<PAGE>
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 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 November 14, 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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2
MONONGAHELA POWER COMPANY AND SUBSIDIARY
Form 10-Q for Quarter Ended September 30, 2000
Index
PART I - FINANCIAL INFORMATION: Page No.
Consolidated Statement of Operations - Three and
nine months ended September 30, 2000 and 1999 3
Consolidated Balance Sheet - September 30, 2000 4
and December 31, 1999
Consolidated Statement of Cash Flows - Nine months 5
ended
September 30, 2000 and 1999
Notes to Consolidated Financial Statements 6-11
Management's Discussion and Analysis of Financial 12-26
Condition and Results of Operations
PART II -OTHER INFORMATION 27-28
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3
MONONGAHELA POWER COMPANY AND SUBSIDIARY
Consolidated Statement of Operations
(Thousands of Dollars)
<TABLE>
<CAPTION>
Unaudited Unaudited
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
OPERATING REVENUES:
<S> <C> <C> <C> <C> <C> <C>
Residential $ 61,761 $ 59,191 $185,131 $163,633
Commercial 37,437 34,229 112,670 97,560
Industrial 56,878 52,744 168,312 159,721
Wholesale and other, including affiliates 34,848 24,737 88,207 72,986
Bulk power transactions, net 4,018 7,429 10,833 15,531
Total Operating Revenues 194,942 178,330 565,153 509,431
OPERATING EXPENSES:
Operation:
Fuel 40,041 39,406 112,425 111,319
Purchased power and exchanges, net 30,049 21,323 90,970 71,247
Gas purchases and production 5,437 - 13,757 -
Deferred power costs, net (2,884) 7,560 247 11,723
Other 27,940 21,802 76,728 64,347
Maintenance 16,009 16,006 50,637 48,226
Depreciation and amortization 17,245 15,303 50,758 45,951
Taxes other than income taxes 12,649 10,721 38,457 32,404
Federal and state income taxes 10,823 13,614 35,279 36,196
Total Operating Expenses 157,309 145,735 469,258 421,413
Operating Income 37,633 32,595 95,895 88,018
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction (27) 389 189 754
Other income, net 1,404 1,843 4,827 4,516
Total Other Income and Deductions 1,377 2,232 5,016 5,270
Income Before Interest Charges and
Extraordinary Charge, Net 39,010 34,827 100,911 93,288
INTEREST CHARGES:
Interest on long-term debt 10,029 7,980 29,124 23,397
Other interest 872 398 2,407 2,000
Allowance for borrowed funds used during
construction (281) (182) (704) (546)
Total Interest Charges 10,620 8,196 30,827 24,851
Consolidated Income Before Extraordinary Charge 28,390 26,631 70,084 68,437
Extraordinary Charge, net (1) - - (58,227) -
CONSOLIDATED NET INCOME $ 28,390 $ 26,631 $ 11,857 $ 68,437
</TABLE>
See accompanying notes to financial statements.
(1) See Note 4 in the notes to the consolidated financial statements.
* Certain amounts have been reclassified for comparative purposes.
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4
MONONGAHELA POWER COMPANY AND SUBSIDIARY
Consolidated Balance Sheet
(Thousands of Dollars)
<TABLE>
<CAPTION>
Unaudited Audited
September 30, December 31,
ASSETS: 2000 1999
Property, Plant, and Equipment:
<S> <C> <C>
Regulated operations $ 2,462,452 $ 2,127,465
Construction work in progress 41,854 46,138
2,504,306 2,173,603
Accumulated depreciation (1,136,674) (958,867)
1,367,632 1,214,736
Investments and Other Assets:
Allegheny Generating Company - common stock at equity 39,764 41,713
Excess of cost over net assets acquired 187,358 26,326
Other 230 170
227,352 68,209
Current Assets:
Cash 4,185 3,826
Accounts receivable:
Utility service 82,593 78,977
Gas 1,710 -
Affiliated and other 49,784 87,345
Allowance for uncollectible accounts (5,079) (4,133)
Materials and supplies - at average cost:
Operating and construction 22,365 22,127
Fuel 11,415 16,049
Prepaid taxes 17,720 23,320
Prepaid gas 31,476 -
Prepaid accounts 10,030 349
Other, including current portion of regulatory assets 3,508 4,359
229,707 232,219
Deferred Charges:
Regulatory assets 98,743 145,176
Unamortized loss on reacquired debt 12,109 16,810
Prepaid gas 10,000 10,000
Other 20,147 6,568
140,999 178,554
Total Assets $ 1,965,690 $ 1,693,718
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 294,550 $ 294,550
Other paid-in capital 164,941 2,441
Retained earnings 247,389 281,960
706,880 578,951
Preferred stock 74,000 74,000
Long-term debt and QUIDS 606,668 503,741
1,387,548 1,156,692
Current Liabilities:
Short-term debt 34,175 -
Notes payable to affiliate 36,400 28,650
Long-term debt due within one year 61,000 65,000
Accounts payable 51,686 40,016
Accounts payable to affiliates 29,002 67,312
Taxes accrued:
Federal and state income 5,437 2,260
Other 22,957 24,235
Interest accrued 9,868 5,883
Other 27,136 11,647
277,661 245,003
Deferred Credits and Other Liabilities:
Unamortized investment credit 12,396 14,007
Deferred income taxes 212,843 248,987
Regulatory liabilities 50,612 13,961
Other 24,630 15,068
300,481 292,023
Total Capitalization and Liabilities $ 1,965,690 $ 1,693,718
</TABLE>
See accompanying notes to financial statements.
* Certain amounts have been reclassified for comparative purposes.
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5
MONONGAHELA POWER COMPANY AND SUBSIDIARY
Consolidated Statement of Cash Flows
(Thousands of Dollars)
<TABLE>
<CAPTION>
Unaudited
Nine Months Ended
September 30
2000 1999
CASH FLOWS FROM OPERATIONS:
<S> <C> <C> <C> <C>
Consolidated net income $ 11,857 $ 68,437
Extraordinary charge, net of taxes 58,227 -
Consolidated income before extraordinary charge 70,084 68,437
Depreciation and amortization 50,758 45,951
Deferred investment credit and income taxes, net 221 (2,769)
Deferred power costs, net 247 11,723
Unconsolidated subsidiaries' dividends in excess of earnings 1,974 2,234
Allowance for other than borrowed funds used
during construction (189) (754)
Changes in certain assets and liabilities:
Accounts receivable, net 44,340 9,168
Materials and supplies 5,426 2,828
Prepayments (3,221) (15,555)
Accounts payable (43,251) 74,748
Taxes accrued 2,551 5,412
Interest accrued 1,250 1,666
Other, net 9,965 (4,443)
140,155 198,646
CASH FLOWS FROM INVESTING:
Construction expenditures (less allowance for other
than borrowed funds used during construction) (52,884) (40,856)
Acquisition of business (226,998) -
(279,882) (40,856)
CASH FLOWS FROM FINANCING:
Equity contribution from parent 162,500 -
Issuance of long-term debt 61,000 7,700
Retirement of long-term debt (65,000) -
Short-term debt, net 17,704 (49,000)
Funds on deposit with trustees 2,561 (5,366)
Notes payable to affiliates 7,750 -
Notes receivable from affiliates - (3,400)
Notes receivable from subsidiary - (54,400)
Dividends on capital stock:
Preferred stock (3,778) (3,778)
Common stock (42,651) (48,483)
140,086 (156,727)
NET CHANGE IN CASH 359 1,063
Cash at January 1 3,826 1,835
Cash at September 30 $ 4,185 $ 2,898
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amount capitalized) 26,581 22,052
Income taxes 31,216 33,751
</TABLE>
See accompanying notes to financial statements.
* Certain amounts have been reclassified for comparative purposes.
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6
MONONGAHELA POWER COMPANY AND SUBSIDIARY
Notes to Consolidated 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
consolidated 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
consolidated financial statements appearing on pages 3 through 5 and
these notes to consolidated financial statements are unaudited. In
the opinion of the Company, such consolidated 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 September 30, 2000, the results of
operations for three and nine months ended September 30, 2000 and
1999, and cash flows for the nine months ended September 30, 2000 and
1999. Certain prior period amounts in these financial statements and
notes have been reclassified for comparative purposes.
2.For purposes of the Consolidated Balance Sheet and Consolidated
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 an affiliate of the Company owns 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 statement of operations information for
AGC:
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
(Thousands of Dollars)
Electric operating
revenues: $17,257 $18,072 $51,771 $53,739
Operation and
maintenance
expense 1,423 1,207 3,747 4,122
Depreciation 4,242 4,245 12,728 12,735
Taxes other than income 1,145 1,137 3,359 3,398
taxes
Federal income taxes 1,415 2,662 5,383 7,622
Interest charges 3,400 3,305 10,054 9,993
Other income, net (282) - (285) (2)
Net income $ 5,914 $5,516 $16,785 $15,871
The Company's share of the equity in earnings above was $1.6
million and $1.5 million for each of the three month periods ended
September 30, 2000 and 1999, respectively, and $4.5 million and
$4.3 million for the nine months ended September 30, 2000 and 1999,
respectively, and is included in other income, net, on the
Company's Consolidated Statement of Operations.
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 that implementation of the
deregulation plan will occur in mid-2001 if the Legislature approves
the necessary tax law changes during their next session in the first
quarter of 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 file a petition seeking W.Va. PSC
approval to transfer its West Virginia jurisdictional generating
assets (approximately 2,040 MW) to its non-regulated generation
affiliate, Allegheny Energy Supply Company, LLC (Allegheny Energy
Supply), at book value. Also, based on a final order issued by the
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8
W.Va. PSC on June 23, 2000, the West Virginia jurisdictional assets
of the Parent's subsidiary, The Potomac Edison Company (Potomac
Edison), were transferred to Allegheny Energy Supply at book value on
August 1, 2000, in conjunction with the Maryland law that allows
generating assets to be transferred to non-regulated ownership.
* 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 effective
July 1, 2000.
* 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.
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 (FASB) Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation," to that separable portion of its
business.
As required by EITF 97-4, the Company discontinued the application
of SFAS No. 71 for its West Virginia jurisdiction's electric
generating operations 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
5.On October 5, 2000, the Public Utilities Commission of Ohio
(Ohio PUC) approved a settlement to implement a restructuring plan
for the Company. The plan will allow the Company's 29,000 Ohio
customers to choose their electricity supplier starting January 1,
2001. Below are the highlights of the plan.
* The Company will be permitted to transfer approximately 325 MW
of Ohio jurisdictional generating assets to its unregulated
affiliate, Allegheny Energy Supply, at net book value as of January
1, 2001.
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9
* Residential customers will receive a five percent reduction in
the generation portion of their electric bills during a five-year
market development period beginning on January 1, 2001. These rates
will be frozen for the five years.
* For commercial and industrial customers, existing generation
rates will be frozen at the current rates for the market development
period, which begins on January 1, 2001. The market development
period is three years for large commercial and industrial customers
and five years for small commercial customers.
* The Company will collect from shopping customers a regulatory
transition charge of $0.0008 per kilowatt-hour (kWh) for the market
development period.
* Allegheny Energy Supply will be permitted to offer competitive
generation service throughout Ohio.
* Additional taxes resulting from the competition legislation will
be deferred for up to two years as a regulatory asset.
As a result of the Ohio PUC approval of the settlement, the Company
expects to record an extraordinary charge in the fourth quarter of
2000 under the provisions of SFAS No. 101 for the estimated amount
of unrecoverable net regulatory assets under the deregulation plan.
The Company estimates the extraordinary charge from the Ohio
deregulation plan to be $8.1 million before taxes ($4.9 million
after taxes).
6.The Consolidated Balance Sheet includes the amounts listed below
for generation assets not subject to SFAS No. 71.
September December
2000 1999
(Millions of Dollars)
Property, plant, and equipment $862.0 $ -
Amounts under construction included above 23.0 -
Accumulated depreciation (469.5) -
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 the Parent 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 Company for the
third quarter of 2000 and 1999 were $43.6 million and $27.1 million,
respectively. The total billings by AESC (including capital) to the
Company for the nine months ended September 30, 2000 and 1999 were
$105.2 million and $83.8 million, respectively. The Company buys
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10
power from and sells power to its affiliates at tariff rates approved
by the FERC.
8.The Company's principal operating segment is regulated
operations. The regulated operations segment, previously referred to
as the utility segment, operates electric transmission and
distribution systems and natural gas distribution systems in
regulatory jurisdictions which have not yet implemented deregulation
of electric generation.
The Company and its regulated affiliates, Potomac Edison and West
Penn Power Company (West Penn), collectively now doing business as
Allegheny Power, are engaged in the purchase, transmission and
distribution of electric energy. Also, with the Company's purchase
of West Virginia Power in December 1999 and Mountaineer Gas Company
(Mountaineer Gas) in August 2000, Allegheny Power is now involved
with the delivery and procurement of natural gas. In addition, the
Company is engaged in the generation and sale of electric energy.
9.A Securities and Exchange Commission (SEC) announcement at the
March 16, 2000 EITF meeting requires companies to disclose their
accounting policy for repair and maintenance costs incurred in
connection with planned major maintenance activities. For the
Company, maintenance expenses represent costs incurred to maintain
the power stations, the transmission and distribution (T&D) system,
and general plant and reflect routine maintenance of equipment and
right-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. Maintenance costs are
expensed in the year incurred. Power station major maintenance costs
are expensed within the year based on estimated annual costs and
estimated generation. T&D right-of-way vegetation control costs are
expensed within the year based on estimated annual costs and
estimated sales. Power station major maintenance accruals and T&D
right-of-way vegetation control accruals are not intended to accrue
for future years' costs.
10.On August 18, 2000, the Company completed the purchase of
Mountaineer Gas, a natural gas sales, transportation, and
distribution company serving southern West Virginia and the northern
and eastern panhandles of West Virginia, from Energy Corporation of
America (ECA). The acquisition included the assets of Mountaineer
Gas Services, which operates natural gas-producing properties,
natural gas-gathering facilities, and intrastate transmission
pipelines. The acquisition increased the Company's number of gas
customers in West Virginia by about 200,000 customers in a region
where the Company already provides energy services.
The Company acquired Mountaineer Gas for $322.8 million, which
includes the assumption of $100.1 million of existing long-term
debt. In accordance with the purchase agreement, the Company
accrued a $2.9 million estimated liability for an additional
payment to ECA related to working capital and construction
expenditure adjustments to the purchase price. The acquisition has
been recorded using the purchase method of accounting. The table
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11
below shows the allocation of the purchase price to assets and
liabilities acquired:
Millions of Dollars
Purchase price $325.7
Direct costs of the acquisition 2.6
Total acquisition cost 328.3
Less assets acquired:
Utility plant 300.2
Accumulated depreciation (144.8)
Utility plant, net 155.4
Investments and other assets
Current assets 45.9
Deferred charges 23.8
Total assets acquired (excluding 225.1
goodwill)
Add liabilities acquired:
Current liabilities 47.9
Deferred credits and other liabilities 10.9
Total liabilities acquired 58.8
Excess of cost over net assets acquired $162.0
The Company is amortizing the excess of cost over net assets
acquired on a straight-line basis over 40 years.
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12
MONONGAHELA POWER COMPANY AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
COMPARISON OF THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2000
WITH THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999
The Notes to Financial Statements and Management's Discussion
and Analysis of Financial Condition and Results of Operations in the
Monongahela Power Company's (the Company) 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
Management's discussion and analysis of financial condition and
results of operations contains forecast information items that are
"forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. These include statements with respect
to deregulation activities and movements toward competition in states
served by the Company and 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 Nine Months 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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13
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 Note 4 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
On August 18, 2000, the Company completed the purchase of
Mountaineer Gas Company (Mountaineer Gas), a natural gas sales,
transportation, and distribution company serving southern West
Virginia and the northern and eastern panhandles of West Virginia,
from Energy Corporation of America (ECA) for $322.8 million (which
includes the assumption of $100.1 million of existing long-term
debt). In accordance with the purchase agreement, the Company
accrued a $2.9 million estimated liability for an additional payment
to ECA related to working capital and construction expenditure
adjustments to the purchase price. The acquisition included the
assets of Mountaineer Gas Services, which operates natural gas-
producing properties, natural gas-gathering facilities, and
intrastate transmission pipelines. The acquisition increased the
Company's number of gas customers in West Virginia by about 200,000
customers in a region where the Company already provides energy
services. (See Note 10 to the consolidated financial statements for
additional information.)
Acquisition of West Virginia Power
In December 1999, the Company purchased from UtiliCorp United
Inc. the assets of West Virginia Power Company (West Virginia Power),
an electric and natural gas distribution company located in southern
West Virginia, for approximately $95 million. In conjunction with the
acquisition of West Virginia Power's assets, the Company purchased
for $2.1 million the assets of a heating, ventilation, and air
conditioning business.
Transfer of Generation Assets
West Virginia
On June 23, 2000, the W.Va. PSC issued an order regarding the
transfer of the generation assets of the Company. In part, the order
requires, that after implementation of the deregulation plan, the
Company file with the W.Va. PSC a petition seeking a Commission
finding that a proposed transfer of generation assets complies with
the conditions of the deregulation plan. The June 23, 2000 order
also permits the Company to submit a petition to the Commission
seeking approval to transfer its West Virginia generation assets
prior to the implementation of the deregulation plan. A filing
before the implementation of the deregulation plan is required to
include commitments to the consumer and other protections contained
in the deregulation plan. On August 15, 2000 and supplemented on
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14
October 31, 2000, the Company filed a petition seeking W.Va. PSC
approval to transfer its West Virginia assets to its unregulated
affiliate, Allegheny Energy Supply, LLC (Allegheny Energy Supply), on
or after January 1, 2001 contemporaneously with the transfer of its
Ohio generation assets.
Ohio Transition Plan
The Company reached a stipulated agreement with major parties on a
transition plan to bring electric choice to its 29,000 Ohio
customers. The stipulation was filed with the Ohio Public Utilities
Commission (Ohio PUC) on June 22, 2000. Following are the highlights
of the agreement:
* The Company will be permitted to transfer approximately 325 MW
of Ohio jurisdictional generating assets to its unregulated
affiliate, Allegheny Energy Supply, at net book value as of January
1, 2001.
* Residential customers will receive a five percent reduction in
the generation portion of their electric bills during a five-year
market development period beginning on January 1, 2001. These rates
will be frozen for the five years.
* For commercial and industrial customers, existing generation
rates will be frozen at the current rates for the market development
period, which begins on January 1, 2001. The market development
period is three years for large commercial and industrial customers
and five years for small commercial customers.
* The Company will collect from shopping customers a regulatory
transition charge of $0.0008 per kilowatt-hour (kWh) for the market
development period.
* Allegheny Energy Supply will be permitted to offer competitive
generation service throughout Ohio.
* Additional taxes resulting from competition legislation will be
deferred for up to two years as a regulatory asset.
On October 5, 2000, the Ohio PUC approved the Company's plan
pending a review period.
Rate Matters
As previously reported, the W.Va. PSC entered an order to
initiate a fuel review proceeding to establish a fuel increment in
rates for the Company and its 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
its affiliate's, Potomac Edison, fuel rates by $8.0 million was
scheduled to become effective March 15, 2000. On June 23, 2000, the
W.Va. PSC approved a Joint Stipulation and Agreement for Settlement,
stating agreed-upon rates designed to make the rates of the Company
and its affiliate, Potomac Edison, consistent. Under the terms of
the settlement, several tariff schedules, notably those available to
residential and small commercial customers, will require several
incremental steps to reach the agreed-upon rate level. The
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15
settlement rates will result in a combined revenue reduction for the
Company and its affiliate, Potomac Edison, of approximately $.3
million for 2000 increasing over 8 years to an annual reduction of
approximately $1.7 million. Offsetting the decrease in rates, the
settlement approved by the W.Va. PSC directs the Company to amortize
the existing over collected deferred fuel balance as of June 30, 2000
(approximately $16.0 million) as a reduction of expenses over a four
and one-half year period beginning July 1, 2000. Also, July 1, 2000,
Potomac Edison and the Company ceased their expanded net energy cost
(fuel clause) as part of the settlement.
Allegheny Power Forms New Independent Transmission Affiliation
Allegheny Energy, Inc.'s (the Parent) regulated subsidiaries,
the Company, Potomac Edison, and West Penn Power Company (West Penn),
collectively doing business as Allegheny Power, announced on October
5, 2000, that it signed a Memorandum of Agreement with Pennsylvania-
New Jersey-Maryland Interconnection, LCC (PJM) to develop a new
affiliation. The alliance was outlined in a filing submitted to the
Federal Energy Regulatory Commission (FERC) on October 16, 2000, in
order to meet the requirements of FERC's Order 2000.
FERC's Order 2000 requires all electric utilities, not currently
in an independent system operator (ISO), to file a plan on how they
would participate in a regional transmission organization (RTO),
those entities that oversee and control the power grid. Although PJM
is an ISO, Allegheny Power will not join PJM, but will pursue the
development of an independent transmission company, working within
the PJM framework.
Allegheny Power will lead the new initiative, known as PJM West,
which will allow transmission service to all market participants
while simultaneously expanding the PJM market. The Company's
unregulated affiliate, Allegheny Energy Supply, will benefit from the
PJM West initiative by having its generation within PJM, opening
markets, and making the generation more competitive in the current
PJM region.
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. Packets of information about the Allegheny Energy
companies (the System) releases were provided to the media in the
System's area and posted on the Parent's web site. The System filed
its 1999 TRI report with the Environmental Protection Agency (EPA)
prior to the July 1, 2000 deadline date, reporting 27.5 million
pounds of total releases for calendar year 1999.
Review of Operations
EARNINGS SUMMARY
Earnings for the third quarter of 2000 was $28.4 million
compared to $26.6 million for the corresponding 1999 period.
<PAGE>
16
Earnings for the first nine months of 2000, excluding an
extraordinary charge of $58.2 million, net of taxes, was $70.1
million compared with $68.4 million in the corresponding 1999 period.
The increases in earnings were primarily due to increases in
operating revenues resulting from increased sales to affiliated
companies.
The nine months ended September 2000 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 net income for the first nine months of 2000 was $11.9
million.
SALES AND REVENUES
The major retail customer classes (residential, commercial, and
industrial) include electric and gas revenues as shown below:
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
(Millions of Dollars)
Electric revenues $147.3 $146.2 $444.4 $420.9
Gas revenues 8.8 - 21.7 -
Total retail
revenues $156.1 $146.2 $466.1 $429.9
Percentage changes in electric revenues and kWh sales by major
retail customer classes were:
Change from Prior Periods
Three Months Ended Nine Months Ended
September 30 September 30
Revenues kWh Revenues kWh
Residential (4.2%) (5.5%) 4.6% 3.9%
Commercial 7.6 11.5 10.8 12.9
Industrial 2.1 6.2 3.5 7.3
Total 0.8% 3.9% 5.6% 7.4%
The third quarter of 2000 includes residential gas revenues of
$5.1 million, $0.6 million in commercial, and $3.1 million industrial
gas revenues related to the Company's acquisition of the assets of
West Virginia Power in December 1999 and Mountaineer Gas in August
2000.
The first nine months of 2000 includes residential gas revenues
of $14.0 million, $4.5 million in commercial, and $3.2 million
industrial gas revenues related to the Company's acquisition of the
assets of West Virginia Power and Mountaineer Gas.
The decrease in residential kWh sales for the three months ended
September 30, 2000, which is more weather sensitive than the other
classes, was primarily related to decreased usage by customers. The
<PAGE>
17
increase in residential kWh sales for the nine months ended September
30, 2000 reflects the acquisition of the assets of West Virginia
Power.
Commercial kWh sales are also affected by weather, but to a
lesser extent than residential. The increases in commercial kWh
sales primarily reflects increased sales related to the acquisition
of the assets of West Virginia Power and Mountaineer Gas, and to a
lesser extent increased customer usage.
The increases in industrial kWh sales were primarily due to
increased kWh sales to iron and steel, chemical, and coal mining
customers.
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) through June 30, 2000 for West
Virginia and September 30, 2000 for Ohio. Effective July 1, 2000,
the Company's West Virginia jurisdiction ceased to have a fuel
clause. Through June 30, 2000 for West Virginia and September 30,
2000 for Ohio, changes in fuel revenues had no effect on the
Company's 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 a fuel clause.
Wholesale and other revenues were as follows:
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
Wholesale customers $ 1.3 $ 1.1 $ 4.0 $ 3.4
Affiliated companies 28.6 22.0 75.3 64.5
Street lighting and other 4.9 1.6 8.9 5.1
Total wholesale and
other revenues $34.8 $24.7 $88.2 $73.0
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 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 the Parent. Revenues from affiliated companies
increased $6.6 million and $10.8 million in the third quarter and
first nine months of 2000, respectively, due primarily to increased
sales to its unregulated affiliate, Allegheny Energy Supply. The
Company has a dispatch arrangement with Allegheny Energy Supply.
<PAGE>
18
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 three and nine months ended periods of 2000 and 1999
were as follows:
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
kWh Transactions (in
billions):
Bulk power - .1 .03 .2
Transmission and other
energy services
to nonaffiliated companies .67 .7 1.99 1.6
Total .67 .8 2.02 1.8
Revenues(Millions of
Dollars):
Bulk power $ - $2.9 $ .7 $ 5.9
Transmission and other
energy services
to nonaffiliated companies 4.0 4.5 10.1 9.6
Total $4.0 $7.4 $10.8 $15.5
Revenues from bulk power transactions decreased due to decreased
sales to power marketers and other utilities. This is a result of
increased affiliated sales due to a dispatch arrangement with its
unregulated affiliate, Allegheny Energy Supply.
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 six months of 2000 and nine months of 1999 periods because
changes are passed to customers through operation of fuel clauses.
The Company assumes 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. Effective January 1, 2001,
a fuel clause is expected to cease to exist for the Company's Ohio
jurisdiction.
OPERATING EXPENSES
Total fuel expenses for the third quarter of 2000 increased 2%
due to a 3% increase in kWhs generated and a 1% increase in average
fuel prices, offset by a 2% decrease due to efficiency.
Total fuel expenses for the first nine months of 2000 increased
1% due to a 2% increase in kWhs generated, offset by a 1% decrease
related to efficiency.
<PAGE>
19
Purchased power and exchanges, net, represents power purchases
from the 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 Nine Months Ended
September 30 September 30
2000 1999 2000 1999
(Millions of Dollars)
Nonaffiliated transactions:
Purchased power:
From PURPA generation* $17.4 $13.0 $53.5 $47.9
Other 6.8 4.1 17.4 9.4
Power exchanges, net - (.8) 1.6 (.7)
Affiliated transactions:
AGC capacity charges 5.9 5.0 18.5 14.6
Purchased power and
exchanges, net $30.1 $21.3 $91.0 $71.2
*PURPA cost (cents per kWh) 5.3 4.9 5.4 5.2
The increases in other purchased power in the third quarter and
first nine months of 2000 were due primarily to serve the customers
acquired through the acquisition of West Virginia Power.
The gas purchases and gas production of $5.4 million and $13.8
million for the third quarter and nine months ended September 30,
2000, respectively, reflects the acquisition of West Virginia Power
in December 1999 and Mountaineer Gas in August 2000.
Other operations expenses increased $6.1 million and $12.4
million in the third quarter and nine months ended September 30,
2000, respectively. The increases in both periods were primarily due
to expenses associated with serving the customers acquired through
the acquisition of West Virginia Power and Mountaineer Gas.
The increase in maintenance expenses for the nine months ended
September 30, 2000, is related to increased power station maintenance
and to transmission and distribution (T&D) maintenance expenses
associated with 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
<PAGE>
20
overhaul and the amount of work found necessary when the equipment is
dismantled.
Depreciation and amortization expense in the three and nine
months ended September 30, 2000 increased due to increased
investment, primarily the acquisition of the assets of West Virginia
Power and Mountaineer Gas.
Taxes other than income taxes increased $1.9 million and $6.1
million in the three and nine months ended September 30, 2000,
respectively, due to increased West Virginia Business and Occupation
Taxes due to the acquisition of West Virginia Power and the
settlement of audit issues.
The decrease in federal and state income taxes of $2.8 million
in the three months ended September 30, 2000 was primarily due to a
reversal of depreciation timing differences.
The increase in interest on long-term debt in the third quarter
and nine months ended September 30, 2000, respectively, resulted
primarily from increased average long-term debt outstanding primarily
due to the acquisition of West Virginia Power in December 1999 and
Mountaineer Gas in August 2000.
The extraordinary charge in the first nine months 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 4 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.
Financing
The Company and its affiliates use an internal money pool as a
facility to accommodate intercompany short-term borrowing needs, to
the extent that certain companies have funds available. The Company
had $36.4 million in money pool borrowings outstanding at September
30, 2000 recorded as notes payable to affiliates.
The Company redeemed $65.0 million of 5 5/8% series first
mortgage bonds in April 2000. On August 18, 2000, the Company
borrowed $61.0 million from a $100.0 million revolving credit
facility. The facility is priced off the London Interbank Offer Rate
<PAGE>
21
(LIBOR) three-month floating rate. The Company will borrow the
remaining amount of the facility, on an as needed basis, prior to the
generating asset transfer to Allegheny Energy Supply. The facility
will then be transferred to Allegheny Energy Supply concurrent with
the asset transfer.
On August 18, 2000, the Parent issued $165.0 million aggregate
principal amount of its 7.75% notes due 2005. The Parent contributed
$162.5 million of the proceeds from its financing to the Company.
The Company used the proceeds from the Parent, and the $61.0 million
borrowed under the revolving credit facility, in connection with the
purchase of Mountaineer Gas.
As part of the purchase of Mountaineer Gas on August 18, 2000,
the Company assumed $100.1 million of existing Mountaineer Gas debt.
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 $0.1
million for the three months ended December 31, 2000 based on
projected short-term borrowings.
Environmental Issue
As previously reported, the EPA's 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. On June 23, 2000, the Court denied the
request for the appeal. The Court also granted the EPA's request 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. The new SIP
submittal deadline is October 28, 2000 and the compliance due date
will remain May 1, 2003. The Company's compliance with such
stringent regulations will require the installation of expensive post-
combustion control technologies on most of its power stations, with
an estimated total capital cost of $96 million. Of that amount,
approximately $3 million was spent in 1999.
On August 2, 2000, the Parent received a letter from the EPA
requiring it to provide certain information on the following ten
electric generating stations: Albright, Armstrong, Fort Martin,
Harrison, Hatfield's Ferry, Mitchell, Pleasants, Rivesville, R. Paul
Smith, and Willow Island. These electric generating stations are now
owned by Allegheny Energy Supply and the Company. The letter
requested information under Section 114 of the federal Clean Air Act
to determine compliance with federal Clean Air Act and state
implementation plan requirements, including potential application of
federal New Source Performance Standards. In general, such standards
can require the installation of additional air pollution control
equipment upon the major modification of an existing facility.
<PAGE>
22
Similar inquiries have been made of other electric utilities and
have resulted in enforcement proceedings being brought in many cases.
The Company believes its generating facilities have been operated in
accordance with the Clean Air Act and rules implementing the Act.
The experience of other utilities, however, suggests that, in recent
years, the EPA may well have revised its interpretation of the rules
regarding the determination of whether an action at a facility
constitutes routine maintenance, which would not trigger the
requirements of the New Source Performance Standards, or a major
modification of the facility, which would require compliance with the
New Source Performance Standards. If federal New Source Performance
Standards were to be applied to these generating stations, in
addition to the possible imposition of fines, compliance would entail
significant expenditures. In connection with the deregulation of
generation, the Parent has agreed to rate caps in each of its
jurisdictions, and there are no provisions under those arrangements
to increase rates to cover such expenditures.
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 FERC to compel
electric utilities to allow third parties to sell electricity to
wholesale customers over their transmission systems. The Parent
continues to be an advocate of federal legislation to remove
artificial barriers to competition in electricity markets, avoid
regional dislocations and ensure level playing fields.
In addition, to the wholesale electricity market becoming more
competitive, the majority of states have taken active steps toward
allowing retail customers the right to choose their electricity
supplier.
The Parent is at the forefront of state-implemented retail
competition, having successfully negotiated settlement agreements in
all of the states the Operating Subsidiaries (the Company, Potomac
Edison, and West Penn) serve. Pennsylvania and Maryland have retail
choice programs in place. West Virginia's legislature has approved a
deregulation plan for the Company pending additional legislation
regarding tax revenues for state and local governments. Virginia,
Ohio, and West Virginia are in the process of developing rules to
implement choice.
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 Public Utilities Holding Company Act (PUHCA) and
Section 210 (Mandatory Purchase Provisions) of 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
<PAGE>
23
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 certain date 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 the mandatory purchase provisions of PURPA. Although there was
considerable activity and discussion on this bill and several other
bills in the House and Senate, that activity fell short of moving
consensus legislation forward prior to the August recess. Initial
momentum on the issue was not sufficient to achieve passage of
restructuring legislation this year. A new congress and
administration are expected to take up the issue early next year.
On December 15, 1999, the FERC issued Order 2000, which requires
all electric utilities not currently in an ISO to file a plan on how
they would participate in a RTO. RTOs are intended to oversee and
control the power grid in a more competitive marketplace. Allegheny
Power and other transmission-owning entities were required to file
with the FERC their plans for joining an RTO by October 16, 2000. On
October 5, 2000, Allegheny Power and the PJM announced that they had
signed a Memorandum of Agreement to develop a new affiliation. The
alliance was outlined in a filing submitted on October 16, 2000 to
the FERC in order to meet the requirements of FERC's Order 2000.
Although PJM is an ISO, Allegheny Power will not join PJM, but will
pursue the development of an independent transmission company,
working within the PJM framework. (See additional discussion on page
15.)
Ohio Activities
The Ohio General Assembly passed legislation in 1999 to
restructure its electric utility industry. 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.
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 Ohio PUC.
The Company reached a stipulated agreement with major parties on
a transition plan to bring electric choice to its 28,000 Ohio
customers. The stipulation was approved by the Ohio PUC on October
5, 2000, pending a 30 day review period. The restructuring plan
allows the Company to transfer its Ohio generating assets to
Allegheny Energy Supply at net book value on January 1, 2001. See
highlights of the agreement on page 14 under Ohio Transition Plan.
West Virginia Activities
In March 1998, the West Virginia Legislature passed legislation
that directed the W.Va. PSC 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. 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
<PAGE>
24
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 if the Legislature approves the necessary tax law changes.
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.
The status of electric energy competition in Maryland,
Pennsylvania, and Virginia in which affiliates of the Company serve
are as follows.
Maryland Activities
On June 7, 2000, the Maryland Public Service Commission
(Maryland PSC) approved the transfer of the generating assets of
Potomac Edison to Allegheny Energy Supply. The transfer was made on
August 1, 2000. Maryland customers of Potomac Edison had the right
to choose an alternative electric provider on July 1, 2000, although
the Commission has not yet finalized all of the rules that will
govern customer choice in the state. As of October 1, 2000, only 23
customers had switched to an alternate provider in Potomac Edison's
service territory.
On July 1, 2000, the Maryland PSC issued a restrictive order on
affiliated transactions and codes of conduct. Potomac Edison filed
an appeal in court on July 31, 2000, which included a request for a
stay of the Maryland PSC's order. The Potomac Edison's awaiting a
ruling from the court. The Maryland PSC is developing rules on
emissions disclosure and is also examining whether and how to require
renewable portfolio standards for retail suppliers in the state.
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. West Penn has retained over 98% of its Pennsylvania
customers as of September 30, 2000.
Virginia Activities
The Virginia Electric Utility Restructuring Act (Restructuring
Act) became law on March 25, 1999. 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 to direct the Virginia State Corporation
Commission (Virginia SCC) to prepare for legislative approval a plan
for competitive metering and billing and authorize the Commission to
<PAGE>
25
implement a consumer education program on electric choice funded
through the Commission's regulatory tax.
On July 11, 2000, the Virginia SCC issued an order approving
Potomac Edison's separation plan permitting the transfer of its
generating assets and the provision of the Phase I application.
Various rulemaking proceedings to implement customer choice are
ongoing before the Virginia SCC.
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. On October 5, 2000, the Ohio PUC
approved the Company's settlement plan pending a 30 day review
period. As a result, the Company expects to record an extraordinary
charge in the forth quarter of 2000 under the provisions of SFAS No.
101 for the estimated amount of unrecoverable net regulatory assets
under the deregulation plan. The Company estimates the extraordinary
charge from the Ohio deregulation plan to be $8.1 million before
taxes ($4.9 million after taxes).
Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 was
subsequently amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 - an amendment of FASB Statement No. 133"
and SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities an amendment of FASB Statement No. 133."
Effective January 1, 2001, the Company will implement the
requirements of these accounting standards.
These Statements establish accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. They require that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. The Statements require that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement or other
comprehensive income, and requires that a company formally document,
<PAGE>
26
designate, and assess the effectiveness of transactions that receive
hedge accounting.
The Parent has organized a cross-functional project team for
implementing SFAS No. 133. The team has substantially completed the
Company's inventory of financial instruments, commodity contracts,
and other commitments for the purpose of identifying and assessing
all of the Company's derivatives. The Company will record an asset
or liability on its balance sheet based on the fair value of any
contracts that meet the derivative criteria in SFAS No. 133 at the
adoption date. The fair values of these contracts will fluctuate
over time due to changes in the underlying commodity prices which are
influenced by various market factors, including weather and
availability of regional electric generation and transmission
capacity. It is anticipated that any contracts meeting SFAS No.
133's derivative criteria will increase the volatility in reported
earnings and other comprehensive income.
<PAGE>
27
MONONGAHELA POWER COMPANY AND SUBSIDIARY
Part II - Other Information to Form 10-Q
for Quarter Ended September 30, 2000
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(27) Financial Data Schedule
(12) Computation in Support of Earnings to Fixed Charges
For Nine Months
Ended September 30, 2000
(Thousands of
Dollars)
Earnings:
Net income* $ 70,084
Plus: Fixed Charges (see below) 32,891
Income taxes* 36,419
Amortization of capitalized 2
interest
Less: Capitalized interest (355)
Total earnings $139,041
Fixed Charges:
Interest on long-term debt $29,124
Other interest 2,407
Estimated interest component
of rentals 1,360
Total Fixed Charges $32,891
Ratio of Earnings for Fixed Charges 4.23
*Net income and income taxes excludes
Extraordinary charges
(b) Form 8-K Reporting Date - October 12, 2000.
Items reported: Other Events
Item 5 - The Company withdrew its proposal to amend its
Articles of Incorporation. The proposal would have removed
from the Articles a provision that limits the Company's
flexibility to issue or assume certain types of debt.
<PAGE>
28
Signature
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
MONONGAHELA POWER COMPANY
/s/ T. J. Kloc
T. J. Kloc, Controller
(Chief Accounting Officer)
November 14, 2000
