FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-3491
PENNSYLVANIA POWER COMPANY
(Exact name of Registrant as specified in its charter)
Pennsylvania 25-0718810
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 E. Washington St., P.O. Box 891, New Castle, PA 16103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 412-652-5531
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 for 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
6,290,000 shares of common stock, $30 par value, outstanding as of August 2,
1994<PAGE>
PENNSYLVANIA POWER COMPANY
TABLE OF CONTENTS
Pages
Part I. Financial Information
Statements of Income. . . . . . . . . . . . . . . . . . . . . . . 1
Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . . 2-3
Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . 4
Notes to Financial Statements . . . . . . . . . . . . . . . . . . 5-6
Report of Independent Public Accountants. . . . . . . . . . . . . 7
Management's Discussion and Analysis of Results of
Operations and Financial Condition. . . . . . . . . . . . . . . 8-9
Part II. Other Information<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
- ------------------------------
PENNSYLVANIA POWER COMPANY
STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1994 1993 1994 1993
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES $74,700 $70,266 $153,058 $144,540
------- ------- --------- --------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 14,072 13,686 31,256 31,238
Nuclear operating costs 8,207 7,213 17,226 14,749
Other operating costs 23,922 15,287 37,336 33,729
-------- ------- -------- --------
Total operation and maintenance expenses 46,201 36,186 85,818 79,716
Provision for depreciation 6,628 7,779 14,227 16,203
Deferral of net regulatory assets (1,664) (1,755) (2,648) (2,640)
General taxes 5,568 5,412 11,912 11,729
Income taxes 4,264 6,086 11,860 9,972
------- ------- -------- --------
Total operating expenses and taxes 60,997 53,708 121,169 114,980
------- ------- -------- --------
OPERATING INCOME 13,703 16,558 31,889 29,560
OTHER INCOME 522 200 936 268
------- ------- -------- --------
TOTAL INCOME 14,225 16,758 32,825 29,828
------- ------- -------- --------
NET INTEREST:
Interest expense 8,627 8,890 17,203 17,660
Allowance for borrowed funds used during
construction (179) (237) (312) (458)
------- ------- -------- --------
Net interest 8,448 8,653 16,891 17,202
------- ------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING 5,777 8,105 15,934 12,626
Cumulative effect to January 1, 1993 of a change
in accounting for unbilled revenues (net of
income taxes of $4,108,000) -- -- -- 5,653
------- ------- -------- --------
NET INCOME 5,777 8,105 15,934 18,279
PREFERRED STOCK DIVIDEND
REQUIREMENTS 1,681 1,534 3,037 3,069
------- ------- -------- --------
EARNINGS ON COMMON STOCK $ 4,096 $ 6,571 $ 12,897 $ 15,210
======= ======= ======== ========
<FN>
The accompanying Notes to Financial Statements are an integral part of
these statements.
</TABLE>
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<PAGE>
<TABLE>
PENNSYLVANIA POWER COMPANY
BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30, December 31,
1994 1993
---------- ------------
(In thousands)
ASSETS
------
<S> <C> <C>
UTILITY PLANT:
In service, at original cost. . . . . . . . . . . $1,203,414 $1,209,961
Less--Accumulated provision for depreciation. . . 398,045 394,530
---------- ----------
805,369 815,431
---------- ----------
Construction work in progress-
Electric plant. . . . . . . . . . . . . . . . . 16,405 10,996
Nuclear fuel. . . . . . . . . . . . . . . . . . 11,150 8,604
---------- ----------
27,555 19,600
---------- ----------
832,924 835,031
---------- ----------
OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . 8,969 15,064
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . 26,646 12,819
Receivables-
Customers (less accumulated provisions
of $513,000 and $559,000, respec-
tively, for uncollectible accounts). . . . . . 32,213 28,122
Parent company. . . . . . . . . . . . . . . . . 16,420 19,737
Other . . . . . . . . . . . . . . . . . . . . . 13,732 17,427
Materials and supplies, at average cost-
Fuel. . . . . . . . . . . . . . . . . . . . . . 5,730 4,350
Other . . . . . . . . . . . . . . . . . . . . . 12,087 12,088
Prepayments . . . . . . . . . . . . . . . . . . . 6,055 4,868
---------- ----------
112,883 99,411
---------- ----------
DEFERRED CHARGES:
Regulatory assets . . . . . . . . . . . . . . . . 227,572 222,301
Other . . . . . . . . . . . . . . . . . . . . . . 7,322 9,176
---------- ----------
234,894 231,477
---------- ----------
$1,189,670 $1,180 983
========== ==========
</TABLE>
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<PAGE>
<TABLE>
PENNSYLVANIA POWER COMPANY
BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30, December 31,
1994 1993
----------- ------------
(In thousands)
<C> <C>
CAPITALIZATION AND LIABILITIES
------------------------------
<S>
CAPITALIZATION:
Common stockholder's equity-
Common stock, $30 par value,
authorized 6,500,000 shares-
6,290,000 shares outstanding. . . . . . . . $ 188,700 $ 188,700
Other paid-in capital (397) (310)
Retained earnings. . . . . . . . . . . . . . 68,599 66,392
----------- -----------
Total common stockholder's equity . . . . . 256,902 254,782
Preferred stock-
Not subject to mandatory redemption. . . . . 50,905 50,905
Subject to mandatory redemption. . . . . . . 15,000 20,500
Long-term debt -
Associated companies . . . . . . . . . . . . 14,783 16,401
Other. . . . . . . . . . . . . . . . . . . . 423,777 424,154
----------- -----------
761,367 766,742
----------- -----------
CURRENT LIABILITIES:
Currently payable preferred stock
and long-term debt-
Associated companies. . . . . . . . . . . . 10,015 10,216
Other . . . . . . . . . . . . . . . . . . . 6,879 1,788
Accounts payable-
Associated companies . . . . . . . . . . . . 8,149 7,755
Other. . . . . . . . . . . . . . . . . . . . 31,326 32,680
Accrued taxes. . . . . . . . . . . . . . . . . 7,692 6,658
Accrued interest . . . . . . . . . . . . . . . 9,992 9,924
Other. . . . . . . . . . . . . . . . . . . . . 17,895 14,308
----------- -----------
91,948 83,329
----------- -----------
DEFERRED CREDITS:
Accumulated deferred income taxes. . . . . . . 274,060 273,319
Accumulated deferred investment tax credits. . 32,885 33,560
Other. . . . . . . . . . . . . . . . . . . . . 29,410 24,033
----------- -----------
336,355 330,912
----------- -----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ----------- -----------
$1,189,670 $1,180,983
=========== ===========
<FN>
The accompanying Notes to Financial Statements are an integral part of these
balance sheets.
</TABLE>
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<PAGE>
<TABLE>
PENNSYLVANIA POWER COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1994 1993 1994 1993
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,777 $ 8,105 $15,934 $18,279
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation 6,628 7,779 14,227 16,203
Nuclear fuel and lease amortization 1,653 798 4,827 3,277
Deferred income taxes, net (96) 5,234 2,386 6,254
Investment tax credits, net (338) (435) (675) (871)
Allowance for equity funds used during
construction (123) (125) (220) (213)
Deferred fuel costs, net (1,926) (2,831) (2,203) (3,946)
Cumulative effect of a change in accounting
for unbilled revenues -- -- -- (5,653)
Other (375) -- (747) --
------- ------- ------- -------
Internal cash before dividends 11,200 18,525 33,529 33,330
Receivables (10,978) (1,361) 2,921 6,767
Materials and supplies (1,301) (1,533) (1,379) (74)
Accounts payable 10,060 5,933 2,761 4,802
Other 14,720 (15,546) 13,011 (16,667)
------- ------- ------- -------
Net cash provided from operating activities 23,701 6,018 50,843 28,158
------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Notes payable, net -- 21,000 -- 17,000
Redemptions and Repayments-
Preferred stock -- -- 362 800
Long-term debt 1,644 10,728 4,807 13,236
Dividend Payments-
Common stock 5,347 5,347 10,693 10,693
Preferred stock 1,355 1,534 2,709 3,062
------- ------- ------- -------
Net cash provided from (used for)
financing activities (8,346) 3,391 (18,571) (10,791)
------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 5,397 10,201 18,155 20,636
Other (647) 91 290 91
------- ------- ------- -------
Net cash used for investing activities 4,750 10,292 18,445 20,727
------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents 10,605 (883) 13,827 (3,360)
Cash and cash equivalents at beginning of period 16,041 1,186 12,819 3,663
------- ------- ------- -------
Cash and cash equivalents at end of period $26,646 $ 303 $26,646 $ 303
======= ======= ======= =======
<FN>
The accompanying Notes to Financial Statements are an integral part of
these statements.
</TABLE>
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<PAGE>
PENNSYLVANIA POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1 - FINANCIAL STATEMENTS:
The condensed financial statements reflect all normal recurring
adjustments which are, in the opinion of management, necessary to fairly
present results of operations for the interim periods. These statements should
be read in conjunction with the financial statements and notes thereto
included in Pennsylvania Power Company's (Company) 1993 Annual Report to
Stockholders. The results of operations are not intended to represent results
of operations for any future period.
2 - COMMITMENTS, GUARANTEES AND CONTINGENCIES:
Construction Program --
The Company, a wholly owned subsidiary of Ohio Edison Company (Edison),
currently forecasts expenditures of approximately $140,000,000 for property
additions and improvements from 1994-1998, of which approximately $27,000,000
is applicable to 1994. The Company's investment in nuclear fuel is expected
to be approximately $38,000,000 during the 1994-1998 period, of which
approximately $9,000,000 is applicable to 1994.
Guarantees --
The Company, together with the other Central Area Power Coordination
Group companies, has severally guaranteed certain debt and lease obligations
in connection with a coal supply contract for the Bruce Mansfield Plant. As
of June 30, 1994, the Company's share of the guarantee was $11,212,000. The
price under the coal supply contract, which includes certain minimum payments,
has been determined to be sufficient to satisfy the debt and lease
obligations.
Environmental Matters --
Various federal, state and local authorities regulate the Company with
regard to air and water quality and other environmental matters. The Company
has estimated additional capital expenditures for environmental compliance of
approximately $17,000,000, which is included in the construction forecast
under "Construction Program" for 1994 through 1998.
The Clean Air Act Amendments of 1990 require significant reductions of
sulfur dioxide and oxides of nitrogen from the Company's coal-fired generating
units by 1995 and additional emission reductions by 2000. Compliance options
include, but are not limited to, installing additional pollution control
equipment, burning less polluting fuel, purchasing emission allowances from
others, operating existing facilities in a manner which minimizes pollution
and retiring facilities. In a system compliance plan for the Company and
Edison submitted to the Pennsylvania Public Utility Commission and to the
Environmental Protection Agency, the Company stated that reductions for the
years 1995 through 1999 are likely to be achieved by burning lower sulfur
fuel, generating more electricity at its lower emitting plants and/or
purchasing emission allowances. The Company continues to evaluate its
compliance plan and other compliance
-5-
<PAGE>
PENNSYLVANIA POWER COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
options as they arise. Plans for complying with the year 2000 reductions are
less certain at this time.
The Pennsylvania Department of Environmental Resources has issued
regulations dealing with the storage, treatment, transportation and disposal
of residual waste such as coal ash and scrubber sludge. These regulations
impose additional requirements relating to permitting, ground water
monitoring, leachate collection systems, closure, liability insurance and
operating matters. The Company is developing and analyzing various compliance
options and is presently unable to determine the ultimate increase in capital
and operating costs at existing sites.
Legislative and administrative action and the effect of court decisions
can be expected in the future (as they have in the past) to change the way
that the Company must operate in order to comply with environmental laws and
regulations. With respect to any such changes and to the environmental matters
described above, the Company expects that any resulting additional capital
costs which may be required, as well as any required increase in operating
costs, would ultimately be recovered from its customers.
-6-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pennsylvania Power Company:
We have reviewed the accompanying balance sheet of Pennsylvania Power
Company (a Pennsylvania corporation and a wholly-owned subsidiary of Ohio
Edison Company) as of June 30, 1994, and the related statements of income and
cash flows for the three-month and six-month periods ended June 30, 1994 and
1993. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet and statement of capitalization of Pennsylvania
Power Company as of December 31, 1993, and the related statements of income,
retained earnings, capital stock and other paid-in capital, cash flows and
taxes for the year then ended (not presented separately herein). In our
opinion, the information set forth in the accompanying balance sheet as of
December 31, 1993 is fairly stated in all material respects in relation to the
balance sheet from which it has been derived.
ARTHUR ANDERSEN & CO.
Cleveland, Ohio,
August 2, 1994
-7-
<PAGE>
PENNSYLVANIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Operating revenues were up $4,400,000 and $8,500,000 for the quarter and
six month periods ended June 30, 1994, respectively, as compared with the same
periods last year. However, earnings were lower in the second quarter
primarily due to voluntary early retirement programs offered to qualifying
employees, discussed more fully below.
For the first half of 1994, total kilowatt-hour sales increased by 3.4%
due to a 9.0% rise in retail sales. Residential and commercial sales
increased 10.4% and 9.7%, respectively, due to increased weather-related
demand and to an increasing customer base. Sales to industrial customers
increased 7.4% due to increased demand by manufacturers in the primary metals
industry. Sales to other utilities were down 11.8% during the first half of
1994. Increased demand in the retail sector and capacity constraints limited
the Company's opportunities to sell power off system.
Total kilowatt-hour sales were up 3.5% during the second quarter of 1994
compared to the same period last year due to an 8.1% increase in retail sales.
Residential and commercial sales rose 7.1% and 5.8%, respectively, while
industrial sales increased 10.5%. Sales to other utilities fell 13.1% during
the quarter.
As a result of a prolonged refueling outage at the Perry Plant, the
Company's nuclear operating costs have increased in the second quarter and
year to date periods of 1994 as compared to the corresponding periods of 1993.
In conjunction with the refueling outage, the company operating the Perry
Plant has been undertaking significant corrective maintenance work designed
to improve the unit's performance. Activities relating to this outage were
essentially complete by the end of July 1994. Other operating costs increased
in the second quarter of 1994 compared to 1993 primarily due to a $9,600,000
charge relating to the voluntary early retirement programs offered to
qualifying employees.
Capital Resources and Liquidity
The Company has continuing cash requirements for planned capital
expenditures and debt maturities. During the remainder of the year, capital
requirements for property additions and capital leases are expected to be
approximately $19,000,000, including $6,000,000 for nuclear fuel. The Company
has additional cash requirements of approximately $600,000 to meet maturities
of long-term debt during the remainder of 1994. In July 1994, the Company
also redeemed $6,000,000 of preferred stock.
-8-
<PAGE>
PENNSYLVANIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
As of June 30, 1994, the Company had approximately $27,000,000 of cash and
temporary investments and no short-term indebtedness. The Company had
$5,000,000 of unused short-term bank lines of credit as of June 30, 1994, and
$32,000,000 of bank facilities which may be borrowed for up to several days
at the banks' discretion.
The Company's performance initiatives activities are continuing and
opportunities for improvement and savings are being identified. As a result,
certain projects and activities have been eliminated and other process
improvements and revenue opportunities are being pursued. In conjunction with
these results, the Company announced, in May 1994, the offering of a voluntary
early retirement program to 60 eligible nonunion employees, with 56 employees
accepting the offer. In addition, the Company offered a similar program to
54 eligible members of Utility Workers Union of America Local 140. Those
employees have until August 22, 1994 to accept the offer.
On June 16, 1994, the Pennsylvania Public Utility Commission (PPUC) issued
an order approving the Company's settlement petition to remove New Castle
Units 1 and 2 from service and to terminate the annual capacity power sales
arrangement from the Company to Ohio Edison. The order requires the Company
to refund $4,750,000 to customers by reducing its energy cost rate (ECR) from
April 1, 1994 through March 31, 1997. On July 7, 1994, the PPUC adopted an
order requiring the Company to refund $4,221,000 to its customers over a two
year period beginning August 1, 1994. The refunds represent final resolution
of a December 1991 PPUC order that required the Company to refund replacement
power costs recovered from customers through the ECR during an extended outage
at Beaver Valley Unit 1 in 1979. There will be no material adverse effect to
net income in future periods as a result of these refunds.
The Company currently has agreements to serve five municipalities; three
of the agreements expire September 1, 1994. The Company is currently
negotiating with these municipalities concerning their electric service.
-9-
<PAGE>
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits
Exhibit
Number
-------
15 Letter from independent public accountants.
Pursuant to paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, the
Company has not filed as an exhibit to this Form 10-Q any instrument with
respect to long-term debt if the total amount of securities authorized
thereunder does not exceed 10% of the total assets of the Company, but
hereby agrees to furnish to the Commission on request any such documents.
(b) Reports on Form 8-K
None
<PAGE>
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.
August 2, 1994
PENNSYLVANIA POWER COMPANY
----------------------------
Registrant
/s/ Robert P. Wushinske
----------------------------
Robert P. Wushinske
Vice President and Treasurer
Chief Accounting Officer
<PAGE>
EXHIBIT 15
Pennsylvania Power Company
1 E. Washington Street
P. O. Box 891
New Castle, Pennsylvania 16103
Gentlemen:
We are aware that Pennsylvania Power Company has incorporated by reference in
its previously filed Registration Statements No. 33-47372, 33-62450 and 33-
65156, the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994, which includes our report dated August 2, 1994, covering the
unaudited interim financial statements contained therein. Pursuant to Rule
436(c) of Regulation C of the Securities Act of 1933, such report is not
considered a part of the Registration Statement prepared or certified by our
firm or a report prepared or certified by our firm within the meaning of
Sections 7 and 11 of the Act.
Very truly yours,
ARTHUR ANDERSEN & CO.
Cleveland, Ohio,
August 2, 1994
