SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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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 EAST WASHINGTON STREET
P.O. BOX 891,
NEW CASTLE, PENNSYLVANIA 16103
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (412) 652-5531
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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4.24% Preferred Stock, $100 par value Philadelphia Stock Exchange, Inc.
4.25% Preferred Stock, $100 par value Philadelphia Stock Exchange, Inc.
4.64% Preferred Stock, $100 par value Philadelphia Stock Exchange, Inc.
7.64% Preferred Stock, $100 par value Philadelphia Stock Exchange, Inc.
8.00% Preferred Stock, $100 par value Philadelphia Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. X
---
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
--- ---
State the aggregate market value of the voting stock held by non-
affiliates of the registrant: None
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest practicable date:
$30 par value - 6,290,000 shares outstanding at March 21, 1997.
Documents incorporated by reference PART OF FORM 10-K INTO WHICH
(to the extent indicated herein): DOCUMENT IS INCORPORATED
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1996 Annual Report to Stockholders Part II
(Pages 1-15)
TABLE OF CONTENTS
Page
----
Part I
Item 1. Business......................................... 1
The Company.................................... 1
Utility Regulation............................. 1
Capital Requirements........................... 2
Central Area Power Coordination Group.......... 3
Nuclear Regulation............................. 4
Nuclear Insurance.............................. 4
Environmental Matters.......................... 5
Air Regulation............................... 5
Water Regulation............................. 6
Waste Disposal............................... 6
Summary...................................... 6
Fuel Supply.................................... 7
Capacity and Reserves.......................... 8
Regional Reliability........................... 8
Competition.................................... 8
Employees...................................... 8
Item 2. Properties....................................... 8
Item 3. Legal Proceedings................................ 9
Item 4. Submission of Matters to a
Vote of Security Holders....................... 9
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters................ 10
Item 6. Selected Financial Data.......................... 10
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.. 10
Item 8. Financial Statements and Supplementary Data...... 10
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure......... 10
Part III
Item 10. Directors and Executive Officers of the
Registrant..................................... 10
Item 11. Executive Compensation........................... 11
Summary Executive Compensation Table........... 11
Long-Term Incentive Plan Table................. 12
Supplemental Executive Retirement Plan......... 13
Pension Plan................................... 13
Compensation Committee Interlocks and Insider
Participation in Compensation Decisions...... 14
Compensation of Directors...................... 14
Item 12. Security Ownership of Certain Beneficial
Owners and Management.......................... 14
Item 13. Certain Relationships and Related Transactions... 15
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................ 15
PART I
ITEM 1. BUSINESS
The Company
Pennsylvania Power Company (Company) was organized under
the laws of the Commonwealth of Pennsylvania in 1930 and owns
property and does business as an electric public utility in that
state. The Company is authorized to do business and owns property
in the State of Ohio. It is a wholly owned subsidiary of Ohio
Edison Company (Edison), an Ohio corporation which does business as
an electric public utility in Ohio. On September 13, 1996, Edison
entered into an agreement to merge with Centerior Energy
Corporation under a new holding company called FirstEnergy Corp. If
the merger is approved, Edison will become a subsidiary of
FirstEnergy, but will remain the Company's parent. The Company and
Edison are referred to herein collectively as Companies.
The Company furnishes electric service to communities in
a 1,500 square mile area of western Pennsylvania. The Company also
provides transmission services and electric energy for resale to
certain municipalities in Pennsylvania. The area served by the
Company has a population of approximately 343,000.
Utility Regulation
The Company is subject to broad regulation as to rates
and other matters by the Pennsylvania Public Utility Commission
(PPUC). With respect to its wholesale and interstate electric
operations and rates, the Company is subject to regulation,
including regulation of its accounting policies and practices, by
the Federal Energy Regulatory Commission (FERC).
The Energy Policy Act of 1992 (1992 Act) amends portions
of the Public Utility Holding Company Act of 1935, providing
independent power producers and other nonregulated generating
facilities easier entry into electric generation markets. The 1992
Act also amended portions of the Federal Power Act, authorizing the
FERC, under certain circumstances, to mandate access to utility-
owned transmission facilities. Following the enactment of the 1992
Act, the FERC has ordered all utilities to file open access tariffs
applicable to transmission facilities, including provisions which
require utilities to offer comparable services on a
nondiscriminatory basis.
The Company has agreements to sell power to four
wholesale customers; two of the agreements expire in March 1998,
and the other two will be in effect until September 1999. A former
municipal customer of the Company signed a contract with another
energy supplier in November 1995. The Company and the former
customer have reached a settlement of the Company's proposed
transmission rate which was approved by the FERC on March 13, 1997.
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The Company's Rate Stability and Economic Development
Plan was approved by the PPUC in the second quarter of 1996. The
regulatory plan maintains current base electric rates for the
Company through June 20, 2006, and revised the Company's fuel cost
recovery method. Under its regulatory plan, the Company eliminated
its energy cost rate (ECR) for the recovery of fuel and net
purchased power costs as a separate component of customer charges.
Energy costs were rolled into the Company's base electric rates at
their projected 1996-1997 level. All of the Company's regulatory
assets are being recovered under provisions of the regulatory plan.
In addition, the PPUC has authorized the Company to recognize
additional depreciation expense related to its generating assets
and additional amortization of regulatory assets during the ten-
year regulatory plan period of at least $358 million more than the
amounts that would have been recognized if the regulatory plan were
not in effect. These additional amounts are being recovered through
current rates.
In December 1996, Pennsylvania enacted "The Electricity
Generation Customer Choice and Competition Act," which will permit
residents, including the Company's customers, to choose their
electric generation supplier, while transmission and distribution
services will continue to be supplied by their current providers.
Customer choice would be phased in over three years, beginning in
1999, after a two-year pilot program. The new Pennsylvania law also
establishes procedures and standards for the recovery of stranded
costs over an eight to nine-year period in the form of a transition
charge on customer billings, and allows utilities to seek PPUC
approval to securitize, or refinance, stranded costs which have
been determined by the PPUC to be recoverable. The Company believes
that this legislation will continue to provide for cost recovery in
a manner which meets the criteria for application of Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation."
Capital Requirements
The Company's total construction costs, excluding nuclear
fuel, amounted to approximately $20 million in 1996. Such costs
included expenditures for the betterment of existing facilities and
for the construction of transmission lines, distribution lines,
substations and other additions. For the years 1997-2001, such
construction costs are estimated to be approximately $100 million,
of which approximately $21 million is applicable to 1997. See
"Environmental Matters" below with regard to possible environment-
related expenditures not included in this estimate.
During the 1997-2001 period, maturities of, and sinking
fund requirements for, long-term debt (excluding nuclear fuel) will
require the expenditure by the Company of approximately $26
million. These requirements are expected to be met with internally
generated cash.
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The Company leases its nuclear fuel requirements from OES
Fuel, Incorporated (a wholly owned subsidiary of Edison).
Investments for additional nuclear fuel during the 1997-2001 period
are estimated to be approximately $33 million, of which
approximately $9 million applies to 1997. During the same periods,
the Company's nuclear fuel investments are expected to be reduced
by approximately $32 million and $7 million, respectively, as the
nuclear fuel is consumed. The Company recovers the cost of nuclear
fuel consumed through its electric rates.
Based on its present plans, the Company could provide for
its cash requirements in 1997 from the following sources: funds to
be received from operations; available cash and temporary cash
investments (approximately $4 million as of December 31, 1996);
funds available under short-term bank credit arrangements presently
aggregating $2 million; and the ability to borrow up to $50 million
from Edison, if available, under a system funds pool agreement.
Additionally, the Company had $12 million of unused bank facilities
which may be borrowed for up to several days at the banks'
discretion.
The extent and type of future financings will depend on
the need for external funds as well as market conditions, the
maintenance of an appropriate capital structure and the ability of
the Company to comply with coverage requirements in order to issue
first mortgage bonds and preferred stock. The Company will continue
to monitor financial market conditions and, where appropriate, may
take advantage of economic opportunities to refund debt and
preferred stock to the extent that its financial resources permit.
The coverage requirements contained in the first mortgage
indenture under which the Company issues first mortgage bonds
provide that, except for certain refunding purposes, the Company
may not issue first mortgage bonds unless applicable net earnings
(before income taxes), calculated as provided in the indenture, for
any period of twelve consecutive months within the fifteen calendar
months preceding the month in which such additional bonds are
issued, are at least twice annual interest requirements on
outstanding first mortgage bonds, including those being issued. The
Company's articles of incorporation prohibit the sale of preferred
stock unless applicable gross income, calculated as provided in the
articles of incorporation, is equal to at least 1-1/2 times the
aggregate of the annual interest requirements on indebtedness and
annual dividend requirements on preferred stock outstanding
immediately thereafter.
With respect to the issuance of first mortgage bonds,
other requirements also apply and are more restrictive than the
earnings test at the present time. The Company is currently able to
issue $251 million principal amount of first mortgage bonds, with
up to $117 million of such amount issuable against property
additions; the remainder could be issued against previously retired
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bonds. Based upon earnings for 1996, the Company would be
permitted, under the earnings coverage test contained in the
Company's charter, to issue at least $176 million of preferred
stock at an assumed dividend rate of 9%. If the Company were to
issue additional debt at or prior to the time it issued preferred
stock, the amount of preferred stock which would be issuable would
be reduced.
To the extent that coverage requirements or market
conditions restrict the Company's ability to issue desired amounts
of first mortgage bonds or preferred stock, the Company may seek
other methods of financing. Such financings could include the sale
of common stock to Edison, or of such other types of securities as
might be authorized by the PPUC which would not otherwise be sold
and could result in annual interest charges and/or dividend
requirements in excess of those that would otherwise be incurred.
Central Area Power Coordination Group (CAPCO)
In September 1967, the CAPCO companies, consisting of the
Company, Edison, The Cleveland Electric Illuminating Company (CEI),
Duquesne Light Company (Duquesne) and The Toledo Edison Company,
announced a program for joint development of power generation and
transmission facilities. Included in the program are Unit 7 at the
W. H. Sammis Plant, Units 1, 2 and 3 at the Bruce Mansfield Plant,
Unit 1 at the Beaver Valley Power Station and the Perry Nuclear
Power Plant, each now in service.
The present CAPCO Basic Operating Agreement provides,
among other things, for coordinated maintenance responsibilities
among the CAPCO companies, a limited and qualified mutual backup
arrangement in the event of outage of CAPCO units and certain
capacity and energy transactions among the CAPCO companies.
The agreements among the CAPCO companies generally treat
the Companies as a single system as between them and the other
three CAPCO companies, but, in agreements between the CAPCO
companies and others, all five companies are treated as separate
entities. Subject to any rights that might arise among the CAPCO
companies as such, each member company, severally and not jointly,
is obligated to pay only its proportionate share of the costs
associated with the facilities and the cost of required fuel. The
CAPCO companies have agreed that any modification of their
arrangements or of their agreed-upon programs requires their
unanimous consent. Should any member become unable to continue to
pay its share of the costs associated with a CAPCO facility, each
of the other CAPCO companies could be adversely affected in varying
degrees because it may become necessary for the remaining members
to assume such costs for the account of the defaulting member.
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Under the agreements governing the construction and
operation of CAPCO generating units, the responsibility is assigned
to a specific CAPCO company. CEI has such responsibilities for
Perry, and Duquesne is responsible for Beaver Valley Unit 1. The
Companies monitor activities in connection with these units but
must rely to a significant degree on the operating company for
necessary information. The Companies in their oversight role as a
practical matter cannot be privy to every detail; it is the
operating company that must directly supervise activities and then
exercise its reporting responsibilities to the co-owners. The
Companies critically review the information given to them by the
operating company, but they cannot be absolutely certain that
things they would have considered significant have been reported or
that they always would have reached exactly the same conclusion
about matters that are reported. In addition, the time that is
necessarily part of the compiling and analyzing process creates a
lag between the occurrence of events and the time the Companies
become aware of their significance. The Company has similar
responsibilities to the other CAPCO companies with respect to Bruce
Mansfield Units 1, 2 and 3 and Edison has those responsibilities
with respect to W. H. Sammis Unit 7.
Nuclear Regulation
The construction and operation of nuclear generating
units are subject to the regulatory jurisdiction of the Nuclear
Regulatory Commission (NRC) including the issuance by it of
construction permits and operating licenses. The NRC's procedures
with respect to application for construction permits and operating
licenses afford opportunities for interested parties to request
public hearings on health, safety, environmental and antitrust
issues. In this connection, the NRC may require substantial changes
in operation or the installation of additional equipment to meet
safety or environmental standards with resulting delay and added
costs. The possibility also exists for modification, denial or
revocation of licenses or permits. Full power operating licenses
were issued for Beaver Valley Unit 1 and Perry on July 1, 1976 and
November 13, 1986, respectively.
The NRC has promulgated and continues to promulgate
regulations related to the safe operation of nuclear power plants.
The Company cannot predict what additional regulations will be
promulgated or design changes required or the effect that any such
regulations or design changes, or the consideration thereof, may
have upon Beaver Valley Unit 1 and Perry. Although the Company has
no reason to anticipate an accident at any nuclear plant in which
it has an interest, if such an accident did happen, it could have
a material but presently undeterminable adverse effect on the
Company's financial position. In addition, such an accident at any
operating nuclear plant, whether or not owned by the Company, could
result in regulations or requirements that could affect the
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operation or licensing of plants that the Company does own with a
consequent but presently undeterminable adverse impact, and could
affect the Company's ability to raise funds in the capital markets.
Nuclear Insurance
The Price-Anderson Act limits the public liability which
can be assessed with respect to a nuclear power plant to $8.92
billion (assuming 110 units licensed to operate) for a single
nuclear incident, which amount is covered by: (i) private insurance
amounting to $200 million; and (ii) $8.72 billion provided by an
industry retrospective rating plan required by the NRC pursuant
thereto. Under such retrospective rating plan, in the event of a
nuclear incident at any unit in the United States resulting in
losses in excess of private insurance, up to $75.5 million (but not
more than $10 million per unit per year in the event of more than
one incident) must be contributed for each nuclear unit licensed to
operate in the country by the licensees thereof to cover
liabilities arising out of the incident. Based on its present
ownership interest in Beaver Valley Unit 1 and the Perry Plant, the
Company's maximum potential assessment under these provisions
(assuming the other CAPCO companies were to contribute their
proportionate share of any assessments under the retrospective
rating plan) would be $18 million per incident but not more than
$2.3 million in any one year for each incident.
In addition to the public liability insurance provided
pursuant to the Price-Anderson Act, the Company has also obtained
insurance coverage in limited amounts for economic loss and
property damage arising out of nuclear incidents. The Company is a
member of Nuclear Electric Insurance Limited (NEIL) which provides
coverage (NEIL I) for the extra expense of replacement power
incurred due to prolonged accidental outages of nuclear units.
Under NEIL I, the Company has policies, renewable yearly,
corresponding to its interest in Beaver Valley Unit 1 and the Perry
Plant, which provide an aggregate indemnity of up to approximately
$70 million for replacement power costs incurred during an outage
after an initial 21-week waiting period. Members of NEIL I pay
annual premiums and are subject to assessments if losses exceed the
accumulated funds available to the insurer. The Company's present
maximum aggregate assessment for incidents occurring during a
policy year would be approximately $0.7 million.
The Company is insured as to its interest in Beaver
Valley Unit 1 and the Perry Plant under property damage insurance
provided by American Nuclear Insurers, Mutual Atomic Energy
Liability Underwriters and NEIL to the operating company for each
plant. Under these arrangements, $2.75 billion of coverage for
decontamination costs, decommissioning costs, debris removal and
repair and/or replacement of property is provided for Beaver Valley
Unit 1 and the Perry Plant. The Company pays annual premiums for
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this coverage and is liable for retrospective assessments of up to
approximately $2.3 million in any one year for each incident.
The Company intends to maintain insurance against nuclear
risks as described above as long as it is available. To the extent
that replacement power, property damage, decontamination,
decommissioning, repair and replacement costs and other such costs
arising from a nuclear incident at any of the Company's plants
exceed the policy limits of the insurance in effect with respect to
that plant, to the extent a nuclear incident is determined not to
be covered by the Company's insurance policies, or to the extent
such insurance becomes unavailable in the future, the Company would
remain at risk for such costs.
The NRC requires nuclear power plant licensees to obtain
minimum property insurance coverage of $1.06 billion or the amount
generally available from private sources, whichever is less. The
proceeds of this insurance are required to be used first to ensure
that the licensed reactor is in a safe and stable condition and can
be maintained in that condition so as to prevent any significant
risk to the public health and safety. Within 30 days of
stabilization, the licensee is required to prepare and submit to
the NRC a cleanup plan for approval. The plan is required to
identify all cleanup operations necessary to decontaminate the
reactor sufficiently to permit the resumption of operations or to
commence decommissioning. Any property insurance proceeds not
already expended to place the reactor in a safe and stable
condition must be used first to complete those decontamination
operations that are ordered by the NRC. The Company is unable to
predict what effect these requirements may have on the availability
of insurance proceeds to the Company for the Company's bondholders.
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 capital
expenditures for environmental compliance of approximately $1
million, which is included in the construction estimate given under
"Capital Requirements" for 1997 through 2001.
Air Regulation
Under the provisions of the Clean Air Act of 1970, both
the Commonwealth of Pennsylvania and the State of Ohio adopted
ambient air quality standards, and related emission limits,
including limits for sulfur dioxide (SO2) and particulates. In
addition, the U.S. Environmental Protection Agency (EPA)
promulgated an SO2 regulatory plan for Ohio which became effective
for W. H. Sammis Unit 7 in 1977. Generating plants to be
constructed in the future and some future modifications of existing
facilities will be covered not only by the applicable state
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standards but also by EPA emission performance standards for new
sources. In both Pennsylvania and Ohio the construction or
modification of emission sources requires approval from appropriate
environmental authorities, and the facilities involved may not be
operated unless a permit or variance to do so has been issued by
those same authorities.
The Company is in compliance with the current 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 purchasing emission
allowances. Plans for complying with reductions required for the
year 2000 and thereafter have not been finalized. The 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.
The Company is required to meet federally approved SO2
regulations. Violation of such regulations can result in shutdown
of the generating unit involved and/or civil or criminal penalties
of up to $25,000 for each day the unit is in violation. The EPA has
an interim enforcement policy for SO2 regulations in Ohio that
allows for compliance based on a 30-day averaging period. The EPA
has proposed regulations that could change the interim enforcement
policy, including the method of determining compliance with
emission limits. The Company cannot predict what action the EPA may
take in the future with respect to proposed regulations or the
interim enforcement policy.
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.
Water Regulation
Various water quality regulations, the majority of which
are the result of the federal Clean Water Act and its amendments,
apply to the Company's plants. In addition, Pennsylvania and Ohio
have water quality standards applicable to the Company's
operations. As provided in the Clean Water Act, authority to grant
federal National Pollutant Discharge Elimination System (NPDES)
water discharge permits can be assumed by a state. Pennsylvania and
Ohio have assumed such authority.
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Waste Disposal
As a result of the Resource Conservation and Recovery Act
of 1976, as amended, and the Toxic Substances Control Act of 1976,
federal and state hazardous waste regulations have been
promulgated. These regulations may result in significantly
increased costs to dispose of waste materials. The ultimate effect
of these requirements cannot presently be determined.
Summary
Environmental controls are still in the process of
development and require, in many instances, balancing the needs for
additional quantities of energy in future years and the need to
protect the environment. As a result, the Company cannot now
estimate the precise effect of existing and potential regulations
and legislation upon any of its existing and proposed facilities
and operations or upon its ability to issue additional first
mortgage bonds under its mortgage. The mortgage contains covenants
by the Company to observe and conform to all valid governmental
requirements at the time applicable unless in course of contest,
and provisions which, in effect, prevent the issuance of additional
bonds if there is a completed default under the mortgage. The
provisions of the mortgage, in effect, also require, in the opinion
of counsel for the Company, that certification of property
additions as the basis for the issuance of bonds or other action
under the mortgage be accompanied by an opinion of counsel that the
Company certifying such property additions has all governmental
permissions at the time necessary for its then current ownership
and operation of such property additions. The Company intends to
contest any requirements it deems unreasonable or impossible for
compliance or otherwise contrary to the public interest.
Developments in these and other areas of regulation may require the
Company to modify, supplement or replace equipment and facilities,
and may delay or impede the construction and operation of new
facilities, at costs which could be substantial.
Fuel Supply
The Company's sources of generation during 1996 were
67.6% coal and 32.4% nuclear. All of the Company's coal supply for
the New Castle Plant is currently supplied through a sole source
contract that provides the coal on a "just-in time" basis.
The Company estimates its 1997 coal requirement to be
1,400,000 tons (including its share of the coal requirements of
CAPCO's W. H. Sammis Unit 7 and the Bruce Mansfield Plant). The
coal requirements of W. H. Sammis Unit 7 are furnished from mines
located in Ohio, Pennsylvania and West Virginia through spot
purchases and Edison contracts which expire at various times
through February 28, 2003. See "Environmental Matters" for factors
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pertaining to meeting environmental regulations affecting coal-
fired generating units.
The Company, together with the other CAPCO companies, has
severally guaranteed (the Company's composite percentage being
approximately 6.7%) certain debt and lease obligations in
connection with a coal supply contract for the Bruce Mansfield
Plant (see Note 5 of Notes to Financial Statements). As of December
31, 1996, the Company's share of the guarantees was $7.3 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. This contract expires December 31,
1999.
The Company's fuel costs (excluding disposal costs) for
each of the five years ended December 31, 1996, were as follows:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Cost of fuel consumed per
million BTUs:
Coal $1.31 $1.30 $1.34 $1.37 $1.42
Nuclear $ .64 $ .77 $ .88 $ .97 $ .94
Average fuel cost per
kilowatt-hour generated
(cents) 1.15 1.20 1.29 1.36 1.34
OES Fuel is the sole lessor for the Company's nuclear
fuel requirements (see "Capital Requirements" and Note 1 of Notes
to Financial Statements).
The Company and OES Fuel have contracts for the supply of
uranium sufficient to meet projected needs through 2000 and
conversion services sufficient to meet projected needs through
2001. Fabrication services for fuel assemblies have been contracted
by the CAPCO companies for the next three reloads for Beaver Valley
Unit 1 (through approximately 2000), and the next five reloads for
Perry (through approximately 2004). The Company has a contract with
U.S. Enrichment Corporation for the majority of its enrichment
requirements for nuclear fuel through 2014.
Prior to the expiration of existing commitments, the
Company intends to make additional arrangements for the supply of
uranium and for the subsequent conversion, enrichment, fabrication,
reprocessing and/or waste disposal services, the specific prices
and availability of which are not known at this time. Due to the
present lack of availability of domestic reprocessing services, to
the continuing absence of any program to begin development of such
reprocessing capability and questions as to the economics of
reprocessing, the Company is calculating nuclear fuel costs based
on the assumption that spent fuel will not be reprocessed. On-site
spent fuel storage facilities for the Perry Plant are expected to
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be adequate through 2010; facilities at Beaver Valley Unit 1 are
expected to be adequate through 2011. After on-site storage
capacity is exhausted, additional storage capacity will have to be
obtained which could result in significant additional costs unless
reprocessing services or permanent waste disposal facilities become
available. The Federal Nuclear Waste Policy Act of 1982 provides
for the construction of facilities for the disposal of high-level
nuclear wastes, including spent fuel from nuclear power plants
operated by electric utilities; however, the selection of a
suitable site has become embroiled in the political process.
Duquesne and CEI have each previously entered into contracts with
the U.S. Department of Energy for the disposal of spent fuel from
Beaver Valley Unit 1 and the Perry Plant, respectively.
Capacity and Reserves
The 1996 net maximum hourly demand on the Company of
792,000 kilowatts (kW) (including 59,000 kW of firm power sales
which extend through 2005 as discussed under "Competition")
occurred on August 6, 1996. The seasonal capability of the Company
(including 72,000 kW of net firm and capacity purchases) on that
day was 890,000 kW. Of that capacity, 10.0% was available to serve
additional load, after giving effect to term power sales to other
utilities. Based on existing capacity plans, the load forecast made
in October 1996 and anticipated term power sales to other
utilities, the capacity margins during the 1997-2001 period are
expected to range from about 8% to 9%.
Regional Reliability
The Companies participate with 26 other electric
companies operating in nine states in the East Central Area
Reliability Coordination Agreement (ECAR), which was organized for
the purpose of furthering the reliability of bulk power supply in
the area through coordination of the planning and operation by the
ECAR members of their bulk power supply facilities. The ECAR
members have established principles and procedures regarding
matters affecting the reliability of the bulk power supply within
the ECAR region. Procedures have been adopted regarding: i) the
evaluation and simulated testing of systems' performance; ii) the
establishment of minimum levels of daily operating reserves; iii)
the development of a program regarding emergency procedures during
conditions of declining system frequency; and iv) the basis for
uniform rating of generating equipment.
Competition
The Company competes with other utilities for intersystem
bulk power sales and for sales to municipalities. The Company
competes with suppliers of natural gas and other forms of energy in
connection with its industrial and commercial sales and in the home
climate control market, both with respect to new customers and
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conversions, and with all other suppliers of electricity. To date,
there has been no substantial cogeneration by the Company's
customers.
Technological advances and regulatory changes are driving
forces toward increasing competition in the energy market. The
Pennsylvania pilot program, which will allow residents to choose
their electric generation supplier (see "Utility Regulation"), is
one such regulatory change. These regulatory changes could place
downward pressure on the Company's prices in the future. The
Company is actively involved in the implementation of the pilot
program, but is unable to predict the ultimate outcome.
In an effort to more fully utilize its facilities and
hold down rates to its other customers, the Company has entered
into a long-term power sales agreement with another utility.
Currently, the Company is selling 63,000 kW annually under this
contract through December 31, 2005. The Company has the option to
reduce this commitment by 21,000 kW, with three years' advance
notice.
Employees
At December 31, 1996, the Company had 1,015 employees.
ITEM 2. PROPERTIES
The Company's First Mortgage Indenture dated as of
November 1, 1945, between the Company and Citibank, N.A. (successor
to The First National Bank of the City of New York), as amended and
supplemented, constitutes, in the opinion of the Company's counsel,
a direct first lien on substantially all of the Company's physical
property, subject only to excepted encumbrances, as defined in the
Indenture. See Notes 2 and 3 of Notes to Financial Statements for
information concerning leases and financing encumbrances affecting
certain of the Company's properties.
The Company owns, individually or together with one or
more of the other CAPCO companies as tenants in common, the
generating units in service shown below:
- 12 -
Net Demonstrated
Capacity (kW)
-------------------------
Company's Ownership
Plant-Location Unit Total Entitlement Interest
- -------------- ---- ----- ----------- ---------
Coal-Fired Units
- ----------------
New Castle-West
Pittsburg, PA 3-5 333,000 333,000 100.00%
B. Mansfield-
Shippingport, PA 1 780,000 33,000 4.20%
2 780,000 53,000 6.80%
3 800,000 50,000 6.28%
W. H. Sammis-
Stratton, OH 7 600,000 125,000 20.80%
Nuclear Units
- -------------
Beaver Valley-
Shippingport, PA 1 810,000 142,000 17.50%
Perry-North Perry
Village, OH 1,194,000 63,000 5.24%
Oil-Fired Units
- ---------------
Various 164,000 25,000 15.18%
--------
Total 824,000
========
Prolonged outages of existing generating units might make
it necessary for the Company, depending upon the demand for
electric service upon its system, to use to a greater extent than
otherwise, less efficient and less economic generating units, or
purchased power, and in some cases may require the reduction of
load during peak periods under the Company's interruptible
programs, all to an extent not presently determinable.
The Company's generating plants and load centers are
connected by a transmission system consisting of elements having
various voltage ratings ranging from 23 kilovolts (kV) to 345 kV.
The Company's overhead and underground transmission lines aggregate
607 miles.
The Company's electric distribution systems include 5,098
miles of overhead pole line and underground conduit carrying
primary, secondary and street lighting circuits. It owns,
individually or together with one or more of the other CAPCO
companies as tenants in common, 85 substations with a total
installed transformer capacity of 3,937,154 kilovolt-amperes, of
which 17 are transmission substations, including 8 located at
generating plants.
- 13 -
The Company's transmission lines also interconnect with
those of Edison, Duquesne and West Penn Power Company. These
interconnections make possible utilization by the Company of
generating capacity constructed as a part of the CAPCO program, as
well as providing opportunities for the sale of power to other
utilities.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company is a wholly owned subsidiary of Edison.
Quarterly dividends of $.85 per share were paid on the Company's
common stock during 1996 and 1995.
For information with respect to certain restrictions on
the payment of cash dividends on common stock, see Note 3(a) of
Notes to Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by Items 6 through 8 is
incorporated herein by reference to the Selected Financial Data,
Management's Discussion and Analysis of Results of Operations and
Financial Condition, and Financial Statements included on pages 1
through 15 in the Company's 1996 Annual Report to Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The present term of office of each director extends until
the next succeeding annual meeting of stockholders and until his
successor is elected and shall qualify.
- 14 -
The executive officers are elected at the annual
organization meeting of the Board of Directors, held immediately
after the annual meeting of stockholders, and hold office until the
next such organization meeting, unless the Board of Directors shall
otherwise determine, or unless a resignation is submitted.
H. Peter Burg-Age 50
President and Chief Operating Officer, and Chief Financial
Officer of Edison since 1996. Senior Vice President and Chief
Financial Officer of Edison from 1989 to 1996. President of
the Company from 1994 to 1995. Director of the Company since
1989. Mr. Burg is also a director of Edison.
Willard R. Holland-Age 60
Chairman of the Board and Chief Executive Officer, and Chief
Financial Officer of the Company, since 1993. Chairman of the
Board and Chief Executive Officer of Edison, since 1996.
President and Chief Executive Officer of Edison, from 1993 to
1996. President and Chief Operating Officer of Edison from
1991 to 1993. Director of the Company since 1991. Mr. Holland
is also a director of Edison and A. Schulman, Inc.
R. Joseph Hrach-Age 48
President of the Company since 1996. Division Manager, Stark
Division, of Edison from 1991 to 1996. Director of the Company
since 1996.
Joseph J. Nowak-Age 65
Retired. Consultant to Armco Inc. during 1993 and Vice
President during 1992 of Armco Inc., and Executive Vice
President-Operations from 1988 to 1992 of Cyclops Industries,
Inc., manufacturers of steel products. Cyclops Industries,
Inc. merged with Armco Inc. in 1992. Director of the Company
since 1982.
Jack E. Reed-Age 54
Vice President of the Company since 1992. Manager, Substation
and Distribution of Edison, from 1991 to 1992. Director of the
Company since 1992.
Richard L. Werner-Age 65
Chairman of the Board, President, and Chief Executive Officer
since 1977 of Werner Co., Inc., manufacturer of aluminum
extrusions, ladders and scaffolding. Director of the Company
since 1993.
- 15 -
Robert P. Wushinske-Age 57
Secretary and General Counsel of the Company since 1994 and
Vice President and Treasurer of the Company since 1987.
David W. McKean-Age 44
Comptroller of the Company since 1992. Director of Financial
Reporting of Edison from 1985 to 1992.
- 16 -
<TABLE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY EXECUTIVE COMPENSATION TABLE
<CAPTION>
Annual Compensation
--------------------------------
Long-Term
Name and Compensation All Other
Principal Position Year Salary Bonus Other(2) Payouts(3) Compensation(4)
- -------------------------- ---- -------- ------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Willard R. Holland 1996 $103,332 $42,639 $ 126 $12,420 $14,461
Chairman of the Board and 1995 100,473 35,907 281 5,294 7,701
Chief Executive Officer 1994 92,346 18,500(1) 178 -0- 8,917
Jack E. Reed 1996 121,900 27,783 623 5,606 7,371
Vice President 1995 117,619 26,247 28 2,683 6,042
1994 109,532 9,666 12 -0 6,214
Robert P. Wushinske 1996 116,773 27,882 102 -0- 6,230
Vice President, Secretary, 1995 112,738 21,774 113 -0- 5,652
Treasurer, and General Counsel 1994 103,747 10,170 -0- -0- 5,529
<FN>
(1) This amount reflects 50% of the annual awards under the Executive
Incentive Compensation Plan; the remaining amount, which was
mandatorily deferred into a Common Stock Equivalent Account, was
previously reported in the Long-Term Incentive Plan Table. Beginning
in 1995, all annual awards are reported in this column as there is no
longer a mandatory deferral.
(2) Consists of reimbursement for income tax obligations on Executive
Indemnity Program premium and on perquisites.
(3) These amounts represent cash payouts of the portion of prior years'
Executive Incentive Compensation Plan annual award previously deferred
into a Common Stock Equivalent Account.
(4) For 1996, amount is comprised of (1) matching Edison common stock
contributions under the tax qualified Savings Plan: Holland - $1,260;
Reed - $4,780; Wushinske - $4,908; (2) the current dollar value of the
Company's portion of the premiums paid in 1996 for insurance policies
under the Executive Supplemental Life Plan: Holland - $3,130;
Reed - $1,650; Wushinske - $1,322; (3) above market interest earned
under the Executive Deferred Compensation Plan: Holland - $10,071;
Reed - $920; and (4) a portion of the Executive Indemnity Program
premium reportable as income: Reed - $21.
</TABLE>
- 17 -
<TABLE>
LONG-TERM INCENTIVE PLAN TABLE
AWARDS IN LAST FISCAL YEAR
<CAPTION>
1996 Target Equivalent Estimated Future Payouts Under
Long-Term Number of Performance or Other Non-Stock Price Based Plan
Incentive Performance Period Until (Number of Performance Shares)
----------------------------------
Name Opportunity Shares Maturation or Payout Below
Threshold Threshold Target Maximum
---- ----------- ----------- -------------------- --------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
W. R. Holland-CEO $62,229 2,692 4 years -0- 1,346 2,692 4,039
J. E. Reed 11,702 506 4 years -0- 253 506 759
R. P. Wushinske 4,272 184 4 years -0- 92 184 275
</TABLE>
- 18 -
Each executive's 1996 target long-term incentive opportunity was
converted into performance shares equal to an equivalent number of
shares of Edison's common stock based on the average price of such
stock during December 1995, and will be held in a Common Stock
Equivalent Account through 1999. At the end of this four-year
performance period, this Common Stock Equivalent Account will be
valued based on the average price of Edison's common stock during
December 1999 and as if any dividends that would have been paid on
such stock during the performance period were reinvested on the
date paid. This value may be increased or decreased based upon the
total return of Edison's common stock relative to the Edison
Electric Institute's Index of 100 Investor-owned Electric Utility
Companies (Index) during the period. If an executive retires, dies
or otherwise leaves the employment of the Company prior to the end
of the four-year period, the value will be further proportionally
decreased based on the number of months worked during the period.
However, an executive must work at least twelve months during the
four-year period to be eligible for an award payout. The final
value of an executive's account, if any, will be paid to the
executive in cash early in the year 2000.
The final value of an executive's account may range from
zero to 150% of the target amount. The maximum amount in the above
table is equal to 150% of the target 1996 long-term incentive
opportunity and will be earned if Edison's total shareholder return
is in the top 15% compared to the Index noted above. An amount
equal to 100% of the target 1996 long-term incentive opportunity
will be earned if Edison's total shareholder return is in the 38th
percentile compared to the Index. The threshold amount is equal to
50% of the target 1996 long-term incentive opportunity and will be
earned if Edison's total shareholder return is in the 60th
percentile compared to the Index. Payouts for a total shareholder
return ranking between the 15th percentile and 60th percentile will
be interpolated. However, there will be no long-term award payouts
if Edison's total shareholder return compared to the Index falls
below the 60th percentile.
Supplemental Executive Retirement Plan
The Company participates in the Ohio Edison System
Supplemental Executive Retirement Plan. Mr. Holland is the only
executive officer listed above who is eligible to participate in
the Plan. At normal retirement, eligible senior executives of the
Company who have five or more years of service with the Ohio Edison
System are provided a retirement benefit equal to the greater of 65
percent of their highest annual salary from the Company, or 55
percent of the average of their highest three consecutive years of
salary plus annual incentive awards paid after January 1, 1996 and
paid prior to retirement, reduced by the executive's pensions under
tax-qualified pension plans of the Company or other employers, any
supplementary pension under the Company's Executive Deferred
Compensation Plan, and social security benefits. Subject to
- 19 -
exceptions that might be made in specific cases, senior executives
retiring prior to age 65, or with less than five years of service,
or both, may receive a similar but reduced benefit. This Plan also
provides for disability and surviving spouse benefits. As of the
end of 1996, the estimated annual retirement benefits at age 65
from all of the above sources was $67,166 for Mr. Holland.
Pension Plan
The Company's trusteed noncontributory Pension Plan
covers substantially all full-time employees including officers of
the Company. Pension benefits are determined using a formula based
on a Pension Plan participant's years of accrued service and
average rate of monthly earnings for the highest 60 months of the
last 120 months of accrued service immediately preceding retirement
or termination of service.
Compensation covered by the Pension Plan consists of
basic cash wages and compensation deferred through the Savings Plan
up to the maximum amount permitted under the Internal Revenue Code
of 1986, as adjusted in accordance with regulations. This amount
was $150,000 per year for 1996 and is $160,000 per year for 1997.
In addition, a supplementary pension benefit may be payable to
participants in the Executive Deferred Compensation Plan.
Compensation for 1996 covered by these two plans for the officers
shown in the Executive Compensation Table who are not currently
participants in the Ohio Edison System Supplemental Executive
Retirement Plan is shown under the Salary column of the Table. The
credited years of service for these same officers are as follows:
J. E. Reed-30 years; and R. P. Wushinske-23 years.
The following table shows the estimated annual amounts
payable upon retirement as pension benefits under the Pension Plan
and the supplemental pension benefit under the Executive Deferred
Compensation Plan, based on specified compensation and years of
credited service classifications, assuming continuation of both
such present Plans and employment until age 65. Retirement prior to
age 62 results in a reduction of pension benefits. The amounts
shown are subject to a reduction based on an individual's covered
compensation, date of birth and years of credited service as
defined by the Pension Plan and its optional survivorship
provision.
- 20 -
<TABLE>
Estimated Annual Retirement Payment from the
Pension Plan and the Annual Supplementary Pension
Benefit under the Executive Deferred Compensation Plan
-------------------------------------------------------
<CAPTION>
Applicable 15 Years 25 Years 35 Years 45 Years
Annual Earnings Service Service Service Service
- --------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
$ 90,000 $25,700 $40,100 $52,700 $62,600
100,000 28,500 45,500 58,500 69,500
110,000 31,400 50,100 64,400 76,500
120,000 34,200 54,600 70,200 83,400
130,000 37,100 59,200 76,100 90,400
140,000 39,900 63,700 81,900 97,300
- 21 -
Compensation Committee Interlocks and Insider Participation in
Compensation Decisions
The Board of Directors has no compensation committee. The
Board of Directors, other than Mr. Holland, establishes the
compensation of Mr. Holland as chief executive officer; Mr. Holland
establishes the compensation of the other executive officers of the
Company. During 1996 Mr. Holland served as a director of Edison and
H. Peter Burg served as an executive officer of Edison and as a
director of the Company. In his capacity as a director of the
Company, Mr. Burg participated in decisions relating to the
compensation of Mr. Holland.
Compensation of Directors
Directors who are not employees of the Companies receive
an annual retainer of $4,200 and 100 shares of Edison Common Stock
for each full year of service. Such directors are also paid a
meeting fee of $375 for each board meeting attended and are
reimbursed for expenses for the attendance thereof, if any.
Directors who are also employees of the Company or of Edison
receive no compensation for serving as directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners at
March 21, 1997:
Name and Address of Amount and Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
- -------------- ------------------- -------------------- --------
Common Stock, Ohio Edison Company 6,290,000 shares 100%
$30 par value 76 South Main Street held directly
Akron, Ohio 44308
(b) Security Ownership of Management at December 31, 1996:
- 22 -
</TABLE>
<TABLE>
<CAPTION>
Title of Class Percent of Class
Edison Nature of Edison Common
Common Stock Beneficial Common Stock
No. of Shares Ownership Stock Equivalents*
-------------- ------------------ --------------------- ------------
<S> <C> <C> <C> <C>
H. P. Burg 10,111 Direct or Indirect Less than one percent 13,569
W. R. Holland 7,502 " " 44,741
R. J. Hrach 1,594 " " 426
J. J. Nowak 1,169 " "
J. E. Reed 4,435 " " 1,895
R. L. Werner 432
R. P. Wushinske 2,168 " " 451
All directors and
executive officers
as a group 29,182 " " 61,082
<FN>
* Common Stock Equivalents are the cumulative number of performance shares
credited to each executive officer as of December 31, 1996. These
performance shares are the portion of the 1992, 1993, and 1994 annual
incentive awards under the Executive Incentive Compensation Plan that were
deferred for four years, and the 1995 and 1996 long-term incentive
opportunities that were deferred for four years under such Plan. For a
detailed explanation of the Plan, see the footnote to the Long-Term
Incentive Plan Table. Such performance shares do not have voting rights
or other rights associated with ownership.
</TABLE>
- 23 -
(c) Changes in Control: Not applicable
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements
Included in Part II of this report and incorporated
herein by reference to the Company's 1996 Annual Report to
Stockholders (Exhibit 13 below) at the pages indicated.
Page No.
--------
Statements of Income-Three Years Ended December 31, 1996 4
Balance Sheets-December 31, 1996 and 1995 5
Statements of Capitalization-December 31, 1996 and 1995 6
Statements of Retained Earnings-Three Years
Ended December 31, 1996 7
Statements of Capital Stock and Other Paid-In Capital-
Three Years Ended December 31, 1996 7
Statements of Cash Flows-Three Years Ended
December 31, 1996 8
Statements of Taxes-Three Years Ended December 31, 1996 9
Notes to Financial Statements 10-15
Report of Independent Public Accountants 15
2. Financial Statement Schedules
Included in Part IV of this report:
Page No.
--------
Report of Independent Public Accountants 22
Schedule - Three Years Ended December 31, 1996:
II - Valuation and Qualifying Accounts 23
Schedules other than the schedule listed above are omitted for
the reason that they are not required or are not applicable, or the
required information is shown in the financial statements or notes
thereto.
- 24 -
3. Exhibits
Exhibit
Number
- -------
3-1 - Agreement of Merger and Consolidation dated April
1,1929, among Pennsylvania Power Company ("Penn Power"),
Harmony Electric Company and Peoples Power Company
(consummated May 31, 1930), copies of Letters Patent
issued thereon, together with the Election Return and
Treasurer's Return, relative to decrease of capital
stock; Election Return authorizing change of capital
stock and increase of indebtedness; Election Return
authorizing change of capital stock; Election Return
authorizing increase of capital stock; Election Return
establishing 4.24% Preferred Stock; Certificate with
respect to the establishment of the 4.64% Preferred
Stock; Election Returns and Certificates of Actual Sale
in connection with the purchase by Penn Power of all the
property of Pine-Mercer Electric Company, Industry
Borough Electric Company, Ohio Township Electric
Company, and Shippingport Borough Electric Company;
Certificate of Change of Location of Penn Power's
principal office; Certificate of Consent authorizing
increase in authorized Common Stock; Certificate of
Consent with respect to the removal of limitations on
the authorized amount of indebtedness of Penn Power;
Election Returns and Certificates of Actual Sale in
connection with the purchase by Penn Power of all the
property of Borolak Public Service Company, Eastfax
Public Service Company, Norango Public Service Company,
Sadwick Public Service Company, Sosango Public Service
Company, Surrick Public Service Company, Wesango Public
Service Company, and Westfax Public Service Company;
Certificate of Change of Location of Penn Power's
principal office; Amendment to the Charter extending the
territory in which Penn Power may operate in the Borough
of Shippingport, Beaver County, Pennsylvania;
Certificate of Consent authorizing increase in
authorized Common Stock; Certificate with respect to the
establishment of the 8% Preferred Stock; Certificate
accepting Business Corporation Law of Pennsylvania for
government and regulation of affairs of Penn Power;
Articles of Amendment incorporating certain protective
provisions relating to Preferred Stock, increasing
amount of authorized Preferred Stock and authorizing
future increases in amounts of authorized Preferred
Stock without a vote of the holders of Preferred Stock;
Articles of Amendment increasing the authorized number
of shares of Common Stock; Statement Affecting Class or
Series of Shares with respect to the establishment of
the 7.64% Preferred Stock; Articles of Amendment
- 25 -
Exhibit
Number
- -------
increasing the authorized number of shares of Common
Stock; Articles of Amendment increasing the number of
authorized shares of Preferred Stock; Statement
Affecting Class or Series of Shares with respect to the
establishment of the 8.48% Preferred Stock; Articles of
Amendment authorizing sinking fund requirements for
Preferred Stock; Statement Affecting Class or Series of
Shares with respect to the establishment of the 11%
Preferred Stock; Articles of Amendment increasing the
authorized number of shares of Common Stock; Statement
Affecting Class or Series of Shares with respect to the
establishment of the 9.16% Preferred Stock; Articles of
Amendment increasing authorized number of shares of
Common Stock; Articles of Amendment increasing
authorized number of shares of Preferred Stock;
Statement Affecting Class or Series of Shares with
respect to the establishment of the 8.24% Preferred
Stock; Statement Affecting Class or Series of Shares
with respect to the establishment of the 10.50%
Preferred Stock; Articles of Amendment increasing
authorized number of shares of Common Stock; Articles of
Amendment increasing authorized number of shares of
Preferred Stock; Statement Affecting Class or Series of
Shares with respect to the establishment of the 15.00%
Preferred Stock; Statement Affecting Class or Series of
Shares with respect to the establishment of the 11.50%
Preferred Stock; Articles of Amendment increasing
authorized number of shares of Preferred Stock;
Statement Affecting Class or Series of Shares with
respect to the establishment of the 13.00% Preferred
Stock; Statement Affecting Class or Series of Shares
with respect to the establishment of the 11.50%
Preferred Stock, Series B; Articles of Amendment
effective April 2, 1987, adding a standard of care for,
and limiting the personal liability of, officers and
directors; Articles of Amendment effective April 1,
1992, setting forth corporate purposes of the Company;
Statement With Respect to Shares with respect to the
establishment of the 7.625% Preferred Stock and
Statement with Respect to Shares with respect to the
establishment of the 7.75% Preferred Stock.(Physically
filed and designated respectively, as follows: in Form
A-2, Registration No. 2-3889, as Exhibit A-1; in Form 1-
MD for 1938, File No.2-3889, as Exhibit (a)-1; in Form
1-MD for 1945, File No. 2-3889, as Exhibit A; in Form U-
1, File No. 70-2310, as Exhibit A-3 (d); in Form 8-K for
March 1951, File No. 1-3491, as Exhibit B; in Form 8-K
for June 1958, File No. 1-3491B, as Exhibit 1; in Form
10-K for 1959 as Exhibits 1, 2, 3 and 4; in Form 8-K for
- 26 -
Exhibit
Number
- -------
March 1960, File No. 1-3491B as Exhibit A; in Form U-1,
File No. 70-3971, as Exhibit A-2; in Form U-1, File No.
70-4055, as Exhibit A-2; as Exhibits 1 through 8 in Form
8-K for January 1962, File No. 1-3491; as Exhibit A in
Form 8-K for August 1963, File No. 1-3491; as Exhibits
A and B in Form 8-K for September 1969, File No. 1-3491;
as Exhibit B in Form 8-K for April 1971, File No. 1-
3491; as Exhibit B in Form 8-K for September 1971, File
No. 1-3491; in Form U-1, File No. 70-5264, as Exhibit A-
2; as Exhibit A in Form 8-K for September 1972, File No.
1-3491; as Exhibit A in Form 8-K for December 1972, File
No. 1-3491; as Exhibit A in Form 8-K for March 1973,
File No. 1-3491; as Exhibit A in Form 8-K for December
1973, File No. 1-3491; as Exhibits A and C in Form 8-K
for February 1974, File No. 1-3491; as Exhibits A and B
in Form 8-K for January 1975, File No. 1-3491; as
Exhibit F in Form 8-K for May 1975, File No. 1-3491; as
Exhibit A in Form 8-K for April 1976, File No. 1-3491;
as Exhibit G in Form 10-Q for quarter ended June 30,
1977, File No. 1-3491; as Exhibit C in Form 10-K for
1977, File No. 1-3491; as Exhibit A in Form 10-K for
1977, File No. 1-3491; as Exhibit D in Form 10-Q for
quarter ended June 30, 1980, File No. 1-3491; as Exhibit
(4) in Form 10-Q for quarter ended June 30, 1981, File
No. 1-3491; as Exhibit 4 in Form 10-Q for quarter ended
June 30, 1982, File No. 1-3491; as Exhibit 4 in Form 10-
Q for quarter ended September 30, 1982, File No. 1-3491;
as Exhibit 4 in Form 10-Q for quarter ended September
30, 1983, File No. 1-3491; as Exhibit 4 in Form 10-Q for
quarter ended March 31, 1984, File No. 1-3491; as
Exhibit 4 in Form 10-Q for quarter ended June 30, 1984,
File No. 1-3491; as Exhibit 4 in Form 10-Q for quarter
ended September 30, 1985, File No. 1-3491; as Exhibit 3-
2 in Form 10-K for 1987 File No. 1-3491; as Exhibit 3-2
in Form 10-K for 1992 File No. 1-3491; as Exhibit 19-2
in Form 10-K for 1992 File No. 1-3491; and as Exhibit 3-
2 in Form 10-K for 1993 File No. 1-3491.)
3-2 - By-Laws of the Company as amended March 25, 1992.(1992
Form 10-K, Exhibit 3-3, File No. 1-3491.)
4-1*- Indenture dated as of November 1, 1945, between the
Company and The First National Bank of the City of New
York (now Citibank, N.A.), as Trustee, as supplemented
and amended by Supplemental Indentures dated as of May
1, 1948, March 1, 1950, February 1, 1952, October 1,
1957, September 1, 1962, June 1, 1963, June 1, 1969, May
1, 1970, April 1, 1971, October 1, 1971, May 1, 1972,
December 1, 1974, October 1, 1975, September 1,
- 27 -
Exhibit
Number
- -------
1976, April 15, 1978, June 28, 1979, January 1, 1980,
June 1, 1981, January 14, 1982, August 1, 1982, December
15, 1982, December 1, 1983, September 6, 1984, December
1, 1984, May 30, 1985, October 29, 1985, August 1, 1987,
May 1, 1988, November 1, 1989, December 1, 1990,
September 1, 1991, May 1, 1992, July 15, 1992, August 1,
1992, and May 1, 1993, July 1, 1993, August 31, 1993,
September 1, 1993, September 15, 1993, October 1, 1993,
November 1, 1993 and August 1, 1994. (Physically filed
and designated as Exhibits 2(b) (1)-1 through 2(b) (l)-
15 in Registration Statement File No. 2-60837; as
Exhibits 2(b) (2), 2(b) (3), and 2 (b) (4) in
Registration Statement File No. 2-68906; as Exhibit 4-2
in Form 10-K for 1981 File No. 1-3491; as Exhibit 19-1
in Form 10-K for 1982 File No. 1-3491; as Exhibit 19-1
in Form 10-K for 1983 File No. 1-3491; as Exhibit 19-1
in Form 10-K for 1984 File No. 1-3491; as Exhibit 19-1
in Form 10-K for 1985 File No. 1-3491; as Exhibit 19-1
in Form 10-K for 1987 File No. 1-3491; as Exhibit 19-1
in Form 10-K for 1988 File No. 1-3491; as Exhibit 19 in
Form 10-K for 1989 File No. 1-3491; as Exhibit 19 in
Form 10-K for 1990 File No. 1-3491; as Exhibit 19 in
Form 10-K for 1991 File No. 1-3491; as Exhibit 19-1 in
Form 10-K for 1992 File No. 1-3491; as Exhibit 4-2 in
Form 10-K for 1993 File No. 1-3491; and as Exhibit 4-2
in Form 10-K for 1994 File No. 1-3491.)
4-2 - Supplemental Indenture dated as of September 1, 1995,
between the Company and Citibank, N.A., as Trustee.
(1995 Form 10-K, Exhibit 4-2.)
10-1 - Administration Agreement between the CAPCO Group dated
as of September 14, 1967. (Registration Statement of
Ohio Edison Company, File No. 2-43102, Exhibit 5 (c)
(2).)
10-2 - Amendment No. 1 dated January 4, 1974 to Administration
Agreement between the CAPCO Group dated as of
September 14, 1967. (Registration Statement No. 2-68906,
Exhibit 5 (c)(3).)
- -----------------
* 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-K
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 instruments.
- 28 -
Exhibit
Number
- -------
10-3 - Transmission Facilities Agreement between the CAPCO
Group dated as of September 14, 1967. (Registration
Statement of Ohio Edison Company, File No. 2-43102,
Exhibit 5 (c)(3).)
10-4 - Amendment No. 1 dated as of January 1, 1993 to
Transmission Facilities Agreement between the CAPCO
Group dated as of September 14, 1967. (1993 Form 10-K,
Exhibit 10-4, Ohio Edison Company.)
10-5 - Agreement for the Termination or Construction of Certain
Agreements effective September 1, 1980 among the CAPCO
Group. (Registration Statement No. 2-68906, Exhibit 10-
4.)
10-6 - Amendment dated as of December 23, 1993 to Agreement for
the Termination or Construction of Certain Agreements
effective September 1, 1980 among the CAPCO Group. (1993
Form 10-K, Exhibit 10-6, Ohio Edison Company.)
10-7 - CAPCO Basic Operating Agreement, as amended September 1,
1980. (Registration Statement No. 2-68906, as Exhibit
10-5.)
10-8 - Amendment No. 1 dated August 1, 1981 and Amendment No.
2 dated September 1, 1982, to CAPCO Basic Operating
Agreement as amended September 1, 1980. (September 30,
1981 Form 10-Q, Exhibit 20-1, and 1982 Form 10-K,
Exhibit 19-3, File No. 1-2578, of Ohio Edison Company.)
10-9 - Amendment No. 3 dated as of July 1, 1984, to CAPCO Basic
Operating Agreement as amended September 1, 1980. (1985
Form 10-K, Exhibit 10-7, File No. 1-2578, of Ohio Edison
Company.)
10-10 - Basic Operating Agreement between the CAPCO Companies
as amended October 1, 1991. (1991 Form 10-K, Exhibit
10-8, File No. 1-2578, of Ohio Edison Company.)
10-11 - Basic Operating Agreement between the CAPCO Companies,
as amended January 1, 1993. (1993 Form 10-K,
Exhibit 10-11, Ohio Edison Company.)
10-12 - Memorandum of Agreement effective as of September 1,
1980, among the CAPCO Group. (1991 Form 10-K, Exhibit
19-2, Ohio Edison Company.)
- 29 -
Exhibit
Number
- -------
10-13 - Operating Agreement for Beaver Valley Power Station
Units Nos. 1 and 2 as Amended and Restated September
15, 1987, by and between the CAPCO Companies. (1987
Form 10-K, Exhibit 10-15, File No. 1-2578, of Ohio
Edison Company.)
10-14 - Construction Agreement with respect to Perry Plant
between the CAPCO Group dated as of July 22, 1974.
(Registration Statement of Toledo Edison Company, File
No. 2-52251, as Exhibit 5 (yy).)
10-15 - Participation Agreement No. 1 relating to the financing
of the development of certain coal mines, dated as of
October 1, 1973, among Quarto Mining Company, the CAPCO
Group, Energy Properties, Inc., General Electric Credit
Corporation, the Loan Participants listed in Schedules
A and B thereto, Central National Bank of Cleveland, as
Owner Trustee, National City Bank, as Loan Trustee, and
National City Bank, as Bond Trustee. (Registration
Statement of Ohio Edison Company, File No. 2-61146,
Exhibit 5 (e) (1).)
10-16 - Amendment No. 1 dated as of September 15, 1978, to
Participation Agreement No. 1 dated as of October 1,
1973, among Quarto Mining Company, the CAPCO Group,
Energy Properties, Inc., General Electric Credit
Corporation, the Loan Participants listed in Schedules
A and B thereto, Central National Bank of Cleveland, as
Owner Trustee, National City Bank, as Loan Trustee, and
National City Bank, as Bond Trustee. (Registration
Statement No. 2-68906, Exhibit 5 (e) (2).)
10-17 - Participation Agreement No. 2 relating to the financing
of the development of certain coal mines, dated as of
August 1, 1974, among Quarto Mining Company, the CAPCO
Group, Energy Properties, Inc., General Electric Credit
Corporation, the Loan Participants listed in Schedules
A and B thereto, Central National Bank of Cleveland, as
Owner Trustee, National City Bank, as Loan Trustee, and
National City Bank, as Bond Trustee. (Ohio Edison
Company, File No. 2-53059, Exhibit 5 (h)(2).)
10-18 - Amendment No. 1 dated as of September 15, 1978, to
Participation Agreement No. 2 dated as of August 1,
1974, among Quarto Mining Company, the CAPCO Group,
Energy Properties, Inc., General Electric Credit
Corporation, the Loan Participants listed in Schedules
A and B thereto, Central National Bank of Cleveland, as
- 30 -
Exhibit
Number
- -------
Owner Trustee, National City Bank, as Loan Trustee, and
National City Bank, as Bond Trustee. (Registration
Statement No. 2-68906, Exhibit 5 (e) (4).)
10-19 - Participation Agreement No. 3 relating to the financing
of the development of certain coal mines, dated as of
September 15, 1978, among Quarto Mining Company, the
CAPCO Group, Energy Properties, Inc., General Electric
Credit Corporation, the Loan Participants listed in
Schedules A and B thereto, Central National Bank of
Cleveland, as Owner Trustee, National City Bank, as
Loan Trustee, and National City Bank, as Bond Trustee.
(Registration Statement No. 2-68906, Exhibit 5 (e)
(5).)
10-20 - Participation Agreement No. 4 relating to the financing
of the development of certain coal mines, dated as of
October 31, 1980, among Quarto Mining Company, the
CAPCO Group, the Loan Participants listed in Schedule
A thereto and National City Bank, as Bond Trustee.
(Registration Statement No. 2-68906, Exhibit 10-16.)
10-21 - Participation Agreement No. 5 dated as of May 1, 1986,
among Quarto Mining Company, the CAPCO Companies, the
Loan Participants listed in Schedule A thereto, and
National City Bank, as Bond Trustee. (1986 Form 10-K,
Exhibit 10-22, File No. 1-2578, Ohio Edison Company.)
10-22 - Participation Agreement No. 6 dated as of December 1,
1991, among Quarto Mining Company, the CAPCO Companies,
the Loan Participants listed in Schedule A thereto,
National City Bank, as Mortgage Bond Trustee, and
National City Bank, as Refunding Bond Trustee. (1991
Form 10-K, Exhibit 10-19, File No. 1-2578, Ohio Edison
Company.)
10-23 - Agreement entered into as of October 20, 1981, among
the CAPCO Companies regarding the use of Quarto Coal at
Mansfield Units Nos. 1, 2 and 3. (1981 Form 10-K,
Exhibit 20-1, File No. 1-2578, Ohio Edison Company.)
10-24 - Restated Option Agreement dated as of May 1, 1983, by
and between The North American Coal Corporation and the
CAPCO Companies. (1983 Form 10-K, Exhibit 19-1, File
No. 1-2578, Ohio Edison Company.)
10-25 - Trust Indenture and Mortgage dated as of October 1,
1973, between Quarto Mining Company and National City
Bank, as Bond Trustee, together with Guaranty, dated as
- 31 -
Exhibit
Number
- -------
of October 1, 1973, with respect thereto by the CAPCO
Group. (Registration Statement of Ohio Edison Company,
File No. 2-61146, Exhibit 5 (e) (5).)
10-26 - Amendment No. 1 dated August 1, 1974, to Trust
Indenture and Mortgage dated as of October 1, 1973,
between Quarto Mining Company and National City Bank,
as Bond Trustee, together with Amendment No. 1 dated
August 1, 1974, to Guaranty dated as of October 1,
1973, with respect thereto by the CAPCO Group.
(Registration Statement of Ohio Edison Company, File
No. 2-53059, Exhibit 5 (h) (2).)
10-27 - Amendment No. 2 dated as of September 15, 1978, to
Trust Indenture and Mortgage dated as of October 1,
1973, as amended, between Quarto Mining Company and
National City Bank, as Bond Trustee, together with
Amendment No. 2 dated as of September 15, 1978, to Bond
Guaranty dated as of October 1, 1973, as amended,
between the CAPCO Group and National City Bank, as Bond
Trustee. (Registration Statement No. 2-68906, Exhibits
5 (e) (11) and 5 (e) (12).)
10-28 - Amendment No. 3 dated as of October 31, 1980, to Trust
Indenture and Mortgage dated as of October 1, 1973, as
amended, between Quarto Mining Company and National
City Bank, as Bond Trustee. (Registration Statement No.
2-68906, Exhibit 10-16.)
10-29 - Amendment No. 4 dated as of July 1, 1985, to Trust
Indenture and Mortgage dated as of October 1, 1973, as
amended, between Quarto Mining Company and National
City Bank, as Bond Trustee. (1985 Form 10-K, Exhibit
10-28, File No. 1-2578, Ohio Edison Company.)
10-30 - Amendment No. 5 dated as of May 1, 1986, to Trust
Indenture and Mortgage dated as of October 1, 1973, as
amended, between Quarto Mining Company and National
City Bank, as Bond Trustee. (1986 Form 10-K, Exhibit
10-30, File No. 1-2578, Ohio Edison Company.)
10-31 - Amendment No. 6 dated as of December 1, 1991, to Trust
Indenture and Mortgage dated as of October 1, 1973, as
amended, between Quarto Mining Company and National
City Bank, as Bond Trustee. (1991 Form 10-K, Exhibit
10-28, File No. 1-2578, Ohio Edison Company.)
- 32 -
Exhibit
Number
- -------
10-32 - Trust Indenture dated as of December 1, 1991, between
Quarto Mining Company and National City Bank, as Bond
Trustee. (1991 Form 10-K, Exhibit 10-29, File No. 1-
2578, Ohio Edison Company.)
10-33 - Amendment No. 3 dated as of October 31, 1980, to the
Bond Guaranty dated as of October 1, 1973, as amended,
with respect to the CAPCO Group. (Registration
Statement No. 2-68906, Exhibit 10-16.)
10-34 - Amendment No. 4 dated as of July 1, 1985, to the Bond
Guaranty dated as of October 1, 1973, as amended, by
the CAPCO Companies to National City Bank, as Bond
Trustee. (1985 Form 10-K, Exhibit 10-30 , File No. 1-
2578, Ohio Edison Company.)
10-35 - Amendment No. 5 dated as of May 1, 1986, to the Bond
Guaranty dated as of October 1, 1973, as amended, by
the CAPCO Companies to National City Bank, as Bond
Trustee. (1986 Form 10-K, Exhibit 10-33, File No. 1-
2578, Ohio Edison Company.)
10-36 - Amendment No. 6A dated as of December 1, 1991, to the
Bond Guaranty dated as of October 1, 1973, as amended,
by the CAPCO Companies to National City Bank, as Bond
Trustee. (1991 Form 10-K, Exhibit 10-33, File No. 1-
2578, Ohio Edison Company.)
10-37 - Amendment No. 6B dated as of December 30, 1991, to the
Bond Guaranty dated as of October 1, 1973, as amended,
by the CAPCO Companies to National City Bank, as Bond
Trustee. (1991 Form 10-K, Exhibit 10-34, File No. 1-
2578, Ohio Edison Company.)
10-38 - Bond Guaranty dated as of December 1, 1991, by the
CAPCO Companies to National City Bank, as Bond Trustee.
(1991 Form 10-K, Exhibit 10-35, File No. 1-2578, Ohio
Edison Company.)
10-39 - Open End Mortgage dated as of October 1, 1973, between
Quarto Mining Company and the CAPCO Companies and
Amendment No. 1 thereto dated as of September 15, 1978.
(Registration Statement No. 2-68906, Exhibit 10-23.)
10-40 - Restructuring Agreement dated as of April 1, 1985,
among Quarto Mining Company, the CAPCO Companies,
Energy Properties, Inc., General Electric Credit
Corporation, the Loan Participants listed in schedules
thereto, Central National Bank of Cleveland, as Owner
- 33 -
Exhibit
Number
- -------
Trustee, National City Bank, as Loan Trustee, and
National City Bank, as Bond Trustee. (1985 Form 10-K,
Exhibit 10-33, File No. 1-2578, Ohio Edison Company.)
10-41 - Unsecured Note Guaranty dated as of July 1, 1985, by
the CAPCO Companies to General Electric Credit
Corporation. (1985 Form 10-K, Exhibit 10-34, File No.
1-2578, Ohio Edison Company.)
10-42 - Memorandum of Understanding dated as of March 31, 1985,
among the CAPCO Companies. (1985 Form 10-K, Exhibit 10-
35, File No. 1-2578, Ohio Edison Company.)
(B) 10-43 - Ohio Edison System Executive Supplemental Life
Insurance Plan. (1995 Form 10-K, Exhibit 10-44, File
No. 1-2578, Ohio Edison Company.)
(B) 10-44 - Ohio Edison System Executive Incentive Compensation
Plan. (1995 Form 10-K, Exhibit 10-45, File No. 1-2578,
Ohio Edison Company.)
(B) 10-45 - Ohio Edison System Restated and Amended Executive
Deferred Compensation Plan. (1995 Form 10-K, Exhibit
10-46, File No. 1-2578, Ohio Edison Company.)
(B) 10-46 - Ohio Edison System Restated and Amended Supplemental
Executive Retirement Plan. (1995 Form 10-K, Exhibit 10-
47, File No. 1-2578, Ohio Edison Company.)
10-47 - Operating Agreement for Perry Unit No. 1 dated March
10, 1987, by and between the CAPCO Companies. (1987
Form 10-K, Exhibit 28-24, File No. 1-2578, Ohio Edison
Company.)
10-48 - Operating Agreement for Bruce Mansfield Units Nos. 1,
2 and 3 dated as of June 1, 1976, and executed on
September 15, 1987, by and between the CAPCO Companies.
(1987 Form 10-K, Exhibit 28-25, File No. 1-2578, Ohio
Edison Company.)
10-49 - Operating Agreement for W. H. Sammis Unit No. 7 dated
as of September 1, 1971, by and between the CAPCO
Companies. (1987 Form 10-K, Exhibit 28-26, File No. 1-
2578, Ohio Edison Company.)
10-50 - OE-APS Power Interchange Agreement dated March 18,
1987, by and among Ohio Edison Company and Pennsylvania
Power Company, and Monongahela Power Company and West
Penn Power Company and The Potomac Edison Company.
- 34 -
Exhibit
Number
- -------
(1987 Form 10-K, Exhibit 28-27, File No. 1-2578, of
Ohio Edison Company.)
10-51 - OE-PEPCO Power Supply Agreement dated March 18, 1987,
by and among Ohio Edison Company and Pennsylvania Power
Company and Potomac Electric Power Company. (1987 Form
10-K, Exhibit 28-28, File No. 1-2578, of Ohio Edison
Company.)
10-52 - Supplement No. 1 dated as of April 28, 1987, to the OE-
PEPCO Power Supply Agreement dated March 18, 1987, by
and among Ohio Edison Company, Pennsylvania Power
Company and Potomac Electric Power Company. (1987 Form
10-K, Exhibit 28-29, File No. 1-2578, of Ohio Edison
Company.)
10-53 - APS-PEPCO Power Resale Agreement dated March 18, 1987,
by and among Monongahela Power Company, West Penn Power
Company, and The Potomac Edison Company and Potomac
Electric Power Company. (1987 Form 10-K, Exhibit 28-30,
File No. 1-2578, of Ohio Edison Company.)
10-54 - Pennsylvania Power Company Master Decommissioning Trust
Agreement for Beaver Valley Power Station and Perry
Nuclear Power Plant dated as of April 21, 1995.
(Quarter ended June 30, 1995 Form 10-Q, Exhibit 10,
File No. 1-3491.)
10-55 - Nuclear Fuel Lease dated as of March 31, 1989, between
OES Fuel, Incorporated, as Lessor, and Pennsylvania
Power Company, as Lessee. (1989 Form 10-K, Exhibit 10-
39, File No. 1-3491.)
(A) 12 - Fixed Charge Ratios
(A) 13 - 1996 Annual Report to Stockholders. (Only those
portions expressly incorporated by reference in this
Form 10-K are to be deemed "filed" with the Securities
and Exchange Commission.)
(A) 23 - Consent of Independent Public Accountants.
(A) 27 - Financial Data Schedule
(A) Provided herein in electronic format as an exhibit.
(B) Management contract or compensatory plan contract or
arrangement filed pursuant to Item 601 of Regulation S-K.
- 35 -
Pursuant to Rule 14a - 3(10) of the Securities Exchange Act of
1934, the Company will furnish any exhibit in this Report upon
the payment of the Company's expenses in furnishing such
exhibit.
(b) Reports on Form 8-K
None.
- 36 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Pennsylvania Power
Company:
We have audited, in accordance with generally accepted
auditing standards, the financial statements included in
Pennsylvania Power Company's Annual Report to Stockholders
incorporated by reference in this Form 10-K and have issued our
report thereon dated February 7, 1997. Our audit was made for the
purpose of forming an opinion on those statements taken as a whole.
The schedule listed in Item 14 is the responsibility of the
Company's management and is presented for the purpose of complying
with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected
to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
February 7, 1997
- 37 -
<TABLE>
SCHEDULE II
PENNSYLVANIA POWER COMPANY
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<CAPTION>
Additions
-----------------------
Charged
Beginning Charged to Other Ending
Description Balance to Income Accounts Deductions Balance
----------- ---------- --------- -------- ---------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996:
Accumulated provision for
uncollectible accounts $ 563 $ 1,308 $ 362(a) $ 1,664(b) $ 569
======== ======= ===== ======== ======
Year Ended December 31, 1995:
Accumulated provision for
uncollectible accounts $ 515 $ 1,140 $ 344(a) $ 1,436(b) $ 563
======== ======= ===== ======== ======
Year Ended December 31, 1994:
Accumulated provision for
uncollectible accounts $ 559 $ 1,020 $ 328(a) $ 1,392(b) $ 515
======== ======= ===== ======= ======
<FN>
- -------------------------
(a) Represents recoveries and reinstatements of accounts
previously written off.
(b) Represents the write-off of accounts considered to be uncollectible.
</TABLE>
- 38 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PENNSYLVANIA POWER COMPANY
BY /s/Willard R.Holland
--------------------------------
Willard R. Holland
Chairman of the Board and
Chief Executive Officer
Date: March 21, 1997
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the date indicated:
/s Willard R. Holland /s/Robert P. Wushinske
- ---------------------------------- ------------------------------
Willard R. Holland Robert P. Wushinske
Chairman of the Board and Chief Vice President and Treasurer
Executive Officer (Principal (Principal Accounting
Executive Officer and Officer)
Principal Financial Officer)
/s/H. Peter Burg /s/Jack E. Reed
- ---------------------------------- ------------------------------
H. Peter Burg Jack E. Reed
Director Director
/s/R. Joseph Hrach
- ---------------------------------- ------------------------------
R. Joseph Hrach Richard L. Werner
Director Director
/s/Joseph J. Nowak
- ----------------------------------
Joseph J. Nowak
Director
Date: March 21, 1997
- 39 -
<TABLE> EXHIBIT 12
Page 1
PENNSYLVANIA POWER COMPANY
RATIO OF EARNINGS TO FIXED CHARGES
<CAPTION>
Year Ended December 31,
-----------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
EARNINGS AS DEFINED IN REGULATION S-K:
Income before extraordinary items $30,956 $15,664 $31,260 $ 38,930 $ 40,587
Add-
Interest before reduction for amounts capitalized 37,028 35,262 34,947 31,350 27,889
Provision for income taxes 21,079 12,865 24,333 32,591 33,421
Interest element of rentals charged to income (a) 2,121 1,662 1,652 1,865 1,868
------- ------- ------- -------- --------
Earnings as defined $91,184 $65,453 $92,192 $104,736 $103,765
======= ======= ======= ======== ========
FIXED CHARGES AS DEFINED IN REGULATION S-K:
Interest on long-term debt $35,707 $33,208 $32,130 $ 28,937 $ 25,715
Interest on nuclear fuel obligations 457 401 519 407 219
Other interest expense 864 1,653 2,298 2,006 1,955
Interest element of rentals charged to income (a) 2,121 1,662 1,652 1,865 1,868
------- ------- ------- -------- --------
Fixed charges as defined $39,149 $36,924 $36,599 $ 33,215 $ 29,757
======= ======= ======= ======== ========
RATIO OF EARNINGS TO FIXED CHARGES (b) 2.33 1.77 2.52 3.15 3.49
==== ==== ==== ==== ====
<FN>
- ------------------------
(a) Includes the interest element of rentals where determinable plus 1/3
of rental expense where no readily defined interest element can be
determined.
(b) These ratios exclude fixed charges applicable to the guarantee of the
debt of a coal supplier aggregating $1,227,000, $1,078,000, $935,000,
$795,000 and $642,000 for each of the five years ended December 31,
1996, respectively.
</TABLE>
<TABLE> EXHIBIT 12
Page 2
PENNSYLVANIA POWER COMPANY
RATIO OF EARNINGS TO FIXED CHARGES PLUS PREFERRED
STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS)
<CAPTION>
Year Ended December 31,
-----------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
EARNINGS AS DEFINED IN REGULATION S-K:
Income before extraordinary items $30,956 $15,664 $31,260 $ 38,930 $ 40,587
Add-
Interest before reduction for amounts capitalized 37,028 35,262 34,947 31,350 27,889
Provision for income taxes 21,079 12,865 24,333 32,591 33,421
Interest element of rentals charged to income (a) 2,121 1,662 1,652 1,865 1,868
------- ------- ------- -------- --------
Earnings as defined $91,184 $65,453 $92,192 $104,736 $103,765
======= ======= ======= ======== ========
FIXED CHARGES AS DEFINED IN REGULATION S-K
PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS
(PRE-INCOME TAX BASIS):
Interest on long-term debt $35,707 $33,208 $32,130 $ 28,937 $ 25,715
Interest on nuclear fuel obligations 457 401 519 407 219
Other interest expense 864 1,653 2,298 2,006 1,955
Preferred stock dividend requirements 6,499 5,863 5,364 4,775 4,626
Adjustment to preferred stock dividends
to state on a pre-income tax basis 4,376 4,757 4,121 3,939 3,751
Interest element of rentals charged to income (a) 2,121 1,662 1,652 1,865 1,868
------- ------- ------- -------- --------
Fixed charges as defined plus preferred
stock dividend requirements (pre-income
tax basis) $50,024 $47,544 $46,084 $ 41,929 $ 38,134
======= ======= ======= ======== ========
RATIO OF EARNINGS TO FIXED CHARGES PLUS
PREFERRED STOCK DIVIDEND REQUIREMENTS
(PRE-INCOME TAX BASIS) (b) 1.82 1.38 2.00 2.50 2.72
==== ==== ==== ==== ====
<FN>
- ------------------------------
(a) Includes the interest element of rentals where determinable plus
1/3 of rental expense where no readily defined interest element can
be determined.
(b) These ratios exclude fixed charges applicable to the guarantee of the
debt of a coal supplier aggregating $1,227,000, $1,078,000, $935,000,
$795,000 and $642,000 for each of the five years ended December 31,
1996, respectively.
</TABLE>
<TABLE>
SELECTED FINANCIAL DATA Pennsylvania Power Company
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 322,625 $ 314,642 $ 301,965 $ 292,084 $ 315,458
========== ========== ========== ========== ==========
Net Income $ 40,587 $ 38,930 $ 31,260 $ 21,317 $ 30,956
========== ========== ========== ========== ==========
Earnings on Common Stock $ 35,961 $ 34,155 $ 25,896 $ 15,454 $ 24,457
========== ========== ========== ========== ==========
Return on Average Common Equity 12.8% 12.9% 10.0% 5.9% 9.2%
==== ==== ==== === ===
Cash Dividends on Common Stock $ 21,386 $ 21,386 $ 21,386 $ 21,386 $ 27,676
========== ========== ========== ========== ==========
Total Assets $1,065,895 $1,146,404 $1,193,198 $1,180,983 $ 986,158
========== ========== ========== ========== ==========
CAPITALIZATION:
Common Stockholder's Equity $ 286,504 $ 271,920 $ 258,973 $ 254,782 $ 261,518
Preferred Stock-
Not Subject to Mandatory Redemption 50,905 50,905 50,905 50,905 41,905
Subject to Mandatory Redemption 15,000 15,000 15,000 20,500 30,362
Long-Term Debt 310,996 338,670 424,457 440,555 398,630
---------- ---------- ---------- ---------- ----------
Total Capitalization $ 663,405 $ 676,495 $ 749,335 $ 766,742 $ 732,415
========== ========== ========== ========== ===========
CAPITALIZATION RATIOS:
Common Stockholder's Equity 43.2% 40.2% 34.6% 33.2% 35.7%
Preferred Stock-
Not Subject to Mandatory Redemption 7.7 7.5 6.8 6.6 5.7
Subject to Mandatory Redemption 2.2 2.2 2.0 2.7 4.2
Long-Term Debt 46.9 50.1 56.6 57.5 54.4
----- ----- ----- ----- -----
Total Capitalization 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
KILOWATT-HOUR SALES (Millions):
Residential 1,254 1,195 1,178 1,105 1,050
Commercial 996 938 891 831 782
Industrial 1,693 1,558 1,293 1,212 1,674
Other 126 151 148 139 138
----- ----- ----- ----- -----
Subtotal 4,069 3,842 3,510 3,287 3,644
Parent Company 221 250 468 469 786
Other Utilities 765 685 466 748 906
----- ----- ----- ----- -----
Total 5,055 4,777 4,444 4,504 5,336
===== ===== ===== ===== =====
CUSTOMERS SERVED:
Residential 127,936 126,480 124,951 123,316 121,879
Commercial 16,531 16,317 15,966 15,593 15,348
Industrial 225 223 219 221 235
Other 99 97 98 97 100
------- ------- ------- ------- -------
Total 144,791 143,117 141,234 139,227 137,562
======= ======= ======= ======= =======
Average Annual Residential
Kilowatt-Hours Used 9,866 9,505 9,501 9,017 8,672
Cost of Fuel per Million Btu $ 1.09 $ 1.12 $ 1.20 $ 1.28 $ 1.26
Peak Load (Megawatts) 792 836 710 690 734
Generating Capability:
Coal 72.1% 72.1% 72.1% 74.6% 74.6%
Oil 3.0 3.0 3.0 2.8 2.8
Nuclear 24.9 24.9 24.9 22.6 22.6
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
SOURCES OF ELECTRIC GENERATION:
Coal 67.6% 65.6% 69.6% 76.8% 68.3%
Nuclear 32.4 34.4 30.4 23.2 31.7
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
NUMBER OF EMPLOYEES 1,015 1,220 1,255 1,355 1,432
===== ===== ===== ===== =====
</TABLE>
- 1 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS-We continued to make significant progress during
1996 as the electric utility industry becomes more competitive in
Pennsylvania. We achieved record operating revenues in 1996 over the
previous record set in 1991. The higher revenues and our aggressive cost
control efforts led to our third consecutive annual increase in net
income. Our 1996 results reflect accelerated depreciation and amortization
of nuclear and regulatory assets totaling approximately $28.5 million
under our Rate Stability and Economic Development Plan.
Our ongoing commitment to cost control continues to produce good
results. Total operation and maintenance expenses in 1996 were lower than
any year since our newest generating unit began commercial operation in
1987. A review of the work we do was an integral part of the Performance
Initiatives program that began in 1993 and continues as a part of our
Corporate Strategy program. Efficiencies continue to be identified which
have resulted in further opportunities for restructuring. In 1996, we
reduced our work force by 205 employees, mostly from restructuring
activities in our districts and our generation group. We expect these
actions to result in annual savings of approximately $13 million. Also,
using economic value added-based justification for capital spending
contributed to a $12 million reduction in our construction expenditures in
1996, compared to our base year of 1993.
Higher operating revenues in 1996 were due to increased retail
sales, which were partially offset by a decrease in other operating
revenues resulting from reduced billings to Ohio Edison for Bruce
Mansfield Plant costs. The following table summarizes the sources of
changes in operating revenues for 1996 and 1995 as compared to the
previous year:
1996 1995
---- ----
(In millions)
Increased retail kilowatt-hour sales $16.5 $18.6
Change in average retail electricity price 0.3 (5.1)
Sales to utilities (0.2) (0.8)
Other (8.6) -
----- -----
Net Increase $ 8.0 $12.7
===== =====
The 1995 start-up of Caparo Steel Company, which purchased the
assets of Sharon Steel Corporation, and an improving local economy helped
us achieve a 6.8% increase in retail sales, following a 9.8% gain in 1995.
Our customer base continues to grow with over 1,600 new retail customers
added in 1996, after gaining nearly 1,900 customers the previous year.
Residential sales were up 4.9% in 1996, after rising 1.5% last year.
- 2 -
Commercial sales followed the same trend, increasing 6.1% and 5.3% in 1996
and 1995, respectively. Industrial sales increased 8.7% during the year.
Excluding Caparo, industrial sales were up 1.9% in 1996 after increasing
6.3% the previous year. Sales to other utilities increased 5.5% in 1996,
and were relatively flat in 1995 compared to 1994. As a result of these
factors, total kilowatt-hour sales were up 5.8% in 1996, following a 7.5%
increase in 1995.
Because of higher kilowatt-hour sales, we spent more on fuel and
purchased power in 1996 and 1995. Nuclear operating costs dropped 32.6% in
1996 due principally to lower refueling outage cost levels. Other
operating costs in 1996 were slightly above the 1995 level, which
decreased in comparison to 1994 due to a charge that year of approximately
$8.4 million for a voluntary retirement program offered to qualifying
employees.
Higher depreciation charges in 1996 resulted mainly from $20
million of accelerated nuclear depreciation recognized under our
regulatory plan referred to above. A higher level of depreciable utility
plant and an increase in the accrual for nuclear decommissioning costs
contributed to the 1995 increase, compared with the previous year. The
1996 change in amortization of net regulatory assets was due to the cost
recovery taking place under our regulatory plan. 1995 results reflect no
amortization of regulatory assets because we stopped deferring
postretirement benefit costs in 1994 and provided a reserve against the
amounts which had been deferred in 1993. The changes in general taxes are
primarily due to 1995 property tax adjustments that totaled approximately
$4.7 million.
The increase in other income, compared to 1995, is principally
due to a 1996 adjustment to the recoverable costs related to Perry Unit 2
as a result of our rate stability plan. Interest costs were lower in 1996
and 1995 due to our economic refinancings and redemption of higher-cost
debt. During 1996, we reduced our total debt by more than $80 million.
Preferred stock dividend requirements were down in 1995 due to the
redemption of preferred stock in the second half of 1994. The 1994 amount
also included a $325,000 charge for premiums paid on preferred stock
redeemed in that year.
CAPITAL RESOURCES AND LIQUIDITY-Over the past five years, we have
significantly improved our financial position as evidenced by our enhanced
fixed charge coverage ratios and the percentage of common equity to total
capitalization. Our SEC ratio of earnings to fixed charges improved to
3.49 at the end of 1996 from 2.37 at the end of 1991. The Company's
indenture ratio, which is used to determine our ability to issue first
mortgage bonds, increased from 3.36 at the end of 1991 to 4.96 at the end
of 1996. Over the same period, the charter ratio-a measure of our ability
to issue preferred stock-improved from 1.75 to 2.33, and our common equity
percentage of capitalization rose from approximately 35% at the end of
1991 to over 43% at the end of 1996.
- 3 -
All cash requirements for the year, including debt repayments,
were met with internally generated funds. Our cash requirements in 1997
for operating expenses, construction expenditures and scheduled debt
maturities are expected to be met without issuing additional securities.
Cash requirements of approximately $26 million for the 1997-2001 period to
meet scheduled maturities of long-term debt are also expected to be funded
internally.
We had about $4 million of cash and temporary investments and no
short-term indebtedness on December 31, 1996. We also had $2 million of
unused short-term bank lines of credit, and $12 million of bank facilities
that provide for borrowings on a short-term basis at the banks'
discretion.
During 1996, our capital spending (excluding nuclear fuel)
totaled approximately $20 million. Our capital spending for the period
1997-2001 is expected to be about $100 million (excluding nuclear fuel),
of which approximately $21 million applies to 1997. This is about $38
million lower than actual capital outlays over the past five years.
Investments for additional nuclear fuel during the 1997-2001
period are estimated to be approximately $33 million, of which about $9
million applies to 1997. During the same periods, our nuclear fuel
investments are expected to be reduced by approximately $32 million and $7
million, respectively, as the nuclear fuel is consumed.
Reference is made to Note 1 for a discussion of regulatory
assets. In accordance with our regulatory plan, electric rates include
recovery of all regulatory assets, including accelerated recovery of those
regulatory assets.
OUTLOOK-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. The
new Pennsylvania law also establishes procedures and standards for the
recovery of stranded costs over an eight to nine-year period in the form
of a transition charge on customer billings, and allows utilities to seek
Pennsylvania Public Utility Commission (PPUC) approval to securitize, or
refinance, stranded costs which have been determined by the PPUC to be
recoverable. This legislation continues to provide for cost recovery in a
manner which meets the criteria for application of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types
of Regulation."
Our regulatory plan provides the foundation to position us to
meet the challenges we are facing by significantly reducing fixed costs
and lowering rates to a more competitive level. For the plan to succeed,
it is imperative that we build on the success of our Performance
Initiatives and Corporate Strategy programs and continue to find ways to
increase revenue, reduce costs and enhance shareholder value.
- 4 -
On September 13, 1996, our parent company, Ohio Edison, entered
into an agreement to merge with Centerior Energy Corporation under a new
holding company called FirstEnergy Corp. If the merger is approved, Ohio
Edison will become a subsidiary of FirstEnergy, but will remain the
Company's parent.
The Financial Accounting Standards Board (FASB) issued a
proposed accounting standard for nuclear decommissioning costs in February
1996. If the standard is adopted as proposed: (1) annual provisions for
decommissioning could increase; (2) the net present value of estimated
decommissioning costs could be recorded as a liability; and (3) income
from the external decommissioning trusts could be reported as investment
income. The FASB has indicated that it plans to issue a revised proposal
or final accounting standard in 1997.
The Clean Air Act Amendments of 1990, discussed in Note 6,
require additional emission reductions by 2000. We are pursuing cost-
effective compliance strategies for meeting the reduction requirements
that begin in 2000.
- 5 -
<TABLE>
STATEMENTS OF INCOME Pennsylvania Power Company
- -------------------------------------------------------------------------------------------------
<CAPTION>
For the Years Ended December 31, 1996 1995 1994
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
OPERATING REVENUES $322,625 $314,642 $301,965
-------- -------- --------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 67,443 63,059 59,529
Nuclear operating costs 22,064 32,759 33,480
Other operating costs 59,753 58,959 65,424
-------- -------- --------
Total operation and maintenance expenses 149,260 154,777 158,433
Provision for depreciation 51,579 33,152 29,108
Amortization of net regulatory assets 5,535 - 4,339
General taxes 24,015 28,278 23,137
Income taxes 29,907 31,118 23,280
-------- -------- --------
Total operating expenses and taxes 260,296 247,325 238,297
-------- -------- --------
OPERATING INCOME 62,329 67,317 63,668
OTHER INCOME 5,760 2,213 1,811
-------- -------- --------
TOTAL INCOME 68,089 69,530 65,479
-------- -------- --------
NET INTEREST:
Interest on long-term debt 25,715 28,937 32,130
Interest on nuclear fuel obligations 219 407 519
Allowance for borrowed funds used during
construction (387) (750) (728)
Other interest expense 1,955 2,006 2,298
-------- -------- --------
Net interest 27,502 30,600 34,219
-------- -------- --------
NET INCOME 40,587 38,930 31,260
PREFERRED STOCK DIVIDEND REQUIREMENTS 4,626 4,775 5,364
-------- -------- --------
EARNINGS ON COMMON STOCK $ 35,961 $ 34,155 $ 25,896
======== ======== ========
<FN>
The accompanying Notes to Financial Statements are an integral part of
these statements.
</TABLE>
- 6 -
<TABLE>
BALANCE SHEETS Pennsylvania Power Company
- --------------------------------------------------------------------------------------------
<CAPTION>
At December 31, 1996 1995
-------- --------
(In thousands)
ASSETS
<S> <C> <C>
UTILITY PLANT:
In service, at original cost $1,228,618 $1,215,274
Less-Accumulated provision for depreciation 465,003 426,974
---------- ----------
763,615 788,300
---------- ----------
Construction work in progress-
Electric plant 7,645 10,997
Nuclear fuel 1,803 7,858
---------- ----------
9,448 18,855
---------- ----------
773,063 807,155
---------- ----------
OTHER PROPERTY AND INVESTMENTS 21,131 14,550
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 1,387 20,984
Notes receivable from parent company (Note 4) 2,500 22,000
Accounts receivable-
Customers (less accumulated provisions of $569,000
and $563,000, respectively, for uncollectible accounts) 38,054 35,987
Parent company 14,450 14,965
Other 14,970 15,329
Materials and supplies, at average cost 14,269 15,588
Prepayments 1,576 2,113
---------- ----------
87,206 126,966
========== ==========
DEFERRED CHARGES:
Regulatory assets 177,283 189,900
Other 7,212 7,833
---------- ----------
184,495 197,733
---------- ----------
$1,065,895 $1,146,404
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (See Statements of Capitalization):
Common stockholder's equity $ 286,504 $ 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 7,245 11,648
Other 303,751 327,022
---------- ---------
663,405 676,495
---------- ---------
CURRENT LIABILITIES:
Currently payable long-term debt-
Associated companies 6,784 6,180
Other 712 53,817
Accounts payable-
Associated companies 8,084 10,593
Other 25,686 26,013
Accrued taxes 14,823 16,221
Accrued interest 7,382 8,487
Other 21,199 28,345
---------- ----------
84,670 149,656
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 253,776 260,458
Accumulated deferred investment tax credits 28,383 30,521
Other 35,661 29,274
---------- ----------
317,820 320,253
---------- ----------
COMMITMENTS, GUARANTEES AND CONTINGENCIES (Notes 2 & 5) ---------- ----------
$1,065,895 $1,146,404
========== ==========
<FN>
The accompanying Notes to Financial Statements are an integral part of
these balance sheets.
</TABLE>
- 7 -
<TABLE>
STATEMENTS OF CAPITALIZATION Pennsylvania Power Company
- -------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<CAPTION>
At December 31, 1996 1995
-------- --------
<C> <C>
COMMON STOCKHOLDER'S EQUITY:
Common stock, $30 par value, 6,500,000 shares authorized, 6,290,000 shares outstanding $188,700 $188,700
Other paid-in capital (413) (422)
Retained earnings (Note 3a) 98,217 83,642
-------- --------
Total common stockholder's equity 286,504 271,920
-------- --------
Number of Shares Optional
Outstanding Redemption Price
-------------------- ------------------------
1996 1995 Per Share Aggregate
-------- -------- --------- ---------
<C> <C> <C> <C>
PREFERRED STOCK (Note 3b):
Cumulative, $100 par value-
Authorized 1,200,000 shares
Not subject to mandatory redemption:
4.24% 40,000 40,000 $ 103.13 $ 4,125 4,000 4,000
4.25% 41,049 41,049 105.00 4,310 4,105 4,105
4.64% 60,000 60,000 102.98 6,179 6,000 6,000
7.64% 60,000 60,000 101.42 6,085 6,000 6,000
7.75% 250,000 250,000 - - 25,000 25,000
8.00% 58,000 58,000 102.07 5,920 5,800 5,800
------- ------- -------- -------- --------
Total not subject to
mandatory redemption 509,049 509,049 $ 26,619 50,905 50,905
======= ======= ======== -------- --------
Subject to mandatory
redemption (Note 3c):
7.625% 150,000 150,000 15,000 15,000
======= ======= -------- --------
LONG-TERM DEBT (Note 3d):
First mortgage bonds-
9.000% due 1996 - 50,000
9.740% due 1999-2019 20,000 20,000
7.500% due 2003 40,000 40,000
6.375% due 2004 37,000 50,000
6.625% due 2004 20,000 20,000
8.500% due 2022 27,250 27,250
7.625% due 2023 6,500 19,500
-------- --------
Total first mortgage bonds 150,750 226,750
-------- --------
Secured notes-
4.750% due 1998 850 850
6.080% due 2000 23,000 23,000
5.400% due 2013 1,000 1,000
5.400% due 2017 10,600 10,600
7.150% due 2017 17,925 17,925
5.900% due 2018 16,800 16,800
8.100% due 2018 10,300 10,300
8.100% due 2020 5,200 5,200
7.150% due 2021 14,482 14,482
6.150% due 2023 12,700 12,700
6.450% due 2027 14,500 14,500
5.450% due 2028 6,950 6,950
6.000% due 2028 14,250 14,250
5.950% due 2029 238 238
-------- --------
Total secured notes 148,795 148,795
Other obligations-
Nuclear fuel 14,029 17,828
Capital leases (Note 2) 5,651 6,309
-------- --------
Total other obligations 19,680 24,137
-------- --------
Net unamortized discount on debt (733) (1,015)
-------- --------
Long-term debt due within one year (7,496) (59,997)
-------- --------
Total long-term debt 310,996 338,670
-------- --------
TOTAL CAPITALIZATION $663,405 $676,495
======== ========
<FN>
The accompanying Notes to Financial Statements are an integral part of
these statements.
</TABLE>
- 8 -
<TABLE>
STATEMENTS OF RETAINED EARNINGS Pennsylvania Power Company
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
For the Years Ended December 31, 1996 1995 1994
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 83,642 $ 70,873 $ 66,392
Net income 40,587 38,930 31,260
-------- -------- --------
124,229 109,803 97,652
-------- -------- --------
Cash dividends on common stock 21,386 21,386 21,386
Cash dividends on preferred stock 4,626 4,775 5,035
Premium on redemption of preferred stock - - 358
-------- -------- --------
26,012 26,161 26,779
-------- -------- --------
Balance at end of year (Note 3a) $ 98,217 $ 83,642 $ 70,873
======== ======== ========
STATEMENTS OF CAPITAL STOCK AND OTHER PAID-IN CAPITAL
- -----------------------------------------------------------------------------------------------------------------
Preferred Stock
-------------------------------------------
Not Subject to Subject to
Common Stock Mandatory Redemption Mandatory Redemption
------------------------------ -------------------- --------------------
Other
Number Par Paid-In Number Par Number Par
of Shares Value Capital of Shares Value of Shares Value
--------- --------- ------- --------- ------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 6,290,000 $188,700 $(310) 509,049 $50,905 213,616 $21,362
Minimum liability for unfunded
retirement benefits (290)
Redemptions-
11.00% Series (3,616) (362)
13.00% Series (60,000) (6,000)
--------- -------- ----- ------- ------- ------- -------
Balance, December 31, 1994 6,290,000 188,700 (600) 509,049 50,905 150,000 15,000
Minimum liability for unfunded
retirement benefits 178
--------- -------- ----- ------- ------- ------- -------
Balance, December 31, 1995 6,290,000 188,700 (422) 509,049 50,905 150,000 15,000
Minimum liability for unfunded
retirement benefits 9
--------- -------- ----- ------- ------- ------- -------
Balance, December 31, 1996 6,290,000 $188,700 $(413) 509,049 $50,905 150,000 $15,000
========= ======== ===== ======= ======= ======= =======
<FN>
The accompanying Notes to Financial Statements are an integral part of
these statements.
</TABLE>
- 9 -
<TABLE>
STATEMENTS OF CASH FLOWS Pennsylvania Power Company
- -------------------------------------------------------------------------------------------------
<CAPTION>
For the Years Ended December 31, 1996 1995 1994
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 40,587 $ 38,930 $ 31,260
Adjustments to reconcile net income to net cash
from operating activities:
Provision for depreciation 51,579 33,152 29,108
Nuclear fuel and lease amortization 8,693 11,337 10,656
Amortization of net regulatory assets 5,535 - 4,339
Deferred income taxes, net 396 8,144 7,578
Investment tax credits, net (2,138) (1,688) (1,351)
Allowance for equity funds used during construction - - (408)
Deferred fuel costs, net 3,220 155 (4,091)
Receivables (1,193) 64 (1,059)
Materials and supplies 1,319 1,451 (601)
Accounts payable (2,472) 1,848 (1,686)
Other (13,787) 11,003 31,051
-------- -------- --------
Net cash provided from operating activities 91,739 104,396 104,796
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt - 13,528 11,868
Redemptions and Repayments-
Preferred stock - - 6,687
Long-term debt 84,347 67,337 23,655
Dividend Payments-
Common stock 21,386 21,386 21,386
Preferred stock 4,626 4,775 5,035
-------- -------- --------
Net cash used for financing activities 110,359 79,970 44,895
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 20,361 29,705 30,072
Loan to parent - - 25,000
Loan payment from parent (19,500) (3,000) -
Sale of utility property to parent - (4,249) -
Other 116 (1,814) 448
-------- -------- --------
Net cash used for investing activities 977 20,642 55,520
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (19,597) 3,784 4,381
Cash and cash equivalents at beginning of year 20,984 17,200 12,819
-------- -------- --------
Cash and cash equivalents at end of year $ 1,387 $ 20,984 $ 17,200
======== ======== ========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid during the year-
Interest (net of amounts capitalized) $ 26,653 $ 30,215 $ 31,738
Income taxes 36,815 26,605 19,873
<FN>
The accompanying Notes to Financial Statements are an integral part of
these statements.
</TABLE>
- 10 -
<TABLE>
STATEMENTS OF TAXES Pennsylvania Power Company
<CAPTION>
For the Years Ended December 31, 1996 1995 1994
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
GENERAL TAXES:
State gross receipts $ 12,305 $ 11,680 $ 11,024
Real and personal property 6,178 11,222 6,699
State capital stock 2,820 2,499 2,440
Social security and unemployment 2,064 2,440 2,590
Other 648 437 384
-------- -------- --------
Total general taxes $ 24,015 $ 28,278 $ 23,137
======== ======== ========
PROVISION FOR INCOME TAXES:
Currently payable-
Federal $ 27,282 $ 20,352 $ 11,040
State 7,881 5,783 7,066
-------- -------- --------
35,163 26,135 18,106
-------- -------- --------
Deferred, net-
Federal 272 6,222 8,088
State 124 1,922 (510)
-------- -------- --------
396 8,144 7,578
-------- -------- --------
Investment tax credit amortization (2,138) (1,688) (1,351)
-------- -------- --------
Total provision for income taxes $ 33,421 $ 32,591 $ 24,333
======== ======== ========
INCOME STATEMENT CLASSIFICATION OF
PROVISION FOR INCOME TAXES:
Operating expenses $ 29,907 $ 31,118 $ 23,280
Other income 3,514 1,473 1,053
-------- -------- --------
Total provision for income taxes $ 33,421 $ 32,591 $ 24,333
======== ======== ========
RECONCILIATION OF FEDERAL INCOME TAX EXPENSE AT
STATUTORY RATE TO TOTAL PROVISION FOR INCOME TAXES:
Book income before provision for income taxes $ 74,008 $ 71,521 $ 55,593
======== ======== ========
Federal income tax expense at statutory rate $ 25,903 $ 25,032 $ 19,458
Increases (reductions) in taxes resulting from:
State income taxes, net of federal income tax benefit 5,203 5,008 4,261
Amortization of investment tax credits (2,138) (1,688) (1,351)
Amortization of tax regulatory assets 4,423 4,398 2,231
Other, net 30 (159) (266)
-------- -------- --------
Total provision for income taxes $ 33,421 $ 32,591 $ 24,333
======== ======== ========
ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31:
Property basis differences $178,886 $178,589 $178,345
Allowance for equity funds used during construction 33,677 38,894 39,921
Deferred nuclear expense 8,031 8,681 8,914
Customer receivables for future income taxes 40,901 43,801 55,498
Unamortized investment tax credits (11,635) (12,510) (13,557)
Other 3,916 3,003 8,421
-------- -------- --------
Net deferred income tax liability $253,776 $260,458 $277,542
======== ======== ========
<FN>
The accompanying Notes to Financial Statements are an integral part of
these statements.
</TABLE>
- 11 -
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company, a wholly owned subsidiary of Ohio Edison Company (Edison),
follows the accounting policies and practices prescribed by the
Pennsylvania Public Utility Commission (PPUC) and the Federal Energy
Regulatory Commission (FERC). The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make periodic estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses.
REVENUES-The Company's principal business is providing electric service to
customers in western Pennsylvania. The Company's retail customers are
metered on a cycle basis. Revenue is recognized for unbilled electric
service through the end of the year.
Receivables from customers include sales to residential,
commercial and industrial customers located in the Company's service area
and sales to wholesale customers. There was no material concentration of
receivables at December 31, 1996 or 1995, with respect to any particular
segment of the Company's customers.
REGULATORY PLAN-The Company's Rate Stability and Economic Development Plan
was approved by the PPUC in the second quarter of 1996. The regulatory
plan maintains current base electric rates for the Company through
June 20, 2006, and revised the Company's fuel cost recovery method.
All of the Company's regulatory assets are being recovered under
provisions of the regulatory plan. In addition, the PPUC has authorized
the Company to recognize additional depreciation expense related to its
generating assets and additional amortization of regulatory assets during
the ten-year regulatory plan period of at least $358 million more than the
amounts that would have been recognized if the regulatory plan was not in
effect. These additional amounts are being recovered through current
rates.
In December 1996, Pennsylvania enacted "The Electricity
Generation Customer Choice and Competition Act," which will permit
residents, including the Company's customers, to choose their electric
generation supplier, while transmission and distribution services will
continue to be supplied by their current providers. Customer choice would
be phased in over three years, beginning in 1999, after a two-year pilot
program.
UTILITY PLANT AND DEPRECIATION-Utility plant reflects the original cost of
construction, including payroll and related costs such as taxes, employee
benefits, administrative and general costs and financing costs (allowance
for funds used during construction).
- 12 -
The Company provides for depreciation on a straight-line basis
at various rates over the estimated lives of property included in plant in
service. The annual composite rate for electric plant was approximately
2.7% in 1996, 1995 and 1994. In addition to the straight-line depreciation
recognized in 1996, the Company also recognized additional capital
recovery of $20 million as additional depreciation expense in accordance
with the regulatory plan.
Depreciation expense in 1996 included approximately $2.8 million
for future decommissioning costs applicable to the Company's ownership
interest in two nuclear generating units. The Company's share of the
future obligation to decommission these units is approximately $74 million
in current dollars and (using a 2.8% escalation rate) approximately $142
million in future dollars. The estimated obligation (based on site-
specific studies) and the escalation rate were developed using information
obtained from consultants. Payments for decommissioning are expected to
begin in 2016, when actual decommissioning work begins. The Company has
recovered approximately $5 million for decommissioning through its
electric rates from customers through December 31, 1996; such amounts are
reflected in the reserve for depreciation on the Balance Sheet. If the
actual costs of decommissioning the units exceed the funds accumulated
from investing amounts recovered from customers, the Company expects that
additional amount to be recoverable from its customers. The Company has
approximately $4.9 million invested in external decommissioning trust
funds as of December 31, 1996. Earnings on these funds are reinvested with
a corresponding increase to the depreciation reserve. The Company has
also recognized an estimated liability of approximately $3.6 million
related to decontamination and decommissioning of nuclear enrichment
facilities operated by the United States Department of Energy (DOE), as
required by the Energy Policy Act of 1992.
The Financial Accounting Standards Board (FASB) issued a
proposed accounting standard for nuclear decommissioning costs in February
1996. If the standard is adopted as proposed: (1) annual provisions for
decommissioning could increase; (2) the net present value of estimated
decommissioning costs could be recorded as a liability; and (3) income
from the external decommissioning trusts could be reported as investment
income. The FASB has indicated that it plans to issue a revised proposal
or final accounting standard in 1997.
COMMON OWNERSHIP OF GENERATING FACILITIES-The Company and other Central
Area Power Coordination Group (CAPCO) companies own, as tenants in common,
various power generating facilities. Each of the companies is obligated to
pay a share of the costs associated with any jointly owned facility in the
same proportion as its interest. The Company's portion of operating
expenses associated with jointly owned facilities is included in the
corresponding operating expenses on the Statements of Income. The amounts
reflected on the Balance Sheet under utility plant at December 31, 1996,
include the following:
- 13 -
Utility Accumulated Construc- Company's
Plant Provision tion Owner-
Generating in for Work in ship
Units Service Depreciation Progress Interest
- ------------------------------------------------------------------
(In millions)
W. H. Sammis #7 $ 57.5 $ 19.5 $ - 20.80%
Bruce Mansfield
#1, #2 and #3 93.4 43.4 .2 5.76%
Beaver Valley #1 226.0 101.9 .8 17.50%
Perry #1 340.0 93.7 .4 5.24%
- ----------------------------------------------------------------
Total $716.9 $258.5 $1.4
================================================================
NUCLEAR FUEL-OES Fuel, Incorporated (OES Fuel), a wholly owned subsidiary
of Edison, is the sole lessor for the Company's nuclear fuel requirements.
Minimum lease payments during the next five years are estimated
to be as follows:
(In millions)
- -----------------------------------------------------------------
1997 $6.8
1998 3.4
1999 2.0
2000 1.5
2001 .4
- -----------------------------------------------------------------
The Company amortizes the cost of nuclear fuel based on the rate
of consumption. The Company's electric rates include amounts for the
future disposal of spent nuclear fuel based upon the formula used to
compute payments to the DOE.
INCOME TAXES-Details of the total provision for income taxes are shown on
the Statements of Taxes. Deferred income taxes result from timing
differences in the recognition of revenues and expenses for tax and
accounting purposes. Investment tax credits, which were deferred when
utilized, are being amortized over the recovery period of the related
property. The liability method is used to account for deferred income
taxes. Deferred income tax liabilities related to tax and accounting basis
differences are recognized at the statutory income tax rates in effect
when the liabilities are expected to be paid. The Company is included in
Edison's consolidated federal income tax return. The consolidated tax
liability is allocated on a "stand-alone" company basis, with the Company
recognizing any tax losses or credits it contributed to the consolidated
return.
- 14 -
RETIREMENT BENEFITS-The Company's trusteed, noncontributory defined
benefit pension plan covers almost all full-time employees. Upon
retirement, employees receive a monthly pension based on length of service
and compensation. The Company uses the projected unit credit method for
funding purposes and was not required to make pension contributions during
the three years ended December 31, 1996.
The following sets forth the funded status of the plan and
amounts recognized on the Balance Sheets as of December 31:
1996 1995
- ------------------------------------------------------------------
(In millions)
Actuarial present value of benefit
obligations:
Vested benefits $ 94.7 $ 98.5
Nonvested benefits 8.2 8.5
- -----------------------------------------------------------------
Accumulated benefit obligation $102.9 $107.0
=================================================================
Plan assets at fair value $150.5 $136.3
Actuarial present value of projected
benefit obligation 122.8 131.3
- ------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 27.7 5.0
Unrecognized net gain (21.8) (3.4)
Unrecognized prior service cost 4.1 5.0
Unrecognized net transition asset (6.3) (7.4)
- ------------------------------------------------------------------
Net pension asset (liability) $ 3.7 $ (.8)
==================================================================
The assets of the plan consist primarily of common stocks,
United States government bonds and corporate bonds. Net pension costs for
the three years ended December 31, 1996, were computed as follows:
1996 1995 1994
- ------------------------------------------------------------------
(In millions)
Service cost-benefits earned
during the period $ 3.2 $ 2.9 $ 3.3
Interest on projected benefit
obligation 9.5 8.8 8.2
Return on plan assets (22.5) (31.0) 1.3
Net deferral (amortization) 9.6 19.1 (14.1)
Voluntary early retirement
program expense - - 9.1
Gain on plan curtailment (4.3) - -
- ------------------------------------------------------------------
Net pension cost $ (4.5) $ (.2) $ 7.8
==================================================================
- 15 -
The assumed discount rates used in determining the actuarial
present value of the projected benefit obligation was 7.5% in 1996 and
1995 and 8.5% in 1994. The assumed rate of increase in future compensation
levels used to measure this obligation was 4.5% in each year. Expected
long-term rates of return on plan assets were assumed to be 10% in each
year.
The Company provides a minimum amount of noncontributory life
insurance to retired employees in addition to optional contributory
insurance. Health care benefits, which include certain employee
deductibles and copayments, are also available to retired employees, their
dependents and, under certain circumstances, their survivors. The Company
pays insurance premiums to cover a portion of these benefits in excess of
set limits; all amounts up to the limits are paid by the Company. The
Company recognizes the expected cost of providing other postretirement
benefits to employees and their beneficiaries and covered dependents from
the time employees are hired until they become eligible to receive those
benefits.
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 88 "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits," the net
pension costs shown above and the postretirement benefit costs shown below
include curtailment effects (significant changes in projected plan
assumptions) relating to the pension and postretirement benefit plans. The
employee terminations in connection with the Company's 1996 restructuring
activities represent a plan curtailment that significantly reduces the
expected future employee service years and the related accrual of defined
pension and postretirement benefits. In the pension plan, the reduction in
the benefit obligation increases the net pension asset and is shown as a
plan curtailment gain. In the postretirement benefit plan, the
unrecognized prior service cost associated with service years no longer
expected to be rendered as a result of the terminations, is shown as a
plan curtailment loss.
The following sets forth the funded status of the plan and
amounts recognized on the Balance Sheets as of December 31:
- 16 -
1996 1995
- ----------------------------------------------------------------
(In millions)
Accumulated postretirement benefit
obligation allocation:
Retirees $24.4 $23.3
Fully eligible active plan participants 2.2 1.4
Other active plan participants 17.1 19.0
- -----------------------------------------------------------------
Accumulated postretirement benefit
obligation 43.7 43.7
Plan assets at fair value .2 .2
- -----------------------------------------------------------------
Accumulated postretirement benefit
obligation in excess of plan assets 43.5 43.5
Unrecognized transition obligation (18.5) (23.0)
Unrecognized net loss (3.0) (6.0)
- -----------------------------------------------------------------
Net postretirement benefit liability $22.0 $14.5
=================================================================
Net periodic postretirement benefit costs for the three years
ended December 31, 1996 were computed as follows:
1996 1995 1994
- -----------------------------------------------------------------
(In millions)
Service cost-benefits attributed
to the period $1.1 $1.1 $1.1
Interest cost on accumulated
benefit obligation 3.2 4.0 3.5
Amortization of transition obligation 1.3 1.7 1.7
Amortization of loss .1 .1 .2
Voluntary early retirement
program expense - - .7
Loss on plan curtailment 3.5 - -
- -----------------------------------------------------------------
Net periodic postretirement benefit cost $9.2 $6.9 $7.2
=================================================================
The health care trend rate assumption is 6.0% in the first year
gradually decreasing to 4.0% for the year 2008 and later. The discount
rates used to compute the accumulated postretirement benefit obligation
were 7.5% in 1996 and 1995 and 8.5% in 1994. An increase in the health
care trend rate assumption by one percentage point in all years would
increase the accumulated postretirement benefit obligation by
approximately $6.5 million and the aggregate annual service and interest
costs by approximately $0.8 million.
The PPUC authorized the Company to defer incremental costs
resulting from a 1993 accounting standard for postretirement benefits, for
future recovery from its retail customers. Similar authorizations relating
- 17 -
to some other utilities regulated by the PPUC were appealed by the Office
of Consumer Advocate to the Commonwealth Court of Pennsylvania. The
Commonwealth Court has issued conflicting opinions and both cases have
been appealed to the Pennsylvania Supreme Court. Due to the uncertainty
resulting from these conflicting opinions, the Company provided a reserve
of $4.3 million ($2.5 million after-tax) in 1994, representing the amount
deferred in 1993.
TRANSACTIONS WITH AFFILIATED COMPANIES-Transactions with affiliated
companies are included on the Statements of Income as follows:
1996 1995 1994
- ------------------------------------------------------------------
(In millions)
Operating revenues:
Electric sales to Edison $ 3.6 $ 4.4 $ 8.9
Bruce Mansfield Plant
administrative and general
charges to Edison - 6.1 6.0
Other transactions with
Edison .4 .3 .4
- ------------------------------------------------------------------
$ 4.0 $10.8 $15.3
==================================================================
Fuel and purchased power:
Power purchased from Edison $13.2 $15.1 $12.7
Nuclear fuel leased from
OES Fuel 9.6 12.0 11.5
- ------------------------------------------------------------------
$22.8 $27.1 $24.2
==================================================================
Other operating costs:
Rental of transmission
lines from Edison $ 1.0 $ 1.0 $ 1.1
Data processing services
from Edison 2.5 2.6 2.7
Other transactions with
Edison 3.9 4.0 3.9
- ------------------------------------------------------------------
$ 7.4 $ 7.6 $ 7.7
==================================================================
SUPPLEMENTAL CASH FLOWS INFORMATION-All temporary cash investments
purchased with an initial maturity of three months or less are reported as
cash equivalents on the Balance Sheets. The Company reflects temporary
cash investments at cost, which approximates their market value. Noncash
financing and investing activities included capital lease transactions
amounting to $4.1 million, $3.7 million and $7.6 million for the years
1996, 1995 and 1994, respectively.
All borrowings with initial maturities of less than one year are
defined as financial instruments under generally accepted accounting
- 18 -
principles and are reported on the Balance Sheets at cost, which
approximates their fair market value. The following sets forth the
approximate fair value and related carrying amounts of all other long-term
debt, preferred stock subject to mandatory redemption and investments
other than cash and cash equivalents as of December 31:
1996 1995
- --------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
(In millions)
Long-term debt $300 $302 $376 $385
- --------------------------------------------------------------
Preferred stock $ 15 $ 14 $ 15 $ 13
- --------------------------------------------------------------
Investments other than
cash and cash equivalents $ 8 $ 9 $ 6 $ 6
- ---------------------------------------------------------------
The fair values of long-term debt and preferred stock reflect
the present value of the cash outflows relating to those securities based
on the current call price, the yield to maturity or the yield to call, as
deemed appropriate at the end of each respective year. The yields assumed
were based on securities with similar characteristics offered by a
corporation with credit ratings similar to the Company's ratings.
The fair value of investments other than cash and cash
equivalents represent cost (which approximates fair value) or the present
value of the cash inflows based on the yield to maturity. The yields
assumed were based on financial instruments with similar characteristics
and terms. Investments other than cash and cash equivalents consist
primarily of decommissioning trust investments. Unrealized gains and
losses applicable to the decommissioning trust have been recognized in the
trust investment with a corresponding offset to the reserve for
depreciation. The Company has no securities held for trading purposes.
REGULATORY ASSETS-The Company recognizes, as regulatory assets, costs
which the FERC and PPUC have authorized for recovery from customers in
future periods. Without such authorization, the costs would have been
charged to income as incurred. All regulatory assets are being recovered
from customers under the Company's regulatory plan. Based on the
regulatory plan and the recently enacted Pennsylvania law which continues
to provide for stranded investment recovery, the Company believes it will
continue to be able to bill and collect cost-based rates; accordingly, it
is improbable that the Company will be required to terminate application
of SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation," in the foreseeable future. The Company also recognized
additional cost recovery of $8 million as additional regulatory asset
amortization in 1996 in accordance with its regulatory plan.
- 19 -
Regulatory assets on the Balance Sheets are comprised of the
following:
1996 1995
- -----------------------------------------------------------------
(In millions)
Customer receivables for future income taxes $ 99.8 $106.9
Nuclear unit expenses 19.6 21.2
Perry Unit 2 termination 40.4 39.6
Loss on reacquired debt 9.8 11.0
DOE decommissioning and
decontamination costs 3.9 4.2
Deferred fuel costs 3.8 7.0
- ------------------------------------------------------------------
Total $177.3 $189.9
==================================================================
2. LEASES:
The Company leases certain transmission facilities, office space
and other property and equipment under cancelable and noncancelable
leases. Consistent with the regulatory treatment, the rental payments for
capital and operating leases are charged to operating expenses on the
Statements of Income. Such costs for the three years ended December 31,
1996, are summarized as follows:
- 20 -
1996 1995 1994
- -----------------------------------------------------------------
(In millions)
Operating leases
Interest element $ .5 $ .3 $ .2
Other 1.3 1.0 .9
Capital leases
Interest element .7 .8 1.0
Other .9 1.3 1.3
- -----------------------------------------------------------------
Total rental payments $3.4 $3.4 $3.4
=================================================================
The future minimum lease payments as of December 31, 1996, are:
Capital Operating
Leases Leases
- ---------------------------------------------------------------
(In millions)
1997 $ 1.7 $ .3
1998 1.4 .2
1999 1.2 .2
2000 1.0 .2
2001 1.0 .2
Years thereafter 11.6 3.4
- --------------------------------------------------------------
Total minimum lease payments 17.9 $4.5
====
Executory costs 3.7
- --------------------------------------------------
Net minimum lease payments 14.2
Interest portion 8.6
- --------------------------------------------------
Present value of net minimum lease payments 5.6
Less current portion .7
- --------------------------------------------------
Noncurrent portion $ 4.9
==================================================
3. CAPITALIZATION:
a. RETAINED EARNINGS-Under the Company's Charter, the Company's retained
earnings unrestricted for payment of cash dividends on the Company's
common stock were $86.7 million at December 31, 1996.
b. PREFERRED STOCK-The Company's 7.625% and 7.75% series of preferred
stock have restrictions which prevent early redemption prior to
October 1997 and July 2003, respectively. All other preferred stock
may be redeemed by the Company in whole, or in part, with 30-60 days'
notice.
- 21 -
c. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION-The Company's 7.625%
series has an annual sinking fund requirement for 7,500 shares
beginning on October 1, 2002.
d. LONG-TERM DEBT-The first mortgage indenture and its supplements,
which secure all of the Company's first mortgage bonds, serve as
direct first mortgage liens on substantially all property and
franchises, other than specifically excepted property, owned by the
Company. Long-term debt maturities (excluding capital leases) during
the next five years are $.9 million in 1998, $.5 million in 1999,
$24.0 million in 2000 and $1.0 million in 2001.
The Company's obligations to repay certain pollution control
revenue bonds are secured by series of first mortgage bonds and, in some
cases, by subordinate liens on the related pollution control facilities.
4. SHORT-TERM FINANCING ARRANGEMENTS:
The Company has lines of credit with banks that provide for
borrowings of up to $2 million under various interest rate options. Short-
term borrowings may be made under these lines of credit on the Company's
unsecured notes. To assure the availability of these lines, the Company is
required to pay annual commitment fees of 0.50%. These lines expire at
various times during 1997.
The Company also has a credit agreement with Edison whereby
either company can borrow funds from the other by issuing unsecured notes
at the prevailing prime or similar interest rate. Under the terms of this
agreement the maximum borrowing is limited only by the availability of
funds; however, the Company's borrowing under this agreement is currently
limited by the PPUC to a total of $50 million. Either company can
terminate the agreement with six months' notice.
5. COMMITMENTS, GUARANTEES AND CONTINGENCIES:
CONSTRUCTION PROGRAM-The Company's current forecast reflects expenditures
of approximately $100 million for property additions and improvements from
1997 through 2001, of which approximately $21 million is applicable to
1997. Investments for additional nuclear fuel during the 1997-2001 period
are estimated to be approximately $33 million, of which approximately $9
million applies to 1997. During the same periods, the Company's nuclear
fuel investments are expected to be reduced by approximately $32 million
and $7 million, respectively, as the nuclear fuel is consumed.
NUCLEAR INSURANCE-The Price-Anderson Act limits the public liability
relative to a single incident at a nuclear power plant to $8.92 billion.
The amount is covered by a combination of private insurance and an
industry retrospective rating plan. Based on its present ownership
interests in Beaver Valley Unit 1 and the Perry Plant, the Company's
maximum potential assessment under the industry retrospective rating plan
(assuming the other CAPCO companies were to contribute their proportionate
- 22 -
share of any assessments under the retrospective rating plan) would be $18
million per incident but not more than $2.3 million in any one year for
each incident.
The Company is also insured as to its interest in Beaver Valley
Unit 1 and the Perry Plant under policies issued to the operating company
for each plant. Under these policies, up to $2.75 billion is provided for
property damage and decontamination and decommissioning costs. The Company
has also obtained approximately $70 million of insurance coverage for
replacement power costs for its interests in Perry and Beaver Valley Unit
1. Under these policies, the Company can be assessed a maximum of
approximately $3 million for incidents at any covered nuclear facility
occurring during a policy year which are in excess of accumulated funds
available to the insurer for paying losses.
The Company intends to maintain insurance against nuclear risks
as described above so long as it is available. To the extent that
replacement power, property damage, decontamination, decommissioning,
repair and replacement costs and other such costs arising from a nuclear
incident at any of the Company's plants exceed the policy limits of the
insurance in effect with respect to that plant, to the extent a nuclear
incident is determined not to be covered by the Company's insurance
policies, or to the extent such insurance becomes unavailable in the
future, the Company would remain at risk for such costs.
GUARANTEES-The Company, together with the other CAPCO companies, has
severally guaranteed certain debt and lease obligations in connection with
a coal supply contract for the Bruce Mansfield Plant. As of December 31,
1996, the Company's share of the guarantee (which approximates fair market
value) was $7.3 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. The Company's total payments under
the coal supply contract amounted to $11.1 million, $9.8 million and $10.1
million during 1996, 1995, and 1994, respectively. The Company's minimum
annual payments are approximately $4 million under the contract, which
expires December 31, 1999.
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,
which is included in the construction forecast under "Construction
Program" for 1997 through 2001.
The Company was in compliance with the sulfur dioxide (SO2) and
nitrogen oxides (NOx) reduction requirements for 1996 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 purchasing emission allowances. Plans for
complying with the 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.
- 23 -
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. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED):
The following summarizes certain operating results by quarter
for 1996 and 1995.
March 31, June 30, Sept. 30, Dec. 31,
Three Months Ended 1996 1996 1996 1996
- -------------------------------------------------------------------
(In millions)
Operating Revenues $80.3 $81.3 $80.5 $80.5
Operating Expenses
and Taxes 60.4 66.3 66.4 67.2
- -------------------------------------------------------------------
Operating Income 19.9 15.0 14.1 13.3
Other Income .3 3.9 .9 .6
Net Interest 7.2 6.9 6.9 6.5
- -------------------------------------------------------------------
Net Income $13.0 $12.0 $ 8.1 $ 7.4
===================================================================
Earnings on
Common Stock $11.9 $10.9 $ 7.0 $ 6.2
===================================================================
March 31, June 30, Sept. 30, Dec. 31,
Three Months Ended 1996 1996 1996 1996
- -------------------------------------------------------------------
(In millions)
Operating Revenues $73.9 $77.6 $81.3 $81.8
Operating Expenses
and Taxes 57.1 60.8 65.8 63.6
- -------------------------------------------------------------------
Operating Income 16.8 16.8 15.5 18.2
Other Income .8 .4 .3 .6
Net Interest 8.2 7.6 7.4 7.3
- -------------------------------------------------------------------
Net Income $ 9.4 $ 9.6 $ 8.4 $11.5
===================================================================
Earnings on
Common Stock $ 8.2 $ 8.3 $ 7.3 $10.3
===================================================================
- 24 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Pennsylvania Power Company:
We have audited the accompanying balance sheets and statements
of capitalization of Pennsylvania Power Company (a Pennsylvania
corporation and wholly owned subsidiary of Ohio Edison Company) as of
December 31, 1996 and 1995, and the related statements of income, retained
earnings, capital stock and other paid-in capital, cash flows and taxes
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
Pennsylvania Power Company as of December 31, 1996 and 1995, and the
results of its operations and its cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Cleveland, Ohio
February 7, 1997
- 25 -
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to
the incorporation of our reports included or incorporated by
reference in this Form 10-K, into the Company's previously filed
Registration Statements, File No. 33-47372, No. 33-62450 and No.
33-65156.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
March 21, 1997
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<ARTICLE> OPUR1
<LEGEND>
(Amounts in 1,000's, except earnings per share)
Income tax expense includes $3,514,000 related to other income.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
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<TOTAL-NET-UTILITY-PLANT> 773,063
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<COMMON> 188,700
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15,000
50,905
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0
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<TOTAL-OPERATING-EXPENSES> 260,296
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<INCOME-BEFORE-INTEREST-EXPEN> 68,089
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4,626
<EARNINGS-AVAILABLE-FOR-COMM> 35,961
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