offset in part by increased transmission services provided to affiliated
companies. All of the Company's wholesale customers have signed contracts
to remain as customers until December 1, 2000.
Revenues from bulk power transactions consist of the
following items:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
(Millions of Dollars)
Revenues:
<S> <C> <C> <C> <C>
From transmission services $2.1 $3.2 $5.2 $6.6
From sale of Company generation 2.1 2.1 3.2 2.8
Total $4.2 $5.3 $8.4 $9.4
</TABLE>
Revenues from transmission services decreased primarily
due to reduced demand, primarily because of mild weather for the quarter
and year-to-date. About 90% of the aggregate benefits from bulk power
transactions are passed on to retail customers through fuel and energy
adjustment clauses (described above) and have had little effect on net
income.
<PAGE>
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OPERATING EXPENSES
Fuel expenses for the second quarter and first six
months of 1997 decreased 6% due to decreases in kWh's generated. Fuel
expenses are primarily subject to deferred power cost accounting
procedures to match fuel and energy cost adjustment clause revenues, with
the result that changes in fuel expenses have little effect on net income.
"Purchased Power and Exchanges, Net" represents power
purchases from and exchanges with nonaffiliated companies and purchases
from qualified facilities under the Public Utility Regulatory Policies Act
of 1978 (PURPA), capacity charges paid to Allegheny Generating Company
(AGC), an affiliate partially owned by the Company, and other transactions
with affiliates made pursuant to a power supply agreement whereby each
company uses the most economical generation available in the Allegheny
Power System at any given time, and consists of the following items:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
(Millions of Dollars)
Nonaffiliated transactions:
Purchased power:
<S> <C> <C> <C> <C>
From PURPA generation* $17.9 $17.0 $35.9 $34.1
Other 1.7 2.1 3.8 5.9
Power exchanges, net (.2) .1 .7 .9
Affiliated transactions:
AGC capacity charges 4.9 5.1 9.7 10.2
Energy and spinning reserve
charges .1 - .1 -
Purchased power and
exchanges, net $24.4 $24.3 $50.2 $51.1
*PURPA cost per kWh $.055 $.055 $.054 $.053
</TABLE>
Other purchased power decreased because of decreased
need due to decreased sales to retail customers. The cost of power
purchased, including power from PURPA generation and affiliated
transactions, is mostly recovered from customers currently through the
regular fuel and energy cost recovery procedures followed by the Company's
regulatory commissions, and is primarily subject to deferred power cost
accounting procedures with the result that changes in such costs have
little effect on net income.
The decreases in other operation expense for the three
and six months ended June 1997 resulted primarily from decreases in
employee benefit costs.
Maintenance expenses represent costs incurred to
maintain the power stations, the transmission and distribution (T&D)
system, and general plant, and reflect routine maintenance of equipment
and rights-of-way as well as planned major repairs and unplanned
expenditures, primarily from forced outages at the power stations and
periodic storm damage on the T&D system. Variations in maintenance
expense result primarily from unplanned events and planned major projects,
which vary in timing and magnitude, depending upon the length of time
equipment has been in service without a major overhaul and the amount of
work found necessary when the equipment is dismantled. Maintenance
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expenses decreased $.5 million and $2.1 million for the second quarter and
first six months of 1997, respectively, due to planned reductions in
maintenance expenses in response to reduced kWh sales to retail customers.
Restructuring credits in the second quarter and
restructuring charges in the first six months of 1996 include expenses
associated with the reorganization, which is essentially complete.
The increases in depreciation expense for the second
quarter and first six months of 1997 resulted from additions to electric
plant. Future depreciation expense increases are expected to be less than
historical increases because of reduced levels of planned capital
expenditures.
The net increase in federal and state income taxes in
the six-month period resulted primarily from an increase in income before
taxes, which was primarily related to restructuring charges recorded in
1996.
Financial Condition and Requirements
The Company's discussion on Financial Condition and
Requirements and Competition In Core Business in the Allegheny Power
System companies' combined Annual Report on Form 10-K for the year ended
December 31, 1996, should be read with the following information.
In the normal course of business, the Company is
subject to various contingencies and uncertainties relating to its
operations and construction programs, including cost recovery in the
regulatory process, laws, regulations and uncertainties related to
environmental matters, to the restructuring of the electric utility
industry, merger activities, and legal actions.
The Company expects to use exchange-traded and over-
the-counter futures, options, and swap contracts both to hedge its
exposure to changes in electric power prices and for trading purposes.
The risks to which the Company is exposed include underlying price
volatility, credit risk, and variations in cash flows, among others. The
Company has implemented risk management policies and procedures consistent
with industry practices and Company goals.
<PAGE>
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MONONGAHELA POWER COMPANY
Part II - Other Information to Form 10-Q
for Quarter Ended June 30, 1997
ITEM 5. OTHER INFORMATION
In late June, the S-4 registration statement filed by
Allegheny Power System, Inc. (Allegheny Power) became effective, allowing
Allegheny Power and DQE, Inc., parent company of Duquesne Light Company,
to pursue shareholder approval for the proposed merger and a change of the
company name to Allegheny Energy, Inc. (Allegheny Energy). Allegheny
Power and DQE, Inc. held shareholder meetings on August 7, 1997, at which
the combination of the two companies and the name change were approved by
a vote of shareholders.
On August 1, 1997, Allegheny Power and DQE, Inc. filed
applications for several major approvals related to the proposed merger of
the two companies. In filings with the Federal Energy Regulatory
Commission (FERC), Pennsylvania Public Utility Commission (PA PUC), and
Maryland Public Service Commission (MD PSC), Allegheny Power and DQE, Inc.
outlined their restructuring and merger plans as discussed below.
The FERC filing includes commitments concerning rate
freezes, rate reductions, and electrical system access options that will
spread the positive effects of the merger to many stakeholders. The
filing includes the offering of a single transmission rate which is less
than the stand-alone rate for the two companies, offers partial rate
freezes to wholesale customers which have contracts expiring after 1998,
and includes a commitment to join or form an independent system operator
(ISO).
The Company's Pennsylvania affiliate, West Penn Power
Company (West Penn), and DQE, Inc. filed individual restructuring plans
with the PA PUC and, as part of a joint restructuring plan, have also
filed their merger application. The filings address unbundled rates for
generation, transmission, and distribution services; stranded costs;
merger synergy benefits; and other issues as required by Pennsylvania's
Electricity Generation Customer Choice and Competition Act. Among other
benefits, West Penn's restructuring filing unbundles its rates and tariffs
separate from those of DQE's utility subsidiary, Duquesne Light. DQE's
restructuring filing includes a redesign of rates and provides for other
benefits. The merger filing offers additional detail on the expected
synergy benefits of the merger and an allocation of the benefits to
customers and shareholders of the two companies.
Allegheny Power filed with the MD PSC requesting
approval for the issuance of stock to exchange for DQE stock upon merger
approval. Allegheny Power is a Maryland Corporation. The filing also
discussed the benefits of the merger to Maryland including lower rates for
customers and improved operating efficiencies over time.
<PAGE>
- 13 -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) (27) Financial Data Schedule
(b) No reports on Form 8-K were filed on behalf of the
Company for the quarter ended June 30, 1997.
Signature
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
MONONGAHELA POWER COMPANY
/s/ THOMAS J. KLOC
Thomas J. Kloc
Controller
(Chief Accounting Officer)
August 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 149
<SECURITIES> 0
<RECEIVABLES> 78,295
<ALLOWANCES> 1,767
<INVENTORY> 40,538
<CURRENT-ASSETS> 135,457
<PP&E> 1,905,794
<DEPRECIATION> 818,172
<TOTAL-ASSETS> 1,470,956
<CURRENT-LIABILITIES> 117,061
<BONDS> 455,415
0
74,000
<COMMON> 294,550
<OTHER-SE> 248,218
<TOTAL-LIABILITY-AND-EQUITY> 1,470,956
<SALES> 306,881
<TOTAL-REVENUES> 306,881
<CGS> 180,544
<TOTAL-COSTS> 229,256
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,093
<INCOME-PRETAX> 62,174
<INCOME-TAX> 23,444
<INCOME-CONTINUING> 38,730
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,730
<EPS-PRIMARY> 0.00<F1>
<EPS-DILUTED> 0.00<F1>
<FN>
<F1>*All common stock os owned by parent, no EPS required.
</FN>
</TABLE>
