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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 March 31, 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 May 12, 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.
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THE POTOMAC EDISON COMPANY
Form 10-Q for Quarter Ended March 31, 1994
Index
Page
No.
PART I - FINANCIAL INFORMATION:
Statement of income -
Three months ended March 31, 1994 and 1993 3
Balance sheet -
March 31, 1994 and December 31, 1993 4
Statement of cash flows -
Three months ended March 31, 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
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THE POTOMAC EDISON COMPANY
Statement of Income
Three Months Ended
March 31
1994 1993
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES:
Residential $101 151 $ 85 761
Commercial 36 163 32 042
Industrial 46 057 41 138
Nonaffiliated utilities 35 840 27 874
Other, including affiliates 7 690 9 367
Total Operating Revenues 226 901 196 182
OPERATING EXPENSES:
Operation:
Fuel 39 820 40 625
Purchased power & exchanges, net 70 194 50 403
Deferred power costs, net (1 789) (1 327)
Other 20 359 18 446
Maintenance 14 855 15 021
Depreciation 14 909 14 106
Taxes other than income taxes 13 048 12 485
Federal & state income taxes 16 477 12 460
Total Operating Expenses 187 873 162 219
Operating Income 39 028 33 963
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed
funds used during construction 1 213 1 057
Other income, net 2 069 2 268
Total Other Income and Deductions 3 282 3 325
Income Before Interest Charges 42 310 37 288
INTEREST CHARGES:
Interest on long-term debt 10 400 10 899
Other interest 341 295
Allowance for borrowed funds used during
construction (716) (685)
Total Interest Charges 10 025 10 509
Net Income $ 32 285 $ 26 779
See accompanying notes to financial statements.
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THE POTOMAC EDISON COMPANY
Balance Sheet
March 31 December 31
1994 1993
(Thousands of Dollars)
ASSETS:
Property, Plant, and Equipment:
At original cost, including $213,824,000
and $208,308,000 under construction $1 880 477 $1 857 961
Accumulated depreciation (643 990) (632 269)
1 236 487 1 225 692
Investments:
Allegheny Generating Company - common
stock at equity 63 482 63 983
Other 811 819
64 293 64 802
Current Assets:
Cash 3 249 1 489
Accounts receivable:
Electric service, net of $1,423,000 and
$1,207,000 uncollectible allowance 63 493 44 575
Affiliated and other 6 524 6 383
Notes receivable from affiliates - 4 600
Materials and supplies - at average cost:
Operating and construction 27 160 26 153
Fuel 17 883 18 596
Prepaid taxes 11 143 12 523
Other 4 757 4 000
134 209 118 319
Deferred Charges:
Regulatory assets 79 445 76 962
Unamortized loss on reacquired debt 9 039 9 188
Other 28 178 24 800
116 662 110 950
Total Assets $1 551 651 $1 519 763
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 447 700 $ 447 700
Other paid-in capital 2 714 2 714
Retained earnings 189 787 176 053
640 201 626 467
Preferred stock:
Not subject to mandatory redemption 36 378 36 378
Subject to mandatory redemption 26 400 26 400
Long-term debt 519 245 517 910
1 222 224 1 207 155
Current Liabilities:
Short-term debt 12 950 -
Long-term debt and preferred stock due
within one year 1 200 17 200
Accounts payable 36 596 41 986
Accounts payable to affiliates 13 598 15 606
Taxes accrued:
Federal and state income 19 920 2 970
Other 14 402 13 552
Interest accrued 11 428 8 632
Other 25 611 22 445
135 705 122 391
Deferred Credits and Other Liabilities:
Unamortized investment credit 29 741 30 308
Deferred income taxes 135 835 133 027
Regulatory liabilities 18 733 18 490
Other 9 413 8 392
193 722 190 217
Total Capitalization and Liabilities $1 551 651 $1 519 763
See accompanying notes to financial statements.
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THE POTOMAC EDISON COMPANY
Statement of Cash Flows
Three Months Ended
March 31
1994 1993
(Thousands of Dollars)
CASH FLOWS FROM OPERATIONS:
Net income $ 32 285 $ 26 779
Depreciation 14 909 14 106
Deferred investment credit and income
taxes, net 2 519 (798)
Deferred power costs, net (1 789) (1 327)
Unconsolidated subsidiaries' dividends in
excess of earnings 520 727
Allowance for other than borrowed funds used
during construction (1 213) (1 057)
Changes in certain current assets & liabilities:
Accounts receivable, net (19 059) (17 656)
Materials and supplies (294) (827)
Accounts payable (7 398) (11 493)
Taxes accrued 17 800 10 602
Interest accrued 2 796 6 662
Other, net 1 348 4 296
42 424 30 014
CASH FLOWS FROM INVESTING:
Construction expenditures (26 151) (32 982)
Allowance for other than borrowed funds used
during construction 1 213 1 057
(24 938) (31 925)
CASH FLOWS FROM FINANCING:
Issuance of long-term debt 1 274 119 437
Retirement of long-term debt (16 000) (41 634)
Deposit with trustee for redemption of
long-term debt - (73 396)
Short-term debt, net 12 950 -
Notes receivable from affiliates 4 600 14 900
Dividends on capital stock:
Preferred stock (1 090) (1 116)
Common stock (17 460) (14 914)
(15 726) 3 277
NET CHANGE IN CASH AND TEMPORARY CASH
INVESTMENTS 1 760 1 366
Cash and Temporary Cash Investments at January 1 1 489 1 781
Cash and Temporary Cash Investments at March 31 $ 3 249 $ 3 147
Supplemental cash flow information:
Cash paid during the quarter for:
Interest (net of amount capitalized) $ 6 990 $ 3 174
Income taxes - 2 758
See accompanying notes to financial statements.
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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 March 31, 1994, and the
results of operations and cash flows for the three months ended March
31, 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 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
March 31
1994 1993
(Thousands of Dollars)
Electric operating revenues $22 431 $23 423
Operation & maintenance expense 1 833 1 678
Depreciation 4 236 4 226
Taxes other than income taxes 1 340 1 297
Federal income taxes 3 513 3 404
Interest charges 4 426 5 602
Other income, net (2) (3)
Net income $ 7 085 $ 7 219
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The Company's share of the equity in earnings above was $2.0 million
for each of the three months ended March 31, 1994 and 1993, and was
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:
Three Months Ended
March 31
1994 1993
Number of shares 22,385,000 19,885,000
Amount per share .78 .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.
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THE POTOMAC EDISON COMPANY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
COMPARISON OF FIRST QUARTER OF 1994 WITH FIRST QUARTER OF 1993
NET INCOME
Net income for the first quarter of 1994 was $32.3 million compared
with $26.8 million for the corresponding 1993 period. The increase in net
income for the first quarter of 1994 resulted from greater kWh sales to
retail customers and previously reported rate increases, primarily in
Maryland and Virginia, effective in February 1993 and September 1993,
respectively, offset in part by increased expenses. Retail sales in the
first quarter were favorably affected by record-setting cold temperatures
in January 1994.
SALES AND REVENUES
Retail kWh sales to residential, commercial, and industrial customers
increased 12%, 6%, and 3%, respectively. The increase in kWh sales to
residential and commercial customers was primarily due to an increase in
weather-related sales. In mid-January 1994, the coldest temperatures ever
recorded in much of the Company's service territory resulted in heating
degree days which were 40% over the prior January and 24% above normal.
The increase in kWh sales to industrial customers occurred in almost all
industrial groups. The 15% increase in revenues from retail customers
resulted from the following:
Change from Prior Period
(Millions of Dollars)
Increased kWh sales $ 9.6
Fuel and energy cost
adjustment clauses (1) 9.4
Rate increases (2):
Maryland 2.9
Virginia 1.4
West Virginia .5
4.8
Other .6
$24.4
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(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, and 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).
KWh sales to and revenues from nonaffiliated utilities are comprised
of the following items:
Three Months Ended
March 31
1994 1993
KWh sales (in billions):
From Company generation .1 .2
From purchased power 1.1 .9
1.2 1.1
Revenues (in millions):
From Company generation $ 3.1 $ 4.2
From sales of purchased
power 32.7 23.7
$35.8 $27.9
Sales from Company generation decreased because of growth of kWh
sales to retail customers and generating unit outages, both of which
reduces the amount available for sale, and continuing price competition.
Increased sales from purchased power were due to increased demand
resulting primarily from reduced availability of eastern utilities'
generation equipment. 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 decreased 2%, primarily the net result of a 4% decrease
in kWh generated and a 1% increase in average coal prices. 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.
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"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
March 31
1994 1993
(Millions of Dollars)
Nonaffiliated transactions:
Purchased power:
For resale to other
utilities $29.0 $21.5
Other 4.2 .7
Power exchanges, net 1.1 -
Affiliated transactions:
AGC capacity charges 7.3 7.5
Other affiliated capacity
charges 8.8 6.2
Energy and spinning
reserve charges 19.8 14.5
$70.2 $50.4
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 affiliated
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 expense resulted primarily from
provisions for claims related to previously reported asbestos suits and a
superfund site cleanup, and the timing of expenditures for increased
participation in research and development activities of the Electric Power
Research Institute.
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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 increase in depreciation expense resulted primarily from
additions to electric plant. Because of the increased levels of capital
expenditures expected 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 increased $.6 million primarily from
increases in gross receipts taxes resulting from higher revenues from
retail customers. The net increase of $4.0 million in federal and state
income taxes 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 $.5 million 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
Company.
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. These increases, along with additional rate
increase requests to be filed in Virginia and at the Federal Energy
Regulatory Commission for wholesale customers, include recovery of the
remaining carrying charges on investment, depreciation, and all 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.
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The Company has continued its participation in the Collaborative
Process for Demand-Side Management in Maryland. Through March 31, 1994,
the Company had received applications for $10.4 million in rebates related
to the commercial lighting program. Program costs including rebates and
lost revenues are deferred and are to be 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, has been named as a defendant along with multiple other
defendants in 1,430 pending asbestos cases involving multiple plaintiffs
and the Company and its affiliates have been named as defendants along
with multiple defendants in an additional 626 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 nonaffiliated defendants. The
Company believes that the remaining cases involving the Company and its
affiliates are without merit and that provisions for liabilities are such
that these suits will not have a material effect on its financial
position.
As also previously reported, the Company and its affiliates and
approximately 875 others have been identified by the Environmental
Protection Agency as potentially responsible parties in a superfund site
subject to cleanup. The Company believes that provisions for liabilities
are such that costs incurred in connection with remediation efforts will
not have a material effect on its financial position.
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THE POTOMAC EDISON COMPANY
Part II--Other Information to Form 10-Q
for Quarter Ended March 31, 1994
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
1. (a) Date and Kind of Meeting:
The annual meeting of shareholders was held at
Hagerstown, Maryland, on April 27, 1994. No
proxies were solicited.
(b) Election of Directors:
The holders of all 22,385,000 shares of common stock
voted to elect the following Directors at this meeting
to hold office until the next annual meeting of
shareholders and until their successors are duly
chosen and qualified:
Klaus Bergman Clarence F. Michalis *
Eleanor Baum Alan J. Noia
William L. Bennett Steven H. Rice
Stanley I. Garnett, II Gunnar E. Sarsten
Phillip E. Lint Peter L. Shea
Edward H. Malone Peter J. Skrgic
Frank A. Metz, Jr.
* Resigned effective May 1, 1994
ITEM 5. OTHER INFORMATION
On May 5, 1994, the Senior Hearing Examiner in the Company's 1993
Virginia base rate filing issued a report recommending an increase in
annual revenues of $4.5 million based on a return on equity of 11.25%.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) No reports on Form 8-K were filed on behalf of the Company
for the quarter ended March 31, 1994.
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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)
May 12, 1994
