Page 1 of 13
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, 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 August 13, 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 June 30, 1996
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Statement of income - Three and six months ended
June 30, 1996 and 1995 3
Balance sheet - June 30, 1996
and December 31, 1995 4
Statement of cash flows - Six months ended
June 30, 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
<PAGE>
<TABLE>
<CAPTION>
- 3 -
THE POTOMAC EDISON COMPANY
Statement of Income
Three Months Ended Six Months Ended
June 30 June 30
1996** 1995 1996** 1995
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES:
<S> <C> <C> <C> <C>
Residential $ 68,975 $ 63,136 $ 176,286 $ 156,935
Commercial 33,836 32,566 72,659 69,646
Industrial 49,045 50,227 96,030 98,509
Wholesale and other, including affiliates* 8,457 6,563 18,378 13,018
Bulk power transactions, net* 7,678 4,848 13,566 9,996
Total Operating Revenues 167,991 157,340 376,919 348,104
OPERATING EXPENSES:
Operation:
Fuel 34,452 29,399 70,758 65,226
Purchased power and exchanges* 32,010 33,564 71,087 69,701
Deferred power costs, net 2,272 3,260 6,684 7,892
Other 17,071 23,451 58,783 46,022
Maintenance 13,217 14,085 28,433 28,556
Depreciation 17,663 17,211 35,411 34,431
Taxes other than income taxes 11,170 11,366 23,320 23,945
Federal and state income taxes 9,902 3,547 20,544 15,891
Total Operating Expenses 137,757 135,883 315,020 291,664
Operating Income 30,234 21,457 61,899 56,440
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 247 404 511 1,070
Other income, net 2,845 3,394 5,707 6,090
Total Other Income and Deductions 3,092 3,798 6,218 7,160
Income Before Interest Charges 33,326 25,255 68,117 63,600
INTEREST CHARGES:
Interest on long-term debt 12,010 12,846 24,165 24,818
Other interest 512 587 1,176 963
Allowance for borrowed funds used during
construction (276) (267) (458) (709)
Total Interest Charges 12,246 13,166 24,883 25,072
NET INCOME $ 21,080 $ 12,089 $ 43,234 $ 38,528
* 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 three and six month 1996 periods include a credit of $3.9 million and a charge of $16.3 million,
respectively for restructuring. See Note 4 on page 6.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- 4 -
THE POTOMAC EDISON COMPANY
Balance Sheet
June 30, December 31,
1996 1995
ASSETS: (Thousands of Dollars)
Property, Plant, and Equipment:
At original cost, including $47,004,000
<S> <C> <C>
and $49,987,000 under construction $2,079,519 $2,050,835
Accumulated depreciation (762,080) (729,653)
1,317,439 1,321,182
Investments:
Allegheny Generating Company - common stock at equity 58,804 59,963
Other 737 868
59,541 60,831
Current Assets:
Cash 2,600 2,953
Accounts receivable:
Electric service, net of $1,462,000 and $1,344,000
uncollectible allowance 91,550 93,250
Affiliated and other 2,807 2,917
Notes receivable from affiliates 4,400 -
Materials and supplies--at average cost:
Operating and construction 25,110 26,414
Fuel 13,454 19,148
Prepaid taxes 7,126 13,748
Other 10,225 3,158
157,272 161,588
Deferred Charges:
Regulatory assets 80,509 80,693
Unamortized loss on reacquired debt 18,468 18,926
Other 11,259 11,224
110,236 110,843
Total Assets $1,644,488 $1,654,444
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $447,700 $447,700
Other paid-in capital 2,690 2,690
Retained earnings 226,996 216,852
677,386 667,242
Preferred stock 16,378 16,378
Long-term debt and QUIDS 628,240 628,854
1,322,004 1,312,474
Current Liabilities:
Short-term debt - 21,637
Long-term debt due within one year 800 18,700
Accounts payable 20,018 28,931
Accounts payable to affiliates 13,711 15,608
Taxes accrued:
Federal and state income 9,568 3,293
Other 9,701 12,603
Interest accrued 10,219 9,638
Customer deposits 6,601 6,540
Restructuring liabilities 10,288 4,251
Other 14,504 8,251
95,410 129,452
Deferred Credits and Other Liabilities:
Unamortized investment credit 24,719 25,816
Deferred income taxes 158,365 155,432
Regulatory liabilities 14,815 15,255
Restructuring liabilities 4,880 -
Other 24,295 16,015
227,074 212,518
Total Capitalization and Liabilities $1,644,488 $1,654,444
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- 5 -
THE POTOMAC EDISON COMPANY
Statement of Cash Flows
Six Months Ended
June 30
1996 1995
(Thousands of Dollars)
CASH FLOWS FROM OPERATIONS:
<S> <C> <C>
Net income $43,234 $38,528
Depreciation 35,411 34,431
Deferred investment credit and income taxes, net (4,969) 4,611
Deferred power costs, net 6,684 7,892
Unconsolidated subsidiaries' dividends in excess of earnings 1,201 1,232
Allowance for other than borrowed funds used
during construction (511) (1,070)
Restructuring charges 14,418 -
Changes in certain current assets and
liabilities:
Accounts receivable, net 1,810 3,197
Materials and supplies 6,998 (3,875)
Accounts payable (10,810) (15,722)
Taxes accrued 3,373 (4,035)
Interest accrued 581 884
Other current liabilities 4,785 3,042
Other, net 7,766 (1,546)
109,971 67,569
CASH FLOWS FROM INVESTING:
Construction expenditures (33,007) (41,878)
Allowance for other than borrowed funds used
during construction 511 1,070
(32,496) (40,808)
CASH FLOWS FROM FINANCING:
Retirement of preferred stock - (910)
Issuance of long-term debt - 207,018
Retirement of long-term debt (18,700) (175,249)
Short-term debt, net (21,637) 14,750
Notes receivable from affiliates (4,400) 1,900
Dividends on capital stock:
Preferred stock (409) (2,091)
Common stock (32,682) (32,682)
(77,828) 12,736
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (353) 39,497
Cash and Temporary Cash Investments at January 1 2,953 2,196
Cash and Temporary Cash Investments at June 30 $ 2,600 $ 41,693
Supplemental cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $22,985 $24,479
Income taxes 20,370 14,139
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 June 30, 1996, the results
of operations for the three and six months ended June 30, 1996
and 1995, and cash flows for the six months ended June 30, 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 of method 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 $24.1 million
and $51.7 million for the three and six months ended June 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.
In March 1996, the Company and its affiliates announced
additional restructuring plans which included consolidating
operating divisions, and centralizing and changing many
accounting, customer services, and other functions. Effective
July 1996, the Company and its affiliates reduced their work
force by about 570 employees. The reductions were accomplished
through an enhanced separation plan, attrition, and layoffs.
An additional reduction of about 500 employees during the next
two or three years will occur primarily through attrition and,
in the union workforce, pursuant to appropriate contract terms.
<PAGE>
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Restructuring charges previously recorded were adjusted in the
second quarter to reflect current estimates. Restructuring
charges reflect estimated liabilities for severance, employee
termination costs, and other restructuring costs. Estimated
additional restructuring charges of about $11 million will be
recorded as the liabilities are incurred. A summary of
restructuring liabilities is provided below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 1996 June 1996
(Millions of Dollars)
Restructuring liability (before tax):
<S> <C> <C>
Balance at beginning of period $20.0 $ 4.3
Accruals/adjustments (3.9) 16.2
Benefit plans curtailment
liabilities/adjustments* .2 (3.5)
Less payments (1.1) (1.8)
Balance at end of period $15.2 $15.2
*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 Six Months Ended
June 30 June 30
1996 1995 1996 1995
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Electric operating revenues $21,023 $22,061 $41,932 $44,157
Operation & maintenance expense 1,215 1,571 2,334 3,367
Depreciation 4,290 4,224 8,580 8,448
Taxes other than income taxes 1,198 1,248 2,408 2,547
Federal income taxes 3,362 3,502 6,706 6,725
Interest charges 4,181 4,432 8,409 9,417
Other income, net - (9) (3) (9)
Net income $ 6,777 $ 7,093 $13,498 $13,662
</TABLE>
The Company's share of the equity in earnings above was $1.9
million and $2.0 million for the three months ended June 30,
1996 and 1995, and $3.8 million for each of the six months
ended June 30, 1996 and 1995, and was included in other income,
net, on the Statement of Income.
<PAGE>
- 8 -
6. Common stock dividends per share declared and paid during the
periods for which income statements are included are as
follows:
<TABLE>
<CAPTION>
1996 1995
1st 2nd 1st 2nd
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Number of Shares 22,385,000 22,385,000 22,385,000 22,385,000
Amount per Share $.73 $.73 $.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 SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1996
WITH SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1995
Review of Operations
NET INCOME
Net income for the second quarter of 1996 was $21.1
million compared with $12.1 million for the corresponding 1995 period.
For the first six months of 1996, net income was $43.2 million compared
with $38.5 million for the corresponding 1995 period. The six month
period ended June 1996 includes restructuring charges of $16.3 million
($10.3 net of taxes). Restructuring activities reported in the first
quarter continued in the second quarter with adjustments to the
restructuring charges previously recorded (see Note 4 to the financial
statements). The increase in net income for the second quarter and first
six months of 1996, excluding the restructuring charges, resulted
primarily from increased sales to retail customers.
SALES AND REVENUES
Retail kilowatt-hour (kWh) sales to residential,
commercial, and industrial customers in the second quarter increased 12%,
7%, and 2%, and in the first six months increased 16%, 8%, and 1%,
respectively. Growth in the number of customers and increased weather-
related sales combined to cause the increase in residential and commercial
sales. The increase in kWh sales to industrial customers in the second
quarter and first six months of 1996 resulted primarily from increased
sales to rubber and plastic products customers. Revenues from sales to
industrial customers decreased in both the second quarter and six months
ended June 1996 due primarily to a decrease in the fuel and energy cost
component. The increase in revenues from retail customers resulted from
the following:
<TABLE>
<CAPTION>
Change from Prior Periods
Quarter Six Months
(Millions of Dollars)
<S> <C> <C>
Increased kWh sales $ 8.0 $23.2
Fuel and energy cost adjustment clauses* (1.9) (1.5)
Rate changes .5 (.2)
Other (.7) (1.6)
$ 5.9 $19.9
</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>
- 10 -
KWh deliveries to and revenues from bulk power
transactions are comprised of the following items:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1996 1995* 1996 1995*
KWh deliveries (in billions):
<S> <C> <C> <C> <C>
From transmission services 1.2 1.0 2.9 2.1
From sale of Company generation .2 - .2 .1
1.4 1.0 3.1 2.2
Revenues (in millions):
From transmission services $4.6 $3.9 $ 9.3 $ 7.4
From sale of Company generation 3.1 .9 4.3 2.6
$7.7 $4.8 $13.6 $10.0
</TABLE>
Increased transmission services and sales of Company
generation resulted primarily from increased activity 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 for the second quarter and the first six
months of 1996 increased 17% and 8%, respectively. The increase in fuel
expenses for both periods was due primarily to an increase 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.
"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 Six Months Ended
June 30 June 30
1996 1995* 1996 1995*
(Millions of Dollars)
Nonaffiliated transactions:
<S> <C> <C> <C> <C>
Purchased power $ 3.5 $ 5.1 $ 7.8 $ 8.3
Power exchanges .4 (.2) 1.7 .5
Affiliated transactions:
AGC capacity charges 6.8 7.1 13.5 14.3
Other affiliated capacity
charges 11.5 10.7 23.7 21.6
Energy and spinning reserve
charges 9.8 10.9 24.4 25.0
$32.0 $33.6 $71.1 $69.7
</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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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), an agreement has been reached with one
facility to commence purchasing generation in 1999. This project may
significantly increase the cost of power purchases.
The increase in other operation expense for the six
months ended June 1996 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. 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 equipment is dismantled.
The net increases of $6.4 million and $4.7 million in
federal and state income taxes for the second quarter and first six-month
periods, respectively, resulted primarily from increases in income before
income taxes.
The combined decrease of $.8 million in allowance for
funds used during construction for the six months ended June 1996 reflects
a decrease in capital expenditures.
The decrease in other income, net for the second
quarter and first six-month periods was due primarily to a write-off of
certain deferred West Virginia expenditures related to the Clean Air Act
Amendments of 1990 and increased interest income in the second quarter of
1995 earned on funds available as a result of the timing of the debt and
preferred stock refinancings.
<PAGE>
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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.
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.
In July 1996, the Company presented an offer to buy the
Hagerstown, Maryland municipal electric distribution system. The offer
includes a $20 million cash payment, a five-year freeze on current
electric rates, technical upgrades and improvements to the electrical
system, and other benefits. The offer came as a result of discussions
with a municipal Study Committee which has recommended a public referendum
on the November 1996 ballot to let voters decide the issue.
The System has joined with six other electric utilities
to form the Partnership for Customer Choice (PCC). The group is urging
immediate enactment of federal legislation to provide real retail
competition to electric customers by the turn of the century. Other
members of the partnership are Cinergy, PacifiCorp, Pennsylvania Power &
Light, UtiliCorp United, Wisconsin Energy Corporation, and Wisconsin Power
and Light. The PCC strongly advocates continued state regulation of local
electric distribution, regulation of the transmission and distribution
systems to enhance, rather than impede, market efficiency, and a method of
dealing with costs that a utility may not recover in the competitive
markets (stranded costs) that does not unduly impede the transition to
full competition.
The Company and its affiliates and three other electric
utilities, whose service areas extend from Lake Erie to North Carolina,
have formed an alliance to jointly manage and coordinate the operation of
their interconnected transmission systems. Alliance operation of the
systems will increase transmission reliability for the companies' nearly
5.5 million retail customers in six states by scheduling and coordinating
bulk power transactions. The alliance will also establish fair
compensation for use of the transmission systems by alliance members and
by power wholesalers.
<PAGE>
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THE POTOMAC EDISON COMPANY
Part II - Other Information to Form 10-Q
for Quarter Ended June 30, 1996
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) (27) Financial Data Schedule
(b) As reported in the first quarter 1996 10-Q, on April
11, 1996, the Company filed a report on Form 8-K
containing a Form of Change in Control Employment
Contract.
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)
August 13, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 2,600
<SECURITIES> 0
<RECEIVABLES> 95,819
<ALLOWANCES> 1,462
<INVENTORY> 38,564
<CURRENT-ASSETS> 157,272
<PP&E> 2,079,519
<DEPRECIATION> 762,080
<TOTAL-ASSETS> 1,644,488
<CURRENT-LIABILITIES> 95,410
<BONDS> 628,240
0
16,378
<COMMON> 447,700
<OTHER-SE> 229,686
<TOTAL-LIABILITY-AND-EQUITY> 1,644,488
<SALES> 376,919
<TOTAL-REVENUES> 376,919
<CGS> 235,745
<TOTAL-COSTS> 294,476
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,883
<INCOME-PRETAX> 63,778
<INCOME-TAX> 20,544
<INCOME-CONTINUING> 43,234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,234
<EPS-PRIMARY> 0.00<F1>
<EPS-DILUTED> 0.00<F1>
<FN>
<F1>All common stock is owned by parent, no EPS required.
</FN>
</TABLE>
