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 March 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------- -----------
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 at May 3, 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
Part II. Other Information
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
- ------------------------------
PENNSYLVANIA POWER COMPANY
<CAPTION>
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
--------------------
1994 1993
-------- --------
(In thousands)
<S> <C> <C>
OPERATING REVENUES . . . . . . . . . . . . . . . . . $ 78,358 $ 74,274
-------- --------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power. . . . . . . . . . . . . . 17,184 17,552
Nuclear operating costs . . . . . . . . . . . . . . 9,019 7,536
Other operating costs . . . . . . . . . . . . . . . 13,414 18,442
-------- --------
Total operation and maintenance expenses . . . . 39,617 43,530
Provision for depreciation. . . . . . . . . . . . . 7,599 8,424
Deferral of net regulatory assets . . . . . . . . . (984) (885)
General taxes . . . . . . . . . . . . . . . . . . . 6,344 6,317
Income taxes. . . . . . . . . . . . . . . . . . . . 7,596 3,886
-------- --------
Total operating expenses and taxes . . . . . . . 60,172 61,272
-------- --------
OPERATING INCOME . . . . . . . . . . . . . . . . . . 18,186 13,002
OTHER INCOME . . . . . . . . . . . . . . . . . . . . 414 68
-------- --------
TOTAL INCOME . . . . . . . . . . . . . . . . . . . . 18,600 13,070
-------- --------
NET INTEREST:
Interest expense. . . . . . . . . . . . . . . . . . 8,576 8,770
Allowance for borrowed funds used during
construction . . . . . . . . . . . . . . . . . . . (133) (221)
-------- --------
Net interest . . . . . . . . . . . . . . . . . . 8,443 8,549
-------- --------
INCOME BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING. . . . . . . . . . . . . . . . 10,157 4,521
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 . . . . . . . . . . . . . . . . . . . . . 10,157 10,174
PREFERRED STOCK DIVIDEND REQUIREMENTS. . . . . . . . 1,356 1,535
-------- --------
EARNINGS ON COMMON STOCK . . . . . . . . . . . . . . $ 8,801 $ 8,639
======== ========
<FN>
The accompanying Notes to Financial Statements are an integral part
of these statements.
</TABLE>
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<PAGE>
<TABLE>
PENNSYLVANIA POWER COMPANY
<CAPTION>
BALANCE SHEETS
(Unaudited)
March 31, December 31,
1994 1993
---------- ------------
(In thousands)
ASSETS
<S> <C> <C>
UTILITY PLANT:
In service, at original cost. . . . . . . . $1,214,234 $1,209,961
Less--Accumulated provision for
depreciation . . . . . . . . . . . . . . . 403,589 394,530
---------- ----------
810,645 815,431
---------- ----------
Construction work in progress-
Electric plant. . . . . . . . . . . . . . 17,540 10,996
Nuclear fuel. . . . . . . . . . . . . . . 10,022 8,604
---------- ----------
27,562 19,600
---------- ----------
838,207 835,031
---------- ----------
OTHER PROPERTY AND INVESTMENTS . . . . . . . 15,892 15,064
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . 16,041 12,819
Receivables-
Customers (less accumulated provisions
of $605,000 and $559,000, respectively,
for uncollectible accounts) . . . . . . 29,786 28,122
Parent company. . . . . . . . . . . . . . 11,698 19,737
Other . . . . . . . . . . . . . . . . . . 9,903 17,427
Materials and supplies, at average cost-
Fuel. . . . . . . . . . . . . . . . . . . 4,268 4,350
Other . . . . . . . . . . . . . . . . . . 12,248 12,088
Prepayments . . . . . . . . . . . . . . . . 9,654 4,868
---------- ----------
93,598 99,411
---------- ----------
DEFERRED CHARGES:
Regulatory assets . . . . . . . . . . . . . 222,437 222,301
Other . . . . . . . . . . . . . . . . . . . 7,675 9,176
---------- ----------
230,112 231,477
---------- ----------
$1,177,809 $1,180,983
========== ==========
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<PAGE>
</TABLE>
<TABLE>
PENNSYLVANIA POWER COMPANY
<CAPTION>
BALANCE SHEETS
(Unaudited)
March 31, December 31,
1994 1993
---------- ------------
(In thousands)
CAPITALIZATION AND LIABILITIES
<S> <C> <C>
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 . . . . . . . . . . . . (310) (310)
Retained earnings . . . . . . . . . . . . . . 69,849 66,392
---------- ----------
Total common stockholder's equity . . . . . . 258,239 254,782
Preferred stock-
Not subject to mandatory redemption . . . . . 50,905 50,905
Subject to mandatory redemption . . . . . . . 20,500 20,500
Long-term debt-
Associated companies. . . . . . . . . . . . . 15,406 16,401
Other . . . . . . . . . . . . . . . . . . . . 423,966 424,154
---------- ----------
769,016 766,742
---------- ----------
CURRENT LIABILITIES:
Currently payable preferred stock and
long-term debt-
Associated companies. . . . . . . . . . . . . 9,669 10,216
Other . . . . . . . . . . . . . . . . . . . . 1,404 1,788
Accounts payable-
Associated companies. . . . . . . . . . . . . 8,270 7,755
Other . . . . . . . . . . . . . . . . . . . . 23,724 32,680
Accrued taxes . . . . . . . . . . . . . . . . . 11,590 6,658
Accrued interest. . . . . . . . . . . . . . . . 7,548 9,924
Other . . . . . . . . . . . . . . . . . . . . . 14,012 14,308
---------- ----------
76,217 83,329
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes . . . . . . . 274,945 273,319
Accumulated deferred investment tax credits . . 33,223 33,560
Other . . . . . . . . . . . . . . . . . . . . . 24,408 24,033
---------- ----------
332,576 330,912
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2). . . . . . . . . . . . . ---------- ----------
$1,177,809 $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
<CAPTION>
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
----------------------
1994 1993
------- -------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . $10,157 $10,174
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation. . . . . . . . . 7,599 8,424
Nuclear fuel and lease amortization . . . . 3,174 2,479
Deferred income taxes, net. . . . . . . . . 2,482 1,020
Investment tax credits, net . . . . . . . . (337) (436)
Allowance for equity funds used during
construction. . . . . . . . . . . . . . . . (97) (88)
Deferred fuel costs, net. . . . . . . . . . (277) (1,115)
Cumulative effect of a change in
accounting for unbilled revenues . . . . . -- (5,653)
Other . . . . . . . . . . . . . . . . . . (372) --
------- -------
Internal cash before dividends. . . . . . . 22,329 14,805
Receivables . . . . . . . . . . . . . . . . 13,899 8,128
Materials and supplies. . . . . . . . . . . (78) 1,459
Accounts payable. . . . . . . . . . . . . . (7,299) (1,131)
Other . . . . . . . . . . . . . . . . . . . (1,709) (1,121)
------- -------
Net cash provided from operating
activities . . . . . . . . . . . . . . . . 27,142 22,140
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemptions and repayments-
Preferred stock . . . . . . . . . . . . . . . 362 800
Long-term debt. . . . . . . . . . . . . . . . 3,163 2,508
Notes payable, net. . . . . . . . . . . . . . -- 4,000
Dividend payments-
Common stock. . . . . . . . . . . . . . . . . 5,346 5,346
Preferred stock . . . . . . . . . . . . . . . 1,354 1,528
------- -------
Net cash used for financing activities. . . 10,225 14,182
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions. . . . . . . . . . . . . . . 12,758 10,435
Other . . . . . . . . . . . . . . . . . . . . . 937 --
------- -------
Net cash used for investing activities. . . 13,695 10,435
------- -------
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . . 3,222 (2,477)
Cash and cash equivalents at beginning of
period. . . . . . . . . . . . . . . . . . . . . 12,819 3,663
------- -------
Cash and cash equivalents at end of period . . . $16,041 $ 1,186
======= =======
<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
March 31, 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-
PENNSYLVANIA POWER COMPANY
NOTES - (Continued)
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 March 31, 1994, and the related statements of income and cash
flows for the three-month periods ended March 31, 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,
May 2, 1994
-7-
<PAGE>
PENNSYLVANIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Earnings on common stock for the first quarter of 1994 increased 1.9%
compared to the first quarter of 1993. Last year's earnings were positively
affected by the cumulative effect of a change in accounting for unbilled
revenues which was partially offset by expenses related to a voluntary early
retirement program offered to certain eligible employees.
Operating revenues were up 5.5% during the first quarter of 1994 due
to a 9.9% increase in retail kilowatt-hour sales. Residential and commercial
sales increased 13.1% and 13.4%, respectively, due to increased heating loads
resulting from more severe weather conditions than those that occurred during
the first quarter of 1993. Sales to industrial customers increased 4.2% due to
increased demand by manufacturers in the primary metals and rubber and plastics
industries. Sales to other utilities were down 11.0% during the first quarter
of 1994.
Higher nuclear operating costs in 1994 reflect additional work being
performed during a scheduled refueling outage at Perry Unit 1. The refueling
outage was originally scheduled to be complete in early May 1994; however, the
most recent estimate extends the outage by at least one month. Other operating
costs were down in 1994 compared to 1993 due primarily to last year's one-time
charge of $3,200,000 for the early retirement program mentioned above.
Capital Resources and Liquidity
The Company has continuing cash requirements for planned capital
expenditures and debt maturities. During the last three quarters of 1994,
capital requirements for property additions and capital leases are expected to
be approximately $23,000,000, including $8,000,000 for nuclear fuel. The
Company has additional cash requirements of approximately $1,500,000 to meet
maturities of, and sinking fund requirements for, long-term debt and preferred
stock during the remainder of 1994.
At March 31, 1994, the Company had approximately $16,000,000 of cash
and temporary investments and no short-term indebtedness. In addition, the
Company has $5,000,000 of unused short-term bank lines of credit and $37,000,000
of bank facilities which may be borrowed for up to several days at the banks'
discretion.
The Company has an ownership interest in two nuclear generating units.
The Company's share of the future obligation to decommission these units is
$69,000,000 in current dollars and (using a 2.9% escalation rate) $144,000,000
in future dollars. The estimated obligation, based on site specific studies,
and the escalation rate were developed using information obtained from
consultants. Payments for decommissioning are expected to begin in 2016, when
actual decommissioning work begins. The Company recovers decommissioning costs
through its electric rates and expects that any increase in actual
decommissioning costs compared to estimates used to compute customer rates would
be recovered from its customers.
-8-
<PAGE>
PART II. OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of stockholders was held on March 23, 1994. The
6,290,000 shares of common stock of the Company outstanding and
entitled to vote were represented by proxy.
(b) At this meeting the following persons were elected to the Company's
Board of Directors:
H. Peter Burg Robert L. Kensinger
Robert H. Carlson Joseph J. Nowak
J. R. Edgerly Jack E. Reed
Willard R. Holland Richard L. Werner
(c) As holder of all of the outstanding common stock of the Company,
Edison voted its shares without distinction for the persons
elected.
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.
May 3, 1994
PENNSYLVANIA POWER COMPANY
--------------------------
Registrant
/s/ Robert P. Wushinske
----------------------------
Robert P. Wushinske
Vice President and Treasurer
Chief Accounting Officer
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 Statement No. 33-47372, 33-62450 and
33-65156, the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1994, which includes our report dated May 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,
May 2, 1994
