FORM 10-Q



U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549




Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934



For Quarterly Period Ended June 30, 2003

Commission File Number: 333-79619



WEST PENN FUNDING LLC
(Exact name of registrant as specified in its charter)

Delaware
(State of Incorporation)

25-1843349
(I.R.S. Employer Identification No.)

2325-B Suite 10 Renaissance Drive, Las Vegas, NV 89119
Telephone Number - (702) 895-6752

Indicate by check mark whether 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 (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[  ]Yes  [ X ]No

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
[  ]Yes  [ X ]No

West Penn Funding LLC (the Registrant) is a Delaware limited liability company, whose sole member is West Penn Funding Corporation.

WEST PENN FUNDING LLC
Form 10-Q for Quarter Ended June 30, 2003


Contents

Page
No.

PART I.  FINANCIAL INFORMATION (UNAUDITED)

3

  Item 1.  Financial Statements (Unaudited):

    Statements of Operations - Three and Six Months
    Ended June 30, 2003 and 2002

3

    Statements of Cash Flows - Six Months Ended
    June 30, 2003 and 2002

4

    Balance Sheets - June 30, 2003 and December 31, 2002

5

    Notes to Financial Statements

6-8

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

8-10

    Item 3.  Quantitative and Qualitative Disclosure About Market Risk

10

    Item 4.  Controls and Procedures

10-11

PART II.  OTHER INFORMATION

11

  Item 1.  Legal Proceedings

11

  Item 2.  Changes in Securities and Use of Proceeds

11

  Item 3.  Default Upon Senior Securities

11

  Item 4.  Submission of Matters to Vote of Security Holders

11

  Item 5.  Other Information

12

  Item 6.  Exhibits and Reports on Form 8-K

12

  Signature

13

2

PART I.  FINANCIAL INFORMATION:
ITEM 1.  FINANCIAL STATEMENTS

WEST PENN FUNDING LLC
Statements of Operations

Unaudited

Three Months Ended
                June 30              

Six Months Ended
                 June 30                

(In thousands)

   2003

  2002
  (Restated)

       2003

2002
(Restated)

Total operating revenues

    $25,423 

  $25,029 

   $54,849 

   $51,910 

Operating Expenses:

   Operation expense

        337 

      334 

       679 

       669 

   Amortization of intangible transition property

     18,029 

   16,392 

    39,714 

    34,566 

      Total operating expenses

     18,366 

   16,726 

    40,393 

    35,235 

Operating income

      7,057 

    8,303 

    14,456 

    16,675 

Other income

         40 

       37 

        79 

        75 

Interest on transition bonds

      7,097 

    8,342 

    14,535 

    16,998 

Loss before income taxes

         --  

       (2)

        --  

      (248)

Federal income tax (benefit)

         --  

     --  

        --  

       (80)

Net loss

    $    --  

  $    (2)

   $    --  

   $  (168)

See accompanying Notes to Financial Statements.

3

West Penn Funding LLC
Statements of Cash Flows

Unaudited
Six Months Ended
               June 30               

(In thousands)

    2003

2002
(Restated)

Cash flows from operations:

  Net loss

     $     --  

     $   (168)

  Amortization of intangible transition property

      39,714 

      34,566 

  Amortization of debt discount and issuance costs

         441 

         515 

  Changes in certain assets and liabilities:

    Accounts receivable from West Penn Power Comany

      749 

      (755)

    Interest and taxes accrued

         (43)

        (120)

      40,861 

      34,038 

Cash flows (used in) financing:

  Equity contribution from member

          10 

          104 

  Change in restricted funds

        (1,491)

         1,607 

  Retirement of transition bonds

     (39,375)

     (35,751)

     (40,856)

     (34,040)

Net change in cash and temporary investments

         5 

          (2)

  Cash and temporary cash investments at January 1

       1,760 

         223 

     $ 1,765 

    $    221 

See accompanying Notes to Financial Statements.

4

West Penn Funding LLC
Balance Sheets

               Unaudited               

(In thousands)

June 30
2003

   December 31
   2002

ASSETS

  Current assets:

    Cash and temporary cash investments

    $  1,765 

    $  1,760 

    Accounts receivable from

      West Penn Power Company

      14,084 

      14,833 

    Restricted funds

       3,842 

       2,351 

    Intangible transition property

      77,567 

      71,675 

      97,258 

      90,619 

  Noncurrent assets:

    Intangible transition property

     288,919 

     334,525 

    Unamortized debt issuance expense

       2,235 

       2,676 

     291,154 

     337,201 

Total assets

    $388,412 

    $427,820 

LIABILITIES AND MEMBER'S EQUITY

  Current liabilities:

    Long-term debt due within one year

    $ 75,363 

    $ 75,996 

    Transition bonds, reclassified to current

     307,912 

     346,654 

    Accounts payable to West Penn Power Company

         10 

          10 

    Interest accrued

        439 

         482 

     383,724 

     423,142 

  Member's equity

       4,688

       4,678

Total liabilities and member's equity

    $388,412

    $427,820

See accompanying Notes to Financial Statements.

5

WEST PENN FUNDING LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1: BASIS OF PRESENTATION

The accompanying unaudited interim financial statements should be read in conjunction with the Annual Report on Form 10-K of West Penn Funding LLC (the Company) for the year ended December 31, 2002. The Company is an indirect wholly-owned subsidiary of Allegheny Energy, Inc. (Allegheny).

The interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles of the United States of America (GAAP) have been condensed or omitted, and management believes that the disclosures are adequate to make the information presented not misleading.

In the opinion of management, the unaudited interim financial statements reflect all normal recurring adjustments which are necessary for a fair presentation of the results of operations for the three and six months ended June 30, 2003, and 2002; cash flows for the six months ended June 30, 2003, and 2002; and financial position at June 30, 2003, and December 31, 2002.

As discussed in the notes in the Company's 2002 Annual Report on Form 10-K, results of operations for the three and six months ended June 30, 2002, have been restated as a result of Allegheny's Comprehensive Financial Review (Note 2, Comprehensive Financial Review and Note 7, Quarterly Financial Information). Accordingly, the statement of cash flows for the six months ended June 30, 2002, also has been restated.

NOTE 2: TRANSITION BONDS

In November 1999, the Company issued $600.0 million of Transition Bonds, Series 1999-A, Class A-1 through A-4. The Company used the proceeds from the Transition Bonds to purchase Intangible Transition Property (ITP) from West Penn Funding Corporation. The ITP and other assets of the Company collateralize the Transition Bonds. The principal balance of Class A-1 was paid in full on June 25, 2001.

Scheduled maturities and interest rates for the Transition Bonds at June 30, 2003, are:

(In Thousands)

Bond Rate

   Principal
   Balance

Expected Final
Payment Date

Final
Maturity Date

Class A-2

6.630%

   $ 29,310 

December 26, 2003

December 26, 2005

Class A-3

6.810%

    198,000 

September 25, 2006

September 25, 2008

Class A-4

6.980%

156,000 

June 25, 2008

December 26, 2008

Total

    383,310 

    (75,363)
         (35)

$307,912 

6

The current maturities stated above are based on a combination of the expected final payment dates and scheduled repayments for the Class A-2 and Class A-3 Transition Bonds rather than the final maturity dates.

During the second quarter of 2003, the principal balance of the Transition Bonds was reduced to $383.3 million as a result of a $19.5 million repayment of Class A-2, 6.630% Transition Bonds. According to the agreement, principal payments will continue to be applied to Class A-2 until the issue is paid in full. Thereafter principal payments will be applied to Class A-3 and Class A-4, respectively.

On the scheduled payment date in June, the Trustee made a quarterly payment of Bond principal, interest and related expenses. Payments and Intangible Transition Charge (ITC) collections were sufficient to pay interest of $6.9 million and the scheduled principal payment in the amount of $19.5 million.

The Company is required to file copies of its annual and quarterly reports as filed with the SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 with or for the debt holders. The Company is also required to deliver to the trustee under its indenture a certificate indicating that the Company has complied with all conditions and covenants under the agreement. On April 30, 2003, the Company provided certificates to the trustee under the indenture indicating that it was not in compliance with the covenants related to the Transition Bonds for filing its annual and quarterly reports. The covenant breaches with respect to the Transition Bonds are deemed defaults of the related agreements for the Company's financial reporting purposes in accordance with Statement of Financial Accounting Standards No. 78 (SFAS No. 78), "Classification of Obligations That Are Callable by the Creditor." Accordingly, the total debt related to the Transition Bonds, reclassified as current, was in the amount of $307.9 million as of June 30, 2003. To date, none of the debt holders have provided the Company with any notices of default under the agreement. Such notices, if received, would allow the Company 30 days to cure its noncompliance before the debt holders could accelerate the due dates of the Transition Bonds.

The Company prepared its financial statements assuming that it will continue as a going concern. However, the Company's noncompliance with certain of its reporting obligations under its debt covenants and the resultant classification of the Transition Bonds as current has caused its independent auditors, PricewaterhouseCoopers LLP, to issue a modified opinion in the 2002 Annual Report that indicates there is substantial doubt about the Company's ability to continue as a going concern (a "Going Concern" opinion). The financial statements do not include any adjustments that might result from the resolution of this uncertainty.

The Company is in the process of preparing its Quarterly Reports on Form 10-Q for the periods ended September 30, 2003, and September 30, 2002, and will file such reports as soon as they are available. Thereafter, the Company plans to file its subsequent financial statements on a timely basis.

7

NOTE 3: SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS

Under an agreement between the Company and West Penn Power Company (West Penn) (the Servicing Agreement), West Penn, as Servicer, is required to manage and administer the ITP of the Company and to collect the ITC on behalf of the Company. The Company pays a maximum annual service fee of $1.25 million to West Penn. The Company recorded servicing fees of $0.6 million for the six months ended June 30, 2003, and 2002. The Company recorded servicing fees of $0.3 million for the three months ended June 30, 2003, and 2002.

At June 30, 2003, the Balance Sheet includes a receivable from West Penn of $14.1 million for ITC collections.

The Company joins with Allegheny and its subsidiaries in filing a consolidated federal income tax return. The consolidated tax liability is allocated among the participants generally in proportion to the taxable income of each participant, except that no subsidiary pays tax in excess of its separate return tax liability.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

The Notes to Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2002 Annual Report on Form 10-K, for West Penn Funding LLC (the Company), should be read in conjunction with the following Management's Discussion and Analysis information.

Forward-Looking Statements

In addition to historical information, this report contains a number of forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Words such as anticipate, expect, project, intend, plan, believe, and words and terms of similar substance used in connection with any discussion of future plans, actions, or events identify forward-looking statements. These include statements with respect to:

·

regulation and the status of retail electricity service in Pennsylvania;

·

regulatory action of the Pennsylvania PUC with respect to ITC;

·

sufficiency and recoverability of ITC revenues;

·

demand for energy;

·

results of operations;

·

regulatory matters; and

·

internal controls and procedures and outstanding financial reporting obligations.

Forward-looking statements involve estimates, expectations, and projections and, as a result, are subject to risks and uncertainties. There can be no assurance that actual results will not materially differ from expectations.

Factors that could cause actual results to differ materially include, among others, the following:

·

loss of revenue due to changes in usage, delinquencies, write-offs, or regulatory action of the Pennsylvania PUC;

·

changes in laws and regulations in Pennsylvania;

·

inaccuracies of projections;

8

·

delays in payment by customers;

·

changes in rate schedules or payment terms related to the collection of ITC revenues in Pennsylvania by West Penn Power Company (West Penn);

·

changes in billing policies and practices by West Penn;

·

general economic and business conditions;

·

the continuing effects of global instability, terrorism, and war;

·

changes in the weather and other natural phenomena; and

·

the effect of accounting policies issued periodically by accounting standard-setting bodies.

9

For the six months ended June 30, 2003, the Company recorded $54.85 million ITC revenue and $0.08 million interest income. The Company recorded $14.09 million interest expense on the Transition Bonds, amortized $0.45 million debt issuance expenses and discounts, incurred $0.63 million servicing fees and $0.05 million other administrative expenses, and recorded $39.72 million ITP amortization.

In comparison, during the six months ended June 30, 2002, the Company recorded $51.91 million ITC revenue and $0.08 million interest income. The Company recorded $16.47 million interest expense on the Transition Bonds, amortized $0.53 million debt issuance expenses and discounts, incurred $0.63 million servicing fees and $0.04 million other administrative expenses, and recorded $34.57 million ITP amortization.

West Penn, as Servicer, remitted to the Trustee $27.8 million of ITC collections for the period covering March, April and May 2003. The ITC collections for March 2003 are reflected in revenues for the first quarter of 2003 with a corresponding receivable from West Penn at March 31, 2003. ITC collections for June 2003 are reflected in second quarter revenues, with a corresponding receivable from West Penn at June 30, 2003.

As discussed in the 2002 Annual Report on Form 10-K, Item 7, "Cash Flow", West Penn, as Servicer, remitted to the Trustee a total of $105.6 million of ITC collections during 2002. Payments and ITC collections were sufficient to pay interest of $31.8 million and principal payments in the amount of $70.3 million for the twelve-month period ended December 31, 2002.

During the second quarter ended June 30, 2002, principal payments were scheduled at $18.4 million, with principal payments issued at $18.3 million, creating a year to date shortfall of $0.1 million. During the third quarter ended September 30, 2002, principal payments were scheduled at $17.0 million, with principal payments issued at $17.1 million, which offset the shortfall created in the prior quarter. The scheduled principal payments were issued in full for the first and fourth quarters of 2002. The shortfall at June 30, 2002, did not constitute an event of default under the Indenture.

In accordance with the Qualified Rate Order for prior years, in order to reconcile under-collections and to recover expected interest and principal payments, fees, or expenses expected in 2003, West Penn, as Servicer, filed a request for an adjustment to the ITC with the Pennsylvania Public Utility Commission (Pennsylvania PUC) on December 10, 2002. On December 19, 2002, the Pennsylvania PUC approved West Penn's request and allowed West Penn to recover the required ITC amounts in rates effective January 1, 2003. West Penn has made its filings with the Pennsylvania PUC in conjunction with its adjustment in rates to become effective in 2004.

Liquidity and Capital Requirements

To meet cash needs for operating expenses, the payment of interest, and retirement of debt, the Company has used net cash flows from operations, restricted funds, and contributions from its member.

The Company's debt agreement requires it to file copies of its annual and quarterly reports as filed with the Securities and Exchange Commission (SEC) pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 with or for the debt holders. The Company is also required to deliver to the trustee under its indentures a certificate indicating that the Company has complied with all conditions and covenants under the agreements. On April 30, 2003, the Company provided certificates to the trustee under the indenture indicating that it was not in compliance with the covenants related to the Transition Bonds for filing its annual and quarterly reports. The covenant breaches with respect to the Transition Bonds are deemed defaults of the related debt agreements for the Company's financial reporting purposes in accordance with SFAS No. 78, "Classification of Obligations That Are Callable by the Creditor." Accordingly, the total debt related to the Transition Bonds reclassified as current in the a ccompanying consolidated balance sheet was $307.9 million as of June 30, 2003. To date, none of the debt holders have provided the Company with any notices of default under the agreement. Such notices, if received, would allow the Company 30 days to cure its noncompliance before the debt holders could accelerate the due dates of the Bonds.

The Company has prepared its financial statements assuming that it will continue as a going concern. However, noncompliance with its reporting obligations under its debt covenants and the resulting classification of the Transition Bonds as current has caused its independent auditors, PricewaterhouseCoopers LLP, to issue a modified opinion that indicates there is substantial doubt about the Company's ability to continue as a going concern (a "Going Concern" opinion). The financial statements do not include any adjustments that might result from resolution of this uncertainty. Allegheny received a similar modified opinion from its independent auditors with respect to its 2002 consolidated financial statements.

During 2002 and 2003, credit rating agencies lowered the credit ratings of Allegheny and certain of its subsidiaries, including West Penn. As a result, West Penn currently does not have a credit rating for short-term debt. Since West Penn does not have a credit rating for short-term debt of A-1 or better by Standard & Poor's, P-1 or better by Moody's, and F-1 or better by Fitch, West Penn is required to remit ITC collections to the Bond Trustee not later than the second business day after ITC collections are received. Accordingly, daily remittances to the Bond Trustee began on October 16, 2002.

On a short-term basis, the Company's ability to cover operating expenses and issue debt payments within the stated due date is solely reliant on the collection of ITC. Revenues from ITC collections on a long-term basis are dependent on the approval of annual rate adjustments by the Pennsylvania PUC, through the annual reconciliation process.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company's exposure to market risk is de minimus.

Bondholders' exposure to regulatory risks could be affected by inaccurate estimates of future revenue requirements necessary to meet debt obligations as filed in the annual adjustment requests or unforeseen changes in the Pennsylvania Competition Act or West Penn's Qualified Rate Order.

ITEM 4.  CONTROLS AND PROCEDURES

After Allegheny filed its quarterly reports on Form 10-Q for the period ended June 30, 2002, Allegheny identified a miscalculation in its business segment information. Following the discovery of this miscalculation and in light of Allegheny's prior restatements of reports filed with the SEC, Allegheny initiated a comprehensive review of its financial processes, records, and internal controls to ensure that its current and prior financial statements, including the financial statements of the Company, are fairly presented in accordance with GAAP. As a result, Allegheny and the Company identified numerous accounting errors, including certain accounting errors related to financial statements of the Company.

10

Allegheny, including the Company, for itself and its subsidiaries, has implemented corrective actions to mitigate the risk that its internal control deficiencies could lead to material misstatements in the financial statements filed as part of this Form 10-Q. Allegheny developed and implemented a plan to perform significant additional procedures designed to mitigate the effects of the deficiencies in internal controls and hired outside professional services firms to assist in the performance of the additional procedures.

To address the weaknesses identified in Allegheny's and the Company's internal controls and disclosure practices, as discussed in Note 2 to the Company's financial statements filed in its 2002 Annual Report on Form 10-K, Allegheny and the Company substantially augmented and revised its procedures in connection with the preparation of this report. These augmented procedures involved the creation of a formal drafting group to comprehensively review, revise, and update disclosure over an iterative process. This exercise also involved a heightened degree of direct involvement by senior officers, including the Principal Executive Officer of the Company. The principal elements of these augmented procedures have formed the basis for the Company's written disclosure controls and procedures applicable to periodic reports and certain public communications.

Allegheny and the Company have created a Disclosure Committee, which is chaired by Allegheny's General Counsel and is currently comprised of executives, including Allegheny's Chief Risk Officer, Vice President and Controller, Director of Audit Services, and Manager of Communications, as well as the senior officers responsible for Allegheny's segments. The Disclosure Committee's principal functions are to establish, maintain, monitor and evaluate Allegheny's and its subsidiaries' written disclosure controls and procedures and to supervise and coordinate the preparation of their periodic reports and certain other public communications.

Following its formation, the Disclosure Committee adopted formal written disclosure controls and procedures. These newly adopted disclosure controls and procedures will be applicable to Allegheny's and the Company's periodic reports and certain public communications.

The Disclosure Committee, with the participation of the Company's management, including the Company's Principal Executive Officer and Chief Financial Officer, reviewed the augmented procedures implemented by Allegheny and the Company in connection with the preparation of this report and found them to be satisfactory. However, until Allegheny completes the actions described above to achieve improvements in its internal controls, Allegheny and the Company intend to devote additional resources to ensure that its public disclosures are accurate.

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     None

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

     None

ITEM 3.  DEFAULT UPON SENIOR SECURITIES

     None

ITEM 4.  SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

     None

11

ITEM 5.  OTHER INFORMATION

     None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

   Exhibit 31.1

Certification of Principal Executive Officer pursuant to Rule 13a-14(a) under Securities Exchange Act of 1934

   Exhibit 31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under Securities Exchange Act of 1934

   Exhibit 32.1

Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

   Exhibit 32.2

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

   Exhibit 99

Quarterly Servicer's Certificates

(b)  Reports on Form 8-K

       No reports on Form 8-K were filed on behalf of the Company for the quarter ended June 30, 2003

12

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.

December 19, 2003

WEST PENN FUNDING LLC


/s/  REGIS F. BINDER     
Regis F. Binder, President,
Chief Financial Officer and
Principal Executive Officer

13