POTOMAC EDISON CO - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

Commission File Number	Name of Registrant State of Incorporation Address of Principal Executive Offices and Telephone Number	IRS Employer Identification Number
1-267	Allegheny Energy, Inc. (A Maryland Corporation) 10435 Downsville Pike Hagerstown, Maryland 21740-1766 Telephone (301) 790-3400	13-5531602

333-72498	Allegheny Energy Supply Company, LLC (A Delaware Limited Liability Company) 4350 Northern Pike Monroeville, Pennsylvania 15146-2841 Telephone (412) 858-1600	23-3020481

1-5164	Monongahela Power Company (An Ohio Corporation) 1310 Fairmont Avenue Fairmont, West Virginia 26554 Telephone (304) 366-3000	13-5229392

1-3376-2	The Potomac Edison Company (A Maryland and Virginia Corporation) 10435 Downsville Pike Hagerstown, Maryland 21740-1766 Telephone (301) 790-3400	13-5323955

1-255-2	West Penn Power Company (A Pennsylvania Corporation) 800 Cabin Hill Drive Greensburg, Pennsylvania 15601 Telephone (724) 837-3000	13-5480882

0-14688	Allegheny Generating Company (A Virginia Corporation) 10435 Downsville Pike Hagerstown, Maryland 21740-1766 Telephone (301) 790-3400	13-3079675

This combined Form 10-Q is separately filed by Allegheny Energy, Inc., Allegheny Energy Supply Company, LLC, Monongahela Power Company, The Potomac Edison Company, West Penn Power Company and Allegheny Generating Company. Information contained in the Form 10-Q relating to Allegheny Energy Supply Company, LLC, Monongahela Power Company, The Potomac Edison Company, West Penn Power Company and Allegheny Generating Company is filed by such registrant on its own behalf. Each of Allegheny Energy Supply Company, LLC, Monongahela Power Company, The Potomac Edison Company, West Penn Power Company and Allegheny Generating Company makes no representation as to information relating to registrants other than itself.

Indicate by check mark whether the registrants (1) have 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 (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrants are accelerated filers (as defined in Rule 12b-2 of the Exchange Act).

Allegheny Energy, Inc.	Yes	x	No	¨
Allegheny Energy Supply Company, LLC	Yes	¨	No	x
Monongahela Power Company	Yes	¨	No	x
The Potomac Edison Company	Yes	¨	No	x
West Penn Power Company	Yes	¨	No	x
Allegheny Generating Company	Yes	¨	No	x

Number of shares outstanding of each class of common stock as of December 31, 2003:

Allegheny Energy, Inc.	126,969,238		($1.25 par value)
Allegheny Energy Supply Company, LLC	(a	)
Monongahela Power Company	5,891,000		($50.00 par value)
The Potomac Edison Company	22,385,000		($0.01 par value)
West Penn Power Company	24,361,586		(no par value)
Allegheny Generating Company	1,000		($1.00 par value)

(a)	The registrant is a limited liability company, the interests in which are not represented by shares.

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (Unaudited)

	Allegheny Energy, Inc.:
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002	7
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002	8
	Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002	9

	Allegheny Energy Supply Company, LLC:
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002	11
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002	12
	Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002	13

	Monongahela Power Company:
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002	15
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002	16
	Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002	17

	The Potomac Edison Company:
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002	19
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002	20
	Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002	21

	West Penn Power Company:
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002	23
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002	24
	Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002	25

	Allegheny Generating Company:
	Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002	27
	Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002	28
	Balance Sheets as of September 30, 2003 and December 31, 2002	29

	Combined Notes to Consolidated Financial Statements	30

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)	60

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	102

Item 4.	Controls and Procedures	103

PART II.	OTHER INFORMATION	106

Item 1.	Legal Proceedings	106

Item 2.	Changes in Securities and Use of Proceeds	106

Item 3.	Default Upon Senior Securities	106

Item 4.	Submission of Matters to Vote of Security Holders	106

Item 5.	Other Information	107

Item 6.	Exhibits and Reports on Form 8-K	108

Signature		116

GLOSSARY

The following abbreviations and terms are used in this report to identify Allegheny Energy, Inc. and its subsidiaries:

AE		Allegheny Energy, Inc., a diversified utility holding company.

AE Supply		Allegheny Energy Supply Company, LLC, an unregulated generation subsidiary of Allegheny Energy, Inc., also a holding company.

AGC		Allegheny Generating Company, an unregulated generation unit of Allegheny Energy, Inc.

Allegheny		Allegheny Energy, Inc. together with its consolidated subsidiaries.

Allegheny Ventures		Allegheny Ventures, Inc., a non-utility, unregulated subsidiary of Allegheny Energy, Inc.

Alliance Energy Services		Alliance Energy Services, LLC, a former indirect subsidiary of Allegheny Ventures, Inc.

Distribution Companies		Collectively, Monongahela Power Company, The Potomac Edison Company, and West Penn Power Company. The Distribution Companies do business as “Allegheny Power.”

Fellon-McCord		Fellon-McCord & Associates, Inc., a former subsidiary of Allegheny Ventures, Inc.

Monongahela		Monongahela Power Company, a regulated subsidiary of Allegheny Energy, Inc.

Mountaineer		Mountaineer Gas Company, a subsidiary of Monongahela Power Company.

Potomac Edison		The Potomac Edison Company, a regulated subsidiary of Allegheny Energy, Inc.

West Penn		West Penn Power Company, a regulated subsidiary of Allegheny Energy, Inc.

II.

The following abbreviations and acronyms are used in this report to identify entities and terms relevant to Allegheny’s business and operations:

ARO		Asset retirement obligation

Borrowing Facilities		Agreements entered into on February 25, 2003, and March 13, 2003, by AE, AE Supply, Monongahela, and West Penn with various credit providers to refinance and restructure the majority of AE and AE Supply’s short-term debt

CAAA		Clean Air Act Amendments of 1990

CDWR		California Department of Water Resources

Clean Air Act		Clean Air Act of 1970

EITF		Emerging Issues Task Force

EPA		United States Environmental Protection Agency

FASB		Financial Accounting Standards Board

FERC		Federal Energy Regulatory Commission (an independent commission within the Department of Energy)

FIN		FASB Interpretation Number

FIN 45		FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others”

FIN 46		FIN 46, “Consolidation of Variable Interest Entities”

GAAP		Generally Accepted Accounting Principles of the United States of America

KWh		Kilowatt-hour

LV Cogen		Las Vegas Cogeneration II

MW		Megawatt

MWh		Megawatt-hour

NSR		The New Source Performance Review Standards, or “New Source Review” applicable to facilities deemed “new” sources of emissions

PJM		PJM Interconnection, LLC, a regional transmission organization

PJM West		The commonly used name of the western extension of PJM Interconnection, LLC

PLR		Provider-of-last-resort

PURPA		Public Utility Regulatory Policies Act of 1978

SEC		United States Securities and Exchange Commission

SFAS		Statement of Financial Accounting Standards

SFAS No. 71		SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation”

SFAS No. 133		SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137 “Accounting for Derivative Instruments and Hedging Activities – Deferral of the Effective Date of FASB Statement No. 133 – an amendment of FASB Statement No. 133”, SFAS No. 138 “Accounting for Certain Derivative Instruments and Certain Hedging Activities – an amendment of FASB Statement No. 133”, and SFAS No. 149, “Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities”

SFAS No. 142		SFAS No. 142, “Goodwill and Other Intangible Assets”

SFAS No. 143		SFAS No. 143, “Accounting for Asset Retirement Obligations”

SFAS No. 149		SFAS No. 149, “Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities”

T&D		Transmission and Distribution

Williams		Williams Energy Marketing and Trading Company

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

ALLEGHENY ENERGY, INC.

Consolidated Statements of Operations

(In thousands, except number of shares and per share data)	Unaudited Three Months Ended September 30,						Unaudited Nine Months Ended September 30,
	2003			2002			2003			2002
Total operating revenues	$	637,560		$	537,136		$	1,712,465		$	2,326,834

Cost of revenues:
Fuel consumed for electric generation		160,764			166,095			453,590			436,266
Purchased energy and transmission		82,046			75,060			249,841			265,498
Natural gas purchases		16,198			128,572			137,702			432,099
Deferred energy costs, net		(10,023	)		(3,675	)		(30,647	)		10,908
Other		7,241			37,287			27,427			77,267

Total cost of revenues		256,226			403,339			837,913			1,222,038

Net revenues		381,334			133,797			874,552			1,104,796

Other operating expenses:
Workforce reduction expenses		—			104,170			—			104,170
Operation expense		213,127			218,704			789,309			714,084
Depreciation and amortization		86,039			77,359			243,124			233,226
Taxes other than income taxes		50,301			52,381			161,663			168,570

Total other operating expenses		349,467			452,614			1,194,096			1,220,050

Operating income (loss)		31,867			(318,817	)		(319,544	)		(115,254	)

Other income and (expenses), net (Note 12)		15,154			(34,867	)		96,767			(27,844	)

Interest charges and preferred dividends:
Interest on debt and other		127,282			81,183			350,930			229,176
Allowance for borrowed funds used during construction and interest capitalized		(2,432	)		(3,610	)		(15,853	)		(9,485	)
Dividends on preferred stock of subsidiaries		1,259			1,260			3,778			3,778

Total interest charges and preferred dividends		126,109			78,833			338,855			223,469

Consolidated loss before income taxes, minority interest, and cumulative effect of accounting changes		(79,088	)		(432,517	)		(561,632	)		(366,567	)

Federal and state income tax (benefit)		(26,554	)		(164,883	)		(231,950	)		(141,563	)

Minority interest (benefit)		(1,537	)		(4,618	)		(9,122	)		(4,602	)

Consolidated loss before cumulative effect of accounting changes		(50,997	)		(263,016	)		(320,560	)		(220,402	)
Cumulative effect of accounting changes, net of taxes of $12,974 and $79,596		—			—			(20,765	)		(130,514	)

Consolidated net loss	$	(50,997	)	$	(263,016	)	$	(341,325	)	$	(350,916	)

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