<PAGE>
Page 1 of 12
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, 1997
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 14, 1997, 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, 1997
Index
Page
No.
PART I--FINANCIAL INFORMATION:
Statement of income - Three months ended
March 31, 1997 and 1996 3
Balance sheet - March 31, 1997
and December 31, 1996 4
Statement of cash flows - Three months ended
March 31, 1997 and 1996 5
Notes to financial statements 6-7
Management's discussion and analysis of financial
condition and results of operations 8-10
PART II--OTHER INFORMATION 11-12
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THE POTOMAC EDISON COMPANY
Statement of Income
<TABLE>
<CAPTION>
Three Months Ended
March 31
1997 1996
(Thousands of Dollars)
<S> <C> <C>
ELECTRIC OPERATING REVENUES:
Residential $ 91,563 $ 107,311
Commercial 37,496 38,823
Industrial 46,737 46,985
Wholesale and other, including affiliates 10,482 9,921
Bulk power transactions, net 5,950 5,888
Total Operating Revenues 192,228 208,928
OPERATING EXPENSES:
Operation:
Fuel 35,397 36,306
Purchased power and exchanges, net 37,597 39,077
Deferred power costs, net (323) 4,412
Other 21,722 21,726
Maintenance 15,584 15,090
Restructuring charges - 20,122
Depreciation 18,377 17,748
Taxes other than income taxes 12,174 12,140
Federal and state income taxes 14,638 10,642
Total Operating Expenses 155,166 177,263
Operating Income 37,062 31,665
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 407 264
Other income, net 2,607 2,862
Total Other Income and Deductions 3,014 3,126
Income Before Interest Charges 40,076 34,791
INTEREST CHARGES:
Interest on long-term debt 11,914 12,155
Other interest 752 664
Allowance for borrowed funds used during
construction (313) (182)
Total Interest Charges 12,353 12,637
NET INCOME $ 27,723 $ 22,154
</TABLE>
See accompanying notes to financial statements.
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THE POTOMAC EDISON COMPANY
Balance Sheet
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
<S> <C> <C>
ASSETS: (Thousands of Dollars)
Property, Plant, and Equipment:
At original cost, including $58,986,000
and $60,082,000 under construction $2,134,927 $2,124,956
Accumulated depreciation (809,632) (791,257)
1,325,295 1,333,699
Investments:
Allegheny Generating Company - common stock at equity 56,093 56,827
Other 619 642
56,712 57,469
Current Assets:
Cash 6,607 1,444
Accounts receivable:
Electric service, net of $1,664,000 and $1,580,000
uncollectible allowance 98,217 95,215
Affiliated and other 4,089 2,968
Notes receivable from affiliates 36,850 -
Materials and supplies - at average cost:
Operating and construction 24,049 23,775
Fuel 18,671 15,019
Prepaid taxes 15,323 17,648
Deferred income taxes 12,572 3,983
Other 3,840 3,781
220,218 163,833
Deferred Charges:
Regulatory assets 89,521 94,919
Unamortized loss on reacquired debt 17,781 18,010
Other 9,012 9,956
116,314 122,885
Total Assets $1,718,539 $1,677,886
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $447,700 $447,700
Other paid-in capital 2,690 2,690
Retained earnings 255,245 227,726
705,635 678,116
Preferred stock 16,378 16,378
Long-term debt and QUIDS 627,726 628,431
1,349,739 1,322,925
Current Liabilities:
Short-term debt - 7,497
Long-term debt due within one year 800 800
Accounts payable 29,947 33,152
Accounts payable to affiliates 16,718 17,896
Taxes accrued:
Federal and state income 16,709 123
Other 13,029 11,542
Interest accrued 13,707 9,412
Customer deposits 5,589 6,121
Restructuring liability 10,002 14,970
Other 10,138 7,603
116,639 109,116
Deferred Credits and Other Liabilities:
Unamortized investment credit 23,084 23,622
Deferred income taxes 189,937 183,727
Regulatory liabilities 13,506 13,907
Other 25,634 24,589
252,161 245,845
Total Capitalization and Liabilities $1,718,539 $1,677,886
</TABLE>
See accompanying notes to financial statements.
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THE POTOMAC EDISON COMPANY
Statement of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
March 31
1997 1996
(Thousands of Dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income $27,723 $22,154
Depreciation 18,377 17,748
Deferred investment credit and income taxes, net 2,034 (5,687)
Deferred power costs, net (323) 4,412
Unconsolidated subsidiaries' dividends in excess of earnings 750 723
Allowance for other than borrowed funds used
during construction (407) (264)
Restructuring liability - 19,417
Changes in certain current assets and
liabilities:
Accounts receivable, net (4,123) (12,747)
Materials and supplies (3,926) (407)
Accounts payable (4,383) (6,662)
Taxes accrued 18,073 18,408
Interest accrued 4,295 5,222
Other, net 2,543 5,214
60,633 67,531
CASH FLOWS FROM INVESTING:
Construction expenditures (10,526) (15,779)
Allowance for other than borrowed funds used
during construction 407 264
(10,119) (15,515)
CASH FLOWS FROM FINANCING:
Retirement of long-term debt (800) (700)
Short-term debt, net (7,497) (21,637)
Notes receivable from affiliates (36,850) (13,150)
Dividends on capital stock:
Preferred stock (204) (204)
Common stock - (16,341)
(45,351) (52,032)
NET CHANGE IN CASH 5,163 (16)
Cash at January 1 1,444 2,953
Cash at March 31 $ 6,607 $ 2,937
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $8,422 $6,985
Income taxes - -
</TABLE>
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, 1996, should be read with the
accompanying financial statements and the following notes.
With the exception of the December 31, 1996, 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 contain all adjustments (which consist only of normal
recurring adjustments) necessary to present fairly the
Company's financial position as of March 31, 1997, and the
results of operations and cash flows for the three months ended
March 31, 1997 and 1996.
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. 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 Electric and
Power Company, a nonaffiliated utility. Following is a summary
of income statement information for AGC:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1997 1996
(Thousands of Dollars)
<S> <C> <C>
Electric operating revenues $20,216 $20,909
Operation and maintenance expense 1,285 1,119
Depreciation 4,284 4,290
Taxes other than income taxes 1,195 1,210
Federal income taxes 3,124 3,344
Interest charges 3,960 4,228
Other income, net - (3)
Net income $ 6,368 $ 6,721
</TABLE>
The Company's share of the equity in earnings above was $1.8
million and $1.9 million for the three months ended March 31,
1997 and 1996, respectively, and was included in other income,
net, on the Statement of Income.
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4. Restructuring charges in the first quarter of 1996 ($12.7
million, net of tax) include expenses associated with the
reorganization, which is essentially complete.
5. On April 7, 1997, Allegheny Power System, Inc. and DQE, Inc.,
parent company of Duquesne Light Company, announced that they
have agreed to merge in a tax-free, stock-for-stock
transaction. The combined company will be called Allegheny
Energy. It is expected that Allegheny Energy will continue to
be operated as an integrated electric utility holding company
and that the Company and its regulated electric utility
affiliates will continue to exist as separate legal entities.
The merger is conditioned, among other things, upon the
approval of each company's shareholders and the necessary
approvals of various state and federal regulatory agencies,
including the public utility commissions in Pennsylvania and
Maryland, the Securities and Exchange Commission, the Federal
Energy Regulatory Commission, and the Nuclear Regulatory
Commission. The companies are hopeful that the required
approvals can be obtained within 12 to 18 months.
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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 1997 WITH FIRST QUARTER OF 1996
Review of Operations
NET INCOME
Net income for the first quarter of 1997 and 1996, and
the after tax restructuring charges included in the 1996 period are shown
below.
<TABLE>
<CAPTION>
Net Income
Three Months Ended
March 31
1997 1996
(Millions of Dollars)
<S> <C> <C>
Net Income as Reported $27.7 $22.2
Restructuring Charges - 12.7
Net Income Adjusted $27.7 $34.9
</TABLE>
Mild weather during the first quarter of 1997 was the
primary reason for the decrease in the adjusted net income before
restructuring charges.
SALES AND REVENUES
In the first quarter of 1997, retail kilowatt-hour
(kWh) sales to residential and commercial customers decreased 13% and 3%,
respectively, and to industrial customers increased 2%. Residential kWh
sales, which are more weather sensitive than the commercial and industrial
classes, decreased due to heating degree days that were 22% below the
corresponding 1996 period and 12% below normal. Commercial kWh sales also
decreased primarily because of the mild weather. The increase in
industrial kWh sales occurred primarily in the glass and concrete
customers groups. The decrease in revenues from sales to residential,
commercial, and industrial customers resulted from the following:
<TABLE>
<CAPTION>
Decrease from Prior Period
(Millions of Dollars)
<S> <C>
Decreased kWh sales $(11.1)
Fuel and energy cost adjustment clauses* (6.4)
Other .2
Net decrease in retail revenues $(17.3)
</TABLE>
* Changes in revenues from fuel and energy cost adjustment
clauses have little effect on net income.
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The increase in wholesale and other revenues in 1997
resulted primarily from load additions to the wholesale customers' systems
(cooperatives and municipalities who own their own distribution systems
and who buy all or part of their power needs for the Company under
regulation by the Federal Energy Regulatory Commission).
Revenues from bulk power transactions consist of the
following items:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1997 1996
(Millions of Dollars)
<S> <C> <C>
Revenues:
From transmission services $4.2 $4.7
From sale of Company generation 1.8 1.2
Total $6.0 $5.9
</TABLE>
About 95% of the aggregate benefits from bulk power
transactions are passed on to retail customers through fuel cost
adjustment clauses and have little effect on net income.
OPERATING EXPENSES
Fuel expenses decreased 3% due primarily to a decrease
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, Net" represents power
purchases from and exchanges with nonaffiliated companies, 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
consists of the following items:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1997 1996
(Millions of Dollars)
<S> <C> <C>
Nonaffiliated transactions:
Purchased power $ 2.7 $ 4.3
Power exchanges, net 1.4 1.3
Affiliated transactions:
AGC capacity charges 6.6 6.7
Other affiliated capacity charges 12.7 12.2
Energy and spinning reserve charges 14.2 14.6
Purchased power and exchanges, net $37.6 $39.1
</TABLE>
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Purchased power decreased because of decreased sales to
retail customers. 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
with the result that changes in such costs have little effect on net
income.
A Public Utility Regulatory Policies Act of 1978
(PURPA) power station project in the Company's Maryland jurisdiction is
scheduled to commence generation in 1999. This project will significantly
increase the costs of power purchases.
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 the equipment is dismantled.
Restructuring charges in the first quarter of 1996
include expenses associated with the reorganization, which is essentially
complete.
Depreciation expense increases resulted from additions
to electric plant. Future depreciation expense increases are expected to
be less than historical increases because of reduced levels of planned
capital expenditures.
The net increase in federal and state income taxes
resulted primarily from an increase in income before taxes.
Financial Condition and Requirements
The Company's discussion on Financial Condition and
Requirements and Competition in Core Business in the Allegheny Power
System companies' combined Annual Report on Form 10-K for the year ended
December 31, 1996, 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, to the restructuring of the electric utility
industry, merger activities, and legal actions.
The Company continues to advocate true competition in
the electric utility industry. Speaking on behalf of the Partnership for
Customer Choice (PCC), a group of utilities established in 1996 to push
for the enactment of federal legislation to bring real choice to electric
consumers by a date certain, Allegheny Power System's President and CEO
continues to deliver a strong, clear message to lawmakers and others that
federal legislation is needed to advance fair and equal competition in the
electric utility industry that would eliminate a patchwork of state-by-
state customer choice plans.
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THE POTOMAC EDISON COMPANY
Part II - Other Information to Form 10-Q
for Quarter Ended March 31, 1997
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 23, 1997. 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 Michael P. Morrell
William L. Bennett Alan J. Noia
Klaus Bergman Jay S. Pifer
Wendell F. Holland Steven H. Rice
Phillip E. Lint Gunnar E. Sarsten
Edward H. Malone Peter L. Shea
Frank A. Metz, Jr. Peter J. Skrgic
ITEM 5. OTHER INFORMATION
On April 7, 1997, Allegheny Power System, Inc. and DQE,
Inc., parent company of Duquesne Light Company, announced that they have
agreed to merge in a tax-free, stock-for-stock transaction. The combined
company will be called Allegheny Energy. It is expected that Allegheny
Energy will continue to be operated as an integrated electric utility
holding company and that the Company and its regulated electric utility
affiliates will continue to exist as separate legal entities.
The merger is conditioned, among other things, upon the
approval of each company's shareholders and the necessary approvals of
various state and federal regulatory agencies, including the public
utility commissions in Pennsylvania and Maryland, the Securities and
Exchange Commission, the Federal Energy Regulatory Commission, and the
Nuclear Regulatory Commission. The companies are hopeful that the
required approvals can be obtained within 12 to 18 months.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) (27) Financial Data Schedule
(b) No reports on Form 8-K were filed on behalf of the
Company for the quarter ended March 31, 1997.
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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
/s/ THOMAS J. KLOC
Thomas J. Kloc
Controller
(Chief Accounting Officer)
May 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 6,607
<SECURITIES> 0
<RECEIVABLES> 103,970
<ALLOWANCES> 1,664
<INVENTORY> 42,720
<CURRENT-ASSETS> 220,218
<PP&E> 2,134,927
<DEPRECIATION> 809,632
<TOTAL-ASSETS> 1,718,539
<CURRENT-LIABILITIES> 116,639
<BONDS> 627,726
0
16,378
<COMMON> 447,700
<OTHER-SE> 257,935
<TOTAL-LIABILITY-AND-EQUITY> 1,718,539
<SALES> 192,228
<TOTAL-REVENUES> 192,228
<CGS> 109,977
<TOTAL-COSTS> 140,528
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,353
<INCOME-PRETAX> 42,361
<INCOME-TAX> 14,638
<INCOME-CONTINUING> 27,723
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,723
<EPS-PRIMARY> 0.00<F1>
<EPS-DILUTED> 0.00<F1>
<FN>
<F1>All common stock is owned by parent, no EPS required.
</FN>
</TABLE>
