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 March 31, 2004


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) 800 Cabin Hill Drive Greensburg, Pennsylvania 15601 Telephone (724) 837-3000	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) 800 Cabin Hill Drive Greensburg, Pennsylvania 15601 Telephone (724) 837-3000	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) 800 Cabin Hill Drive Greensburg, Pennsylvania 15601 Telephone (724) 837-3000	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 April 30, 2004:


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. Financial Statements (Unaudited)

Allegheny Energy, Inc.:
Consolidated Statements of Operations for the Three Months
Ended March 31, 2004 and 2003		6
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2004 and 2003		7
Consolidated Balance Sheets as of March 31, 2004 and
December 31, 2003		8-9

Allegheny Energy Supply Company, LLC:
Consolidated Statements of Operations for the Three Months
Ended March 31, 2004 and 2003		10
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2004 and 2003		11
Consolidated Balance Sheets as of March 31, 2004 and
December 31, 2003		12-13

Monongahela Power Company:
Consolidated Statements of Operations for the Three Months
Ended March 31, 2004 and 2003		14
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2004 and 2003		15
Consolidated Balance Sheets as of March 31, 2004 and
December 31, 2003		16-17

The Potomac Edison Company:
Consolidated Statements of Operations for the Three Months
Ended March 31, 2004 and 2003		18
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2004 and 2003		19
Consolidated Balance Sheets as of March 31, 2004 and
December 31, 2003		20-21

West Penn Power Company:
Consolidated Statements of Operations for the Three Months
Ended March 31, 2004 and 2003		22
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2004 and 2003		23
Consolidated Balance Sheets as of March 31, 2004 and
December 31, 2003		24-25

Allegheny Generating Company:
Statements of Operations for the Three Months Ended
March 31, 2004 and 2003		26
Statements of Cash Flows for the Three Months Ended
March 31, 2004 and 2003		27
Balance Sheets as of March 31, 2004 and December 31, 2003		28-29
Combined Notes to Financial Statements		30-50


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)		51-77

Item 3. Quantitative and Qualitative Disclosures About Market Risk		77

Item 4. Controls and Procedures		78

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		79

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		79

Item 3. Defaults Upon Senior Securities		79

Item 4. Submission of Matters to Vote of Security Holders		79

Item 5. Other Information		79

Item 6. Exhibits and Reports on Form 8-K		80-86

Signature		87

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.

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

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

GAAP		Generally Accepted Accounting Principles of the United States of America

KWh		Kilowatt-hour

MW		Megawatt

MWh		Megawatt-hour

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

New Loan Facilities		Agreements entered into on March 8, 2004, by AE and AE Supply with various credit providers to refinance and restructure the majority of the Borrowing Facilities

PJM		PJM Interconnection, LLC, a regional transmission organization

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”

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ALLEGHENY ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)


	Three Months Ended March 31,
	2004		2003
Operating revenues	$	889,720	$	715,691

Operating expenses:
Fuel consumed in electric generation		161,955		158,772
Purchased power and transmission		81,118		86,268
Cost of utility gas sold		90,503		95,959
Deferred energy costs, net		16,731		(13,659	)
Operations and maintenance		211,784		312,501
Depreciation and amortization		83,291		77,611
Taxes other than income taxes		59,513		60,627

Total operating expenses		704,895		778,079

Operating income (loss)		184,825		(62,388	)

Other income, net (Note 11)		8,074		80,260

Interest expense and preferred dividends:
Interest expense		130,929		95,565
Preferred dividend requirements of subsidiaries		1,259		1,259

Total interest expense and preferred dividends		132,188		96,824


Income (loss) before income taxes, minority interest and cumulative effect of accounting changes		60,711		(78,952	)

Income tax expense (benefit)		25,574		(38,018	)

Minority interest in net income (loss) of subsidiaries		1,859		(2,890	)


Income (loss) before cumulative effect of accounting changes		33,278		(38,044	)

Cumulative effect of accounting changes, net of taxes of $12,974		—		(20,765	)

Net income (loss)	$	33,278	$	(58,809	)

Basic income (loss) per common share:
Income (loss) before cumulative effect of accounting changes	$	0.26	$	(0.30	)
Cumulative effect of accounting changes, net		—		(0.16	)

Net income (loss) per common share	$	0.26	$	(0.46	)

Diluted income (loss) per common share:
Income (loss) before cumulative effect of accounting changes	$	0.25	$	(0.30	)
Cumulative effect of accounting changes, net		—		(0.16	)

Net income (loss) per common share	$	0.25	$	(0.46	)

See accompanying Combined Notes to Financial Statements.

ALLEGHENY ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Three Months Ended March 31,
	2004			2003
Cash Flows From Operating Activities:
Net income (loss)	$	33,278		$	(58,809	)
Cumulative effect of accounting changes, net		—			20,765

Income (loss) before cumulative effect of accounting changes		33,278			(38,044	)
Adjustments for noncash (credits) and charges:
Reapplication of SFAS No. 71		—			(75,823	)
Depreciation and amortization		83,291			77,611
(Gain) loss on asset sales and assets held for sale, net		(11,600	)		31,837
Minority interest		1,859			(2,890	)
Deferred investment credit and income taxes, net		13,491			(33,661	)
Unrealized losses on commodity contracts, net		11,139			64,673
Other, net		30,424			(13,305	)
Changes in certain assets and liabilities:
Accounts receivable, net		(89,330	)		(18,398	)
Materials and supplies		48,396			1,611
Taxes receivable/accrued, net		(15,781	)		156,113
Prepaid taxes		(28,561	)		(32,295	)
Accounts payable		(5,859	)		(19,039	)
Interest accrued		24,252			23,612
Commodity contract termination costs		(259	)		(47,652	)
Other, net		21,657			4,050

Net cash from operating activities		116,397			78,400


Cash Flows Used in Investing Activities:
Construction expenditures		(53,773	)		(66,615	)
Acquisition of electric generating facility		—			(318,435	)
Proceeds from sale of businesses and assets		11,589			333
Decrease (increase) in restricted funds		17,357			(135,531	)
Other investments		(3,116	)		9,448

Net cash used in investing activities		(27,943	)		(510,800	)


Cash Flows (Used in) From Financing Activities:
Net repayments of short-term debt		—			(1,121,966	)
Issuance of long-term debt		1,481,592			1,931,506
Retirement of long-term debt		(1,709,650	)		(229,975	)

Net cash (used in) from financing activities		(228,058	)		579,565


Net (decrease) increase in cash and cash equivalents		(139,604	)		147,165
Cash and cash equivalents at beginning of period		528,612			204,231

Cash and cash equivalents at end of period	$	389,008		$	351,396

See accompanying Combined Notes to Financial Statements.

ALLEGHENY ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)


	March 31, 2004	December 31, 2003
ASSETS
Current Assets:
Cash and cash equivalents	$

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