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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1998
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 November 16, 1998, 5,891,000 shares of the Common Stock
($50 par value) of the registrant were outstanding, all of which
are held by Allegheny Energy, Inc., the Company's parent.
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MONONGAHELA POWER COMPANY
Form 10-Q for Quarter Ended September 30, 1998
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Statement of income - Three and nine months ended
September 30, 1998 and 1997 3
Balance sheet - September 30, 1998
and December 31, 1997 4
Statement of cash flows - Nine months ended
September 30, 1998 and 1997 5
Notes to financial statements 6-9
Management's discussion and analysis of financial
condition and results of operations 10-18
PART II--OTHER INFORMATION 19
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MONONGAHELA POWER COMPANY
Statement of Income
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
ELECTRIC OPERATING REVENUES:
<S> <C> <C> <C> <C>
Residential $ 55,492 $ 48,677 $ 151,908 $ 148,640
Commercial 35,458 31,682 95,124 89,640
Industrial 53,055 49,690 154,726 145,052
Wholesale and other, including affiliates 26,200 22,593 69,590 67,825
Bulk power transactions, net 7,159 5,598 18,062 13,964
Total Operating Revenues 177,364 158,240 489,410 465,121
OPERATING EXPENSES:
Operation:
Fuel 40,779 36,363 110,443 104,023
Purchased power and exchanges, net 24,563 21,600 72,864 71,797
Deferred power costs, net 1,823 16 (6,117) (8,867)
Other 21,995 19,570 64,198 55,331
Maintenance 14,844 15,060 50,095 50,869
Depreciation 14,652 14,355 44,142 43,018
Taxes other than income taxes 11,710 10,039 33,487 30,088
Federal and state income taxes 15,111 12,744 36,966 36,188
Total Operating Expenses 145,477 129,747 406,078 382,447
Operating Income 31,887 28,493 83,332 82,674
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction (239) 181 119 470
Other income, net 1,640 4,097 4,721 7,450
Total Other Income and Deductions 1,401 4,278 4,840 7,920
Income Before Interest Charges 33,288 32,771 88,172 90,594
INTEREST CHARGES:
Interest on long-term debt 7,264 8,958 24,479 27,199
Other interest 1,145 572 2,980 1,767
Allowance for borrowed funds used during
construction (365) (216) (569) (559)
Total Interest Charges 8,044 9,314 26,890 28,407
NET INCOME $ 25,244 $ 23,457 $ 61,282 $ 62,187
</TABLE>
See accompanying notes to financial statements.
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MONONGAHELA POWER COMPANY
Balance Sheet
(Thousands of Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
ASSETS:
Property, Plant, and Equipment:
<S> <C> <C>
At original cost, including $59,084
and $55,588 under construction $ 1,990,752 $ 1,950,478
Accumulated depreciation (873,010) (840,525)
1,117,742 1,109,953
Investments:
Allegheny Generating Company - common stock at equity 43,482 53,888
Other 234 268
43,716 54,156
Current Assets:
Cash 1,788 1,686
Accounts receivable:
Electric service, net of $2,416 and $2,176
uncollectible allowance 67,144 68,143
Affiliated and other 19,859 10,917
Materials and supplies - at average cost:
Operating and construction 20,573 18,716
Fuel 14,245 15,885
Prepaid taxes 19,672 17,287
Other, including current portion of
regulatory assets 8,008 3,559
151,289 136,193
Deferred Charges:
Regulatory assets 162,930 164,260
Unamortized loss on reacquired debt 18,082 14,338
Other 16,551 14,354
197,563 192,952
Total Assets $ 1,510,310 $ 1,493,254
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 294,550 $ 294,550
Other paid-in capital 2,441 2,441
Retained earnings 276,877 243,939
573,868 540,930
Preferred stock 74,000 74,000
Long-term debt and QUIDS 453,828 455,088
1,101,696 1,070,018
Current Liabilities:
Short-term debt 30,650 56,829
Long-term debt due within one year - 20,100
Notes payable to affiliates - 1,450
Accounts payable 722 5,910
Accounts payable to affiliates 29,351 5,804
Taxes accrued:
Federal and state income 9,902 5,046
Other 20,049 18,935
Interest accrued 8,951 7,877
Other 9,874 13,470
109,499 135,421
Deferred Credits and Other Liabilities:
Unamortized investment credit 16,686 18,297
Deferred income taxes 246,228 235,291
Regulatory liabilities 15,891 16,973
Other 20,310 17,254
299,115 287,815
Total Capitalization and Liabilities $ 1,510,310 $ 1,493,254
</TABLE>
See accompanying notes to financial statements.
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MONONGAHELA POWER COMPANY
Statement of Cash Flows
(Thousands of Dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1998 1997
CASH FLOWS FROM OPERATIONS:
<S> <C> <C> <C>
Net income $ 61,282 $ 62,187
Depreciation 44,142 43,018
Deferred investment credit and income taxes, net 7,859 13,626
Deferred power costs, net (6,117) (8,867)
Unconsolidated subsidiaries' dividends in excess of earnings 10,440 1,034
Allowance for other than borrowed funds used
during construction (119) (470)
Restructuring liability - (12,922)
Changes in certain current assets and
liabilities:
Accounts receivable, net (7,943) (568)
Materials and supplies (217) (1,055)
Accounts payable 18,359 (3,537)
Taxes accrued 5,970 (5,478)
Interest accrued 1,074 3,671
Other, net 51 (10,180)
134,781 80,459
CASH FLOWS FROM INVESTING:
Construction expenditures (less allowance for
equity funds used during construction) (52,935) (44,536)
CASH FLOWS FROM FINANCING:
Issuance of long-term debt 85,918 -
Retirement of long-term debt (111,690) (15,500)
Short-term debt, net (26,179) (28,239)
Notes payable to affiliates (1,450) 35,550
Dividends on capital stock:
Preferred stock (3,778) (3,778)
Common stock (24,565) (26,097)
(81,744) (38,064)
NET CHANGE IN CASH 102 (2,141)
Cash at January 1 1,686 2,290
Cash at September 30 $ 1,788 $ 149
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the quarter for:
Interest (net of amount capitalized) $23,727 $27,949
Income taxes 24,280 24,218
</TABLE>
See accompanying notes to financial statements.
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MONONGAHELA POWER COMPANY
Notes to Financial Statements
1. Monongahela Power Company (the Company) is a wholly-owned
subsidiary of Allegheny Energy, Inc. The Company's Notes to
Financial Statements in its Annual Report on Form 10-K for
the year ended December 31, 1997 should be read with the
accompanying financial statements and the following notes.
With the exception of the December 31, 1997 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
necessary to present fairly the Company's financial position
as of September 30, 1998, the results of operations for the
three and nine months ended September 30, 1998 and 1997, and
cash flows for the nine months ended September 30, 1998 and
1997.
2. The Statement of Income reflects the results of past
operations and is not intended as any representation as to
future results. The Company's comprehensive income does not
differ from its net income. 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
megawatts (MW), in the 2,100 MW pumped-storage hydroelectric
station in Bath County, Virginia, operated by the 60% owner,
Virginia Electric and Power Company, a nonaffiliated utility.
Following is a summary of income statement information for
AGC:
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
(Thousands of Dollars)
Electric operating revenues $18,303 $19,664 $56,033 $60,288
Operation and maintenance
expense 888 856 3,383 3,612
Depreciation 4,242 4,284 12,710 12,852
Taxes other than income taxes 1,168 1,185 3,505 3,581
Federal income taxes 2,708 3,109 8,480 9,374
Interest charges 3,707 3,888 10,518 11,765
Other income, net (35) (9,054) (86) (9,055)
Net income $ 5,625 $15,396 $17,523 $28,159
The Company's share of the equity in earnings above was $1.5
million and $4.2 million for the three months ended September
30, 1998 and 1997, respectively, and $4.7 million and $7.6
million for the nine months ended September 30, 1998 and
1997, respectively, and was included in other
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income, net, on the Statement of Income. Dividends received
from AGC in 1998 exceeded equity in earnings by $10.4 million
which reflects an effort to reduce AGC equity to about 45% of
capital.
4. On April 7, 1997, the Company's parent, Allegheny Power
System, Inc. (now renamed Allegheny Energy, Inc.) and DQE,
Inc. (DQE), parent company of Duquesne Light Company in
Pittsburgh, Pennsylvania, announced that they had agreed to
merge in a tax-free, stock-for-stock transaction.
On March 25, 1998, the Maryland Public Service Commission
(PSC) approved a settlement agreement between Allegheny
Energy, Inc. (Allegheny Energy) and various parties, in which
the PSC indicated its approval of the merger. This action
was requested in connection with the proposed issuance of
Allegheny Energy stock to exchange for DQE stock to complete
the merger.
On July 8, 1998, the City of Pittsburgh reached a settlement
agreement with Allegheny Energy and agreed to support the
merger.
On July 16, 1998, the Public Utilities Commission of Ohio
(PUCO) found that the proposed merger would be in the public
interest. The PUCO also stated that the Midwest Independent
System Operator (ISO) is the regional transmission entity
that will best serve the interests of the Ohio customers of
the Company and will best mitigate any market power issues
which might exist.
The Nuclear Regulatory Commission has approved the transfer
of control of the operating licenses for DQE's nuclear
plants. While Duquesne Light Company (Duquesne), principal
subsidiary of DQE, will continue to be the licensee, this
approval was necessary since control of Duquesne will pass
from DQE to Allegheny Energy after the merger.
On July 23, 1998, the Pennsylvania Public Utility Commission
(PUC) approved the Allegheny Energy-DQE merger with
conditions acceptable to Allegheny Energy in response to a
Petition for Reconsideration filed by Allegheny Energy on
June 12, 1998. In its Petition for Reconsideration of a
previous PUC Order, Allegheny Energy reiterated its
commitment to staying in and supporting the Midwest ISO
subject to merger consummation, and also offered to
relinquish some generation in order to mitigate market power
concerns. Allegheny Energy committed to relinquishing
control of the 570 MW Cheswick, Pennsylvania, generating
station through at least June 30, 2000 and, in the event that
the Midwest ISO has not eliminated pancaked transmission
rates by June 30, 2000, Allegheny Energy could be required to
divest up to 2,500 MW of generation, if the PUC were to so
order.
In a letter to Allegheny Energy dated July 28, 1998, DQE
stated that its Board of Directors determined that DQE was
not required to proceed with the merger under present
circumstances, referring to the PUC's Orders of July 23, 1998
(regarding the PUC's approval of the merger described above),
and May 29, 1998 (regarding the restructuring plan of the
Company's Pennsylvania affiliate, West Penn Power Company
(West Penn) described in Note 5 below). DQE took the
position that the findings of both Orders constitute a
material adverse effect under the Agreement and Plan of
Merger and invited Allegheny Energy to agree promptly to
terminate the merger agreement by mutual consent. DQE
asserted that the findings in
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the PUC Orders will result in a failure of the conditions to
DQE's obligation to consummate the merger. DQE indicated
that if Allegheny Energy was not amenable to a consensual
termination, DQE would terminate the agreement unilaterally
not later than October 5, 1998 if circumstances did not
change sufficiently to remedy the adverse effects DQE stated
were associated with the PUC Orders. In a letter dated July
30, 1998, Allegheny Energy informed DQE that DQE's
allegations were incorrect, that the Orders do not constitute
a material adverse effect, that Allegheny Energy remains
committed to the merger, and that if DQE prevents completion
of the merger, Allegheny Energy would pursue all remedies
available to protect the legal and financial interests of
Allegheny Energy and its shareholders. Allegheny Energy has
also notified DQE that its letter and other actions
constitute a material breach of the merger agreement by DQE.
On September 16, 1998, the Federal Energy Regulatory
Commission (FERC) approved Allegheny Energy's merger with DQE
with conditions that were acceptable to Allegheny Energy.
The principal condition is divestiture of the Cheswick
Generating Station which enhances the proposal initially made
by Allegheny Energy and DQE to mitigate market power
concerns.
On October 5, 1998, DQE notified Allegheny Energy that it had
decided to terminate the merger. In response, Allegheny
Energy filed with the United States District Court for the
Western District of Pennsylvania on October 5, 1998, a
complaint for specific performance of the merger agreement
or, alternatively, damages and motions for a temporary
restraining order and preliminary injunction against DQE.
On October 28, 1998, the District Court denied Allegheny
Energy's motions for a temporary restraining order and
preliminary injunction. The District Court did not rule on
the merits of the complaint for specific performance or
damages. On October 30, 1998, Allegheny Energy appealed the
District Court's order to the United States Court of Appeals
for the Third Circuit. Allegheny Energy cannot predict the
outcome of the litigation between it and DQE.
All of the Company's incremental costs of the merger process
($4.2 million through September 30, 1998) are being deferred.
The accumulated merger costs will be written off by the
Company when the merger occurs, or if it is determined that
the merger will not occur.
5. In December 1996, Pennsylvania enacted the Electricity
Generation Customer Choice and Competition Act (Customer
Choice Act) to restructure the electric industry in
Pennsylvania to create retail access to a competitive
electric energy generation market. The Company's
Pennsylvania affiliate, West Penn, is subject to this Act.
On August 1, 1997, West Penn filed with the PUC a
comprehensive restructuring plan to implement full customer
choice of electric generation suppliers as required by the
Customer Choice Act.
On November 4, 1998, the PUC tentatively approved an
agreement between West Penn and intervenors to settle West
Penn's restructuring proceeding. Under the settlement
agreement, two-thirds of West Penn's customers may, beginning
in 1999, choose an alternative generation supplier. All of
West Penn's customers can do so beginning in the year 2000.
Additionally, West
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Penn received authorization to transfer its generation assets
to an unregulated business at book value, and the unregulated
business received authorization, subject to a code of
conduct, to sell generation capacity and energy in
unregulated markets. A majority of West Penn's generating
assets are jointly owned with its affiliates in Allegheny
Energy, including the Company. The Company and its
affiliates, including West Penn, are also parties to a power
supply agreement under which generating capacity, generating
spinning reserves and energy are subject to intercompany
allocations based in large part upon generation reserve
margins of each company which are based on each company's
demand from regulated customers. The anticipated changes in
West Penn's generation demand will require adjustments in the
administration of the power supply agreement. The Company
believes that West Penn's transfer of generation assets to an
unregulated business and the administrative adjustments to
the power supply agreement will not have a significant effect
on the Company's operations or its financial condition.
6. In June 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No.
131, "Disclosures about Segments of an Enterprise and Related
Information," to establish standards for reporting
information about operating segments in financial statements.
The Company continues to review this standard for further
potential effect on the Company's financial statement
disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," to establish
accounting and reporting standards for derivatives. The new
standard requires recognizing all derivatives as either
assets or liabilities on the balance sheet at their fair
value and specifies the accounting for changes in fair value
depending upon the intended use of the derivative. The new
standard is effective for fiscal years beginning after June
15, 1999. The Company expects to adopt SFAS No. 133 in the
first quarter of 2000. The Company is in the process of
evaluating the impact of SFAS No. 133.
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MONONGAHELA POWER COMPANY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
COMPARISON OF THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998
WITH THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1997
The Notes to Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of
Operations in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 should be read in conjunction with
the following management's discussion and analysis information.
Factors That May Affect Future Results
This Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forecast information
items that are "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. These include
statements with respect to deregulation activities and movements
toward competition in states served by the Company and the DQE,
Inc. (DQE) merger as well as results of operations. All such
forward-looking information is necessarily only estimated. There
can be no assurance that actual results will not materially
differ from expectations. Actual results have varied materially
and unpredictably from past expectations.
Factors that could cause actual results to differ
materially include, among other matters, electric utility
restructuring, including the ongoing state and federal
activities; potential Year 2000 operation problems; developments
in the legislative, regulatory, and competitive environments in
which the Company operates, including regulatory proceedings
affecting rates charged by the Company; environmental legislative
and regulatory changes; future economic conditions; developments
relating to the proposed merger with DQE, including expenses that
may be incurred in litigation; and other circumstances that could
affect anticipated revenues and costs such as significant
volatility in the market price of wholesale power, unscheduled
maintenance or repair requirements, weather, and compliance with
laws and regulations.
Significant Events in the First Nine Months of 1998
* Merger with DQE
In a letter to Allegheny Energy dated October 5, 1998,
DQE stated that it had decided to terminate the merger. In
response, Allegheny Energy filed with the United States District
Court for the Western District of Pennsylvania on October 5, 1998
a complaint for specific performance of the merger agreement or,
in the alternative, damages, and also filed a request for a
temporary restraining order and preliminary injunction against
DQE. See Note 4 to the Financial Statements for more information
about the merger. Allegheny Energy believes that DQE's basis for
seeking to terminate the merger
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is without merit. Accordingly, Allegheny Energy continues to
seek the remaining regulatory approvals from the Department of
Justice and the Securities and Exchange Commission. It is not
likely either agency will act on the requests unless Allegheny
Energy obtains judicial relief requiring DQE to move forward.
Allegheny Energy cannot predict the outcome of the litigation
between it and DQE.
* Pennsylvania Deregulation
On November 4, 1998, the Pennsylvania Public Utility
Commission (PUC) tentatively approved an agreement reached
between the Company's Pennsylvania affiliate, West Penn Power
Company (West Penn), and intervenors in West Penn's deregulation
proceedings in that state. Under the settlement agreement, West
Penn's customers will obtain the ability to choose alternative
generation suppliers and West Penn's generation assets, some of
which are jointly owned with the Company, will be removed from
rate regulation. See Note 5 to the Financial Statements for
information concerning certain intercompany transactions between
the Company and West Penn which will be affected by the
Pennsylvania deregulation process. The Company does not believe
that the changes to the intercompany transactions, if any, will
have a significant effect on the Company's operations or its
financial condition.
Review of Operations
EARNINGS SUMMARY
Net income for the third quarter of 1998 was $25.2
million compared with $23.5 million in the corresponding 1997
period. For the first nine months of 1998, net income was $61.3
million compared with $62.2 million for the corresponding 1997
period. The increase in third quarter 1998 earnings resulted
primarily from increased kilowatt-hour (kWh) sales to retail
customers. The $905,000 decrease in earnings for the first nine
months of 1998 was primarily the result of increases in operation
expenses and taxes other than income taxes in excess of the
increases in kWh sales to retail customers.
SALES AND REVENUES
Percentage changes in revenues and kWh sales by major
customer classes were:
Change from Prior Periods
Three Months Ended Nine Months Ended
September 30 September 30
Revenues kWh Revenues kWh
Residential 14.0% 13.9% 2.2% 1.7%
Commercial 11.9 10.3 6.1 5.8
Industrial 6.8 4.1 6.7 8.1
Total 10.7 8.0 4.8 5.8
Residential kWh sales, which are more weather sensitive
than the other classes, increased 13.9% in the third quarter due
primarily to weather conditions. The third quarter of 1998 was
67% warmer than the corresponding
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1997 period as measured in cooling degree days. Residential kWh
sales increased only 1.7% in the nine month ended period due to mild
winter weather in early 1998. The first quarter winter weather
was 12% warmer than 1997 and 19% warmer than normal as measured
in heating degree days. The increase in commercial kWh sales for
the three and nine months ended periods reflects increased usage
due to weather as well as growth in the number of customers. The
increase in industrial kWh sales in the third quarter was due
primarily to increased sales to paper and printing customers.
The increase in industrial kWh sales in the nine months ended
period was due in part to increased kWh sales to one of the
Company's customers who switched an additional portion of their
load requirements to the Company in September 1997. The increase
in both periods reflects continued economic growth in the service
territory.
The changes in revenues from sales to residential,
commercial, and industrial customers resulted from the following:
Change from Prior Periods
Three Months Ended Nine Months Ended
September 30 September 30
(Millions of Dollars)
Fuel clauses $ 5.7 $ 9.3
All other 8.3 9.1
Net change in retail
revenues $14.0 $18.4
Revenues reflect not only the changes in kWh sales, but
also any changes in revenues from fuel and energy cost adjustment
clauses (fuel clauses) which have little effect on net income
because increases and decreases in fuel and purchased power costs
and sales of transmission services and bulk power are passed on
to customers by adjustment of customer bills through fuel
clauses.
All other is the net effect of kWh sales changes due to
changes in customer usage (primarily weather for residential
customers), growth in the number of customers, and changes in
pricing other than changes in general tariff and fuel clause
rates. The increase in the three and nine months ended periods
all other retail revenues was primarily the result of customer
usage.
Wholesale and other revenues were as follows:
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
(Millions of Dollars)
Wholesale customers $ 1.4 $ 1.3 $ 3.9 $ 3.7
Affiliated companies 23.0 19.6 60.6 59.0
Street lighting and other 1.8 1.7 5.1 5.1
Total wholesale and other
revenues $26.2 $22.6 $69.6 $67.8
Wholesale customers are cooperatives and municipalities
that own their own distribution systems and buy all or part of
their bulk power needs from the Company under regulation by the
Federal Energy Regulatory Commission (FERC). Competition in the
wholesale market for electricity was initiated by
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the National Energy Policy Act of 1992 (EPACT), which permits
wholesale generators, utility-owned and otherwise, and wholesale
customers to request from owners of bulk power transmission
facilities a commitment to supply transmission services. All of
the Company's wholesale customers have signed contracts to remain
as customers until December 1, 2000.
Revenues from affiliated companies represent sales of
energy and intercompany allocations of generating capacity,
generation spinning reserves, and transmission services pursuant
to a power supply agreement among the Company and the other
regulated utility subsidiaries of Allegheny Energy. The increase
in such revenues in the third quarter and first nine months of
1998 resulted primarily from an increase in energy sales and an
increase in the allocation of generation spinning reserves
revenue.
Bulk power transactions consist of sales of power to
power marketers and other utilities. Revenues from bulk power
transactions consist of the following items:
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
(Millions of Dollars)
Revenues:
Transmission services sales
to nonaffiliated companies $4.7 $2.4 $ 9.4 $ 7.6
Bulk power 2.5 3.2 8.7 6.4
Total bulk power trans-
actions, net $7.2 $5.6 $18.1 $14.0
Revenues from bulk power sales increased in the first nine
months of 1998 due to increased sales which occurred primarily in
the month of June as a result of warm weather which increased the
demand and price for energy. The increase in revenues from
transmission services was due to an increase in price.
In June and July 1998, certain events combined to produce
significant volatility in the spot prices for electricity at the
wholesale level. These events included extremely hot weather and
Midwest generation unit outages and transmission constraints.
Wholesale prices for electricity rose from a normal range of from
$25-$40 per megawatt-hour (mWh) to as high as $3,500-$7,000 per
mWh. The costs of purchased power and revenues from sales to
power marketers and other utilities, including transmission
services, are currently recovered from or credited to customers
under fuel and energy cost recovery procedures. The impact to
the fuel and energy cost recovery clauses, either positively or
negatively, depends on whether the Company is a net buyer or
seller of electricity during such periods. The impact of such
price volatility in June and the third quarter of 1998 was
insignificant to the Company because changes are passed through
to customers through operation of fuel clauses.
OPERATING EXPENSES
Fuel expenses for the three and nine months ended
September 30, 1998 increased 12.2% and 6.2%, respectively,
primarily due to a 12% and 7% increase in kWhs generated. Fuel
expenses are primarily subject to deferred power cost
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accounting procedures 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 other companies and purchases
from qualified facilities under the Public Utility Regulatory
Policies Act of 1978 (PURPA), capacity charges paid to AGC, an
affiliate partially owned by the Company, and other transactions
with affiliates made pursuant to a power supply agreement whereby
each company uses the most economical generation available in the
Allegheny Energy System at any given time, and consists of the
following items:
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
(Millions of Dollars)
Nonaffiliated transactions:
Purchased power:
From PURPA generation* $15.8 $15.4 $50.9 $51.3
Other 4.6 2.4 8.2 6.2
Power exchanges, net (.7) (.6) (.4) .1
Affiliated transactions:
AGC capacity charges 4.9 4.3 14.1 14.0
Energy and spinning
reserve charges - .1 .1 .2
Purchased power and
exchanges, net $24.6 $21.6 $72.9 $71.8
*PURPA cost (cents per kWh) 4.9 5.0 5.1 5.3
The increases in other purchased power resulted primarily
from increased purchases for sales. As described earlier, an
increase in price caused by volatility in the spot prices for
electricity at the wholesale level in June as well as in the
third quarter of 1998 also contributed to the increases.
None of the Company's purchased power contracts are
capitalized since there are no minimum payment requirements
absent associated kWh generation and under a regulated
environment recovery of the costs are reasonably assured.
The increase in other operation expenses for the three
months ended September 30, 1998 was due primarily to increased
provisions for uninsured claims ($1.2 million) because of a re-
evaluation of claims exposure and allowances for uncollectible
accounts ($.4 million). The increase in the nine-month period
resulted primarily from an increase in the allowance for
uncollectible accounts ($1.6 million), increased provisions for
uninsured claims ($1.3 million), increased property insurance
expense due in part to a prior period adjustment ($.7 million),
and increases in salaries and wages and employee benefits.
Maintenance expenses decreased slightly for the three and
nine months ended September 30, 1998, respectively, because of a
management program to postpone such expenses for the year in
response to limited sales growth in the first quarter due to the
warm winter weather. The Company is postponing these expenses
primarily by extending the time between maintenance outages. The
nine months ended September 30, 1998 period includes
approximately
<PAGE>
- 15 -
$2.5 million of incremental transmission and distribution (T&D)
expenses primarily incurred in the second quarter for an
unusually strong thunderstorm in the Company's service territory.
Maintenance expenses represent costs incurred to maintain the
power stations, the T&D system, and general plant, and reflect
routine maintenance of equipment and rights-of-way as well as
planned major repairs and unplanned expenditures, primarily from
forced outages at the power stations and periodic storm damage on
the T&D system. Variations in maintenance expense result
primarily from unplanned events and planned major projects, which
vary in timing and magnitude depending upon the length of time
equipment has been in service without a major overhaul and the
amount of work found necessary when the equipment is dismantled.
Depreciation expense in the three and nine months ended
September 30, 1998 increased due to additions to electric plant.
Taxes other than income taxes increased $3.4 million in
the nine months ended September 30, 1998, $1.4 million of which
is an adjustment to West Virginia Business and Occupation Taxes
for a prior period.
The increase in federal and state income taxes for the
three months ended September 30, 1998 was primarily due to
increases in income before taxes.
The decreases in allowance for other than borrowed funds
used during construction of $.4 million in both the three and
nine months ended September 30, 1998 reflect a shift in the rate
calculated under the Federal Energy Regulatory Commission formula
to lower cost short-term debt financing. The allowance for
borrowed funds used during construction component of the formula
receives greater weighting when short-term debt increases. The
decreases also reflect adjustments of prior period accruals.
The decreases in other income, net, of $2.5 million and
$2.7 million in the three and nine months ended September 30,
1998, respectively, were primarily due to an interest refund on a
tax-related contract settlement in the three and nine months
ended September 30, 1997, received by the Company's subsidiary,
AGC.
The decreases in interest on long-term debt of $1.7
million and $2.7 million for the three and nine months ended
September 30, 1998, respectively, result from reduced long-term
debt and lower interest rates.
Other interest expense reflects changes in the levels of
short-term debt maintained by the Company throughout the year, as
well as the associated rates.
Financial Condition
The Company's discussion on Financial Condition,
Requirements, and Resources and Significant Continuing Issues in
its Annual Report on Form 10-K for the year ended December 31,
1997 should be read in conjunction with the following
information.
<PAGE>
- 16 -
In the normal course of business, the Company is subject
to various contingencies and uncertainties relating to its
operations and construction programs, including legal actions and
regulations and uncertainties related to environmental matters.
See Notes 4 and 5 to the Financial Statements for information
about merger activities and the Pennsylvania Customer Choice
Act's effect on its affiliate, West Penn.
* Year 2000 Readiness Disclosure
As the year 2000 approaches, most organizations,
including the Company, could experience serious problems related
to software and various equipment with embedded chips which may
not properly recognize calendar dates. To minimize such
problems, the Company and its affiliates in the Allegheny Energy
System (the System) are proceeding with a comprehensive effort to
continue operations without significant problems in the Year 2000
(Y2K) and beyond. An Executive Task Force is coordinating the
efforts of 23 separate Y2K Teams, representing all business and
support units in the System.
The System has segmented the Y2K problem into the
following components:
* Computer software
* Embedded chips in various equipment
* Vendors and other organizations on which the System relies
for critical materials and services.
The System's effort for each of these three components
includes assessment of the problem areas, remediation, testing
and contingency plans for critical functions for which
remediation and testing are not possible or which do not provide
reasonable assurance.
The Company has expended significant time and money over
the past several years on upgrading and replacing its large and
complex computer systems and software to achieve greater
efficiency as well as Y2K readiness. As a result, the Company
expects these systems to achieve a state of Y2K readiness on or
about March 31, 1999, subject to continuing review and testing.
Various equipment used by the System includes thousands
of embedded chips. Most are not date sensitive, but identifying
those which are, and which are critical to operations, is a labor
intensive task. Identification, remediation, and testing in many
cases require the assistance of the original equipment
manufacturers. Even they frequently cannot state with certainty
if the chips they used are date sensitive. The System's review
calls for the inventory and assessment of suspect embedded chips
in critical systems to be completed by December 31, 1998, with
remediation initiated as needs are identified, and with 1999 to
complete remediation and testing.
Integrated electric utilities are uniquely reliant on
each other to avoid, in a worst case situation, cascading failure
of the entire electrical system. The System is working with the
Edison Electric Institute (EEI), the Electric Power Research
Institute (EPRI), the North American Electric Reliability Council
(NERC), and the East Central Area Reliability Agreement group
(ECAR) to capitalize on industry-wide experiences and to
participate in industry-wide testing and contingency planning.
The effort with regard to vendors and other organizations is to
obtain reasonable assurance of their
<PAGE>
- 17 -
readiness to conduct operations in the year 2000 and beyond and,
where reasonable assurance is questionable, to develop
contingency plans. Of particular concern are telecommunications
systems which are integral to the System's electricity production
and distribution operations. While the System will develop
contingency plans for critical telecommunication needs, there can
be no assurance that the contingency plans could cope with a
significant failure of major telecommunication systems.
The Company is aware of the importance of electricity to
its service territory and its customers and is using its best
efforts to avoid any serious Y2K problems. Despite the System's
best efforts, including working with internal resources, external
vendors, and industry associations, the Company cannot guarantee
that it will be able to conduct all of its operations without Y2K
interruptions. To the extent that any Y2K problem may be
encountered, the Company is committed to resolution as
expeditiously as possible to minimize the effect.
Expenditures for Y2K readiness are not expected to have a
material effect on the Company's results of operations or
financial position primarily because of the significant time and
money expended over the past several years on upgrading and
replacing its large mainframe computer systems and software.
While the remaining Y2K work is significant, it primarily
represents an internal labor intensive effort of assessment,
remediation, and component testing for noncompliant embedded
chips in equipment, and a substantial labor intensive effort of
multiple systems testing, documentation, and working with other
parties. While outside contractors and equipment vendors will be
employed for some of the work, the Company believes it must rely
on System employees for most of the effort because of their
experience with systems and equipment. The Company currently
estimates that its incremental expenditures for the remaining Y2K
effort will not exceed $4 million.
The descriptions herein of the elements of the Company's
Y2K effort are forward-looking statements as defined in the
Private Securities Litigation Reform Act of 1995. Of necessity,
this effort is based on estimates of assessment, remediation,
testing and contingency planning activities and dates for
perceived problems not yet identified. There can be no assurance
that actual results will not materially differ from expectations.
* Environmental Issues
The Environmental Protection Agency (EPA) issued its final
regional NOx State Implementation Plan (SIP) call rule on
September 24, 1998. EPA's SIP call rule finds that 22 eastern
states (including Maryland, Pennsylvania, and West Virginia) and
the District of Columbia are all contributing significantly to
ozone nonattainment in downwind states. The final rule declares
that this downwind nonattainment will be eliminated (or
sufficiently mitigated) if the upwind states reduce their NOx
emissions by an amount that is precisely set by EPA on a state-by-
state basis. The final SIP call rule requires that all state-
adopted NOx reduction measures must be incorporated into SIPs by
September 24, 1999 and must be implemented by May 1, 2003. The
Company's compliance with these requirements would require the
installation of post-combustion control technologies on most, if
not all, of its power stations at a cost of approximately $95
million. The Company continues to work with other coal-burning
utilities and other affected constituencies in coal-producing
states to challenge this EPA action.
<PAGE>
- 18 -
The Company previously reported that the EPA had
identified the Company and its regulated affiliates and
approximately 875 others as potentially responsible parties in a
Superfund site subject to cleanup. A final determination has not
been made for the Company's share of the remediation costs based
on the amount of materials sent to the site. The Company has
also been named as a defendant along with multiple other
affiliated and nonaffiliated defendants in pending asbestos cases
involving one or more plaintiffs. The Company believes that
provisions for liabilities and insurance recoveries are such that
final resolution of these claims will not have a material effect
on its financial position.
* Electric Energy Competition
Allegheny Energy is working actively within its states to
advance customer choice. However, Allegheny Energy believes that
federal legislation is necessary to ensure that electric
restructuring is implemented consistently across state and
regional boundaries so that all electric customers have an equal
opportunity to benefit from competition and customer choice by a
date certain. Federal legislation is also needed to remove
barriers to competition, including the repeal of both the Public
Utility Holding Company Act of 1935 and PURPA. Allegheny Energy
has been working with Congress to advance these goals.
The West Virginia Legislature passed a bill on March 14,
1998 which sets the stage for the restructuring of the electric
utility industry in West Virginia. The bill directed the Public
Service Commission of West Virginia (West Virginia PSC) to
determine if deregulation is in the best interests of the state
and, if so, to develop a transition plan. It also set up a task
force of all interested parties to participate in the plan
development. The West Virginia PSC has been conducting meetings
of the Task Force on Restructuring over the summer to examine if
competition is in the best interest of the state and, if so, to
develop a transition plan. All interested parties have
participated in the process with little apparent progress
concerning a defined plan for restructuring. Due to the workshop
participants' inability to file a consensus position on or before
November 16, 1998, the West Virginia PSC has scheduled additional
meetings in November to discuss how the West Virginia PSC and
workshop participants "should continue to explore electric
industry restructuring." Evidentiary hearings originally
scheduled for September 29, 1998 to address utility unbundling
and stranded cost filings were cancelled.
In late March, bills to start competition in Ohio were
introduced in both houses of the General Assembly. In their
current form, the bills would allow residential customers to
choose their electric provider beginning July 1, 1999, for
service beginning January 1, 2000. However, the bills have not
been fully supported by legislative bodies or by the utilities in
the state. In order to strike a compromise, the Ohio legislative
leadership asked the Ohio utilities to offer a compromise bill,
which the utilities recently presented. Negotiations are
continuing for introduction of the compromise bill.
<PAGE>
- 19 -
MONONGAHELA POWER COMPANY
Part II - Other Information to Form 10-Q
For Quarter Ended September 30, 1998
ITEM 1. LEGAL PROCEEDINGS
On October 5, 1998, Allegheny Energy, Inc. (Allegheny
Energy), filed a lawsuit in the United States District Court for
the Western District of Pennsylvania against DQE, Inc. (DQE) for
specific performance of the Agreement and Plan of Merger among
DQE, Allegheny Power System, Inc., and AYP Sub, Inc., dated as of
April 5, 1997 (the "Merger Agreement"), or for damages.
Allegheny Energy also filed motions for a temporary restraining
order and preliminary injunction against DQE. On October 28,
1998, the court denied Allegheny Energy's motions for a temporary
restraining order and preliminary injunction. On October 30,
1998, Allegheny Energy appealed the District Court's order to the
Third Circuit Court of Appeals. Allegheny Energy cannot predict
the outcome of the litigation between it and DQE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) The Company filed a Form 8-K on October 8, 1998.
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/ T. J. KLOC
T. J. Kloc, Controller
(Chief Accounting Officer)
November 16, 1998
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