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, 1997
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 13, 1997
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,
----------------------
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
OPERATING REVENUES $ 78,977 $ 80,324
-------- --------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 15,897 17,980
Nuclear operating costs 6,473 5,256
Other operating costs 13,588 13,318
-------- --------
Total operation and maintenance expenses 35,958 36,554
Provision for depreciation 14,291 8,003
Amortization of net regulatory assets 1,845 -
General taxes 6,299 6,492
Income taxes 6,951 9,392
-------- --------
Total operating expenses and taxes 65,344 60,441
-------- --------
OPERATING INCOME 13,633 19,883
OTHER INCOME 670 352
-------- --------
TOTAL INCOME 14,303 20,235
-------- --------
NET INTEREST:
Interest expense 5,756 7,387
Allowance for borrowed funds used during construction (47) (184)
-------- --------
Net interest 5,709 7,203
-------- --------
NET INCOME 8,594 13,032
PREFERRED STOCK DIVIDEND REQUIREMENTS 1,157 1,157
-------- --------
EARNINGS ON COMMON STOCK $ 7,437 $ 11,875
======== ========
<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,
1997 1996
----------- ------------
(In thousands)
<S> <C> <C>
ASSETS
------
UTILITY PLANT:
In service, at original cost $1,229,915 $1,228,618
Less--Accumulated provision for depreciation 481,301 465,003
---------- ----------
748,614 763,615
---------- ----------
Construction work in progress-
Electric plant 8,923 7,645
Nuclear fuel 2,727 1,803
---------- ----------
11,650 9,448
---------- ----------
760,264 773,063
---------- ----------
OTHER PROPERTY AND INVESTMENTS 24,628 21,131
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 475 1,387
Notes receivable from parent company - 2,500
Receivables-
Customers (less accumulated provisions of $666,000 and
$569,000, respectively, for uncollectible accounts) 36,825 38,054
Parent company 15,127 14,450
Other 15,036 14,970
Materials and supplies, at average cost 14,644 14,269
Prepayments 8,783 1,576
---------- ----------
90,890 87,206
---------- ----------
DEFERRED CHARGES:
Regulatory assets 173,489 177,283
Other 7,143 7,212
---------- ---------
180,632 184,495
---------- ---------
$1,056,414 $1,065,895
========== ==========
</TABLE>
- 2 -
<TABLE>
PENNSYLVANIA POWER COMPANY
BALANCE SHEETS
(Unaudited)
<CAPTION>
March 31, December 31,
1997 1996
------------- ------------
(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 (413) (413)
Retained earnings 100,308 98,217
------------ ------------
Total common stockholder's equity 288,595 286,504
Preferred stock-
Not subject to mandatory redemption 50,905 50,905
Subject to mandatory redemption 15,000 15,000
Long-term debt-
Associated companies 7,572 7,245
Other 292,853 303,751
------------ ------------
654,925 663,405
------------ ------------
CURRENT LIABILITIES:
Currently payable long-term debt-
Associated companies 5,135 6,784
Other 1,577 712
Notes payable 5,000 -
Accounts payable-
Associated companies 7,749 8,084
Other 25,845 25,686
Accrued taxes 20,410 14,823
Accrued interest 4,053 7,382
Other 18,428 21,199
---------- ----------
88,197 84,670
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 248,835 253,776
Accumulated deferred investment tax credits 27,801 28,383
Other 36,656 35,661
---------- ----------
313,292 317,820
---------- ----------
COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ---------- ----------
$1,056,414 $1,065,895
========== ==========
<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,
------------------------
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,594 $13,032
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation 14,291 8,003
Nuclear fuel and lease amortization 2,489 1,814
Other amortization, net 1,535 478
Deferred income taxes, net (3,141) 2,243
Investment tax credits, net (582) (367)
Receivables 486 9,360
Materials and supplies (375) (128)
Accounts payable (21) (5,900)
Other (8,128) (11,484)
------- -------
Net cash provided from operating activities 15,148 17,051
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
New financing-
Notes payable, net 5,000 -
Redemptions and repayments-
Long-term debt 12,023 14,689
Dividend payments-
Common stock 5,346 5,346
Preferred stock 1,157 1,158
------- -------
Net cash used for financing activities 13,526 21,193
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 3,331 5,412
Loan payment from parent (2,500) (4,000)
Other 1,703 15
------- -------
Net cash used for investing activities 2,534 1,427
------- -------
Net decrease in cash and cash equivalents 912 5,569
Cash and cash equivalents at beginning of period 1,387 20,984
------- -------
Cash and cash equivalents at end of period $ 475 $15,415
======= =======
<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) 1996 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
$100 million for property additions and improvements from 1997-
2001, of which approximately $21 million is applicable to 1997. The
Company's investment in nuclear fuel is expected to be
approximately $33 million during the 1997-2001 period, of which
approximately $9 million is applicable to 1997.
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, 1997, the Company's
share of the guarantee was $5.8 million. 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 $1
million for the period 1997 through 2001, which is included in the
construction forecast under "Construction Program."
The Company is in compliance with the current 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
- 5 -
PENNSYLVANIA POWER COMPANY
NOTES - (Continued)
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.
In December 1996, EPA proposed changes in the National
Ambient Air Quality Standard for ozone and proposed a new standard
for previously unregulated ultra-fine particulate matter. Final
regulations for both of these standards are expected later in 1997.
The cost of compliance with these regulations may be substantial
and depends on the final provisions of the proposed regulations and
the manner in which they are implemented by the states in which the
Company operates affected facilities.
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, 1997, and
the related statements of income and cash flows for the three-month
periods ended March 31, 1997 and 1996. 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,
1996, 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, 1996 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 13, 1997
- 7 -
PENNSYLVANIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Earnings on common stock decreased 37.4% in the first
quarter of 1997 compared to the same period last year. The
reduction resulted from accelerated depreciation and amortization
of regulatory assets totaling approximately $9,500,000 in the first
quarter of 1997, under the Company's Rate Stability and Economic
Development Plan; the plan was not effective until the second
quarter of 1996.
Retail kilowatt-hour sales increased 1.1% in the first
quarter of 1997, compared with the first quarter of 1996, due to a
4.8% increase in industrial sales. The higher level of industrial
sales was partially offset by a 2.5% decrease in residential sales.
During the period, commercial sales were up slightly over 1996.
Sales to other utilities fell 29.8% in 1997 as compared to the
first quarter of 1996 as a result of the December 31, 1996
expiration of a one-year contract with another utility to supply 33
megawatts of power. This decrease offset higher retail sales,
causing total kilowatt-hour sales to decrease by 6.7% during the
first quarter of 1997, compared with the first quarter of 1996.
Because of lower kilowatt-hour sales, the Company spent
less on fuel and purchased power during the first quarter of 1997,
compared to last year. Higher nuclear expenses reflect increased
operating costs at the Perry Plant in 1997. The increases in
depreciation and regulatory asset amortization reflect
accelerations under the regulatory plan mentioned above.
The decrease in interest costs compared to 1996 is due to
redemptions of long-term debt, totaling approximately $82,000,000,
that occurred subsequent to March 31, 1996.
Capital Resources and Liquidity
The Company has continuing cash requirements for planned
capital expenditures and debt maturities. During the last three
quarters of 1997, capital requirements for property additions and
capital leases are expected to be about $26,000,000, including
$8,000,000 for nuclear fuel. The Company has additional cash
requirements of approximately $400,000 for maturing long-term debt
during the remainder of 1997. These requirements are expected to be
satisfied with internal cash.
As of March 31, 1997, the Company had approximately
$475,000 of cash and temporary investments and $5,000,000 of
short-term indebtedness. The Company had $2,000,000 of unused
- 8 -
PENNSYLVANIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION ((Cont'd)
short-term bank lines of credit as of March 31, 1997, and
$19,000,000 of bank facilities which may be borrowed for up to
several days at the banks' discretion.
During the first quarter of 1997, the Company made open
market purchases for $10,000,000 of its 6.375% first mortgage
bonds.
On December 3, 1996, Pennsylvania enacted "The
Electricity Generation Customer Choice and Competition Act," under
which residents of Pennsylvania will be permitted to choose their
electric generation supplier, while transmission and distribution
services will continue to be supplied by their current providers.
Customer choice will be phased in over three years, beginning in
1999, after a two year pilot program. On April 1, 1997, the Company
filed an application with the Pennsylvania Public Utility
Commission to permit all of its retail customers an opportunity to
participate in the pilot program, which is expected to begin in the
fourth quarter of 1997.
- 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.
May 13, 1997
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, 1997 which
includes our report dated May 13, 1997, 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 13, 1997
<TABLE> <S> <C>
<ARTICLE> OPUR1
<LEGEND>
(Amounts in 1,000's, except earnings per share)
Income tax expense includes $244,000 related to other income.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 760,264
<OTHER-PROPERTY-AND-INVEST> 24,628
<TOTAL-CURRENT-ASSETS> 90,890
<TOTAL-DEFERRED-CHARGES> 180,632
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,056,414
<COMMON> 188,700
<CAPITAL-SURPLUS-PAID-IN> (413)
<RETAINED-EARNINGS> 100,308
<TOTAL-COMMON-STOCKHOLDERS-EQ> 288,595
15,000
50,905
<LONG-TERM-DEBT-NET> 300,425
<SHORT-TERM-NOTES> 5,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 850
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 5,862
<OTHER-ITEMS-CAPITAL-AND-LIAB> 389,777
<TOT-CAPITALIZATION-AND-LIAB> 1,056,414
<GROSS-OPERATING-REVENUE> 78,977
<INCOME-TAX-EXPENSE> 7,195
<OTHER-OPERATING-EXPENSES> 58,393
<TOTAL-OPERATING-EXPENSES> 65,344
<OPERATING-INCOME-LOSS> 13,633
<OTHER-INCOME-NET> 670
<INCOME-BEFORE-INTEREST-EXPEN> 14,303
<TOTAL-INTEREST-EXPENSE> 5,709
<NET-INCOME> 8,594
1,157
<EARNINGS-AVAILABLE-FOR-COMM> 7,437
<COMMON-STOCK-DIVIDENDS> 5,346
<TOTAL-INTEREST-ON-BONDS> 5,273
<CASH-FLOW-OPERATIONS> 15,148
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.18
</TABLE>
