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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, 2000
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, 2000, 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, 2000
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Statement of Income - Three months ended
March 31, 2000 and 1999 3
Balance Sheet - March 31, 2000
and December 31, 1999 4
Statement of Cash Flows - Three months ended
March 31, 2000 and 1999 5
Notes to Financial Statements 6-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-20
PART II--OTHER INFORMATION 21
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MONONGAHELA POWER COMPANY
Statement of Income
(Thousands of Dollars)
Three Months Ended
March 31
2000 1999
UTILITY OPERATING REVENUES:
Residential $ 69,743 $ 57,998
Commercial 38,231 32,060
Industrial 54,256 52,743
Wholesale and other, including affiliates 27,673 24,787
Bulk power transactions, net 3,574 3,054
Total Operating Revenues 193,477 170,642
OPERATING EXPENSES:
Operation:
Fuel 36,308 37,547
Purchased power and exchanges, net 37,669 26,526
Deferred power costs, net 2,065 283
Other 23,925 21,801
Maintenance 17,672 16,407
Depreciation and amortization 16,801 15,345
Taxes other than income taxes 11,563 9,686
Federal and state income taxes 14,756 12,726
Total Operating Expenses 160,759 140,321
Operating Income 32,718 30,321
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 171 124
Other income, net 1,935 1,253
Total Other Income and Deductions 2,106 1,377
Income Before Interest Charges and
Extraordinary Charge, Net 34,824 31,698
INTEREST CHARGES:
Interest on long-term debt 10,005 7,882
Other interest 560 772
Allowance for borrowed funds used during
construction (159) (206)
Total Interest Charges 10,406 8,448
Income Before Extraordinary Charge 24,418 23,250
Extraordinary Charge, net (58,227) -
NET (LOSS) INCOME $ (33,809) $ 23,250
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: 2000 1999
Property, Plant, and Equipment:
<S> <C> <C>
Utility plant $ 2,127,009 $ 2,126,482
Nonutility plant 2,523 983
Construction work in progress 48,446 46,138
2,177,978 2,173,603
Accumulated depreciation (968,377) (958,867)
1,209,601 1,214,736
Investments and Other Assets:
Allegheny Generating Company - common stock at equity 41,363 41,713
Excess of cost over net assets acquired 26,161 26,325
Other 155 170
67,679 68,208
Current Assets:
Cash 4,216 3,826
Accounts receivable:
Utility service 78,026 78,977
Affiliated and other 71,473 87,345
Allowance for uncollectible accounts (4,227) (4,133)
Notes receivable from affiliate 27,750 -
Materials and supplies - at average cost:
Operating and construction 21,908 22,127
Fuel 16,859 16,049
Prepaid taxes 15,444 23,320
Other, including current portion of regulatory assets 3,839 4,708
235,288 232,219
Deferred Charges:
Regulatory assets 92,103 145,176
Unamortized loss on reacquired debt 10,860 16,810
Other 15,425 16,569
118,388 178,555
Total Assets $ 1,630,956 $ 1,693,718
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 294,550 $ 294,550
Other paid-in capital 2,441 2,441
Retained earnings 246,892 281,960
543,883 578,951
Preferred stock 74,000 74,000
Long-term debt and QUIDS 506,418 503,741
1,124,301 1,156,692
Current Liabilities:
Notes payable to affiliate - 28,650
Long-term debt due within one year 65,000 65,000
Accounts payable 45,842 40,016
Accounts payable to affiliates 43,297 67,312
Taxes accrued:
Federal and state income 18,613 2,260
Other 15,488 24,235
Interest accrued 9,843 5,883
Other 18,847 11,647
216,930 245,003
Deferred Credits and Other Liabilities:
Unamortized investment credit 13,470 14,007
Deferred income taxes 210,164 248,987
Regulatory liabilities 51,066 13,961
Other 15,025 15,068
289,725 292,023
Total Capitalization and Liabilities $ 1,630,956 $ 1,693,718
</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
2000 1999
CASH FLOWS FROM OPERATIONS:
<S> <C> <S> <C> <C>
Net (loss) income $ (33,809) $ 23,250
Extraordinary charge, net of taxes 58,227 -
Income before extraordinary charge 24,418 23,250
Depreciation and amortization 16,801 15,345
Deferred investment credit and income taxes, net (1,004) (375)
Deferred power costs, net 2,065 283
Unconsolidated subsidiaries' dividends in excess of earnings 366 809
Allowance for other than borrowed funds used
during construction (171) (124)
Changes in assets and liabilities:
Accounts receivable, net 16,917 (88,712)
Materials and supplies (591) (665)
Prepaid taxes 7,876 4,743
Accounts payable (18,189) 85,035
Taxes accrued 7,606 8,464
Interest accrued 3,960 1,456
Other current liabilities 7,200 4,775
Other, net (896) (1,038)
66,358 53,246
CASH FLOWS FROM INVESTING:
Construction expenditures (less allowance for other
than borrowed funds used during construction) (10,870) (7,052)
CASH FLOWS FROM FINANCING:
Short-term debt, net - (43,500)
Funds on deposit with trustees 2,561 -
Notes payable to affiliates (28,650) -
Notes receivable from affiliates (27,750) -
Dividends on capital stock:
Preferred stock (1,259) (1,259)
(55,098) (44,759)
NET CHANGE IN CASH 390 1,435
Cash at January 1 3,826 1,835
Cash at March 31 $ 4,216 $ 3,270
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amount capitalized) $6,187 $6,604
Income taxes (3,156) (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 Parent). The
Company's Notes to Financial Statements in its Annual Report
on Form 10-K for the year ended December 31, 1999 should be
read with the accompanying financial statements and the
following notes. With the exception of the December 31, 1999
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, 2000, and the results of operations and cash
flows for the three months ended March 31, 2000 and 1999.
2. 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 Federal Energy Regulatory Commission (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
2000 1999
(Thousands of Dollars)
Electric operating revenues $17,155 $17,857
Operation and maintenance expense 1,366 1,611
Depreciation 4,244 4,245
Taxes other than income taxes 1,133 1,132
Federal income taxes 1,829 2,414
Interest charges 3,305 3,403
Other income, net - (1)
Net income $ 5,278 $ 5,053
The Company's share of the equity in earnings above was $1.4
million for each of the three month periods ended March 31,
2000 and 1999, and is included in other income, net, on the
Company's Statement of Income.
4.The West Virginia Legislature passed House Concurrent
Resolution 27 on March 11, 2000 approving an electric
deregulation plan submitted by the Public Service Commission of
West Virginia (W.Va. PSC) with certain modifications. The need
for further action by the Legislature, including the enactment of
certain tax changes regarding preservation of tax revenues for
state and local government, is required prior to the
implementation of the restructuring plan for customer choice.
The Company expects the West Virginia Legislature to pass the
necessary tax law changes in their next session in the first
quarter of 2001 and the implementation of the deregulation plan
is expected to occur in mid-2001. Among the provisions of the
plan are the following:
* Customer choice will begin for all customers when the plan
is implemented (expected in mid-2001).
* Rates for electricity service will be unbundled at current
levels and capped for four years, with power supply rates
transitioning to market rates over the next six years for the
residential and small commercial customers.
After year 7, the power supply rate for large commercial
and industrial customers will no longer be regulated.
* The Company is permitted to transfer its West Virginia
jurisdictional generating assets to its non-regulated generation
affiliate, Allegheny Energy Supply Company, LLC (Allegheny Energy
Supply) at book value.
* The Company will recover the cost of its non-utility
generation contracts through a series of surcharges applied to
all customers over 10 years.
* Industrial customers will receive a 3% rate reduction.
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* A special "Rate Stabilization" account of $42.6 million will
be established by the Company for residential and small business
customers to mitigate the impact of the market price of power as
determined by the W. Va. PSC.
5.In 1997, the Emerging Issues Task Force (EITF) issued EITF
No. 97-4, "Deregulation of the Pricing of Electricity-Issues
Related to the Application of FASB Statement Nos. 71 and 101."
The EITF agreed that, when a rate order that contains sufficient
detail for the enterprise to reasonably determine how the
transition plan will affect the separable portion of its business
whose pricing is being deregulated is issued, the entity should
cease to apply the Financial Accounting Standards Board's (FASB)
Statement of Financial Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation," to that separable
portion of its business.
On March 11, 2000, the West Virginia Legislature passed House
Concurrent Resolution 27 based on a company specific electric
deregulation plan submitted by the W. Va. PSC. As required by
EITF 97-4, the Company discontinued the application of SFAS
No. 71 for its electric generation operations in its West
Virginia jurisdiction in the first quarter of 2000. The
Company recorded under the provisions of SFAS No. 101,
"Accounting for the Discontinuation of Application of FASB
Statement No. 71," an extraordinary charge of $58.2 million in
the first quarter of 2000 to reflect unrecoverable net
regulatory assets that will not be collected from customers
and establishment of a rate stabilization account for
residential and small commercial customers as required by the
deregulation plan as shown below:
Gross Net-of-Tax
(Millions of Dollars)
Unrecoverable regulatory assets $54.1 $32.5
Rate stabilization obligation 42.6 25.7
2000 extraordinary charges $96.7 $58.2
6. The Balance Sheet includes the amounts listed below for
generation assets not subject to SFAS No. 71.
March December
2000 1999
(Millions of Dollars)
Property, plant and equipment at
original cost $978.1 $ -
Amounts under construction included above 26.0 -
Accumulated depreciation (525.5) -
The Company expects to transfer these assets to Allegheny
Energy Supply in 2001 based on the deregulation plan approved
by the W. Va. PSC as discussed in Note 4.
7. All of the employees of Allegheny Energy are employed by
Allegheny Energy Service Corporation (AESC), which performs
services at cost for the Company and its affiliates in accordance
with the Public Utility Holding Company Act of 1935. Through
AESC, the Company is responsible for its proportionate share of
services provided by AESC. The total billings by AESC (including
capital) to the
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Company for the three months ended March 31, 2000 and 1999
were $30.8 million and $25.8 million, respectively. The
Company buys power from and sells power to its affiliates at
tariff rates approved by the FERC.
8. The Company and its utility affiliates, The Potomac Edison
Company (Potomac Edison) and West Penn Power Company (West Penn),
collectively now doing business as Allegheny Power, are engaged
in the generation (except West Penn), purchase, transmission,
distribution, and sale of electric energy. Also, with the
purchase of West Virginia Power in December 1999, the Company is
now involved in the procurement and delivery of natural gas. The
Company operates as a single utility segment in the states of
Ohio and West Virginia.
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MONONGAHELA POWER COMPANY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
COMPARISON OF FIRST QUARTER OF 2000 WITH FIRST QUARTER OF 1999
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, 1999 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) 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; 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; the Company's ability to
compete in unregulated energy markets; future economic
conditions; and other circumstances that could affect anticipated
revenues and costs such as significant volatility in the market
price of wholesale power and fuel for electric generation,
unscheduled maintenance or repair requirements, weather, and
compliance with laws and regulations.
Significant Events in the First Quarter of 2000
West Virginia Deregulation
The West Virginia Legislature passed House Concurrent
Resolution 27 on March 11, 2000 approving an electric
deregulation plan submitted by the Public Service Commission of
West Virginia (W. Va. PSC) with certain modifications. As a
result of West Virginia legislation, the Company discontinued the
application of Financial Accounting Standards Board's (FASB)
Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation," for
the electric generation portion of its West Virginia operations
and has adopted SFAS No. 101, "Accounting for the Discontinuation
of Application of FASB Statement No. 71."
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Accordingly, the Company recorded an extraordinary charge of
$96.7 million ($58.2 million after taxes) during the first
quarter of 2000. The write-off reflects unrecoverable net
regulatory assets that will not be collected from customers and
establishment of a rate stabilization account for residential and
small commercial customers as required by the deregulation plan.
See Notes 4 and 5 to the financial statements for details of the
deregulation plan.
See Electric Energy Competition for more information
regarding restructuring in West Virginia.
Acquisition of Mountaineer Gas Company
The Company previously reported plans to purchase
Mountaineer Gas Company, conditioned upon certain approvals.
The Department of Justice and Federal Trade Commission,
after
reviewing the proposed acquisition and exploring antitrust
issues, approved the acquisition.
The Company filed a Form U-1 application with the Securities
and Exchange Commission (SEC) in February 2000 requesting
permission to acquire Mountaineer Gas Company. The Form U-1
filing is required because the Company is a registered holding
company under the Public Utility Holding Company Act of 1935
(PUHCA).
A number of key intervenors in the Company's application to
the W. Va. PSC signed a Joint Stipulation and Settlement
Agreement in April 2000 to not oppose the Company's acquisition
of Mountaineer Gas Company. The settlement agreement is subject
to the approval of the W. Va. PSC and was presented at an
evidentiary hearing held by the W. Va. PSC on April 17, 2000.
The company anticipates that all required approvals will be
granted by the end of the third quarter 2000. The closing date
will occur shortly after all necessary approvals are received.
Rate Matters
As previously reported, on February 26, 1999, the W. Va. PSC
entered an order to initiate a fuel review proceeding to
establish a fuel increment in rates for the Company and the
Company's affiliate, The Potomac Edison Company (Potomac Edison)
to be effective July 1, 1999, through June 30, 2000. If an
agreement was not reached, the proposed fuel rates which would
increase the Company's fuel rates by $10.9 million and decrease
Potomac Edison's fuel rates by $8.0 million was scheduled to
become effective March 15, 2000. The W. Va. PSC granted an
extension, and the parties continue to negotiate.
Review of Operations
EARNINGS SUMMARY
Net income for the first quarter of 2000, excluding an
extraordinary charge of $58.2 million, net of taxes, was $24.4
million compared with $23.3 million in the corresponding 1999
period. The increase in net income for the first quarter of 2000
was due primarily
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to favorable earnings from the operations of the recently
acquired West Virginia Power.
The first quarter extraordinary charge of $58.2 million, net
of taxes, reflects a write-off by the Company of costs determined
to be unrecoverable as a result of West Virginia legislation
requiring deregulation of electric generation and recognition of
a rate stabilization obligation. As a result of the write-off,
the loss for the first quarter of 2000 was $33.8 million.
SALES AND REVENUES
The major retail customer classes (residential, commercial,
and industrial) include electric and gas revenues as shown below:
Three Months Ended
March 31
2000 1999
(Thousands of Dollars)
Electric revenues $152.7 $142.8
Gas revenues 9.5 -
Total retail revenues $162.2 $142.8
Percentage changes in electric revenues and kWh sales by
major retail customer classes were:
Change from Comparable Period
of the Prior Year
Revenues kWh
Residential 8.8% 8.5%
Commercial 10.4 11.5
Industrial 2.9 6.1
Total 7.0% 7.9%
The first quarter of 2000 includes gas revenues of $6.6
million in residential and $2.9 million in commercial related to
the Company's acquisition of West Virginia Power in December
1999.
The change in residential kWh sales, which are more weather
sensitive than the other classes, was due primarily to sales
related to the acquisition of the assets of West Virginia Power
and growth in the number of customers. These increases were
offset in part by changes in customer usage due to milder first
quarter 2000 winter weather.
Commercial kWh sales are also affected by weather, but to a
lesser extent than residential. The 11.5% increase in commercial
kWh sales in the first quarter primarily reflects increased sales
related to the acquisition of the assets of West Virginia Power
and growth in the number of customers.
The increase of 6.1% in industrial kWh sales was due to
increased kWh sales to iron and steel and paper, printing, and
publishing customers.
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Changes in utility revenues from retail customers resulted
from the following:
Change from Comparable Period
of the Prior Year
(Millions of Dollars)
Fuel clauses $ 2.0
All other 17.4
Net change in utility retail revenues* $19.4
*Includes $9.5 million of retail gas revenues.
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 customers'
bills through fuel clauses. A fuel clause will cease to exist
for the Company's West Virginia jurisdiction when the West
Virginia deregulation plan is implemented which is expected to
occur in mid-2001. The Company will then assume the risks and
benefits of changes in fuel and purchased power costs and sales
of transmission services and bulk power.
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 kWh sales and gas sales
related to the recently acquired West Virginia Power.
Wholesale and other revenues were as follows:
Three Months Ended
March 31
2000 1999
(Millions of Dollars)
Wholesale customers $ 1.8 $ 1.2
Affiliated companies 23.5 21.9
Street lighting and other 2.4 1.7
Total wholesale and other revenues $27.7 $24.8
Wholesale customers are cooperatives and municipalities that
own their own distribution systems and buy all or part of their
bulk power needs from the Company under 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. The increase in first quarter 2000 wholesale customers
revenue was due to wholesale customer revenue from the recently
acquired West Virginia Power.
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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 street
lighting and other revenues was due primarily to increased rental
revenues.
Bulk power transactions include sales of bulk power and
transmission and other energy services to power marketers and
other utilities. Bulk power and transmission and other energy
services revenues for the first quarter of 2000 and 1999 were as
follows:
Three Months Ended
March 31
2000 1999
kWh Transactions (in billions):
Bulk power .03 .03
Transmission and other energy services
to nonaffiliated companies .67 .36
Total .70 .39
Revenues(Millions of Dollars):
Bulk power $ .7 $.9
Transmission and other energy services
To nonaffiliated companies 2.9 2.2
Total $3.6 $3.1
Revenues from transmission and other energy services
increased in the first quarter of 2000 primarily due to increased
megawatt-hours (MWh) transmitted. The costs of purchased power
and revenues from sales to power marketers and other utilities,
including transmission services, are currently recovered from or
credited to customers under fuel and energy cost recovery
procedures. The impact to the fuel and energy cost recovery clauses
may be either positive or negative depending on whether the Company
is a net buyer or seller of electricity during such periods and the
open commitments which exist at such times. The impact of such price
volatility was insignificant to the Company in the first quarter 2000
and 1999 periods because changes are passed to customers through
operation of fuel clauses.
A fuel clause will cease to exist for the Company's West
Virginia jurisdiction when the deregulation plan is implemented
which is expected to occur in mid-2001. The Company will then
assume the risks and benefits of changes in fuel and purchased
power costs and sales of transmission services and bulk power in
the West Virginia jurisdiction.
OPERATING EXPENSES
Fuel expenses for the first quarter of 2000 decreased 3% due
to a 6% decrease in average fuel prices, offset in part by a 3%
increase related to kWh's generated. The decrease in average
fuel prices was due to renegotiated fuel contracts.
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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:
Purchased Power and Exchanges, Net
Three Months Ended
March 31
2000 1999
(Millions of Dollars)
Nonaffiliated transactions:
Purchased power:
From PURPA generation* $18.1 $18.5
Other 7.1 2.5
Purchased gas 5.7
Power exchanges, net 1.6 .7
Affiliated transactions:
AGC capacity charges 5.2 4.8
Purchased power and exchanges, net $37.7 $26.5
*PURPA cost (cents per kWh) 5.4 cents 5.4 cents
The increase in other purchased power and the purchase of
gas in the first quarter of 2000 was due primarily to serve the
customers acquired through the acquisition of West Virginia
Power.
The increase in other operation expenses of $2.1 million was
due to expenses associated with serving the customers acquired
through the acquisition of the assets of West Virginia Power and
increased salaries and wages.
The increase in maintenance expenses was due to increased
power station maintenance and to transmission and distribution
(T&D) maintenance expenses related to the West Virginia Power
acquisition. 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 and amortization expense in the first quarter
of 2000 increased due to increased investment.
Taxes other than income taxes increased $1.9 million in the
first quarter of 2000 due to increased West Virginia Business and
Occupation Taxes and FICA taxes due in part to the acquisition of
West Virginia Power.
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Federal and state income taxes increased $2.0 million
primarily due to increased taxable income.
The increase in other income, net of $.7 million was
primarily due to increased interest income on investments and
increased equity in earnings from the Company's 27% owned
subsidiary, AGC.
The increase in interest on long-term debt in the first
quarter of 2000 of $2.1 million resulted primarily from increased
average long-term debt outstanding primarily due to the
acquisition of West Virginia Power in December 1999.
The extraordinary charge in the first quarter of $96.7
million ($58.2 million, net of taxes) was required to reflect a
write-off by the Company of net regulatory assets determined to
be unrecoverable from customers and establishment of a rate
stabilization account for residential and small commercial
customers as required by the deregulation plan. The
extraordinary charge was a result of West Virginia legislation
requiring deregulation of electric generation. See Note 5 to the
financial statements for additional information.
Financial Condition and Requirements
The Company's discussion of Financial Condition,
Requirements, and Resources and Significant Continuing Issues in
its Annual Report on Form 10-K for the year ended December 31, 1999
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.
* Impact of Change in Short-term Interest Rate
A one percent increase in the short-term borrowing interest
rate would increase projected interest expense by approximately
$.1 million for the nine months ended December 31, 2000 based on
projected short-term borrowings.
* Environmental Issue
As previously reported, the Environmental Protection
Agency's (EPA) nitrogen oxides (NOx) State Implementation Plan
(SIP) call regulation has been under litigation and on March 3,
2000, the District of Columbia Circuit Court of Appeals issued a
decision that basically upheld the regulation. However, an
appeal of that decision was filed in April 2000 by the state and
industry litigants. A court decision on whether to grant an
appeal is expected within a few months. If the appeal is
granted, a final decision could be issued by Spring 2001. Also
in April 2000, the EPA filed a motion with the court to lift the
previous court ordered stay of the September 1999 SIP submittal
deadline by which the states must file their compliance plans to
implement the NOx SIP call regulation. If the court grants the
EPA's request, the new SIP submittal deadline would be September
1, 2000, and the compliance due date would remain May 1, 2003. A
court decision on whether to grant EPA's motion is expected
within a few months.
<PAGE>
- 17 -
* Electric Energy Competition
The electricity supply segment of the electric industry in
the United States is becoming increasingly competitive. The
national Energy Policy Act of 1992 deregulated the wholesale
exchange of power within the electric industry by permitting the
Federal Energy Regulatory Commission 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 more competitive as companies are
engaging 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. 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. Legislation before
the U.S. Congress to restructure the nation's electric utility
industry cleared an important hurdle on October 28, 1999, when a
House Commerce Committee subcommittee gave its approval to a
bill. The bill will now move on to the full Commerce Committee.
In the absence of federal legislation, state-by-state
implementation of deregulation of electric generation is under
way. The five states in which the Company and its affiliates
serve customers are at various stages of implementation or
investigation of programs that allow customers to choose their
electric supplier. Pennsylvania is furthest along with a retail
program in place. Maryland has approved a deregulation plan for
the Company's affiliate, Potomac Edison, which will begin July 1,
2000. West Virginia passed legislation approving a deregulation
plan for the Company and its affiliate, Potomac Edison, which is
expected to be implemented in mid-2001. Ohio and Virginia have
passed legislation to adopt customer choice which requires
further action by the regulatory agencies in those states
regarding specific deregulation plans for the Company and its
affiliates.
Activities at the Federal Level
The Company 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 Company unless certain outmoded and
anti-competitive laws, specifically the PUHCA and Section 210
(Mandatory Purchase Provisions) of the Public Utility Regulatory
Policies Act of 1978 (PURPA), are repealed or significantly
revised. The Company continues to advocate the repeal of PUHCA
and Section 210 of PURPA on the grounds that they are obsolete
and anti-competitive and that PURPA results in utility customers
paying above-market prices for power. H.R. 2944, which was
sponsored by U.S. Representative Joe Barton, was favorably
reported out of the House Commerce Subcommittee on Energy and
Power. While the bill does not mandate a date certain for
customer choice, several key provisions favored by the Company
are included in the legislation, including an amendment that
allows existing state restructuring plans and agreements to
remain in effect. Other provisions address important Company
priorities by repealing PUHCA and
<PAGE>
- 18 -
the mandatory purchase provisions of PURPA. Consensus remains
elusive, with significant hurdles remaining in both houses of
Congress. It is uncertain whether momentum on the issue will
result in legislation in 2000.
The Company has franchised regulated customers in Ohio and
West Virginia.
Ohio Activities
On June 22, 1999, the Ohio General Assembly passed
legislation to restructure its electric utility industry.
Governor Taft added his signature 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 (Ohio PUC). On January 3, 2000, the Company
filed a transition plan with the Ohio PUC, including its claim
for recovery of stranded costs of $21.3 million. The Ohio PUC is
expected to hold hearings on the Company's transition plan filing
and issue a decision by October 2000. Rulemaking proceedings to
implement customer choice are ongoing at the Ohio PUC.
West Virginia Activities
In March 1998, legislation was passed by the West Virginia
Legislature that 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. In January 2000,
the W.Va. PSC submitted a restructuring plan to the legislature
for approval that would open full retail competition on January
1, 2001. Generation would be deregulated and electricity rates
initially would be reduced for large commercial and industrial
customers and then frozen for all customers for four years, with
power supply rates gradually transitioning to market rates over
the next six years. Other highlights of the plan include the
ability to transfer generation assets, the transfer of control of
transmission to a regional transmission organization by 2003, a
utility-funded rate stabilization deferral mechanism to offset
residential and small commercial rates in later years, a wires
charge for customers who shop, and a systems benefit charge to
assist low income customers and displaced employees in utility
and related industries. The plan was endorsed by virtually all
of the interested parties, including the Company and it's
affiliate, Potomac Edison. On March 11, 2000, the West Virginia
Legislature approved the Commission's plan, but assigned the tax
issues surrounding the plan to the 2000 Legislative Interim
Committees to recommend the necessary tax changes involved and
come back to the Legislature in 2001 for approval of those
changes and authority to implement the plan. The start date of
competition is contingent upon the necessary tax changes being
made and approved by the legislature. The Company expects that
implementation of the deregulation plan will occur in mid-2001.
The W. Va. PSC is currently in the process of developing the
rules under which competition will occur. Associated rulemaking
proceedings are scheduled for the remainder of this year.
<PAGE>
- 19 -
The status of electric energy competition in Maryland,
Pennsylvania, and Virginia in which affiliates of the Company
serve are as follows.
Maryland Activities
On September 23, 1999, a settlement agreement between the
Company's affiliate, Potomac Edison, the Staff of the Maryland
Public Service Commission (Maryland PSC), and other parties
working to implement customer choice and deregulation of electric
generation for Potomac Edison in Maryland was filed with the
Maryland PSC. On December 23, 1999, Maryland PSC approved the
settlement agreement, which provides nearly all of Potomac
Edison's 211,000 Maryland customers with the ability to choose an
electric generation supplier starting July 1, 2000. Potomac
Edison filed an application on December 15, 1999, to transfer its
Maryland generating assets at book value to an affiliate in
accordance with Section 7-508 of the Electric Customer Choice and
Competition Act of 1999. A Maryland PSC decision approving the
transfer of the generating assets is expected prior to July 1,
2000.
Pennsylvania Activities
As of January 2, 2000, all electricity customers in
Pennsylvania had the right to choose their electric suppliers.
The number of customers who have switched suppliers and the
amount of electrical load transferred in Pennsylvania far exceed
that of any other state so far. However, for the Company's
affiliate, West Penn Power Company, less than 12,500 of its
680,500 Pennsylvania customers have chosen an alternate energy
supplier. West Penn Power Company has retained about 98% of its
Pennsylvania customers through April 1, 2000. More than 100
electric generation suppliers have been licensed to sell to
retail customers in Pennsylvania
Virginia Activities
On March 25, 1999, Governor Gilmore signed the Virginia
Electric Utility Restructuring Act (Restructuring Act) passed by
the Virginia General Assembly. All utilities must submit a
restructuring plan by January 1, 2001, to be effective on January
1, 2002. Customer choice will be phased in beginning on January
1, 2002, with full customer choice by January 1, 2004. The
Restructuring Act was amended during the 2000 General Assembly
legislative session. In addition to a number of clarifying and
technical changes, the amendments direct the State Corporation
Commission to prepare for legislative approval a plan for
competitive metering and billing and authorize the Commission to
implement a consumer education program on electric choice funded
through the Commission's regulatory tax. Legislation was also
adopted in 2000 governing the ability of rural electric
cooperatives to engage in competitive businesses, including
certain restrictions on the competitive sale of electricity by
cooperatives and their affiliates.
Various rulemaking proceedings to implement customer choice
are ongoing before the State Corporation Commission.
<PAGE>
- 20 -
Accounting for the Effects of Price Deregulation
In July 1997, the Emerging Issues Task Force (EITF) of the
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 SFAS No. 71 for the generation portion
of their business when a deregulation plan is in place and its
terms are known. In accordance with guidance of EITF Issue No. 97-
4, the Company has discontinued the application of SFAS No. 71 to
its electric generation business in West Virginia. The
legislation passed in Ohio established a definitive process for
transition to deregulation and market-based pricing for electric
generation. However, the deregulation plan and its terms in Ohio
will not be known until relevant regulatory proceedings are
complete and final orders are received. The Company expects that
charges to earnings, if any, due to discontinuing SFAS No. 71 for
the electric generation portion of its business in Ohio will be
less than $15 million, pre-tax.
<PAGE>
- 21 -
MONONGAHELA POWER COMPANY
Part II - Other Information to Form 10-Q
for Quarter Ended March 31, 2000
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 17, 2000. 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) The Company filed a Form 8-K on March 9, 2000.
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, 2000
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