<PAGE>
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 March 31, 1997
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 14, 1997, 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 SUBSIDIARIES
Form 10-Q for Quarter Ended March 31, 1997
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Consolidated statement of income -
Three months ended March 31, 1997 and 1996 3
Consolidated balance sheet - March 31, 1997
and December 31, 1996 4
Consolidated statement of cash flows -
Three months ended March 31, 1997 and 1996 5
Notes to consolidated financial statements 6-7
Management's discussion and analysis of financial
condition and results of operations 8-11
PART II--OTHER INFORMATION 12-13
<PAGE>
- 3 -
WEST PENN POWER COMPANY AND SUBSIDIARIES
Consolidated Statement of Income
<TABLE>
<CAPTION>
Three Months Ended
March 31
1997 1996
(Thousands of Dollars)
<S> <C> <C>
ELECTRIC OPERATING REVENUES:
Residential $ 110,311 $ 119,779
Commercial 56,137 58,859
Industrial 87,741 91,358
Wholesale and other, including affiliates 19,788 18,434
Bulk power transactions, net 8,553 8,015
Total Operating Revenues 282,530 296,445
OPERATING EXPENSES:
Operation:
Fuel 64,146 62,355
Purchased power and exchanges, net 31,915 32,965
Deferred power costs, net 2,048 8,762
Other 35,892 36,596
Maintenance 27,093 28,434
Restructuring charges - 27,371
Depreciation 30,454 29,880
Taxes other than income taxes 23,522 24,006
Federal and state income taxes 20,189 11,708
Total Operating Expenses 235,259 262,077
Operating Income 47,271 34,368
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 609 34
Other income, net 5,597 3,064
Total Other Income and Deductions 6,206 3,098
Income Before Interest Charges 53,477 37,466
INTEREST CHARGES:
Interest on long-term debt 16,247 16,247
Other interest 820 1,042
Allowance for borrowed funds used during
construction (491) (205)
Total Interest Charges 16,576 17,084
CONSOLIDATED NET INCOME $ 36,901 $ 20,382
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
- 4 -
WEST PENN POWER COMPANY AND SUBSIDIARIES
Consolidated Balance Sheet
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
<S> <C> <C>
ASSETS: (Thousands of Dollars)
Property, Plant, and Equipment:
At original cost, including $107,755,000
and $102,003,000 under construction $3,200,115 $3,182,208
Accumulated depreciation (1,182,721) (1,152,383)
2,017,394 2,029,825
Investments and Other Assets:
Allegheny Generating Company - common stock at equity 90,179 91,330
Other 851 881
91,030 92,211
Current Assets:
Cash and temporary cash investments 6,444 5,160
Accounts receivable:
Electric service, net of $11,857,000 and $11,524,000
uncollectible allowance 116,208 117,240
Affiliated and other 22,793 20,251
Materials and supplies - at average cost:
Operating and construction 36,064 34,011
Fuel 31,433 26,247
Prepaid taxes 30,799 20,688
Deferred income taxes 35,364 29,003
Other 6,374 10,392
285,479 262,992
Deferred Charges:
Regulatory assets 286,830 284,099
Unamortized loss on reacquired debt 10,674 10,990
Other 17,999 19,620
315,503 314,709
Total Assets $2,709,406 $2,699,737
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $465,994 $465,994
Other paid-in capital 55,475 55,475
Retained earnings 418,634 441,283
940,103 962,752
Preferred stock 79,708 79,708
Long-term debt and QUIDS 905,387 905,243
1,925,198 1,947,703
Current Liabilities:
Short-term debt 61,700 33,387
Accounts payable 71,447 74,229
Accounts payable to affiliates 9,092 7,985
Taxes accrued:
Federal and state income 11,254 250
Other 10,274 28,649
Deferred power costs 14,803 10,107
Interest accrued 14,072 15,741
Restructuring liability 20,832 27,134
Other 24,446 21,341
237,920 218,823
Deferred Credits and Other Liabilities:
Unamortized investment credit 47,141 47,786
Deferred income taxes 441,951 429,122
Regulatory liabilities 32,940 33,302
Other 24,256 23,001
546,288 533,211
Total Capitalization and Liabilities $2,709,406 $2,699,737
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
- 5 -
WEST PENN POWER COMPANY AND SUBSIDIARIES
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
March 31
1997 1996
(Thousands of Dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Consolidated net income $36,901 $20,382
Depreciation 30,454 29,880
Deferred investment credit and income taxes, net 2,539 (12,740)
Deferred power costs, net 2,048 8,762
Unconsolidated subsidiaries' dividends in excess of earnings 1,183 1,171
Allowance for other than borrowed funds used
during construction (609) (34)
Restructuring liability - 25,488
Changes in certain current assets and
liabilities:
Accounts receivable, net (1,510) 18,007
Materials and supplies (7,239) (3,178)
Accounts payable (1,675) (30,459)
Taxes accrued (7,371) 11,789
Interest accrued (1,669) (327)
Other, net (4,550) (12,905)
48,502 55,836
CASH FLOWS FROM INVESTING:
Construction expenditures (19,490) (18,670)
Allowance for other than borrowed funds used
during construction 609 34
(18,881) (18,636)
CASH FLOWS FROM FINANCING:
Short-term debt, net 28,313 (12,498)
Notes receivable from affiliates 2,900 -
Dividends on capital stock:
Preferred stock (839) (861)
Common stock (58,711) (24,118)
(28,337) (37,477)
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS 1,284 (277)
Cash and Temporary Cash Investments at January 1 5,160 717
Cash and Temporary Cash Investments at March 31 $ 6,444 $ 440
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $17,579 $16,811
Income taxes - 2,507
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
- 6 -
WEST PENN POWER COMPANY AND SUBSIDIARIES
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, 1996, should be read
with the accompanying financial statements and the following
notes. With the exception of the December 31, 1996,
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 contain all adjustments (which
consist only of normal recurring adjustments) necessary to
present fairly the Company's financial position as of March 31,
1997, and the results of operations and cash flows for the
three months ended March 31, 1997 and 1996.
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. 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 Electric and
Power Company, a nonaffiliated utility. Following is a summary
of income statement information for AGC:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1997 1996
(Thousands of Dollars)
<S> <C> <C>
Electric operating revenues $20,216 $20,909
Operation and maintenance expense 1,285 1,119
Depreciation 4,284 4,290
Taxes other than income taxes 1,195 1,210
Federal income taxes 3,124 3,344
Interest charges 3,960 4,228
Other income, net - (3)
Net income $ 6,368 $ 6,721
</TABLE>
The Company's share of the equity in earnings above was $2.9
million and $3.0 million for the three months ended March 31,
1997 and 1996, respectively, and was included in other income,
net, on the Consolidated Statement of Income.
<PAGE>
- 7 -
4. Restructuring charges in the first quarter of 1996 ($16.1
million, net of tax) include expenses associated with the
reorganization, which is essentially complete.
5. On April 7, 1997, Allegheny Power System, Inc. and DQE, Inc.,
parent company of Duquesne Light Company, announced that they
have agreed to merge in a tax-free, stock-for-stock
transaction. The combined company will be called Allegheny
Energy. It is expected that Allegheny Energy will continue to
be operated as an integrated electric utility holding company
and that the Company and its regulated electric utility
affiliates will continue to exist as separate legal entities.
The merger is conditioned, among other things, upon the
approval of each company's shareholders and the necessary
approvals of various state and federal regulatory agencies,
including the public utility commissions in Pennsylvania and
Maryland, the Securities and Exchange Commission, the Federal
Energy Regulatory Commission, and the Nuclear Regulatory
Commission. The companies are hopeful that the required
approvals can be obtained within 12 to 18 months.
<PAGE>
- 8 -
WEST PENN POWER COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
COMPARISON OF FIRST QUARTER OF 1997 WITH FIRST QUARTER OF 1996
Review of Operations
CONSOLIDATED NET INCOME
Consolidated net income for the first quarter of 1997
and 1996, and the after tax restructuring charges included in the 1996
period are shown below.
<TABLE>
<CAPTION>
Consolidated Net Income
Three Months Ended
March 31
1997 1996
(Millions of Dollars)
<S> <C> <C>
Consolidated Net Income as Reported $36.9 $20.4
Restructuring Charges - 16.1
Consolidated Net Income Adjusted $36.9 $36.5
</TABLE>
The increase in adjusted consolidated net income before
restructuring charges for the first quarter of 1997 was due to a gain on a
sale of land by a subsidiary and lower expenses, which more than offset
decreased retail sales which resulted from the mild first quarter weather.
SALES AND REVENUES
In the first quarter of 1997, retail kilowatt-hour
(kWh) sales to residential, commercial, and industrial customers decreased
7%, 4%, and 1%, respectively. Residential kWh sales, which are more
weather sensitive than the commercial and industrial classes, decreased
due to heating degree days that were 12% below the corresponding 1996
period and more than 8% below normal. Commercial kWh sales also decreased
primarily because of the mild weather. Industrial kWh sales decreased for
a variety of reasons, primarily in the iron and steel and coal mining
customers groups.
<PAGE>
- 9 -
The decrease in revenues from sales to residential,
commercial, and industrial customers resulted from the following:
<TABLE>
<CAPTION>
Decrease from Prior Period
(Millions of Dollars)
<S> <C>
Decreased kWh sales $ (7.6)
Fuel and energy cost adjustment clauses* (7.5)
Other (.7)
Decrease in retail revenues $(15.8)
</TABLE>
* Changes in revenues from fuel and energy cost adjustment
clauses have little effect on consolidated net income.
However, beginning May 1, 1997, the Company will roll its fuel
and energy cost adjustment clause (energy cost rate or ECR)
into base rates and will discontinue deferred fuel accounting.
The Company will then assume the risks of increases in the
costs of fuel and purchased power and any declines in bulk
power transaction sales. However, the Company will also retain
the benefits of decreases in such costs and increases in such
sales.
Revenues from bulk power transactions consist of the
following items:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1997 1996
(Millions of Dollars)
<S> <C> <C>
Revenues:
From transmission services $5.6 $6.4
From sales of Company generation 3.0 1.6
Total $8.6 $8.0
</TABLE>
Most of the aggregate benefits from bulk power
transactions are passed on to retail customers through fuel cost
adjustment clauses and have little effect on consolidated net income.
However, beginning May 1, 1997, due to the elimination of the Company's
ECR, the Company, will retain the aggregate benefits from bulk power
transactions. See page 11 for more information.
OPERATING EXPENSES
Fuel expenses increased 3% due 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. See page 11 for information
regarding the May 1, 1997 change in the ECR in Pennsylvania.
"Purchased Power and Exchanges, Net" represents power
purchases from and exchanges with nonaffiliated companies 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
<PAGE>
- 10 -
economical generation available in the Allegheny Power System at any given
time, and consists of the following items:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1997 1996
(Millions of Dollars)
<S> <C> <C>
Nonaffiliated transactions:
Purchased power:
From PURPA generation $16.7 $15.1
Other 3.8 6.1
Power exchanges, net 1.8 1.4
Affiliated transactions:
AGC capacity charges 8.8 9.1
Energy and spinning reserve charges .8 1.3
Purchased power and exchanges, net $31.9 $33.0
</TABLE>
Other purchased power decreased because of decreased
sales to retail customers. 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
commission, and is primarily subject to deferred power cost procedures
with the result that changes in such costs have little effect on
consolidated net income. See page 11 for information regarding the May 1,
1997 change in the ECR in Pennsylvania.
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 the equipment is dismantled.
Restructuring charges in the first quarter of 1996
include expenses associated with the reorganization, which is essentially
complete.
The depreciation expense increase resulted from
additions to electric plant. Future depreciation expense increases are
expected to be less than historical increases because of reduced levels of
planned capital expenditures.
The increase in federal and state income taxes resulted
primarily from an increase in income before taxes.
The combined increase of $.9 million in allowance for
funds used during construction (AFUDC) reflects an increase in capital
expenditures.
Other income, net increased $2.5 million primarily due
to the gain on a sale of land by the Company's subsidiary, West Virginia
Power & Transmission Company.
Other interest expense reflects changes in the levels
of short-term debt maintained by the Company throughout the year, as well
as the associated interest rates.
<PAGE>
- 11 -
Financial Condition and Requirements
The Company's discussion on Financial Condition and
Requirements and Competition in Core Business in the Allegheny Power
companies' combined Annual Report on Form 10-K for the year ended December
31, 1996, 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, to the restructuring of the electric utility
industry and the Pennsylvania restructuring legislation, merger
activities, and legal actions.
The Company continues to advocate true competition in
the electric utility industry. Speaking on behalf of the Partnership for
Customer Choice (PCC), a group of utilities established in 1996 to push
for the enactment of federal legislation to bring real choice to electric
consumers by a date certain, the Allegheny Power System's President and
CEO continues to deliver a strong, clear message to lawmakers and others
that federal legislation is needed to advance fair and equal competition
in the electric utility industry that would eliminate a patchwork of
state-by-state customer choice plans.
In preparation for retail competition in Pennsylvania,
the Company filed a petition on February 28, 1997 with the Pennsylvania
Public Utility Commission (PUC) asking for permission to roll energy costs
and state tax adjustments into base rates, effective May 1, 1997. On
April 24, 1997, the PUC approved the Company's request to roll the above
items into base rates but denied the request to defer the difference
between the level of energy costs rolled into base rates and an
anticipated future level of such costs. The Company's petition was
necessitated by the passage of the Electric Generation Customer Choice and
Competition Act, which capped electric rates in Pennsylvania as of January
1, 1997, and marks a major ratemaking change for the Company. Effective
May 1, 1997, the Company's cost of fuel and costs for energy purchased
from other companies will no longer be protected by deferred fuel
accounting, so fuel purchases and purchased power operations will begin to
affect the Company's earnings. The move will not only simplify the
Company's rate structure, but will provide additional incentive to keep
the costs of fuel and associated expenses down, moving the Company one
step closer to full retail choice.
At the end of February, all electric utilities in
Pennsylvania, including the Company, filed proposals to establish retail
access pilot programs, which will allow customers in part of Pennsylvania
to purchase electric generation from their existing utility or an
alternative supplier. The existing utility, however, will continue to
provide these customers with transmission and distribution, as well as
related services. Before the end of 1997, about 5% of all electric
consumers in Pennsylvania will have the opportunity to choose their
electric supplier.
The Company's pilot is slated to begin late this year
and will continue until January 1, 1999, when one-third of electric
consumers in Pennsylvania will be allowed to choose their electricity
providers. Another one-third of customers will be allowed to choose on
January 1, 2000, and the final one-third will have the opportunity to
choose on January 1, 2001. Required under the Electric Generation Customer
Choice and Competition Act, the pilot must be approved by the Pennsylvania
Public Utility Commission before its implementation.
<PAGE>
- 12 -
WEST PENN POWER COMPANY AND SUBSIDIARIES
Part II - Other Information to Form 10-Q
for Quarter Ended March 31, 1997
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 16, 1997. 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:
<TABLE>
<S> <C>
Eleanor Baum Michael P. Morrell
William L. Bennett Alan J. Noia
Klaus Bergman Jay S. Pifer
Wendell F. Holland Steven H. Rice
Phillip E. Lint Gunnar E. Sarsten
Edward H. Malone Peter L. Shea
Frank A. Metz, Jr. Peter J. Skrgic
</TABLE>
ITEM 5. OTHER INFORMATION
On April 7, 1997, Allegheny Power System, Inc. and DQE,
Inc., parent company of Duquesne Light Company, announced that they have
agreed to merge in a tax-free, stock-for-stock transaction. The combined
company will be called Allegheny Energy. It is expected that Allegheny
Energy will continue to be operated as an integrated electric utility
holding company and that the Company and its regulated electric utility
affiliates will continue to exist as separate legal entities.
The merger is conditioned, among other things, upon the
approval of each company's shareholders and the necessary approvals of
various state and federal regulatory agencies, including the public
utility commissions in Pennsylvania and Maryland, the Securities and
Exchange Commission, the Federal Energy Regulatory Commission, and the
Nuclear Regulatory Commission. The companies are hopeful that the
required approvals can be obtained within 12 to 18 months.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) (27) Financial Data Schedule
(b) No reports on Form 8-K were filed on behalf of the
Company for the quarter ended March 31, 1997.
<PAGE>
- 13 -
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
/s/ T. J. KLOC
T. J. Kloc
Controller
(Chief Accounting Officer)
May 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 4,825
<SECURITIES> 1,619
<RECEIVABLES> 150,858
<ALLOWANCES> 11,857
<INVENTORY> 67,497
<CURRENT-ASSETS> 285,479
<PP&E> 3,200,115
<DEPRECIATION> 1,182,721
<TOTAL-ASSETS> 2,709,406
<CURRENT-LIABILITIES> 237,920
<BONDS> 905,387
0
79,708
<COMMON> 465,994
<OTHER-SE> 474,109
<TOTAL-LIABILITY-AND-EQUITY> 2,709,406
<SALES> 282,530
<TOTAL-REVENUES> 282,530
<CGS> 161,094
<TOTAL-COSTS> 215,070
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,576
<INCOME-PRETAX> 57,090
<INCOME-TAX> 20,189
<INCOME-CONTINUING> 36,901
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,901
<EPS-PRIMARY> 0.00<F1>
<EPS-DILUTED> 0.00<F1>
<FN>
<F1>All common stock is owned by parent, no EPS required.
</FN>
</TABLE>
