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, 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
as of November 12, 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
Report of Independent Public Accountants 6
Management's Discussion and Analysis of Results of
Operations and Financial Condition 7-8
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,
--------------------- ----------------------
1996 1995 1996 1995
------- ------- --------- --------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES $80,489 $81,318 $242,127 $232,856
------- ------- -------- --------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 16,191 17,279 50,126 46,874
Nuclear operating costs 5,688 7,465 17,204 23,480
Other operating costs 15,534 13,699 43,955 42,664
------- ------- -------- --------
Total operation and maintenance expenses 37,413 38,443 111,285 113,018
Provision for depreciation 14,530 8,639 37,019 25,136
Amortization of net regulatory assets 1,845 - 3,690 -
General taxes 6,159 9,019 18,191 22,441
Income taxes 6,438 9,682 22,924 23,097
------- ------- -------- --------
Total operating expenses and taxes 66,385 65,783 193,109 183,692
------- ------- -------- --------
OPERATING INCOME 14,104 15,535 49,018 49,164
OTHER INCOME 934 334 5,154 1,569
------- ------- -------- --------
TOTAL INCOME 15,038 15,869 54,172 50,733
------- ------- -------- --------
NET INTEREST:
Interest expense 6,926 7,648 21,316 23,838
Allowance for borrowed funds used during construction (30) (215) (342) (566)
------- ------- -------- --------
Net interest 6,896 7,433 20,974 23,272
------- ------- -------- --------
NET INCOME 8,142 8,436 33,198 27,461
PREFERRED STOCK DIVIDEND REQUIREMENTS 1,157 1,157 3,470 3,618
------- ------- -------- --------
EARNINGS ON COMMON STOCK $ 6,985 $ 7,279 $ 29,728 $ 23,843
======= ======= ======== ========
<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,
1996 1995
------------- ------------
(In thousands)
<S> <C> <C>
ASSETS
------
UTILITY PLANT:
In service, at original cost $1,223,563 $1,215,274
Less--Accumulated provision for depreciation 450,384 426,974
---------- ----------
773,179 788,300
---------- ----------
Construction work in progress-
Electric plant 10,553 10,997
Nuclear fuel 1,808 7,858
---------- ----------
12,361 18,855
---------- ----------
785,540 807,155
---------- ----------
OTHER PROPERTY AND INVESTMENTS 16,756 14,550
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 914 20,984
Notes receivable from parent company 37,000 22,000
Receivables-
Customers (less accumulated provisions
of $555,000 and $563,000, respectively,
for uncollectible accounts) 35,518 35,987
Parent company 9,860 14,965
Other 10,991 15,329
Materials and supplies, at average cost 13,335 15,588
Prepayments 2,771 2,113
---------- -----------
110,389 126,966
---------- -----------
DEFERRED CHARGES:
Regulatory assets 181,721 189,900
Other 7,594 7,833
---------- ----------
189,315 197,733
---------- ----------
$1,102,000 $1,146,404
</TABLE>
- 2 -
<TABLE>
PENNSYLVANIA POWER COMPANY
BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(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 (422) (422)
Retained earnings 97,330 83,642
---------- ----------
Total common stockholder's equity 285,608 271,920
Preferred stock-
Not subject to mandatory redemption 50,905 50,905
Subject to mandatory redemption 15,000 15,000
Long-term debt -
Associated companies 7,578 11,648
Other 303,816 327,022
---------- ----------
662,907 676,495
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt-
Associated companies 8,834 6,180
Other 50,658 53,817
Accounts payable-
Associated companies 7,765 10,593
Other 17,997 26,013
Accrued taxes 12,028 16,221
Accrued interest 5,541 8,487
Other 17,641 28,345
---------- ----------
120,464 149,656
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 258,592 260,458
Accumulated deferred investment tax credits 28,974 30,521
Other 31,063 29,274
---------- ----------
318,629 320,253
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ---------- ----------
$1,102,000 $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 Nine Months Ended
September 30, September 30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,142 $ 8,436 $ 33,198 $27,461
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation 14,530 8,639 37,019 25,136
Nuclear fuel and lease amortization 2,435 3,168 5,901 8,276
Deferred income taxes, net (2,194) 2,466 2,696 5,177
Investment tax credits, net (590) (616) (1,547) (1,285)
Allowance for equity funds used during construction - 222 - -
Deferred fuel costs, net 603 590 3,117 320
Receivables 3,883 489 9,912 6,178
Materials and supplies 957 1,207 2,253 2,310
Accounts payable (3,845) 256 (10,404) (187)
Other 2,583 4,936 (20,437) (2,367)
-------- ------- -------- -------
Net cash provided from operating activities 26,504 29,793 61,708 71,019
-------- ------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt - 13,650 - 13,650
Redemptions and Repayments-
Long-term debt 2,390 9,719 31,581 50,068
Dividend Payments-
Common stock 5,347 5,347 16,040 16,040
Preferred stock 1,157 1,157 3,470 3,618
-------- ------- -------- -------
Net cash used for financing activities 8,894 2,573 51,091 56,076
-------- ------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 3,757 5,402 15,415 20,741
Loan to parent 14,000 - 15,000 -
Loan payment from parent - (6,000) - (25,000)
Sale of utility property to parent - (4,249) - (4,249)
Other 228 360 272 547
-------- ------- -------- -------
Net cash used for (provided from) investing activities 17,985 (4,487) 30,687 (7,961)
-------- ------- -------- -------
Net increase (decrease) in cash and cash equivalents (375) 31,707 (20,070) 22,904
Cash and cash equivalents at beginning of period 1,289 8,397 20,984 17,200
-------- ------- -------- -------
Cash and cash equivalents at end of period $ 914 $40,104 $ 914 $40,104
======== ======= ======== =======
<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, 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 September 30, 1996, the Company's
share of the guarantee was $7,332,000. 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
- 5 -
more electricity from lower-emitting plants and/or purchasing
emission 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 September 30, 1996,
and the related statements of income and cash flows for the three-
month and nine-month periods ended September 30, 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
November 12, 1996
- 7 -
PENNSYLVANIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Earnings on common stock increased 24.7% for the nine-
month period ended September 30, 1996, compared to the same period
last year. For the third quarter of 1996, earnings decreased 4.0%
from 1995 levels. The 1996 nine-month results reflect accelerated
depreciation and amortization of nuclear and regulatory assets
totaling approximately $19,000,000 under the Company's Rate
Stability and Economic Development Plan. For the quarter ended
September 30, 1996, the accelerated amounts were approximately
$10,000,000.
Operating revenues were up 4.0% during the first nine
months of 1996 due to a 7.8% increase in retail kilowatt-hour
sales. Residential and commercial sales increased 5.5% and 7.3%,
respectively, during the period. Industrial sales were up 10.0%
over 1995 due to the restart of operations by Caparo Steel Company
in the second half of 1995. Excluding Caparo, industrial sales were
relatively flat compared to the first nine months of 1995. Sales to
other utilities decreased 3.9% in the first nine months of 1996
compared to last year. This decrease, offset by the higher level of
retail sales, produced a 4.7% increase in total kilowatt-hour sales
during the period.
Retail kilowatt-hour sales were up slightly in the third
quarter of 1996 compared to the same period last year. Residential
and commercial sales increased 1.8% and 5.3%, respectively,
compared to 1995. Industrial sales decreased 3.4% during the
period. Sales to other utilities were down 19.3% compared to the
third quarter of 1995, resulting in a 4.4% decrease in total
kilowatt-hour sales.
Because of higher kilowatt-hour sales, the Company spent
more on fuel and purchased power during the first nine months of
1996, compared to last year. Reduced nuclear expenses during the
three and nine month periods reflect lower refueling outage cost
levels in 1996. The comparative increases in other operating costs
reflect higher plant maintenance costs during the third quarter
coupled with severance costs related to the reorganization
discussed below. The changes in depreciation and regulatory asset
amortization reflect accelerations under the rate stability plan
referred to above. The changes in general taxes are primarily due to
1995 adjustments that totaled approximately $4,700,000, of which
$3,000,000 was applicable to the third quarter of that year.
- 8 -
The change in other income for the nine-month period,
compared to 1995, is principally due to a second quarter 1996
adjustment to the recoverable costs related to Perry Unit 2 as a
result of the Company's rate stability plan.
The decreases in interest costs for the 1996 periods
compared to 1995 are due to redemptions and refinancing of long-
term debt. During the twelve months ended September 30, 1996, the
Company reduced its long-term debt by approximately $42,000,000.
Capital Resources and Liquidity
The Company has continuing cash requirements for planned
capital expenditures and debt maturities. During the fourth quarter
of 1996, capital requirements for property additions and capital
leases are expected to be about $14,000,000, including $1,000,000
for nuclear fuel. The Company has additional cash requirements of
approximately $50,000,000 for maturing long-term debt during the
fourth quarter of 1996. These requirements are expected to be
satisfied with internal cash.
As of September 30, 1996, the Company had approximately
$38,000,000 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 September 30, 1996, and $12,000,000 of bank
facilities which may be borrowed for up to several days at the
banks' discretion.
As part of the Company's continuing efforts to enhance
customer service, improve productivity and reduce costs, its
district operations areas were restructured during the third
quarter of 1996. This reorganization resulted in a work force
reduction totaling 52 positions. The Company expects to save
approximately $2,500,000 per year as a result of these actions.
Legislative proposals changing the structure of the
electric utility industry are receiving attention in Pennsylvania.
In the legislature, three separate bills have been introduced and
the Pennsylvania Public Utility Commission has issued a Report and
Recommendation to the Governor and General Assembly dealing with
the implementation of electric utility competition in the State.
Recently, all stakeholders in the restructuring process have been
actively pursuing compromise legislation in the State which may
result in a revised bill being presented to the legislature before
the current legislative session adjourns. Under the provisions of
this revised bill, utilities would be required to reduce potential
stranded investment, similar to what the Company is accomplishing
through its rate stability plan, and be provided an opportunity to
collect the remainder of their stranded investment in the form of
a transition charge on customer billings. The proposal provides for
a phase-in to full retail access over four years with the
collection of a transition charge over seven to eight years.
- 9 -
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
- 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.
November 12, 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 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, 1996, which
includes our report dated November 12, 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 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 12, 1996
<TABLE> <S> <C>
<ARTICLE> OPUR1
<LEGEND>
(Amounts in 1,000's, except earnings per share)
Income tax expense includes $3,259,000 related to other income.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 785,540
<OTHER-PROPERTY-AND-INVEST> 16,756
<TOTAL-CURRENT-ASSETS> 110,389
<TOTAL-DEFERRED-CHARGES> 189,315
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,102,000
<COMMON> 188,700
<CAPITAL-SURPLUS-PAID-IN> (422)
<RETAINED-EARNINGS> 97,330
<TOTAL-COMMON-STOCKHOLDERS-EQ> 285,608
15,000
50,905
<LONG-TERM-DEBT-NET> 311,394
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 50,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 9,492
<OTHER-ITEMS-CAPITAL-AND-LIAB> 379,601
<TOT-CAPITALIZATION-AND-LIAB> 1,102,000
<GROSS-OPERATING-REVENUE> 242,127
<INCOME-TAX-EXPENSE> 26,183
<OTHER-OPERATING-EXPENSES> 170,185
<TOTAL-OPERATING-EXPENSES> 193,109
<OPERATING-INCOME-LOSS> 49,018
<OTHER-INCOME-NET> 5,154
<INCOME-BEFORE-INTEREST-EXPEN> 54,172
<TOTAL-INTEREST-EXPENSE> 20,974
<NET-INCOME> 33,198
3,470
<EARNINGS-AVAILABLE-FOR-COMM> 29,728
<COMMON-STOCK-DIVIDENDS> 16,040
<TOTAL-INTEREST-ON-BONDS> 19,654
<CASH-FLOW-OPERATIONS> 61,708
<EPS-PRIMARY> 4.73
<EPS-DILUTED> 4.73
</TABLE>
