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 September 30, 1995
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
as of November 6, 1995
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
<TABLE>
PART I. FINANCIAL INFORMATION
PENNSYLVANIA POWER COMPANY
STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1995 1994 1995 1994
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES $81,318 $77,055 $232,856 $230,113
------- ------- -------- --------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 17,279 13,895 46,874 45,151
Nuclear operating costs 7,465 9,036 23,480 26,262
Other operating costs 13,699 13,569 42,664 50,905
------- ------- -------- --------
Total operation and maintenance expenses 38,443 36,500 113,018 122,318
Provision for depreciation 8,639 7,709 25,136 21,936
Deferral of net regulatory assets - (762) - (3,410)
General taxes 9,019 5,682 22,441 17,594
Income taxes 9,682 8,308 23,097 20,168
------- ------- -------- --------
Total operating expenses and taxes 65,783 57,437 183,692 178,606
------- ------- -------- --------
OPERATING INCOME 15,535 19,618 49,164 51,507
OTHER INCOME 334 408 1,569 1,344
------- ------- -------- --------
TOTAL INCOME 15,869 20,026 50,733 52,851
------- ------- -------- --------
NET INTEREST:
Interest expense 7,648 9,000 23,838 26,203
Allowance for borrowed funds used during construction (215) (198) (566) (510)
------- ------- -------- --------
Net interest 7,433 8,802 23,272 25,693
------- ------- -------- --------
NET INCOME 8,436 11,224 27,461 27,158
PREFERRED STOCK DIVIDEND REQUIREMENTS 1,157 1,167 3,618 4,204
------- ------- -------- --------
EARNINGS ON COMMON STOCK $ 7,279 $10,057 $ 23,843 $ 22,954
======= ======= ======== ========
<FN>
The accompanying Notes to Financial Statements are an integral part of these statements.
</TABLE>
- 1 -
<TABLE>
PENNSYLVANIA POWER COMPANY
BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
(In thousands)
<S> <C> <C>
ASSETS
UTILITY PLANT:
In service, at original cost $1,217,519 $1,215,831
Less--Accumulated provision for depreciation 425,115 410,508
---------- ----------
792,404 805,323
---------- ----------
Construction work in progress-
Electric plant 11,965 11,226
Nuclear fuel 5,380 12,389
---------- ----------
17,345 23,615
---------- ----------
809,749 828,938
---------- ----------
OTHER PROPERTY AND INVESTMENTS 13,115 8,777
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 40,104 17,200
Note receivable from parent company - 25,000
Receivables-
Customers (less accumulated provisions of $535,000
and $515,000, respectively, for uncollectible accounts) 33,325 32,745
Parent company 14,140 20,777
Other 12,702 12,823
Materials and supplies, at average cost-
Fuel 4,697 5,384
Other 10,032 11,655
Prepayments 2,930 2,048
---------- ----------
117,930 127,632
---------- ----------
DEFERRED CHARGES:
Regulatory assets 208,336 219,726
Other 7,988 8,125
---------- ----------
216,324 227,851
---------- ----------
$1,157,118 $1,193 198
========== ==========
</TABLE>
- 2 -
<TABLE>
PENNSYLVANIA POWER COMPANY
BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
(In thousands)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
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 (600) (600)
Retained earnings 78,676 70,873
---------- ----------
Total common stockholder's equity 266,776 258,973
Preferred stock-
Not subject to mandatory redemption 50,905 50,905
Subject to mandatory redemption 15,000 15,000
Long-term debt -
Associated companies 11,266 15,155
Other 380,024 409,302
---------- ----------
723,971 749,335
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt-
Associated companies 6,882 9,318
Other 15,082 15,126
Accounts payable-
Associated companies 9,581 9,440
Other 24,504 25,276
Accrued taxes 11,887 15,421
Accrued interest 6,363 10,108
Other 22,342 21,473
---------- ----------
96,641 106,162
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 276,296 277,542
Accumulated deferred investment tax credits 30,924 32,209
Other 29,286 27,950
---------- ----------
336,506 337,701
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ---------- ----------
$1,157,118 $1,193,198
========== ==========
<FN>
The accompanying Notes to Financial Statements are an integral part of these balance sheets.
</TABLE>
- 3 -
<TABLE>
PENNSYLVANIA POWER COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1995 1994 1995 1994
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,436 $11,224 $ 27,461 $27,158
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation 8,639 7,709 25,136 21,936
Nuclear fuel and lease amortization 3,168 2,886 8,276 7,713
Deferred income taxes, net 2,466 8,871 5,177 11,257
Investment tax credits, net (616) (338) (1,285) (1,013)
Allowance for equity funds used during construction 222 (95) - (315)
Deferred fuel costs, net 590 (2,562) 320 (4,765)
Receivables 489 (4,974) 6,178 (2,053)
Materials and supplies 1,207 593 2,310 (786)
Accounts payable 256 (3,218) (187) (457)
Other 4,936 3,174 (2,367) 15,438
-------- ------- -------- -------
Net cash provided from operating activities 29,793 23,270 71,019 74,113
-------- ------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 13,650 11,961 13,650 11,969
Redemptions and Repayments-
Preferred stock - 6,325 - 6,687
Long-term debt 9,719 2,849 50,068 7,664
Dividend Payments-
Common stock 5,347 5,347 16,040 16,040
Preferred stock 1,157 1,166 3,618 3,875
-------- ------- -------- -------
Net cash used for financing activities 2,573 3,726 56,076 22,297
-------- ------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 5,402 5,986 20,741 24,141
Loan payment from parent (6,000) - (25,000) -
Sale of utility property to parent (4,249) - (4,249) -
Other 360 (83) 547 207
-------- ------- -------- -------
Net cash used for (provided from) investing
activities (4,487) 5,903 (7,961) 24,348
-------- ------- -------- -------
Net increase in cash and cash equivalents 31,707 13,641 22,904 27,468
Cash and cash equivalents at beginning of period 8,397 26,646 17,200 12,819
-------- ------- -------- -------
Cash and cash equivalents at end of period $ 40,104 $40,287 $ 40,104 $40,287
======== ======= ======== =======
<FN>
The accompanying Notes to Financial Statements are an integral part of these statements.
</TABLE>
- 4 -
PENNSYLVANIA POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1 - FINANCIAL STATEMENTS:
The condensed financial statements reflect all normal
recurring adjustments that, in the opinion of management, are
necessary to fairly present results of operations for the interim
periods. These statements should be read in conjunction with the
financial statements and notes included in Pennsylvania Power
Company's (Company) 1994 Annual Report to Stockholders. The results
of operations are not intended to be indicative of results of
operations for any future period.
2 - COMMITMENTS, GUARANTEES AND CONTINGENCIES:
Construction Program --
The Company, a wholly owned subsidiary of Ohio Edison
Company, currently forecasts expenditures of approximately
$138,000,000 for property additions and improvements from 1995-
1999, of which approximately $28,000,000 is applicable to 1995. The
Company's investment in nuclear fuel is expected to be
approximately $26,000,000 during the 1995-1999 period, of which
approximately $2,000,000 is applicable to 1995.
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 September 30, 1995, the Company's
share of the guarantee was $9,160,000. 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
$12,000,000 for the period 1995 through 1999, which is included in
the construction forecast under "Construction Program."
The Clean Air Act Amendments of 1990 required significant
reductions of sulfur dioxide (SO2) and nitrogen oxides (NOx) from
the Company's coal-fired generating units by 1995 and additional
- 5 -
PENNSYLVANIA POWER COMPANY
NOTES TO FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
emission reductions by 2000. SO2 reductions for the years 1995
through 1999 are being achieved by burning lower-sulfur fuel,
generating more electricity from lower-emitting plants and/or
purchasing emission allowances. Equipment already installed
provides NOx reductions sufficient to meet the 1995 requirements.
Plans for complying with reductions required for the year 2000 and
thereafter have not been finalized. The Environmental Protection
Agency is conducting additional studies which could indicate the
need for additional NOx reductions from the Company's Pennsylvania
facilities by the year 2003. The cost of such reductions, if
required, may be substantial. The Company continues to evaluate its
compliance plan and other compliance options.
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 considering various compliance options but
is presently unable to determine the ultimate increase in capital
and operating costs at existing sites.
Legislative, administrative and judicial actions will
continue 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 -
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 September 30, 1995,
and the related statements of income and cash flows for the three-
month and nine-month periods ended September 30, 1995 and 1994.
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,
1994, 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, 1994, is fairly stated, in all material
respects, in relation to the balance sheet from which it has been
derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
November 3, 1995
- 7 -
PENNSYLVANIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
During the first nine months of 1995, retail kilowatt-hour
sales increased 7.3% over the same period last year. Commercial and
industrial sales increased 2.4% and 17.8%, respectively, during
this period due to an improving local economy. The industrial
sector was also positively affected by the second quarter start-up
of Caparo Steel Company which purchased the assets of Sharon Steel
Corporation. Residential sales were down slightly compared to the
nine-month period in 1994 and sales to other utilities fell 2.1%
for the same period. Total kilowatt-hour sales were up 5.1% in the
first nine months of 1995.
Total kilowatt-hour sales were up 19.6% in the third quarter
of 1995, with retail kilowatt-hour sales increasing 14.6% over the
same period last year. Residential and commercial sales increased
3.9% and 2.8%, respectively, compared to the third quarter of 1994,
due to warmer than normal temperatures in 1995 and an improving
local economy. Industrial sales were up 33.2% for the period. The
Company began supplying approximately 40 megawatts of power to
another utility in the second quarter of 1995 under a short-term
contract that expires at the end of 1995. This contract contributed
to a 44.9% increase in sales to other utilities in the third
quarter of 1995 compared to last year's third quarter.
The change in fuel and purchased power costs during the three
and nine month periods ended September 30, 1995 reflects the
differing sales volume for the corresponding periods. Nuclear
expenses were lower in the first nine months of 1995 than they were
last year because of corrective maintenance work that was being
performed during the scheduled refueling outage at the Perry Plant
in 1994. The comparative decrease in other operating costs for the
first nine months of the year reflects charges totaling
approximately $8,400,000 relating to a voluntary early retirement
program offered to qualifying employees in 1994.
Increased depreciation charges in 1995 reflect a higher level
of depreciable utility plant combined with an increase in the
accrual for nuclear decommissioning costs. The change in the
deferral of net regulatory assets is due to the Company ceasing
recognition, for financial reporting purposes, of the deferral of
postretirement benefit costs, due to contradictory court decisions
in Pennsylvania which increase the uncertainty of ultimate
recovery. General taxes increased in the first nine months of 1995
primarily due to adjustments totaling approximately $4,700,000, of
which $3,000,000 is applicable to the third quarter.
- 8 -
PENNSYLVANIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont'd)
The decrease in interest costs compared to 1994 is due to the
redemption of long-term debt subsequent to September 30, 1994.
Capital Resources and Liquidity
The Company has continuing cash requirements for planned
capital expenditures and debt maturities. During the fourth quarter
of 1995, capital requirements for property additions and capital
leases are expected to be about $12,000,000, including $1,000,000
for nuclear fuel. The Company has additional cash requirements of
approximately $200,000 for maturing long-term debt during the
remainder of 1995. These requirements are expected to be satisfied
with internal cash.
As of September 30, 1995, the Company had approximately
$40,000,000 of cash and temporary investments. Of that amount,
$14,250,000 was held in escrow for the redemption of pollution
control notes discussed below. The Company had no short-term
indebtedness as of September 30, 1995. The Company had $2,000,000
of unused short-term bank lines of credit as of September 30, 1995,
and $7,000,000 of bank facilities which may be borrowed for up to
several days at the banks' discretion.
During September 1995, the Company issued $14,250,000 of 6%
pollution control notes. The proceeds from that issue were used to
redeem a like amount of 8.125% pollution control notes in October
1995. The Company also optionally redeemed $6,500,000 of 7.625%
first mortgage bonds during the third quarter.
On August 31, 1995, the Company sold its interest in the West
Lorain Plant to Ohio Edison Company for approximately $4,250,000.
There was no material effect to net income resulting from this
transaction.
In connection with proceedings before the Federal Energy
Regulatory Commission (FERC) between the Company and one of its
municipal customers, both parties have filed proposals with the
FERC requesting it to establish final terms. No ruling has yet been
issued. Sales to this municipality were approximately $1,468,000
for the year 1994.
- 9 -
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to "Item 3. Legal Proceedings" in the
Company's Annual Report on Form 10-K for the year ended
December 31, 1994, for a discussion of an adverse decision
in a Central Area Power Coordination Group (CAPCO) suit
against Westinghouse Electric Corporation. In September
1995, the United States Court of Appeals for the Third
Circuit upheld the decision in an appeal by the CAPCO
companies.
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
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.
November 6, 1995
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 Statements No. 33-
47372, No. 33-62450 and No. 33-65156, the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995, which
includes our report dated November 3, 1995, 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 Statements 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 LLP
Cleveland, Ohio
November 3, 1995
<TABLE> <S> <C>
<ARTICLE> OPUR1
<LEGEND>
(Amounts in 1,000's, except earnings per share)
Income tax expense includes $1,029,000 related to other income.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 809,749
<OTHER-PROPERTY-AND-INVEST> 13,115
<TOTAL-CURRENT-ASSETS> 117,930
<TOTAL-DEFERRED-CHARGES> 216,324
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,157,118
<COMMON> 188,700
<CAPITAL-SURPLUS-PAID-IN> (600)
<RETAINED-EARNINGS> 78,676
<TOTAL-COMMON-STOCKHOLDERS-EQ> 266,776
15,000
50,905
<LONG-TERM-DEBT-NET> 391,290
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 14,250
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 7,714
<OTHER-ITEMS-CAPITAL-AND-LIAB> 411,183
<TOT-CAPITALIZATION-AND-LIAB> 1,157,118
<GROSS-OPERATING-REVENUE> 232,856
<INCOME-TAX-EXPENSE> 24,126
<OTHER-OPERATING-EXPENSES> 160,595
<TOTAL-OPERATING-EXPENSES> 183,692
<OPERATING-INCOME-LOSS> 49,164
<OTHER-INCOME-NET> 1,569
<INCOME-BEFORE-INTEREST-EXPEN> 50,733
<TOTAL-INTEREST-EXPENSE> 23,272
<NET-INCOME> 27,461
3,618
<EARNINGS-AVAILABLE-FOR-COMM> 23,843
<COMMON-STOCK-DIVIDENDS> 16,040
<TOTAL-INTEREST-ON-BONDS> 22,041
<CASH-FLOW-OPERATIONS> 71,019
<EPS-PRIMARY> 3.79
<EPS-DILUTED> 3.79
</TABLE>
