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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, 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 August 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 and six months ended
June 30, 1997 and 1996 3
Balance sheet - June 30, 1997
and December 31, 1996 4
Statement of cash flows - Six months ended
June 30, 1997 and 1996 5
Notes to financial statements 6-7
Management's discussion and analysis of financial
condition and results of operations 8-11
PART II--OTHER INFORMATION 12-13
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THE POTOMAC EDISON COMPANY
Statement of Income
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES:
Residential $ 66,256 $ 68,975 $ 157,819 $ 176,286
Commercial 34,367 33,836 71,863 72,659
Industrial 50,034 49,045 96,771 96,030
Wholesale and other, including affiliates 8,992 8,457 19,474 18,378
Bulk power transactions, net 5,218 7,678 11,168 13,566
Total Operating Revenues 164,867 167,991 357,095 376,919
OPERATING EXPENSES:
Operation:
Fuel 33,472 34,452 68,869 70,758
Purchased power and exchanges, net 32,047 32,010 69,644 71,087
Deferred power costs, net (667) 2,272 (990) 6,684
Other 19,777 20,994 41,499 42,720
Maintenance 15,320 13,146 30,904 28,236
Restructuring charges - (3,862) - 16,260
Depreciation 18,374 17,663 36,751 35,411
Taxes other than income taxes 12,756 11,180 24,930 23,320
Federal and state income taxes 6,894 9,902 21,532 20,544
Total Operating Expenses 137,973 137,757 293,139 315,020
Operating Income 26,894 30,234 63,956 61,899
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 317 247 724 511
Other income, net 3,174 2,845 5,781 5,707
Total Other Income and Deductions 3,491 3,092 6,505 6,218
Income Before Interest Charges 30,385 33,326 70,461 68,117
INTEREST CHARGES:
Interest on long-term debt 11,913 12,010 23,827 24,165
Other interest 451 512 1,203 1,176
Allowance for borrowed funds used during
construction (355) (276) (668) (458)
Total Interest Charges 12,009 12,246 24,362 24,883
NET INCOME $ 18,376 $ 21,080 $ 46,099 $ 43,234
See accompanying notes to financial statements.
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THE POTOMAC EDISON COMPANY
Balance Sheet
June 30, December 31,
1997 1996
ASSETS: (Thousands of Dollars)
Property, Plant, and Equipment:
At original cost, including $49,771,000
and $60,082,000 under construction $ 2,150,580 $ 2,124,956
Accumulated depreciation (828,079) (791,257)
1,322,501 1,333,699
Investments:
Allegheny Generating Company - common stock at equity 55,384 56,827
Other 588 642
55,972 57,469
Current Assets:
Cash 137 1,444
Accounts receivable:
Electric service, net of $1,114,000 and $1,580,000
uncollectible allowance 84,989 95,215
Affiliated and other 7,081 2,968
Notes receivable from affiliates 34,650 -
Materials and supplies - at average cost:
Operating and construction 23,719 23,775
Fuel 20,336 15,019
Prepaid taxes 14,465 17,648
Other 7,224 7,764
192,601 163,833
Deferred Charges:
Regulatory assets 88,606 94,919
Unamortized loss on reacquired debt 17,552 18,010
Other 10,031 9,956
116,189 122,885
Total Assets $ 1,687,263 $ 1,677,886
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock $ 447,700 $ 447,700
Other paid-in capital 2,690 2,690
Retained earnings 263,119 227,726
713,509 678,116
Preferred stock 16,378 16,378
Long-term debt and QUIDS 627,821 628,431
1,357,708 1,322,925
Current Liabilities:
Short-term debt - 7,497
Long-term debt due within one year 800 800
Accounts payable 22,008 33,152
Accounts payable to affiliates 15,914 17,896
Taxes accrued:
Federal and state income - 123
Other 16,641 11,542
Interest accrued 9,433 9,412
Customer deposits 5,058 6,121
Restructuring liability 7,959 14,970
Other 8,630 7,603
86,443 109,116
Deferred Credits and Other Liabilities:
Unamortized investment credit 22,546 23,622
Deferred income taxes 180,886 183,727
Regulatory liabilities 13,190 13,907
Other 26,490 24,589
243,112 245,845
Total Capitalization and Liabilities $ 1,687,263 $ 1,677,886
See accompanying notes to financial statements.
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THE POTOMAC EDISON COMPANY
Statement of Cash Flows
Six Months Ended
June 30
1997 1996
(Thousands of Dollars)
CASH FLOWS FROM OPERATIONS:
Net income $ 46,099 $ 43,234
Depreciation 36,751 35,411
Deferred investment credit and income taxes, net 4,424 (4,969)
Deferred power costs, net (990) 6,684
Unconsolidated subsidiaries' dividends in excess of earnings 1,477 1,201
Allowance for other than borrowed funds used
during construction (724) (511)
Restructuring liability (7,011) 14,418
Changes in certain current assets and
liabilities:
Accounts receivable, net 6,113 1,810
Materials and supplies (5,261) 6,998
Accounts payable (13,126) (10,810)
Taxes accrued 4,976 3,373
Interest accrued 21 581
Other current liabilities 1,916 4,785
Other, net 3,487 7,766
78,152 109,971
CASH FLOWS FROM INVESTING:
Construction expenditures (less allowance for
equity funds used during construction) (25,806) (32,496)
CASH FLOWS FROM FINANCING:
Retirement of long-term debt (800) (18,700)
Short-term debt, net (7,497) (21,637)
Notes receivable from affiliates (34,650) (4,400)
Dividends on capital stock:
Preferred stock (409) (409)
Common stock (10,297) (32,682)
(53,653) (77,828)
NET CHANGE IN CASH (1,307) (353)
Cash at January 1 1,444 2,953
Cash at June 30 $ 137 $ 2,600
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $24,268 $22,985
Income taxes 16,620 20,370
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 June 30, 1997, the results
of operations for the three and six months ended June 30, 1997
and 1996, and cash flows for the six months ended June 30, 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:
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
(Thousands of Dollars)
Electric operating revenues $20,408 $21,023 $40,624 $41,932
Operation & maintenance expense 1,471 1,215 2,756 2,334
Depreciation 4,284 4,290 8,568 8,580
Taxes other than income taxes 1,201 1,198 2,396 2,408
Federal income taxes 3,141 3,362 6,265 6,706
Interest charges 3,917 4,181 7,877 8,409
Other income, net (1) - (1) (3)
Net income $ 6,395 $ 6,777 $12,763 $13,498
The Company's share of the equity in earnings above was $1.8
million and $1.9 million for the three months ended June 30,
1997 and 1996, respectively, and $3.6 million and $3.8 million
for the six months ended June 30, 1997 and 1996, respectively,
and was included in other income, net, on the Statement of
Income.
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4. On April 7, 1997, Allegheny Power System, Inc. (Allegheny
Power) 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, Inc. (Allegheny Energy). It is expected that
Allegheny Energy will continue to be operated as an integrated
electric utility holding company and that the regulated
electric utility companies will continue to exist as separate
legal entities, including DQE, Inc.
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 by May 1, 1998. On May 2, 1997,
Allegheny Power filed a registration statement on Form S-4
containing a joint proxy statement/prospectus with DQE, Inc.
concerning the merger and the transactions contemplated
thereby. In late June, the S-4 became effective allowing
Allegheny Power and DQE, Inc. to pursue shareholder approval
for the proposed merger that would create Allegheny Energy.
Allegheny Power and DQE, Inc. each held separate shareholder
meetings on August 7, 1997, at which the combination of the two
companies was approved by the necessary number of shareholders
of both companies. At Allegheny Power's meeting, the necessary
number of shareholders also approved the change in Allegheny
Power's name to Allegheny Energy, Inc.
5. Restructuring charges in the first six months of 1996 ($10.3
million, net of tax) include expenses associated with the
reorganization, which is essentially complete.
6. For the most part, regulatory assets and liabilities are not
included in rate base. Income tax regulatory
assets/(liabilities), net of $58 million at June 30, 1997, are
primarily related to investments in electric facilities and
will be recovered over a period of from 20 to 40 years. The
remaining recovery period for items other than income taxes, is
from three to seven years.
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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, 1997
WITH SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1996
Review of Operations
NET INCOME
Net income for the second quarter and first six months
of 1997 and 1996, and the after tax restructuring charges included in the
1996 periods are shown below.
Net Income
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
(Millions of Dollars)
Net Income as Reported $18.4 $21.1 $46.1 $43.2
Restructuring (Credits)
Charges - (2.4) - 10.3
Net Income Adjusted $18.4 $18.7 $46.1 $53.5
The decrease in second quarter adjusted net income,
before restructuring charges, was due primarily to a 3% decrease in
kilowatt-hour (kWh) sales to residential customers largely due to second
quarter 1997 cooling degree days (air conditioning weather) which were 15%
below normal and 25% less than the corresponding 1996 period.
The decrease in year-to-date adjusted net income,
before restructuring charges, was primarily due to a decrease in kWh
sales. Residential kWh sales decreased 9% due to mild first quarter
winter weather (heating degree days 12% below normal and 22% below the
first quarter of 1996) and the cooler than normal second quarter weather.
Commercial kWh sales were also down slightly for the period.
SALES AND REVENUES
Retail kWh sales to residential customers decreased 3%,
and to commercial and industrial customers increased 2% and 1%,
respectively, in the second quarter, for a net decrease of .1%. In the
first six months, kWh sales to residential and commercial customers
decreased 9% and 1%, respectively, and to industrial customers increased
2%, for a net decrease of 3%. As discussed above, residential kWh sales,
which are more weather sensitive than the commercial and industrial
classes, decreased in the second quarter and in the first six months due
to the mild weather. In the first six months, commercial kWh sales also
decreased primarily because of the mild weather. Industrial
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kWh sales increased for the second quarter and first six months of 1997
due primarily to increased sales to the glass and concrete, nonferrous
metals, and rubber and plastics products customer groups.
The decrease in revenues from sales to residential,
commercial, and industrial customers resulted from the following:
Decrease from Prior Periods
Quarter Six Months
(Millions of Dollars)
Fuel and energy cost adjustment clauses* $(1.8) $ (8.9)
Net changes in kWh sales .5 (9.9)
Other .1 .3
Net decrease in retail revenues $(1.2) $(18.5)
* Changes in revenues from fuel and energy cost adjustment
clauses have little effect on net income. Changes in the costs
of fuel, purchased power, and certain other costs, and changes
in revenues from sales to other utilities, including
transmission services, have had little effect on net income
because such changes have been passed on to customers by
adjustment of customer bills through fuel and energy cost
adjustment clauses.
The increase in wholesale and other revenues for the
second quarter and first six months of 1997 was due primarily to the sale
of transmission services to affiliated companies, offset in part by second
quarter decreased sales to a wholesale customer related to the shutdown of
a paper recycling plant. All of the Company's wholesale customers have
signed contracts to remain as customers for periods ranging from one year
to four and one-half years.
Revenues from bulk power transactions consist of the
following items:
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
(Millions of Dollars)
Revenues:
From transmission services $2.9 $4.6 $ 7.1 $ 9.3
From sale of Company generation 2.3 3.1 4.1 4.3
Total $5.2 $7.7 $11.2 $13.6
Revenues from transmission services decreased primarily
due to reduced demand primarily because of mild weather both for the
quarter and year to date. About 95% of the aggregate benefits from bulk
power transactions are passed on to retail customers through the fuel and
energy adjustment clause and have had little effect on net income.
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OPERATING EXPENSES
Fuel expenses for each of the second quarter and first
six month periods of 1997 decreased 3% due to decreases in kWh generated
and lower 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, 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:
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
(Millions of Dollars)
Nonaffiliated transactions:
Purchased power $ 2.4 $ 3.5 $ 5.1 $ 7.8
Power exchanges, net (.5) .4 .9 1.7
Affiliated transactions:
AGC capacity charges 6.7 6.8 13.3 13.5
Other affiliated capacity
charges 12.9 11.5 25.6 23.7
Energy and spinning reserve
charges 10.5 9.8 24.7 24.4
Purchased power and
exchanges, net $32.0 $32.0 $69.6 $71.1
Nonaffiliated purchased power decreased because of
decreased need due to 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. Maintenance
expenses increased $2.2 million and $2.7 million for the second quarter and
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first six months of 1997, respectively, due primarily to the maintenance
requirements determined to be necessary during planned outages at the
Harrison power station.
Restructuring credits in the second quarter and
restructuring charges in the first six months 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.
Taxes other than income taxes increased $1.6 million
for each of the three and six months ended June 1997 due to increased
property taxes and capital stock and franchise taxes related to an
increase in the assessment of property in Maryland.
The net decrease in federal and state income taxes in
the second quarter resulted primarily from a decrease in income before
taxes. The net increase in the six-month period resulted primarily from
an increase in income before taxes, which was primarily related to
restructuring charges recorded in 1996.
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 expects to use exchange-traded and over-
the-counter futures, options, and swap contracts both to hedge its
exposure to changes in electric power prices and for trading purposes.
The risks to which the Company is exposed include underlying price
volatility, credit risk, and variations in cash flows, among others. The
Company has implemented risk management policies and procedures consistent
with industry practices and Company goals.
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THE POTOMAC EDISON COMPANY
Part II - Other Information to Form 10-Q
for Quarter Ended June 30, 1997
ITEM 5. OTHER INFORMATION
In late June, the S-4 registration statement filed by
Allegheny Power System, Inc. (Allegheny Power) became effective, allowing
Allegheny Power and DQE, Inc., parent company of Duquesne Light Company,
to pursue shareholder approval for the proposed merger and a change of the
company name to Allegheny Energy, Inc. (Allegheny Energy). Allegheny
Power and DQE, Inc. held shareholder meetings on August 7, 1997, at which
the combination of the two companies and the name change were approved by
a vote of shareholders.
On August 1, 1997, Allegheny Power and DQE, Inc. filed
applications for several major approvals related to the proposed merger of
the two companies. In filings with the Federal Energy Regulatory
Commission (FERC), Pennsylvania Public Utility Commission (PA PUC), and
Maryland Public Service Commission (MD PSC), Allegheny Power and DQE, Inc.
outlined their restructuring and merger plans as discussed below.
The FERC filing includes commitments concerning rate
freezes, rate reductions, and electrical system access options that will
spread the positive effects of the merger to many stakeholders. The
filing includes the offering of a single transmission rate which is less
than the stand-alone rate for the two companies, offers partial rate
freezes to wholesale customers which have contracts expiring after 1998,
and includes a commitment to join or form an independent system operator
(ISO).
The Company's Pennsylvania affiliate, West Penn Power
Company (West Penn), and DQE, Inc. filed individual restructuring plans
with the PA PUC and, as part of a joint restructuring plan, have also
filed their merger application. The filings address unbundled rates for
generation, transmission, and distribution services; stranded costs;
merger synergy benefits; and other issues as required by Pennsylvania's
Electricity Generation Customer Choice and Competition Act. Among other
benefits, West Penn's restructuring filing unbundles its rates and tariffs
separate from those of DQE's utility subsidiary, Duquesne Light. DQE's
restructuring filing includes a redesign of rates and provides for other
benefits. The merger filing offers additional detail on the expected
synergy benefits of the merger and an allocation of the benefits to
customers and shareholders of the two companies.
Allegheny Power filed with the MD PSC requesting
approval for the issuance of stock to exchange for DQE stock upon merger
approval. Allegheny Power is a Maryland Corporation. The filing also
discussed the benefits of the merger to Maryland including lower rates for
customers and improved operating efficiencies over time.
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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 June 30, 1997.
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)
August 14, 1997