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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 1-5164
MONONGAHELA POWER COMPANY
(Exact name of registrant as specified in its charter)
Ohio 13-5229392
(State of Incorporation) (I.R.S. Employer Identification No.)
1310 Fairmont Avenue, Fairmont, West Virginia 26554
Telephone Number - 304-366-3000
The registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to
such filing requirements for the past 90 days.
At August 14, 2000, 5,891,000 shares of the Common Stock
($50 par value) of the registrant were outstanding, all of which
are held by Allegheny Energy, Inc., the Company's parent.
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MONONGAHELA POWER 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 6-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-23
PART II--OTHER INFORMATION 24
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MONONGAHELA POWER COMPANY
Statement of Income
(Thousands of Dollars)
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
OPERATING REVENUES:
Residential $ 53,627 $ 46,444 $ 123,370 $ 104,442
Commercial 37,002 31,271 75,233 63,331
Industrial 57,178 54,234 111,434 106,977
Wholesale and other, including affiliates 25,686 23,462 53,359 48,249
Bulk power transactions, net 3,241 5,048 6,815 8,102
Total Operating Revenues 176,734 160,459 370,211 331,101
OPERATING EXPENSES:
Operation:
Fuel 36,076 34,366 72,384 71,913
Purchased power and exchanges, net 31,573 23,398 69,242 49,924
Deferred power costs, net 1,066 3,880 3,131 4,163
Other 24,863 20,744 48,788 42,545
Maintenance 16,956 15,813 34,628 32,220
Depreciation and amortization 16,712 15,303 33,513 30,648
Taxes other than income taxes 14,245 11,997 25,808 21,683
Federal and state income taxes 9,700 9,856 24,456 22,582
Total Operating Expenses 151,191 135,357 311,950 275,678
Operating Income 25,543 25,102 58,261 55,423
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 45 241 216 365
Other income, net 1,488 1,420 3,423 2,673
Total Other Income and Deductions 1,533 1,661 3,639 3,038
Income Before Interest Charges and
Extraordinary Charge, Net 27,076 26,763 61,900 58,461
INTEREST CHARGES:
Interest on long-term debt 9,090 7,535 19,095 15,417
Other interest 975 830 1,535 1,602
Allowance for borrowed funds used during
construction (264) (158) (423) (364)
Total Interest Charges 9,801 8,207 20,207 16,655
Income Before Extraordinary Charge 17,275 18,556 41,693 41,806
Extraordinary Charge, net - - (58,227) -
NET INCOME (LOSS) $ 17,275 $ 18,556 $ (16,534) $ 41,806
See accompanying notes to financial statements.
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MONONGAHELA POWER COMPANY
Balance Sheet
(Thousands of Dollars)
June 30, December 31,
ASSETS: 2000 1999
Property, Plant, and Equipment:
Utility plant $ 2,147,744 $ 2,126,482
Nonutility plant 2,522 983
Construction work in progress 43,799 46,138
2,194,065 2,173,603
Accumulated depreciation (979,687) (958,867)
1,214,378 1,214,736
Investments and Other Assets:
Allegheny Generating Company - common stock at equity 40,328 41,713
Excess of cost over net assets acquired 25,997 26,325
Other 261 170
66,586 68,208
Current Assets:
Cash 219 3,826
Accounts receivable:
Utility service 74,162 78,977
Affiliated and other 76,374 87,345
Allowance for uncollectible accounts (4,243) (4,133)
Materials and supplies - at average cost:
Operating and construction 21,013 22,127
Fuel 16,734 16,049
Prepaid taxes 12,292 23,320
Other, including current portion of regulatory assets 5,181 4,708
201,732 232,219
Deferred Charges:
Regulatory assets 92,090 145,176
Unamortized loss on reacquired debt 10,649 16,810
Other 15,301 16,569
118,040 178,555
Total Assets $ 1,600,736 $ 1,693,718
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 294,550 $ 294,550
Other paid-in capital 2,441 2,441
Retained earnings 241,582 281,960
538,573 578,951
Preferred stock 74,000 74,000
Long-term debt and QUIDS 506,487 503,741
1,119,060 1,156,692
Current Liabilities:
Short-term debt 25,450 -
Notes payable to affiliate 38,050 28,650
Long-term debt due within one year - 65,000
Accounts payable 40,223 40,016
Accounts payable to affiliates 38,674 67,312
Taxes accrued:
Federal and state income 5,937 2,260
Other 18,363 24,235
Interest accrued 9,805 5,883
Other 14,133 11,647
190,635 245,003
Deferred Credits and Other Liabilities:
Unamortized investment credit 12,933 14,007
Deferred income taxes 212,352 248,987
Regulatory liabilities 50,839 13,961
Other 14,917 15,068
291,041 292,023
Total Capitalization and Liabilities $ 1,600,736 $ 1,693,718
See accompanying notes to financial statements.
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MONONGAHELA POWER COMPANY
Statement of Cash Flows
(Thousands of Dollars)
Six Months Ended
June 30
2000 1999
CASH FLOWS FROM OPERATIONS:
Net (loss) income $ (16,534) $ 41,806
Extraordinary charge, net of taxes 58,227 -
Income before extraordinary charge 41,693 41,806
Depreciation and amortization 33,513 30,648
Deferred investment credit and income taxes, net 393 142
Deferred power costs, net 3,131 4,163
Unconsolidated subsidiaries' dividends in excess of earnings 1,390 1,549
Allowance for other than borrowed funds used
during construction (216) (365)
Changes in assets and liabilities:
Accounts receivable, net 15,896 (35,356)
Materials and supplies 429 (175)
Prepaid taxes 11,028 7,830
Accounts payable (28,431) 56,163
Taxes accrued (2,195) (5,741)
Interest accrued 3,922 292
Other, net 4,554 7,769
85,107 108,725
CASH FLOWS FROM INVESTING:
Construction expenditures (less allowance for other
than borrowed funds used during construction) (37,281) (22,191)
CASH FLOWS FROM FINANCING:
Issuance of long-term debt - 7,700
Retirement of long-term debt (65,000) -
Short-term debt, net 25,450 (49,000)
Funds on deposit with trustees 2,561 (6,597)
Notes payable to affiliates 9,400 -
Notes receivable from affiliates - (1,850)
Dividends on capital stock:
Preferred stock (2,519) (2,519)
Common stock (21,325) (32,990)
(51,433) (85,256)
NET CHANGE IN CASH (3,607) 1,278
Cash at January 1 3,826 1,835
Cash at June 30 $ 219 $ 3,113
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amount capitalized) $15,839 $15,619
Income taxes 18,006 19,503
See accompanying notes to financial statements.
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MONONGAHELA POWER COMPANY
Notes to Financial Statements
1. Monongahela Power Company (the Company) is a wholly-owned
subsidiary of Allegheny Energy, Inc (the Parent). The Company's
Notes to Financial Statements in its Annual Report on Form 10-K
for the year ended December 31, 1999 should be read with the
accompanying 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 from
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 27% 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 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 $1.5
million and $1.4 for each of the three month periods ended June
30, 2000 and 1999, respectively, and $2.9 million and $2.8
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 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.
* The Company is permitted to transfer West Virginia
jurisdictional generating assets to its non-regulated generation
affiliate, Allegheny Energy Supply Company, LLC at book value.
* The Company will recover the cost of its non-utility
generation contracts through a series of surcharges applied to
all customers over 10 years.
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* Industrial customers will receive a 3% rate reduction.
* A special "Rate Stabilization" account of $42.6 million will
be established by the Company for residential and small business
customers to mitigate the impact of the market price of power as
determined by the W. Va. PSC.
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, "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 $58.2 million in the first quarter of
2000 to reflect unrecoverable net regulatory assets that will not
be collected from customers and establishment of a rate
stabilization account for residential and small commercial
customers as required by the deregulation plan as shown below:
Gross Net-of-Tax
(Millions of Dollars)
Unrecoverable regulatory assets $54.1 $32.5
Rate stabilization obligation 42.6 25.7
2000 extraordinary charges $96.7 $58.2
6. 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 $857.7 $ -
Amounts under construction included above 23.0 -
Accumulated depreciation (462.0) -
The Company expects to transfer these assets to Allegheny Energy
Supply in 2001 based on the deregulation plan approved by the W.
Va. PSC as discussed in Note 4.
7. All of the employees of 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 second quarter of 2000
and 1999 were $30.9 million and $30.8 million, respectively. The total
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billings by AESC (including capital) to the Company for the six months
ended June 30, 2000 and 1999 were $61.7 million and $56.7 million,
respectively. The Company buys power from and sells power to its
affiliates at tariff rates approved by the FERC.
8. The Company's principal operating segment is regulated
operations. The regulated operations segment, previously
referred to as the utility segment, operates electric
transmission and distribution systems and natural gas
distribution systems in regulatory jurisdictions which have not
yet implemented deregulation of electric generation.
The Company and its regulated affiliates, The Potomac Edison
Company (Potomac Edison) and West Penn Power Company (West Penn),
collectively now doing business as Allegheny Power, are engaged
in the purchase, transmission and distribution of electric
energy. Also, with the Company's purchase of West Virginia Power
in December 1999, Allegheny Power is now involved with the
delivery and procurement of natural gas. In addition, the
Company is engaged in the generation and sale of electric energy.
9. A Securities and Exchange Commission 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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MONONGAHELA POWER COMPANY
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 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 Monongahela Power Company
(the Company) and results of operations. All such forward-
looking information is necessarily only estimated. There can be
no assurance that actual results will not materially differ from
expectations. Actual results have varied materially and
unpredictably from past expectations.
Factors that could cause actual results to differ materially
include, among other matters, electric utility restructuring,
including the ongoing state and federal activities; developments
in the legislative, regulatory, and competitive environments in
which the Company operates, including regulatory proceedings
affecting rates charged by the Company; environmental,
legislative, and regulatory changes; the Company's ability to
compete in unregulated energy markets; future economic
conditions; and other circumstances that could affect anticipated
revenues and costs such as significant volatility in the market
price of wholesale power and fuel for electric generation,
unscheduled maintenance or repair requirements, weather, and
compliance with laws and regulations.
Significant Events in the First 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 Virginia legislation, the Company discontinued the
application of Financial Accounting Standards Board's (FASB)
Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation," for
the electric generation portion of its West Virginia operations
and has adopted SFAS No. 101, "Accounting for the Discontinuation
of Application of FASB Statement No. 71."
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Accordingly, the Company recorded an extraordinary charge of $96.7
million ($58.2 million after taxes) during the first quarter of
2000. The write-off reflects unrecoverable net regulatory assets
that will not be collected from customers and establishment of a
rate stabilization account for residential and small commercial
customers as required by the deregulation plan. See Notes 4 and
5 to the financial statements for details of the deregulation
plan.
See Electric Energy Competition for more information
regarding restructuring in West Virginia.
Acquisition of Mountaineer Gas Company
The Company previously reported it 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 $323.0 million (which includes the
assumption of approximately $100.0 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.
The Company 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).
A number of key intervenors in the Company's application to
the W. Va. PSC signed a Joint Stipulation and Settlement
Agreement in April 2000 to not oppose the Company'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.
The Company is awaiting approval from the Securities and
Exchange Commission, which is the final regulatory approval
required. The anticipated closing date for the acquisition will
occur shortly after notification of final approval, which is
expected sometime in the third quarter.
Transfer of Generation Assets
West Virginia
On June 23, 2000 the W. Va. PSC issued an order that will
permit the Company 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 the Company 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 the Company agrees to adhere
to the rate protections, consumer protections, capacity
protections and tax neutrality protections to state and local
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governments contained in the plan. If the Company 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.
Ohio Transition Plan
The Company has reached a stipulated agreement with major
parties on a transition plan to bring electric choice to it's
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.
* The Company's existing, low generation rates will be frozen
for a maximum of three years for large industrial and commercial
customers.
* The Company will collect a regulatory asset transition
charge through the respective market development periods.
* The Company'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.
* The Company 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 a
fuel increment in rates for the Company and its affiliate, Potomac
Edison, to be effective July 1, 1999, through June 30, 2000. If an
agreement was not reached, the proposed fuel rates which would increase
the Company's fuel rates by $10.9 million and decrease its affiliate's,
Potomac Edison, fuel rates by $8.0 million was scheduled to become
effective March 15, 2000. On June 23, 2000, the W. Va. PSC approved a
Joint Stipulation and Agreement for Settlement, stating agreed-upon
rates designed to make the rates of the Company and its affiliate,
Potomac Edison, consistent. Under the terms of the settlement, several
tariff schedules, notably those available to residential and small
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commercial customers, will require several incremental steps to reach
the agreed-upon rate level. The settlement rates will result in a
combined revenue reduction for the Company and its affiliate, Potomac
Edison, of approximately $.3 million for 2000 increasing over 8 years
to an annual reduction of approximately $1.7 million.
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, the Company ceased its
expanded net energy cost as part of the settlement.
Toxics Release Inventory (TRI)
On Earth Day 1997, President Clinton announced the expansion
of Right-to-Know TRI reporting to include electric utilities,
limited to facilities that combust coal and/or oil for the
purpose of generating power for distribution in commerce. The
purpose of TRI is to provide site-specific information on
chemical releases to the air, land, and water. Packets of
information about the Allegheny Energy companies (the System)
releases were provided to the media in the System's area and
posted on the Parent's web site. The System filed its 1999 TRI
report with the Environmental Protection Agency 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 for the second quarter of 2000 was $17.3 million
compared to $18.6 million for the corresponding 1999 period. The
decrease in net income was primarily due to increases in
operating expenses as a result of increases in several expense
categories and increased interest expense. Net income for the
first six months of 2000, excluding an extraordinary charge of
$58.2 million, net of taxes, was $41.7 million compared with
$41.8 million in the corresponding 1999 period.
The six months ended June 2000 extraordinary charge of $58.2
million, net of taxes, reflects a write-off by the Company of
costs determined to be unrecoverable as a result of West Virginia
legislation requiring deregulation of electric generation and
recognition of a rate stabilization obligation. As a result of
the write-off, the loss for the first six months of 2000 was
$16.5 million.
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SALES AND REVENUES
The major retail customer classes (residential, commercial,
and industrial) include electric and gas revenues as shown below:
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
(Thousands of Dollars)
Electric revenues $144.5 $131.9 $297.2 $274.8
Gas revenues 3.3 - 12.8 -
Total retail revenues $147.8 $131.9 $310.0 $274.8
Percentage changes in electric revenues and 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 10.5% 10.1% 9.6% 9.2%
Commercial 15.1 16.0 12.7 13.7
Industrial 5.4 9.3 4.2 7.8
Total 9.5% 10.9% 8.2% 9.3%
The second quarter of 2000 includes residential gas revenues
of $2.3 million and $1.0 million in commercial gas revenues
related to the Company's acquisition of the assets of West
Virginia Power in December 1999.
The first six months of 2000 includes residential gas
revenues of $8.9 million and $3.9 million in commercial gas
revenues related to the Company's acquisition of the assets of
West Virginia Power Company.
The changes in residential kWh sales, which are more weather
sensitive than the other classes, was due primarily to sales
related to the acquisition of the assets of West Virginia Power,
and to a lesser extent higher kWh sales as a result of increased
usage by customers.
Commercial kWh sales are also affected by weather, but to a
lesser extent than residential. The increases in commercial kWh
sales primarily reflects increased sales related to the
acquisition of the assets of West Virginia Power and, to a lesser
extent increased customer usage.
The increases in industrial kWh sales were primarily due to
increased kWh sales to iron and steel, paper, printing, and
publishing, and chemical customers.
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Changes in revenues from retail customers resulted from the
following:
Change from Prior Periods
Three Months Ended Six Months Ended
June 30 June 30
(Millions of Dollars)
Fuel clauses $ 2.9 $ 4.9
All other 13.0 30.3
Net change in retail
revenues* $15.9 $35.2
*Includes $3.3 million and $12.8 million for the three and six
months ended June 30, 2000, respectively, of retail gas revenues.
Revenues reflect not only the changes in kWh sales and base
rate changes, but also any changes in revenues from fuel and
energy cost adjustment clauses (fuel clauses) through June 30,
2000, which were applicable in all the Company's jurisdictions
served. Effective July 1, 2000, the Company's West Virginia
jurisdiction ceased to have a fuel clause. Through June 30, 2000
changes in fuel revenues had no effect on the Company's net
income because increases and decreases in fuel and purchased
power costs and sales of transmission services and bulk power are
passed on to customers by adjustment of customers' bills through
a fuel clause.
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
for all other retail revenues were primarily the result of kWh
sales and gas sales related to the recently acquired West
Virginia Power and increased usage by existing customers.
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 $ .9 $ 1.1 $ 2.7 $ 2.3
Affiliated companies 23.2 20.6 46.7 42.5
Street lighting and other 1.6 1.8 4.0 3.4
Total wholesale and
other revenues $25.7 $23.5 $53.4 $48.2
Wholesale customers are cooperatives and municipalities that own
their own distribution systems and buy all or part of their bulk power
needs from the Company under Federal Energy Regulatory Commission
(FERC) regulation. Competition in the wholesale market for electricity
was initiated by the national Energy Policy Act of 1992 which permits
wholesale generators, utility-owned and otherwise, and wholesale
customers to request from owners of bulk power transmission facilities
- 16 -
a commitment to supply transmission services.
Revenues from affiliated companies represent sales of energy
and intercompany allocations of generating capacity, generation
spinning reserves, and transmission services pursuant to a power
supply agreement among the Company and the other regulated
utility subsidiaries of Allegheny Energy. Revenues from
affiliated companies increased $2.6 million and $4.2 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
with Allegheny Energy Supply.
Bulk power transactions include sales of bulk power and
transmission and other energy services to power marketers and
other utilities. Bulk power and transmission and other energy
services revenues for the three and six months ended periods of
2000 and 1999 were as follows:
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
kWh Transactions (in billions):
Bulk power - .07 .03 .10
Transmission and other
energy services
to nonaffiliated companies .65 .53 1.32 .89
Total .65 .60 1.35 .99
Revenues(Millions of Dollars):
Bulk power - 2.1 .7 3.0
Transmission and other
energy services
to nonaffiliated companies 3.2 2.9 6.1 5.1
Total $3.2 $5.0 $6.8 $8.1
Revenues from bulk power transactions decreased due to
decreased sales to power marketers and other utilities. This is a
result of increased affiliated sales due to a dispatch arrangement
with its unregulated affiliate, Allegheny Energy Supply.
The costs of purchased power and revenues from sales to power
marketers and other utilities, including transmission services, are
currently recovered from or credited to customers under fuel and
energy cost recovery procedures. The impact to the fuel and energy
cost recovery clauses may be either positive or negative depending
on whether the Company is a net buyer or seller of electricity
during such periods and the open commitments which exist at such
times. The impact of such price volatility was insignificant to the
Company in the first six months 2000 and 1999 periods because
changes are passed to customers through operation of fuel clauses.
The Company assumes the risks and benefits of changes in fuel
and purchased power costs and sales of transmission services and
bulk power in the West Virginia jurisdiction. Effective January 1,
2001 a fuel clause is expected to cease to exist for the Company's
Ohio jurisdiction.
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OPERATING EXPENSES
Total fuel expenses for the second quarter of 2000 increased 5%
due to a 3% increase in average fuel prices and a 2% increase in
kWhs generated.
Total fuel expenses for the first six months of 2000 increased
1% due to a 3% increase in kWhs generated, offset in part by a 2%
decrease related to average fuel prices.
Purchased power and exchanges, net, represents power purchases
from and exchanges with other companies and purchases from qualified
facilities under the Public Utility Regulatory Policies Act of 1978
(PURPA), capacity charges paid to Allegheny Generating Company
(AGC), an affiliate partially owned by the Company, and other
transactions with affiliates made pursuant to a power supply
agreement whereby each company uses the most economical generation
available in the Allegheny Energy System at any given time, and
consists of the following items:
Purchased Power and Exchanges, Net
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
(Millions of Dollars)
Nonaffiliated transactions:
Purchased power:
From PURPA generation* $18.1 $16.4 $36.1 $34.9
Other 3.5 2.8 10.6 5.3
Purchased gas 2.6 - 8.3 -
Power exchanges, net - (.6) 1.6 .1
Affiliated transactions:
AGC capacity charges 7.4 4.8 12.6 9.6
Purchased power and
exchanges, net $31.6 $23.4 $69.2 $49.9
*PURPA cost (cents per kWh) 5.5 5.3 5.5 5.3
The increases in other purchased power and the purchase of
gas in the second quarter and first six months of 2000 were due
primarily to serve the customers acquired through the acquisition
of West Virginia Power.
Other operations expenses increased $4.1 million and $6.2
million in the second quarter and six months ended June 30, 2000,
respectively. The increases in both periods were primarily due
to expenses associated with serving the customers acquired
through the acquisition of the assets of West Virginia Power.
The increases in maintenance expenses were due to increased
power station maintenance and to transmission and distribution (T&D)
maintenance expenses related to the West Virginia Power acquisition.
Maintenance expenses represent costs incurred to maintain the power
stations, the T&D system, and general plant, and reflect routine
maintenance of equipment and rights-of-way, as well as planned major
repairs and unplanned expenditures, primarily from forced outages
at the power stations and periodic storm damage on the T&D system.
Variations in maintenance expense result primarily from unplanned
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events and planned major projects, which vary in timing and magnitude
depending upon the length of time equipment has been in service
without a major overhaul and the amount of work found necessary when
the equipment is dismantled.
Depreciation and amortization expense in the three and six
months ended June 30, 2000 increased due to increased investment,
primarily the acquisition of the assets of West Virginia Power.
Taxes other than income taxes increased $2.2 million and
$4.1 million in the three and six months ended June 30, 2000,
respectively, due to increased West Virginia Business and
Occupation Taxes due to the acquisition of West Virginia Power
and the settlement of audit issues.
The increase in federal and state income taxes of $1.9
million in the six months ended June 30, 2000 was primarily due
to a reversal of prior years' book versus tax depreciation timing
differences.
The increase in interest on long-term debt in the second
quarter and six months ended June 30, 2000, respectively,
resulted primarily from increased average long-term debt
outstanding primarily due to the acquisition of West Virginia
Power in December 1999.
The extraordinary charge in the first six months of $96.7
million ($58.2 million, net of taxes) was required to reflect a
write-off by the Company of net regulatory assets determined to
be unrecoverable from customers and establishment of a rate
stabilization account for residential and small commercial
customers as required by the deregulation plan. The
extraordinary charge was a result of West Virginia legislation
requiring deregulation of electric generation. See Note 5 to the
financial statements for additional information.
Financial Condition and Requirements
The Company's discussion of Financial Condition,
Requirements, and Resources and Significant Continuing Issues in
its Annual Report 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
The Company redeemed $65 million of 5 5/8% series first
mortgage bonds.
Impact of Change in Short-term Interest Rate
A one percent increase in the short-term borrowing interest
rate would increase projected interest expense by approximately
$.2 million for the six months ended December 31, 2000 based on
projected short-term borrowings.
- 19 -
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 an estimated total capital cost of $96 million.
Of that amount, approximately $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
the Company. The letter requested information under Section 114
of the federal Clean Air Act to determine compliance with federal
Clean Air Act and state implementation plan requirements,
including potential application of federal New Source Performance
Standards. In general, such standards can require the
installation of additional air pollution control equipment upon
the major modification of an existing facility.
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 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 transmission systems.
- 20 -
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 Company and its affiliates
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 provisions favored by
the Company are included in the legislation, including an amendment
that allows existing state restructuring plans and agreements to remain
in effect. Other provisions address important Company priorities by
repealing PUHCA and the mandatory purchase provisions of PURPA. Although
there was considerable activity and discussion on this bill and several
other bills in the House and Senate, that activity fell short of moving
consensus legislation forward prior to the August recess. 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 Ohio and
West Virginia.
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
- 21 -
determination of stranded cost recovery will be handled by the Ohio
PUC. On January 3, 2000, The Company filed a transition plan with the
Ohio PUC, including its claim for recovery of stranded costs of $21.3
million.
The Company reached a stipulated agreement with major
parties on a transition plan to bring electric choice to its
28,000 Ohio customers. The stipulation was filed with the Ohio
PUC on June 22, 2000. See highlights of the agreement on page 12
under Ohio Transition Plan.
West Virginia Activities
In March 1998, legislation was passed by the West Virginia
Legislature that directed the W.Va. PSC to meet with all
interested parties to develop a restructuring plan which would
meet the dictates and goals of the legislation. In January 2000,
the W.Va. PSC submitted a restructuring plan to the legislature
for approval that would open full retail competition on January
1, 2001. Generation would be deregulated and electricity rates
initially would be reduced for large commercial and industrial
customers and then frozen for all customers for four years, with
power supply rates gradually transitioning to market rates over
the next six years. Other highlights of the plan include the
ability to transfer generation assets, the transfer of
control of transmission to a regional transmission organization
by 2003, a utility-funded rate stabilization deferral mechanism
to offset residential and small commercial rates in later years,
a wires charge for customers who shop, and a systems benefit
charge to assist low income customers and displaced employees in
utility and related industries. The plan was endorsed by virtually
all of the interested parties, including The Company and its affiliate,
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 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 request to transfer its and its affiliate
, Potomac Edison, 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 Maryland,
Pennsylvania, and Virginia in which affiliates of the Company
serve are as follows.
- 22 -
Maryland Activities
On June 7, 2000, the Maryland Public Service Commission
(PSC) approved the transfer of the generating assets of The
Company's affiliate, Potomac Edison, to the Company's unregulated
affiliate, 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.
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 State Corporation Commission
(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's affiliate, Potomac Edison,
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 Company, LLC as 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
affiliate's, Potomac Edison, generating assets.
- 23 -
Accounting for the Effects of Price Deregulation
In July 1997, the Emerging Issues Task Force (EITF) of the
FASB released Issue No. 97-4, "Deregulation of the Pricing of
Electricity - Issues Related to the Application of FASB Statement
Nos. 71 and 101," which concluded that utilities should
discontinue application of SFAS No. 71 for the generation portion
of their business when a deregulation plan is in place and its
terms are known. In accordance with guidance of EITF Issue No. 97-
4, the Company has discontinued the application of SFAS No. 71 to
its electric generation business in West Virginia. The
legislation passed in Ohio established a definitive process for
transition to deregulation and market-based pricing for electric
generation. However, the deregulation plan and its terms in Ohio
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 will be
less than $15 million, pre-tax.
- 24 -
MONONGAHELA POWER 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) No reports were filed on behalf of the Company for the
quarter ended June 30, 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.
MONONGAHELA POWER COMPANY
/s/ T. J. KLOC
T. J. Kloc, Controller
(Chief Accounting Officer)
August 14, 2000