FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from______________to______________
Commission File Number 1-3491
PENNSYLVANIA POWER COMPANY
(Exact name of Registrant as specified in its charter)
Pennsylvania 25-0718810
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 E. Washington St., P.O. Box 891, New Castle, PA 16103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 412-652-5531
Indicate by check mark whether 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 (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
____ ____
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date:
6,290,000 shares of common stock, $30 par value, outstanding as
of November 7, 1994
PENNSYLVANIA POWER COMPANY
TABLE OF CONTENTS
Pages
Part I. Financial Information
Statements of Income 1
Balance Sheets 2-3
Statements of Cash Flows 4
Notes to Financial Statements 5-6
Report of Independent Public Accountants 7
Management's Discussion and Analysis of Results of
Operations and Financial Condition 8-9
Part II. Other Information
PART I. FINANCIAL INFORMATION
- ------------------------------
PENNSYLVANIA POWER COMPANY
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1994 1993 1994 1993
------ ------ ------ ------
(In thousands)
OPERATING REVENUES $77,055 $76,226 $230,113 $220,766
------- ------- -------- --------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 13,895 15,691 45,151 46,929
Nuclear operating costs 9,036 7,771 26,262 22,520
Other operating costs 13,569 13,187 50,905 46,916
------- ------- -------- --------
Total operation and maintenance expenses 36,500 36,649 122,318 116,365
Provision for depreciation 7,709 6,636 21,936 22,839
Deferral of net regulatory assets (762) (803) (3,410) (3,443)
General taxes 5,682 6,088 17,594 17,817
Income taxes 8,308 8,140 20,168 18,112
------- ------- -------- --------
Total operating expenses and taxes 57,437 56,710 178,606 171,690
------- ------- -------- --------
OPERATING INCOME 19,618 19,516 51,507 49,076
OTHER INCOME 408 437 1,344 705
------- ------- -------- --------
TOTAL INCOME 20,026 19,953 52,851 49,781
------- ------- -------- --------
NET INTEREST:
Interest expense 9,000 8,970 26,203 26,630
Allowance for borrowed funds used during
construction (198) (151) (510) (609)
------- ------- -------- --------
Net interest 8,802 8,819 25,693 26,021
------- ------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING 11,224 11,134 27,158 23,760
Cumulative effect to January 1, 1993 of a change
in accounting for unbilled revenues (net of
income taxes of $4,108,000) -- -- -- 5,653
------- ------- --------- --------
NET INCOME 11,224 11,134 27,158 29,413
PREFERRED STOCK DIVIDEND
REQUIREMENTS 1,167 1,428 4,204 4,497
------- ------- --------- --------
EARNINGS ON COMMON STOCK $10,057 $ 9,706 $ 22,954 $ 24,916
======= ======= ========= ========
<FN>
The accompanying Notes to Financial Statements are an integral
part of these statements.
-1-
PENNSYLVANIA POWER COMPANY
BALANCE SHEETS
(Unaudited)
September 30, December 31,
1994 1993
------------- -------------
(In thousands)
ASSETS
------
UTILITY PLANT:
In service, at original cost $1,208,463 $1,209,961
Less--Accumulated provision for depreciation 402,244 394,530
---------- ----------
806,219 815,431
---------- ----------
Construction work in progress-
Electric plant 14,138 10,996
Nuclear fuel 10,903 8,604
---------- ----------
25,041 19,600
---------- ----------
831,260 835,031
---------- ----------
OTHER PROPERTY AND INVESTMENTS 8,891 15,064
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 40,287 12,819
Receivables-
Customers (less accumulated provisions
of $517,000 and $559,000, respec-
tively, for uncollectible accounts) 32,213 28,122
Parent company 20,559 19,737
Other 14,567 17,427
Materials and supplies, at average cost-
Fuel 6,432 4,350
Other 10,792 12,088
Prepayments 3,792 4,868
---------- ----------
128,642 99,411
---------- ----------
DEFERRED CHARGES:
Regulatory assets 228,958 222,301
Other 8,458 9,176
---------- ----------
237,416 231,477
---------- ----------
$1,206,209 $1,180 983
========== ==========
-2-
PENNSYLVANIA POWER COMPANY
BALANCE SHEETS
(Unaudited)
September 30, December 31,
1994 1993
------------- ------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
CAPITALIZATION:
Common stockholder's equity-
Common stock, $30 par value,
authorized 6,500,000 shares-
6,290,000 shares outstanding $ 188,700 $ 188,700
Other paid-in capital (440) (310)
Retained earnings 73,277 66,392
----------- ----------
Total common stockholder's equity 261,537 254,782
Preferred stock-
Not subject to mandatory redemption 50,905 50,905
Subject to mandatory redemption 15,000 20,500
Long-term debt-
Associated companies 16,260 16,401
Other 423,593 424,154
----------- ----------
767,295 766,742
----------- ----------
CURRENT LIABILITIES:
Currently payable preferred stock
and long-term debt-
Associated companies 9,411 10,216
Other 13,594 1,788
Accounts payable-
Associated companies 8,848 7,755
Other 26,657 32,680
Accrued taxes 9,515 6,658
Accrued interest 7,651 9,924
Other 20,163 14,308
---------- ----------
95,839 83,329
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 282,043 273,319
Accumulated deferred investment tax credits 32,547 33,560
Other 28,485 24,033
---------- ----------
343,075 330,912
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ---------- ----------
$1,206,209 $1,180,983
========== ==========
<FN>
The accompanying Notes to Financial Statements are an integral part
of these balance sheets.
-3-
PENNSYLVANIA POWER COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1994 1993 1994 1993
---- ---- ---- ----
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,224 $11,134 $ 27,158 $ 29,413
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation 7,709 6,636 21,936 22,839
Nuclear fuel and lease amortization 2,886 3,428 7,713 6,705
Deferred income taxes, net 8,871 4,605 11,257 10,859
Investment tax credits, net (338) (436) (1,013) (1,307)
Allowance for equity funds used during
construction (95) 77 (315) (136)
Deferred fuel costs, net (2,562) (607) (4,765) (4,553)
Cumulative effect of a change in accounting
for unbilled revenues -- -- -- (5,653)
Other (380) -- (1,127) --
-------- -------- -------- --------
Internal cash before dividends 27,315 24,837 60,844 58,167
Receivables (4,974) (3,175) (2,053) 3,592
Materials and supplies 593 1,743 (786) 1,669
Accounts payable (3,218) (2,084) (457) 2,718
Other 3,554 6,249 16,565 (10,418)
-------- -------- -------- --------
Net cash provided from operating activities 23,270 27,570 74,113 55,728
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Preferred stock -- 24,654 -- 24,654
Long-term debt 11,961 147,945 11,969 147,945
Redemptions and Repayments-
Preferred stock 6,325 28,170 6,687 28,970
Long-term debt 2,849 110,769 7,664 124,005
Notes payable, net -- 28,000 -- 11,000
Dividend Payments-
Common stock 5,347 5,347 16,040 16,040
Preferred stock 1,166 1,210 3,875 4,272
-------- -------- -------- --------
Net cash used for financing activities 3,726 897 22,297 11,688
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 5,986 7,663 24,141 28,299
Other (83) 252 207 343
-------- -------- -------- --------
Net cash used for investing activities 5,903 7,915 24,348 28,642
-------- -------- -------- --------
Net increase in cash and cash equivalents 13,641 18,758 27,468 15,398
Cash and cash equivalents at beginning of period 26,646 303 12,819 3,663
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 40,287 $ 19,061 $ 40,287 $ 19,061
======== ======== ======== ========
<FN>
The accompanying Notes to Financial Statements are an integral part
of these statements.
-4-
PENNSYLVANIA POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1 - FINANCIAL STATEMENTS:
The condensed financial statements reflect all normal
recurring adjustments that, in the opinion of management, are
necessary to fairly present results of operations for the interim
periods. These statements should be read in conjunction with the
financial statements and notes included in Pennsylvania Power
Company's (Company) 1993 Annual Report to Stockholders. The results
of operations are not intended to represent results of operations
for any future period.
2 - COMMITMENTS, GUARANTEES AND CONTINGENCIES:
Construction Program --
The Company, a wholly owned subsidiary of Ohio Edison
Company (Edison), currently forecasts expenditures of approximately
$140,000,000 for property additions and improvements from 1994-
1998, of which approximately $27,000,000 is applicable to 1994. The
Company's investment in nuclear fuel is expected to be
approximately $38,000,000 during the 1994-1998 period, of which
approximately $9,000,000 is applicable to 1994.
Guarantees --
The Company, together with the other Central Area Power
Coordination Group companies, has severally guaranteed certain debt
and lease obligations in connection with a coal supply contract for
the Bruce Mansfield Plant. As of September 30, 1994, the Company's
share of the guarantee was $10,952,000. The price under the coal
supply contract, which includes certain minimum payments, has been
determined to be sufficient to satisfy the debt and lease
obligations.
Environmental Matters --
Various federal, state and local authorities regulate the
Company with regard to air and water quality and other
environmental matters. The Company has estimated additional capital
expenditures for environmental compliance of approximately
$17,000,000, which is included in the construction forecast under
"Construction Program" for 1994 through 1998.
The Clean Air Act Amendments of 1990 require significant
reductions of sulfur dioxide (SO2) and oxides of nitrogen (NOx)
from the Company's coal-fired generating units by 1995 and
additional emission reductions by 2000. Compliance options include,
but are not limited to, installing additional pollution control
equipment, burning less polluting fuel, purchasing emission
-5-
PENNSYLVANIA POWER COMPANY
NOTES - (Continued)
allowances, operating facilities in a manner that minimizes
pollution and retiring facilities. In a system compliance plan for
the Company and Edison submitted to the Pennsylvania Public Utility
Commission and to the Environmental Protection Agency (EPA), the
Company stated that SO2 reductions for the years 1995 through 1999
likely will be achieved by burning lower-sulfur fuel, generating
more electricity from lower-emitting plants, and/or purchasing
emission allowances. Equipment already installed, or to be
installed by May 1995, is expected to provide NOx reductions
sufficient to meet 1995 requirements. Plans for complying with the
year 2000 and later reductions have not been finalized. EPA is
conducting additional studies which could indicate the need for
additional NOx reductions from the Company's Pennsylvania
facilities by the year 2003. The cost of such reductions, if
required, may be substantial. The Company continues to evaluate its
compliance plan and other compliance options.
The Pennsylvania Department of Environmental Resources has
issued regulations dealing with the storage, treatment,
transportation and disposal of residual waste such as coal ash and
scrubber sludge. These regulations impose additional requirements
relating to permitting, ground water monitoring, leachate
collection systems, closure, liability insurance and operating
matters. The Company is considering various compliance options but
is presently unable to determine the ultimate increase in capital
and operating costs at existing sites.
Legislative, administrative and judicial actions will
continue to change the way that the Company must operate in order
to comply with environmental laws and regulations. With respect to
any such changes and to the environmental matters described above,
the Company expects that any resulting additional capital costs
which may be required, as well as any required increase in
operating costs, would ultimately be recovered from its customers.
-6-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pennsylvania Power Company:
We have reviewed the accompanying balance sheet of
Pennsylvania Power Company (a Pennsylvania corporation and a
wholly-owned subsidiary of Ohio Edison Company) as of September 30,
1994, and the related statements of income and cash flows for the
three-month and nine-month periods ended September 30, 1994 and
1993. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information consists
principally of applying analytical procedures to financial data and
making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the financial statements
referred to above for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally
accepted auditing standards, the balance sheet and statement of
capitalization of Pennsylvania Power Company as of December 31,
1993, and the related statements of income, retained earnings,
capital stock and other paid-in capital, cash flows and taxes for
the year then ended (not presented separately herein). In our
opinion, the information set forth in the accompanying balance
sheet as of December 31, 1993 is fairly stated in all material
respects in relation to the balance sheet from which it has been
derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
November 4, 1994
-7-
PENNSYLVANIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Earnings on common stock for the nine month period ended
September 30, 1994, increased 19.2% over 1993, excluding the
cumulative effect of a change in accounting for unbilled revenues
during 1993. Earnings in the third quarter of 1994 increased 3.6%
over the same period last year.
Higher retail sales during the nine months ended September
30, 1994, pushed total sales revenue up by $8,200,000 over the same
period last year. Residential and commercial sales rose 7.6% and
8.0%, respectively, and industrial sales increased 6.2%. Total
kilowatt-hour sales remained relatively flat in the first nine
months of 1994 due to a 20.9% decrease in sales to other utilities.
Opportunities to sell power to other utilities were limited due to
reduced demand for these sales, generating capacity constraints and
increased demand in the retail sector.
For the three months ended September 30, 1994, retail
kilowatt-hour sales increased 3.6% compared to the third quarter of
1993. Residential and commercial sales increased 2.2% and 4.9%,
respectively; sales to industrial customers increased 3.9% due to
increased demand by manufacturers in the primary metals industry.
Total kilowatt-hour sales were down 7.6% in the period due to a
39.5% decrease in sales to other utilities.
Fuel and purchased power costs decreased in the third
quarter of 1994 compared with 1993 as a result of the drop in total
kilowatt-hour sales. Higher nuclear expenses during the 1994
periods were primarily due to corrective maintenance work and
refueling costs at the Perry Plant. The plant was returned to full
operational power on August 14, 1994, following the completion of
the outage. Other operating costs increased in the first nine
months of 1994 primarily due to charges relating to early
retirement programs offered to qualifying employees.
Preferred stock dividend requirements are lower for the
1994 periods due to the redemption of high cost issues of preferred
stock during the second half of 1993 and the third quarter of 1994.
Capital Resources and Liquidity
The Company has continuing cash requirements for planned
capital expenditures and debt maturities. During the fourth quarter
of 1994, capital requirements for property additions and capital
leases are expected to be approximately $10,000,000, including
$3,000,000 for nuclear fuel. Cash requirements for maturing long-
term debt are approximately $300,000 for the remainder of 1994.
-8-
PENNSYLVANIA POWER COMPANY (Cont'd)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont'd)
As of September 30, 1994, the Company had approximately
$40,000,000 of cash and temporary investments and no short-term
indebtedness. The Company had $5,000,000 of unused short-term bank
lines of credit as of September 30, 1994, and $32,000,000 of bank
facilities which may be borrowed for up to several days at the
banks' discretion.
During the third quarter of 1994, the Company issued
$12,700,000 of 6.15% pollution control notes. The proceeds from
that issue will be used in the fourth quarter of 1994 to redeem a
like amount of 12% pollution control notes. The Company also
redeemed $6,000,000 of preferred stock during the quarter.
The Company currently serves five municipalities, three of
which had agreements that expired on September 1, 1994. The Company
signed new five-year agreements (commencing September 1, 1994) with
two of these municipalities. The third filed a request with the
Federal Energy Regulatory Commission on September 9, 1994, to
require the Company to provide transmission services. The Company
has filed a response to that request and is awaiting Commission
action. The Company continues to negotiate with this municipality
as well as the other two whose agreements expire on September 1,
1995.
Caparo Group purchased the assets of Sharon Steel
Corporation, formerly the Company's largest customer, on October
26, 1994 in bankruptcy court. Caparo Group currently plans to have
the facility operational by April 1995. They plan to produce in
excess of 800,000 tons of steel in 1995 utilizing electric arc
furnaces.
-9-
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number
-------
15 Letter from independent public accountants.
Pursuant to paragraph (b)(4)(iii)(A) of Item 601 of
Regulation S-K, the Company has not filed as an exhibit to
this Form 10-Q any instrument with respect to long-term
debt if the total amount of securities authorized
thereunder does not exceed 10% of the total assets of the
Company, but hereby agrees to furnish to the Commission on
request any such documents.
(b) Reports on Form 8-K
None
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.
November 7, 1994
PENNSYLVANIA POWER COMPANY
--------------------------
Registrant
/s/ Robert P. Wushinske
----------------------------
Robert P. Wushinske
Vice President
Chief Accounting Officer