Page 1 of 14
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Quarterly Report Under Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For Quarter Ended June 30, 1994
Commission file number 1-3376-2
THE POTOMAC EDISON COMPANY
(Exact name of registrant as specified in its charter)
Maryland and Virginia 13-5323955
(States of Incorporation) (I.R.S. Employer Identification No.)
10435 Downsville Pike, Hagerstown, Maryland 21740-1766
Telephone number 301-790-3400
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 and (2) has been subject to such filing requirements
for the past 90 days.
At August 11, 1994, 22,385,000 shares of the Common Stock (no par
value) of the registrant were outstanding, all of which are held by
Allegheny Power System, Inc., the Company's parent.
<PAGE>
- 2 -
THE POTOMAC EDISON COMPANY
Form 10-Q for Quarter Ended June 30, 1994
Index
Page
No.
PART I - FINANCIAL INFORMATION:
Statement of income -
Three and six months ended June 30, 1994 and 1993 3
Balance sheet -
June 30, 1994 and December 31, 1993 4
Statement of cash flows -
Six months ended June 30, 1994 and 1993 5
Notes to financial statements 6-7
Management's discussion and analysis of financial
condition and results of operations 8-12
PART II - OTHER INFORMATION 13-14
<PAGE>
- 3 -
THE POTOMAC EDISON COMPANY
Statement of Income
Three Months Ended Six Months Ended
June 30 June 30
1994 1993 1994 1993
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES:
Residential $ 65 980 $ 62 663 $167 131 $148 424
Commercial 31 671 29 022 67 834 61 064
Industrial 49 304 44 542 95 361 85 680
Nonaffiliated utilities 24 129 28 610 59 969 56 484
Other, including affiliates 5 954 5 895 13 644 15 262
Total Operating Revenues 177 038 170 732 403 939 366 914
OPERATING EXPENSES:
Operation:
Fuel 33 282 34 551 73 102 75 176
Purchased power & exchanges,
net 51 627 46 634 121 821 97 037
Deferred power costs, net 315 27 (1 474) (1 300)
Other 20 880 18 416 41 239 36 862
Maintenance 14 669 15 184 29 524 30 205
Depreciation 14 908 14 137 29 817 28 243
Taxes other than income taxes 11 054 11 299 24 102 23 784
Federal & state income taxes 6 327 5 632 22 804 18 092
Total Operating Expenses 153 062 145 880 340 935 308 099
Operating Income 23 976 24 852 63 004 58 815
OTHER INCOME AND DEDUCTIONS:
Allowance for other than
borrowed funds used during
construction 605 867 1 818 1 924
Other income, net 2 071 2 314 4 140 4 582
Total Other Income and
Deductions 2 676 3 181 5 958 6 506
Income Before Interest
Charges 26 652 28 033 68 962 65 321
INTEREST CHARGES:
Interest on long-term debt 10 427 10 812 20 827 21 711
Other interest 549 269 890 564
Allowance for borrowed funds
used during construction (426) (562) (1 142) (1 247)
Total Interest Charges 10 550 10 519 20 575 21 028
Net Income $ 16 102 $ 17 514 $ 48 387 $ 44 293
See accompanying notes to financial statements.
<PAGE>
- 4 -
THE POTOMAC EDISON COMPANY
Balance Sheet
June 30, December 31,
1994 1993
(Thousands of Dollars)
ASSETS:
Property, Plant, and Equipment:
At original cost, including $215,232,000
and $208,308,000 under construction $1 912 388 $1 857 961
Accumulated depreciation (655 874) (632 269)
1 256 514 1 225 692
Investments and Other Assets:
Allegheny Generating Company - common
stock at equity 62 893 63 983
Other 814 819
63 707 64 802
Current Assets:
Cash 1 422 1 489
Accounts receivable:
Electric service, net of $1,344,000 and
$1,207,000 uncollectible allowance 52 083 44 575
Affiliated and other 6 231 6 383
Notes receivable from affiliates 31 900 4 600
Materials and supplies - at average cost:
Operating and construction 27 195 26 153
Fuel 21 950 18 596
Prepaid taxes 6 858 12 523
Other 7 125 4 000
154 764 118 319
Deferred Charges:
Regulatory assets 82 197 76 962
Unamortized loss on reacquired debt 8 626 9 188
Other 26 998 24 800
117 821 110 950
Total Assets $1 592 806 $1 519 763
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 447 700 $ 447 700
Other paid-in capital 2 714 2 714
Retained earnings 187 115 176 053
637 529 626 467
Preferred stock:
Not subject to mandatory redemption 36 378 36 378
Subject to mandatory redemption 26 401 26 400
Long-term debt 593 152 517 910
1 293 460 1 207 155
Current Liabilities:
Long-term debt and preferred stock due
within one year 1 200 17 200
Accounts payable 38 194 41 986
Accounts payable to affiliates 14 185 15 606
Taxes accrued:
Federal and state income 9 147 2 970
Other 9 136 13 552
Interest accrued 8 800 8 632
Other 25 785 22 445
106 447 122 391
Deferred Credits and Other Liabilities:
Unamortized investment credit 29 174 30 308
Deferred income taxes 136 676 133 027
Regulatory liabilities 17 974 18 490
0ther 9 075 8 392
192 899 190 217
Total Capitalization and Liabilities $1 592 806 $1 519 763
See accompanying notes to financial statements.
<PAGE>
- 5 -
THE POTOMAC EDISON COMPANY
Statement of Cash Flows
Six Months Ended
June 30
1994 1993
(Thousands of Dollars)
CASH FLOWS FROM OPERATIONS:
Net income $ 48 387 $ 44 293
Depreciation 29 817 28 243
Deferred investment credit and income
taxes, net 2 338 (5 360)
Deferred power costs, net (1 474) (1 300)
Unconsolidated subsidiaries' dividends in
excess of earnings 1 130 1 380
Allowance for other than borrowed funds used
during construction (1 818) (1 924)
Changes in certain current assets & liabilities:
Accounts receivable, net (7 356) (7 565)
Materials and supplies (4 396) 2 028
Accounts payable (5 213) (9 728)
Taxes accrued 1 761 42
Interest accrued 168 1 539
Other, net 2 673 13 423
66 017 65 071
CASH FLOWS FROM INVESTING:
Construction expenditures (62 698) (83 285)
Allowance for other than borrowed funds used
during construction 1 818 1 924
(60 880) (81 361)
CASH FLOWS FROM FINANCING:
Issuance of long-term debt 75 420 130 466
Retirement of long-term debt (16 000) (123 888)
Short-term debt, net - 4 250
Notes receivable from affiliates (27 300) 38 000
Dividends on capital stock:
Preferred stock (2 180) (2 232)
Common stock (35 144) (29 828)
(5 204) 16 768
NET CHANGE IN CASH AND TEMPORARY CASH
INVESTMENTS (67) 478
Cash and Temporary Cash Investments at January 1 1 489 1 781
Cash and Temporary Cash Investments at June 30 $ 1 422 $ 2 259
Supplemental cash flow information:
Cash paid during the quarter for:
Interest (net of amount capitalized) $ 20 150 $ 18 074
Income taxes 14 441 16 666
See accompanying notes to financial statements.
<PAGE>
- 6 -
THE POTOMAC EDISON COMPANY
Notes to Financial Statements
1. The Company's Notes to Financial Statements in the Allegheny Power
System companies' combined Annual Report on Form 10-K for the year
ended December 31, 1993, should be read with the accompanying
financial statements and the following notes. With the exception of
the December 31, 1993 balance sheet in the aforementioned annual
report on Form 10-K, the accompanying financial statements appearing
on pages 3 through 5 and these notes to financial statements are
unaudited. In the opinion of the Company, such financial statements
together with these notes thereto contain all adjustments (which
consist only of normal recurring adjustments) necessary to present
fairly the Company's financial position as of June 30, 1994, and the
results of operations for the three and six months ended June 30, 1994
and 1993, and cash flows for the six months ended June 30, 1994 and
1993.
2. The Statement of Income reflects the results of past operations and is
not intended as any representation as to future results. For purposes
of the Balance Sheet and Statement of Cash Flows, temporary cash
investments with original maturities of three months or less,
generally in the form of commercial paper, certificates of deposit,
and repurchase agreements, are considered to be the equivalent of
cash.
3. On June 22, 1994, the Company issued $75 million of 8%, 30-year first
mortgage bonds. The proceeds from the sale were used to repay
outstanding short-term debt and for other corporate purposes.
On March 1, 1994, the Company retired at maturity $16 million of 4-
5/8% first mortgage bonds.
4. The Company owns 28% of the common stock of Allegheny Generating
Company (AGC), and affiliates of the Company own the remainder. AGC
owns an undivided 40% interest, 840 MW, in the 2,100-MW pumped-storage
hydroelectric station in Bath County, Virginia operated by the 60%
owner, Virginia Power Company, an unaffiliated utility. Following is
a summary of income statement information for AGC:
Three Months Ended Six Months Ended
June 30 June 30
1994 1993 1994 1993
(Thousands of Dollars)
Electric operating revenues $21 869 $23 730 $44 300 $47 153
Operation & maintenance expense 1 444 1 963 3 277 3 641
Depreciation 4 236 4 226 8 472 8 452
Taxes other than income taxes 1 528 1 302 2 868 2 599
Federal income taxes 3 408 3 494 6 921 6 898
Interest charges 4 487 5 357 8 913 10 959
Other income, net (5) (90) (7) (93)
Net income $ 6 771 $ 7 478 $13 856 $14 697
<PAGE>
- 7 -
The Company's share of the equity in earnings above was $1.9 million
and $2.1 million for the three months ended June 30, 1994 and 1993,
respectively, and $3.9 million and $4.1 million for the six months
ended June 30, 1994 and 1993, respectively. These amounts were
included in other income, net, on the Statement of Income.
5. Common stock dividends per share declared and paid during the periods
for which income statements are included are as follows:
1994 1993
1st 2nd 1st 2nd
Quarter Quarter Quarter Quarter
Number of Shares 22 385 000 22 385 000 19 885 000 19 885 000
Amount per Share $.78 $.79 $.75 $.75
Earnings per share are not reported inasmuch as the common stock of
the Company is 100% owned by its parent, Allegheny Power System, Inc.
<PAGE>
- 8 -
THE POTOMAC EDISON COMPANY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
COMPARISON OF SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1994
WITH SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1993
NET INCOME
Net income for the second quarter and first six months of 1994 was
$16.1 million and $48.4 million, respectively, compared with $17.5 million
and $44.3 million for the corresponding 1993 periods. The increase in net
income for the first six months of 1994 reflects revenue increases from
retail customers due to previously reported rate increases, primarily in
Maryland and Virginia, effective in February and September 1993,
respectively, and greater kilowatthour (kWh) sales to retail customers.
Earnings for the second quarter of 1994 also reflect increased retail
revenues, but to a lesser extent because of more moderate weather in April
and May 1994. Increased depreciation and other expenses continued in both
periods.
SALES AND REVENUES
Retail kWh sales to residential, commercial, and industrial customers
increased .3%, 3%, and 2% for the second quarter and 7%, 5%, and 2% for
the first six months, respectively. The increase in kWh sales to
residential and commercial customers was primarily due to variances in
weather-related sales. Record cold temperatures in mid-January 1994
contributing to first quarter 1994 residential and commercial kWh sales
increases of 12% and 6%, respectively, were followed by milder
temperatures and lower kWh sales in April and May 1994. Increases in
residential sales caused by the June 1994 higher-than-normal temperatures
will, to a substantial extent, be reflected in earnings in the third
quarter after such sales have been billed to customers. The increases in
kWh sales to industrial customers resulted primarily from increased sales
to rubber and cement customers. The increases in revenues from retail
customers resulted from the following:
Increase from Prior Periods
Quarter Six Months
(Millions of Dollars)
Increased kWh sales $ 1.8 $11.5
Fuel and energy cost
adjustment clauses (1) 4.1 11.7
Rate increases (2):
Virginia 2.5 5.8
Maryland 1.6 4.5
West Virginia .4 .9
4.5 11.2
Other .3 .8
$10.7 $35.2
<PAGE>
- 9 -
(1) Changes in revenues from fuel and energy cost adjustment
clauses have little effect on net income.
(2) Reflects a rate increase on an annual basis of about $11.3
million in Maryland effective February 25, 1993, a $10.0 million
base rate increase in Virginia effective September 28, 1993,
(including amounts subject to refund for which estimated
liabilities have been recorded), a surcharge of $.8 million in
West Virginia effective July 1, 1992, which was increased to
$2.2 million effective July 1, 1993, for recovery of carrying
charges on costs to comply with the Clean Air Act Amendments of
1990 (CAAA), and cogeneration project and energy conservation
surcharges in Maryland effective January 5, 1994 and May 5,
1994, respectively.
KWh sales to and revenues from nonaffiliated utilities are comprised
of the following items:
Three Months Ended Six Months Ended
June 30 June 30
1994 1993 1994 1993
KWh sales (in billions):
From Company generation .1 .2 .2 .3
From purchased power .5 .8 1.6 1.7
.6 1.0 1.8 2.0
Revenues (in millions):
From Company generation $ 2.8 $ 3.5 $ 6.0 $ 7.8
From sales of purchased
power 21.3 25.1 54.0 48.7
$24.1 $28.6 $60.0 $56.5
Sales from Company generation decreased because of growth of kWh
sales to retail customers and generating unit outages, both of which
reduce the amount available for sale, and continuing price competition.
Sales from purchased power varies depending on the availability of eastern
utilities' generating equipment, demand for energy, and competition.
About 95% of the aggregate benefits from sales to nonaffiliated utilities
is passed on to retail customers and has little effect on net income.
OPERATING EXPENSES
Fuel expenses for the second quarter and the first six months of 1994
decreased 4% and 3%, respectively, due primarily to decreases in kWh
generated. Fuel expenses are primarily subject to deferred power cost
accounting procedures with the result that changes in fuel expenses have
little effect on net income.
<PAGE>
- 10 -
"Purchased power and exchanges, net" represents power purchases from
and exchanges with nonaffiliated utilities, capacity charges paid to
Allegheny Generating Company (AGC) and other transactions with affiliates
made pursuant to a power supply agreement whereby each company uses the
most economical generation available in the Allegheny Power System at any
given time, and is comprised of the following items:
Three Months Ended Six Months Ended
June 30 June 30
1994 1993 1994 1993
(Millions of Dollars)
Nonaffiliated transactions:
Purchased power:
For resale to other
utilities $18.7 $21.4 $ 47.7 $42.9
Other 3.1 1.2 7.3 1.9
Power exchanges, net (.8) (.6) .2 (.6)
Affiliated transactions:
AGC capacity charges 7.3 7.5 14.6 15.0
Other affiliated capacity
charges 9.9 7.2 18.8 13.4
Energy and spinning
reserve charges 13.4 9.9 33.2 24.4
$51.6 $46.6 $121.8 $97.0
The amount of power purchased from nonaffiliated utilities for use by
the Company and for resale to nonaffiliated utilities depends upon the
availability of the Company's generating equipment, transmission capacity,
and fuel, and its cost of generation and the cost of operations of
nonaffiliated utilities from which such purchases are made. The cost of
power purchased from nonaffiliates for use by the Company, AGC capacity
charges in West Virginia, and affiliated energy and spinning reserve
charges are mostly recovered from customers currently through the regular
fuel and energy cost recovery procedures followed by the Company's
regulatory commissions and is primarily subject to deferred power cost
procedures with the result that changes in such costs have little effect
on net income. As described under SALES AND REVENUES above, the increase
in sales to retail customers combined with generating unit outages
resulted in increased purchases from nonaffiliated utilities. The primary
reason for the fluctuation in purchases for resale to nonaffiliated
utilities is also described under SALES AND REVENUES above. The increase
in affiliated capacity and energy and spinning reserve charges was due to
growth of kWh sales to retail customers and an increase in affiliate
energy available because of energy purchased by an affiliate from a new
qualified facility under the Public Utility Regulatory Policies Act of
1978 (PURPA) in 1993.
The increase in other operation expenses resulted primarily from
previously reported asbestos suits and a Superfund site cleanup, increased
provisions for uncollectible accounts, cogeneration project expenses, an
SEC-directed larger allocation of the Parent's corporate expenses for
shareholder-related activities, and increases in salaries and wages and
employee benefit costs.
<PAGE>
- 11 -
Maintenance expenses represent costs incurred to maintain the power
stations, the transmission and distribution (T&D) system, and general
plant, and reflect routine maintenance of equipment and rights-of-way as
well as planned major repairs and unplanned expenditures, primarily from
forced outages at the power stations and periodic storm damage on the T&D
system. The Company is experiencing, and expects to continue to
experience, increased expenditures due to the aging of its power stations.
Variations in maintenance expense result primarily from unplanned events
and planned major projects, which vary in timing and magnitude depending
upon the length of time equipment has been in service without a major
overhaul, the amount of work found necessary when equipment is dismantled,
and outage requirements to comply with the CAAA.
The increases in depreciation expense for the second quarter and
first six months of 1994 resulted primarily from additions to electric
plant. Because of the increased levels of capital expenditures as a
result of the CAAA and the replacement of aging equipment at the Company's
power stations, depreciation expense is expected to increase significantly
over the next few years.
Taxes other than income taxes decreased $.2 million for the second
quarter and increased $.3 million for the first six months of 1994 due
primarily to increased property taxes and gross receipts taxes resulting
from higher revenues from retail customers, offset by decreased West
Virginia Business and Occupation taxes due to lower generation within that
state.
The net increase of $4.7 million in federal and state income taxes
for the first six months of 1994 resulted primarily from an increase in
income before taxes and an increase in the federal income tax rate
pursuant to the Revenue Reconciliation Act of 1993 enacted in August 1993.
Interest on long-term debt decreased $.4 million for the quarter and
$.9 million for the first six months due primarily to interest savings
from debt refinancings in 1993. Fluctuations in other interest expense as
well as other income, net, reflect changes in the levels of temporary
investments and short-term debt maintained by the companies.
LIQUIDITY AND CAPITAL RESOURCES
The Company's discussion on Liquidity and Capital Resources in the
Allegheny Power System companies' combined Annual Report on Form 10-K for
the year ended December 31, 1993 should be read with the following
information.
On January 14, 1994, the Company filed an application with the Public
Service Commission of West Virginia for a base rate increase designed to
produce $12.2 million in additional annual revenues. On April 15, 1994,
the Company filed with the Maryland Public Service Commission for a rate
increase designed to produce $31 million in additional annual revenues
from its Maryland customers. Also, on June 22, 1994, the Company filed
with the Virginia State Corporation Commission for an increase in electric
rates that would result in about $12.5 million in additional revenues on
an annual basis when combined with interim rates now in effect (subject to
refund) from an earlier filing.
<PAGE>
- 12 -
These increases, along with an additional rate increase request to be
filed at the Federal Energy Regulatory Commission for wholesale customers,
include recovery of the remaining carrying charges on investment,
depreciation, and operating costs required to comply with Phase I of the
CAAA, and other increasing levels of expenses. It is expected that the
Company will begin to receive additional revenues from these rate cases on
or about the time it begins to incur additional depreciation and operating
costs for the scrubbers to be placed in service on or before January 1,
1995.
On August 10, 1994, the Company issued $11.56 million of 6-3/4%, 30-
year solid waste disposal revenue notes, the proceeds of which will be
used on the Harrison Power Station scrubber project.
The Company has continued its participation in the Collaborative
Process for Demand-Side Management in Maryland. Through June 30, 1994,
the Company had approved applications for $11.4 million in rebates related
to the commercial lighting program. Program costs, including rebates, and
lost revenues are deferred and are being recovered through an energy
conservation surcharge over a seven-year period.
In the normal course of business, the Company is subject to various
contingencies and uncertainties relating to its operations and
construction program, including cost recovery in the regulatory process,
laws, regulations and uncertainties related to environmental matters, and
legal actions.
As previously reported, Monongahela Power Company, an affiliated
company, is currently named as a defendant along with multiple other
defendants in 1,625 pending asbestos cases involving multiple plaintiffs,
including 195 new cases filed in the second quarter of 1994, and the
Company and its affiliates have been named as defendants along with
multiple defendants in an additional 627 cases by multiple plaintiffs.
While the cumulative number of claims appears to be significant, previous
cases have been settled for an amount substantially less than the
anticipated cost of defense, and it is believed that more than half of the
cases relate solely to other defendants. The Company believes that the
remaining cases involving the Company are without merit and that
provisions for liabilities are such that these suits will not have a
material effect on its financial position.
The Company previously reported that the Environmental Protection
Agency (EPA) had identified it and its affiliates and approximately 875
others as potentially responsible parties in a Superfund site subject to
cleanup. A Remedial Investigation/Feasibility Study prepared by the EPA
indicates remedial alternatives which range as high as $113 million, to be
shared by all responsible parties. The EPA has not yet selected which
remedial alternative it will use. The Company believes it has defenses to
allegations of liability and intends to vigorously defend this matter.
Although it is not possible at this time to determine what costs, if any, the
Company may incur, it has recorded provisions for liabilities based on the
range of remediation cost estimates and its relative participation, along with
its affiliates and the approximately 875 others. The Company believes that
final resolution of this matter will not have a material effect on its financial
position.
<PAGE>
- 13 -
THE POTOMAC EDISON COMPANY
Part II--Other Information to Form 10-Q
for Quarter Ended June 30, 1994
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) On June 22, 1994, the Company filed a report on Form 8-K
consisting of a supplemental indenture dated June 22, 1994.
<PAGE>
- 14 -
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
THE POTOMAC EDISON COMPANY
THOMAS J. KLOC
Thomas J. Kloc
Comptroller
(Chief Accounting Officer)
August 11, 1994
