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 September 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 November 14, 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 September 30, 1994
Index
Page
No.
PART I - FINANCIAL INFORMATION:
Statement of income -
Three and nine months ended September 30, 1994 and 1993 3
Balance sheet -
September 30, 1994 and December 31, 1993 4
Statement of cash flows -
Nine months ended September 30, 1994 and 1993 5
Notes to financial statements 6-7
Management's discussion and analysis of financial
condition and results of operations 8-13
PART II - OTHER INFORMATION 14
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THE POTOMAC EDISON COMPANY
Statement of Income
Three Months Ended Nine Months Ended
September 30 September 30
1994 1993 1994 1993
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES:
Residential $ 66 611 $ 62 827 $233 742 $211 251
Commercial 35 008 32 928 102 842 93 992
Industrial 48 964 43 769 144 325 129 449
Nonaffiliated utilities 24 477 25 050 84 446 81 534
Other, including affiliates 5 911 8 206 19 555 23 468
Total Operating Revenues 180 971 172 780 584 910 539 694
OPERATING EXPENSES:
Operation:
Fuel 36 793 34 557 109 895 109 733
Purchased power & exchanges,
net 49 243 52 787 171 064 149 824
Deferred power costs, net 660 (5 681) (814) (6 981)
Other 22 292 18 288 63 531 55 150
Maintenance 14 856 16 832 44 380 47 037
Depreciation 14 781 14 121 44 598 42 364
Taxes other than income taxes 11 694 11 426 35 796 35 210
Federal & state income taxes 6 293 6 845 29 097 24 937
Total Operating Expenses 156 612 149 175 497 547 457 274
Operating Income 24 359 23 605 87 363 82 420
OTHER INCOME AND DEDUCTIONS:
Allowance for other than
borrowed funds used during
construction 833 1 406 2 651 3 330
Other income, net 2 873 2 167 7 013 6 749
Total Other Income and
Deductions 3 706 3 573 9 664 10 079
Income Before Interest
Charges 28 065 27 178 97 027 92 499
INTEREST CHARGES:
Interest on long-term debt 11 906 10 493 32 733 32 204
Other interest 403 224 1 293 788
Allowance for borrowed funds
used during construction (522) (911) (1 664) (2 158)
Total Interest Charges 11 787 9 806 32 362 30 834
Net Income $ 16 278 $ 17 372 $ 64 665 $ 61 665
See accompanying notes to financial statements.
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THE POTOMAC EDISON COMPANY
Balance Sheet
Sept. 30 December 31
1994 1993
(Thousands of Dollars)
ASSETS:
Property, Plant, and Equipment:
At original cost, including $234,360,000
and $208,308,000 under construction $1 942 509 $1 857 961
Accumulated depreciation (665 182) (632 269)
1 277 327 1 225 692
Investments and Other Assets:
Allegheny Generating Company - common
stock at equity 62 392 63 983
Other 848 819
63 240 64 802
Current Assets:
Cash 1 578 1 489
Accounts receivable:
Electric service, net of $1,023,000 and
$1,207,000 uncollectible allowance 46 396 44 575
Affiliated and other 2 797 6 383
Notes receivable from affiliates 33 700 4 600
Materials and supplies - at average cost:
Operating and construction 27 114 26 153
Fuel 21 574 18 596
Prepaid taxes 12 509 12 523
Other 7 304 4 000
152 972 118 319
Deferred Charges:
Regulatory assets 84 984 76 962
Deferred power costs 11 880 13 931
Unamortized loss on reacquired debt 8 485 9 188
Other 11 727 10 869
117 076 110 950
Total Assets $1 610 615 $1 519 763
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 447 700 $ 447 700
Other paid-in capital 2 724 2 714
Retained earnings 188 439 176 053
638 863 626 467
Preferred stock:
Not subject to mandatory redemption 36 378 36 378
Subject to mandatory redemption 25 201 26 400
Long-term debt 604 679 517 910
1 305 121 1 207 155
Current Liabilities:
Long-term debt and preferred stock due
within one year 1 200 17 200
Accounts payable 35 539 41 986
Accounts payable to affiliates 11 847 15 606
Taxes accrued:
Federal and state income 10 023 2 970
Other 15 079 13 552
Interest accrued 13 639 8 632
Other 19 292 22 445
106 619 122 391
Deferred Credits and Other Liabilities:
Unamortized investment credit 28 608 30 308
Deferred income taxes 135 483 133 027
Regulatory liabilities 17 974 18 490
Other 16 810 8 392
198 875 190 217
Total Capitalization and Liabilities $1 610 615 $1 519 763
See accompanying notes to financial statements.
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THE POTOMAC EDISON COMPANY
Statement of Cash Flows
Nine Months Ended
September 30
1994 1993
(Thousands of Dollars)
CASH FLOWS FROM OPERATIONS:
Net income $ 64 665 $ 61 665
Depreciation 44 598 42 364
Deferred investment credit and income
taxes, net 636 (4 614)
Deferred power costs, net (814) (6 981)
Unconsolidated subsidiaries' dividends in
excess of earnings 1 652 2 655
Allowance for other than borrowed funds used
during construction (2 651) (3 330)
Changes in certain current assets & liabilities:
Accounts receivable, net 1 765 (6 707)
Materials and supplies (3 939) 11 009
Accounts payable (10 206) (10 858)
Taxes accrued 8 580 4 474
Interest accrued 5 007 13 791
Other, net (1 127) 9 741
108 166 113 209
CASH FLOWS FROM INVESTING:
Construction expenditures (99 036) (128 690)
Allowance for other than borrowed funds used
during construction 2 651 3 330
(96 385) (125 360)
CASH FLOWS FROM FINANCING:
Issuance of long-term debt 86 877 136 686
Retirement of long-term debt (16 000) (123 888)
Retirement of preferred stock (1 190) (1 611)
Short-term debt, net - 10 750
Notes receivable from affiliates (29 100) 38 000
Dividends on capital stock:
Preferred stock (3 256) (3 337)
Common stock (49 023) (44 940)
(11 692) 11 660
NET CHANGE IN CASH AND TEMPORARY CASH
INVESTMENTS 89 (491)
Cash and Temporary Cash Investments at January 1 1 489 1 781
Cash and Temporary Cash Investments at Sept. 30 $ 1 578 $ 1 290
Supplemental cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 26 749 $ 24 673
Income taxes 22 174 24 888
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 September 30, 1994, the
results of operations for the three and nine months ended September
30, 1994 and 1993, and cash flows for the nine months ended September
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 August 10, 1994, the Company issued $11.56 million of 6.75%, 30-
year solid waste disposal revenue notes, the proceeds of which are
being used on the Harrison Power Station scrubber project.
On June 22, 1994, the Company issued $75 million of 8%, 30-year first
mortgage bonds, the proceeds of which 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
4.625% 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 Nine Months Ended
September 30 September 30
1994 1993 1994 1993
(Thousands of Dollars)
Electric operating revenues $22 337 $23 391 $66 637 $70 544
Operation & maintenance expense 1 653 1 312 4 930 4 953
Depreciation 4 236 4 225 12 708 12 677
Taxes other than income taxes 1 399 1 298 4 267 3 897
Federal income taxes 3 498 4 001 10 419 10 899
Interest charges 4 467 5 199 13 380 16 158
Other income, net (3) (9) (10) (102)
Net income $ 7 087 $ 7 365 $20 943 $22 062
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The Company's share of the equity in earnings above was $2.0 million
and $2.1 million for the three months ended September 30, 1994 and
1993, respectively, and $5.9 million and $6.2 million for the nine
months ended September 30, 1994 and 1993, respectively. These amounts
were included in other income, net, on the Statement of Income.
7. Common stock dividends per share declared and paid during the periods
for which income statements are included are as follows:
1994 1993
Number of Amount Number of Amount
Shares Per Share Shares Per Share
First Quarter 22 385 000 $.78 19 885 000 $.75
Second Quarter 22 385 000 $.79 19 885 000 $.75
Third Quarter 22 385 000 $.62 19 885 000 $.76
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 THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1994
WITH THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1993
NET INCOME
Net income for the third quarter and first nine months of 1994 was
$16.3 million and $64.7 million, respectively, compared with $17.4 million
and $61.7 million for the corresponding 1993 periods. The increase in net
income for the first nine 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. The weather was
relatively cool in the 1994 third quarter, compared to the prior year,
with the result that the increase in retail kWh sales was not sufficient
to offset increases in interest, depreciation, and other expenses.
SALES AND REVENUES
Retail kWh sales to residential customers remained unchanged,
commercial sales decreased 1%, and sales to industrial customers increased
3% for the third quarter. Retail kWh sales to residential, commercial,
and industrial customers increased 5%, 3%, and 3%, respectively, for the
first nine months. The change in kWh sales to residential and commercial
customers was primarily due to variances in weather-related sales.
Increased kWh sales in July 1994, reflecting additional temperature-
related June sales billed in July, were offset by lower August and
September sales. Moderate temperatures this summer resulted in cooling
degree days in the third quarter 17% below normal and 29% lower than
during the corresponding 1993 quarter. The increase in kWh sales to
industrial customers occurred in almost all industrial groups, the most
significant of which was from sales to rubber customers. The increases in
revenues from retail customers resulted from the following:
Increase from Prior Periods
Quarter Nine Months
(Millions of Dollars)
Increased kWh sales $ .2 $11.6
Fuel and energy cost
adjustment clauses (1) 4.3 16.0
Rate increases (2):
Virginia 2.6 8.4
Maryland 3.3 7.8
West Virginia .4 1.3
6.3 17.5
Other .3 1.1
$11.1 $46.2
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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 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 and further increased to $4.1 million effective
July 1, 1994 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 Nine Months Ended
September 30 September 30
1994 1993 1994 1993
KWh sales (in billions):
From Company generation .1 - .3 .3
From purchased power .5 .9 2.2 2.6
.6 .9 2.5 2.9
Revenues (in millions):
From Company generation $ 1.7 $ .3 $ 7.6 $ 8.0
From sales of purchased
power 22.8 24.8 76.8 73.5
$24.5 $25.1 $84.4 $81.5
Sales from Company generation increased in the third quarter because
of the decrease in weather-related kWh sales to retail customers and the
availability of Company's generating units. 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 third quarter of 1994 increased 6% due
primarily to an increase in kWhs 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.
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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 Nine Months Ended
September 30 September 30
1994 1993 1994 1993
(Millions of Dollars)
Nonaffiliated transactions:
Purchased power:
For resale to other
utilities $20.3 $21.8 $ 68.0 $ 64.8
Other 2.6 5.3 10.0 7.2
Power exchanges, net (.9) (.8) (.7) (1.4)
Affiliated transactions:
AGC capacity charges 7.2 7.4 21.8 22.4
Other affiliated capacity
charges 9.5 7.2 28.3 20.5
Energy and spinning
reserve charges 10.5 11.9 43.7 36.3
$49.2 $52.8 $171.1 $149.8
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 decrease
in weather-related sales to retail customers, combined with the
availability of Company generating units resulted in decreased purchases
from nonaffiliated utilities in the third quarter. 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 in the first nine months
of 1994 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
first quarter charges for previously reported asbestos suits and a
Superfund site cleanup, increased cogeneration project expenses,
affiliated company charges for transmission service, 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.
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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 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 third quarter and first
nine 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, including an increase in the fourth quarter of 1994
commensurate with the in-service date of the Harrison Power Station
scrubber project.
Taxes other than income taxes increased $.3 million for the quarter
and $.6 million for the first nine months due to increased property taxes
and gross receipts taxes resulting from higher revenues from retail
customers, offset by decreased West Virginia Business and Occupation
taxes. The variances in federal and state income taxes for the third
quarter and first nine months resulted primarily from changes in income
before taxes.
The combined decreases of $1.0 million and $1.2 million in allowance
for funds used during construction (AFUDC) for the third quarter and first
nine months, respectively, reflect increases in the current recovery of
carrying charges on CAAA expenditures in lieu of recording AFUDC.
Interest on long-term debt increased $1.4 million for the third
quarter and $.5 million for the first nine months due primarily to an
increase in the amount of long-term debt outstanding. Fluctuations in
other interest expense as well as other income, net, reflect changes in
the levels of short-term debt and temporary investments 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.
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On November 9, 1994, the Public Service Commission of West Virginia issued
an order in the Company's base rate case, summarily affirming the Administrative
Law Judge's (ALJ) recommended decision of September 30, 1994. The order
authorized an increase in annual revenues of $1.5 million effective November 11,
1994. Due to time constraints which precluded the Commission from addressing
the exceptions filed on the ALJ's recommendations, the Commission invited the
parties to file petitions for reconsideration of issues raised in the
exceptions. The Company plans to file a petition for reconsideration and, in
the meantime, has placed the new rates in effect subject to further revisions
when the Commission completes its reconsideration. 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. On September 20, 1994,
the Maryland Public Service Commission approved a Settlement Agreement
that will increase the Company's annual revenues from its Maryland
customers by $19.6 million including a $4.9 million per-year CAAA surcharge
that became effective in May 1994. The rate increase will become effective
November 11, 1994.
These increases, along with an additional rate increase request 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 Harrison Power Station scrubbers to be placed in operation.
The Company has continued its participation in the Collaborative
Process for Demand-Side Management in Maryland. Through September 30,
1994, the Company had approved applications for $15.0 million in rebates
related to the commercial lighting program. Program costs, including
rebates, and lost revenues are deferred in regulatory assets 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,
and the Company and its affiliates have been named as defendants along
with multiple defendants in an additional 718 cases by multiple
plaintiffs, including 91 new cases filed in the third quarter of 1994.
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 and insurance recoveries are such that these
suits will not have a material effect on its financial position.
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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 provisions for liabilities and insurance recoveries are such
that final resolution of this matter 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 September 30, 1994
ITEM 5. OTHER INFORMATION
On September 8, 1994, the Board of Directors of the Company
elected Jay S. Pifer as its President and a member of the Board of
Directors effective January 1, 1995.
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 September 30, 1994.
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)
November 14, 1994
<PAGE>
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<NAME> THE POTOMAC EDISON COMPANY
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25,201
36,378
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