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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 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 August 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.
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THE POTOMAC EDISON COMPANY
Form 10-Q for Quarter Ended June 30, 2000
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Statement of Income - Three and six months ended
June 30, 2000 and 1999 3
Balance Sheet - June 30, 2000
and December 31, 1999 4
Statement of Cash Flows - Six months ended
June 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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THE POTOMAC EDISON COMPANY
Statement of Income
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
OPERATING REVENUES:
<S> <C> <C> <C> <C> <C> <C>
Residential $ 74,210 $ 70,094 $ 176,194 $ 170,582
Commercial 42,793 40,640 85,449 83,165
Industrial 53,433 53,756 104,158 103,819
Wholesale and other, including affiliates 13,952 3,893 28,547 9,656
Bulk power transactions, net 4,216 6,308 8,990 10,447
Total Operating Revenues 188,604 174,691 403,338 377,669
OPERATING EXPENSES:
Operation:
Fuel 33,679 32,568 68,662 69,216
Purchased power and exchanges, net 47,549 28,655 100,734 61,504
Deferred power costs, net 1,338 5,490 1,735 8,894
Other 20,838 24,595 44,082 47,279
Maintenance 13,334 13,388 27,767 27,307
Depreciation and amortization 19,541 19,151 39,450 38,108
Taxes other than income taxes 13,339 13,978 25,948 25,285
Federal and state income taxes 8,713 9,323 24,456 27,438
Total Operating Expenses 158,331 147,148 332,834 305,031
Operating Income 30,273 27,543 70,504 72,638
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction (21) 177 237 326
Other income, net 1,588 1,882 3,533 3,703
Total Other Income and Deductions 1,567 2,059 3,770 4,029
Income Before Interest Charges and
Extraordinary Charge 31,840 29,602 74,274 76,667
INTEREST CHARGES:
Interest on long-term debt 11,251 10,722 22,009 21,354
Other interest 873 433 1,643 1,000
Allowance for borrowed funds used during
construction (331) (289) (536) (587)
Total Interest Charges 11,793 10,866 23,116 21,767
Income Before Extraordinary Charge 20,047 18,736 51,158 54,900
Extraordinary Charge, net - - (12,278) -
NET INCOME $ 20,047 $ 18,736 $ 38,880 $ 54,900
</TABLE>
See accompanying notes to financial statements.
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THE POTOMAC EDISON COMPANY
Balance Sheet
(Thousands of Dollars)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS: 2000 1999
Property, Plant, and Equipment:
<S> <C> <C>
Utility plant $ 2,291,025 $ 2,264,783
Nonutility plant 3,967 3,967
Construction work in progress 51,715 53,354
2,346,707 2,322,104
Accumulated depreciation (1,022,727) (998,710)
1,323,980 1,323,394
Investments and Other Assets:
Allegheny Generating Company - common stock at equity 41,821 43,258
Other 400 410
42,221 43,668
Current Assets:
Cash and temporary cash investments 387 34,509
Accounts receivable:
Electric service 84,260 88,789
Affiliated and other 19,438 27,494
Allowance for uncollectible accounts (3,973) (3,534)
Notes receivable from affiliates 33,750 -
Materials and supplies - at average cost:
Operating and construction 27,398 26,047
Fuel 15,559 15,584
Prepaid taxes 9,946 15,914
Other 2,962 2,877
189,727 207,680
Deferred Charges:
Regulatory assets 40,833 46,121
Unamortized loss on reacquired debt 12,313 14,226
Other 2,885 3,762
56,031 64,109
Total Assets $ 1,611,959 $ 1,638,851
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 447,700 $ 447,700
Other paid-in capital 2,690 2,690
Retained earnings 216,384 250,032
666,774 700,422
Long-term debt and QUIDS 593,534 510,344
1,260,308 1,210,766
Current Liabilities:
Long-term debt due within one year - 75,000
Accounts payable 12,565 31,331
Accounts payable to affiliates 42,907 36,433
Taxes accrued:
Federal and state income 12,380 5,861
Other 12,584 19,211
Deferred power costs 16,817 7,859
Interest accrued 7,814 7,321
Maryland settlement 17,892 9,649
Other 7,333 15,662
130,292 208,327
Deferred Credits and Other Liabilities:
Unamortized investment credit 16,784 17,720
Deferred income taxes 153,690 159,351
Regulatory liabilities 43,295 25,319
Other 7,590 17,368
221,359 219,758
Total Capitalization and Liabilities $ 1,611,959 $ 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>
Six Months Ended
June 30
2000 1999
CASH FLOWS FROM OPERATIONS:
<S> <C> <C> <C> <C>
Net income $ 38,880 $ 54,900
Extraordinary charge, net of taxes 12,278 -
Income before extraordinary charge 51,158 54,900
Depreciation and amortization 39,450 38,108
Deferred investment credit and income taxes, net (788) (7,047)
Deferred power costs, net 1,735 8,894
Unconsolidated subsidiaries' dividends in excess of earnings 1,441 1,605
Allowance for other than borrowed funds used
during construction (237) (326)
Changes in certain current assets and
liabilities:
Accounts receivable, net 13,024 (35,089)
Materials and supplies (1,326) (1,439)
Prepaid taxes 5,968 5,735
Accounts payable (12,292) (14,158)
Taxes accrued (108) 5,564
Other deferred credits 99 7,181
Other, net 6,104 14,073
104,228 78,001
CASH FLOWS FROM INVESTING:
Construction expenditures (less allowance for other
than borrowed funds used during construction) (40,106) (28,155)
CASH FLOWS FROM FINANCING:
Issuance of long-term debt 79,900 9,300
Retirement of long-term debt (75,000) -
Funds on deposit with trustees 3,133 (8,013)
Notes receivable from subsidiary - 7,100
Notes receivable from affiliates (33,750) (18,250)
Dividends on preferred stock - (409)
Dividends on common stock (72,527) (32,906)
(98,244) (43,178)
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (34,122) 6,668
Cash and temporary cash investments at January 1 34,509 1,805
Cash at June 30 $ 387 $ 8,473
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amount capitalized) $22,221 $20,920
Income taxes 20,092 23,282
</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 (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
June 30, 2000, the results of operations for the three and six months
ended June 30, 2000 and 1999, and cash flows for the six months ended
June 30, 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 Six Months Ended
June 30 June 30
2000 1999 2000 1999
(Thousands of Dollars)
Electric operating revenues $17,359 $17,810 $34,514 $35,667
Operation and maintenance expense 958 1,304 2,324 2,915
Depreciation and amortization 4,242 4,245 8,486 8,490
Taxes other than income taxes 1,081 1,129 2,214 2,261
Federal income taxes 2,139 2,546 3,968 4,960
Interest charges 3,349 3,285 6,654 6,688
Other income, net (3) (1) (3) (2)
Net income $ 5,593 $ 5,302 $10,871 $10,355
The Company's share of the equity in earnings above was $1.6 million
and $1.5 million for the three months ended June 30, 2000 and 1999,
respectively, and $3.0 million and $2.9 million for the six months
ended June 30, 2000 and 1999, respectively, and is included in other
income, net, on the Company's Statement of Income.
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 Company
(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 in
December 1999, 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 the
West Virginia Legislature to consider the necessary tax law changes in
their next session in the first quarter of 2001 and if the Legislature
approves 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
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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 Company, is
permitted to transfer West Virginia jurisdictional generating assets to
its non-regulated generation affiliate, 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
will be transferred to a Allegheny Energy Supply at book value in
August 2000 in conjunction with the Maryland law that allows generating
assets to be transferred to non-regulated ownership.
* The Company will recover the cost of its non-utility generation
contracts through a series of surcharges applied to all customers over
10 years.
* Industrial customers will receive a 3% rate reduction.
* A special "Rate Stabilization" account of $14.1 million was
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 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
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7. The Balance Sheet includes the amounts listed below for
generation assets not subject to SFAS No. 71.
June December
2000 1999
(Millions of Dollars)
Property, plant and equipment at
original cost $797.1 $563.9
Amounts under construction included above 24.0 17.6
Accumulated depreciation (428.2) (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
six months ended June 30, 2000 and 1999 were $28.2 million and $31.2
million, respectively.
9. A Securities and Exchange Commission announcement at the March
16, 2000 EITF meeting requires companies to disclose their accounting
policy for repair and maintenance costs incurred in connection with
planned major maintenance activities. For the Company, maintenance
expenses represent costs incurred to maintain the power stations, the
transmission and distribution (T&D) system, and general plant and
reflect routine maintenance of equipment and right-of-way, as well as
planned major repairs and unplanned expenditures, primarily from forced
outages at the power stations and periodic storm damage on the T&D
system. Maintenance costs are expensed in the year incurred. Power
station major maintenance costs are expensed within the year based on
estimated annual costs and estimated generation. T&D right-of-way
vegetation control costs are expensed within the year based on
estimated annual costs and estimated sales. Power station major
maintenance accruals and T&D right-of-way vegetation control accruals
are not intended to accrue for future years' costs.
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Subsequent Events
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.
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 Allegheny Generating Company 42.3
Other assets 33.6
Liabilities 184.0
The Company made a liquidating dividend to Allegheny Energy,
Inc. reducing the Company's common equity by $338.4 million for its
ownership interest in a subsidiary merged in Allegheny Energy
Supply. The Company no longer has any ownership interest in
generating assets or contractual rights to generating capacity other
than 4 MW in hydro stations in Virginia and those arising under the
Public Utility Regulatory Policies Act of 1978.
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THE POTOMAC EDISON COMPANY
Management's Discussion and Analysis of Financial Condition
And Results of Operations
COMPARISON OF SECOND QUARTER OF 2000 AND SIX MONTHS ENDED JUNE
30, 2000 WITH SECOND QUARTER AND SIX MONTHS ENDED JUNE 30,
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
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 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 Six 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 Virginialegislation,
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
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recorded an extraordinary charge of $20.0 million ($12.3 million after
taxes) during the first six 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 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.
Transfer of Potomac Edison Generation Assets to Allegheny Energy
Supply
On August 1, 2000, Allegheny Energy, Inc. (Allegheny Energy)
transferred 2,100 megawatts (MW) of the Company's 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 SEC approved the transfer.
Pursuant to a series of fixed period contracts, Allegheny Energy
Supply supplies the West Penn Power Company (West Penn) and Potomac
Edison with power through 2008. Under these contracts, referred to
as full requirements 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 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 Allegheny Energy's
shareholders. Allegheny Energy will withhold any decision until
Monongahela Power's generating assets are transferred to Allegheny
Energy Supply, which is currently targeted for the first quarter of
2001.
Virginia Functional Separation Plan
In connection with the transfer of generating assets discussed
above, on May 25, 2000, Allegheny Energy filed an application with
the Virginia State Corporation Commission (Virginia SCC) to
functionally separate its approximately 380 MW of generating assets
from its transmission and distribution assets effective July 1, 2000.
On July 11, 2000 the Virginia SCC issued an order approving Allegheny
Energy's functional separation plan permitting the transfer of
Allegheny Energy's Virginia generating assets to its unregulated
subsidiary, Allegheny Energy Supply.
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As a part of the application filed with the Virginia SCC on May 25,
2000, Allegheny Energy also filed a Memorandum of Understanding,
which included the following:
* Agreement to reduce Virginia jurisdictional base rate
revenues by $1 million, effective July 1, 2000.
* Agreement not to file an application for a base rate increase
prior to January 1, 2001.
* Agreement to operate and maintain its distribution system in
Virginia at or above historic levels of service quality and
reliability.
* Agreement during default service period to contract for
generation services to be provided to customers at the same costs
that it would incur to serve customers from the units it now owns.
* A proposal to terminate the fuel factor mechanism and instead
recover fuel costs through base rates.
The Virginia SCC separated their consideration of the proposed
transfers from that of the elimination of the fuel factor and the
base rate reduction. After negotiations, Allegheny Energy filed a
Motion to Expand Settlement providing for an additional decrease
Allegheny Energy's Virginia rates during the first two years
following the effective date of the $1 million base rate decrease.
The expanded settlement calls for Allegheny Energy to roll fuel into
base rates effective at the time of the $1 million base rate
decrease. Thereafter, Allegheny Energy agrees that for the first
year following the effective date of the $1 million base rate
decrease, it will implement a fuel rate adjustment (credit) reducing
Allegheny Energy's annual fuel revenues by $750,000. In the second
year following the effective date of the $1 million base rate
decrease, Allegheny Energy agrees to revise the fuel adjustment
(credit) such that its annual revenues are reduced by $250,000.
Thereafter, the fuel rate adjustment will terminate. The Va. SCC
issued an order on July 26, 2000 approving the termination of the
fuel factor mechanism. The fuel factor will be rolled into base
rates effective for bills rendered on and after August 7, 2000. The
Commission also granted the Motion to Expand Settlement and the
resulting customer credits.
West Virginia Approval of Monongahela Power Transfer of Generation
Assets to Allegheny Energy Supply
On June 23, 2000, the W. Va. PSC issued an order that will
permit Monongahela Power to transfer its approximately 2,040 MW of
generating assets to Allegheny Energy Supply prior to implementation
of the industry restructuring plan approved by the Legislature in
March, 2000. If Monongahela Power elects to transfer its generating
assets prior to implementation of the plan, it must file a detailed
description of the transfer with the W. Va. PSC and obtain the
Commission's prior consent. A condition of obtaining that consent
would be that Monongahela Power agree to adhere to the rate
protections, consumer protections, capacity protections, and tax
neutrality protections to state and local governments contained in
the plan. If Monongahela Power elects to transfer the assets after
implementation of the plan, it must submit a petition to the W. Va.
PSC containing a detailed description of the proposed transfer and
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seek a finding that the transfer complies with the terms and
conditions of the plan. Monongahela Power currently anticipates
seeking the Commission's consent to transfer the assets prior to
implementation of the plan.
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 the Company's affiliate's, Monongahela Power, 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 its affiliate, 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
Company's settlement rates will result in a net annual revenue
increase of approximately $.2 million for 2000 increasing over 8
years to an annual increase of approximately $4.3 million. The
Company's affiliate, Monongahela Power, settlement rates will result
in a net annual revenue reduction of approximately $.5 million in
2000 increasing over 8 years to annual reduction of approximately
$6.0 million.
Also the Company shall amortize the existing overcollected
deferred fuel balance as of June 30, 2000 (approximately $ 10
million) as a reduction of expenses over a 4 and one-half year period
that began July 1, 2000 which offsets the net rate decreases.
Effective July 1, 2000, the Company and Monongahela Power used their
expanded net energy cost 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 over-recovery of approximately $9.9
million to customers over a period of twelve months that began April
30, 2000. As of July 1, 2000, the deferred fuel balance was $5.9
million which will continue to be refunded to customers through April
30, 2001.
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 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
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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 of 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
targeted earnings level. As a result, 50 percent of the amount above
the targeted 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. The Company accrued an
estimate of the overearnings sharing obligation during 1999.
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 Company's Parent, Allegheny
Energy, Inc., releases were provided to the media in the Parent
company's area and posted on the Parent company's web site. The
Parent company filed its 1999 TRI report with the Environmental
Protection Agency prior to the July 1, 2000 deadline date, reporting
27.5 million pounds of total releases for calendar year 1999.
Review of Operations
EARNINGS SUMMARY
Net income in the second quarter of 2000 was $20.0 million,
compared with $18.7 million in the corresponding 1999 period. For
the first six months of 2000, net income was $51.2 million, excluding
an extraordinary charge of $12.3 million, net of taxes, compared with
$54.9 million in the corresponding 1999 period. The increase in net
income for the second quarter of 2000 was primarily due to decreases
in certain operating expenses as a result of decreases in several
expense categories. The decrease in net income before the
extraordinary charge for the six months ended June 30, 2000 was
primarily due to increases in interest expense and depreciation and
amortization expense.
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. Net income for the first six months of
2000 was $38.9 million.
<PAGE>
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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 Six Months Ended
June 30 June 30
Revenues kWh Revenues kWh
Residential 5.9% 7.4% 3.3% 3.0%
Commercial 5.3 9.3 2.7 4.0
Industrial (.6) 3.0 .3 2.2
Total 3.6% 5.7% 2.3% 2.8%
Residential kWh sales, which are more weather sensitive than the
other classes, experienced increases for both the second quarter and
six months ended June 30, 2000. The increases for residential kWh
sales were due to changes in customer usage because of weather
conditions and growth in 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 second quarter and six months ended June 30, 2000, were
primarily due to growth in the number of customers and increased
usage.
Industrial kWh sales for the second quarter and first six months
of 2000 increased due to increased sales to primary metal industry
customers, paper, printing, and publishing customers, and food
products 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 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.
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Changes in revenues from retail customers resulted from the
following:
Change from Prior Periods
(Millions of Dollars)
Three Month Ended Six Month Ended
June 30 June 30
Fuel clauses $(4.6) $(8.5)
All other 10.5 16.7
Net change in retail revenues $ 5.9 $ 8.2
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 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 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 assume 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.
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 increases in
the second quarter and first six months of 2000 for all other retail
revenues was primarily the result of growth in the number of
customers and increased usage.
Wholesale and other revenues were as follows:
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
(Millions of Dollars)
Wholesale customers $5.1 $4.8 $10.9 $10.6
Affiliated companies 8.1 2.8 14.9 6.0
Street lighting and other 1.6 .8 2.8 2.1
Settlement Revenues
(Deferred revenues) (.8) (4.5) (.1) (9.0)
Total wholesale and
other revenues $14.0 $3.9 $28.5 $9.7
Wholesale customers are cooperatives and municipalities that own
their own distribution systems and buy all or part of their bulk power
<PAGE>
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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 second quarter and
first six 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 $5.3 million and $8.9 million in the second quarter and
first six 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.
Settlement deferred revenues 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 were as follows:
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
kWh Transactions (in billions):
Bulk power - - .03 .12
Transmission and other
energy services to
nonaffiliated companies .85 .46 1.71 1.17
Total .85 .46 1.74 1.29
Revenues (in millions):
Bulk power $ - $2.2 $1.1 $3.4
Transmission and other
energy services to
nonaffiliated companies 4.2 4.1 7.9 7.0
Total $4.2 $6.3 $9.0 $10.4
The costs of purchased power and revenues from sales to power
marketers and other utilities, including transmission services, are
currently recovered from or credited to customers under fuel and
energy cost recovery procedures. The impact to the fuel and energy
cost recovery clauses may be either positive or negative depending on
whether the Company is a net buyer or seller of electricity during
such periods and the open commitments which exist at such times. The
impact of such price volatility was insignificant to the Company in
the first six months of 2000 and 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
<PAGE>
- 19 -
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.
OPERATING EXPENSES
Fuel expenses for the three and six months ended June 30, 2000
increased 3.4% and decreased 1.0%, respectively. Total fuel expenses
in the second quarter of 2000 increased due to an increase in average
fuel prices. The decrease for the first six months resulted from a
decrease in kWh's generated.
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 Six Months Ended
June 30 June 30
2000 1999 2000 1999
(Millions of Dollars)
Nonaffiliated transactions:
Purchased Power:
From PURPA generation* $21.0 $ 3.1 $39.3 $6.0
Other (.8) 2.9
Power exchanges, net - (1.3) 4.1 (.2)
Affiliated transactions:
AGC capacity charges 4.3 5.0 9.7 10.0
Other affiliated capacity
charges 7.4 9.7 16.5 19.8
Energy and spinning reserve
charges 15.6 12.2 28.2 25.9
Purchased power and
exchanges, net $47.5 $28.7 $100.7 $61.5
*PURPA cost (cents per kWh) 6.7 - 6.1 -
The increases for the three and six months ended June 30, 2000,
of $17.9 million and $33.3, 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.
<PAGE>
- 20 -
Other operations expenses decreased $3.8 million and $3.2
million in the second quarter and six months ended June 30, 2000,
respectively. The decreases were due in part to second quarter and
year to date June 2000 underruns in provisions for uninsured claims
of $1.5 million and $1.3 million, respectively. In addition, the
2000 decreases were due to a 1999 second quarter litigation
settlement of $2.7 million.
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 theamount of work found necessary when the equipment is dismantled.
On August 1, 2000, the Company transferred 2,100 megawatts of its
Maryland, Virginia, and West Virginia jurisdictional generating
assets to Allegheny Energy Supply. As a result effective August 1,
2000, future maintenance expenses will be to support the Company's
delivery or wires business.
Depreciation and amortization expense in the three and six
months ended June 30, 2000 increased $.4 million and $1.3,
respectively, due to increased investment.
Taxes other than income taxes decreased $.6 million in the
second quarter of 2000 primarily due to a $1.1 million prior period
adjustment related to FICA taxes, offset in part by a $.4 million
increase in property taxes. Year-to-date June 2000 taxes other than
income taxes increased $.7 million due to increased property and
gross receipts taxes.
Federal and state income taxes decreased $.6 million and $3.0
million in the second quarter and first six months of 2000,
respectively, due primarily to decreased taxable income and to the
Company's share of tax savings in consolidation related to its
parent, Allegheny Energy.
The increase in other interest expense of $.4 million and $.6
million for the second quarter and first six months of 2000 reflects
changes in the levels of short-term debt maintained by the Company
throughout the year, as well as the associated interest rates.
The extraordinary charge in the first six 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 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.
<PAGE>
- 21 -
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.
* Financings
In the first six months of 2000 the Company redeemed $75 million
of 5 7/8% series first mortgage bonds.
* 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 six months ended
December 31, 2000.
<PAGE>
- 22 -
* 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. On June
23, 2000, the court denied the request for the appeal. The Court
also granted the EPA's request to lift the previous court ordered
stay of the September 1999 SIP submittal deadline by which the States
must file their compliance plans to implement the NOx SIP call
regulation. The new SIP submittal deadline is October 28, 2000 and
the compliance due date will remain May 1, 2003. The Company's
compliance with such stringent regulations will require the
installation of expensive post-combustion control technologies on
most of its power stations, with a total capital cost of $103
million. Of that amount, $3 million was spent in 1999.
On August 2, 2000, Allegheny Energy 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
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.
Allegheny Energy believes its generating facilities have been
operated 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 not
trigger the requirements of the New Source Performance Standards, or
a major modification of the facility, which would require compliance
with the New Source Performance Standards. If federal new Source
Performance Standards were to be applied to these generating
stations, in addition to the possible imposition of fines, compliance
would entail significant expenditures. In connection with the
deregulation of generation, we have agreed to rate caps in each of
our 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 Federal Energy
Regulatory Commission to compel electric utilities to allow third
parties to sell electricity to wholesale customers over their
<PAGE>
- 23 -
transmission systems.
Since 1992, the wholesale electricity market has become more
competitive as companies are engaging in nationwide power trading. In
addition, the majority of states have taken active steps toward
allowing retail customers the right to choose their electricity
supplier. The Company continues to be an advocate of federal
legislation to create competition in the retail electricity markets
to avoid regional dislocations and ensure level playing fields.
In the absence of federal legislation, state-by-state
implementation of deregulation of electric generation is under way.
Allegheny Energy is at the forefront of state-implemented retail
competition, having successfully negotiated settlement agreements in
all of the states the Operating Subsidiaries (Monongahela Power,
Potomac Edison, and West Penn serve. Pennsylvania and Maryland have
retail choice programs in place, while Virginia, Ohio, and West
Virginia are in the process of developing rules to implement choice
over the next two years.
Activities at the Federal Level
Allegheny Energy continues to seek enactment of federal
legislation to bring choice to all retail electric customers,
deregulate the generation and sale of electricity on a national
level, and create a more liquid, free market for electric power.
Fully meeting challenges in the emerging competitive environment will
be difficult for the Company unless certain outmoded and anti-
competitive laws, specifically the PUHCA and Section 210 (Mandatory
Purchase Provisions) of PURPA, are repealed or significantly revised.
Allegheny Energy 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 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 Company priorities
by repealing PUHCA and the mandatory purchase provisions of PURPA.
Although there was considerable activity and discussion on this bill
and several other bills in the House and Senate, that activity fell
short of moving consensus legislation forward prior to the August
recess. While it is too early to tell whether initial momentum on
the issue will result in legislation this year, the upcoming
presidential elections in November pose a significant hurdle.
The Company has franchised regulated customers in Maryland,
Virginia, and West Virginia.
<PAGE>
- 24 -
Maryland Activities
On June 7, 2000, the Maryland PSC approved the transfer of the
Company's generating assets to, 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. To date, no
customers have switched in the Company's service territory. On July
1, 2000, the Commission issued a restrictive order on affiliated
transactions and codes of conduct, which Allegheny Energy plans to
file an appeal in court. The Commission is developing rules on emissions
disclosure and is also examining whether and how to require renewable
portfolio standards for retail suppliers in the state.
Virginia Activities
On March 25, 1999, Governor Gilmore signed the Virginia Electric
Utility Restructuring Act (Restructuring Act) passed by the Virginia
General Assembly. All utilities must submit a restructuring plan by
January 1, 2001, to be effective on January 1, 2002. Customer choice
will be phased in beginning on January 1, 2002, with full customer
choice by January 1, 2004. The Restructuring Act was amended during
the 2000 General Assembly legislative session. In addition to a
number of clarifying and technical changes, the amendments direct the
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. 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.
On May 25, 2000, the Company filed Phase I of its functional
separation plan with the Virginia SCC, requesting approval to
transfer ownership, at book value, of its generation facilities with the
exception of the Virginia hydro stations and the Riverton power plant
property to Allegheny Energy Supply as of July 1, 2000.
On July 11, 2000, the Virginia SCC issued an order approving the
Company's separation plan permitting the transfers of The Company's
generating assets and the following provision of the Phase I
application. See Virginia Functional Separation Plan on page 11 for
more information.
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 a
nd electricity rates initially would be reduced for large
<PAGE>
- 25 -
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 its 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 if the
Legislative approves the necessary tax law changes. The W. Va. PSC
is currently in the process of developing the rules under which
competition will occur. Associated rulemaking proceedings are
scheduled for the remainder of this year. The W. Va. PSC approved
the Company's and its affiliate's, Monongahela Power, request to
transfer generating assets to Allegheny Energy Supply by July 1, 2000
and the start of competition, respectively. In accordance with the
restructuring agreement the Company 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
On June 22, 1999, the Ohio General Assembly passed legislation
to restructure its electric utility industry. Governor Taft added his
signature soon thereafter, and all of the state's customers will be
able to choose their electricity supplier starting January 1, 2001,
beginning a five-year transition to market rates. Total electric
rates will be frozen over that period, and residential customers are
guaranteed a 5% cut in the generation portion of their rate. The
determination of stranded cost recovery will be handled by the 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 Company's affiliate, 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 filed with
the (Ohio PUC) on June 22, 2000. The following are the highlights of
the agreement:
<PAGE>
- 26 -
* Monongahela Power will be permitted to transfer approximately
325 MW of Ohio jurisdictional generating assets to a non-regulated
affiliate at book value on January 1, 2001.
* Residential customers will receive a five-percent reduction
in the generation portion of their electric bills during a five-year
market development period beginning on January 1, 2001. The rates
will be frozen for five years.
* Monongahela Power's affiliate's existing, low generation
rates will be frozen for a maximum of three years for large
industrial and commercial customers.
* Monongahela Power, will collect a regulatory asset transition
charge through the respective market development periods.
* Monongahela Power's unregulated affiliate Allegheny Energy
Supply, will be permitted to offer competitive generation service
throughout Ohio.
* All additional taxes resulting from competitive legislation
will be deferred for up to two years.
* Monongahela Power will participate with the Ohio PUC and Ohio
Consumer's Counsel in a statewide consumer education campaign
supplemented by a local education effort.
The Company anticipates the Ohio PUC's approval during the third
quarter of 2000.
Pennsylvania Activities
As of January 2, 2000, all electricity customers in Pennsylvania
had the right to choose their electric suppliers. The number of
customers who have switched suppliers and the amount of electrical
load transferred in Pennsylvania far exceed that of any other state
so far. The Company's affiliate, West Penn Power Company, has
retained about 98% of its Pennsylvania customers through June 30, 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 the change to earnings,
<PAGE>
- 27 -
if any, due to discontinuing SFAS No. 71 for the electric portion of
its business in Virginia will be less than 10 million, pre-tax.
<PAGE>
- 28 -
THE POTOMAC EDISON COMPANY
Part II - Other Information to Form 10-Q
for Quarter Ended June 30, 2000
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) The Company filed a Form 8-K on April 24,, 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)
August 14, 2000
