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, 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 August 12, 1996<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
Report of Independent Public Accountants 6
Management's Discussion and Analysis of
Results of Operations and Financial Condition 7-8
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,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES $81,314 $77,622 $161,638 $151,538
------- ------- -------- --------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 15,955 15,387 33,935 29,595
Nuclear operating costs 6,260 8,130 11,516 16,015
Other operating costs 15,103 15,090 28,421 28,965
------- ------- -------- --------
Total operation and maintenance expenses 37,318 38,607 73,872 74,575
Provision for depreciation 14,486 8,100 22,489 16,497
Amortization of net regulatory assets 1,845 - 1,845 -
General taxes 5,540 7,362 12,032 13,422
Income taxes 7,094 6,765 16,486 13,415
------- ------- -------- --------
Total operating expenses and taxes 66,283 60,834 126,724 117,909
------- ------- -------- --------
OPERATING INCOME 15,031 16,788 34,914 33,629
OTHER INCOME 3,868 479 4,220 1,235
------- ------- -------- --------
TOTAL INCOME 18,899 17,267 39,134 34,864
------- ------- -------- --------
NET INTEREST:
Interest expense 7,003 7,779 14,390 16,190
Allowance for borrowed funds used during
construction (128) (131) (312) (351)
------- ------- -------- --------
Net interest 6,875 7,648 14,078 15,839
------- ------- -------- --------
NET INCOME 12,024 9,619 25,056 19,025
PREFERRED STOCK DIVIDEND
REQUIREMENTS 1,156 1,301 2,313 2,461
------- ------- -------- --------
EARNINGS ON COMMON STOCK $10,868 $ 8,318 $ 22,743 $ 16,564
======= ======= ======== ========
<FN>
The accompanying Notes to Financial Statements are an integral
part of these statements.
</TABLE>
- 1 -
<TABLE>
PENNSYLVANIA POWER COMPANY
BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
(In thousands)
<S> <C> <C>
ASSETS
------
UTILITY PLANT:
In service, at original cost $1,216,645 $1,215,274
Less--Accumulated provision for depreciation 434,784 426,974
---------- ----------
781,861 788,300
---------- ----------
Construction work in progress-
Electric plant 14,752 10,997
Nuclear fuel 618 7,858
---------- ----------
15,370 18,855
---------- ----------
797,231 807,155
---------- ----------
OTHER PROPERTY AND INVESTMENTS 16,563 14,550
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 1,289 20,984
Notes receivable from parent company 23,000 22,000
Receivables-
Customers (less accumulated provisions
of $555,000 and $563,000, respectively,
for uncollectible accounts) 36,727 35,987
Parent company 12,226 14,965
Other 11,299 15,329
Materials and supplies, at average cost 14,292 15,588
Prepayments 5,840 2,113
---------- ----------
104,673 126,966
---------- ----------
DEFERRED CHARGES:
Regulatory assets 185,937 189,900
Other 7,565 7,833
---------- ----------
193,502 197,733
---------- ----------
$1,111,969 $1,146 404
========== ==========
</TABLE>
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<TABLE>
PENNSYLVANIA POWER COMPANY
BALANCE SHEETS
(Unaudited)
<CAPTION>
June 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 95,804 83,642
----------- ----------
Total common stockholder's equity 284,082 271,920
Preferred stock-
Not subject to mandatory redemption 50,905 50,905
Subject to mandatory redemption 15,000 15,000
Long-term debt-
Associated companies 8,397 11,648
Other 303,946 327,022
----------- ----------
662,330 676,495
----------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt-
Associated companies 9,007 6,180
Other 50,709 53,817
Accounts payable-
Associated companies 7,208 10,593
Other 22,404 26,013
Accrued taxes 12,718 16,221
Accrued interest 7,814 8,487
Other 17,390 28,345
---------- ----------
127,250 149,656
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 262,594 260,458
Accumulated deferred investment tax credits 29,564 30,521
Other 30,231 29,274
---------- ----------
322,389 320,253
---------- ----------
COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ---------- ----------
$1,111,969 $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 Six Months Ended
June 30, June 30,
------------------ ------------------
1996 1995 1996 1995
------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $12,024 $ 9,619 $25,056 $19,025
Adjustments to reconcile net income to net cash
from operating activities-
Provision for depreciation 14,486 8,100 22,489 16,497
Nuclear fuel and lease amortization 1,652 3,358 3,466 5,108
Deferred income taxes, net 2,647 (357) 4,890 2,711
Investment tax credits, net (590) (335) (957) (669)
Allowance for equity funds used during construction - (105) - (222)
Deferred fuel costs, net 1,634 748 2,514 (270)
Receivables (3,331) 11,640 6,029 5,689
Materials and supplies 1,424 415 1,296 1,103
Accounts payable (659) (2,221) (6,559) (443)
Other (11,134) 4,978 (23,020) (7,303)
------- ------- -------- -------
Net cash provided from operating activities 18,153 35,840 35,204 41,226
------- ------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemptions and Repayments-
Long-term debt 14,502 22,344 29,191 40,349
Dividend Payments-
Common stock 5,347 5,347 10,693 10,693
Preferred stock 1,043 1,300 2,201 2,461
------- ------- ------- -------
Net cash used for financing activities 20,892 28,991 42,085 53,503
------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 6,246 9,018 11,658 15,339
Loan to parent 5,000 6,000 1,000 -
Loan payment from parent - - - (19,000)
Other 141 (2,040) 156 187
------- ------- ------- -------
Net cash used for (provided from) investing activities 11,387 12,978 12,814 (3,474)
------- ------- ------- -------
Net decrease in cash and cash equivalents 14,126 6,129 19,695 8,803
Cash and cash equivalents at beginning of period 15,415 14,526 20,984 17,200
------- ------- ------- -------
Cash and cash equivalents at end of period $ 1,289 $ 8,397 $ 1,289 $ 8,397
======= ======= ======= =======
<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 June 30, 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 -
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 June 30, 1996, and
the related statements of income and cash flows for the three-month
and six-month periods ended June 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
August 9, 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 30.7% in the second
quarter of 1996 compared to the same period last year. For the six-
month period ended June 30, 1996, earnings increased 37.3% over
1995. These results include accelerated depreciation and
amortization of nuclear and regulatory assets totaling
approximately $9,000,000 under the Company's Rate Stability and
Economic Development Plan (Plan).
On June 20, 1996, the Pennsylvania Public Utility
Commission (PPUC) approved the Plan. The Plan, which will 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 will be recovered through current
rates.
Operating revenues were up 6.7% during the first half of
1996 due to an 11.9% increase in retail kilowatt-hour sales.
Residential and commercial sales increased 7.4% and 8.3%,
respectively, during the period. Industrial sales were up 18.1%
over 1995 due to the restart of operations by Caparo Steel Company
in the second half of 1995. Excluding Caparo, industrial sales were
up 1.7% compared to the first half of 1995. Sales to other
utilities increased 5.2% in the first half of 1996 compared to last
year. This increase, coupled with the higher level of retail sales,
contributed to a 9.9% increase in total kilowatt-hour sales during
the period.
Retail kilowatt-hour sales increased 9.2% in the second
quarter of 1996 compared to the same period last year. Residential
sales were up slightly during the three-month period, while
commercial and industrial sales increased 6.8% and 17.3%,
respectively, compared to 1995. Sales to other utilities were down
28.6% compared to the second quarter of 1995, with total kilowatt-
hour sales being relatively flat.
- 8 -
Because of higher kilowatt-hour sales, the Company spent
more on fuel and purchased power during the first half of 1996,
compared to last year. Reduced nuclear expenses during the three
and six month periods reflect lower refueling outage cost levels in
1996. The comparative increases in depreciation and regulatory
asset amortization reflect accelerations under the Plan discussed
above.
The changes in other income, compared to 1995, are
principally due to an adjustment to the recoverable costs related
to Perry Unit 2 since recovery is beginning sooner than originally
anticipated through the Company's Plan.
The decrease in interest costs compared to 1995 is due to
redemptions and refinancing of long-term debt. During the twelve
months ended June 30, 1996, the Company reduced its long-term debt
by approximately $36,000,000.
Capital Resources and Liquidity
The Company has continuing cash requirements for planned
capital expenditures and debt maturities. During the second half of
1996, capital requirements for property additions and capital
leases are expected to be about $15,000,000, including $2,000,000
for nuclear fuel. The Company has additional cash requirements of
approximately $50,000,000 due to maturing long-term debt during the
remainder of 1996. These requirements are expected to be satisfied
with internal cash.
As of June 30, 1996, the Company had approximately
$24,000,000 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 June 30, 1996, and $12,000,000 of bank
facilities which may be borrowed for up to several days at the
banks' discretion.
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 PPUC has issued a Report and Recommendation (Report) to the
Governor and General Assembly dealing with the implementation of
electric utility competition in the State. Both the bills and the
Report have provisions that allow for transition periods in which
utilities would have an opportunity to reduce their potential
stranded investment, similar to what the Company is accomplishing
through its rate stability plan. Numerous legislative proposals
have been introduced in Congress as well. Distribution services
would still be regulated under the pending proposals. The Company
does not expect state or federal legislation dealing with these
issues to be passed during the current sessions.
- 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
The Company filed one report on Form 8-K since March 31,
1996. A report dated June 27, 1996, reported that the
Pennsylvania Public Utility Commission had approved 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.
August 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 June 30, 1996, which
includes our report dated August 9, 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
August 9, 1996
- 1 -
<TABLE> <S> <C>
<ARTICLE> OPUR1
<LEGEND>
(Amounts in 1,000's, except earnings per share)
Income tax expense includes $2,842,000 related to other income.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 797,231
<OTHER-PROPERTY-AND-INVEST> 16,563
<TOTAL-CURRENT-ASSETS> 104,673
<TOTAL-DEFERRED-CHARGES> 193,502
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,111,969
<COMMON> 188,700
<CAPITAL-SURPLUS-PAID-IN> (422)
<RETAINED-EARNINGS> 95,804
<TOTAL-COMMON-STOCKHOLDERS-EQ> 284,082
15,000
50,905
<LONG-TERM-DEBT-NET> 312,343
<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> 9,716
<OTHER-ITEMS-CAPITAL-AND-LIAB> 389,923
<TOT-CAPITALIZATION-AND-LIAB> 1,111,969
<GROSS-OPERATING-REVENUE> 161,638
<INCOME-TAX-EXPENSE> 19,328
<OTHER-OPERATING-EXPENSES> 110,238
<TOTAL-OPERATING-EXPENSES> 126,724
<OPERATING-INCOME-LOSS> 34,914
<OTHER-INCOME-NET> 4,220
<INCOME-BEFORE-INTEREST-EXPEN> 39,134
<TOTAL-INTEREST-EXPENSE> 14,078
<NET-INCOME> 25,056
2,313
<EARNINGS-AVAILABLE-FOR-COMM> 22,743
<COMMON-STOCK-DIVIDENDS> 10,693
<TOTAL-INTEREST-ON-BONDS> 13,232
<CASH-FLOW-OPERATIONS> 35,204
<EPS-PRIMARY> 3.62
<EPS-DILUTED> 3.62
</TABLE>
