Page 1 of 14
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 March 31, 1996
Commission File Number 1-255-2
WEST PENN POWER COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 13-5480882
(State of Incorporation) (I.R.S. Employer Identification No.)
800 Cabin Hill Drive, Greensburg, Pennsylvania 15601
Telephone Number - 412-837-3000
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 May 15, 1996, 24,361,586 shares of the Common Stock (no par
value) of the registrant were outstanding, all of which are held by Allegheny
Power System, Inc., the Company's parent.
<PAGE>
- 2 -
WEST PENN POWER COMPANY AND SUBSIDIARY COMPANIES
Form 10-Q for Quarter Ended March 31, 1996
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Consolidated statement of income -
Three months ended March 31, 1996 and 1995 3
Consolidated balance sheet - March 31, 1996
and December 31, 1995 4
Consolidated statement of cash flows -
Three months ended March 31, 1996 and 1995 5
Notes to consolidated financial statements 6-8
Management's discussion and analysis of financial
condition and results of operations 9-12
PART II--OTHER INFORMATION 13-14
<PAGE>
<TABLE>
<CAPTION>
- 3-
WEST PENN POWER COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statement of Income
Three Months Ended
March 31
1996** 1995
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES:
<S> <C> <C>
Residential $ 119,779 $ 113,500
Commercial 58,859 57,069
Industrial 91,358 91,226
Wholesale and other, including affiliates 18,434 20,734 *
Bulk power transactions, net 8,015 6,369 *
Total Operating Revenues 296,445 288,898
OPERATING EXPENSES:
Operation:
Fuel 62,355 63,981
Purchased power and exchanges 32,965 32,850 *
Deferred power costs, net 8,762 7,790
Other 63,334 34,148
Maintenance 29,058 28,167
Depreciation 29,880 28,726
Taxes other than income taxes 24,015 22,701
Federal and state income taxes 11,708 20,644
Total Operating Expenses 262,077 239,007
Operating Income 34,368 49,891
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 34 818
Other income, net 3,064 2,328
Total Other Income and Deductions 3,098 3,146
Income Before Interest Charges 37,466 53,037
INTEREST CHARGES:
Interest on long-term debt 16,247 15,509
Other interest 1,042 632
Allowance for borrowed funds used during
construction (205) (516)
Total Interest Charges 17,084 15,625
NET INCOME $ 20,382 $ 37,412
* Prior period amounts have been reclassified for comparative purposes to reflect
a change in 1996 in reporting certain bulk power transmission transactions with
nonaffiliated utilities. See Note 3 on page 6.
**The 1996 period includes restructuring charges of $16.1 million, net of taxes.
See Note 4 on page 6.
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- 4 -
WEST PENN POWER COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheet
March 31, December 31,
1996 1995
ASSETS: (Thousands of Dollars)
Property, Plant, and Equipment:
At original cost, including $59,972,000
<S> <C> <C>
and $67,626,000 under construction $3,107,824 $3,097,522
Accumulated depreciation (1,087,476) (1,063,399)
2,020,348 2,034,123
Investments and Other Assets:
Allegheny Generating Company - common stock at equity 95,242 96,369
Other 1,197 1,239
96,439 97,608
Current Assets:
Cash and temporary cash investments 440 717
Accounts receivable:
Electric service, net of $9,204,000 and $9,436,000
uncollectible allowance 125,760 140,979
Affiliated and other 17,395 20,183
Materials and supplies--at average cost:
Operating and construction 36,765 36,660
Fuel 35,518 32,445
Deferred income taxes 24,611 21,024
Prepaid taxes 37,329 12,863
Other 4,362 4,881
282,180 269,752
Deferred Charges:
Regulatory assets 341,387 342,150
Unamortized loss on reacquired debt 11,939 12,256
Other 15,978 15,275
369,304 369,681
Total Assets $2,768,271 $2,771,164
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $465,994 $465,994
Other paid-in capital 55,475 55,475
Retained earnings 447,121 451,719
968,590 973,188
Preferred stock 79,708 79,708
Long-term debt and QUIDS 904,813 904,669
1,953,111 1,957,565
Current Liabilities:
Short-term debt 57,720 70,218
Accounts payable 58,033 86,935
Accounts payable to affiliates 4,695 6,252
Taxes accrued:
Federal and state income 25,911 4,128
Other 10,155 20,149
Deferred power costs 24,000 12,399
Interest accrued 15,563 15,890
Restructuring liabilities 17,497 6,491
Other 24,099 19,927
237,673 242,389
Deferred Credits and Other Liabilities:
Unamortized investment credit 49,721 50,366
Deferred income taxes 461,502 469,559
Regulatory liabilities 34,639 35,077
Restructuring liabilities 9,493 -
Other 22,132 16,208
577,487 571,210
Total Capitalization and Liabilities $2,768,271 $2,771,164
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- 5 -
WEST PENN POWER COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statement of Cash Flows
Three Months Ended
March 31
1996 1995
(Thousands of Dollars)
CASH FLOWS FROM OPERATIONS:
<S> <C> <C>
Consolidated net income $20,382 $37,412
Depreciation 29,880 28,726
Deferred investment credit and income taxes, net (12,740) 2,230
Deferred power costs, net 8,762 7,790
Unconsolidated subsidiaries' dividends in excess of earnings 1,171 1,117
Allowance for other than borrowed funds used
during construction (34) (818)
Restructuring charges 25,488 -
Changes in certain current assets and
liabilities:
Accounts receivable, net 18,007 (5,280)
Materials and supplies (3,178) (1,890)
Accounts payable (30,459) (26,801)
Taxes accrued 11,789 12,720
Interest accrued (327) (2,151)
Other, net (12,905) (17,708)
55,836 35,347
CASH FLOWS FROM INVESTING:
Construction expenditures (18,670) (32,249)
Allowance for other than borrowed funds used
during construction 34 818
(18,636) (31,431)
CASH FLOWS FROM FINANCING:
Short-term debt, net (12,498) 20,197
Notes receivable from affiliates - 1,000
Dividends on capital stock:
Preferred stock (861) (2,259)
Common stock (24,118) (22,900)
(37,477) (3,962)
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (277) (46)
Cash and Temporary Cash Investments at January 1 717 345
Cash and Temporary Cash Investments at March 31 $ 440 $ 299
Supplemental cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $16,811 $17,200
Income taxes 2,507 -
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
- 6 -
WEST PENN POWER COMPANY AND SUBSIDIARY COMPANIES
Notes to Consolidated Financial Statements
1. The Company's Notes to Consolidated Financial Statements in the
Allegheny Power System companies' combined Annual Report on
Form 10-K for the year ended December 31, 1995, should be read
with the accompanying financial statements and the following
notes. With the exception of the December 31, 1995,
consolidated balance sheet in the aforementioned annual report
on Form 10-K, the accompanying consolidated financial
statements appearing on pages 3 through 5 and these notes to
consolidated financial statements are unaudited. In the
opinion of the Company, such consolidated financial statements
together with these notes thereto contain all adjustments
(which consist only of normal recurring adjustments) necessary
to present fairly the Company's financial position as of March
31, 1996, and the results of operations and cash flows for the
three months ended March 31, 1996 and 1995.
2. The Consolidated Statement of Income reflects the results of
past operations and is not intended as any representation as to
future results. For purposes of the Consolidated Balance Sheet
and Consolidated Statement of Cash Flows, temporary cash
investments with original maturities of three months or less,
generally in the form of commercial paper, certificates of
deposit, and repurchase agreements, are considered to be the
equivalent of cash.
3. Effective in 1996 the Company changed its method of reporting
certain bulk power transmission transactions with nonaffiliated
utilities, and reclassified prior year's bulk power revenues
and operation expenses to achieve a consistent presentation.
In prior years, some use of the Company's transmission system
was recorded as purchased power from selling utilities and as
sales of power to buying utilities. The benefit to the Company
was the difference between the two. Because of new Federal
Energy Regulatory Commission requirements, the Company
predominantly does not "buy" and "sell" such energy, but rather
a transmission fee is charged.
Under the new reporting method all such transactions are
recorded on a net revenue basis. The effect of the
reclassification was to reduce amounts reported for bulk power
transaction revenues and operation expenses by $19.6 million
and $36.9 million for the three months ended March 31, 1996 and
1995, respectively, with no change in operating income or
consolidated net income.
4. As previously announced, the System is undergoing a
reorganization and reengineering process (restructuring) to
simplify its management structure and to increase efficiency.
On March 12, 1996, the Company and its affiliates announced
additional restructuring plans which include consolidating
operating divisions, and centralizing and changing many
accounting, customer services, and other functions. As a
consequence of this process, an additional workforce reduction
of approximately 1,000 System employees will occur. It is
expected that approximately 50% of the positions will be
eliminated by July 1996 with the remaining positions eliminated
by 1998. Reductions will be accomplished through an enhanced
separation plan, attrition, and, in the union workforce,
pursuant to appropriate contract.
<PAGE>
- 7 -
Additional restructuring charges which reflect estimated
liabilities for severance and other employee termination costs
are estimated to be about $45 million ($25 million after tax)
of which $27.4 million ($16.1 million after tax) was recorded
in the first quarter of 1996. The remaining charges will be
recorded later, primarily in the third quarter of 1996, as
required by applicable accounting rules. A summary of
restructuring liabilities is provided below:
<TABLE>
<CAPTION>
First Quarter 1996
(Millions of Dollars)
Restructuring Liability (before tax):
<S> <C>
Balance at beginning of quarter $ 6.5
Add first quarter accrual 27.4
Less benefit plans curtailment
liabilities (5.0)*
Less first quarter payments (1.9)
Balance at end of quarter $27.0
*Primarily recorded in other deferred credits.
</TABLE>
5. The Company owns 45% of the common stock of Allegheny
Generating Company (AGC), and affiliates of the Company own the
remainder. AGC owns an undivided 40% interest, 840 MW, in the
2,100-MW pumped-storage hydroelectric station in Bath County,
Virginia, operated by the 60% owner, Virginia Power Company, a
nonaffiliated utility. Following is a summary of income
statement information for AGC:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1996 1995
(Thousands of Dollars)
<S> <C> <C>
Electric operating revenues $20,909 $22,096
Operation and maintenance expense 1,119 1,796
Depreciation 4,290 4,224
Taxes other than income taxes 1,210 1,299
Federal income taxes 3,344 3,223
Interest charges 4,228 4,985
Other income, net (3) -
Net income $ 6,721 $ 6,569
</TABLE>
The Company's share of the equity in earnings above was $3.0
million for each of the three months ended March 31, 1996 and
1995, and was included in other income, net, on the
Consolidated Statement of Income.
<PAGE>
- 8 -
6. Common stock dividends per share declared and paid during the
periods for which income statements are included are as
follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1996 1995
<S> <C> <C>
Number of Shares 24,361,586 24,361,586
Amount per Share $.99 $.94
</TABLE>
Earnings per share are not reported inasmuch as the common
stock of the Company is 100% owned by its parent, Allegheny
Power System, Inc.
<PAGE>
- 9 -
WEST PENN POWER COMPANY AND SUBSIDIARY COMPANIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
COMPARISON OF FIRST QUARTER OF 1996 WITH FIRST QUARTER OF 1995
Review of Operations
CONSOLIDATED NET INCOME
Consolidated net income for the first quarter of 1996
was $20.4 million, after reflecting a restructuring charge net of taxes of
$16.1 million, compared with $37.4 million for the corresponding 1995
period. The restructuring charge reflects estimated liabilities for
severance and other employee termination costs incurred to date for
continuing restructuring activities which commenced during the last half
of 1995. The 2% decrease in earnings, excluding the restructuring
charges, was the net result of increased sales to retail customers offset
by higher expenses, primarily operations expense, taxes, and depreciation.
SALES AND REVENUES
Retail kilowatt-hour (kWh) sales to residential,
commercial, and industrial customers increased 9%, 6%, and 3%
respectively. The increase in Kwh sales to residential customers was
primarily due to an increase in weather related sales. Colder
temperatures in the first quarter of 1996 as compared to milder first
quarter 1995 weather, resulted in heating degree days 5% above normal and
11% above the 1995 first quarter. The increase in commercial sales
reflects both increased usage and growth in the number of customers. The
increase in kWh sales to industrial customers occurred in almost all
industrial groups. The increase in revenues from retail customers
resulted from the following:
<TABLE>
<CAPTION>
Change from Prior Period
(Millions of Dollars)
<S> <C>
Increased kWh sales $11.5
Fuel and energy cost adjustment clauses* (.3)
Other (3.0)
$ 8.2
</TABLE>
* Changes in revenues from fuel and energy cost adjustment
clauses have little effect on consolidated net income.
The decrease in wholesale and other revenues resulted
primarily from continued decreases in sales of energy and spinning reserve
to other affiliated companies.
<PAGE>
- 10 -
KWh deliveries to and revenues from bulk power
transactions are comprised of the following items:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1996 1995*
KWh deliveries (in billions):
<S> <C> <C>
From transmission services 2.2 1.5
From sale of Company generation .1 -
2.3 1.5
Revenues (in millions):
From transmission services $6.4 $4.8
From sales of Company generation 1.6 1.6
$8.0 $6.4
</TABLE>
Increased transmission services resulted primarily from
increased demand from power marketers. Most of the aggregate benefits
from bulk power and affiliated transactions are passed on to retail
customers and have little effect on consolidated net income.
OPERATING EXPENSES
Fuel expenses decreased 3%, the net result of a 4%
decrease in average coal prices and a 1% increase in kWh generated. Fuel
expenses are primarily subject to deferred power cost accounting
procedures with the result that changes in fuel expenses have little
effect on consolidated net income.
"Purchased power and exchanges" represents power
purchases from and exchanges with other utilities 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 Power
System at any given time, and is comprised of the following items:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1996 1995*
(Millions of Dollars)
Nonaffiliated transactions:
Purchased power:
<S> <C> <C>
From PURPA generation $15.1 $16.6
Other 6.1 4.5
Power exchanges 1.4 1.1
Affiliated transactions:
AGC capacity charges 9.1 9.6
Energy and spinning reserve charges 1.1 .9
Other affiliated capacity charges .2 .2
$33.0 $32.9
</TABLE>
* Prior period amounts have been reclassified for comparative
purposes to reflect a change in the method of reporting
certain bulk power transmission transactions with
nonaffiliated utilities. See Note 3 to the Consolidated
Financial Statements for further information.
<PAGE>
- 11 -
Other purchased power increased because of increased sales to
retail customers and the availability of more economic energy. The cost
of purchased power and exchanges, including power from PURPA generation
and affiliated transactions, is mostly recovered from customers currently
through the regular fuel and energy cost recovery procedures followed by
the Company's regulatory commissions, and is primarily subject to deferred
power cost procedures with the result that changes in such costs have
little effect on consolidated net income.
The increase in other operation expense resulted primarily
from restructuring charges which are discussed in Note 4 to the
Consolidated Financial Statements.
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 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. The Company is also experiencing, and expects to continue to
experience, increased expenditures due to the aging of its power stations.
Variations in maintenance expense result primarily from unplanned events
and planned major projects, which vary in timing and magnitude depending
upon the length of time equipment has been in service without a major
overhaul and the amount of work found necessary when the equipment is
dismantled.
The increase in depreciation expense was due to additions to
electric plant.
Taxes other than income taxes increased $1.3 million primarily
from prior year property tax adjustments made in 1995. The decrease in
federal and state income taxes resulted primarily from a decrease in
income before taxes.
Financial Condition and Requirements
The Company's discussion on Financial Condition and
Requirements and Changes in the Electric Utility Industry in the Allegheny
Power System companies' combined Annual Report on Form 10-K for the year
ended December 31, 1995, 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 cost recovery in the regulatory process,
laws, regulations and uncertainties related to environmental matters, and
legal actions.
The final rules on open transmission access were released by
the Federal Energy Regulatory Commission (FERC) on April 24 and the
Company is in the process of reviewing the document. The first rule,
Order No. 888, requires utilities with transmission capacity to file open
access tariffs that offer to others transmission service that is
comparable to service they provide themselves. In addition, utilities
must apply the same tariffs offered to others to their own wholesale
energy sales and purchases. The
<PAGE>
- 12 -
Company has had an open access transmission tariff on file with the FERC
since December 1995. The Order also provides for full recovery of
stranded costs-- those costs that were prudently incurred to serve power
customers and that could go unrecovered if those customers use open access
to move to another supplier.
Order No. 889 which is also included in the rules, requires
utilities to establish electronic systems to share information about
available transmission capacity for wholesale transactions.
The FERC also proposed that each public utility would replace
the network and point-to-point tariffs in the open access rule with a
single capacity reservation tariff by the end of 1997.
<PAGE>
- 13 -
WEST PENN POWER COMPANY AND SUBSIDIARY COMPANIES
Part II - Other Information to Form 10-Q
for Quarter Ended March 31, 1996
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDER
1. (a) Date and Kind of Meeting:
The annual meeting of shareholders was held at
Greensburg, Pennsylvania, on April 17, 1996. No
proxies were solicited.
(b) Election of Directors:
The holder of all 24,361,586 shares of common
stock voted to elect the following Directors at
the annual meeting to hold office until the next
annual meeting of shareholders and until their
successors are duly chosen and qualified:
Eleanor Baum Alan J. Noia
William L. Bennett Jay S. Pifer
Klaus Bergman Steven H. Rice
Wendell F. Holland Gunnar E. Sarsten
Phillip E. Lint Peter L. Shea
Edward H. Malone Peter J. Skrgic
Frank A. Metz, Jr.
ITEM 5. OTHER INFORMATION
On April 1, 1996, Champion Industries, Inc., North
Branch Energy Inc., and Air Products and Chemicals, Inc., entities
claiming involvement or potential involvement in the Burgettstown PURPA
project, filed suit in federal court in the Western District of
Pennsylvania against the Company, Allegheny Power System, Inc., and
Allegheny Power Service Corporation alleging antitrust violations, unfair
competition, and intentional interference with a contract. The lawsuit
seeks recovery of lost profits and out-of-pocket costs as well as treble
and punitive damages. The companies cannot predict the outcome of this
proceeding. This case is related to a suit filed on May 2, 1995, in
federal court in the same district by Washington Power, LP, the developer
of the Burgettstown PURPA project, against the same defendants alleging
essentially the same causes of action.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) On March 13, 1996, the Company filed a Form 8-K
for the restructuring of its organization.
On April 11, 1996, the Company filed a Form 8-K
containing a Form of Change in Control Employment
Contract.
<PAGE>
- 14 -
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.
WEST PENN POWER COMPANY
T. J. KLOC
T. J. Kloc
Controller
(Chief Accounting Officer)
May 15, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 288
<SECURITIES> 152
<RECEIVABLES> 152,359
<ALLOWANCES> 9,204
<INVENTORY> 72,283
<CURRENT-ASSETS> 282,180
<PP&E> 3,107,824
<DEPRECIATION> 1,087,476
<TOTAL-ASSETS> 2,768,271
<CURRENT-LIABILITIES> 237,673
<BONDS> 904,813
465,994
0
<COMMON> 79,708
<OTHER-SE> 502,596
<TOTAL-LIABILITY-AND-EQUITY> 2,768,271
<SALES> 296,445
<TOTAL-REVENUES> 296,445
<CGS> 196,474
<TOTAL-COSTS> 250,369
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,084
<INCOME-PRETAX> 32,090
<INCOME-TAX> 11,708
<INCOME-CONTINUING> 20,382
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,382
<EPS-PRIMARY> 0.00<F1>
<EPS-DILUTED> 0.00<F1>
<FN>
<F1>All common stock is owned by parent, no EPS required.
</FN>
</TABLE>
