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, 1997
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 13, 1997
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 6-7
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,
--------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
(In thousands, except per share amounts)
OPERATING REVENUES $85,239 $80,489 $243,436 $242,127
------- ------- -------- --------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 17,299 16,191 48,411 50,126
Nuclear operating costs 6,407 5,688 19,541 17,204
Other operating costs 13,870 15,534 45,122 43,955
------- ------- -------- --------
Total operation and maintenance expenses 37,576 37,413 113,074 111,285
Provision for depreciation 15,621 14,530 42,903 37,019
Amortization of net regulatory assets 1,845 1,845 5,535 3,690
General taxes 5,913 6,159 17,620 18,191
Income taxes 8,649 6,438 22,032 22,924
------- ------- -------- --------
Total operating expenses and taxes 69,604 66,385 201,164 193,109
------- ------- -------- --------
OPERATING INCOME 15,635 14,104 42,272 49,018
OTHER INCOME 795 934 1,789 5,154
------- ------- -------- --------
TOTAL INCOME 16,430 15,038 44,061 54,172
NET INTEREST:
Interest expense 5,669 6,926 17,066 21,316
Allowance for borrowed funds used during
construction (133) (30) (269) (342)
------- ------- -------- --------
Net interest 5,536 6,896 16,797 20,974
------- ------- -------- --------
NET INCOME 10,894 8,142 27,264 33,198
------- ------- -------- --------
PREFERRED STOCK DIVIDEND
REQUIREMENTS 1,157 1,157 3,470 3,470
------- ------- ------- --------
EARNINGS ON COMMON STOCK $ 9,737 $ 6,985 $23,794 $ 29,728
======= ======= ======= ========
<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,
1997 1996
------------- ------------
(In thousands)
ASSETS
------
UTILITY PLANT:
In service, at original cost $1,235,062 $1,228,618
Less--Accumulated provision for depreciation 511,925 465,003
---------- ----------
723,137 763,615
---------- ----------
Construction work in progress-
Electric plant 8,216 7,645
Nuclear fuel 6,697 1,803
---------- ----------
14,913 9,448
---------- ----------
738,050 773,063
---------- ----------
OTHER PROPERTY AND INVESTMENTS 29,304 21,131
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 12 1,387
Notes receivable from parent company 24,500 2,500
Receivables-
Customers (less accumulated provisions
of $3,612,000 and $569,000, respectively,
for uncollectible accounts) 32,892 38,054
Parent company 10,689 14,450
Other 12,528 14,970
Materials and supplies, at average cost 14,869 14,269
Prepayments 3,011 1,576
---------- ----------
98,501 87,206
---------- ----------
DEFERRED CHARGES:
Regulatory assets 166,659 177,283
Other 6,899 7,212
---------- ----------
173,558 184,495
---------- ----------
$1,039,413 $1,065,895
========== ==========
- 2 -
PENNSYLVANIA POWER COMPANY
BALANCE SHEETS
(Unaudited)
September 30, December 31,
1997 1996
------------- ------------
(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 (413) (413)
Retained earnings 105,972 98,217
---------- ----------
Total common stockholder's equity 294,259 286,504
Preferred stock-
Not subject to mandatory redemption 50,905 50,905
Subject to mandatory redemption 15,000 15,000
Long-term debt -
Associated companies 8,132 7,245
Other 280,135 303,751
---------- ----------
648,431 663,405
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt-
Associated companies 5,046 6,784
Other 14,007 712
Accounts payable-
Associated companies 5,547 8,084
Other 18,890 25,686
Accrued taxes 18,164 14,823
Accrued interest 3,680 7,382
Other 20,629 21,199
---------- ----------
85,963 84,670
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 239,911 253,776
Accumulated deferred investment tax credits 26,635 28,383
Other 38,473 35,661
---------- ----------
305,019 317,820
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ---------- ----------
$1,039,413 $1,065,895
========== ==========
<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,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,894 $ 8,142 $ 27,264 $ 33,198
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation 15,621 14,530 42,903 37,019
Nuclear fuel and lease amortization 1,658 2,435 6,467 5,901
Other amortization, net 1,553 1,517 4,631 2,620
Deferred income taxes, net (1,857) (2,194) (8,464) 2,696
Investment tax credits, net (629) (590) (1,748) (1,547)
Receivables (122) 3,883 11,365 9,912
Materials and supplies 328 957 (600) 2,253
Accounts payable (5,025) (3,845) (9,177) (10,404)
Other 2,013 1,669 (3,051) (19,940)
------- -------- -------- --------
Net cash provided from operating activities 24,434 26,504 69,590 61,708
------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 10,007 - 10,007 -
Redemptions and Repayments-
Long-term debt 12,103 2,390 26,415 31,581
Dividend Payments-
Common stock 5,347 5,347 16,040 16,040
Preferred stock 1,232 1,157 3,470 3,470
------- -------- -------- --------
Net cash used for financing activities 8,675 8,894 35,918 51,091
------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 3,529 3,757 10,059 15,415
Loan to parent 11,500 14,000 22,000 15,000
Other 1,211 228 2,988 272
------- -------- -------- --------
Net cash used for investing activities 16,240 17,985 35,047 30,687
------- -------- -------- --------
Net decrease in cash and cash equivalents 481 375 1,375 20,070
Cash and cash equivalents at beginning of period 493 1,289 1,387 20,984
------- -------- -------- --------
Cash and cash equivalents at end of period $ 12 $ 914 $ 12 $ 914
======= ======== ======== ========
<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) 1996 Annual Report to Stockholders. The
results of operations are not intended to be indicative of
results of operations for any future period.
2 - COMMITMENTS, GUARANTEES AND CONTINGENCIES:
Construction Program --
The Company, a wholly owned subsidiary of Ohio Edison
Company, currently forecasts expenditures of approximately $100
million for property additions and improvements from 1997-2001,
of which approximately $18 million is applicable to 1997. Nuclear
fuel investments for the Company are expected to be approximately
$33 million during the 1997-2001 period, of which approximately
$9 million is applicable to 1997.
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, 1997,
the Company's share of the guarantee was $5.5 million. 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 $1 million for the period 1997 through 2001, which
is included in the construction forecast under "Construction
Program."
The Company is in compliance with the current sulfur
dioxide (SO2) and nitrogen oxides (NOx) reduction requirements
under the Clean Air Act Amendments of 1990. SO2 reductions
through the year 1999 will be achieved by burning lower-sulfur
fuel, generating more electricity from lower-emitting plants
- 5 -
and/or purchasing emission allowances. Plans for complying with
reductions required for the year 2000 and thereafter have not
been finalized. The Environmental Protection Agency (EPA) is
conducting additional studies which could indicate the need for
additional NOx reductions from the Company's Pennsylvania
facilities by the year 2003. In October 1997, the EPA proposed
rules that call for a regional approach for NOx reductions.
Comments are being accepted by the EPA and the rules could go
into effect in late 1998. The cost of such reductions, if
required, may be substantial. The Company continues to evaluate
its compliance plan and other compliance options.
In December 1996, the EPA proposed changes in the
National Ambient Air Quality Standard for ozone and proposed a
new standard for previously unregulated ultra-fine particulate
matter. Final regulations for both of these standards were
announced in July 1997. The cost of compliance with these
regulations may be substantial and depends on the manner in which
they are implemented by the states in which the Company operates
affected facilities.
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, 1997, and
the related statements of income and cash flows for the three-
month and nine-month periods then ended. 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,
1996, 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 herein), and, in our report
dated February 7, 1997, we expressed an unqualified opinion on
that statement. In our opinion, the information set forth in the
accompanying balance sheet as of December 31, 1996, 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 13, 1997
- 7 -
PENNSYLVANIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Earnings on common stock increased by 39.4% in the third
quarter of 1997, compared to the same period last year. For the
nine months ended September 30, 1997, earnings were down 20.0% from
the nine months ended September 30, 1996. The nine-month results
for 1997 reflect accelerated depreciation and amortization of
nuclear and regulatory assets totaling approximately $28,500,000
under the Company's Rate Stability and Economic Development Plan;
results for the first nine months of 1996 included approximately
$19,000,000 of accelerated depreciation and amortization. The
accelerated amounts were similar during the comparable three month
periods.
Operating revenues increased by 5.9% and 0.5% in the
three and nine-month periods ended September 30, 1997,
respectively, compared to the three and nine-month periods ended
September 30, 1996. The following table summarizes the percentage
changes in kilowatt-hour sales for the three months and nine months
ended September 30, 1997 compared to the corresponding periods in
1996:
3 Months 9 Months
-------- --------
Residential - - 1.6%
Commercial + 4.9% + 1.7%
Industrial - 3.3% + 0.5%
Total Retail - 0.1% + 0.1%
Other Utilities + 3.5% - 9.8%
Total + 0.5% - 1.7%
During the nine months ended September 30, 1997,
residential sales were down compared to last year due to milder
weather conditions. Commercial sales have increased during 1997 due
to an improving local economy. The drop in industrial sales during
the third quarter is primarily due to reduced sales to Caparo
Steel, which closed its electric arc furnace in August 1997.
Excluding sales to Caparo, industrial sales increased 5.5%,
compared to the third quarter of 1996. For the nine-month period,
sales to other utilities were down due to the December 31, 1996
expiration of a one-year contract with another utility to supply 33
megawatts of power. The third quarter rise in sales to other
utilities was due to increased sales to Edison.
Because of lower kilowatt-hour sales, the Company spent
less on fuel and purchased power during the first nine months of
1997, compared to last year. For the third quarter, fuel and
purchased power costs were up due to the increase in total
kilowatt-hour sales. Higher nuclear expenses reflect increased
- 8 -
operating costs at the Beaver Valley Plant in 1997. For the three
months ended September 30, 1997, the decrease in other operating
costs reflects the effect of last year's charges for severance
costs and higher plant maintenance expenses, which were included in
the 1996 third quarter results. For the nine-month period, the
decreases were more than offset by a $3,000,000 charge for
uncollectible customer accounts in the second quarter of 1997. The
changes in depreciation and regulatory asset amortization reflect
accelerations under the rate stability plan discussed above.
The decrease in other income for the nine months ended
September 30, 1997 is principally due to last year's second quarter
adjustment to the recoverable costs related to Perry Unit 2 since
recovery began sooner than originally anticipated; that adjustment
increased other income in the second quarter of 1996.
The decreases in interest costs compared to 1996 were due
to redemptions of long-term debt, totaling approximately
$69,000,000, that occurred subsequent to September 30, 1996.
Capital Resources and Liquidity
The Company has continuing cash requirements for planned
capital expenditures and debt maturities. During the fourth
quarter of 1997, capital requirements for property additions and
capital leases are expected to be about $13,000,000, including
$4,000,000 for nuclear fuel. The Company has additional cash
requirements of approximately $12,600,000 during the fourth quarter
of 1997 for maturing long-term debt and the optional redemptions
discussed below. These requirements are expected to be satisfied
with internal cash.
As of September 30, 1997, the Company had approximately
$25,000,000 of cash and temporary investments and no short-term
indebtedness. The Company had $2,000,000 of unused short-term bank
lines of credit as of September 30, 1997, and $12,000,000 of bank
facilities which may be borrowed for up to several days at the
banks' discretion.
During October 1997, the Company made open market
purchases for $6,000,000 of its 6.625% first mortgage bonds and
$6,500,000 of its 6.375% first mortgage bonds.
On September 30, 1997, the Company filed a restructuring
plan with the Pennsylvania Public Utility Commission (PPUC). The
plan describes how the Company will restructure its rates and
provide customers with direct access to alternative electricity
suppliers beginning in 1999. The Company will continue to deliver
power to homes and businesses through its transmission and
distribution system, which remains regulated by the PPUC. The
Company also plans to sell electricity and energy related services
in its own territory and throughout Pennsylvania as an alternative
supplier through its nonregulated subsidiary, Penn Power Energy.
Through the restructuring plan, the Company is seeking recovery of
- 9 -
$293 million of stranded costs through a competitive transition
charge starting in 1999 and ending 2005, which is consistent with
its Rate Stability and Economic Development Plan currently in
effect. Later this year, the PPUC is expected to announce plans to
hold public hearings on the Company's restructuring plan.
The Federal Energy Regulatory Commission (FERC) issued an
order on October 29, 1997, conditionally approving Ohio Edison's
merger with Centerior Energy Corporation to form FirstEnergy Corp.
The order requires the companies to make some minor modifications
to the mitigation measures filed with the FERC on August 8, 1997.
FERC's order also encourages the companies to participate in the
formation of an independent system operator for the region. Ohio
Edison and Centerior notified the FERC of their acceptance of that
order on October 30, 1997. The application of FirstEnergy to the
Securities and Exchange Commission under the Public Utility Holding
Company Act of 1935 to acquire the common stock of Ohio Edison and
the Centerior subsidiaries was approved on November 5, 1997, and
the merger was effective on November 8, 1997. Ohio Edison is now a
subsidiary of FirstEnergy, but remains the Company's parent.
- 10 -
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
- 11 -
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 13, 1997
PENNSYLVANIA POWER COMPANY
--------------------------
Registrant
/s/ Robert P. Wushinske
-----------------------
Robert P. Wushinske
Vice President and Treasurer
Chief Accounting Officer
- 12 -