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, 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 as of August 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 8-9
Part II. Other Information
<TABLE>
PART I. FINANCIAL INFORMATION
- ------------------------------
PENNSYLVANIA POWER COMPANY
STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES $79,220 $81,314 $158,197 $161,638
------- ------- -------- --------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 15,215 15,955 31,112 33,935
Nuclear operating costs 6,661 6,260 13,134 11,516
Other operating costs 17,664 15,103 31,252 28,421
------- ------- -------- --------
Total operation and maintenance expenses 39,540 37,318 75,498 73,872
Provision for depreciation 12,991 14,486 27,282 22,489
Amortization of net regulatory assets 1,845 1,845 3,690 1,845
General taxes 5,408 5,540 11,707 12,032
Income taxes 6,432 7,094 13,383 16,486
------- ------- -------- --------
Total operating expenses and taxes 66,216 66,283 131,560 126,724
------ ------ ------- -------
OPERATING INCOME 13,004 15,031 26,637 34,914
OTHER INCOME 324 3,868 994 4,220
------- ------- -------- --------
TOTAL INCOME 13,328 18,899 27,631 39,134
------- ------- -------- --------
NET INTEREST:
Interest expense 5,641 7,003 11,397 14,390
Allowance for borrowed funds used during
construction (89) (128) (136) (312)
------- ------- -------- --------
Net interest 5,552 6,875 11,261 14,078
------- ------- -------- --------
NET INCOME 7,776 12,024 16,370 25,056
PREFERRED STOCK DIVIDEND REQUIREMENTS 1,156 1,156 2,313 2,313
------- ------- -------- --------
EARNINGS ON COMMON STOCK $ 6,620 $10,868 $ 14,057 $ 22,743
======= ======= ======== ========
<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,
1997 1996
----------- -------------
(In thousands)
ASSETS
-------
<S> <C> <C>
UTILITY PLANT:
In service, at original cost $1,231,553 $1,228,618
Less--Accumulated provision for depreciation 495,597 465,003
---------- ----------
735,956 763,615
---------- ----------
Construction work in progress-
Electric plant 9,196 7,645
Nuclear fuel 3,207 1,803
---------- ----------
12,403 9,448
---------- ----------
748,359 773,063
---------- ----------
OTHER PROPERTY AND INVESTMENTS 26,354 21,131
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 493 1,387
Notes receivable from parent company 13,000 2,500
Receivables-
Customers (less accumulated provisions
of $3,606,000 and $569,000, respectively,
for uncollectible accounts) 32,338 38,054
Parent company 11,427 14,450
Other 12,222 14,970
Materials and supplies, at average cost 15,197 14,269
Prepayments 6,069 1,576
---------- ----------
90,746 87,206
---------- ----------
DEFERRED CHARGES:
Regulatory assets 169,959 177,283
Other 6,871 7,212
---------- ----------
176,830 184,495
---------- ----------
$1,042,289 $1,065 895
========== ==========
</TABLE>
- 2 -
<TABLE>
PENNSYLVANIA POWER COMPANY
BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30, 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 101,656 98,217
---------- ----------
Total common stockholder's equity 289,943 286,504
Preferred stock-
Not subject to mandatory redemption 50,905 50,905
Subject to mandatory redemption 15,000 15,000
Long-term debt-
Associated companies 6,982 7,245
Other 292,701 303,751
---------- ----------
655,531 663,405
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt-
Associated companies 4,122 6,784
Other 1,545 712
Accounts payable-
Associated companies 6,738 8,084
Other 22,724 25,686
Accrued taxes 16,619 14,823
Accrued interest 7,216 7,382
Other 19,180 21,199
---------- ----------
78,144 84,670
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 243,759 253,776
Accumulated deferred investment tax credits 27,264 28,383
Other 37,591 35,661
---------- ----------
308,614 317,820
---------- ----------
COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ---------- ----------
$1,042,289 $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 Six Months Ended
June 30, June 30,
-------------------- ------------------
1997 1996 1997 1996
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,776 $12,024 $16,370 $25,056
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation 12,991 14,486 27,282 22,489
Nuclear fuel and lease amortization 2,320 1,652 4,809 3,466
Other amortization, net 1,543 3,036 3,078 3,514
Deferred income taxes, net (3,466) 2,647 (6,607) 4,890
Investment tax credits, net (537) (590) (1,119) (957)
Receivables 11,001 (3,331) 11,487 6,029
Materials and supplies (553) 1,424 (928) 1,296
Accounts payable (4,131) (659) (4,152) (6,559)
Other 3,064 (12,536) (5,064) (24,020)
------- ------- ------- -------
Net cash provided from operating activities 30,008 18,153 45,156 35,204
------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemptions and Repayments-
Long-term debt 2,289 14,502 14,312 29,191
Notes payable, net 5,000 - - -
Dividend Payments-
Common stock 5,347 5,347 10,693 10,693
Preferred stock 1,081 1,043 2,238 2,201
------- ------- ------- -------
Net cash used for financing activities 13,717 20,892 27,243 42,085
------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 3,199 6,246 6,530 11,658
Loan to parent 13,000 5,000 10,500 1,000
Other 74 141 1,777 156
------- ------- ------- -------
Net cash used for investing activities 16,273 11,387 18,807 12,814
------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents 18 (14,126) (894) (19,695)
Cash and cash equivalents at beginning of period 475 15,415 1,387 20,984
------- ------- ------- -------
Cash and cash equivalents at end of period $ 493 $ 1,289 $ 493 $ 1,289
======= ======= ======= =======
<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, 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 June 30, 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 will be achieved by burning lower-sulfur fuel,
generating more electricity from lower-emitting plants, and/or
- 5 -
PENNSYLVANIA POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited) (Cont'd)
purchasing emission allowances. Plans for complying with reductions
required for the year 2000 and thereafter have not been finalized.
The Environmental Protection Agency (EPA) 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 were announced in July
1997. The cost of compliance with these regulations may be
substantial and depends on 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 June 30, 1997, and
the related statements of income and cash flows for the three-month
and six-month periods ended June 30, 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
August 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 were down 38.2% for the six-
month period ended June 30, 1997, compared with the same period
last year. Earnings for the second quarter of 1997 decreased 39.1%
from results for the three months ended June 30, 1996. The six-
month results for 1997 reflect accelerated depreciation and
amortization of nuclear and regulatory assets totaling
approximately $17,500,000 under the Company's Rate Stability and
Economic Development Plan; results for the first half of 1996
included approximately $9,000,000 of accelerated depreciation and
amortization. For the quarters ended June 30, 1997, and June 30,
1996, these amounts were approximately $8,000,000 and $9,000,000,
respectively.
Retail kilowatt-hour sales increased 0.3% in the first
half of 1997, compared with the first half of 1996, due to a 2.3%
increase in industrial sales. The higher level of industrial sales
was partially offset by a 2.3% decrease in residential sales, which
were affected by milder weather. During the period, commercial
sales were up slightly over 1996. Sales to other utilities fell
15.8% in 1997 as compared to the first half of 1996. This decrease
was due to the December 31, 1996 expiration of a one-year contract
with another utility to supply 33 megawatts of power, partially
offset by increased sales to Ohio Edison. The decrease in sales to
other utilities offset higher retail sales, causing total kilowatt-
hour sales to decrease by 2.9% during the first half of 1997,
compared with the first half of 1996.
Retail kilowatt-hour sales decreased 0.6% in the second
quarter of 1997 compared to the same period last year. Residential
and commercial sales were down 2.0% and 0.2%, respectively, during
the period while industrial sales remained flat. Sales to other
utilities were up 13.0% compared to the second quarter of 1996,
which contributed to a 1.5% rise in total kilowatt-hour sales.
Because of lower kilowatt-hour sales, the Company spent
less on fuel and purchased power during the first half of 1997,
compared to last year. Higher nuclear expenses reflect increased
operating costs at the Beaver Valley Plant in 1997 and a $420,000
retroactive billing adjustment for Beaver Valley costs applicable
to prior years. Other operating costs were up compared to 1996 due
to a $3,000,000 charge for uncollectible customer accounts. The
changes in depreciation and regulatory asset amortization reflect
accelerations under the rate stability plan discussed above.
- 8 -
PENNSYLVANIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont'd)
The comparative decreases in other income are principally
due to last year's adjustment to the recoverable costs related to
Perry Unit 2 since recovery began sooner than originally
anticipated; that adjustment increased other income in the second
quarter of 1996.
The decreases in interest costs compared to 1996 were due
to redemptions of long-term debt, totaling approximately
$69,000,000, that occurred subsequent to June 30, 1996.
Capital Resources and Liquidity
The Company has continuing cash requirements for planned
capital expenditures and debt maturities. During the second half of
1997, capital requirements for property additions and capital
leases are expected to be about $22,000,000, including $8,000,000
for nuclear fuel. The Company has additional cash requirements of
approximately $369,000 due to maturing long-term debt during the
remainder of 1997. These requirements are expected to be satisfied
with internal cash.
As of June 30, 1997, the Company had approximately
$13,000,000 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, 1997, and $12,000,000 of bank
facilities which may be borrowed for up to several days at the
banks' discretion.
The Company sold $10,300,000 principal amount of variable
rate pollution control notes, with an initial interest rate of
3.75%, on July 2, 1997. The proceeds from the sale will be used in
September, 1997 to redeem a like amount of pollution control notes
bearing an interest rate of 8.1%.
On July 9, 1997, Standard & Poors Corp. lowered the
Company's security ratings in connection with Ohio Edison's pending
merger with Centerior Energy to form FirstEnergy Corp. Standard &
Poors applied a consolidated rating methodology for all of the
FirstEnergy operating units. Standard & Poors assigned ratings of
BB+ to the Company's senior secured debt and BB- to senior
unsecured debt and preferred stock, all with positive implications.
- 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.
August 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 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, 1997, which includes our report dated August 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
August 13, 1997
<TABLE> <S> <C>
<ARTICLE> OPUR1
<LEGEND>
(Amounts in 1,000's, except earnings per share)
Income tax expense includes $349,000 related to other income.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 748,359
<OTHER-PROPERTY-AND-INVEST> 26,354
<TOTAL-CURRENT-ASSETS> 90,746
<TOTAL-DEFERRED-CHARGES> 176,830
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,042,289
<COMMON> 188,700
<CAPITAL-SURPLUS-PAID-IN> (413)
<RETAINED-EARNINGS> 101,656
<TOTAL-COMMON-STOCKHOLDERS-EQ> 289,943
15,000
50,905
<LONG-TERM-DEBT-NET> 299,683
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 850
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 4,817
<OTHER-ITEMS-CAPITAL-AND-LIAB> 381,091
<TOT-CAPITALIZATION-AND-LIAB> 1,042,289
<GROSS-OPERATING-REVENUE> 158,197
<INCOME-TAX-EXPENSE> 13,732
<OTHER-OPERATING-EXPENSES> 118,177
<TOTAL-OPERATING-EXPENSES> 131,560
<OPERATING-INCOME-LOSS> 26,637
<OTHER-INCOME-NET> 994
<INCOME-BEFORE-INTEREST-EXPEN> 27,631
<TOTAL-INTEREST-EXPENSE> 11,261
<NET-INCOME> 16,370
2,313
<EARNINGS-AVAILABLE-FOR-COMM> 14,057
<COMMON-STOCK-DIVIDENDS> 10,693
<TOTAL-INTEREST-ON-BONDS> 10,420
<CASH-FLOW-OPERATIONS> 45,156
<EPS-PRIMARY> 2.23
<EPS-DILUTED> 2.23
</TABLE>
