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 March 31, 1996
Commission File Number 1-3376-2
THE POTOMAC EDISON COMPANY
(Exact name of registrant as specified in its charter)
Maryland and Virginia 13-5323955
(State 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 15, 1996, 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 March 31, 1996
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Statement of income - Three months ended
March 31, 1996 and 1995 3
Balance sheet - March 31, 1996
and December 31, 1995 4
Statement of cash flows - Three months ended
March 31, 1996 and 1995 5
Notes to financial statements 6-8
Management's discussion and analysis of financial
condition and results of operations 9-12
PART II--OTHER INFORMATION 13-14
<PAGE>
<TABLE>
<CAPTION>
- 3 -
THE POTOMAC EDISON COMPANY
Statement of Income
Three Months Ended
March 31
1996** 1995
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES:
<S> <C> <C>
Residential $ 107,311 $ 93,799
Commercial 38,823 37,080
Industrial 46,985 48,282
Wholesale and other, including affiliates 9,921 6,455 *
Bulk power transactions, net 5,888 5,148 *
Total Operating Revenues 208,928 190,764
OPERATING EXPENSES:
Operation:
Fuel 36,306 35,827
Purchased power and exchanges 39,077 36,137 *
Deferred power costs, net 4,412 4,632
Other 41,712 22,571
Maintenance 15,216 14,471
Depreciation 17,748 17,220
Taxes other than income taxes 12,150 12,579
Federal and state income taxes 10,642 12,344
Total Operating Expenses 177,263 155,781
Operating Income 31,665 34,983
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 264 666
Other income, net 2,862 2,696
Total Other Income and Deductions 3,126 3,362
Income Before Interest Charges 34,791 38,345
INTEREST CHARGES:
Interest on long-term debt 12,155 11,972
Other interest 664 376
Allowance for borrowed funds used during
construction (182) (442)
Total Interest Charges 12,637 11,906
NET INCOME $ 22,154 $ 26,439
* Prior period amounts have been reclassified for comparative purposes to reflect
a change in 1996 in reporting certain bulk power transmission transactions with
nonaffiliated utilities. See Note 3 on page 6.
**The 1996 period includes restructuring charges of $12.7 million, net of taxes.
See Note 4 on page 6.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- 4 -
THE POTOMAC EDISON COMPANY
Balance Sheet
March 31, December 31,
1996 1995
ASSETS: (Thousands of Dollars)
Property, Plant, and Equipment:
At original cost, including $42,884,000
<S> <C> <C>
and $49,987,000 under construction $2,064,169 $2,050,835
Accumulated depreciation (746,012) (729,653)
1,318,157 1,321,182
Investments:
Allegheny Generating Company - common stock at equity 59,262 59,963
Other 792 868
60,054 60,831
Current Assets:
Cash 2,937 2,953
Accounts receivable:
Electric service, net of $1,560,000 and $1,344,000
uncollectible allowance 106,499 93,250
Affiliated and other 2,415 2,917
Notes receivable from affiliates 13,150 0
Materials and supplies--at average cost:
Operating and construction 25,730 26,414
Fuel 20,239 19,148
Prepaid taxes 12,038 13,748
Other 8,268 3,158
191,276 161,588
Deferred Charges:
Regulatory assets 80,673 80,693
Unamortized loss on reacquired debt 18,697 18,926
Other 11,323 11,224
110,693 110,843
Total Assets $1,680,180 $1,654,444
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $447,700 $447,700
Other paid-in capital 2,690 2,690
Retained earnings 222,461 216,852
672,851 667,242
Preferred stock 16,378 16,378
Long-term debt and QUIDS 628,146 628,854
1,317,375 1,312,474
Current Liabilities:
Short-term debt - 21,637
Long-term debt due within one year 18,800 18,700
Accounts payable 22,481 28,931
Accounts payable to affiliates 15,396 15,608
Taxes accrued:
Federal and state income 20,336 3,293
Other 13,968 12,603
Interest accrued 14,860 9,638
Restructuring liabilities 12,948 4,251
Other 17,281 14,791
136,070 129,452
Deferred Credits and Other Liabilities:
Unamortized investment credit 25,268 25,816
Deferred income taxes 156,875 155,432
Regulatory liabilities 14,966 15,255
Restructuring liabilities 7,026 -
Other 22,600 16,015
226,735 212,518
Total Capitalization and Liabilities $1,680,180 $1,654,444
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- 5 -
THE POTOMAC EDISON COMPANY
Statement of Cash Flows
Three Months Ended
March 31
1996 1995
(Thousands of Dollars)
CASH FLOWS FROM OPERATIONS:
<S> <C> <C>
Net income $22,154 $26,439
Depreciation 17,748 17,220
Deferred investment credit and income taxes, net (5,687) 826
Deferred power costs, net 4,412 4,632
Unconsolidated subsidiaries' dividends in excess of earnings 723 690
Allowance for other than borrowed funds used
during construction (264) (666)
Restructuring charges 19,417 -
Changes in certain current assets and
liabilities:
Accounts receivable, net (12,747) (7,374)
Materials and supplies (407) (3,714)
Accounts payable (6,662) (9,081)
Taxes accrued 18,408 15,038
Interest accrued 5,222 4,409
Other, net 5,214 (2,279)
67,531 46,140
CASH FLOWS FROM INVESTING:
Construction expenditures (15,779) (20,262)
Allowance for other than borrowed funds used
during construction 264 666
(15,515) (19,596)
CASH FLOWS FROM FINANCING:
Retirement of preferred stock - (910)
Retirement of long-term debt (700) -
Short-term debt, net (21,637) -
Notes receivable from affiliates (13,150) (8,500)
Dividends on capital stock:
Preferred stock (204) (1,068)
Common stock (16,341) (16,341)
(52,032) (26,819)
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (16) (275)
Cash and Temporary Cash Investments at January 1 2,953 2,196
Cash and Temporary Cash Investments at March 31 $ 2,937 $ 1,921
Supplemental cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $6,985 $7,586
Income taxes - -
See accompanying notes to financial statements.
</TABLE>
<PAGE>
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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, 1995, should be read with the
accompanying financial statements and the following notes.
With the exception of the December 31, 1995, 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, 1996, and the
results of operations and cash flows for the three months ended
March 31, 1996 and 1995.
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. Effective in 1996 the Company changed its method of reporting
certain bulk power transmission transactions with nonaffiliated
utilities, and reclassified prior year's bulk power revenues
and operation expenses to achieve a consistent presentation.
In prior years, some use of the Company's transmission system
was recorded as purchased power from selling utilities and as
sales of power to buying utilities. The benefit to the Company
was the difference between the two. Because of new Federal
Energy Regulatory Commission requirements, the Company
predominantly does not "buy" and "sell" such energy, but rather
a transmission fee is charged.
Under the new reporting method all such transactions are
recorded on a net revenue basis. The effect of the
reclassification was to reduce amounts reported for bulk power
transaction revenues and operation expenses by $14.6 million
and $27.6 million for the three months ended March 31, 1996 and
1995, respectively, with no change in operating income or net
income.
4. As previously announced, the System is undergoing a
reorganization and reengineering process (restructuring) to
simplify its management structure and to increase efficiency.
On March 12, 1996, the Company and its affiliates announced
additional restructuring plans which include consolidating
operating divisions, and centralizing and changing many
accounting, customer services, and other functions. As a
consequence of this process, an additional work force reduction
of approximately 1,000 System employees will occur. It is
expected that approximately 50% of the positions will be
eliminated by July 1996 with the remaining positions eliminated
by 1998. Reductions will be accomplished through an enhanced
separation plan, attrition, and, in the union workforce,
pursuant to appropriate contract.
<PAGE>
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Additional restructuring charges which reflect estimated
liabilities for severance and other employee termination costs
are estimated to be about $30 million ($20 million after tax)
of which $20.1 million ($12.7 million after tax) was recorded
in the first quarter of 1996. The remaining charges will be
recorded later, primarily in the third quarter of 1996, as
required by applicable accounting rules. A summary of
restructuring liabilities is provided below:
<TABLE>
<CAPTION>
First Quarter 1996
(Millions of Dollars)
Restructuring liability (before tax):
<S> <C>
Balance at beginning of quarter $ 4.3
Add first quarter accrual 20.1
Less benefit plans curtailment
liabilities (3.7)*
Less first quarter payments (.7)
Balance at end of quarter $20.0
*Primarily recorded in other deferred credits.
</TABLE>
5. 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, a
nonaffiliated utility. Following is a summary of income
statement information for AGC:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1996 1995
(Thousands of Dollars)
<S> <C> <C>
Electric operating revenues $20,909 $22,096
Operation and maintenance expense 1,119 1,796
Depreciation 4,290 4,224
Taxes other than income taxes 1,210 1,299
Federal income taxes 3,344 3,223
Interest charges 4,228 4,985
Other income, net (3) -
Net income $ 6,721 $ 6,569
</TABLE>
The Company's share of the equity in earnings above was $1.9
million and $1.8 million for the three months ended March 31,
1996 and 1995, respectively, and was included in other income,
net, on the Statement of Income.
<PAGE>
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6. Common stock dividends per share declared and paid during the
periods for which income statements are included are as
follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1996 1995
<S> <C> <C>
Number of Shares 22,385,000 22,385,000
Amount per Share $.73 $.73
</TABLE>
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>
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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 1996 WITH FIRST QUARTER OF 1995
Review of Operations
NET INCOME
Net income for the first quarter of 1996 was $22.2
million, after reflecting a restructuring charge net of taxes of $12.7
million, compared with $26.4 million for the corresponding 1995 period.
The restructuring charge reflects estimated liabilities for severance and
other employee termination costs incurred to date for continuing
restructuring activities which commenced during the last half of 1995.
The 32% increase in earnings, excluding the restructuring charge, resulted
primarily from increased sales to retail customers.
SALES AND REVENUES
Retail kilowatt-hour (kWh) sales to residential and
commercial customers increased 18% and 9%, respectively, and sales to
industrial customers remained about the same. The increase in kWh sales
to residential customers was primarily due to an increase in weather-
related sales. Colder temperatures in the first quarter of 1996 as
compared to milder first quarter 1995 weather, resulted in heating degree
days 13% above normal and 15% above the 1995 first quarter. The increase
in commercial sales reflects both increased usage and growth in the number
of customers. The increase in revenues from retail customers resulted
from the following:
<TABLE>
<CAPTION>
Change from Prior Period
(Millions of Dollars)
<S> <C>
Increased kWh sales $15.2
Fuel and energy cost adjustment clauses* .3
Rate changes (.7)
Other (.8)
$14.0
</TABLE>
* Changes in revenues from fuel and energy cost adjustment
clauses have little effect on net income.
The increase in wholesale and other revenues reflects
increased revenues from wholesale customers due to a rate increase
effective in June 1995, increased weather-related sales, and load
additions to the wholesale customers' systems.
<PAGE>
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KWh deliveries to and revenues from bulk power
transactions are comprised of the following items:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1996 1995*
KWh deliveries (in billions):
<S> <C> <C>
From transmission services 1.7 1.1
From sale of Company generation - .1
1.7 1.2
Revenues (in millions):
From transmission services $4.7 $3.5
From sales of Company generation 1.2 1.6
$5.9 $5.1
</TABLE>
Increased transmission services resulted primarily from
increased demand from power marketers. About 95% of the aggregate
benefits from bulk power transactions are passed on to retail customers
and have little effect on net income.
OPERATING EXPENSES
Fuel expenses increased 1%, the net result of a 5%
increase related to kWh generated and a 4% decrease 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.
"Purchased power and exchanges" represents power
purchases from and exchanges with nonaffiliated utilities, capacity
charges paid to Allegheny Generating Company (AGC), an affiliate partially
owned by the Company, 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:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1996 1995*
(Millions of Dollars)
Nonaffiliated transactions:
<S> <C> <C>
Purchased power $ 4.3 $ 3.2
Power exchanges 1.3 .7
Affiliated transactions:
AGC capacity charges 6.7 7.2
Other affiliated capacity charges 12.2 10.9
Energy and spinning reserve charges 14.6 14.1
$39.1 $36.1
</TABLE>
* Prior period amounts have been reclassified for comparative
purposes to reflect a change in the method of reporting
certain bulk power transmission transactions with
nonaffiliated utilities. See Note 3 to the Financial
Statements for further information.
<PAGE>
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Purchased power increased because of increased sales to
retail customers and the availability of more economic energy. The
increase in energy and spinning reserve charges was due to an increase in
retail kWh sales. The cost of purchased power, AGC capacity charges in
West Virginia, and affiliated energy and spinning reserve charges is
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.
While the Company does not currently purchase
generation from qualified facilities under the Public Utility Regulatory
Policies Act of 1978 (PURPA), it will be required to do so in 1999 because
of a PURPA facility which is then scheduled to commence operations. This
project may significantly increase the cost of power purchases passed on
to customers.
The increase in other operation expense resulted
primarily from restructuring charges which are discussed in Note 4 to the
Financial Statements.
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 also
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 and
the amount of work found necessary when the equipment is dismantled.
Depreciation expense increases resulted from additions
to electric plant.
The net decrease of $1.7 million in federal and state
income taxes resulted primarily from a decrease in income before taxes.
The combined decrease of $.7 million in allowance for
funds used during construction (AFUDC) reflects a decrease in capital
expenditures.
Financial Condition and Requirements
The Company's discussion on Financial Condition and
Requirements and Changes in the Electric Utility Industry in the Allegheny
Power System companies' combined Annual Report on Form 10-K for the year
ended December 31, 1995, should be read with the following information.
<PAGE>
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In the normal course of business, the Company is
subject to various contingencies and uncertainties relating to its
operations and construction programs, including cost recovery in the
regulatory process, laws, regulations and uncertainties related to
environmental matters, and legal actions.
The final rules on open transmission access were
released by the Federal Energy Regulatory Commission (FERC) on April 24
and the Company is in the process of reviewing the document. The first
rule, Order No. 888, requires utilities with transmission capacity to file
open access tariffs that offer to others transmission service that is
comparable to service they provide themselves. In addition, utilities
must apply the same tariffs offered to others to their own wholesale
energy sales and purchases. The Company has had an open access
transmission tariff on file with the FERC since December 1995. The Order
also provides for full recovery of stranded costs-- those costs that were
prudently incurred to serve power customers and that could go unrecovered
if those customers use open access to move to another supplier.
Order No. 889, which is also included in the rules,
requires utilities to establish electronic systems to share information
about available transmission capacity for wholesale transactions.
The FERC also proposed that each public utility would
replace the network and point-to-point tariffs in the open access rule
with a single capacity reservation tariff by the end of 1997.
<PAGE>
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THE POTOMAC EDISON COMPANY
Part II - Other Information to Form 10-Q
for Quarter Ended March 31, 1996
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDER
1. (a) Date and Kind of Meeting:
The annual meeting of shareholders was held at
Hagerstown, Maryland, on April 24, 1996. No
proxies were solicited.
(b) Election of Directors:
The holder 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:
Eleanor Baum Alan J. Noia
William L. Bennett Jay S. Pifer
Klaus Bergman Steven H. Rice
Wendell F. Holland Gunnar E. Sarsten
Phillip E. Lint Peter L. Shea
Edward H. Malone Peter J. Skrgic
Frank A. Metz, Jr.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) (27) Financial Data Schedule
(b) On March 13, 1996, the Company filed a Form 8-K for the
restructuring of its organization.
On April 11, 1996, the Company filed a Form 8-K
containing a Form of Change in Control Employment
Contract.
<PAGE>
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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
Controller
(Chief Accounting Officer)
May 15, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 2,937
<SECURITIES> 0
<RECEIVABLES> 110,474
<ALLOWANCES> 1,560
<INVENTORY> 45,969
<CURRENT-ASSETS> 191,276
<PP&E> 2,064,169
<DEPRECIATION> 746,012
<TOTAL-ASSETS> 1,680,180
<CURRENT-LIABILITIES> 136,070
<BONDS> 628,146
447,700
0
<COMMON> 16,378
<OTHER-SE> 225,151
<TOTAL-LIABILITY-AND-EQUITY> 1,680,180
<SALES> 208,928
<TOTAL-REVENUES> 208,928
<CGS> 136,723
<TOTAL-COSTS> 166,621
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,637
<INCOME-PRETAX> 32,796
<INCOME-TAX> 10,642
<INCOME-CONTINUING> 22,154
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,154
<EPS-PRIMARY> 0.00<F1>
<EPS-DILUTED> 0.00<F1>
<FN>
<F1>All common stock is owned by parent, no EPS required.
</FN>
</TABLE>
