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 1-3376-2
THE POTOMAC EDISON COMPANY
(Exact name of registrant as specified in its charter)
Maryland and Virginia 13-5323955
(State(s) of Incorporation) (I.R.S. Employer Identification No.)
10435 Downsville Pike, Hagerstown, Maryland 21740-1766
Telephone Number - 301-790-3400
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, 22,385,000 shares of the Common Stock (no
par value) of the registrant were outstanding, all of which are held
by Allegheny Energy, Inc., the Company's parent.
<PAGE>
THE POTOMAC EDISON COMPANY
Form 10-Q for Quarter Ended September 30, 2000
Index
Page No.
PART I - FINANCIAL INFORMATION:
Statement of Operations - Three and nine months
ended September 30, 2000 and 1999 3
Balance Sheet - September 30, 2000
and December 31, 1999 4
Statement of Cash Flows - Nine months ended
September 30, 2000 and 1999 5
Notes to Financial Statements 6-10
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-27
PART II - OTHER INFORMATION 28
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<TABLE>
<CAPTION>
THE POTOMAC EDISON COMPANY
Consolidated Statement of Operations
(Thousands of Dollars)
Unaudited Unaudited
Three Months Ended Nine Months Ended
September 30 September 30
___________________ _________________
2000 1999 2000 1999
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Residential $ 66,320 $ 78,215 $242,514 $248,797
Commercial 38,479 43,472 123,928 126,637
Industrial 48,994 55,509 153,152 159,328
Wholesale and other,
including affiliates 32,746 2,594 61,293 12,250
Bulk power transactions, net 20,160 9,699 29,150 20,146
_______ _______ _______ _______
Total Operating Revenues 206,699 189,489 610,037 567,158
_______ _______ _______ _______
OPERATING EXPENSES:
Operation:
Fuel 13,247 37,461 81,909 106,677
Purchased power and exchanges, net 127,824 31,228 228,558 92,732
Deferred power costs, net (10,386) 5,356 (8,651) 14,250
Other 18,134 23,552 62,216 70,831
Maintenance 7,754 13,982 35,521 41,289
Depreciation and amortization 12,422 19,219 51,872 57,327
Taxes other than income taxes 10,326 13,068 36,274 38,353
Federal and state income taxes 2,913 11,275 27,369 38,713
_______ _______ _______ _______
Total Operating Expenses 182,234 155,141 515,068 460,172
_______ _______ _______ _______
Operating Income 24,465 34,348 94,969 106,986
_______ _______ _______ _______
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed
funds used during construction 186 232 423 558
Other income, net 189 2,701 3,722 6,404
_______ _______ _______ ________
Total Other Income and Deductions 375 2,933 4,145 6,962
_______ _______ _______ ________
Income Before Interest Charges
and Extraordinary Charge 24,840 37,281 99,114 113,948
_______ _______ _______ ________
INTEREST CHARGES:
Interest on long-term debt 8,681 10,758 30,690 32,112
Other interest 261 389 1,904 1,389
Allowance for borrowed funds used
during construction (116) (358) (652) (945)
_______ _______ _______ ________
Total Interest Charges 8,826 10,789 31,942 32,556
_______ _______ _______ ________
Consolidated Income Before
Extraordinary Charge 16,014 26,492 67,172 81,392
Extraordinary Charge, net - - (12,278) -
_______ _______ _______ _______
CONSOLIDATED NET INCOME $ 16,014 $ 26,492 $ 54,894 $ 81,392
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
Certain amounts have been reclassified for comparative purposes.
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<TABLE>
<CAPTION>
THE POTOMAC EDISON COMPANY
Consolidated Balance Sheet
(Thousands of Dollars)
<S> <C> <C>
Unaudited Audited
September 30, December 31,
2000 1999
ASSETS: _______________ ______________
Property, Plant, and Equipment:
Regulated operations $ 1,367,987 $ 2,268,750
Construction work in progress 16,304 53,354
_________ _________
1,384,291 2,322,104
Accumulated depreciation (505,120) (998,710)
_________ _________
879,171 1,323,394
Investments and Other Assets:
Allegheny Generating Company - common stock
at equity - 43,258
Other 372 410
_________ _________
372 43,668
Current Assets:
Cash and temporary cash investments 8,054 34,509
Accounts receivable:
Electric service 74,680 88,789
Affiliated and other 11,387 27,494
Allowance for uncollectible accounts (3,999) (3,534)
Notes receivable from affiliates 7,350 -
Materials and supplies - at average cost:
Operating and construction 11,825 26,047
Fuel - 15,584
Prepaid taxes 5,335 15,914
Other 4,398 2,877
_________ _________
119,030 207,680
Deferred Charges:
Regulatory assets 42,186 46,121
Unamortized loss on reacquired debt 12,149 14,226
Other 1,993 3,762
_________ _________
56,328 64,109
_________ _________
Total Assets $ 1,054,901 $ 1,638,851
========= =========
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 224 $ 447,700
Other paid-in capital 105,323 2,690
Retained earnings 202,178 250,032
_________ _________
307,725 700,422
Long-term debt and QUIDS 513,697 510,344
_________ _________
821,422 1,210,766
Current Liabilities:
Long-term debt due within one year - 75,000
Accounts payable 16,410 31,331
Accounts payable to affiliates 26,725 36,433
Taxes accrued:
Federal and state income 5,770 5,861
Other 10,044 19,211
Deferred power costs 12,938 7,859
Interest accrued 12,795 7,321
Maryland settlement 14,547 9,649
Other 6,432 15,662
_________ _________
105,661 208,327
Deferred Credits and Other Liabilities:
Unamortized investment credit 10,801 17,720
Deferred income taxes 72,411 159,351
Regulatory liabilities 39,858 25,319
Other 4,748 17,368
_________ _________
127,818 219,758
_________ _________
Total Capitalization and Liabilities $ 1,054,901 $ 1,638,851
========= =========
</TABLE>
See accompanying notes to financial statements.
Certain amounts have been reclassified for comparative purposes.
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<TABLE>
<CAPTION>
THE POTOMAC EDISON COMPANY
Consolidated Statement of Cash Flows
(Thousands of Dollars)
Unaudited
Nine Months Ended
September 30
____________________________
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Consolidated net income $ 54,894 $ 81,392
Extraordinary charge, net of taxes 12,278 -
________ ________
Consolidated income before extraordinary charge 67,172 81,392
Depreciation and amortization 51,872 57,327
Maryland settlement (3,545) 15,462
Deferred investment credit and income taxes, net 1,038 (10,542)
Deferred power costs, net (9,124) 14,250
Unconsolidated subsidiaries' dividends in excess of
earnings 980 2,315
Allowance for other than borrowed funds used
during construction (423) (558)
Changes in certain current assets and liabilities:
Accounts receivable, net 35,083 (35,594)
Materials and supplies 2,071 982
Prepaid taxes 6,302 2,241
Accounts payable (26,707) (35,867)
Taxes accrued (4,982) 10,555
Interest accrued 5,474 5,315
Other, net 6,820 5,286
________ ________
132,031 112,564
________ ________
CASH FLOWS FROM INVESTING:
Construction expenditures (less allowance for other
than borrowed funds used during construction) (56,422) (47,484)
________ ________
CASH FLOWS FROM FINANCING:
Retirement of preferred stock - (16,902)
Issuance of long-term debt 79,900 9,300
Retirement of long-term debt (75,000) -
Funds on deposit with trustees 3,133 (6,537)
Notes receivable from affiliates (7,350) 31,050
Dividends on preferred stock - (545)
Dividends on common stock (102,747) (79,019)
_________ ________
(102,064) (62,653)
_________ ________
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (26,455) 2,427
Cash and temporary cash investments at January 1 34,509 1,805
_________ ________
Cash and temporary cash investments at September 30 $ 8,054 $ 4,232
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amount capitalized) 25,452 26,143
Income taxes 30,026 39,836
</TABLE>
See accompanying notes to financial statements.
Certain amounts have been reclassified for comparative purposes.
<PAGE>
THE POTOMAC EDISON COMPANY
Notes to Financial Statements
1. The Potomac Edison Company (The Company) is a wholly-owned
subsidiary of Allegheny Energy, Inc. (Allegheny Energy). 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
September 30, 2000, the results of operations for the 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 revised for
comparative purposes.
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 owned 28% of the common stock of Allegheny
Generating Company (AGC) through July 31, 2000. On August 1, 2000,
the Company transferred its 28% ownership in AGC to Allegheny Energy
Supply Company, LLC (Allegheny Energy Supply) at book value due to
deregulation restructuring plans in Maryland, Virginia, and West
Virginia. An affiliate of the Company, the Monongahela Power Company
(Monongahela Power), owns the remainder. AGC was 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 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 FERC,
AGC's ROE was set at 11% for 1996 and will continue until the time
any affected party seeks renegotiation of the ROE.
<PAGE>
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
taxes 1,145 1,137 3,359 3,398
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 $.5 million
and $1.5 million for the three months ended September 30, 2000 and
1999, respectively, and $3.5 million and $4.4 million for the nine
months ended September 30, 2000 and 1999, respectively, and is
included in other income, net, on the Company's Statement of
Operations.
4. 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.
The Company and its regulated affiliates, Monongahela Power 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
Monongahela Power's purchase of West Virginia Power Company (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,
Monongahela Power is engaged in the generation and sale of electric
energy. The Company operates as a single regulated operations
segment in the states of Maryland, West Virginia, and Virginia.
5. 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:
<PAGE>
* 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's affiliate, Monongahela Power, 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 W.Va. PSC on June 23, 2000, the West Virginia
jurisdictional assets of the Company 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.
* Large commercial and industrial customers will receive a 3% rate
reduction effective July 1, 2000.
* A special "Rate Stabilization" account of $14.1 million was
established 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's (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.
<PAGE>
As required by EITF 97-4, the Company discontinued the application
of SFAS No. 71 for its West Virginia jurisdictions' electric
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 $12.3 million in March 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 $ 5.9 $ 3.6
Rate stabilization obligation 14.1 8.7
2000 extraordinary charge $20.0 $12.3
6. The 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 $7.3 $563.9
Amounts under construction included
above .8 17.6
Accumulated depreciation (4.7) (298.7)
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 (PUHCA). 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 nine months ended September 30, 2000 and 1999
were $83.2 million and $82.3 million, respectively. The Company
purchases power from its affiliate, Allegheny Energy Supply, under a
fixed price multi-year contract.
8. 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, ongoing maintenance expenses represent costs incurred to
maintain, 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 periodic storm damage on the T&D system. Maintenance costs
are expensed in the year incurred. T&D right-of-way vegetation
control costs are expensed within the year based on estimated annual
costs and estimated sales. T&D right-of-way vegetation control
accruals are not intended to accrue for future years' costs.
9. The pollution control notes related to the energy supply assets
transferred to Allegheny Energy Supply are included as debt in the
Company's financial statements because the Company is a co-obligor
for the debt. The Company accrues interest expense on the pollution
<PAGE>
control notes but Allegheny Energy Supply is responsible for the
payment of the pollution control notes interest and principal.
Allegheny Energy Supply's payment of interest is reflected in the
Company's financial statements as a reduction in interest accrued and
an increase in other paid-in capital.
10. On June 7, 2000, the Maryland Public Service Commission
(Maryland PSC) approved the transfer of the Maryland jurisdictional
share of the generating assets of the Company, to Allegheny Energy
Supply at net book value. On June 23, 2000, the W.Va. PSC issued an
order which, in part, authorized the Company to transfer at net book
value its West Virginia jurisdictional share of its generating assets
to an unregulated affiliate in conjunction with the Maryland
transfer. Also, on July 11, 2000, the Virginia State Corporation
Commission (Virginia SCC) authorized the transfer of the Virginia
jurisdictional share of the Company's generating assets, excluding
the hydroelectric assets located within the state of Virginia, to an
unregulated affiliate at net book value. On July 31, 2000, the SEC
approved these transfers of generating assets. On August 1, 2000,
the Company transferred 2,100 MW of its Maryland, Virginia, and West
Virginia jurisdictional generating assets to Allegheny Energy Supply
at net book value with the result of reducing the Company's common
equity by $345.4 million.
The net assets transferred to Allegheny Energy Supply are shown below:
(Millions of Dollars)
Property, plant, and equipment, net of
accumulated depreciation $446.5
Investment in AGC 42.3
Other assets 33.6
Liabilities 177.0
The Company no longer has ownership interest in generating assets
other than 5 MW in hydroelectric generating assets in Virginia.
11. In April 2000, the Company's shareholders amended its Articles
of Incorporation. Prior to the amendment and restatement, the
Company was authorized to issue 23,000,000 shares of common stock
without par value and 5,378,611 shares of preferred stock with $100
par value per share. The Company now has authority to issue
26,000,000 shares of common stock with $.01 par value per share and
10,000,000 shares of preferred stock with $.01 par value per share.
As a result of the change in par value, the Company's common stock
was reduced and other paid-in capital was increased by $447.5
million.
<PAGE>
THE POTOMAC EDISON COMPANY
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
Potomac Edison 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 Public 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 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 Effect of Certain Types
of Regulation," for the electric generation portion of its West
<PAGE>
Virginia operations and has adopted SFAS No. 101. "Accounting for the
Discontinuation of Application of FASB Statement No. 71."
Accordingly, the Company recorded an extraordinary charge of $20.0
million ($12.3 million after taxes) during the first nine months 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 5 to the financial
statements for details of the deregulation plan.
See Electric Energy Competition for more information regarding
restructuring in West Virginia.
Transfer of Generation Assets
Transfer of Potomac Edison Generation Assets to Allegheny Energy Supply
On August 1, 2000, the Company transferred 2,100 megawatts (MW)
of its Maryland, Virginia, and West Virginia jurisdictional
generating assets to Allegheny Energy Supply Company, LLC (Allegheny
Energy Supply) at net book value. State utility commissions in
Maryland, Virginia, and West Virginia approved the transfer of these
assets as part of deregulation proceedings in those states. The
Federal Energy Regulatory Commission (FERC) and the Securities and
Exchange Commission (SEC) also approved the transfer.
Pursuant to a series of fixed period contracts, Allegheny Energy
Supply supplies West Penn Power Company (West Penn) and the Company
with power through 2008. Under these contracts, Allegheny Energy
Supply provides these regulated electricity distribution affiliates
with the amount of electricity, up to their retail load, that they
may demand. These contracts represent approximately 90% of the
normal operating capacity of Allegheny Energy Supply's fleet of
generating assets and can be terminated by Allegheny Energy Supply
with 12 months' notice.
Allegheny Energy, Inc. (the Parent) is considering ways to
maximize the value of its generating assets, including by means of
partnering, selling all or a portion of the common stock of Allegheny
Energy Supply through an initial public offering, or combining a
partial initial public offering with a spin-off of the remaining
stock to the Parent's shareholders. The Parent will withhold any
decision until the Monongahela Power Company's (Monongahela Power)
generating assets are transferred to Allegheny Energy Supply.
Monongahela Power has requested approval from the W.Va. PSC to
transfer its West Virginia generation assets to Allegheny Energy
Supply on or after January 1, 2001, in conjunction with already
authorized transfer of the Ohio portion of those assets.
Virginia Separation Plan
In connection with the transfer of generating assets discussed
above, on May 25, 2000, the Company filed an application with the
Virginia State Corporation Commission (Virginia SCC) to separate its
approximately 380 MW of generating assets, excluding the
hydroelectric assets located within the state of Virginia, from its
transmission and distribution assets effective July 1, 2000. On July
11, 2000, the Virginia SCC issued an order approving the Company's
separation plan permitting the transfer of its Virginia generating
<PAGE>
assets to its unregulated generation affiliate, Allegheny Energy
Supply.
In conjunction with the separation plan, the Virginia SCC
approved a Memorandum of Understanding highlighted below:
* Effective with bills rendered on or after August 7, 2000, base
rates were reduced by $1 million.
* The Company will not file for a base rate increase prior to
January 1, 2001.
* Fuel rates were rolled into base rates with a decrease in annual
fuel revenues of $750,000 effective with bills rendered on or after
August 7, 2000. Effective August 2001, the annual fuel revenue
adjustment will drop to $250,000. Effective August 2002, the fuel
rate adjustment will be eliminated.
* Termination of the Company's fuel factor in Virginia effective
for bills rendered on or after August 7, 2000.
* The Company's agreement to operate and maintain its distribution
system in Virginia at or above historic levels of service quality and
reliability.
* The Company's agreement during default service period to
contract for generation service to be provided to customers at the
same costs that it would incur to serve customers from the units it
owned prior to the transfer of generation assets to Allegheny Energy
Supply.
On August 10, 2000, the Company applied to the Virginia SCC to
transfer its hydroelectric assets located within the state of
Virginia to Green Valley Hydro, LLC (a subsidiary). Commission
action is pending.
West Virginia Transfer of Monongahela Power Generation Assets to
Allegheny Energy Supply
On June 23, 2000, the W.Va. PSC issued an order regarding the
transfer of the generation assets of the Company's affiliate,
Monongahela Power. In part, the order requires that after
implementation of the deregulation plan, Monongahela Power 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 Monongahela
Power 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 October
31, 2000, Monongahela Power filed a petition seeking W.Va. PSC
approval to transfer its West Virginia assets to its unregulated
affiliate, Allegheny Energy Supply, on or after January 1, 2001
contemporaneously with the transfer of its Ohio generation assets.
<PAGE>
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 its affiliate,
Monongahela Power, to be effective July 1, 1999, through June 30,
2000. If an agreement was not reached, the proposed fuel rates which
would increase Monongahela Power's fuel rates by $10.9 million and
decrease the Company's 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
Monongahela Power 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 settlement rates will result
in a revenue reduction of approximately $0.3 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 and Monongahela Power to
amortize the existing overcollected 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, the Company and Monongahela Power ceased their expanded
net energy cost (fuel clause) as part of the settlement.
On March 24, 2000, the Maryland Public Service Commission
(Maryland PSC) issued an order requiring the Company to refund the
1999 deferred fuel balance overrecovery of approximately $9.9 million
to customers over a period of twelve months that began April 30, 2000.
On October 4, 2000, the Maryland PSC approved the Company's
filing which represents the final reconciliation of its deferred fuel
balance. The filing will refund to customers the $3.2 million
overrecovery balance existing in the Maryland deferred fuel account
as of September 30, 2000. The deferred fuel credit to customers
began in October 2000 and will be effective until the balance falls
to zero, which is projected to take twelve months. The refund of the
overrecovered balance does not affect the Company's earnings since
the overrecovered amounts have been deferred.
On April 12, 2000 the Maryland PSC approved the Power Sales
Agreement between the Company and Virginia Electric Power Company
covering the sale of the AES Warrior Run output to the wholesale
market for the period July 1, 2000 through December 31, 2000. The
AES Warrior Run cogeneration project was developed under the Public
Utility Regulatory Policies Act of 1978 (PURPA) and achieved
commercial operation on February 10, 2000. Under the terms of the
Maryland deregulation plan approved in 1999, the revenues from the
sale of the AES Warrior Run output are used to offset the capacity
and energy costs the Company pays to the AES Warrior Run cogeneration
project in determining amounts to be recovered from Maryland
customers.
As previously reported, the Company decreased the fuel portion
of Maryland customers' bills by about $6.4 million annually effective
with bills rendered on or after December 7, 1999, subject to refund,
based on the outcome of proceedings before the Maryland PSC. A
proposed order was issued on February 18, 2000, granting the
<PAGE>
requested decrease in the Company`s fuel rate, and on March 21, 2000
the proposed order became final. Effective July 1, 2000, coincident
with Customer Choice in Maryland, the fuel rates were rolled into
base rates.
On June 7, 2000, the Company's Maryland customers began
receiving an Earnings Sharing Credit on their electric bills. The
credit is the result of an agreement approved by the Maryland PSC
where the Company agreed to share one-half of its 1999 and 2000
earnings above an 11.4% return on equity with its customers.
During 1999, the Maryland PSC found that the Company exceeded
the threshold earnings level that triggers sharing. As a result, 50
percent of the amount above the threshold earnings amount, or $9.7
million, is being distributed to customers in the form of an Earnings
Sharing Credit. The credit will remain in affect through April 30,
2001.
Allegheny Power Forms New Independent Transmission Affiliation
The Parent's regulated subsidiaries, Monongahela Power, West
Penn, and the Company, 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 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 Parent's
subsidiary 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 Parent releases were
provided to the media in the Parent company's area and posted on the
Parent company's web site. The Parent 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.
<PAGE>
Review of Operations
EARNINGS SUMMARY
Earnings in the third quarter of 2000 were $16.0 million,
compared with $26.5 million in the corresponding 1999 period. For
the first nine months of 2000, earnings were $67.9 million, excluding
an extraordinary charge of $12.3 million, net of taxes, compared with
$81.4 million in the corresponding 1999 period. The decrease in
earnings for the three and nine months ended September 2000 was
primarily due to the August 1, 2000 transfer of the Company's 2,100
MW of generating capacity at net book value to Allegheny Energy
Supply, an unregulated wholly owned subsidiary of Allegheny Energy.
As a result of the transfer the Company only has 5 MW of
hydroelectric generating capacity in Virginia available for sale.
The first quarter extraordinary charge of $12.3 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.
SALES AND REVENUES
Percentage changes in revenues and kilowatt-hour (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 (15.2)% (7.2)% (2.5)% (.2)%
Commercial (11.5) 1.6 (2.1) 3.2
Industrial (11.7) .7 (3.9) 1.7
Total (13.2)% (1.7)% (2.8)% 1.3%
Residential kWh sales, which are more weather sensitive than the
other classes, experienced decreases for both the third quarter and
nine months ended September 30, 2000. The decreases for residential
kWh sales were due to changes in customer usage because of weather
conditions, which was offset in part by growth in the number of
customers.
Commercial kWh sales are also affected by weather, but to a
lesser extent than residential. The increases in commercial kWh
sales for the third quarter and nine months ended September 30, 2000
were primarily due to growth in the number of customers.
Industrial kWh sales for the third quarter and first nine months
of 2000 increased due to increased sales to primary metal industry
customers and food products customers.
The decreases in residential, commercial, and industrial
revenues in the three and nine months ended September 30, 2000
periods were due primarily to certain reductions applied to
<PAGE>
customers' revenues. These reductions included credits to customer
bills resulting from conditions within the Maryland settlement
agreements and in the third quarter an adjustment was made to
revenues related to overrecovery from the Warrior Run cogeneration
project. In addition, milder weather in the quarter and year-to-date
periods of 2000 led to lower residential kWh sales and revenues.
In October 1998, the Maryland PSC approved a settlement
agreement for the Company. Under the terms of that agreement, the
Company increased its rates $13 million in 1999 and 2000 and will
increase its rates an additional $13 million in 2001 (a $79 million
total revenue increase during 1999 through 2001). The increases are
designed to recover additional costs of about $131 million over the
1999 through 2001 period for capacity purchases from the AES Warrior
Run cogeneration project, net of alleged over-earnings of $52 million
for the same period. The net effect of these changes over the 2000
through 2001 time frame results in a pre-tax income reduction of $21
million in 2000 and $19 million in 2001. Also, the Company will
share on a 50% customer, 50% shareholder basis, earnings above a ROE
of 11.4% in Maryland for 1999 and 2000. This sharing occurs through
an annual true-up. The Company's revenues reflect an estimated
obligation for shared earnings above an 11.4% return on equity.
Based on 1999 results, the Company will return Maryland customers
$9.7 million in earnings sharing over the eleven month period
beginning with bills rendered June 7, 2000. An estimate of the
earnings sharing for 1999 results was accrued by the Company during
1999.
Effective July 1, 2000, the Company's Maryland jurisdiction
ceased to have a fuel clause under the terms of the September 23,
1999, settlement agreement. Also, effective July 1, 2000, a fuel
clause ceased to exist for the Company's West Virginia jurisdiction,
and effective August 2000, ceased to exist for the Company's Virginia
jurisdiction. Through June 30, 2000, 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 were passed on to customers by adjustment of customers'
bills through a fuel clause. Effective July 1, 2000, the Company
assumed the risk and benefits of changes in fuel and purchased power
costs and sales of transmission services and bulk power in its
Maryland and West Virginia jurisdictions, and in August for its
Virginia jurisdiction.
<PAGE>
Wholesale and other revenues were as follows:
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
(Millions of Dollars)
Wholesale customers $ 5.5 $5.8 $16.4 $16.2
Affiliated companies 24.5 2.8 39.4 8.8
Street lighting and other 2.0 .5 4.8 2.7
Settlement Revenues
(Deferred revenues) .8 (6.5) .7 (15.4)
Total wholesale and
other revenues $32.8 $2.6 $61.3 $12.3
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. Wholesale customer revenues in the third
quarter and first nine months of 2000 remained about the same as the
comparable 1999 periods.
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. Revenues from affiliated companies
increased $21.7 million and $30.6 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 in place with Allegheny Energy
Supply. On August 1, 2000, the Company transferred its generating
capacity to Allegheny Energy Supply.
Settlement deferred revenues result from settlement agreements
approved by the Maryland PSC and reflects $7.7 million revenue
deferred in 1999 and recorded in 2000.
<PAGE>
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
sales were as follows:
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
kWh Transactions (in billions):
Bulk Power .38 .07 .41 .19
Transmission and other
energy services to
nonaffiliated companies .86 .96 2.56 2.13
Total 1.24 1.03 2.97 2.32
Revenues (in millions):
Bulk power $15.0 $3.7 $16.1 $7.1
Transmission and other
energy services to
nonaffiliated companies 5.2 6.0 13.1 13.0
Total $20.2 $9.7 $29.2 $20.1
The costs of purchased power and revenues from sales to power
marketers and other utilities, including transmission services, were
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 the first nine months of 1999 because changes
are passed to customers through operation of fuel clauses. Effective
July 1, 2000, the fuel clause was discontinued in the Company's
Maryland and West Virginia jurisdictions, and was discontinued for
its Virginia jurisdiction effective in August. The discontinuation
of the fuel clauses may cause an increase in the volatility of
earnings for the Company. With the discontinuation of the 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 its Maryland, West Virginia, and Virginia
jurisdictions.
Bulk power sales for the three and nine months ended September
30, 2000 periods include $15.0 million for the sale of the output of
the AES Warrior Run cogeneration facility located in the Company's
territory into the open market. This sale of output was part of a
Maryland PSC settlement agreement with the Company.
OPERATING EXPENSES
The decrease in fuel expenses was due to the fuel expenses
associated with the 2,100 MW of the Company's generating capacity
that were transferred to Allegheny Energy Supply on August 1, 2000.
<PAGE>
Purchased power and exchanges, net, represents power purchases
from and exchanges with other companies, including affiliated
companies and, purchases from qualified facilities under the PURPA,
and prior to August 1, 2000 capacity charges paid to Allegheny
Generating Company.
Purchased Power and Exchanges, Net
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
(Millions of Dollars)
Regulated Operations:
Purchased Power:
From PURPA generation* $ 24.4 $ .1 $ 63.7 $ .1
Other 1.0 4.3 3.9 10.3
Power exchanges, net (.1) (2.6) 4.0 (2.8)
AGC capacity charges 1.5 5.0 11.2 15.0
Other affiliated capacity
charges 1.5 9.5 18.0 29.3
Affiliated energy and
spinning reserve charges 99.6 14.9 127.8 40.8
Purchased power and
exchanges, net $127.9 $31.2 $228.6 $92.7
*PURPA cost (cents per kWh) 6.3 - 6.2 -
The increases for the three and nine months ended September 30,
2000, of $20.0 million and $53.3 million, respectively, in purchased
power from PURPA generation is due to the start of commercial
operations of the AES Warrior Run PURPA cogeneration project on
February 10, 2000 in the Company's Maryland service territory. The
Maryland PSC has approved the Company's full recovery of the AES
Warrior Run purchased power costs as part of the September 23, 1999,
settlement agreement. See Sales and Revenues for more information on
the settlement agreement.
AGC capacity charges and other affiliated capacity charges
decreased in the quarter and nine months ended September 30, 2000
periods, due to the transfer of the Company's generation, including
its ownership interest in AGC, to Allegheny Energy Supply on August
1, 2000.
The increases in affiliated energy and spinning reserve charges
for the third quarter and nine months ended September 30, 2000 were
due primarily to the Company's purchase of power from Allegheny
Energy Supply in order to provide energy to the Company's Maryland
customers eligible to chose an alternate supplier, but electing not
to do so. The generation previously available to serve those
customers has been freed up upon the June 7, 2000 approval of the
Maryland PSC and has been transferred by the Company to Allegheny
Energy Supply
Other operations expenses decreased $5.4 million and $8.6
million for the three and nine months ended September 30, 2000. The
decreases were primarily due to the transfer of the Company's
generation to Allegheny Energy Supply, and the in the nine months
<PAGE>
ended period also to due to a litigation settlement.
The decrease in total maintenance expenses of $6.2 million and
$5.8 million for the third quarter and nine months ended September
30, 2000, respectively, were primarily due to the transfer of the
Company's generation to Allegheny Energy Supply. Until August 1,
2000, maintenance expenses represented costs incurred to maintain the
power stations, the transmission and distribution (T&D) system,
general plant, and reflected 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. Current and future
maintenance expenses will be to support the Company's wires or
delivery business.
Depreciation and amortization expense in the three and nine
months ended September 30, 2000 decreased $6.8 million and $5.5
million, respectively, due to the Company's transfer of its
generation assets to Allegheny Energy Supply..
Taxes other than income taxes decreased $2.7 million and $2.1
million in the third quarter and first nine months of 2000,
respectively, due primarily to the transfer of generation assets to
Allegheny Energy Supply.
Federal and state income taxes decreased $8.4 million and $11.3
million in the third quarter and first nine months of 2000,
respectively, primarily due to decreased taxable income and to the
Company's share of tax savings in consolidation related to its
Parent.
Other income, net decreased $2.5 million and $2.7 million for
the three and nine months ended September 30, 2000, respectively, due
primarily to the transfer of the Company's ownership interest in AGC
to Allegheny Energy Supply. Prior to this August 1, 2000 transfer,
the Company reported AGC in its financial statements using the equity
method of accounting.
Interest on long-term debt decreased $2.1 million and $1.4
million for the three and nine months ended September 30, 2000,
respectively, due primarily to the March 20 redemption of $75 million
of first mortgage bonds.
The extraordinary charge in the first nine months of $20.0
million ($12.3 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 the 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
<PAGE>
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
In March 2000, the Company redeemed $75 million of 5 7/8% series
first mortgage bonds.
On June 1, 2000, the Company issued $80 million London Interbank
Offer Rate (LIBOR) floating rate private placement notes assumable by
Allegheny Energy Supply upon its acquisition of the Company's
Maryland electric generating assets. On August 1, 2000, after the
Company's generating assets were transferred to Allegheny Energy
Supply, the notes were re-marketed as Allegheny Energy Supply
floating rate notes with the same maturity date. Accordingly, the
obligation for this debt was transferred to Allegheny Energy Supply.
No additional proceeds were received.
Impact of Change in Short-term Interest Rate
A one percent increase in the short-term borrowing interest rate
would have no effect on the Company's interest expense. The Company
has no projected short-term borrowings for the three months ended
December 31, 2000.
Environmental Issues
As previously reported, the 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. 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 was October 28, 2000 and the compliance due date
will remain May 1, 2003. The Parent'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 $347.9 million. Of that amount,
approximately $8.5 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 Monongahela Power. The letter
requested information under Section 114 of the federal Clean Air Act
<PAGE>
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.
Similar inquiries have been made of other electric utilities and
have resulted in enforcement proceedings being brought in many cases.
The Parent believes its generating facilities have been operating in
accordance with the Clean Air Act and the 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 trigger the requirements
of the New Source Performance Standards, or a major modification of
the facility, which would require compliance with the New Service
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 its Operating Subsidiaries (Monongahela Power, the
Company, and West Penn) serve. Pennsylvania and Maryland have retail
choice programs in place. West Virginia's legislature has approved a
deregulation plan for Monongahela Power 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 Parent 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
<PAGE>
for the Parent unless certain outmoded and anti-competitive laws,
specifically the PUHCA and Section 210 (Mandatory Purchase
provisions) of PURPA, are repealed or significantly revised. The
Parent 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 certain date
for customer choice, several key provisions favored by Allegheny
Energy are included in the legislation, including an amendment that
allows existing state restructuring plans and agreements to remain in
effect. Other provisions address important Parent 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.)
Maryland Activities
On June 7, 2000, the Maryland PSC approved the transfer of the
Company's generating assets to its affiliate, Allegheny Energy
Supply. The transfer was made on August 1, 2000. Maryland customers
of the Company 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.
On July 1, 2000, the Maryland PSC issued a restrictive order
imposing standards of conduct for transactions between Maryland
utilities and their affiliates. Among other things, the order:
* restricts sharing of employees between utilities and affiliates,
* announces the Maryland PSC's intent to impose a royalty fee to
compensate the utility for the use by an affiliate of the utility's
name and/or logo and for other "intangible or unquantified benefits",
and
<PAGE>
* requires asymmetric pricing for asset transfers between
utilities and their affiliates. Asymmetric pricing requires that
transfers of assets from the regulated utility to an affiliate be
recorded at the greater of book cost or market value while transfers
of assets from the affiliate to the regulated utility be at lesser of
book costs or market.
The Company, along with substantially all of Maryland's gas and
electric utilities, filed a Circuit Court petition for judicial
review and a motion for stay of the order. The Circuit Court has
granted a partial stay of the Maryland PSC's Code of
Conduct/Affiliated Transactions Order. The Judge granted a stay on
the issues of employee sharing, royalties for the use of the name and
logo and for certain intangibles, and on the requirement to use a
disclaimer on advertising for non-core services.
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 SCC 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.
On July 11, 2000, the Virginia SCC issued an order approving the
Company's separation plan permitting the transfer of the Company's
generating assets and the provision of the Phase I application. See
Virginia Functional Separation Plan on page 12 for more information.
Various rulemaking proceedings to implement customer choice are
ongoing before the State Corporation Commission.
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
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.
<PAGE>
The W.Va. PSC approved the Company's request to transfer
generating assets to its affiliate, Allegheny Energy Supply, on or
after July 1, 2000 and established a process for obtaining approval
of transfer of the Company's affiliate's, Monongahela Power, assets
on or before the starting date for customer choice. In accordance
with the restructuring agreement, the Company and its affiliate,
Monongahela Power implemented a commercial and industrial rate
reduction program on July 1, 2000. The W.Va. PSC is expected to rule
on the Company's July 12, 2000 unbundled tariffs filing before year
end.
The status of electric energy competition in Ohio and Pennsylvania,
in which affiliates of the Company serve, are as follows:
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 Public Utilities Commission (Ohio PUC).
Monongahela Power 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 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.
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. The Company's affiliate, West Penn, has retained about 98%
of its Pennsylvania customers through September 30, 2000.
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
Maryland and West Virginia.
The Virginia legislation established a definitive process of
transition to deregulation and market-based pricing for electric
generation. However, the deregulation plan in Virginia will not be
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known until certain regulatory proceedings occur with filing
scheduled for the fourth quarter of 2000. The Company estimates that
a charge to earnings for Virginia deregulation would be 1.6 million
after taxes (2.6 million before 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,
designate, and assess the effectiveness of transactions that receive
hedge accounting.
The Company 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.
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THE POTOMAC EDISON COMPANY
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
(b) No reports on Form 8-K were filed on behalf of the Company
for the quarter ended September 20, 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 hereunto duly authorized.
THE POTOMAC EDISON COMPANY
/S/ T. J. Kloc
T. J. Kloc, Controller
(Chief Accounting Officer)
November 14, 2000
