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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 1-267
ALLEGHENY ENERGY, INC.
(Exact name of registrant as specified in its charter)
Maryland 13-5531602
(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, 110,436,317 shares of the Common Stock ($1.25
par value) of the registrant were outstanding.
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ALLEGHENY ENERGY, INC.
Form 10-Q for Quarter Ended June 30, 2000
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Consolidated Statement of Income -
Three and six months ended June 30, 2000 and 1999 3
Consolidated Balance Sheet - June 30, 2000
and December 31, 1999 4
Consolidated Statement of Cash Flows -
Six months ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6-10
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-30
PART II--OTHER INFORMATION 31-33
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ALLEGHENY ENERGY, INC.
Consolidated Statement of Income
(Thousands of Dollars)
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
OPERATING REVENUES:
Regulated operations $ 573,961 $ 534,191 $ 1,196,511 $ 1,126,783
Unregulated generation 286,488 107,591 527,553 202,535
Other 4,874 1,622 8,049 4,073
Total Operating Revenues 865,323 643,404 1,732,113 1,333,391
OPERATING EXPENSES:
Operation:
Fuel for electric generation 129,726 127,335 265,414 267,944
Purchased power and exchanges, net 306,100 97,372 570,395 188,207
Deferred power costs, net 2,404 9,370 4,868 13,056
Other 93,782 87,630 190,085 169,931
Maintenance 58,842 54,432 115,917 110,866
Depreciation and amortization 62,793 63,987 126,454 130,852
Taxes other than income taxes 50,750 48,023 100,677 95,917
Federal and state income taxes 41,984 43,510 99,231 104,627
Total Operating Expenses 746,381 531,659 1,473,041 1,081,400
Operating Income 118,942 111,745 259,072 251,991
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 83 440 570 776
Other income, net 6,213 (2,048) 5,241 (1,040)
Total Other Income and Deductions 6,296 (1,608) 5,811 (264)
Income Before Interest Charges, Preferred
Dividends, and Extraordinary Charge, Net 125,238 110,137 264,883 251,727
INTEREST CHARGES AND PREFERRED DIVIDENDS:
Interest on long-term debt 41,718 38,700 83,002 77,202
Other interest 13,018 5,890 25,215 10,115
Allowance for borrowed funds used during
construction and interest capitalized (2,214) (1,234) (3,705) (2,402)
Dividends on preferred stock of subsidiaries 1,260 2,267 2,520 4,523
Total Interest Charges and
Preferred Dividends 53,782 45,623 107,032 89,438
Consolidated Income Before
Extraordinary Charge 71,456 64,514 157,851 162,289
Extraordinary Charge, net (1) - - (70,505) -
CONSOLIDATED NET INCOME $ 71,456 $ 64,514 $ 87,346 $ 162,289
COMMON STOCK SHARES OUTSTANDING (average) 110,436,317 118,152,307 110,436,317 120,262,254
BASIC AND DILUTED EARNINGS PER AVERAGE SHARE:
Consolidated income before extraordinary charge $0.65 $0.55 $1.43 $1.35
Extraordinary charge, net (1) - - ($0.64) -
Consolidated net income $0.65 $0.55 $0.79 $1.35
See accompanying notes to consolidated financial statements.
(1) See Note 5 in the notes to the consolidated financial statements.
Certain amounts have been reclassified for comparative purposes.
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ALLEGHENY ENERGY, INC.
Consolidated Balance Sheet
(Thousands of Dollars)
June 30, December 31,
ASSETS: 2000 1999
Property, Plant, and Equipment:
Utility plant $ 6,644,350 $ 6,547,533
Nonutility plant 2,080,044 2,060,423
Construction work in progress 282,979 231,763
9,007,373 8,839,719
Accumulated depreciation (3,722,567) (3,632,568)
5,284,806 5,207,151
Investments and Other Assets:
Excess of cost over net assets acquired 42,240 42,584
Benefit plans' investments 95,151 94,168
Nonutility investments 19,489 15,252
Other 1,821 1,479
158,701 153,483
Current Assets:
Cash and temporary cash investments 10,240 65,984
Accounts receivable:
Utility service 399,230 383,316
Other 12,557 12,273
Allowance for uncollectible accounts (29,854) (26,975)
Materials and supplies - at average cost:
Operating and construction 96,280 92,560
Fuel 63,652 62,280
Prepaid taxes 81,765 58,190
Deferred income taxes - 30,477
Purchased options 31,234 9,158
Other, including current portion of regulatory assets 30,566 31,205
695,670 718,468
Deferred Charges:
Regulatory assets 595,620 663,847
Unamortized loss on reacquired debt 33,225 41,825
Other 65,297 67,667
694,142 773,339
Total Assets $ 6,833,319 $ 6,852,441
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 153,045 $ 153,045
Other paid-in capital 1,044,085 1,044,085
Retained earnings 888,973 896,602
Treasury stock (at cost) (398,407) (398,407)
1,687,696 1,695,325
Preferred stock 74,000 74,000
Long-term debt and QUIDS 2,315,098 2,254,463
4,076,794 4,023,788
Current Liabilities:
Short-term debt 772,826 641,095
Long-term debt due within one year 60,083 189,734
Accounts payable 198,618 233,331
Taxes accrued:
Federal and state income 30,609 20,699
Other 41,858 67,292
Adverse power purchase commitments 25,246 24,895
Other, including current portion of
regulatory liabilities 135,603 131,489
1,264,843 1,308,535
Deferred Credits and Other Liabilities:
Unamortized investment credit 113,052 116,971
Deferred income taxes 857,102 920,943
Regulatory liabilities 133,268 78,743
Adverse power purchase commitments 290,757 303,935
Other 97,503 99,526
1,491,682 1,520,118
Total Capitalization and Liabilities $ 6,833,319 $ 6,852,441
See accompanying notes to consolidated financial statements.
Certain amounts have been reclassified for comparative purposes.
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ALLEGHENY ENERGY, INC.
Consolidated Statement of Cash Flows
(Thousands of Dollars)
Six Months Ended
June 30
2000 1999
CASH FLOWS FROM OPERATIONS:
Consolidated net income $ 87,346 $ 162,289
Extraordinary charges, net of taxes 70,505 -
Consolidated income before extraordinary charges 157,851 162,289
Depreciation and amortization 126,454 130,852
Amortization of adverse purchase power contract (6,275) (5,390)
Deferred investment credit and income taxes, net 5,394 13,086
Deferred power costs, net 4,868 13,056
Allowance for other than borrowed funds used
during construction (570) (776)
Changes in certain assets and liabilities:
Accounts receivable, net (13,319) (34,940)
Materials and supplies (5,092) (9,413)
Prepaid taxes (23,575) 3,195
Purchased options (22,076) (5,101)
Accounts payable (34,713) 15,836
Taxes accrued (15,524) 228
Restructuring settlement rate refund - (12,825)
Other, net 6,940 11,524
180,363 281,621
CASH FLOWS FROM INVESTING:
Regulated operations construction expenditures (less allowance
for other than borrowed funds used during construction) (108,404) (88,771)
Unregulated generation construction expenditures and investments (97,651) (32,839)
Other construction expenditures and investments (2,712) (6,032)
(208,767) (127,642)
CASH FLOWS FROM FINANCING:
Repurchase of common stock - (191,450)
Issuance of long-term debt 79,900 114,830
Retirement of long-term debt (159,655) (51,714)
Funds on deposit with trustees
and restricted funds 13,172 (26,453)
Short-term debt, net 131,731 115,147
Cash dividends paid on common stock (92,488) (102,786)
(27,340) (142,426)
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (55,744) 11,553
Cash and temporary cash investments at January 1 65,984 17,559
Cash and temporary cash investments at June 30 $ 10,240 $ 29,112
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amount capitalized) $105,798 $80,094
Income taxes 110,399 63,096
See accompanying notes to consolidated financial statements.
Certain amounts have been reclassified for comparative purposes.
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ALLEGHENY ENERGY, INC.
Notes to Consolidated Financial Statements
1. The Notes to Consolidated Financial Statements of Allegheny
Energy, Inc. (the Company) in its Annual Report on Form 10-K for the
year ended December 31, 1999 should be read with the accompanying
consolidated financial statements and the following notes. With the
exception of the December 31, 1999 consolidated balance sheet in the
aforementioned annual report on Form 10-K, the accompanying
consolidated financial statements appearing on pages 3 through 5 and
these notes to consolidated financial statements are unaudited. In
the opinion of the Company, such consolidated financial statements
together with these notes contain all adjustments (which consist only
of normal recurring adjustments) necessary to present fairly the
Company's financial position as of June 30, 2000, the results of
operations for three and six months ended June 30, 2000 and 1999, and
cash flows for the six months ended June 30, 2000 and 1999. Certain
prior period amounts in these notes have been revised for comparative
purposes.
2. The Company owns all of the outstanding common stock of its
subsidiaries. The consolidated financial statements include the
accounts of the Company and all subsidiary companies after elimination
of intercompany transactions.
3. For purposes of the Consolidated Balance Sheet and Consolidated
Statement of Cash Flows, temporary cash investments with original
maturities of three months or less, generally in the form of
commercial paper, certificates of deposit, and repurchase agreements,
are considered to be the equivalent of cash.
4. The West Virginia Legislature passed House Concurrent Resolution
27 on March 11, 2000 approving an electric deregulation plan submitted
by the Public Service Commission of West Virginia (W.Va. PSC) with
certain modifications. The need for further action by the
Legislature, including the enactment of certain tax changes regarding
preservation of tax revenues for state and local government, is
required prior to the implementation of the restructuring plan for
customer choice. The Company expects the West Virginia Legislature to
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 customers.
* After year 7, the power supply rate for large commercial and
industrial customers will no longer be regulated.
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* The Company is permitted to transfer West Virginia jurisdictional
generating assets of its Monongahela Power Company (Monongahela Power)
subsidiary to its non-regulated generation company, Allegheny Energy
Supply Company, LLC (Allegheny Energy Supply), at book value. Also,
based on a final order issued by the W. Va. PSC on June 23, 2000, the
West Virginia jurisdictional assets of the Company's subsidiary, The
Potomac Edison Company (Potomac Edison), will be transferred to
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 $56.7 million has been
established for residential and small business customers to mitigate
the impact of the market price of power as determined by the W. Va.
PSC.
5. In 1997, the Emerging Issues Task Force (EITF) issued EITF No. 97-
4, "Deregulation of the Pricing of Electricity-Issues Related to the
Application of FASB Statement Nos. 71 and 101." The EITF agreed that,
when a rate order that contains sufficient detail for the enterprise
to reasonably determine how the transition plan will affect the
separable portion of its business whose pricing is being deregulated
is issued, the entity should cease to apply the Financial Accounting
Standards Board's (FASB) Statement of Financial Standards (SFAS) No.
71 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, Monongahela Power and Potomac Edison discontinued the
application of SFAS No. 71 for their West Virginia jurisdictions'
electric generation operations in the first quarter of 2000.
Monongahela Power and Potomac Edison recorded under the provisions
of SFAS No. 101, "Accounting for the Discontinuation of
Application of FASB Statement No. 71," an extraordinary charge of
$70.5 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 $ 60.0 $36.2
Rate stabilization obligation 56.7 34.3
2000 extraordinary charge $116.7 $70.5
6. On June 7, 2000 the Maryland Public Service Commission (Maryland
PSC) approved the transfer of the Maryland jurisdictional share of the
generating assets of Potomac Edison, to Allegheny Energy Supply at net
book value. On June 23, 2000, the W. Va. PSC issued an order which,
in part, authorized Potomac Edison to transfer at net book value its
West Virginia jurisdictional share of its generating assets to an
unregulated affiliate in conjunction with the Maryland transfer.
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Also, on July 11, 2000, the Virginia State Corporation Commission
(Virginia SCC) authorized the transfer of the Virginia jurisdictional
share of Potomac Edison's generating assets, excluding the hydroelectric
assets located within the state of Virginia, approximately 380
megawatts (MW) of electric generation facilities with an estimated
book value of $292 per kilowatt to an unregulated affiliate at net
book value. On July 31, 2000, the Securities and Exchange
Commission approved these transfers of generating assets. As a
result, approximately 2,100 MW of electric generation facilities
with an estimated net book value of approximately $615 million was
transferred to Allegheny Energy Supply in August 2000.
7. The 1998 Pennsylvania Public Utility Commission (Pennsylvania
PUC) order for restructuring authorized recognition of an additional
Competitive Transition Charge (CTC) regulatory asset (Additional CTC
Regulatory Asset) to reduce the adverse effects, if any, that
competition will have on West Penn Power Company (West Penn) during
the years 1999 to 2002. No additional CTC Regulatory Asset was
recorded by West Penn as of June 30, 2000.
8. The Consolidated Balance Sheet includes the amounts listed below
for generation assets not subject to SFAS No. 71, "Accounting for the
Effects of Certain Types of Regulation." The final one-third of West
Penn's generation assets were transferred to the Company's unregulated
generation segment on January 2, 2000.
June December
2000 1999
(Millions of Dollars)
Property, plant and equipment at
original cost $3,854.1 $2,678.4
Amounts under construction included above 199.5 101.8
Accumulated depreciation (1,846.9) (1,238.3)
9. The Company's principal operating segments are regulated
operations, unregulated generation, and other. Prior to the second
quarter of 2000, the Company reported operating segments consisting of
utility and nonutility operations. The Company has restated prior
period segment information.
The regulated operations segment, previously reported as the
utility segment, consists primarily of the subsidiaries Monongahela
Power, Potomac Edison, and West Penn. The regulated operations
segment operates electric transmission and distribution systems and
natural gas distribution systems and generates electric energy in
regulatory jurisdictions which have not yet implemented
deregulation of electric generation.
The unregulated generation segment, previously reported in the
nonutility segment, consists primarily of the subsidiary Allegheny
Energy Supply. Allegheny Energy Supply is an unregulated energy
production and marketing subsidiary which markets competitive
wholesale electricity and retail electricity in states where
customer choice has been implemented.
The other segment, previously reported in the nonutility segment,
consists of Allegheny Ventures, Inc. (Allegheny Ventures), an
unregulated subsidiary which develops new business opportunities
including telecommunication.
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Business segment information is summarized below. Significant
transactions between reportable segments are eliminated to reconcile
the segment information to consolidated amounts. The identifiable
assets information does not reflect the elimination of intercompany
balances or transactions which are eliminated in the Company's
consolidated financial statements.
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
(Thousands of Dollars)
Operating Revenues:
Regulated operations $591,883 $546,179 $1,230,262 $1,143,147
Unregulated generation 410,348 186,855 786,369 353,663
Other 4,968 1,622 8,165 4,074
Eliminations (141,876) (91,252) (292,683) (167,493)
Depreciation and amortization:
Regulated operations 49,436 49,801 99,948 101,871
Unregulated generation 12,912 14,065 25,796 28,834
Other 445 121 710 147
Federal and State Income Taxes:
Regulated operations 39,769 38,048 87,013 89,644
Unregulated generation 1,648 5,577 11,601 15,176
Other 567 (115) 617 (193)
Operating Income:
Regulated operations 104,032 96,991 221,833 216,854
Unregulated generation 14,052 14,343 36,280 35,029
Other 858 411 959 108
Interest Charges and
Preferred Dividends:
Regulated operations 52,542 36,938 104,535 72,560
Unregulated generation 5,188 8,677 10,222 16,849
Other 261 8 261 29
Eliminations (4,209) (7,986)
Consolidated Income Before
Extraordinary Charge:
Regulated operations 59,573 60,318 127,265 144,476
Unregulated generation 10,654 4,509 29,396 18,423
Other 1,229 (313) 1,190 (610)
Extraordinary Charge, Net:
Regulated operations 70,505
Capital Expenditures:
Regulated operations 67,468 55,163 108,974 89,547
Unregulated generation 55,724 31,575 97,651 32,839
Other 4,060 (373) 2,712 6,032
June 30 December 31
2000 1999
Identifiable Assets:
Regulated operations $5,201,388 $5,293,394
Unregulated generation 1,584,844 1,518,074
Other 47,087 40,973
See Note 5 for a discussion of extraordinary charge, net.
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10. Common stock dividends per share declared during the periods for
which income statements are included are as follows:
2000 1999
1st 2nd 1st 2nd
Quarter Quarter Quarter Quarter
Number of Shares 110,436,317 110,436,317 122,436,317 116,600,317
Amount per Share $.43 $.43 $.43 $.43
11. On May 17, 2000, the United States Court of Appeals for the Third
Circuit affirmed the decision of the United States District Court for the
Western District of Pennsylvania which had found that DQE, Inc. did not
breach the April 1, 1997 Agreement and Plan of Merger and had granted
judgment in favor of DQE, Inc. on all claims and all requests for
injunctive relief.
12. 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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ALLEGHENY ENERGY, INC.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
COMPARISON OF SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 2000 WITH
SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1999
The Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of
Operations in the Allegheny Energy, Inc.'s (the Company) Annual Report
on Form 10-K for the year ended December 31, 1999 should be read with
the following Management's Discussion and Analysis information.
Factors That May Affect Future Results
Management's discussion and analysis of financial condition and
results of operations contains forecast information items that are
"forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. These include statements with respect
to deregulation activities and movements toward competition in states
served by the Company, and results of operations. All such forward-
looking information is necessarily only estimated. There can be no
assurance that actual results will not materially differ from
expectations. Actual results have varied materially and unpredictably
from past expectations.
Factors that could cause actual results to differ materially
include, among other matters, electric utility restructuring,
including 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's subsidiaries; environmental, legislative, and
regulatory changes; future economic conditions; earnings retention and
dividend payout policies; the Company's ability to compete in
unregulated energy markets; 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.
Acquisition of Mountaineer Gas Company
The Company previously reported that Monongahela Power Company
(Monongahela Power) planned to purchase Mountaineer Gas Company, a
natural gas sales, transportation, and distribution company serving
southern West Virginia and the northern and eastern panhandles of West
Virginia, from Energy Corporation of America for $323 million (which
includes the assumption of approximately $100 million in existing
debt).
The Department of Justice and Federal Trade Commission, after
reviewing the proposed acquisition approved the acquisition. The
Federal Communications Commission has approved the transfer of
licenses.
Monongahela Power filed a Form U-1 application with the
Securities and Exchange Commission (SEC) in February 2000 requesting
permission to acquire Mountaineer Gas Company. The Form U-1 filing is
required because the Company is a registered holding company under the
Public Utility Holding Company Act of 1935 (PUHCA).
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A number of key intervenors in the Company's application to the Public
Service Commission of West Virginia (W. Va. PSC) signed a Joint
Stipulation and Settlement Agreement in April 2000 to not oppose
Monongahela Power's acquisition of Mountaineer Gas Company. In May 2000
the W.Va. PSC approved the settlement agreement subject to conditions
previously agreed upon by all parties.
On August 11, 2000, the Company received authority from the Securities and
Exchange Commission to close on the purchase agreement with the Mountaineer Gas
Company. The anticipated closing date for the acquisition of the Mountaineer
Gas Company is August 18, 2000.
Acquisition of West Virginia Power
In December 1999, Monongahela Power purchased from UtiliCorp
United Inc. the assets of West Virginia Power, an electric and natural
gas distribution company located in southern West Virginia, for
approximately $95 million. As part of the transaction, Monongahela
Power signed a 20-year option agreement with UtiliCorp United's
subsidiary, Aquila Energy, for gas supply to Monongahela Power. In
conjunction with the acquisition of West Virginia Power's assets, the
Company purchased for $2.1 million the assets of a heating,
ventilation, and air conditioning business with approximately 10,000
customers and 52 employees.
Transfer of Generation Assets
Transfer of Potomac Edison Generation Assets to Allegheny Energy
Supply
On August 1, 2000, the Company transferred 2,100 megawatts (MW)
of The Potomac Edison Company's (Potomac Edison) 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 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.
The Company is considering ways to maximize the value of its
generating assets, including by means of partnering, selling all or a
portion of the common stock of Allegheny Energy Supply through an
initial public offering, or combining a partial initial public
offering with a spin-off of the remaining stock to the Company's
shareholders. The Company 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.
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Virginia Functional Separation Plan
In connection with the transfer of generating assets discussed above,
on May 25, 2000, the Company filed an application with the Virginia
State Corporation Commission (Virginia SCC ) to 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 the Company's functional
separation plan permitting the transfer of the Company's Virginia
generating assets to its unregulated subsidiary, Allegheny Energy
Supply.
As a part of the application filed with the Virginia SCC on May 25,
2000, the Company 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, the Company filed a Motion to
Expand Settlement providing for an additional decrease to the
Company's Virginia rates during the first two years following the
effective date of the $1 million base rate decrease.
The expanded settlement calls for the Company to roll fuel into
base rates effective at the time of the $1 million base rate decrease.
Thereafter, the Company 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 the Company's annual fuel
revenues by $750,000. In the second year following the effective
date of the $1 million base rate decrease, the Company 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
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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 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.
Ohio Transition Plan
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 Public Utilities
Commission of Ohio (Ohio PUC) on June 22, 2000. The following are the
highlights of the agreement:
* The Company will be permitted to transfer approximately 325
megawatts (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 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 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.
Rate Matters
As previously reported, on February 26, 1999, the W. Va. PSC entered an
order to initiate a fuel review proceeding to establish afuel increment in
rates for Potomac Edison and Monongahela Power to be effective July 1, 1999,
through June 30, 2000. If an agreement was not reached, the proposed fuel
rates which would increase Monongahela Power's fuel rates by $10.9 million
and decrease Potomac Edison'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
- 15 -
designed to make the rates of Potomac Edison and Monongahela Power
consistent. Under the terms of the settlement, several tariff
schedules, notably those available to residential and small commercial
customers, will require several incremental steps to reach the agreed-
upon rate level. The settlement rates will result in a revenue
reduction of approximately $.3 million for 2000 increasing over 8
years to an annual reduction of approximately $1.7 million.
Also the Company shall amortize the existing overcollected
deferred fuel balance as of June 30, 2000 (approximately $16.0
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, Potomac Edison and Monongahela Power ceased
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 Potomac Edison 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.
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, Potomac Edison 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 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 had accrued an
estimate of the overearnings sharing obligation during 1999.
- 16 -
America's Fiber Network Partnership
The Company's unregulated subsidiary, Allegheny Communications
Connect, announced in March 2000 that it, along with five other energy
and telecommunications companies, are partnering to create America's
Fiber Network LLC (AFN), a super-regional high-speed
telecommunications company. The network will initially offer more
than 7,000 route miles, or 140,000 fiber miles, connecting major
markets in the eastern United States to secondary markets with a
growing need for broadband access. The initial footprint of fiber in
AFN puts the company in position to reach areas responsible for roughly
35 percent of the national wholesale communications capacity market.
By year-end 2000, AFN expects to expand its network from the
current 7,000 route miles to 10,000 route miles or 200,000 fiber
miles. AFN will reach this capacity by adding partners with existing
fiber, installing fiber in areas of opportunity, and acquiring existing
fiber from others or contracting long-term lease agreements for existing fiber.
Other partners include AEP Communications, a subsidiary of American
Electric Power; GPU Telcom, a subsidiary of GPU, Inc.; FirstEnergy Telecom,
a subsidiary of FirstEnergy Corp.; CFW Communications; and R&B Communications.
Stockholder Protection Rights Agreement
The Company has adopted a Stockholder Protection Rights Agreement
(Rights Agreement). Under the Rights Agreement, rights were distributed as a
dividend at the rate of one right per each share of the Company's common
stock. The dividend was paid to shareholders of record as of March 16, 2000.
Under its principal provision, if any person or group acquires 15 percent or
more of the Company's outstanding common stock, all other shareholders of the
Company would be entitled to buy, for the exercise price of $100 per right,
common stock of the Company having a market value equal to twice the exercise
price, thereby substantially diluting the acquiring person's or group's
investment.
The rights may cause substantial dilution to a person or group that
acquires 15 percent or more of the Company's common stock. The rights should
not interfere with a transaction that is in the best interests of the Company
and its shareholders, because the rights can be redeemed prior to a triggering
event for $0.01 per right.
The SEC previously issued an order pursuant to the PUHCA, granting
the Company authority to adopt and implement the Rights Agreement.
Allegheny Energy Solutions Alliance
On May 15, 2000, one of the Company's unregulated subsidiaries,
Allegheny Energy Solutions, Inc. announced the formation of a
strategic alliance with Capstone Turbine Corporation (Capstone).
Capstone is the world's leading manufacturer of commercial, ultra-low
emission microturbine power systems. The alliance will help position
the Company as a local and national solutions provider for distributed
generation services.
Conemaugh Generating Station Acquisition
The Company's unregulated subsidiary, Allegheny Energy Supply announced
on May 19, 2000 that it, along with partner PPL Global, Inc., a subsidiary of
- 17 -
PPL Corporation, jointly acquired Potomac Electric Power Company's (Pepco)'s
9.72 percent share in the 1,711 MW Conemaugh Generating Station. This
acquisition of an additional 166 MWs for $152.5 million, will be split
equally between the two companies. Allegheny Energy Supply expects to
finance its $76.25 million share through debt. The purchase strengthens
the Company's presence in the Pennsylvania-New Jersey-Maryland (PJM) power
market. An application for approval has been filed with the SEC. Approval
is expected in the fourth quarter.
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 releases wereprovided to the media in the
Company's area and posted on the Company's web site. The 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.
DQE, Inc. Merger
On May 17, 2000, the United States Court of Appeals for the Third
Circuit affirmed the decision of the United States District Court for
the Western District of Pennsylvania which had found that DQE, Inc.
did not breach the April 1, 1997 Agreement and Plan of Merger and had
granted judgment in favor of DQE, Inc. on all claims and all requests
for injunctive relief.
- 18 -
Review of Operations
EARNINGS SUMMARY
Consolidated Net Income
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
(Millions of Dollars)
Regulated operations $59.6 $60.3 $127.2 $144.5
Unregulated generation 10.7 4.5 29.4 18.4
Other 1.2 (.3) 1.2 (.6)
Consolidated income
before
Extraordinary charge 71.5 64.5 157.8 162.3
Extraordinary charge, - - (70.5) -
net
Consolidated net $71.5 $64.5 $87.3 $162.3
income
Cents Per Share
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
Regulated operations $.54 $.51 $1.15 $1.20
Unregulated generation .10 .04 .27 .16
Other .01 - .01 (.01)
Consolidated Income before
Extraordinary charge .65 .55 1.43 1.35
Extraordinary charge, - - (.64) -
net
Consolidated net $.65 $.55 $ .79 $1.35
income
The increase in earnings for the second quarter of 2000 was due
primarily to solid growth of the Company's unregulated energy supply
business which in part, reflected the transfer of the final one-third
of generating assets of West Penn on January 2, 2000.
The increase in earnings per share in the first six months of
2000, before the extraordinary charge, is primarily attributed to
increased unregulated sales of electricity and the Company's 1999
stock repurchase plan.
Included in the second quarter and first six months of 2000
earnings from regulated operations was income of $3.6 million related
to insurance/litigation settlements. The second quarter and first six
months of 1999 included a similar charge of $3.2 million.
The extraordinary charge of $70.5 million, net of taxes, reflects
write-offs by the Company's regulated West Virginia subsidiaries,
Monongahela Power and Potomac Edison, 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.
- 19 -
SALES AND REVENUES
Total operating revenues for the second quarter and first six
months of 2000 and 1999 were as follows:
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
(Millions of Dollars)
Operating revenues:
Regulated operations:
Electric $548.9 $506.2 $1,138.0 $1,077.5
Gas 3.3 - 13.1 -
Choice 9.6 9.1 20.4 15.9
Bulk power 13.6 17.4 27.9 20.7
Transmission and other
energy services 16.5 13.5 30.9 29.1
Total regulated operations 591.9 546.2 1,230.3 1,143.2
Unregulated generation:
Retail and other 58.9 33.4 113.2 69.3
Bulk power 351.4 153.5 673.2 284.3
Total unregulated generation 410.3 186.9 786.4 353.6
Other 5.0 1.6 8.1 4.1
Eliminations (141.9) (91.3) (292.7) (167.5)
Total operating revenues $865.3 $643.4 $1,732.1 $1,333.4
The increase in regulated electric and gas revenues in the second
quarter and first six months of 2000 was primarily due to the
acquisition of the assets of West Virginia Power purchased by
Monongahela Power in December 1999 and increased regulated electric
revenues due to higher kWh sales as a result of increased usage by
customers.
Choice revenues represent transmission and distribution revenues from
customers in West Penn's distribution territory who chose another supplier to
provide their energy needs. Pennsylvania deregulation gave West Penn's
regulated customers the ability to choose another energy supplier. In the
six month period of 2000, all of West Penn's regulated customers had the
ability to choose, and in the six month period of 1999, two-thirds of West
Penn's customers had the ability to choose. At June 30, 2000, less than 2%
of West Penn's customers chose alternate energy suppliers.
In October 1998, the Maryland PSC approved a settlement agreement for
Potomac Edison. Under the terms of that agreement, Potomac Edison 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 pre-tax income reductions of
$21 million in 2000 and $19 million in 2001. Also, Potomac Edison 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. Potomac Edison'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
- 20 -
over the eleven month period beginning with bills rendered June 7, 2000.
Total regulated operations 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) through June
30, 2000, which were applicable in all Company jurisdictions served,
except for Pennsylvania. Effective July 1, 2000, Potomac Edison'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 West Virginia jurisdiction
for Monongahela Power and Potomac Edison, and effective August 2000, a
fuel clause ceased to exist for Potomac Edison's Virginia
jurisdiction. Effective January 1, 2001, a fuel clause is expected to
cease to exist for Monongahela Power's Ohio jurisdiction.
Through June 30, 2000 changes in fuel revenues in jurisdictions
for which a fuel clause was in existence had no effect on consolidated
net income because increases and decreases in fuel and purchased power
costs and sales of transmission services and bulk power were passed on
to customers by adjustment of customers' bills through fuel clauses.
The first six months of 2000 also includes gas sales and services
and electric revenues from the assets of West Virginia Power purchased
by Monongahela Power in December 1999. Because a significant portion
of the gas sold by the Company's gas distribution operations is
ultimately used for space heating, both revenues and earnings are
subject to seasonal fluctuations. The Company assumes the risks and
benefits of changes in fuel and purchased power costs and sales of
transmission services and bulk power in jurisdictions where a fuel
clause has been eliminated. Effective January 1, 1999 the Company
assumed these risks in Pennsylvania and effective July 1, 2000, the
Company assumes similar risks and benefits for its Maryland and West
Virginia jurisdictions and in August 2000 for its Virginia
jurisdiction. The Company will also assume this risk for the Ohio
jurisdiction when the deregulation plan is implemented which is
expected to occur on January 1, 2001.
The potential exists for significant volatility in the spot
prices for electricity at the wholesale level to significantly affect
the Company'soperating results. The effect may be either positive or
negative, depending on whether the Company's subsidiaries are net buyers or
sellers of electricity during such periods, the open commitments which
exist at such times, and whether the effects of such transactions by
the Company's regulated subsidiaries are included in fuel or energy
cost recovery clauses in their respective jurisdictions.
The increase in unregulated generation revenues is a result of
increased transactions by Allegheny Energy Supply, the Company's
unregulated generation subsidiary, in the unregulated market place to
sell electricity to both wholesale and retail customers and is also
due to having increased generation available for sale. As a result of
the Electricity Generation Customer Choice and Competition Act
(Customer Choice Act) in Pennsylvania, two-thirds of West Penn's
generation was freed up in the first quarter of 1999 and was available
for sale into the unregulated marketplace by the supply business,
subject to Allegheny Energy Supply's obligations under the full
requirements contracts it entered into. In the first quarter of 2000,
the final one-third of West Penn's generation was similarly freed up
and became available for sale into the deregulated marketplace. As a
result, the unregulated generation segment had more generation
available for sale into the deregulated marketplace in the first six
months of 2000.
- 21 -
The elimination between regulated operations, unregulated generation,
and other revenues is necessary to remove the effect of affiliated
revenues, primarily sales of power.
OPERATING EXPENSES
Fuel expenses for the second quarter and first six months of 2000
and 1999 were as follows:
Fuel Expenses
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
(Millions of Dollars)
Regulated operations $ 69.7 $ 83.7 $141.2 $177.4
Unregulated generation 60.0 43.6 124.2 90.5
Total fuel expenses $129.7 $127.3 $265.4 $267.9
Total fuel expenses increased in the second quarter of 2000
primarily due to an increase in average fuel prices.
Total fuel expenses for the first six months of 2000 decreased 1%
due to a 2% decrease in average fuel prices, offset by a 1% increase
related to kWh generated.
The decreases in fuel expenses for regulated operations and the
increases in fuel expenses for unregulated generation for the second
quarter and first six months of 2000, were primarily due to the fuel
expenses associated with the final one-third of West Penn's generation
assets transferred to the Company's unregulated generation subsidiary,
Allegheny Energy Supply, as of January 2, 2000.
Purchased power and exchanges, net, includes purchases from
qualified facilities under the PURPA 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)
Regulated operations:
From PURPA generation* $50.1 $25.8 $ 96.4 $53.8
Purchased gas 2.6 - 8.3 -
Other purchased power 117.5 10.8 255.9 30.8
Total purchased power for
regulated operations 170.2 36.6 360.6 84.6
Power exchanges, net (.1) (3.3) 7.2 1.0
Unregulated generation purchased power 262.5 74.6 475.7 116.1
Eliminations (126.5) (10.5) (273.1) (13.5)
Purchased power and exchanges, net $306.1 $97.4 $570.4 $188.2
*PURPA cost (cents per kWh) 5.7 4.8 5.5 4.9
- 22 -
The increases of $24.3 million and $42.6 million in regulated
operations PURPA generation for the second quarter and first six
months ended June 30, 2000, were due to the start of commercial
operations of the AES Warrior Run PURPA cogeneration project in
Potomac Edison's Maryland service territory. The Maryland PSC has
approved Potomac Edison's full recovery of the AES Warrior Run
purchased power costs as part of the September 23, 1999, settlement
agreement. Accordingly, the Company defers the difference between
revenues collected related to Warrior Run and the cost of the Warrior
Run purchased power which is reflected in other operation expenses.
Purchased gas for the second quarter and year to date 2000
periods was to serve the customers acquired through the acquisition of
West Virginia Power by Monongahela Power.
The increases in other regulated operations purchased power in
the second quarter and six months ended June 30, 2000, were due
primarily to West Penn's purchase of power from its unregulated
generation affiliate, Allegheny Energy Supply, in order to provide
energy to its customers eligible to choose an alternate supplier, but
electing not to do so. The generation previously available to serve
those customers has been freed up by the Customer Choice Act in
Pennsylvania and has been transferred to Allegheny Energy Supply.
Also, unplanned generating plant outages in the first quarter of 2000
caused the regulated utility operations of Potomac Edison and
Monongahela Power to make purchases of higher-priced power on the open
energy market.
The increases in unregulated generation purchased power in the
second quarter and first six months ended June 30, 2000, were for
power to serve the provider of last resort load of, West Penn, and
unplanned first quarter generating plant outages which caused the
Company to make purchases of higher-priced power on the open energy
market.
The elimination between regulated operations and unregulated
generation purchased power is necessary to remove the effect of
affiliated purchased power expenses.
Other operation expenses for the second quarter and first six
months of 2000 and 1999 were as follows:
Other Operation Expenses
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
(Millions of Dollars)
Regulated operations $68.7 $74.7 $140.3 $145.1
Unregulated generation 26.1 15.8 52.2 30.8
Other 3.0 1.3 5.7 2.6
Eliminations (4.0) (4.2) (8.1) (8.6)
Total other operation
expenses $93.8 $87.6 $190.1 $169.9
The decreases in regulated operations expense of $6.0 million and
$4.8 million for the three and six months ended June 30, 2000, reflects
the transfer of the additional one-third of West Penn's generation assets
from regulated operations to unregulated generation on January 2, 2000.
These decreases were offset in part by additional expenses related to the
- 23 -
assets of West Virginia Power purchased by Monongahela Power in December
1999.
The increases in unregulated generation other operation
expenses for the three and six months ended June 30, 2000, were
$10.3 million and $21.4 million, respectively. These increases
were primarily due to increased purchasing of transmission of
electricity for delivery of energy to customers and increased
expenses related to the transfer of West Penn generation assets.
The increases in other - other operations expenses of $1.7
million and $3.1 million, respectively, were due primarily to
increased expenses related to the expanding telecommunications
business of Allegheny Communications Connect, Inc., a subsidiary of
Allegheny Ventures.
The elimination between regulated operations, unregulated
generation, and other operation expenses is primarily to remove the
effect of affiliated transmission purchases.
Maintenance expenses for the second quarter and first six
months of 2000 and 1999 were as follows:
Maintenance Expenses
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
(Millions of Dollars)
Regulated operations $39.1 $43.9 $80.6 $89.9
Unregulated generation 19.7 10.5 35.3 20.9
Other .1
Total maintenance expenses $58.8 $54.4 $115.9 $110.9
The increases in total maintenance expenses for the second quarter
and first six months ended June 30, 2000, were primarily due to
increased power station maintenance in the second quarter of 2000. The
decreases in regulated operations maintenance and the increases in unregulated
generation maintenance were mainly due to the maintenance associated
with the final one-third of West Penn's generation assets transferred
to the Company's unregulated generation subsidiary, Allegheny Energy
Supply. Unregulated generation maintenance in the first six months of 2000
reflects a change in capitalization policy for the Company's subsidiary,
Allegheny Energy Supply, which was formed in November 1999. The policy
change reflects the transfer of assets from a rate regulated operating
environment to one that is non rate regulated. Maintenance expenses
represent costs incurred to maintain the power stations, the T&D
system, and general plant, and reflect routine maintenance of equipment
and rights-of-way, as well as planned major repairs and unplanned
expenditures, primarily from forced outages at the power stations and
periodic storm damage on the T&D system. Variations in maintenance
expense result primarily from unplanned events and planned major
projects, which vary in timing and magnitude depending upon the length
of time equipment has been in service without a major overhaul and the
amount of work found necessary when the equipment is dismantled.
- 24 -
Depreciation and amortization expenses for the second quarter and
first six months of 2000 and 1999 were as follows:
Depreciation and Amortization Expenses
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
(Millions of Dollars)
Regulated operations $49.4 $49.8 $100.0 $101.9
Unregulated generation 12.9 14.1 25.8 28.8
Other .5 .1 .7 .2
Total depreciation and
amortization expenses $62.8 $64.0 $126.5 $130.9
Total depreciation and amortization expenses for the second
quarter and first six months of 2000 decreased $1.2 million and
$4.4 million, respectively, reflecting the changes related to the
establishment of capital recovery policies of Allegheny Energy
Supply. The decreases in regulated operations depreciation and
amortization expenses reflects the transfer of the additional one-
third of West Penn's generation assets from regulated operations to
unregulated generation offset by depreciation of new capital
additions.
Taxes other than income taxes for the second quarter and first
six months of 2000 and 1999 were as follows:
Taxes Other than Income Taxes
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
(Millions of Dollars)
Regulated operations $37.1 $39.8 $75.0 $79.9
Unregulated generation 13.6 8.2 25.5 15.9
Other .1 - .2 .1
Total taxes other than
income taxes $50.8 $48.0 $100.7 $95.9
Total taxes other than income taxes increased $2.8 million and
$4.8 million in the second quarter and first six months of 2000,
respectively, due primarily to increased gross receipts taxes
resulting from higher revenues from retail customers, increased
property taxes, and increased West Virginia Business and Occupation
taxes. These increases were offset in part by reduced franchise and
capital stock taxes due to reduced tax rates and an adjustment
related to prior years.
Regulated operations and unregulated generation taxes other
than income taxes reflect the movement of taxes other than income
taxes associated with the final one-third of West Penn generation
that has been freed up and transferred to the Company's subsidiary,
Allegheny Energy Supply, which is reflected in unregulated
generation.
Federal and state income taxes for the second quarter and first
six months of 2000 decreased $1.5 million and $5.4 million,
respectively, due to decreased taxable income.
- 25 -
Other Income, Net
Other income, net increased $8.3 million and $6.3 million for
the three months and six months ended June 30, 2000, due to a
litigation settlement, interest income on temporary cash
investments, and income related to investments of the Company's
unregulated subsidiary, Allegheny Ventures, Inc.
Interest on long-term debt and other interest for the second
quarter and first six months of 2000 and 1999 were as follows:
Interest Expense
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
(Millions of Dollars)
Interest on long-term debt:
Regulated operations $38.7 $30.6 $78.4 $61.3
Unregulated generation 5.5 8.1 10.9 15.9
Elimination (2.5) - (6.3) -
Total interest on long-term debt 41.7 38.7 83.0 77.2
Other interest:
Regulated operations 12.7 5.1 24.9 8.7
Unregulated generation 1.0 .8 1.7 1.4
Other .3 - .3 -
Elimination (1.0) - (1.7) -
Total other interest 13.0 5.9 25.2 10.1
Total interest expense $54.7 $44.6 $108.2 $87.3
The increases in total interest on long-term debt in the second
quarter and six months ended June 30, 2000 of $3.0 million and $5.8
million, respectively, resulted from increased average long-term debt
outstanding.
The elimination between regulated operations and unregulated
generation on long-term debt is to remove the effect of pollution
control debt interest recorded by Allegheny Energy Supply and West
Penn. The service obligation for the pollution control debt was
assumed by Allegheny Energy Supply in conjunction with the transfer of
West Penn's generating assets. West Penn continues to be a co-obligor
with respect to the pollution control debt.
Other interest expense reflects changes in the levels of short-
term debt maintained by the companies throughout the year, as well as the
associated interest rates. The increase in other interest expense of
$7.1 million and $15.1 million for the second quarter and first six months
ended June 30, 2000, respectively, resulted primarily from the increase in
short-term debt outstanding in conjunction with the repurchase of the
Company's common stock that began late in the first quarter of 1999.
The elimination between regulated operations, unregulated
generation, and other is to remove the effect of affiliated interest
expense.
Dividends on the preferred stock of the subsidiaries decreased due
to the redemption by Potomac Edison and West Penn of their cumulative
preferred stock on September 30, 1999, and July 15, 1999, respectively.
- 26 -
Extraordinary Charge
The extraordinary charge in the six months ended June 30, 2000 of
$116.7 million ($70.5 million, net of taxes) was required to reflect a
write-off by the Company's West Virginia subsidiaries, Monongahela
Power and Potomac Edison, of net regulatory assets determined to be
unrecoverable from customers and establishment of a rate stabilization
account for residential and small commercial customers as required by
the deregulation plan. The extraordinary charge was a result of West
Virginia legislation requiring deregulation of electric generation.
See Note 5 to the consolidated financial statements for additional
information.
Financial Condition and Requirements
Allegheny Energy, Inc's (the Company) 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 subsidiaries are subject to
various contingencies and uncertainties relating to their operations
and construction programs, including legal actions and regulations and
uncertainties related to environmental matters.
Financings
In the first six months of 2000 Potomac Edison redeemed $75
million of 5 7/8% series first mortgage bonds, Monongahela Power
redeemed $65 million of 5 5/8% series first mortgage bonds, and West
Penn Power redeemed $19.7 million of class A-1 6.32% transition bonds.
In the first six months of 2000 Potomac Edison issued $80 million
London Interbank Offer Rate (LIBOR) floating rate private placement
notes assumable by Allegheny Energy Supply upon its acquisition of
Potomac Edison's Maryland electric generating assets.
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
$4.3 million for the six months ended December 31, 2000, based on
projected short-term borrowings.
Unregulated Construction Expenditures and Investments
The increase in unregulated generation construction expenditures
and investments of $65 million in the six months ended June 30, 2000,
as compared to the six months ended June 30, 1999, is primarily due to
expenditures related to the generation expansion program of Allegheny
Energy Supply.
Environmental Issues
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.
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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. Allegheny's compliance
with such stringent regulations will require the installation of
expensive post-combustion control technologies on most of its power
stations, with an estimated total capital cost of $370 million. Of
that amount, approximately $12 million was spent in 1999.
On August 2, 2000, The Company 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.
The Company 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 trigger the requirements
of the New Source Performance Standards, or a major modification of the
facility, which would require compliance with the New Service Performance
Standards. If federal New Source Performance Standards were to be applied
to these generating stations, in addition to the possible imposition of
fines, compliance would entail significant expenditures. In connection
with the deregulation of generation, 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 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. The
Company is at the forefront of state-implemented retail competition,
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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
The Company continues to seek enactment of federal legislation to
bring choice to all retail electric customers, deregulate the
generation and sale of electricity on a national level, and create a
more liquid, free market for electric power. Fully meeting challenges in
the emerging competitive environment will be difficult for the Company
unless certain outmoded and anti-competitive laws, specifically the PUHCA
and Section 210 (Mandatory Purchase Provisions) of 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 provisionsfavored by the Company are included in the
legislation, including an amendment that allows existing state restructuring
plans and agreements to remain in effect. Other provisions address important
Company priorities by repealing PUHCA and the mandatory purchase provisions of
PURPA. Although there was considerable activity and discussion on this
bill and several other bills in the House and Senate, that activity
fell short of moving consensus legislation forward prior to the August
recess. 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.
Maryland Activities
On June 7, 2000, the Maryland Public Service Commission (PSC)
approved the transfer of the generating assets of Potomac Edison to
Allegheny Energy Supply. The transfer was made on August 1, 2000.
Maryland customers of Potomac Edison had the right to choose an
alternative electric provider on July 1, 2000, although the Commission
has not yet finalized all of the rules that will govern customer choice
in the state. 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 the Company filed an appeal in court on July 31, 2000. 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.
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,
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Monongahela Power filed a transition plan with the Ohio PUC, including
its claim for recovery of stranded costs of $21.3 million.
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. See highlights of the agreement on page 14 under Ohio
Transition Plan.
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 has retained about 98% of its Pennsylvania customers as of
June 30, 2000. More than 100 electric generation suppliers have been
licensed to sell to retail customers in Pennsylvania.
Virginia Activities
On March 25, 1999, Governor Gilmore signed the Virginia Electric
Utility Restructuring Act (Restructuring Act) passed by the Virginia
General Assembly. All utilities must submit a restructuring plan by
January 1, 2001, to be effective on January 1, 2002. Customer choice
will be phased in beginning on January 1, 2002, with full customer
choice by January 1, 2004.The Restructuring Act was amended during the
2000 General Assembly legislative session. In addition to a number of
clarifying and technical changes, the amendments direct the 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 July 1, 2000. On July 11, 2000,
the Virginia SCC issued an order approving the Company's separation
plan permitting the transfers of Potomac Edison's generating assets and
the provision of the Phase I application. See Virginia Functional
Separation Plan on page 13 for more information.
Various rulemaking proceedings to implement customer choice are
ongoing before the Virginia SCC.
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
- 30 -
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
Monongahela Power and Potomac Edison. On March 11, 2000, the West Virginia
Legislature approved the Commission's plan, but assigned the tax issues
surrounding the plan to the 2000 Legislative Interim Committees to
recommend the necessary tax changes involved and come back to the
Legislature in 2001 for approval of those changes and authority to
implement the plan. The start date of competition is contingent upon
the necessary tax changes being made and approved by the legislature.
The Company expects that implementation of the deregulation plan will
occur in mid-2001 if the Legislature approves the necessary tax law
changes. The W. Va. PSC is currently in the process of developing the
rules under which competition will occur. Associated rulemaking
proceedings are scheduled for the remainder of this year. The W.
Va. PSC approved the Company's request to transfer the Potomac Edison
and Monongahela Power 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.
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, Pennsylvania, and West Virginia. The
legislation passed in Ohio and Virginia established definitive
processes for transition to deregulation and market-based pricing for
electric generation. However, the deregulation plans and their terms
in Ohio and 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 Ohio and
Virginia will be less than $25 million, pre-tax.
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ALLEGHENY ENERGY, INC.
Part II - Other Information to Form 10-Q
for Quarter Ended June 30, 2000
ITEM 1. LEGAL PROCEEDINGS
As previously reported, on May 17, 2000, the United States Court
of Appeals for the Third Circuit affirmed the decision of the United
States District Court for the Western District of Pennsylvania which
had found that DQE, Inc. did not breach the April 1, 1997 Agreement and
Plan of Merger and had granted judgment in favor of DQE, Inc. on all
claims and all requests for injunctive relief.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
(a) Date and kind of meeting:
At the annual meeting of stockholders held on May 11, 2000, votes
were taken for the election of directors, the approval of the
appointment of PricewaterhouseCoopers LLP as independent accountants,
the issuance of a report to shareholders on greenhouse gas emissions,
and the approval by shareholders of golden parachutes above a certain
amount. The total number of votes cast in the election for directors
was 85,513,219 with the following results:
Nominees for Director Votes For Votes Withheld
Wendell F. Holland 80,507,026 5,006,193
Gunnar E. Sarsten 80,507,243 5,005,976
These are the results on the other votes:
Votes For Votes Against Abstentions
Approval of independent
Accountants 84,689,203 384,218 439,798
Shareholder proposal regarding
the issuance of a report to
shareholders regarding
greenhouse gas emissions 5,751,910 59,066,566 7,075,341
Shareholder proposal regarding
the approval by shareholders
of golden parachutes above
a certain amount 25,558,725 41,802,635 4,535,656
The shareholders approved the company's independent accountants. The
shareholders did not approve the shareholder proposals regarding global
warming or golden parachutes.
- 32 -
ITEM 5. OTHER
On July 13, 2000, the Company's unregulated telecommunications
subsidiary, Allegheny Communications Connect, Inc. (Allegheny
Communications), announced that it has sold 50 percent ownership in
Allegheny Hyperion Telecommunications, LLC, to Adelphia Business
Solutions (Adelphia) for 330,000 shares of Adelphia's Class A Common
Stock.
The Pennsylvania Public Utility Commission, Department of Justice,
and Federal Trade Commission have approved the stock transaction.
Allegheny Communications Connect is working with Adelphia to
install 700 route miles of fiber optic lines throughout western
Pennsylvania, northern Virginia, western and central Maryland, and
northern Virginia. By year-end, Allegheny Communications Connect will
have more than 1,300 route miles of fiber in its network.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) Form 8-K Reporting Date - May 17, 2000.
Items reported: Other Events
Item 5 - Decision of U. S. Court of Appeals for Third Circuit
affirming lower court's finding in favor of DQE, Inc.
Form 8-K Reporting Date - May 19, 2000.
Items reported:
Item 5 - Other Events
Allegheny Energy announced signing a definitive agreement to
purchase Conemaugh generating station.
Exhibit 99 - Press release issued May 19, 2000 relating to
Purchase.
- 33 -
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.
ALLEGHENY ENERGY, INC.
/s/ T. J. KLOC
T. J. Kloc, Vice President
and Controller
(Chief Accounting Officer)
August 14, 2000