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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 March 31, 1999
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 14, 1999, 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, 1999
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Statement of Income - Three months ended
March 31, 1999 and 1998 3
Balance Sheet - March 31, 1999
and December 31, 1998 4
Statement of Cash Flows - Three months ended
March 31, 1999 and 1998 5
Notes to Financial Statements 6-7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-17
PART II--OTHER INFORMATION 18
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MONONGAHELA POWER COMPANY
Statement of Income
(Thousands of Dollars)
Three Months Ended
March 31
1999 1998
ELECTRIC OPERATING REVENUES:
Residential $ 57,998 $ 52,172
Commercial 32,060 29,965
Industrial 52,743 50,128
Wholesale and other, including affiliates 24,787 22,945
Bulk power transactions, net 3,054 3,062
Total Operating Revenues 170,642 158,272
OPERATING EXPENSES:
Operation:
Fuel 37,547 34,837
Purchased power and exchanges, net 26,526 25,010
Deferred power costs, net 283 (6,671)
Other 21,801 21,319
Maintenance 16,407 17,498
Depreciation 15,345 14,760
Taxes other than income taxes 9,686 11,522
Federal and state income taxes 12,726 12,639
Total Operating Expenses 140,321 130,914
Operating Income 30,321 27,358
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 124 252
Other income, net 1,253 1,538
Total Other Income and Deductions 1,377 1,790
Income Before Interest Charges 31,698 29,148
INTEREST CHARGES:
Interest on long-term debt 7,882 8,814
Other interest 772 1,018
Allowance for borrowed funds used during
construction (206) (111)
Total Interest Charges 8,448 9,721
NET INCOME $ 23,250 $ 19,427
See accompanying notes to financial statements.
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MONONGAHELA POWER COMPANY
Balance Sheet
(Thousands of Dollars)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS: 1999 1998
Property, Plant, and Equipment:
<S> <C> <C>
At original cost, including $38,688
and $43,657 under construction $ 2,013,205 $ 2,007,876
Accumulated depreciation (897,477) (883,915)
1,115,728 1,123,961
Investments:
Allegheny Generating Company - common stock at equity 43,829 44,624
Other 217 231
44,046 44,855
Current Assets:
Cash 3,270 1,835
Accounts receivable:
Electric service 72,156 70,809
Affiliated and other 108,212 19,674
Allowance for uncollectible accounts (3,689) (2,516)
Materials and supplies - at average cost:
Operating and construction 22,367 21,942
Fuel 16,828 16,588
Prepaid taxes 14,885 19,627
Other, including current portion of
regulatory assets 9,182 9,652
243,211 157,611
Deferred Charges:
Regulatory assets 154,508 154,882
Unamortized loss on reacquired debt 17,572 17,826
Other 23,388 19,893
195,468 192,601
Total Assets $ 1,598,453 $ 1,519,028
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 294,550 $ 294,550
Other paid-in capital 2,441 2,441
Retained earnings 295,188 273,197
592,179 570,188
Preferred stock 74,000 74,000
Long-term debt and QUIDS 454,137 453,917
1,120,316 1,098,105
Current Liabilities:
Short-term debt 5,500 49,000
Accounts payable 18,733 13,080
Accounts payable to affiliates 93,340 13,958
Taxes accrued:
Federal and state income 21,953 6,277
Other 15,980 23,192
Interest accrued 9,148 7,692
Other 18,137 13,362
182,791 126,561
Deferred Credits and Other Liabilities:
Unamortized investment credit 15,618 16,155
Deferred income taxes 240,064 242,805
Regulatory liabilities 15,117 15,476
Other 24,547 19,926
295,346 294,362
Total Capitalization and Liabilities $ 1,598,453 $ 1,519,028
</TABLE>
See accompanying notes to financial statements.
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MONONGAHELA POWER COMPANY
Statement of Cash Flows
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998
CASH FLOWS FROM OPERATIONS:
<S> <C> <C> <C> <C>
Net income $ 23,250 $ 19,427
Depreciation 15,345 14,760
Deferred investment credit and income taxes, net (375) 7,320
Deferred power costs, net 283 (6,671)
Unconsolidated subsidiaries' dividends in excess of earnings 809 568
Allowance for other than borrowed funds used
during construction (124) (252)
Internal restructuring liability - (102)
Changes in certain current assets and
liabilities:
Accounts receivable, net (88,712) 1,550
Materials and supplies (665) (5,423)
Accounts payable 85,035 3,121
Taxes accrued 8,464 556
Interest accrued 1,456 3,722
Other, net 8,480 7,686
53,246 46,262
CASH FLOWS FROM INVESTING:
Construction expenditures (less allowance for other
than borrowed funds used during construction) (7,052) (12,371)
CASH FLOWS FROM FINANCING:
Issuance of long-term debt - 42,660
Retirement of long-term debt - (18,000)
Deposit with trustee for redemption
of long-term debt - (25,304)
Short-term debt, net (43,500) (31,079)
Notes payable to affiliates - (1,450)
Dividends on preferred stock (1,259) (1,259)
(44,759) (34,432)
NET CHANGE IN CASH 1,435 (541)
Cash at January 1 1,835 1,686
Cash at March 31 $ 3,270 $ 1,145
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amount capitalized) $ 6,604 $ 5,356
Income taxes (375) -
</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, 1998 should be read with the
accompanying financial statements and the following notes.
With the exception of the December 31, 1998 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, 1999, and the results of operations and cash
flows for the three months ended March 31, 1999 and 1998.
2. Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," established standards for
reporting comprehensive income and its components (revenues,
expenses, gains, and losses) in the financial statements.
The Company does not have any elements of other comprehensive
income to report in accordance with SFAS No. 130. 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 is reported by the Company in its
financial statements using the equity method of accounting.
AGC owns an undivided 40% interest, 840 megawatts (MW), in
the 2,100-MW pumped-storage hydroelectric station in Bath
County, Virginia, operated by the 60% owner, Virginia
Electric and Power Company, a nonaffiliated utility.
AGC recovers from the Company and its affiliates all of its
operation and maintenance expenses, depreciation, taxes, and
a return on its investment under a wholesale rate schedule
approved by the FERC. AGC's rates are set by a formula filed
with and previously accepted by the FERC. The only component
which changes is the return on equity (ROE). Pursuant to a
settlement agreement filed April 4, 1996 with the FERC, AGC's
ROE was set at 11% for 1996 and will continue until the time
any affected party seeks renegotiation of the ROE.
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Following is a summary of income statement information for
AGC:
Three Months Ended
March 31
1999 1998
(Thousands of Dollars)
Electric operating revenues $17,857 $18,604
Operation and maintenance expense 1,611 953
Depreciation 4,245 4,226
Taxes other than income taxes 1,132 1,160
Federal income taxes 2,414 2,865
Interest charges 3,403 3,513
Other income, net (1) (50)
Net income $ 5,053 $ 5,937
The Company's share of the equity in earnings above was $1.4
million and $1.6 million for the three months ended March 31,
1999 and 1998, respectively, and is included in other income,
net, on the Company's Statement of Income. Dividends
received from AGC in the first quarter of 1999 approximated
$2.2 million which reflects an effort to reduce AGC equity to
about 45% of total capitalization and short-term debt.
4. On March 11, 1999, the United States Court of Appeals for the
Third Circuit vacated the United States District Court for
the Western District of Pennsylvania's denial of the
Company's parent, Allegheny Energy, Inc., (Allegheny Energy)
motion for preliminary injunction, enjoining DQE, Inc. (DQE),
parent company of Duquesne Light Company in Pittsburgh, Pa.,
from taking actions prohibited by the Merger Agreement. The
Circuit Court stated that if DQE breached the Merger
Agreement, Allegheny Energy would be entitled to specific
performance of the Merger Agreement. The Circuit Court also
stated that Allegheny Energy would be irreparably harmed if
DQE took actions that would prevent Allegheny Energy from
receiving the specific performance remedy. The Circuit Court
remanded the case to the District Court for further
proceedings consistent with its opinion.
In the District Court, discovery is ongoing, and Allegheny
Energy cannot predict the outcome of this litigation.
However, Allegheny Energy believes that DQE's basis for
seeking to terminate the merger 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.
All of the Company's incremental costs of the merger process
($4.4 million through March 31, 1999) are 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. SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," established standards for reporting
information about operating segments in financial statements.
The Company's principal business segment is utility
operations which includes the generation, purchase,
transmission, distribution, and sale of electricity.
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MONONGAHELA POWER COMPANY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
COMPARISON OF FIRST QUARTER OF 1999 WITH FIRST QUARTER OF 1998
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, 1998 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. These include
statements with respect to deregulation activities and movements
toward competition in states served by Monongahela Power Company
(the Company), the proposed merger of Allegheny Energy, Inc.
(Allegheny Energy) and related litigation against DQE, Inc.
(DQE), parent company of Duquesne Light Company in Pittsburgh,
Pa., Year 2000 readiness disclosure, and results of operations.
All such forward-looking information is necessarily only
estimated. There can be no assurance that actual results will
not materially differ from expectations. Actual results have
varied materially and unpredictably from past expectations.
Factors that could cause actual results to differ
materially include, among other matters, electric utility
restructuring, including 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 of Allegheny Energy
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 Quarter of 1999
- - Merger with DQE
See Note 4 to the financial statements for information
about the proposed merger of Allegheny Energy, Inc., the
Company's parent, with DQE, Inc. (DQE), parent company of
Duquesne Light Company in Pittsburgh, Pa., and proposed
litigation.
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Review of Operations
EARNINGS SUMMARY
Net income for the first quarter of 1999 was $23.3
million compared with $19.4 million in the corresponding 1998
period. The increase in net income for the first quarter of 1999
was due primarily to colder weather that led to increased
kilowatt-hour (kWh) sales to retail utility customers and, to a
lesser extent, to reduced interest expenses. The winter of 1999
was 21% cooler than the relatively warm winter of 1998, as
measured by heating degree days, but was still 2% warmer than
normal. Residential kWh sales, which are very weather sensitive,
increased 10% in the first quarter of 1999.
SALES AND REVENUES
Percentage changes in revenues and kWh sales by major
retail customer classes were:
Change from Comparable Period
of the Prior Year
Revenues kWh
Residential 11.2% 10.1%
Commercial 7.0 4.5
Industrial 5.2 3.2
Total 8.0% 5.4%
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
1999 first quarter winter weather was 21% cooler than 1998 and 2%
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 4.5% increase in commercial
kWh sales in the first quarter primarily reflects increased usage
and growth in the number of customers. The increase of 3.2% in
industrial kWh sales was due in part to increased kWh sales to
paper and printing product customers, and also reflects continued
economic growth in the service territory.
The changes in revenues from retail customers resulted
from the following:
Change from Comparable Period
of the Prior Year
(Millions of Dollars)
Fuel clauses $ 4.6
All other 5.9
Net change in retail revenues $10.5
Revenues reflect not only the changes in kWh sales and
base rate changes, 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.
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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 first quarter for all other retail
revenues was primarily the result of colder weather and its
effect on kWh sales.
Wholesale and other revenues were as follows:
Three Months Ended
March 31
1999 1998
(Millions of Dollars)
Wholesale customers $ 1.2 $ 1.3
Affiliated companies 21.9 19.8
Street lighting and other 1.7 1.8
Total wholesale and other revenues $24.8 $22.9
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 Federal Energy
Regulatory Commission (FERC) regulation. Competition in the
wholesale market for electricity was initiated by the National
Energy Policy Act of 1992 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.
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 first quarter of 1999 resulted primarily
from increased sales of energy and intercompany allocations of
generation spinning reserves.
Revenues from bulk power transactions include sales of
bulk power and transmission services to power marketers and other
utilities. Bulk power and transmission services revenues for the
first quarter of 1999 and 1998 were as follows:
Three Months Ended
March 31
1999 1998
(Millions of Dollars)
Revenues:
Transmission services to nonaffiliated
companies $2.2 $2.1
Bulk power .9 1.0
Total bulk power transactions, net $3.1 $3.1
Revenues from bulk power transactions in the first
quarter of 1999 remained the same as the first quarter of 1998.
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
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energy cost recovery clauses, either positively or negatively,
depends on whether the Company is a net buyer or seller of
electricity during such periods.
OPERATING EXPENSES
Fuel expenses for the first quarter of 1999 increased 8%
due to an 11% increase in kWh's generated, offset in part by a 4%
decrease in average fuel prices. The increase in kWh's generated
was primarily the result of increased sales to retail customers
and to affiliated companies. 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.
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 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
1999 1998
(Millions of Dollars)
Nonaffiliated transactions:
Purchased power:
From PURPA generation* $18.5 $17.7
Other 2.5 2.1
Power exchanges, net .7 .7
Affiliated transactions:
AGC capacity charges 4.8 4.5
Purchased power and exchanges, net $26.5 $25.0
*PURPA cost (cents per kWh) $5.4 $5.2
None of the Company's purchased power contracts are
capitalized since there are no minimum payment requirements
absent associated kWh generation.
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.
Depreciation expense in the first quarter of 1999
increased due to increased investment.
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Taxes other than income taxes decreased $1.8 million in
the first quarter of 1999 due primarily to decreased West
Virginia Business and Occupation Taxes ($1.3 million) related to
a prior period adjustment.
The decrease in interest on long-term debt in the first
quarter of 1999 of $.9 million resulted primarily from reduced
long-term debt and lower interest rates.
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,
1998, 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 Note 4 to the Financial Statements for information about
merger activities.
- - Market Risk
The Company supplies power in the bulk power market. At
March 31, 1999, the marketing books for such operations consisted
primarily of fixed-priced, forward-purchase and/or sale contracts
which require settlement by 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.
- - Year 2000 Readiness Disclosure
As the Year 2000 (Y2K) 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 System are
proceeding with a comprehensive effort to continue operations
without significant problems in 2000 and beyond. An Executive
Task Force is coordinating the efforts of 24 separate Y2K Teams,
representing all business and support units in the System.
In May 1998, the North American Electric Reliability
Council (NERC), of which the System is a member, accepted a
request from the United States Department of Energy to coordinate
the industry's Y2K efforts. The electric utility industry and
the System have segmented the Y2K problem into the following
components:
- - Computer hardware and software;
- - Embedded chips in various equipment; and
- - Vendors and other organizations on which the System relies
for critical materials and services.
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The industry's and the System's efforts for each of these
three components include assessment of the problem areas and
remediation, testing, and contingency plans for critical
functions for which remediation and testing are not possible or
which do not provide reasonable assurance.
The NERC has established a goal of having the industry
achieve a state of Y2K readiness for critical systems by June 30,
1999, and to monitor progress, requires each utility to prepare
and submit a monthly report showing progress and dated plans. By
Order dated July 9, 1998, the Pennsylvania Public Utility
Commission (Pennsylvania PUC) initiated a proceeding requiring
each utility that cannot meet a Y2K readiness date of March 31,
1999 for mission critical systems to file contingency plans by
that date. On March 30, 1999, the System reported to the
Pennsylvania PUC that, except for a few items, its critical
electricity production and delivery systems were Y2K ready
pending final confirmation system testing of its power stations
in April and May. The Company anticipates that all of its
critical systems, including its business applications systems as
well as the electricity production and delivery systems, will be
Y2K ready by June 30, 1999 in accordance with the NERC targets.
The Company has defined Y2K Ready to mean that a
determination has been made by testing or other means that a
component or system will be able to perform its critical functions,
or that contingency plans are in place to overcome any inability
to do so. The Company's progress towards completion of the Y2K
processes on its critical systems (business applications systems
and electricity production and delivery systems) at mid-April,
1999, is as follows: inventory, 100%; assessment, 99%; remediation,
75%; testing, 70%; and contingency planning, 64% for a total of 77%.
As stated above, the Company expects all such systems to be Y2K
Ready by June 30, 1999.
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, the Electric Power Research Institute,
the 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 NERC, on April 30, 1999, issued a press release stating "that
millennium-related problems in most of the electric utility
industry will have been tested and fixed by June 30," and that it
will focus its attention on the exceptions which are expected to
be completed later in the year. Since the Company and its
neighboring utilities in the ECAR group are all participants in
the NERC Y2K effort, the Company believes that this worst case
possibility has been reduced to an unlikely event. The Company
has recently re-tested its existing contingency plans for
restoration of service even if this unlikely event were to occur.
As part of the on-going NERC program, the Company
participated in an industry-wide Y2K drill on April 9, 1999 and
will participate in a more extensive industry-wide drill planned
for September 9, 1999. While the electric utility industry is
aware of the extensive Y2K programs of the major
telecommunications companies, the industry has determined that
telecommunication facilities are so important to continued
operations that we must have contingency plans just in case some
of those facilities may not be available. The drills are
designed to test the ability of utilities to continue to operate
if telecommunications service is interrupted. During the April
test, the Company was able to maintain adequate communications
under a simulated failure of selected systems, and obtained
valuable information for improvement of its plans. NERC has
reported that the industry-wide tests produced similar results.
On December 31, 1999, the Company will have extra staff in
critical areas of the system to implement these and other
contingency plans if they are required.
The SEC requires that each company disclose its estimate
of the "most reasonably likely worst case scenario" of a negative
Y2K event. Since the Company and the industry are working
diligently to avoid any disruption of electric service, the
Company does not believe it or its customers will experience any
significant long-term disruptions of electric service. It is
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the Company's opinion that the "most reasonably likely worst case
scenario" is that there could be isolated problems at various
Company facilities or at the facilities of neighboring utilities
that may have somehow escaped discovery in the identification,
remediation, and testing process, and that these problems may
cause isolated disruptions of service. All utilities, including
the Company, have experience in the implementation of existing
emergency plans and are currently expanding their emergency plans
to include contingency plans to respond quickly to any such
events.
The Company is aware of the importance of electricity to
its customers and is using its best efforts to avoid any serious
Y2K problems. Despite the Company'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 of any such event.
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 a labor-intensive effort of remediation, component
testing, multiple systems testing, documentation, and contingency
planning. While outside contractors and equipment vendors are
being 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 the Company's systems and equipment. The Company
currently estimates that its total incremental expenditures for
the Y2K effort since it began identification of Y2K costs will be
within a range of $4 to $5 million, of which about $3 million has
been incurred through March 31, 1999. These expenditures are
financed by internal sources and primarily result from the
purchase of external expert assistance by the Generation and
Information Services departments. The expenditures have not
required a material reduction in the normal budgets and work
efforts of these departments.
The descriptions herein of the Company's Y2K effort are
made pursuant to the Year 2000 Information and Readiness
Disclosure Act. Forward-looking statements herein are made
pursuant to the Private Securities Litigation Reform Act of 1995.
Of necessity, the Company's Y2K effort is based on estimates of
assessment, remediation, testing, and contingency planning
activities. There can be no assurance that actual results will
not materially differ from expectations.
- - Electric Energy Competition
The electricity supply segment of the electric utility
industry in the United States is in the midst of becoming a
competitive marketplace. The Energy Policy Act of 1992 began the
process of deregulating the wholesale exchange of power within
the electric industry by permitting the FERC to compel electric
utilities to allow third parties to sell electricity to wholesale
customers over their transmission systems. Since 1992, the
wholesale electricity market has become increasingly competitive
as companies began to engage in nationwide power trading. In
addition, some states have taken active steps toward allowing
retail customers the right to choose their electricity supplier.
All of the states served by the utility subsidiaries of
<PAGE>
- 15 -
Allegheny Energy have investigated or implemented retail access
to alternate electricity suppliers. The Company has been an
advocate of federal legislation to create competition in the
retail electricity markets to avoid regional dislocations and
ensure level playing fields. In the absence of federal
legislation, state-by-state implementation has begun.
The Company has franchised regulated customers in Ohio
and West Virginia.
Ohio
In early 1999, Ohio's legislative leadership developed a
framework that would restructure the state's electric utility
industry. Since that time, active input has continued from all
interested parties, but a formal bill is still not available.
Major provisions of the anticipated legislation include a start
date for competition of January 1, 2001; a four-year transition
to full competition; stranded cost recovery; require owners to
join an independent transmission entity; and following the
transition period, an annual competitive auction of generation
service would be held for customers who do not choose an
alternate supplier; and a reduction in utilities' personal
property taxes to the same level as other businesses, with the
difference to be made up by a kilowatt-hour tax on consumers.
Hearings are currently being held in both the Senate and House.
West Virginia
A task force established to further investigate
restructuring issues anticipates reconvening in 1999 to further
discuss restructuring. The Public Service Commission of West
Virginia has since issued an order setting a schedule for a
series of hearings in 1999 on major issues such as transition
costs, codes of conduct, and customer protections.
The status of electric energy competition in Virginia,
Maryland, and Pennsylvania in which affiliates of the Company
serve are as follows.
Virginia
Legislation concerning restructuring was introduced in
the Virginia General Assembly on January 21, 1999. The Virginia
General Assembly passed the Virginia Electric Utility
Restructuring Act (the "Restructuring Act") on March 25, 1999.
On March 29, 1999, the Governor of Virginia signed the
Restructuring Act. Major provisions of the Restructuring Act
include:
- - Customer choice of electric energy supply begins January 1,
2002 to be phased in by January 1, 2004, a schedule which is
subject to acceleration or delay under certain conditions.
- - Incumbent utilities are required to join a regional
transmission entity by January 1, 2001.
- - The Virginia State Corporation Commission (Virginia SCC) is
to develop rules and regulations to implement customer choice.
<PAGE>
- 16 -
- - Utilities are required to unbundle rates, functionally
separate generation, transmission, and distribution, and separate
regulated and unregulated functions.
- - Utilities are permitted but not required to sell generation.
- - Retail rates for generation, transmission, and distribution
are capped from January 1, 2001 through July 1, 2007, although
after January 1, 2004, a utility may petition the Virginia SCC
for termination of capped rates under certain circumstances or
petition for a one-time change in the nongeneration component of
rates.
- - A wires charge mechanism is set forth for recovery of
stranded costs and other costs associated with the transition to
retail choice.
- - The utility may be designated in its service territory as
default service provider at regulated rates.
Maryland
On April 2, 1999, the Maryland General Assembly passed
legislation to restructure the electric utility industry. On
April 8, 1999, the Governor of Maryland signed the legislation
that will bring competition to Maryland's electric generation
market. Major provisions of the restructuring legislation
include:
- - Phase-in of retail choice begins July 1, 2000, with all
customers being able to shop for electricity by July 1, 2002, a
schedule subject to acceleration or delay under certain
conditions.
- - A methodology is set forth to provide an opportunity to
recover certain net costs associated with the transition to
retail choice.
- - Retail rates are capped from July 1, 2000, through July 1,
2004, with residential rate reductions of between 3% and 7.5%
during the cap period, and certain flexibility in price
protection matters if approved as part of a settlement.
- - Generation, supply, and pricing of electricity are
deregulated, and the legislation provides for the transfer of
generating assets to an affiliate.
- - Voluntary sales of generating assets are permitted but not
mandated.
- - Costs of purchased power contracts may remain regulated or
be recovered through the distribution function as part of a
settlement.
- - Functional, operational, structural, or legal separation
between regulated and unregulated utility businesses is required,
and utilities must unbundle their electric rate components into
separate charges.
- - Creates a Universal Service fund and program to benefit low-
income customers.
- - Requires utilities to provide Standard Offer Service at
regulated rates through July 1, 2003 with certain provisions for
extension thereafter.
<PAGE>
- 17 -
Pennsylvania
As previously disclosed, beginning in January 1999, two-
thirds of the customers of the Company's Pennsylvania affiliate,
West Penn Power Company, were permitted to choose an alternate
electricity supplier. Remaining customers can do so in January
2000.
<PAGE>
- 18 -
MONONGAHELA POWER COMPANY
Part II - Other Information to Form 10-Q
for Quarter Ended March 31, 1999
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 19, 1999. No proxies were
solicited.
(b) Election of Directors:
The holder of all 5,891,000 shares 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) No reports on Form 8-K were filed on behalf of the
Company for the quarter ended March 31, 1999.
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, Vice President
(Chief Accounting Officer)
May 17, 1999
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