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, 1996
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, 1996
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
<TABLE>
PART I. FINANCIAL INFORMATION
- ------------------------------
PENNSYLVANIA POWER COMPANY
STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
----------------------
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
OPERATING REVENUES $ 80,324 $ 73,916
-------- --------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 17,980 14,208
Nuclear operating costs 5,256 7,885
Other operating costs 13,318 13,875
-------- --------
Total operation and maintenance expenses 36,554 35,968
Provision for depreciation 8,003 8,397
General taxes 6,492 6,060
Income taxes 9,392 6,650
-------- --------
Total operating expenses and taxes 60,441 57,075
-------- --------
OPERATING INCOME 19,883 16,841
OTHER INCOME 352 756
-------- --------
TOTAL INCOME 20,235 17,597
-------- --------
NET INTEREST:
Interest expense 7,387 8,411
Allowance for borrowed funds used during construction (184) (220)
-------- --------
Net interest 7,203 8,191
-------- --------
NET INCOME 13,032 9,406
PREFERRED STOCK DIVIDEND REQUIREMENTS 1,157 1,160
-------- --------
EARNINGS ON COMMON STOCK $ 11,875 $ 8,246
======== ========
<FN>
The accompanying Notes to Financial Statements are an integral
part of these statements.
</TABLE>
- 1 -
<TABLE>
PENNSYLVANIA POWER COMPANY
BALANCE SHEETS
(Unaudited)
<CAPTION>
March 31, December 31,
1996 1995
----------- ------------
(In thousands)
<S> <C> <C>
ASSETS
------
UTILITY PLANT:
In service, at original cost $1,217,339 $1,215,274
Less--Accumulated provision for depreciation 435,986 426,974
---------- ----------
781,353 788,300
---------- ----------
Construction work in progress-
Electric plant 13,637 10,997
Nuclear fuel 10,337 7,858
---------- ----------
23,974 18,855
---------- ----------
805,327 807,155
---------- ----------
OTHER PROPERTY AND INVESTMENTS 16,275 14,550
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 15,415 20,984
Notes receivable from parent company 18,000 22,000
Receivables-
Customers (less accumulated provisions of $621,000 and $563,000,
respectively, for uncollectible accounts) 34,620 35,987
Parent company 11,659 14,965
Other 10,642 15,329
Materials and supplies, at average cost 15,716 15,588
Prepayments 8,565 2,113
---------- ----------
114,617 126,966
---------- ----------
DEFERRED CHARGES:
Regulatory assets 188,174 189,900
Other 7,591 7,833
---------- ----------
195,765 197,733
---------- ----------
$1,131,984 $1,146,404
========== ==========
</TABLE>
- 2 -
<TABLE>
PENNSYLVANIA POWER COMPANY
BALANCE SHEETS
(Unaudited)
<CAPTION>
March 31, December 31,
1996 1995
----------- ------------
(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 (422) (422)
Retained earnings 90,170 83,642
---------- ----------
Total common stockholder's equity 278,448 271,920
Preferred stock-
Not subject to mandatory redemption 50,905 50,905
Subject to mandatory redemption 15,000 15,000
Long-term debt-
Associated companies 11,473 11,648
Other 303,964 327,022
---------- ----------
659,790 676,495
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt-
Associated companies 7,280 6,180
Other 63,764 53,817
Accounts payable-
Associated companies 8,295 10,593
Other 22,453 26,013
Accrued taxes 20,153 16,221
Accrued interest 5,849 8,487
Other 22,757 28,345
---------- ----------
150,551 149,656
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 261,755 260,458
Accumulated deferred investment tax credits 30,154 30,521
Other 29,734 29,274
---------- ----------
321,643 320,253
---------- ----------
COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ---------- ----------
$1,131,984 $1,146,404
========== ==========
<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
March 31,
------------------------
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $13,032 $ 9,406
Adjustments to reconcile net income to net cash from operating activities-
Provision for depreciation 8,003 8,397
Nuclear fuel and lease amortization 1,814 1,750
Deferred income taxes, net 2,243 3,068
Investment tax credits, net (367) (334)
Allowance for equity funds used during construction - (117)
Deferred fuel costs, net 880 (1,018)
Receivables 9,360 (5,951)
Materials and supplies (128) 688
Accounts payable (5,900) 1,778
Other (11,886) (12,281)
------- --------
Net cash provided from operating activities 17,051 5,386
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemptions and repayments-
Long-term debt 14,689 18,005
Dividend payments-
Common stock 5,346 5,346
Preferred stock 1,158 1,161
------- --------
Net cash used for financing activities 21,193 24,512
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 5,412 6,321
Loan payment from parent (4,000) (25,000)
Other 15 2,227
------- --------
Net cash used for (provided from) investing activities 1,427 (16,452)
------- --------
Net decrease in cash and cash equivalents 5,569 2,674
Cash and cash equivalents at beginning of period 20,984 17,200
------- --------
Cash and cash equivalents at end of period $15,415 $14,526
======= ========
<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) 1995 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 (Edison), currently forecasts expenditures of approximately
$105,000,000 for property additions and improvements from 1996-
2000, of which approximately $24,000,000 is applicable to 1996. The
Company's investment in nuclear fuel is expected to be
approximately $31,000,000 during the 1996-2000 period, of which
approximately $5,000,000 is applicable to 1996.
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, 1996, the Company's
share of the guarantee was $7,628,000. 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
$2,000,000 for the period 1996 through 2000, which is included in
the construction forecast under "Construction Program."
The Company is in compliance with the sulfur dioxide (SO2)
and nitrogen oxides (NOx) reduction requirements under the Clean
Air Act Amendments of 1990. SO2 reductions through the year 1999
are being achieved by burning lower-sulfur fuel, generating more
electricity from lower-emitting plants, and/or purchasing emission
- 5 -
PENNSYLVANIA POWER COMPANY
NOTES - (Continued)
allowances. 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.
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 March 31, 1996, and
the related statements of income and cash flows for the three-month
periods ended March 31, 1996 and 1995. 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,
1995, 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, 1995 is fairly stated in all material
respects in relation to the balance sheet from which it has been
derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
May 1, 1996
- 7 -
PENNSYLVANIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Operating revenues were up 8.7% during the first quarter of
1996 due to a 14.6% increase in retail kilowatt-hour sales.
Residential and commercial sales increased 13.5% and 9.7%,
respectively, during the period. Industrial sales were up 19.1%
over 1995 due to the restart of operations by Caparo Steel Company
in the second half of 1995. Excluding Caparo, industrial sales were
down 2.7% compared to the first quarter of 1995. The Company began
supplying 33 megawatts of power to another utility at the beginning
of 1996 under a one-year contract, which was the principal cause
for a 54% increase in sales to other utilities in the first quarter
of 1996 compared to last year. This increase, coupled with the
higher level of retail sales, caused total kilowatt-hour sales to
increase by 20.1% during the first quarter of 1996 compared with
the first quarter of 1995.
Because of higher kilowatt-hour sales, the Company spent more
on fuel and purchased power during the first quarter of 1996,
compared to last year. Reduced nuclear expenses reflect lower
refueling outage cost levels in 1996.
The decrease in interest costs compared to 1995 is due to
redemptions and refinancing of long-term debt. During the twelve
months ended March 31, 1996, the Company reduced its long-term debt
by approximately $45,000,000.
Capital Resources and Liquidity
The Company has continuing cash requirements for planned
capital expenditures and debt maturities. During the last three
quarters of 1996, capital requirements for property additions and
capital leases are expected to be about $21,000,000, including
$3,000,000 for nuclear fuel. The Company has additional cash
requirements of approximately $51,000,000 due to maturing long-term
debt during the remainder of 1996. These requirements are expected
to be satisfied with internal cash.
As of March 31, 1996, the Company had approximately
$33,000,000 of cash and temporary investments and no short-term
indebtedness. The Company had $2,000,000 of unused short-term bank
lines of credit as of March 31, 1996, and $12,000,000 of bank
facilities which may be borrowed for up to several days at the
banks' discretion.
- 8 -
During the first quarter of 1996, the Company made open
market purchases for $13,000,000 of its 6.375% first mortgage
bonds. From April 1, 1996 through May 1, 1996, the Company made
open market purchases for $13,000,000 of its 7.625% first mortgage
bonds.
On March 7, 1996, the Company filed a petition and
application with the Pennsylvania Public Utility Commission
requesting approval of a Rate Stability and Economic Development
Plan (Plan). The Plan, which would remain in effect unless certain
significant events occur, provides for the roll-in to base rates of
the energy cost rate and the freezing of base rates for a ten-year
period. A major component of the Plan is the commitment to reduce
fixed costs during the ten-year period. The Company expects to
recognize additional depreciation expense related to generating
assets and additional amortization of regulatory assets during the
ten-year Plan period of at least $330,000,000 more than the amount
that would have been recognized if the Plan were not in effect.
Additionally, the Plan provides for an increase in contributions to
the Company's nuclear decommissioning trusts amounting to
$28,000,000 over the ten-year period. The entire $358,000,000 would
be recovered through current rates.
- 9 -
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 27, 1996. 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 Joseph J. Nowak
Willard R. Holland Jack E. Reed
Charles E. Jones 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
The Company filed one report on Form 8-K since
December 31, 1995. A report dated March 8, 1996,
reported the filing of a petition and application
with the Pennsylvania Public Utility Commission for
authority to implement the Company's Rate Stability
and Economic Development Plan.
- 10 -
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, 1996
PENNSYLVANIA POWER COMPANY
--------------------------
Registrant
/s/ Robert P. Wushinske
---------------------------------
Robert P. Wushinske
Vice President and Treasurer
Chief Accounting Officer
- 11 -
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, No. 33-62450 and No. 33-65156, the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996 which
includes our report dated May 1, 1996, 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 LLP
Cleveland, Ohio
May 1, 1996
<TABLE> <S> <C>
<ARTICLE> OPUR1
<LEGEND>
(Amounts in 1,000's, except earnings per share)
Income tax expense includes $406,000 related to other income.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 805,327
<OTHER-PROPERTY-AND-INVEST> 16,275
<TOTAL-CURRENT-ASSETS> 114,617
<TOTAL-DEFERRED-CHARGES> 195,765
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,131,984
<COMMON> 188,700
<CAPITAL-SURPLUS-PAID-IN> (422)
<RETAINED-EARNINGS> 90,170
<TOTAL-COMMON-STOCKHOLDERS-EQ> 278,448
15,000
50,905
<LONG-TERM-DEBT-NET> 315,437
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 63,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 8,044
<OTHER-ITEMS-CAPITAL-AND-LIAB> 401,150
<TOT-CAPITALIZATION-AND-LIAB> 1,131,984
<GROSS-OPERATING-REVENUE> 80,324
<INCOME-TAX-EXPENSE> 9,798
<OTHER-OPERATING-EXPENSES> 51,049
<TOTAL-OPERATING-EXPENSES> 60,441
<OPERATING-INCOME-LOSS> 19,883
<OTHER-INCOME-NET> 352
<INCOME-BEFORE-INTEREST-EXPEN> 20,235
<TOTAL-INTEREST-EXPENSE> 7,203
<NET-INCOME> 13,032
1,157
<EARNINGS-AVAILABLE-FOR-COMM> 11,875
<COMMON-STOCK-DIVIDENDS> 5,346
<TOTAL-INTEREST-ON-BONDS> 6,774
<CASH-FLOW-OPERATIONS> 17,051
<EPS-PRIMARY> 1.89
<EPS-DILUTED> 1.89
</TABLE>
