<PAGE>
Page 1 of 17
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 March 31, 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 May 15, 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 March 31, 1998
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Statement of income - Three months ended
March 31, 1998 and 1997 3
Balance sheet - March 31, 1998
and December 31, 1997 4
Statement of cash flows - Three months ended
March 31, 1998 and 1997 5
Notes to financial statements 6-8
Management's discussion and analysis of financial
condition and results of operations 9-15
PART II--OTHER INFORMATION 16-17
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MONONGAHELA POWER COMPANY
Statement of Income
Three Months Ended
March 31
1998 1997
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES:
Residential $ 52,172 $ 56,040
Commercial 29,965 30,253
Industrial 50,128 47,792
Wholesale and other, including affiliates 22,945 24,537
Bulk power transactions, net 3,062 4,181
Total Operating Revenues 158,272 162,803
OPERATING EXPENSES:
Operation:
Fuel 34,837 35,131
Purchased power and exchanges, net 25,010 25,847
Deferred power costs, net (6,671) (3,807)
Other 21,319 18,378
Maintenance 17,498 17,958
Depreciation 14,760 14,348
Taxes other than income taxes 11,522 10,317
Federal and state income taxes 12,639 14,151
Total Operating Expenses 130,914 132,323
Operating Income 27,358 30,480
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 252 136
Other income, net 1,538 1,658
Total Other Income and Deductions 1,790 1,794
Income Before Interest Charges 29,148 32,274
INTEREST CHARGES:
Interest on long-term debt 8,814 9,119
Other interest 1,018 759
Allowance for borrowed funds used during
construction (111) (160)
Total Interest Charges 9,721 9,718
NET INCOME $ 19,427 $ 22,556
See accompanying notes to financial statements.
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MONONGAHELA POWER COMPANY
Balance Sheet
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
ASSETS: (Thousands of Dollars)
Property, Plant, and Equipment:
<S> <C> <C>
At original cost, including $57,244,000
and $55,588,000 under construction $ 1,962,000 $ 1,950,478
Accumulated depreciation (854,865) (840,525)
1,107,135 1,109,953
Investments:
Allegheny Generating Company - common stock at equity 53,331 53,888
Other 257 268
53,588 54,156
Current Assets:
Cash 1,145 1,686
Deposit with trustee for redemption
of long-term debt 25,304 -
Accounts receivable:
Electric service, net of $2,479,000 and $2,176,000
uncollectible allowance 65,602 68,143
Affiliated and other 11,908 10,917
Materials and supplies - at average cost:
Operating and construction 20,380 18,716
Fuel 19,644 15,885
Prepaid taxes 14,414 17,287
Other 7,703 3,559
166,100 136,193
Deferred Charges:
Regulatory assets 163,706 164,260
Unamortized loss on reacquired debt 14,263 14,338
Other 13,375 14,354
191,344 192,952
Total Assets $ 1,518,167 $ 1,493,254
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 294,550 $ 294,550
Other paid-in capital 2,441 2,441
Retained earnings 262,106 243,939
559,097 540,930
Preferred stock 74,000 74,000
Long-term debt and QUIDS 474,777 455,088
1,107,874 1,070,018
Current Liabilities:
Short-term debt 25,750 56,829
Long-term debt due within one year 25,160 20,100
Notes payable to affiliates - 1,450
Accounts payable 4,562 5,910
Accounts payable to affiliates 10,273 5,804
Taxes accrued:
Federal and state income 10,826 5,046
Other 13,711 18,935
Interest accrued 11,599 7,877
Other 9,840 13,470
111,721 135,421
Deferred Credits and Other Liabilities:
Unamortized investment credit 17,760 18,297
Deferred income taxes 245,399 235,291
Regulatory liabilities 16,612 16,973
Other 18,801 17,254
298,572 287,815
Total Capitalization and Liabilities $ 1,518,167 $ 1,493,254
</TABLE>
See accompanying notes to financial statements.
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MONONGAHELA POWER COMPANY
Statement of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
March 31
1998 1997
(Thousands of Dollars)
CASH FLOWS FROM OPERATIONS:
<S> <C> <C>
Net income $ 19,427 $ 22,556
Depreciation 14,760 14,348
Deferred investment credit and income taxes, net 7,320 4,664
Deferred power costs, net (6,671) (3,807)
Unconsolidated subsidiaries' dividends in excess of earnings 568 688
Allowance for other than borrowed funds used
during construction (252) (136)
Restructuring liability (102) (5,535)
Changes in certain current assets and
liabilities:
Accounts receivable, net 1,550 (3,794)
Materials and supplies (5,423) (3,152)
Accounts payable 3,121 (7,485)
Taxes accrued 556 6,978
Interest accrued 3,722 3,826
Other, net 7,686 7,086
46,262 36,237
CASH FLOWS FROM INVESTING:
Construction expenditures (less allowance for
equity funds used during construction) (12,371) (11,502)
CASH FLOWS FROM FINANCING:
Issuance of long-term debt 25,660 -
Retirement of long-term debt (1,000) (500)
Deposit with trustee for redemption
of long-term debt (25,304) -
Short-term debt, net (31,079) (21,841)
Notes payable to affiliates (1,450) (2,900)
Dividends on preferred stock (1,259) (1,259)
(34,432) (26,500)
NET CHANGE IN CASH (541) (1,765)
Cash at January 1 1,686 2,290
Cash at March 31 $ 1,145 $ 525
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $5,356 $5,511
Income taxes - -
</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 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
(which consist only of normal recurring adjustments)
necessary to present fairly the Company's financial position
as of March 31, 1998, and the results of operations and cash
flows for the three months ended March 31, 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. 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:
Three Months Ended
March 31
1998 1997
(Thousands of Dollars)
Electric operating revenues $18,604 $20,216
Operation and maintenance expense 953 1,285
Depreciation 4,226 4,284
Taxes other than income taxes 1,160 1,195
Federal income taxes 2,865 3,124
Interest charges 3,513 3,960
Other income, net (50) -
Net income $ 5,937 $ 6,368
The Company's share of the equity in earnings above was $1.6
million and $1.7 million for the three months ended March 31,
1998 and 1997, respectively, and was included in other
income, net, on the Statement of Income.
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4. On April 7, 1997, Allegheny Power System, Inc. (Allegheny
Power) 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.
The combined company will be called Allegheny Energy, Inc.
(Allegheny Energy).
On March 25, 1998, the Maryland Public Service Commission
(PSC) approved a settlement agreement between 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 April 30, 1998, the Pennsylvania Public Utility Commission
(PUC) adopted a motion (the "Order") approving the merger
subject to a condition precedent that the merged entity joins
a Federal Energy Regulatory Commission (FERC) approved, fully
functioning Independent System Operator (ISO). The Order
specifically approved the Midwest ISO as satisfying the
condition precedent provided it was FERC approved and fully
functioning. Allegheny Energy has joined the Midwest ISO,
contingent only on merger consummation, but it is not
projected to be FERC approved and fully functioning until on
or after January 1, 2000. The Order also noted that the
Pennsylvania, New Jersey, Maryland, L.L.C. ISO (PJM ISO)
might also satisfy the pre-condition but that it would
require an updated study and analysis be submitted to the
PUC. The PJM ISO is FERC approved and fully functioning.
The PUC Order noted that the merger would produce substantial
savings and further noted that an 18-month delay recommended
by two Administrative Law Judges (ALJs) in their recommended
decision of March 25, 1998, was not in the public interest.
Allegheny Energy is dismayed that the PUC nevertheless
imposed a condition precedent that could impose a delay
likely to be as long or longer than recommended by the ALJs.
Upon official entry of the PUC's Order, Allegheny Energy is
likely to file a motion for reconsideration to allow the
merger to go forward immediately as it has already joined the
Midwest ISO and has already pledged sufficient interim
mitigation measures until the Midwest ISO is functioning,
including temporary relinquishment of control of 570
megawatts of generation to mitigate market power concerns.
Allegheny Energy may also propose additional interim
mitigation measures. Allegheny Energy is also exploring
further the PJM ISO. Allegheny Energy believes the merger is
unlikely to be completed if the pre-condition in the Order
actually imposes significant delay.
The Nuclear Regulatory Commission (NRC) 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.
Merger-related decisions are expected by the end of the
second quarter from the FERC, the Department of
Justice/Federal Trade Commission, and the Securities and
Exchange Commission. Allegheny Energy is also filing for
review of certain merger-related activities with the Public
Service Commission of West Virginia and the Virginia State
Corporation Commission.
All of the Company's incremental costs of the merger process
($3.2 million through March 31, 1998) are being deferred.
The accumulated merger costs will be written off by the
Company when the merger occurs, or when it is determined that
the merger will not occur.
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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. On August 1, 1997,
concurrent with Allegheny Power's merger approval filing, the
Company's Pennsylvania utility affiliate, West Penn Power
Company (West Penn), filed with the PUC a comprehensive stand-
alone restructuring plan to implement full customer choice of
electric generation suppliers as required by the Customer
Choice Act. The filing included an unbundling of West Penn's
electric service rates into generation, transmission, and
distribution components; a plan to revise how West Penn and
its utility affiliates, including the Company, share
capacity, energy, capacity reserves, transmission resources,
and costs; and a plan for recovery of stranded costs through
a Competitive Transition Charge (CTC). Recovery of stranded
costs is a key issue.
On April 30, 1998, the PUC, in a non-binding polling,
outlined a restructuring plan for West Penn. According to
the polling, West Penn is allowed to collect $524 million in
stranded costs over seven years, starting in January 1999,
through a CTC. In its restructuring application, West Penn
had requested $1.6 billion in stranded costs. Stranded costs
are costs incurred under a regulated environment which are
not recoverable in a competitive market. Starting in 1999,
West Penn would unbundle its rates to reflect separate prices
for the generation charge, the CTC, and transmission and
distribution charges. While generation would be open to
competition, West Penn would continue to provide transmission
and distribution services to its customers at PUC and FERC
regulated rates. Allegheny Energy and West Penn believe that
the $524 million of stranded costs recommended for recovery
is inadequate and financially harmful to West Penn. The non-
binding polling of the PUC is a preliminary step leading up
to a final order on West Penn's restructuring plan expected
May 21, 1998. If the PUC's final order remains as
financially harmful as the polling, West Penn plans to seek
redress through reconsideration by the PUC and/or full
judicial review and/or legislative revision of the Customer
Choice Act.
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 March 31, 1998,
are primarily related to investments in electric facilities.
The portion related to transmission and distribution
facilities will be recovered over periods of from 20 to 40
years under the expected continuing regulated transmission
and distribution business. The remaining recovery period for
items other than income taxes is from three to seven years in
businesses that remain subject to regulation.
7. The Company uses derivative instruments to manage risk
exposure associated with energy contracts. Such instruments
are used in accordance with a risk management policy adopted
by the Board of Directors. The fair value of such
instruments at March 31, 1998, is not materially different
from book value.
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MONONGAHELA POWER COMPANY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
COMPARISON OF FIRST QUARTER OF 1998 WITH FIRST QUARTER OF 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 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. 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; future economic conditions; earnings retention;
developments in the legislative, regulatory, and competitive
environments in which the Company operates; environmental
legislative and regulatory changes; and other circumstances that
could affect anticipated revenues and costs, such as unscheduled
maintenance or repair requirements and compliance with laws and
regulations.
Significant Events in the First Quarter of 1998
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 issuance of stock for the merger
with DQE, Inc. (DQE). This action was requested in connection
with the proposed issuance of Allegheny Energy stock to exchange
for DQE stock to complete the merger. Thereafter, the Nuclear
Regulatory Commission approved the transfer of control of the
operating licenses for Duquesne Light Company's (Duquesne) Beaver
Valley Unit No.'s 1 and 2 and Perry Unit No. 1 nuclear plants as
required for the proposed merger between Allegheny Power System,
Inc. and DQE, parent company of Duquesne. Duquesne will still be
the licensee, but the approval was necessary since control of
Duquesne after the merger will pass from DQE to Allegheny Energy.
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On April 30, 1998, the Pennsylvania Public Utility
Commission (PUC) adopted a motion (the "Order") approving the
merger subject to a condition precedent that the merged entity
joins a Federal Energy Regulatory Commission (FERC) approved,
fully functioning Independent System Operator (ISO). The Order
specifically approved the Midwest ISO as satisfying the condition
precedent provided it was FERC approved and fully functioning.
Allegheny Energy has joined the Midwest ISO, contingent only on
merger consummation, but it is not projected to be FERC approved
and fully functioning until on or after January 1, 2000. The
Order also noted that the Pennsylvania, New Jersey, Maryland,
L.L.C. ISO (PJM ISO) might also satisfy the pre-condition but
that it would require an updated study and analysis be submitted
to the PUC. The PJM ISO is FERC approved and fully functioning.
The PUC Order noted that the merger would produce substantial
savings and further noted that an 18-month delay recommended by
two Administrative Law Judges (ALJs) in their recommended
decision of March 25, 1998, was not in the public interest.
Allegheny Energy is dismayed that the PUC nevertheless imposed a
condition precedent that could impose a delay likely to be as
long or longer than recommended by the ALJs. Upon official
entry of the PUC's Order, Allegheny Energy is likely to file a
motion for reconsideration to allow the merger to go forward
immediately as it has already joined the Midwest ISO and has
already pledged sufficient interim mitigation measures until the
Midwest ISO is functioning, including temporary relinquishment of
control of 570 megawatts of generation to mitigate market power
concerns. Allegheny Energy may also propose additional interim
mitigation measures. Allegheny Energy is also exploring further
the PJM ISO. Allegheny Energy believes the merger is unlikely to
be completed if the pre-condition in the Order actually imposes
significant delay.
On April 30, 1998, the PUC, in a non-binding polling,
outlined a restructuring plan for West Penn. According to the
polling, West Penn is allowed to collect $524 million in stranded
costs over seven years, starting in January 1999, through a
Competitive Transition Charge (CTC). In its restructuring
application, West Penn had requested $1.6 billion in stranded
costs. Stranded costs are costs incurred under a regulated
environment, which are not recoverable in a competitive market.
Starting in 1999, West Penn would unbundle its rates to reflect
separate prices for the generation charge, the CTC, and
transmission and distribution charges. While generation would be
open to competition, West Penn would continue to provide
transmission and distribution services to its customers at PUC
and FERC regulated rates. Allegheny Energy and West Penn believe
that the $524 million of stranded costs recommended for recovery
is inadequate and financially harmful to West Penn. The non-
binding polling of the PUC is a preliminary step leading up to a
final order on West Penn's restructuring plan expected May 21,
1998. If the PUC's final order remains as financially harmful as
the polling, West Penn plans to seek redress through
reconsideration by the PUC and/or full judicial review and/or
legislative revision of the Customer Choice Act.
Review of Operations
EARNINGS SUMMARY
Net income for the first quarter of 1998 was $19.4
million compared with $22.6 million in the corresponding 1997
period. The decrease in first quarter 1998 earnings resulted
primarily from a 7.3% decrease in residential kilowatt-hour (kWh)
sales resulting from the extremely mild winter weather in 1998.
The 1998 winter was 12% warmer than 1997 and 19% warmer than
normal as measured by heating degree days and was the warmest in
more than 100 years.
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SALES AND REVENUES
Percentage changes in revenues and kWh sales by major
retail customer classes were:
Change from Prior Period
Quarter
Revenues kWh
Residential (6.9)% (7.3)%
Commercial (1.0) (.3)
Industrial 4.9 8.5
Total (1.4)% 1.8%
The change in residential kWh sales, which are more
weather sensitive than the other classes, was due primarily to
changes in customer usage because of weather conditions. The
1998 first quarter winter weather was 12% warmer than 1997 and
19% warmer than normal as measured by heating degree days.
Commercial kWh sales are also affected by weather, but to a
lesser extent than residential. The increase of 8.5% in
industrial kWh sales was due in part to increased kWh sales to a
new customer with particular large electricity requirements, and
also 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 Period
Quarter
(Millions of Dollars)
Fuel clauses $ .8
All other (2.6)
Net change in retail revenues $(1.8)
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 decrease in the first quarter all other retail
revenues was primarily the result of mild weather and its effect
on residential kWh sales.
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Wholesale and other revenues were as follows:
Three Months Ended
March 31
1998 1997
(Millions of Dollars)
Wholesale customers $ 1.3 $ 1.3
Affiliated companies 19.8 21.4
Street lighting and other 1.8 1.8
Total wholesale and other revenues $22.9 $24.5
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
FERC. Competition in the wholesale market for electricity was
initiated by 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 decrease
in such revenues in 1998 resulted primarily from a decrease in
energy sales and a decrease in the allocation of transmission
services and generation spinning reserves revenue.
Revenues from bulk power transactions consist of the
following items:
Three Months Ended
March 31
1998 1997
(Millions of Dollars)
Revenues:
Transmission services to
nonaffiliated companies $2.1 $3.1
Bulk power 1.0 1.1
Total bulk power transactions, net $3.1 $4.2
The final rules on open transmission access, issued by
the FERC in early 1996, require utilities to offer to others
transmission service that is comparable to service they provide
to themselves. Revenues from transmission services to
nonaffiliated companies in the first quarter of 1998 decreased
due to reduced demand, primarily because of the mild weather.
OPERATING EXPENSES
Fuel expenses decreased .8% for the first quarter of 1998
due primarily to a decrease in kWh's generated. Fuel expenses
are primarily subject to deferred power cost accounting
procedures with the result that changes in fuel expenses have
little effect on net income.
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Purchased power and exchanges, net represents power
purchases from and exchanges with nonaffiliated utilities 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 Energy
System at any given time, and consists of the following items:
Three Months Ended
March 31
1998 1997
(Millions of Dollars)
Nonaffiliated transactions:
Purchased power:
From PURPA generation* $17.7 $18.0
Other 2.0 2.1
Power exchanges, net .7 .9
Affiliated transactions:
AGC capacity charges 4.5 4.8
Purchased power and exchanges, net $25.0 $25.8
*PURPA cost (cents per kWh) $5.2 $5.3
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 $2.9 million increase in other operation expense
resulted primarily from an increase in employee benefit costs
($1.3 million), increased allowances for uncollectible accounts
($.8 million), and increased property insurance expense ($.7
million) due in part to a prior period adjustment.
Maintenance expenses decreased slightly for the first
quarter due primarily to reduced expenses achieved through
restructuring efforts and other cost controls. 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.
Taxes other than income taxes increased $1.2 million in
the first quarter due primarily to increased West Virginia
Business and Occupation Taxes resulting from a prior period
adjustment.
The net decrease in federal and state income taxes in the
first quarter resulted primarily from a decrease in income before
taxes.
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.
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Financial Condition and Requirements
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 with the following information.
In the normal course of business, the Company is subject
to various contingencies and uncertainties relating to its
operations and construction programs, including legal actions and
regulations and uncertainties related to environmental matters.
See Notes 4 and 5 to the Financial Statements for information
about merger activities and the Pennsylvania Customer Choice Act.
The Company uses derivative instruments to manage the
risk exposure associated with contracts it writes for the
purchase and/or sale of electricity for receipt or delivery at
future dates. Such instruments are used in accordance with a
risk management policy adopted by the Board of Directors and
monitored by an Exposure Management Committee of senior
management. The policy requires continuous monitoring,
reporting, and stress testing of all open positions for
conformity to policies which limit value at risk and market risk
associated with the credit standing of trading counterparties.
Such credit standings must be investment grade or better, or be
guaranteed by a parent company with such a credit standing for
all over-the-counter instruments.
At March 31, 1998, the trading books of the Company
consisted primarily of physical contracts with fixed pricing.
Most contracts were fixed-priced, forward purchase and/or sale
contracts which required settlement by physical delivery of
electricity. During 1998, the Company also entered into option
contracts which, if exercised, were settled with physical
delivery of electricity. These transactions result in market
risk which occurs when the market price of a particular
obligation or entitlement varies from the contract price. As the
Company continues to develop its power marketing and trading
business, its exposure to volatility in the price of electricity
and other energy commodities may increase within approved policy
limits.
The Company and its affiliates have spent considerable
time and effort over the past several years on the issue of the
year 2000 software compliance, and the effort is continuing.
Certain software has already been made year 2000 compliant by
upgrades and replacement, and analysis is continuing on others,
in accordance with a schedule planned to permit the Company and
its affiliates to process information in the year 2000 and beyond
without significant problems. Expenditures for year 2000
compliance are not expected to have a material effect on the
Company's results of operations or financial position.
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.
<PAGE>
- 15 -
Allegheny Energy is working actively within its states to
advance customer choice. However, it 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 Public Utility Holding Company Act of 1935 and PURPA.
The West Virginia Legislature passed a House Bill on March
14, 1998, which sets the stage for the restructuring of the
electric utility industry in West Virginia. The House Bill
directs the West Virginia Public Service Commission to determine
if deregulation is in the best interests of the state and, if so,
to develop a transition plan. It also sets up a task force of
all interested parties to participate in the plan development.
When complete, the plan will be returned to the Legislature for
approval or rejection.
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.
In late March, on the federal level, the Clinton
Administration outlined its electricity deregulation proposal in
a set of "principles" for Congress. The proposal sets January 1,
2003, as the start date for customer choice. States that have
already deregulated would be allowed to maintain the structures
they have created, and low-cost states could opt out if they
believe their consumers would not benefit from competition.
<PAGE>
- 16 -
MONONGAHELA POWER COMPANY
Part II - Other Information to Form 10-Q
for Quarter Ended March 31, 1998
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDER
1. (a) Date and Kind of Meeting
The annual meeting of shareholders was held at Fairmont,
West Virginia, on April 20, 1998. No proxies were
solicited.
(b) Election of Directors:
The holder of all 5,891,000 share of common stock voted
to elect the following Directors of the Company to hold
office until the next annual meeting of shareholders and
until their successors are duly chosen and qualified:
Eleanor Baum Alan J. Noia
William L. Bennett Jay S. Pifer
Wendell F. Holland Steven H. Rice
Phillip E. Lint Gunnar E. Sarsten
Frank A. Metz, Jr. Peter J. Skrgic
Michael P. Morrell
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) On March 23, 1998, the Company filed a Form 8-K
concerning the Senior Officer Separation Plan which may
be offered to certain of its officers after consummation
of the merger between Allegheny Energy, Inc. and DQE,
Inc. At the Company's December 4, 1997, Board of
Directors Meeting, the Board approved the Separation
Plan.
<PAGE>
- 17 -
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)
May 15, 1998
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