<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 March 31, 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 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 May 15, 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.
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THE POTOMAC EDISON COMPANY
Form 10-Q for Quarter Ended March 31, 2000
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Statement of Income - Three months ended
March 31, 2000 and 1999 3
Balance Sheet - March 31, 2000
and December 31, 1999 4
Statement of Cash Flows - Three months ended
March 31, 2000 and 1999 5
Notes to Financial Statements 6-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-20
PART II--OTHER INFORMATION 21
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THE POTOMAC EDISON COMPANY
Statement of Income
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended
March 31
2000 1999
ELECTRIC OPERATING REVENUES:
<S> <C> <C> <C> <C>
Residential $ 101,984 $ 100,488
Commercial 42,656 42,525
Industrial 50,725 50,063
Wholesale and other, including affiliates 14,595 5,763
Bulk power transactions, net 4,774 4,139
Total Operating Revenues 214,734 202,978
OPERATING EXPENSES:
Operation:
Fuel 34,983 36,648
Purchased power and exchanges, net 53,185 32,849
Deferred power costs, net 397 3,404
Other 23,244 22,684
Maintenance 14,433 13,919
Depreciation and amortization 19,909 18,957
Taxes other than income taxes 12,609 11,307
Federal and state income taxes 15,743 18,115
Total Operating Expenses 174,503 157,883
Operating Income 40,231 45,095
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 258 149
Other income, net 1,945 1,821
Total Other Income and Deductions 2,203 1,970
Income Before Interest Charges and
Extraordinary Charge 42,434 47,065
INTEREST CHARGES:
Interest on long-term debt 10,758 10,632
Other interest 770 567
Allowance for borrowed funds used during
construction (205) (298)
Total Interest Charges 11,323 10,901
Income Before Extraordinary Charge 31,111 36,164
Extraordinary Charge, net (12,278) -
NET INCOME $ 18,833 $ 36,164
</TABLE>
See accompanying notes to financial statements.
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THE POTOMAC EDISON COMPANY
Balance Sheet
(Thousands of Dollars)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS: 2000 1999
Property, Plant, and Equipment:
<S> <C> <C>
Utility plant $ 2,275,210 $ 2,264,783
Nonutility plant 3,967 3,967
Construction work in progress 51,391 53,354
2,330,568 2,322,104
Accumulated depreciation (1,011,615) (998,710)
1,318,953 1,323,394
Investments and Other Assets:
Allegheny Generating Company - common stock at equity 42,895 43,258
Other 392 410
43,287 43,668
Current Assets:
Cash and temporary cash investments 2,187 34,509
Accounts receivable:
Electric service 93,204 88,789
Affiliated and other 51,007 27,494
Allowance for uncollectible accounts (3,657) (3,534)
Materials and supplies - at average cost:
Operating and construction 27,056 26,047
Fuel 16,005 15,584
Prepaid taxes 13,337 15,914
Other 3,120 2,877
202,259 207,680
Deferred Charges:
Regulatory assets 38,683 46,121
Unamortized loss on reacquired debt 12,569 14,226
Other 3,614 3,762
54,866 64,109
Total Assets $ 1,619,365 $ 1,638,851
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 447,700 $ 447,700
Other paid-in capital 2,690 2,690
Retained earnings 211,782 250,032
662,172 700,422
Long-term debt and QUIDS 513,561 510,344
1,175,733 1,210,766
Current Liabilities:
Short-term debt 7,950 -
Notes payable to affiliates 53,200 -
Long-term debt due within one year - 75,000
Accounts payable 21,111 31,331
Accounts payable to affiliates 48,731 36,433
Taxes accrued:
Federal and state income 22,950 5,861
Other 14,089 19,211
Deferred power costs 18,038 7,859
Interest accrued 12,254 7,321
Maryland settlement 19,286 9,649
Other 9,209 15,662
226,818 208,327
Deferred Credits and Other Liabilities:
Unamortized investment credit 17,252 17,720
Deferred income taxes 153,199 159,351
Regulatory liabilities 38,388 25,319
Other 7,975 17,368
216,814 219,758
Total Capitalization and Liabilities $ 1,619,365 $ 1,638,851
</TABLE>
See accompanying notes to financial statements.
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THE POTOMAC EDISON COMPANY
Statement of Cash Flows
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended
March 31
2000 1999
CASH FLOWS FROM OPERATIONS:
<S> <C> <C>
Net income $ 18,833 $ 36,164
Extraordinary charge, net of taxes 12,278 -
Income before extraordinary charge 31,111 36,164
Depreciation and amortization 19,909 18,957
Deferred investment credit and income taxes, net (1,000) (3,642)
Deferred power costs, net 397 3,404
Unconsolidated subsidiaries' dividends in excess of earnings 379 839
Allowance for other than borrowed funds used
during construction (258) (149)
Changes in certain current assets and
liabilities:
Accounts receivable, net (27,805) (45,922)
Materials and supplies (1,430) (2,364)
Accounts payable 2,078 14,289
Taxes accrued 11,967 16,746
Interest accrued 4,933 5,060
Other, net 10,672 12,676
50,953 56,058
CASH FLOWS FROM INVESTING:
Construction expenditures (less allowance for other
than borrowed funds used during construction) (15,476) (12,440)
CASH FLOWS FROM FINANCING:
Retirement of long-term debt (75,000) -
Funds on deposit with trustees 3,133 -
Short-term debt, net 7,950 -
Notes payable to affiliates 53,200 -
Notes receivable from affiliates - (44,700)
Notes receivable from subsidiary - 2,950
Dividends on common stock (57,082) (204)
(67,799) (41,954)
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (32,322) 1,664
Cash and temporary cash investments at January 1 34,509 1,805
Cash at March 31 $ 2,187 $ 3,469
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amount capitalized) $6,043 $5,463
Income taxes 86 497
</TABLE>
See accompanying notes to financial statements.
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THE POTOMAC EDISON COMPANY
Notes to Financial Statements
1. The Potomac Edison Company (the Company) is a wholly-owned
subsidiary of Allegheny Energy, Inc. The Company's Notes to
Financial Statements in its Annual Report on Form 10-K for
the year ended December 31, 1999 should be read with the
accompanying financial statements and the following notes.
With the exception of the December 31, 1999 balance sheet in
the aforementioned annual report on Form 10-K, the
accompanying financial statements appearing on pages 3
through 5 and these notes to financial statements are
unaudited. In the opinion of the Company, such financial
statements together with these notes contain all adjustments
(which consist only of normal recurring adjustments)
necessary to present fairly the Company's financial position
as of March 31, 2000, and the results of operations and cash
flows for the three months ended March 31, 2000 and 1999.
2. For purposes of the Balance Sheet and Statement of Cash
Flows, temporary cash investments with original maturities of
three months or less, generally in the form of commercial
paper, certificates of deposit, and repurchase agreements,
are considered to be the equivalent of cash.
3. The Company owns 28% of the common stock of Allegheny
Generating Company (AGC), and affiliates of the Company own
the remainder. AGC is reported by the Company in its
financial statements using the equity method of accounting.
AGC owns an undivided 40% interest, 840 megawatts (MW), in
the 2,100 MW pumped-storage hydroelectric station in Bath
County, Virginia, operated by the 60% owner, Virginia
Electric and Power Company, a nonaffiliated utility.
AGC recovers from the Company and its affiliates all of its
operation and maintenance expenses, depreciation, taxes, and
a return on its investment under a wholesale rate schedule
approved by the Federal Energy Regulatory Commission (FERC).
AGC's rates are set by a formula filed with and previously
accepted by the FERC. The only component which changes is
the return on equity (ROE). Pursuant to a settlement
agreement filed April 4, 1996 with the FERC, AGC's ROE was
set at 11% for 1996 and will continue until the time any
affected party seeks renegotiation of the ROE.
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Following is a summary of income statement information for
AGC:
Three Months Ended
March 31
2000 1999
(Thousands of Dollars)
Electric operating revenues $17,155 $17,857
Operation and maintenance expense 1,366 1,611
Depreciation 4,244 4,245
Taxes other than income taxes 1,133 1,132
Federal income taxes 1,829 2,414
Interest charges 3,305 3,403
Other income, net (1)
Net income $ 5,278 $ 5,053
The Company's share of the equity in earnings above was $1.5
million and $1.4 million for the three months ended March 31,
2000 and 1999, respectively, and is included in other income,
net, on the Company's Statement of Income.
4. The Company and its utility affiliates, Monongahela
Power Company (Monongahela Power) and West Penn Power Company
(West Penn), collectively now doing business as Allegheny Power,
are engaged in the generation (except West Penn), purchase,
transmission, distribution, and sale of electric energy. Also,
with Monongahela Power Company's purchase of West Virginia Power
in December 1999, Allegheny Power is now involved in the
procurement and delivery of natural gas. The Company operates as
a single utility segment in the states of Maryland, Virginia, and
West 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 the West Virginia Legislature to pass the
necessary tax law changes in their next session in the first
quarter of 2001 and the implementation of the deregulation plan
is expected to occur in mid-2001. Among the provisions of the
plan are the following:
* Customer choice will begin for all customers when the
plan is implemented (expected in mid-2001).
* Rates for electricity service will be unbundled at
current levels and capped for four years, with power supply rates
transitioning to market rates over the next six years for the
residential and small commercial customers.
After year 7, the power supply rate for large commercial
and industrial customers will no longer be regulated.
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* Subject to an order by the W. Va. PSC granting final
approval, the West Virginia jurisdictional assets of the Company
may be transferred to a non-regulated affiliate at book value 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.
* A special "Rate Stabilization" account of $14.1 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.
6. In 1997, the Emerging Issues Task Force (EITF) issued EITF
No. 97-4, "Deregulation of the Pricing of Electricity-
Issues Related to the Application of FASB Statement Nos. 71
and 101." The EITF agreed that, when a rate order that
contains sufficient detail for the enterprise to reasonably
determine how the transition plan will affect the separable
portion of its business whose pricing is being deregulated is
issued, the entity should cease to apply the Financial
Accounting Standards Board's (FASB) Statement of Financial
Standards (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation," to that separable portion of
its business.
On March 11, 2000, the West Virginia Legislature passed House
Concurrent Resolution 27 based on a company specific electric
deregulation plan submitted by the W. Va. PSC. As required
by EITF 97-4, the Company discontinued the application of
SFAS No. 71 for its electric generation operations in its
West Virginia jurisdiction in the first quarter of 2000. The
Company recorded under the provisions of SFAS No. 101,
"Accounting for the Discontinuation of Application of FASB
Statement No. 71," an extraordinary charge of $12.3 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 $ 5.9 $ 3.6
Rate stabilization obligation 14.1 8.7
2000 extraordinary charge $20.0 $12.3
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7. The Balance Sheet includes the amounts listed below for
generation assets not subject to SFAS No. 71.
March December
2000 1999
(Millions of Dollars)
Property, plant and equipment at
original cost $790.2 $563.9
Amounts under construction included above 23.3 17.6
Accumulated depreciation (423.7) (298.7)
8. All of the employees of Allegheny Energy are employed by
Allegheny Energy Service Corporation (AESC), which performs
services at cost for the Company and its affiliates in
accordance with the Public Utility Holding Company Act of
1935. Through AESC, the Company is responsible for its
proportionate share of services provided by AESC. The total
billings by AESC (including capital) to the Company for the
three months ended March 31, 2000 and 1999 were $28.6 million
and $24.8 million, respectively. The Company buys power from
and sells power to its affiliates at tariff rates approved by
the FERC.
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THE POTOMAC EDISON COMPANY
Management's Discussion and Analysis of Financial Condition
And Results of Operations
COMPARISON OF FIRST QUARTER OF 2000 WITH FIRST QUARTER OF 1999
The Notes to Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of
Operations in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999 should be read with the following
Management's Discussion and Analysis information.
Factors That May Affect Future Results
This management's discussion and analysis of financial
condition and results of operations contains forecast information
items that are "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. These include
statements with respect to deregulation activities and movements
toward competition in states served by The Potomac Edison Company
(the Company), and results of operations. All such forward-
looking information is necessarily only estimated. There can be
no assurance that actual results will not materially differ from
expectations. Actual results have varied materially and
unpredictably from past expectations.
Factors that could cause actual results to differ materially
include, among other matters, electric utility restructuring,
including the ongoing state and federal activities; developments
in the legislative, regulatory, and competitive environments in
which the Company operates, including regulatory proceedings
affecting rates charged by the Company; environmental,
legislative, and regulatory changes; the Company's ability to
compete in unregulated energy markets; future economic
conditions; and other circumstances that could affect anticipated
revenues and costs such as significant volatility in the market
price of wholesale power and fuel for electric generation,
unscheduled maintenance or repair requirements, weather, and
compliance with laws and regulations.
Significant Events in the First Quarter of 2000
* West Virginia Deregulation
The West Virginia Legislature passed House Concurrent
Resolution 27 on March 11, 2000 approving an electric
deregulation plan submitted by the Public Service Commission of
West Virginia (W. Va. PSC) with certain modifications. As a
result of West Virginia legislation, the Company discontinued the
application of Financial Accounting Standards Board's (FASB)
Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation," for
the electric generation portion of its West Virginia operations
and has adopted SFAS No. 101, "Accounting for the Discontinuation
of Application of FASB Statement No. 71." Accordingly, the
Company recorded an extraordinary charge of $20.0 million ($12.3
million after
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taxes) during the first quarter of 2000. The
write-off reflects unrecoverable net regulatory assets that will
not be collected from customers and establishment of a rate
stabilization account for residential and small commercial
customers as required by the deregulation plan. See Notes 5
and 6 to the financial statements for details of the deregulation
plan.
See Electric Energy Competition for more information
regarding restructuring in West Virginia.
* Rate Matters
On January 17, 2000, the Company filed with the Virginia
State Corporation Commission (Virginia SCC) for a decrease in
fuel rates of approximately $4 million to become effective March
8, 2000. The decrease is primarily due to the refunding of a
prior overrecovery of fuel costs, coupled with a decrease in
projected energy costs. On March 1, 2000, the Virginia SCC
approved the decrease on an interim basis effective March 8,
2000. On April 27, 2000, the Virginia SCC suspended the
procedural schedule pending the filing and investigation of the
Company's application for approval of its restructuring plan.
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. The July 1, 2000, deferred fuel balance will be
collected or refunded beginning no later than October 1, 2000,
over a twelve-month period.
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.
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 requested decrease in the Company's fuel
rate, and on March 21, 2000 the proposed order became final.
As previously reported, on February 26, 1999, the W. Va. PSC
entered an order to initiate a fuel review proceeding to
establish a fuel increment in rates for the Company and the
Company's affiliate, Monongahela Power Company (Monongahela
Power) to be effective July 1, 1999, through June 30, 2000. If
an agreement was not reached, the proposed fuel rates which would
decrease the Company's fuel rates by $8.0 million and increase
Monongahela Power's rates by $10.9 million was scheduled to
become effective March 15, 2000. The W. Va. PSC granted an
extension, and the parties continue to negotiate.
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* Transfer of Generation Assets
On February 11, 2000, the Company filed a Form U-1
application with the Securities and Exchange Commission
requesting authority to transfer its Maryland, Virginia, West
Virginia, and Federal Energy Regulatory Commission generation
assets to its unregulated affiliate, Allegheny Energy Supply
Company, LLC (Allegheny Energy Supply).
As previously reported, a Maryland PSC decision approving
the transfer of the Company's Maryland jurisdictional generation
assets is expected prior to July 1, 2000.
Review of Operations
EARNINGS SUMMARY
Net income in the first quarter of 2000, excluding an
extraordinary charge of $12.3 million, net of taxes, was $31.1
million compared with $36.2 million in the corresponding 1999
period. The decrease in net income for the first quarter of 2000
was due primarily to increases in operating expenses as a result
of increases in several expense categories.
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. As a result of the write-off,
net income for the first quarter of 2000 was $18.8 million.
SALES AND REVENUES
Percentage changes in revenues and kilowatt-hour (kWh) sales
by major retail customer classes were:
Change from Comparable Period
of the Prior Year
Revenues kWh
Residential 1.5% .1%
Commercial .3 (.9)
Industrial 1.3 1.3
Total 1.2% .4%
The first quarter change in residential kWh sales, which are
more weather sensitive than the other classes, remained about the
same. Increased kWh sales due to growth in the number of
customers was offset by changes in customer usage due to first
quarter winter weather that was milder than the first quarter of
1999.
Commercial kWh sales are also affected by weather but to a
lesser extent than residential. The .9% decrease in commercial
kWh sales in the first quarter reflects decreased usage, offset
in part by increased kWh sales due to growth in the number of
customers.
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The increase in industrial kWh sales for the first quarter
of 2000 of 1.3% resulted primarily from increased sales to paper,
printing and publishing customers and to primary metals
customers.
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 return on equity of 11.4% in
Maryland for 1999 and 2000. This sharing will occur through an
annual true-up. The Company's revenues reflect an estimated
obligation for shared earnings above an 11.4% return on equity.
Changes in revenues from retail customers resulted from the
following:
Change from Comparable Period
of the Prior Year
(Millions of Dollars)
Fuel clauses $(3.9)
All other 6.2
Net change in retail revenues $ 2.3
Revenues reflect not only changes in kWh sales and base rate
changes, but also any changes in revenues from fuel and energy
cost adjustment clauses (fuel clauses) which are still applicable
in the Company's jurisdictions. Effective July 1, 2000, the
Company's Maryland jurisdiction will cease to have a fuel clause
under the terms of the September 23, 1999, settlement agreement.
Also, a fuel clause will cease to exist for the Company's West
Virginia jurisdiction when the West Virginia deregulation plan is
implemented which is expected to occur in mid-2001. Historically
and through June 30, 2000, changes in fuel revenues have 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.
Effective July 1, 2000, the Company will also assume this risk
and benefits of changes in fuel and purchased power costs and
sales of transmission services and bulk power in its Maryland
jurisdiction. The Company will also assume this risk for the
West Virginia jurisdiction when the deregulation plan is
implemented which is expected to occur in mid-2001.
All other is the net effect of kWh sales changes due to
changes in customer usage (primarily weather for residential
customers), growth in the number of customers, and changes in
pricing other than changes in general tariff and fuel clause
rates. The increase in the first quarter for all other retail
revenues was primarily the result of growth in the number of
customers.
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Wholesale and other revenues were as follows:
Three Months Ended
March 31
2000 1999
(Millions of Dollars)
Wholesale customers $ 5.9 $5.8
Affiliated companies 6.8 3.2
Street lighting and other 1.2 1.3
Settlement Revenues (Deferred revenues) .7 (4.5)
Total wholesale and other revenues $14.6 $5.8
Wholesale customers are cooperatives and municipalities that
own their own distribution systems and buy all or part of their
bulk power needs from the Company under Federal Energy Regulatory
Commission (FERC) regulation. Competition in the wholesale market
for electricity was initiated by the national Energy Policy Act
of 1992, which permits wholesale generators, utility-owned and
otherwise, and wholesale customers to request from owners of bulk
power transmission facilities a commitment to supply
transmission services. Wholesale revenues in the first quarter
of 2000 remained about the same as in the first quarter of 1999.
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 $3.6 million in the first quarter
of 2000 due primarily to increased transmission revenues from
affiliates.
Settlement revenues of $.7 million in the first quarter of
2000 and deferred revenues of $4.5 million in the first quarter
of 1999 result from settlement agreements approved by the
Maryland PSC.
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 for the first quarter of 2000 and 1999 were as
follows:
Three Months Ended
March 31
2000 1999
kWh Transactions (in billions):
Bulk power .03 .04
Transmission and other energy services
to nonaffiliated companies .86 .62
Total .89 .66
Revenues (in millions):
Bulk power $1.0 $1.2
Transmission and other energy services
to nonaffiliated companies 3.8 2.9
Total $4.8 $4.1
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Revenues from bulk power transactions in the first quarter
of 2000 remained about the same as the first quarter of 1999.
Revenues from transmission and other energy services increased in
the first quarter of 2000 primarily due to increased megawatt-
hours (MWh) transmitted.
The costs of purchased power and revenues from sales to
power marketers and other utilities, including transmission
services, are currently recovered from or credited to customers
under fuel and energy cost recovery procedures. The impact to
the fuel and energy cost recovery clauses may be either positive
or negative depending on whether the Company is a net buyer or
seller of electricity during such periods and the open
commitments which exist at such times. The impact of such price
volatility was insignificant to the Company in the first quarter
2000 and 1999 periods because changes are passed to customers
through operation of fuel clauses. Effective July 1, 2000, the
fuel clause will be discontinued in Maryland which may cause an
increase in the volatility of earnings for the Company.
A fuel clause will cease to exist for the Company's West
Virginia jurisdiction when the deregulation plan is implemented
which is expected to occur in mid-2001. The Company will then
assume the risks and benefits of changes in fuel and purchased
power costs and sales of transmission services and bulk power in
the West Virginia jurisdiction.
OPERATING EXPENSES
Fuel expenses for the first quarter of 2000 decreased 4.6%
due primarily to a 4.2% decrease in average fuel prices. The
decrease in average fuel prices was due to renegotiated fuel
contracts.
Purchased power and exchanges, net, represents power
purchases from and exchanges with other companies, capacity
charges paid to Allegheny Generating Company (AGC), purchases
from qualified facilities under the Public Utility Regulatory
Policies Act of 1978 (PURPA), and other transactions with
affiliates made pursuant to a power supply agreement whereby each
company uses the most economical generation available in the
Allegheny Energy System at any given time and consists of the
following items:
Purchased Power and Exchanges, Net
Three Months Ended
March 31
2000 1999
(Millions of Dollars)
Nonaffiliated transactions:
Purchased Power:
From PURPA generation $18.3 $ -
Other 3.7 2.9
Power exchanges, net 4.1 1.1
Affiliated transactions:
AGC capacity charges 5.4 5.0
Other affiliated capacity charges 9.1 10.1
Energy and spinning reserve charges 12.6 13.7
Purchased power and exchanges, net $53.2 $32.8
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The increase of $18.3 million 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 AES Warrior
cogeneration contract will increase the cost of power purchases
by about $60 million annually. 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.
Maintenance expenses represent costs incurred to maintain
the power stations, the transmission and distribution (T&D)
system, and general plant, and reflect routine maintenance of
equipment and rights-of-way, as well as planned major repairs and
unplanned expenditures, primarily from forced outages at the
power stations and periodic storm damage on the T&D system.
Variations in maintenance expense result primarily from
unplanned events and planned major projects, which vary in timing
and magnitude depending upon the length of time equipment has
been in service without a major overhaul and the amount of work
found necessary when the equipment is dismantled.
Depreciation and amortization expense increased $1.0 million
due to increased investment.
Taxes other than income taxes increased $1.3 million in the
first quarter of 2000 due primarily to increased FICA and federal
unemployment taxes.
Federal and state income taxes decreased $2.4 million in the
first quarter of 2000 due primarily to decreased taxable income
and to the Company's share of tax savings in consolidation
related to its parent, Allegheny Energy.
The extraordinary charge in the first quarter 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 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 6 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.
<PAGE>
- 17 -
* Financings
In the first quarter of 2000 the Company redeemed $75 million
of first mortgage bonds.
* Impact of Change in Short-term Interest Rate
A one percent increase in the short-term borrowing interest
rate would increase projected short-term interest expense by
approximately $.3 million for the nine months ended December 31,
2000 based on projected short-term borrowings.
* Environmental Issue
As previously reported, the Environmental Protection
Agency's (EPA) nitrogen oxides (NOx) State Implementation Plan
(SIP) call regulation has been under litigation and on March 3,
2000, the District of Columbia Circuit Court of Appeals issued a
decision that basically upheld the regulation. However, an
appeal of that decision was filed in April 2000 by the state and
industry litigants. A court decision on whether to grant an
appeal is expected within a few months. If the appeal is
granted, a final decision could be issued by Spring 2001. Also
in April 2000, the EPA filed a motion with the court to lift the
previous court ordered stay of the September 1999 SIP submittal
deadline by which the states must file their compliance plans to
implement the NOx SIP call regulation. If the court grants the
EPA's request, the new SIP submittal deadline would be September
1, 2000, and the compliance due date would remain May 1, 2003. A
court decision on whether to grant EPA's motion is expected
within a few months.
* Electric Energy Competition
The electricity supply segment of the electric industry in
the United States is becoming increasingly competitive. The
national Energy Policy Act of 1992 deregulated the wholesale
exchange of power within the electric industry by permitting the
Federal Energy Regulatory Commission to compel electric utilities
to allow third parties to sell electricity to wholesale customers
over their transmission systems. Since 1992, the wholesale
electricity market has become more competitive as companies are
engaging in nationwide power trading. In addition, an increasing
number of states have taken active steps toward allowing retail
customers the right to choose their electricity supplier. The
Company has been an advocate of federal legislation to create
competition in the retail electricity markets to avoid regional
dislocations and ensure level playing fields. Legislation before
the U.S. Congress to restructure the nation's electric utility
industry cleared an important hurdle on October 28, 1999, when a
House Commerce Committee subcommittee gave its approval to a
bill. The bill will now move on to the full Commerce Committee.
In the absence of federal legislation, state-by-state
implementation of deregulation of electric generation is under
way. The five states in which the Company and its affiliates
serve customers are at various stages of implementation or
investigation of programs that allow customers to choose their
electric supplier. Pennsylvania is furthest along with a retail
program in place.
<PAGE>
- 18 -
Maryland has approved a deregulation plan
for the Company which will begin July 1, 2000. West Virginia
passed legislation approving a deregulation plan for the
Company and its affiliate, Monongahela Power which is expected
to be implemented in mid-2001. Ohio and Virginia have passed
legislation to adopt customer choice which requires further
action by the regulatory agencies in those states regarding
specific deregulation plans for the Company and its affiliate.
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 Utility Holding
Company Act of 1935 (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 sponsored by
U.S. Representative Joe Barton, was favorably reported out of the
House Commerce Subcommittee on Energy and Power. While the bill
does not mandate a date certain for customer choice, several key
provisions favored by the Company are included in the
legislation, including an amendment that allows existing state
restructuring plans and agreements to remain in effect. Other
provisions address important Company priorities by repealing
PUHCA and the mandatory purchase provisions of PURPA. Consensus
remains elusive, with significant hurdles remaining in both
houses of Congress. It is uncertain whether momentum on the issue
will result in legislation in 2000.
The Company has franchised regulated customers in Maryland,
Virginia, and West Virginia.
Maryland Activities
On September 23, 1999, a settlement agreement between the
Company, the Staff of the Maryland PSC, and other parties working
to implement customer choice and deregulation of electric
generation for the Company in Maryland was filed with the
Maryland PSC. On December 23, 1999, the Maryland PSC approved
the settlement agreement, which provides nearly all of the
Company's 211,000 Maryland customers with the ability to choose
an electric generation supplier starting July 1, 2000. The
Company filed an application on December 15, 1999, to transfer
its Maryland generating assets at book value to an affiliate in
accordance with Section 7-508 of the Electric Customer Choice and
Competition Act of 1999. A Maryland PSC decision approving the
transfer of the generating assets is expected prior to July 1,
2000.
Virginia Activities
On March 25, 1999, Governor Gilmore signed the Virginia
Electric Utility Restructuring Act (Restructuring Act) passed by
the Virginia General Assembly. All utilities must submit a
restructuring plan by January 1, 2001, to be effective on January
1, 2002. Customer choice will be phased in beginning on January
1, 2002, with full customer choice by January 1, 2004. The
Restructuring Act was amended during
<PAGE>
- 19 -
the 2000 General Assembly legislative session. In addition to
a number of clarifying and technical changes, the amendments
direct the State Corporation Commission to prepare for legislative
approval a plan for competitive metering and billing and authorize
the Commission to implement a consumer education program on electric
choice funded through the Commission's regulatory tax. Legislation
was also adopted in 2000 governing the ability of rural electric
cooperatives to engage in competitive businesses, including
certain restrictions on the competitive sale of electricity by
cooperatives and their affiliates.
Various rulemaking proceedings to implement customer choice
are ongoing before the State Corporation Commission.
West Virginia Activities
In March 1998, legislation was passed by the West Virginia
Legislature that directed the W.Va. PSC to meet with all
interested parties to develop a restructuring plan which would
meet the dictates and goals of the legislation. In January 2000,
the W.Va. PSC submitted a restructuring plan to the legislature
for approval that would open full retail competition on January
1, 2001. Generation would be deregulated and electricity rates
initially would be reduced for large commercial and industrial
customers and then frozen for all customers for four years, with
power supply rates gradually transitioning to market rates over
the next six years. Other highlights of the plan include the
ability to transfer generation assets, the transfer of control of
transmission to a regional transmission organization by 2003, a
utility-funded rate stabilization deferral mechanism to offset
residential and small commercial rates in later years, a wires
charge for customers who shop, and a systems benefit charge to
assist low income customers and displaced employees in utility
and related industries. The plan was endorsed by virtually all
of the interested parties, including the Company and it's
affiliate, Monongahela Power.
On March 11, 2000, the West Virginia Legislature approved
the Commission's plan, but assigned the tax issues surrounding
the plan to the 2000 Legislative Interim Committees to recommend
the necessary tax changes involved and come back to the
Legislature in 2001 for approval of those changes and authority
to implement the plan. The start date of competition is
contingent upon the necessary tax changes being made and approved
by the legislature. The Company expects that implementation of
the deregulation plan will occur in mid-2001. The W. Va. PSC is
currently in the process of developing the rules under which
competition will occur. Associated rulemaking proceedings are
scheduled for the remainder of this year.
The status of electric energy competition in Ohio and
Pennsylvania in which affiliates of the Company serve are as
follows:
Ohio Activities
On June 22, 1999, the Ohio General Assembly passed
legislation to restructure its electric utility industry.
Governor Taft added his signature soon thereafter, and all of the
state's customers will be able to choose their electricity
supplier starting January 1, 2001, beginning a five-year
transition to market rates. Total electric rates will be frozen
over that period, and residential customers are
<PAGE>
- 20 -
guaranteed a 5% cut in the generation portion of their rate. The
determination of stranded cost recovery will be handled by the
Public Utilities Commission of Ohio (Ohio PUC). On January 3,
2000, the Company's affiliate, Monongahela Power filed a
transition plan with the Ohio PUC, including its claim for
recovery of stranded costs of $21.3 million. The Ohio PUC is
expected to hold hearings on Monongahela Power's transition plan
filing and issue a decision by October 2000. Rulemaking
proceedings to implement customer choice are ongoing at the Ohio
PUC.
Pennsylvania Activities
As of January 2, 2000, all electricity customers in
Pennsylvania had the right to choose their electric suppliers.
The number of customers who have switched suppliers and the
amount of electrical load transferred in Pennsylvania far exceed
that of any other state so far. However, for the Company's
affiliate, West Penn Power Company, less than 12,500 of its
680,500 Pennsylvania customers have chosen an alternate energy
supplier. West Penn Power Company has retained about 98% of its
Pennsylvania customers through April 1, 2000. More than 100
electric generation suppliers have been licensed to sell to
retail customers in Pennsylvania.
Accounting for the Effects of Price Deregulation
In July 1997, the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board (FASB) released Issue No.
97-4, "Deregulation of the Pricing of Electricity - Issues Related
to the Application of FASB Statement Nos. 71 and 101," which
concluded that utilities should discontinue application of
Statement of Financial Accounting Standards (SFAS) No. 71 for the
generation portion of their business when a deregulation plan is
in place and its terms are known. 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 legislation passed in Virginia
established a definitive process for transition to deregulation
and market-based pricing for electric generation. However, the
deregulation plan and its terms in Virginia will not be known
until relevant regulatory proceedings are complete and final
orders are received. The Company expects that charges to
earnings, if any, due to discontinuing SFAS No. 71 for the
electric generation portion of its business in Virginia will be
less than $10 million, pre-tax.
<PAGE>
- 21 -
THE POTOMAC EDISON COMPANY
Part II - Other Information to Form 10-Q
for Quarter Ended March 31, 2000
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDER
1. (a) Date and Kind of Meeting:
The annual meeting of shareholders was held at
Hagerstown, Maryland, on April 26, 2000. No proxies were
solicited.
(b) Election of Directors:
The holder of all 22,385,000 shares of common stock voted
to elect the following Directors at the annual meeting to
hold office until the next annual meeting of shareholders
and until their successors are duly chosen and qualified:
Eleanor Baum Alan J. Noia
William L. Bennett Jay S. Pifer
Wendell F. Holland Steven H. Rice
Phillip E. Lint Gunnar E. Sarsten
Frank A. Metz, Jr. Peter J. Skrgic
Michael P. Morrell
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) The Company filed a Form 8-K on March 10, 2000.
Signature
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
THE POTOMAC EDISON COMPANY
/s/ T. J. KLOC
T. J. Kloc, Controller
(Chief Accounting Officer)
May 15, 2000
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