Page 1 of 13
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, 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 August 13, 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 June 30, 1996
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Consolidated statement of income -
Three and six months ended June 30, 1996 and 1995 3
Consolidated balance sheet - June 30, 1996
and December 31, 1995 4
Consolidated statement of cash flows -
Six months ended June 30, 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
<PAGE>
<TABLE>
<CAPTION>
- 3 -
WEST PENN POWER COMPANY AND SUBSIDIARIES COMPANIES
Consolidated Statement of Income
Three Months Ended Six Months Ended
June 30 June 30
1996** 1995 1996** 1995
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES:
<S> <C> <C> <C> <C>
Residential $ 89,987 $ 86,974 $ 209,766 $ 200,474
Commercial 53,176 51,627 112,035 108,696
Industrial 88,736 87,773 180,094 178,999
Wholesale and other, including affiliates* 15,645 17,044 34,079 37,778
Bulk power transactions, net* 10,887 6,422 18,902 12,791
Total Operating Revenues 258,431 249,840 554,876 538,738
OPERATING EXPENSES:
Operation:
Fuel 57,441 54,121 119,796 118,102
Purchased power and exchanges* 32,225 32,944 65,190 65,794
Deferred power costs, net 2,936 1,899 11,698 9,689
Other 41,723 34,553 105,057 68,701
Maintenance 25,287 26,743 54,345 54,910
Depreciation 30,739 28,974 60,619 57,700
Taxes other than income taxes 22,313 21,743 46,328 44,444
Federal and state income taxes 10,828 12,082 22,536 32,726
Total Operating Expenses 223,492 213,059 485,569 452,066
Operating Income 34,939 36,781 69,307 86,672
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 25 364 59 1,182
Other income, net 2,661 3,583 5,725 5,911
Total Other Income and Deductions 2,686 3,947 5,784 7,093
Income Before Interest Charges 37,625 40,728 75,091 93,765
INTEREST CHARGES:
Interest on long-term debt 16,247 15,880 32,494 31,389
Other interest 2,309 842 3,351 1,474
Allowance for borrowed funds used during
construction (390) (607) (595) (1,123)
Total Interest Charges 18,166 16,115 35,250 31,740
CONSOLIDATED NET INCOME $ 19,459 $ 24,613 $ 39,841 $ 62,025
* 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 three and six month 1996 periods include restructuring charges and asset write-off of
$6.7 million and $34.1 million, respectively. See Note 4 on page 6 for additional information on
the restructuring charges.
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- 4 -
WEST PENN POWER COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheet
June 30, December 31,
1996 1995
ASSETS: (Thousands of Dollars)
Property, Plant, and Equipment:
At original cost, including $68,925,000
<S> <C> <C>
and $67,626,000 under construction $3,115,808 $3,097,522
Accumulated depreciation (1,110,360) (1,063,399)
2,005,448 2,034,123
Investments:
Allegheny Generating Company - common stock at equity 94,507 96,369
Other 1,158 1,239
95,665 97,608
Current Assets:
Cash and temporary cash investments 343 717
Accounts receivable:
Electric service, net of $9,707,000 and $9,436,000
uncollectible allowance 115,962 140,979
Affiliated and other 13,921 20,183
Materials and supplies--at average cost:
Operating and construction 37,175 36,660
Fuel 27,109 32,445
Deferred income taxes 25,527 21,024
Prepaid taxes 29,354 12,863
Other 4,913 4,881
254,304 269,752
Deferred Charges:
Regulatory assets 340,638 342,150
Unamortized loss on reacquired debt 11,623 12,256
Other 13,149 15,275
365,410 369,681
Total Assets $2,720,827 $2,771,164
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $465,994 $465,994
Other paid-in capital 55,475 55,475
Retained earnings 442,108 451,719
963,577 973,188
Preferred stock 79,708 79,708
Long-term debt and QUIDS 904,957 904,669
1,948,242 1,957,565
Current Liabilities:
Short-term debt 37,983 70,218
Accounts payable 50,906 86,935
Accounts payable to affiliates 5,594 6,252
Taxes accrued:
Federal and state income 7,121 4,128
Other 9,546 20,149
Deferred power costs 24,000 12,399
Interest accrued 17,212 15,890
Restructuring liabilities 14,446 6,491
Other 23,611 19,927
190,419 242,389
Deferred Credits and Other Liabilities:
Unamortized investment credit 49,076 50,366
Deferred income taxes 463,200 469,559
Regulatory liabilities 34,194 35,077
Restructuring liabilities 6,590 -
Other 29,106 16,208
582,166 571,210
Total Capitalization and Liabilities $2,720,827 $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
Six Months Ended
June 30
1996 1995
(Thousands of Dollars)
CASH FLOWS FROM OPERATIONS:
<S> <C> <C>
Consolidated net income $39,841 $62,025
Depreciation 60,619 57,700
Deferred investment credit and income taxes, net (13,053) 4,206
Deferred power costs, net 11,698 9,689
Unconsolidated subsidiaries' dividends in excess of earnings 1,948 1,997
Allowance for other than borrowed funds used
during construction (59) (1,182)
Restructuring charges 19,274
Asset write-off 10,762
Changes in certain current assets and
liabilities:
Accounts receivable, net 31,279 (1,762)
Materials and supplies 4,821 (2,107)
Accounts payable (36,687) (31,175)
Taxes accrued (7,610) (9,010)
Interest accrued 1,322 (68)
Other, net 3,610 (12,293)
127,765 78,020
CASH FLOWS FROM INVESTING:
Construction expenditures (46,511) (70,752)
Allowance for other than borrowed funds used
during construction 59 1,182
(46,452) (69,570)
CASH FLOWS FROM FINANCING:
Issuance of long-term debt - 143,700
Retirement of long-term debt - (78,888)
Short-term debt, net (32,235) 0
Notes receivable from affiliates 0 (22,800)
Dividends on capital stock:
Preferred stock (1,703) (4,460)
Common stock (47,749) (46,043)
(81,687) (8,491)
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (374) (41)
Cash and Temporary Cash Investments at January 1 717 345
Cash and Temporary Cash Investments at June 30 $ 343 $ 304
Supplemental cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $31,394 $30,570
Income taxes 32,631 26,467
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
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 June 30, 1996, the
results of operations for the three and six months ended June
30, 1996 and 1995, and cash flows for the six months ended June
30, 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 $32.2 million and $69.1 million for the
three and six months ended June 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.
In March 1996, the Company and its affiliates announced
additional restructuring plans which included consolidating
operating divisions, and centralizing and changing many
accounting, customer services, and other functions. Effective
July 1996, the Company and its affiliates reduced their
workforce by about 570 employees. The reductions were
accomplished through an enhanced separation plan,
<PAGE>
- 7 -
attrition, and layoffs. An additional reduction of about 500
employees during the next two or three years will occur
primarily through attrition and, in the union workforce,
pursuant to appropriate contract terms.
Restructuring charges previously recorded were adjusted in the
second quarter to reflect current estimates. Restructuring
charges reflect estimated liabilities for severance, employee
termination costs, and other restructuring costs. Estimated
additional restructuring charges of about $15 million will be
recorded as the liabilities are incurred. A summary of the
Company's restructuring liabilities is provided below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 1996 June 1996
(Millions of Dollars)
Restructuring liability (before tax):
<S> <C> <C>
Balance at beginning of period $27.0 $ 6.5
Accruals/adjustments (4.0) 23.3
Benefit plans curtailment
liabilities/adjustments* .2 (4.7)
Less payments (2.2) (4.1)
Balance at end of period $21.0 $21.0
*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 Six Months Ended
June 30 June 30
1996 1995 1996 1995
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Electric operating revenues $21,023 $22,061 $41,932 $44,157
Operation & maintenance expense 1,215 1,571 2,334 3,367
Depreciation 4,290 4,224 8,580 8,448
Taxes other than income taxes 1,198 1,248 2,408 2,547
Federal income taxes 3,362 3,502 6,706 6,725
Interest charges 4,181 4,432 8,409 9,417
Other income, net - (9) (3) (9)
Net income $ 6,777 $ 7,093 $13,498 $13,662
</TABLE>
The Company's share of the equity in earnings above was $3.0
million and $3.2 million for the three months ended June 30,
1996 and 1995, respectively, and $6.1 million for each of the
six months ended June 30, 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>
1996 1995
1st 2nd 1st 2nd
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Number of Shares 24,361,586 24,361,586 24,361,586 24,361,586
Amount per Share $.99 $.97 $.94 $.95
</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 SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1996
WITH SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1995
Review of Operations
CONSOLIDATED NET INCOME
Consolidated net income for the second quarter of 1996
was $19.5 million compared with $24.6 million for the corresponding 1995
period. For the first six months of 1996, consolidated net income was
$39.8 million compared with $62.0 million for the corresponding 1995
period. The three and six month periods ended June 1996 include
restructuring charges and an asset write-off of $6.7 million ($4.0 million
net of taxes) and $34.1 million ($20.1 million net of taxes),
respectively. Restructuring activities reported in the first quarter
continued in the second quarter with adjustments to the restructuring
charges previously recorded (see Note 4 to the Consolidated Financial
Statements). The decrease in earnings for the second quarter and first
six months of 1996 of 5% and 3%, respectively, excluding the restructuring
charges and an asset write-off, 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 in the second quarter increased 5%,
4%, and 2%, and in the first six months increased 7%, 5%, and 3%,
respectively. Growth in the number of customers and increased weather-
related sales combined to cause the increase in residential and commercial
sales. The increase in kWh sales to industrial customers in the second
quarter and first six months of 1996 resulted primarily from increased
sales to fabricated metals, coal mining, and wood products customers. The
increase in revenues from retail customers resulted from the following:
<TABLE>
<CAPTION>
Change from Prior Periods
Quarter Six Months
(Millions of Dollars)
<S> <C> <C>
Increased kWh sales $3.5 $14.5
Fuel and energy cost adjustment clauses* 1.8 1.5
Other .2 (2.3)
$5.5 $13.7
*Changes in revenues from fuel and energy cost adjustment
clauses have little effect on consolidated net income.
</TABLE>
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 Six Months Ended
June 30 June 30
1996 1995* 1996 1995*
KWh deliveries (in billions):
<S> <C> <C> <C> <C>
From transmission services 1.6 1.3 3.9 2.8
From sale of Company generation .3 .1 .3 .1
1.9 1.4 4.2 2.9
Revenues (in millions):
From transmission services $ 6.0 $4.9 $12.4 $ 9.7
From sale of Company generation 4.9 1.5 6.5 3.1
$10.9 $6.4 $18.9 $12.8
</TABLE>
Increased transmission services and sales of Company
generation resulted primarily from increased activity 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 for the second quarter and the first six
months of 1996 increased 6% and 1%, respectively. The increase in fuel
expenses in both periods was due primarily to an 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 Six Months Ended
June 30 June 30
1996 1995* 1996 1995*
(Millions of Dollars)
Nonaffiliated transactions:
Purchased power:
<S> <C> <C> <C> <C>
From PURPA generation $16.3 $16.0 $31.4 $32.6
Other 6.1 6.9 12.2 11.4
Power exchanges (.7) (.4) .7 .7
Affiliated transactions:
AGC capacity charges 9.2 9.4 18.3 19.0
Energy and spinning reserve
charges 1.3 1.0 2.6 2.1
$32.2 $32.9 $65.2 $65.8
*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.
</TABLE>
<PAGE>
- 11 -
The cost of purchased power, 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 increases in other operation expense for the three
and six months ended June 1996 resulted primarily from restructuring
charges discussed in Note 4 to the Consolidated Financial Statements and a
$10.8 million write-off of accumulated land-related costs on a previously
proposed transmission line. The proposed line is not in the Company's
future plans and, in the industry's more competitive environment, it is no
longer reasonable to assume future recovery of these costs in rates.
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. 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 equipment is dismantled.
The increases in depreciation expense for the second
quarter and first six months resulted primarily from additions to electric
plant.
Taxes other than income taxes increased $1.9 million
for the first six months primarily from prior year property tax
adjustments made in 1995.
The net changes in federal and state income taxes for
the second quarter and first six month periods resulted primarily from
variances in income before income taxes.
The combined decrease of $1.7 million in allowance for
funds used during construction for the six months ended June 1996 reflects
a decrease in capital expenditures.
The decrease in other income, net for the second
quarter of 1996 was due primarily to interest income earned on funds
available as a result of the timing of the debt and preferred stock
refinancings in the second quarter of 1995.
The increases of $1.5 million and $1.9 million in other
interest for the second quarter and first six months, respectively,
resulted primarily from interest on overcollections from customers of the
Energy Cost Rate (ECR).
<PAGE>
12
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.
In May 1996, the Pennsylvania Public Utility Commission
(PUC) approved the Company's petition seeking permission to recover from
customers through the Energy Cost Rate (ECR) the $31 million buyout cost
of the Shannopin PURPA project. The Company will recover the cost over
three years including recovery of $24 million in the current ECR year
ending March 31, 1997. This increase in customer rates will be offset by
a $27 million refund of overcollections from the past ECR year. The
buyout will save the Company's customers approximately $665 million over
the next 30 years by eliminating the need to buy the overpriced power.
The System has joined with six other electric utilities
to form the Partnership for Customer Choice (PCC). The group is urging
immediate enactment of federal legislation to provide real retail
competition to electric customers by the turn of the century. Other
members of the partnership are Cinergy, PacifiCorp, Pennsylvania Power &
Light, UtiliCorp United, Wisconsin Energy Corporation, and Wisconsin Power
and Light. The PCC strongly advocates continued state regulation of local
electric distribution, regulation of the transmission and distribution
systems to enhance, rather than impede, market efficiency, and a method of
dealing with costs that a utility may not recover in the competitive
markets (stranded costs) that does not unduly impede the transition to
full competition.
The Company and its affiliates and three other electric
utilities, whose service areas extend from Lake Erie to North Carolina,
have formed an alliance to jointly manage and coordinate the operation of
their interconnected transmission systems. Alliance operation of the
systems will increase transmission reliability for the companies' nearly
5.5 million retail customers in six states by scheduling and coordinating
bulk power transactions. The alliance will also establish fair
compensation for use of the transmission systems by alliance members and
by power wholesalers.
<PAGE>
- 13 -
WEST PENN POWER COMPANY AND SUBSIDIARY COMPANIES
Part II - Other Information to Form 10-Q
for Quarter Ended June 30, 1996
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) (27) Financial Data Schedule
(b) As reported in the first quarter 1996 10-Q, on April
11, 1996, the Company filed a Form 8-K containing a
Form of Change in Control Employment Contract.
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
THOMAS J. KLOC
Thomas J. Kloc
Controller
(Chief Accounting Officer)
August 13, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 343
<SECURITIES> 0
<RECEIVABLES> 139,590
<ALLOWANCES> 9,707
<INVENTORY> 64,284
<CURRENT-ASSETS> 254,304
<PP&E> 3,115,808
<DEPRECIATION> 1,110,360
<TOTAL-ASSETS> 2,720,827
<CURRENT-LIABILITIES> 190,419
<BONDS> 904,957
0
79,708
<COMMON> 465,994
<OTHER-SE> 497,583
<TOTAL-LIABILITY-AND-EQUITY> 2,720,827
<SALES> 554,876
<TOTAL-REVENUES> 554,876
<CGS> 356,086
<TOTAL-COSTS> 463,033
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,250
<INCOME-PRETAX> 62,377
<INCOME-TAX> 22,536
<INCOME-CONTINUING> 39,841
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,841
<EPS-PRIMARY> 0.00<F1>
<EPS-DILUTED> 0.00<F1>
<FN>
<F1>All common stock is owned by parent, no EPS required.
</FN>
</TABLE>
