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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 June 30, 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 August 13, 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 June 30, 1999
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Statement of Income - Three and six months ended
June 30, 1999 and 1998 3
Balance Sheet - June 30, 1999
and December 31, 1998 4
Statement of Cash Flows - Six months ended
June 30, 1999 and 1998 5
Notes to Financial Statements 6-8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-20
PART II--OTHER INFORMATION 21-22
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MONONGAHELA POWER COMPANY
Statement of Income
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
ELECTRIC OPERATING REVENUES:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential $ 46,444 $ 44,244 $ 104,442 $ 96,416
Commercial 31,271 29,701 63,331 59,666
Industrial 54,234 51,543 106,977 101,671
Wholesale and other, including affiliates 23,462 20,445 48,249 43,390
Bulk power transactions, net 5,048 7,841 8,102 10,903
Total Operating Revenues 160,459 153,774 331,101 312,046
OPERATING EXPENSES:
Operation:
Fuel 34,366 34,827 71,913 69,664
Purchased power and exchanges, net 23,398 23,291 49,924 48,301
Deferred power costs, net 3,880 (1,269) 4,163 (7,940)
Other 20,744 20,884 42,545 42,203
Maintenance 15,813 17,753 32,220 35,251
Depreciation 15,303 14,730 30,648 29,490
Taxes other than income taxes 11,997 10,255 21,683 21,777
Federal and state income taxes 9,856 9,216 22,582 21,855
Total Operating Expenses 135,357 129,687 275,678 260,601
Operating Income 25,102 24,087 55,423 51,445
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 241 106 365 358
Other income, net 1,420 1,543 2,673 3,081
Total Other Income and Deductions 1,661 1,649 3,038 3,439
Income Before Interest Charges 26,763 25,736 58,461 54,884
INTEREST CHARGES:
Interest on long-term debt 7,535 8,401 15,417 17,215
Other interest 830 817 1,602 1,835
Allowance for borrowed funds used during
construction (158) (93) (364) (204)
Total Interest Charges 8,207 9,125 16,655 18,846
NET INCOME $ 18,556 $ 16,611 $ 41,806 $ 36,038
</TABLE>
See accompanying notes to financial statements.
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MONONGAHELA POWER COMPANY
Balance Sheet
(Thousands of Dollars)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS: 1999 1998
Property, Plant, and Equipment:
At original cost, including $42,591
<S> <C> <C>
and $43,657 under construction $ 2,024,221 $ 2,007,876
Accumulated depreciation (908,497) (883,915)
1,115,724 1,123,961
Investments:
Allegheny Generating Company - common stock at equity 43,100 44,624
Other 206 231
43,306 44,855
Current Assets:
Cash 3,113 1,835
Accounts receivable:
Electric service 69,097 70,809
Affiliated and other 58,199 19,674
Allowance for uncollectible accounts (3,973) (2,516)
Notes receivable from affiliate 1,850 -
Materials and supplies - at average cost:
Operating and construction 22,111 21,942
Fuel 16,594 16,588
Prepaid taxes 11,798 19,627
Other, including current portion of regulatory assets 7,156 9,652
185,945 157,611
Deferred Charges:
Regulatory assets 154,135 154,882
Unamortized loss on reacquired debt 17,318 17,826
Other 18,440 19,893
189,893 192,601
Total Assets $ 1,534,868 $ 1,519,028
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 294,550 $ 294,550
Other paid-in capital 2,441 2,441
Retained earnings 279,495 273,197
576,486 570,188
Preferred stock 74,000 74,000
Long-term debt and QUIDS 461,803 453,917
Funds on deposit with trustees (6,597) -
1,105,692 1,098,105
Current Liabilities:
Short-term debt - 49,000
Accounts payable 21,867 13,080
Accounts payable to affiliates 61,334 13,958
Taxes accrued:
Federal and state income 8,687 6,277
Other 15,041 23,192
Interest accrued 7,984 7,692
Other 10,155 13,362
125,068 126,561
Deferred Credits and Other Liabilities:
Unamortized investment credit 15,081 16,155
Deferred income taxes 249,297 242,805
Regulatory liabilities 14,751 15,476
Other 24,979 19,926
304,108 294,362
Total Capitalization and Liabilities $ 1,534,868 $ 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>
Six Months Ended
June 30
1999 1998
CASH FLOWS FROM OPERATIONS:
<S> <C> <C> <C> <C>
Net income $ 41,806 $ 36,038
Depreciation 30,648 29,490
Deferred investment credit and income taxes, net 142 8,730
Deferred power costs, net 4,163 (7,940)
Unconsolidated subsidiaries' dividends in excess of earnings 1,549 9,778
Allowance for other than borrowed funds used
during construction (365) (358)
Internal restructuring liability - (236)
Changes in certain current assets and
liabilities:
Accounts receivable, net (35,356) (2)
Materials and supplies (175) (4,854)
Accounts payable 56,163 14,731
Taxes accrued (5,741) (10,323)
Other, net 9,294 7,364
102,128 82,418
CASH FLOWS FROM INVESTING:
Construction expenditures (less allowance for other
than borrowed funds used during construction) (22,191) (34,764)
CASH FLOWS FROM FINANCING:
Issuance of long-term debt 7,700 42,660
Retirement of long-term debt - (111,690)
Short-term debt, net (49,000) 26,124
Notes payable to affiliates - (1,450)
Notes receivable from affiliates (1,850) -
Dividends on capital stock:
Preferred stock (2,519) (2,519)
Common stock (32,990) (1,001)
(78,659) (47,876)
NET CHANGE IN CASH 1,278 (222)
Cash at January 1 1,835 1,686
Cash at June 30 $ 3,113 $ 1,464
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amount capitalized) $15,619 $17,787
Income taxes 19,503 19,750
</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 Parent). 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 June 30, 1999, the results of operations for the three
and six months ended June 30, 1999 and 1998, and cash flows
for the six months ended June 30, 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.
3. 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.
4. 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 Six Months Ended
June 30 June 30
1999 1998 1999 1998
(Thousands of Dollars)
Electric operating revenues $17,810 $19,126 $35,667 $37,730
Operation and maintenance
expense 1,304 1,542 2,915 2,495
Depreciation 4,245 4,242 8,490 8,468
Taxes other than income taxes 1,129 1,177 2,261 2,337
Federal income taxes 2,546 2,907 4,960 5,772
Interest charges 3,285 3,298 6,688 6,811
Other income, net (1) (1) (2) (51)
Net income $ 5,302 $ 5,961 $10,355 $11,898
The Company's share of the equity in earnings above was $1.4
million and $1.6 million for the three months ended June 30,
1999 and 1998, respectively, and $2.8 million and $3.2
million for the six months ended June 30, 1999 and 1998,
respectively, and is included in other income, net, on the
Company's Statement of Income.
5. As previously reported, 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 may be entitled to specific performance of
the Merger Agreement. The Circuit Court also stated that
Allegheny Energy could 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, DQE has filed a motion for summary
judgment which Allegheny Energy has opposed. The court has
not yet ruled. 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.
The $4.4 million deferred incremental costs of the merger
process recorded by the Company through March 31, 1999 were
transferred to the Parent company in the second quarter of
1999. The accumulated merger costs will be written off by
the Parent company when the merger occurs or if it is
determined that the merger will not occur.
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6. 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 SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1999
WITH SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 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 Six Months of 1999
* Merger with DQE
See Note 5 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 related
litigation.
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* West Virginia Fuel Review
On February 26, 1999, the Public Service Commission of
West Virginia (W.Va. PSC) entered an Order to initiate a fuel
review proceeding to establish a fuel increment in rates for the
Company to be effective July 1, 1999 through June 30, 2000. On
June 29, 1999, the W.Va. PSC approved a joint stipulation and
agreement between the Company and the intervenors. Under the
agreement, the parties are to negotiate further in an effort to
more closely align the Company's West Virginia rate schedules
with the West Virginia rate schedules of The Potomac Edison
Company, an affiliate, and to petition to reopen this case if
they are successful. Absent such agreement by October 15, 1999,
the rates will revert to the originally proposed rates in this
case. This change would be effective November 1, 1999 and would
increase the Company's fuel rates by $10.9 million. These
changes, if implemented, will have no effect on the companies'
net income.
* Ohio and West Virginia Deregulation
See Electric Energy Competition on page 17 for ongoing
information regarding restructuring in Ohio and West Virginia.
* Toxics Release Inventory (TRI)
On Earth Day 1997, President Clinton announced the
expansion of Right-to-Know TRI reporting to include electric
utilities, limited to facilities that combust coal and/or oil for
the purpose of generating power for distribution in commerce.
The purpose of TRI is to provide site-specific information on
chemical releases to the air, land, and water. On June 4, 1999,
the Allegheny Energy companies (the System) joined with other
members of the Edison Electric Institute in reporting power
station releases to the public. Packets of information about the
System's releases were provided to media in the System's area and
posted on the Parent Company's web site. The System filed its
first TRI report with the Environmental Protection Agency prior
to the July 1, 1999 deadline date, reporting 18 million pounds of
total releases for calendar year 1998.
Review of Operations
EARNINGS SUMMARY
Net income for the second quarter of 1999 was $18.6
million compared with $16.6 million in the corresponding 1998
period. For the first six months of 1999, net income was $41.8
million compared with $36.0 million for the corresponding 1998
period. The increase in net income for the second quarter of
1999 was due primarily to increased kilowatt-hour (kWh) sales to
retail utility customers and to reduced maintenance and interest
expenses. The increase in net income in the first six months of
1999 is primarily attributed to increased kilowatt-hour sales,
including increased sales to residential customers due to winter
weather that was 21% cooler than the relatively warm winter of
1998, as measured by heating degree days, but was still 2% warmer
than normal. The increase is also due to reduced maintenance and
interest expenses.
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SALES AND REVENUES
Percentage changes in revenues and kWh sales by major
retail customer classes were:
Change from Prior Periods
Three Months Ended Six Months Ended
June 30 June 30
Revenues kWh Revenues kWh
Residential 5.0% 3.7% 8.3% 7.2%
Commercial 5.3 4.9 6.1 4.7
Industrial 5.2 2.3 5.2 2.7
Total 5.1% 3.1% 6.6% 4.3%
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, and to a
lesser extent, growth in the number of customers. 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 increase in commercial kWh sales in the three
and six months ended periods primarily reflects increased usage
and growth in the number of customers. The increase in
industrial kWh sales in both periods 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 Prior Periods
Three Months Ended Six Months Ended
June 30 June 30
(Millions of Dollars)
Fuel clauses $3.2 $ 7.8
All other 3.3 9.2
Net change in retail
revenues $6.5 $17.0
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.
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 six months ended periods
for all other retail revenues was primarily the result of
increased kWh sales due to customer usage and growth, and in the
six months ended period due to first quarter winter weather that
was cooler than the 1998 period.
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Wholesale and other revenues were as follows:
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
(Millions of Dollars)
Wholesale customers $ 1.1 $ 1.2 $ 2.3 $ 2.5
Affiliated companies 20.6 17.8 42.5 37.6
Street lighting and other 1.8 1.4 3.4 3.3
Total wholesale and other
revenues $23.5 $20.4 $48.2 $43.4
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 second quarter and first six months 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
three and six months ended periods of 1999 and 1998 were as
follows:
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
(Millions of Dollars)
Revenues:
Transmission services to
nonaffiliated companies $2.9 $2.6 $5.1 $ 4.7
Bulk power 2.1 5.2 3.0 6.2
Total bulk power trans-
actions, net $5.0 $7.8 $8.1 $10.9
Revenues from bulk power transactions in the three and
six months ended periods of 1999 decreased from the same periods
of 1998. Revenues from bulk power transactions in the second
quarter and first six months of 1998 were high due to increased
sales of energy which occurred primarily in the month of June
1998 as a result of a heat wave which increased the demand and
prices for energy. The costs of purchased power and revenues
from sales to power marketers and other utilities, including
transmission services, are
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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.
OPERATING EXPENSES
Fuel expenses for the second quarter and the first six
months of 1999 decreased by 1.3% and increased by 3.2%,
respectively. The decrease in the second quarter was due to a
9.8% decrease in average fuel prices, offset in part by a 7.5%
increase in kWh's generated. The increase in the first six
months fuel expenses was due to a 9.2% increase in kWh's
generated, offset in part by a 7% decrease in average fuel
prices. The increase in kWh's generated in the three and six
months ended June 1999 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 Six Months Ended
June 30 June 30
1999 1998 1999 1998
(Millions of Dollars)
Nonaffiliated transactions:
Purchased power:
From PURPA generation* $16.4 $17.4 $34.9 $35.1
Other 2.8 1.5 5.3 3.6
Power exchanges, net (.6) (.4) .1 .3
Affiliated transactions:
AGC capacity charges 4.8 4.7 9.6 9.2
Energy and spinning
reserve charges .1 .1
Purchased power and
exchanges, net $23.4 $23.3 $49.9 $48.3
*PURPA cost (cents per kWh) 5.3 5.2 5.3 5.2
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 these costs are reasonably assured.
The decrease in purchased power from PURPA generation for
the three months June 1999 was primarily due to reduced
generation at a hydroelectric plant.
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Maintenance expenses in the three and six months ended
June 30, 1999 decreased from the same periods in 1998 by $1.9
million and $3.0 million, respectively. These decreases are
primarily due to $2.5 million of incremental transmission and
distribution (T&D) storm damages expenses incurred in June 1998
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 six months ended
June 30, 1999 increased due to increased investment.
Taxes other than income taxes increased $1.7 million in
the second quarter of 1999 due primarily to an adjustment of a
prior period to include FICA taxes in taxes other than income.
The decrease in interest on long-term debt in the first
six months of 1999 of $1.8 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 5 to the Financial Statements for information about
merger activities.
* Market Risk
The Company supplies power in the bulk power markets. At
June 30, 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.
* Issuance of Notes
In April 1999, the Company issued $7.7 million of 5.50%
30-year pollution control revenue notes to Pleasants County, West
Virginia.
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* Year 2000 Readiness Disclosure
The transition from 1999 into the Year 2000 (Y2K) has the
potential to cause serious problems to most organizations,
including the Company, 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 have been working under a comprehensive Y2K program
to identify and remediate the problem areas in order 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.
The industry's and the System's efforts for each of these
three components include inventory, assessment and, where
possible, remediation of the problem areas by repair, replacement
or removal, supplemented by confirmation testing and contingency
plans. Contingency plans include alternate methods of certain
operations to help avoid electric service or business
interruptions, and the review and update of restoration of
service plans to mitigate the severity and length of
interruptions in the unlikely even that any should occur.
Based on this work, the Company has determined that as of
June 30, 1999 all of its critical components and systems related
to safety and the production and distribution of electricity and
nearly all of its important business systems (accounting,
billing, etc.) are Y2K ready. The Company anticipates that the
remediation and testing work on the remaining business and non-
critical systems will be completed by September 30, 1999. 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 readiness program has been conducted in
accordance with time schedules recommended by state regulatory
commissions and by NERC. As is the case of most electric
utilities, the System is interconnected with neighboring
utilities, which provides added strength of supply diversity and
flexibility. But the interconnections also mean that any one
utility's Y2K readiness is related to the readiness of the group.
Integrated electric utilities are uniquely reliant on each other
to avoid, in a worst case situation, a 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.
Since the Company and its neighboring utilities in the ECAR group
are all participants in the NERC Y2K
<PAGE>
- 16 -
effort (which had a target completion date of June 30 for critical
systems related to production and delivery of electricity),
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 dry
runs designed to test the ability of utilities to continue to
operate with less than normal telecommunication facilities.
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 believes its customers will not experience any
significant long-term disruptions of electric service. It is the
Company's opinion that the "most reasonably likely worst case
scenario" is a Y2K event or series of events at Company
facilities or at the facilities of neighboring utilities that
escaped discovery that may cause isolated disruptions of service.
All utilities, including the Company, have experience in the
implementation of existing restoration of service plans. As
stated above, the Company's Y2K program includes a review and
update of these 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 Y2K work has been and continues to be 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 have been employed for some of the work, the Company has
used its own 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 $5 to $6 million, of which about $4 million has
been incurred through June 30, 1999.
<PAGE>
- 17 -
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.
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
competitive. 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, an increasing number of 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 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. All of the states served by the
utility subsidiaries of Allegheny Energy are at various stages of
implementation or investigation of programs that allow customers
to choose their electric supplier. Ohio has passed legislation
this year to implement retail choice. West Virginia continues to
actively study this issue.
Activities at the Federal Level
The System is an advocate of federal legislation to
mandate competition in retail electricity markets nationwide to
avoid regional dislocations and ensure level playing fields. The
System continues to seek enactment of federal legislation to
bring choice to all retail electric customers, deregulate the
generation and sale of electricity on a national level, and
create a more liquid, free market for electric power. Fully
meeting challenges in the emerging competitive environment will
be difficult for the System unless certain outmoded and anti-
competitive laws, specifically the Public Utility Holding Company
Act of 1935 (PUHCA) and Section 210 of the Public Utility
Regulatory Policies Act of 1978 (PURPA), are repealed or
significantly revised. The System continues to advocate the
repeal of PUHCA and PURPA, on the grounds that they are obsolete
and anti-competitive, and that PURPA results in utility customers
paying above-market prices for power. In the U.S. Congress, a
series of hearings on the competition issue in both the House and
Senate recently have been completed, and committee staffs in both
chambers are writing comprehensive competition bills. Consensus
remains elusive, however, with significant hurdles remaining in
both houses of Congress. While it is too early to tell whether
initial momentum on the issue will result in legislation in the
current Congress, the competition issue has received more
attention this year than ever before.
<PAGE>
- 18 -
Ohio
The Ohio General Assembly passed legislation on June 22,
1999 to restructure the electric utility industry. Governor Taft
signed the bill soon thereafter, and all of the state's customers
will be able to choose their electricity supplier starting
January 1, 2001, beginning a five-year transition to market
rates. Total electric rates will be frozen over that period, and
residential customers are guaranteed a 5% cut in the generation
portion of their rate. The determination of stranded cost
recovery will be handled by The Public Utilities Commission of
Ohio. The bill stipulates that no entity shall own or control
transmission facilities after the start of competitive retail
electric service unless that entity is a member of and transfers
control of those facilities to one or more qualifying independent
transmission entities. The legislation provides for consumer
education, universal service, consolidation of Ohio's low income
customer assistance programs as well as incentives for
development of renewable resources and disclosure of the
environmental characteristics of power supplies.
West Virginia
In December 1996, the W.Va. PSC issued an Order
initiating a general investigation regarding the restructuring of
the electric utility industry. A Task Force was established to
further investigate restructuring issues. In December 1997, the
Task Force approved legislative language that would have given
the W.Va. PSC broad authority to implement retail choice. The
proposed legislation was substantially modified by the West
Virginia Legislature and passed in March 1998. The legislation
directed the W.Va. PSC to meet with all interested parties to
develop a restructuring plan which would meet the dictates and
goals of the legislation. Interested parties formed a new Task
Force that met during 1998, but the Task Force was unable to
reach a consensus on a model for restructuring. The W.Va. PSC
issued an Order on December 23, 1998 setting hearings to begin on
August 17, 1999 and August 24, 1999. The August 17 hearing will
address certification, licensing, bonding, reliability, universal
service, consumer protection, and code of conduct. The August 24
hearing will address subsidies and stranded costs. Following
these hearings, the W.Va. PSC will make a determination whether
restructuring is in the public interest.
The status of electric energy competition in Virginia,
Maryland, and Pennsylvania in which affiliates of the Company
serve are as follows:
Virginia
The Virginia Electric Utility Restructuring Act (the
"Restructuring Act") was passed by the Virginia General Assembly
on March 25, 1999 and was signed by the Governor of
Virginia on March 29, 1999. The Legislative Transition Task
Force on Electric Utility Restructuring, which was established by
the Restructuring Act, is holding hearings this summer on a
number of issues concerning the implementation of retail
competition in Virginia. Working groups also continue to meet
with State Corporation Commission staff, comments were filed and
Commission hearings have been held to discuss the proposed retail
pilot programs of other utilities in the state. Recommended
interim rules for retail pilot programs were issued August 6,
1999, subject to final approval by the Commission. It is
anticipated that these interim rules
<PAGE>
- 19 -
will provide a framework for rules and regulations applicable to
full implementation of retail choice beginning in 2002. The
Commission is seeking comments on issues relating to the
development of and participation in regional transmission
entities required by the Restructuring Act to facilitate access
to electric transmission systems.
Maryland
The Maryland General Assembly passed legislation to
restructure the electric utility industry on April 2, 1999, and
on April 8, 1999, the Governor of Maryland signed the legislation
that will bring competition to Maryland's electric generation
market. The Maryland Public Service Commission (Maryland PSC) is
in the process of implementing the new law. Final Electric
Restructuring Roundtable reports were filed with the commission
on May 3, 1999. Legislative style hearings have been scheduled
this summer with the commission expected to issue decisions by
the end of the year.
Potomac Edison, the Company's Maryland affiliate, filed
testimony in Maryland's investigation into transition costs,
price protection, and unbundled rates. The filing requested
recovery of transition costs and a surcharge to recover the cost
of the AES Warrior Run cogeneration project beyond 2001. The
staff of the Maryland PSC advised the commission that a tentative
settlement agreement was achieved with the majority of the
parties participating in the negotiations. The parties are in
the process of finalizing the agreement, which should be filed by
August 20, 1999.
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.
Accounting for the Effects of Price Deregulation
In July 1997, the Emerging Issues Task Force (EITF) of
the Financial Accounting Standards Board (FASB) released Issue
No. 97-4, "Deregulation of the Pricing of Electricity - Issues
Related to the Application of FASB Statement Nos. 71 and 101,"
which concluded that utilities should discontinue application of
Statement of Financial Accounting Standards (SFAS) No. 71 for the
generation portion of their business when a deregulation plan is
in place and its terms are known. Because Ohio has passed
legislation for a deregulation plan, the Company has determined
that it will be required to discontinue use of SFAS No. 71 for
the generation portion of its business (the Ohio portion) on an
uncertain future date. One of the conclusions of the EITF is
that after discontinuing SFAS No. 71, utilities should continue
to carry on their books the assets and liabilities recorded under
SFAS No. 71 if the regulatory cash flows to settle them will be
derived from the continuing regulated transmission and
distribution business. Additionally, continuing costs and
obligations of the deregulated generation business which are
similarly covered by the cash flows from the continuing regulated
business
<PAGE>
- 20 -
will meet the criteria as regulatory assets and liabilities. The
Ohio legislation establishes definitive processes for transition
to deregulation and market-based pricing for electric generation.
Until relevant regulatory proceedings are complete and final
orders are received, the Company is unable to predict the effect
of discontinuing SFAS No. 71, but it may be required to write off
unrecoverable regulatory assets, impaired assets, and uneconomic
commitments.
<PAGE>
- 21 -
MONONGAHELA POWER COMPANY
Part II - Other Information to Form 10-Q
for Quarter Ended June 30, 1999
ITEM 1. LEGAL PROCEEDINGS
The MidAtlantic case, previously reported as an ongoing
litigation matter, has been settled and an Order was entered on
July 9, 1999 dismissing the case with prejudice.
As of August 9, 1999, the Company has been named as a
defendant, along with multiple other defendants in a total of
approximately 8,000 asbestos cases. The Potomac Edison Company
and West Penn Power Company, affiliates of the Company, were
named as defendants along with multiple other defendants in
approximately one-half of those cases. As of June 30, 1999, a
total of 721 cases have been settled and/or dismissed against the
Company, The Potomac Edison Company, and West Penn Power Company
for reasonable settlement amounts. While the Company, The
Potomac Edison Company, and West Penn Power Company believe that
all of the cases are without merit, they cannot predict the
outcome nor are they able to determine whether additional cases
will be filed.
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 Allegheny
Energy's 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 may be entitled to specific performance of the
Merger Agreement. The Circuit Court also stated that Allegheny
Energy could 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, DQE has filed a motion for summary
judgment which Allegheny Energy has opposed. The court has not
yet ruled. 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.
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 June 30, 1999.
<PAGE>
- 22 -
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)
August 16, 1999
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