UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended...June 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..................1-1401...................
.......................PECO Energy Company.......................
(Exact name of registrant as specified in its charter)
..........Pennsylvania................ 23-0970240................
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
....2301 Market Street, Philadelphia, PA..........19103..........
(Address of principal executive offices) (Zip Code)
........................(215)841-4000............................
(Registrant's telephone number, including area code)
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:
The Company had 222,542,087 shares of common stock outstanding on July
31, 1997.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Millions of Dollars)
3 Months Ended 6 Months Ended
June 30, June 30,
---------------------- ----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
OPERATING REVENUES
Electric $ 943.4 $ 915.4 $1,913.9 $1,889.1
Gas 88.9 74.0 281.8 270.8
--------- --------- --------- ---------
TOTAL OPERATING REVENUES 1,032.3 989.4 2,195.7 2,159.9
--------- --------- --------- ---------
OPERATING EXPENSES
Fuel and Energy Interchange 266.1 211.3 600.1 510.8
Operation 223.1 230.5 447.5 461.5
Maintenance 73.2 89.7 150.7 175.1
Depreciation 147.6 116.4 290.1 233.1
Income Taxes 73.0 71.3 166.6 175.2
Other Taxes 72.6 74.3 155.6 155.0
--------- --------- --------- ---------
TOTAL OPERATING EXPENSES 855.6 793.5 1,810.6 1,710.7
--------- --------- --------- ---------
OPERATING INCOME 176.7 195.9 385.1 449.2
--------- --------- --------- ---------
OTHER INCOME AND DEDUCTIONS
Allowance for Other Funds Used
During Construction 5.1 3.0 7.5 6.0
Salem Litigation Settlement 69.8 - 69.8 -
Income Taxes (26.6) (0.4) 24.7) 0.2
Other, Net (6.7) (0.2) (9.1) (3.2)
--------- --------- --------- ---------
TOTAL OTHER INCOME AND DEDUCTIONS 41.6 2.4 43.5 3.0
--------- --------- --------- ---------
INCOME BEFORE INTEREST CHARGES 218.3 198.3 428.6 452.2
--------- --------- --------- ---------
INTEREST CHARGES
Long-Term Debt 79.7 81.4 159.7 170.1
Company Obligated Mandatorily Redeemable
Preferred Securities of a Partnership 6.9 6.7 13.6 13.4
Other Interest 13.6 14.1 26.4 25.0
--------- --------- --------- ---------
TOTAL INTEREST CHARGES 100.2 102.2 199.7 208.5
Allowance for Borrowed Funds
Used During Construction (4.7) (2.7) (6.9) (5.4)
--------- --------- --------- ---------
NET INTEREST CHARGES 95.5 99.5 192.8 203.1
NET INOME 122.8 98.8 235.8 249.1
PREFERRED STOCK DIVIDENDS 4.5 4.5 9.0 9.0
--------- --------- --------- ---------
EARNINGS APPLICABLE TO COMMON STOCK $ 118.3 $ 94.3 $ 226.8 $ 240.1
========= ========= ========= =========
AVERAGE SHARES OF COMMON STOCK
OUTSTANDING (Millions) 222.5 222.5 222.5 222.5
EARNINGS PER AVERAGE COMMON
SHARE (Dollars) $ 0.53 $ 0.43 $ 1.02 $ 1.08
DIVIDENDS PER COMMON SHARE (Dollars) $ 0.45 $ 0.435 $ 0.90 $ 0.87
See Notes to Condensed Consolidated Financial Statements.
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
June 30, December 31,
1997 1996
------------- -------------
(Unaudited)
ASSETS
UTILITY PLANT
Plant at Original Cost $ 15,208.8 $ 14,945.0
Less Accumulated Provision for Depreciation 5,308.9 5,047.0
------------- -------------
9,899.9 9,898.0
Nuclear Fuel, net 171.5 199.6
Construction Work in Progress 613.6 661.8
Leased Property, net 172.9 182.1
------------- -------------
10,857.9 10,941.5
------------- -------------
CURRENT ASSETS
Cash and Temporary Cash Investments 42.0 29.2
Accounts Receivable, net
Customer 18.6 19.2
Other 154.2 74.4
Inventories, at average cost
Fossil Fuel 64.0 84.6
Materials and Supplies 112.4 119.8
Deferred Energy Costs - Gas 7.1 30.0
Other 183.5 63.2
------------- -------------
581.8 420.4
------------- -------------
DEFERRED DEBITS AND OTHER ASSETS
Recoverable Deferred Income Taxes 2,348.9 2,325.7
Deferred Limerick Costs 336.8 361.8
Deferred Non-Pension Postretirement Benefits Costs 226.2 233.5
Deferred Energy Costs - Electric 99.4 92.0
Investments 503.4 432.6
Loss on Reacquired Debt 272.0 283.8
Other 164.5 169.3
------------- -------------
3,951.2 3,898.7
------------- -------------
TOTAL $ 15,390.9 $ 15,260.6
============= =============
See Notes to Condensed Consolidated Financial Statements.
(continued on next page)
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
(continued)
June 30, December 31,
1997 1996
CAPITALIZATION AND LIABILITIES ------------- -------------
(Unaudited)
CAPITALIZATION
Common Shareholders' Equity
Common Stock (No Par) $ 3,517.6 $ 3,517.6
Other Paid-In Capital 1.2 1.3
Retained Earnings 1,153.5 1,127.0
Preferred and Preference Stock
Without Mandatory Redemption 199.4 199.4
With Mandatory Redemption 92.7 92.7
Company Obligated Mandatorily Redeemable
Preferred Securities of a Partnership 352.1 302.2
Long-Term Debt 3,954.2 3,935.5
------------- -------------
9,270.7 9,175.7
------------- -------------
CURRENT LIABILITIES
Notes Payable, Bank 351.5 287.5
Long-Term Debt Due Within One Year 256.1 283.3
Capital Lease Obligations Due Within One Year 54.4 49.4
Accounts Payable 164.5 213.0
Taxes Accrued 81.9 71.5
Interest Accrued 80.8 82.0
Dividends Payable 28.9 22.4
Other 117.1 94.3
------------- -------------
1,135.2 1,103.4
------------- -------------
DEFERRED CREDITS AND OTHER LIABILITIES
Capital Lease Obligations 118.5 132.7
Deferred Income Taxes 3,759.5 3,745.2
Unamortized Investment Tax Credits 327.1 336.1
Pension Obligation 224.5 224.5
Non-Pension Postretirement Benefits Obligation 334.5 315.1
Other 220.9 227.9
------------- -------------
4,985.0 4,981.5
------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
------------- -------------
TOTAL $ 15,390.9 $ 15,260.6
============= =============
See Notes to Condensed Consolidated Financial Statements.
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Millions of Dollars)
6 Months Ended
June 30,
---------------------------------
1997 1996
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 235.8 $ 249.1
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 327.7 270.3
Deferred Income Taxes (11.7) 81.9
Deferred Energy Costs 15.5 0.4
Salem Litigation Settlement (69.8) -
Changes in Working Capital:
Accounts Receivable (9.4) 28.6
Inventories 28.0 15.1
Accounts Payable (48.5) (120.8)
Other Current Assets and Liabilities (88.3) (144.9)
Other Items Affecting Operations 35.9 54.8
---------- ----------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 415.2 434.5
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Plant (245.9) (165.1)
Increase in Investments (70.8) (88.6)
---------- ----------
NET CASH FLOWS USED BY INVESTING ACTIVITIES (316.7) (253.7)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Short-Term Debt 64.0 355.4
Issuance of Common Stock - 10.7
Issuance of Long-Term Debt 17.2 34.0
Retirement of Long-Term Debt (27.2) (393.4)
Loss on Reacquired Debt 11.8 12.8
Issuance of Company Obligated Mandatorily
Redeemable Preferred Securities of a Partnership 50.0 -
Dividends on Preferred and Common Stock (209.3) (205.6)
Change in Dividends Payable 6.5 9.8
Other Items Affecting Financing 1.3 (0.5)
---------- ----------
NET CASH FLOWS USED BY FINANCING ACTIVITIES (85.7) (176.8)
---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 12.8 4.0
---------- ----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 29.2 20.6
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 42.0 $ 24.6
========== ==========
See Notes to Condensed Consolidated Financial Statements.
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements as of June
30, 1997 and for the three and six months then ended are unaudited, but include
all adjustments that PECO Energy Company (Company) considers necessary for a
fair presentation of such financial statements. All adjustments are of a normal,
recurring nature except the settlement of the litigation against Public Service
Electric and Gas Company (PSE&G) with respect to the shutdown of Salem
Generating Station (Salem) described in note 2. The year-end condensed
consolidated balance sheet data were derived from audited financial statements
but do not include all disclosures required by generally accepted accounting
principles. Certain prior-year amounts have been reclassified for comparative
purposes. These notes should be read in conjunction with the Notes to
Consolidated Financial Statements in the Company's 1996 Annual Report to
Shareholders, which are incorporated by reference in the Company's 1996 Annual
Report on Form 10-K for the year ended December 31, 1996.
2. SHUTDOWN OF SALEM GENERATING STATION
PSE&G, the operator of Salem Units No. 1 and No. 2 which are 42.59%
owned by the Company, removed the units from service in the second quarter of
1995. At that time, PSE&G informed the Nuclear Regulatory Commission (NRC) that
it had determined to keep the Salem units shut down pending review and
resolution of certain equipment and management issues and NRC agreement that
each unit is sufficiently prepared to restart.
On August 6, 1997, PSE&G informed the Company that it received final
approval from the NRC to restart Unit No. 2. PSE&G has indicated that it will
begin restart activities and that it expects that Unit No. 2 will return to
service in the third quarter of 1997. PSE&G expects that Unit No. 1 will return
to service in late 1997. Because the timing of restart of the Salem units is
subject to satisfactory completion of the requirements of the restart plan, as
determined by PSE&G and the NRC, no assurance can be given that the projected
restart dates will be met.
In accordance with a May 9, 1997 settlement agreement, PSE&G has agreed
to pay the Company $69.8 million to settle a suit filed on March 5, 1996 against
PSE&G concerning the shutdown of Salem. The payment is due on December 31, 1997.
During June 1997, the Company recorded into income $69.8 million ($41.0 million
net of income taxes) to reflect the settlement. The agreement also provides that
if the outage exceeds 64 reactor months PSE&G will pay the Company $1.1 million
per reactor unit month. A reactor unit month is a month during the current
outage in which a unit is off-line. As of June 30, 1997, the Salem units have
been shut down for a total of 50 reactor unit months.
For additional information regarding the shutdown of Salem, see "PART II.
OTHER INFORMATION. ITEM 5. OTHER INFORMATION" in this Quarterly Report on Form
10-Q.
For the three and six months ended June 30, 1997, the Company recorded
in the accompanying Statements of Income as Fuel and Energy Interchange $28 and
$57 million, respectively, of replacement power costs and recorded as
Maintenance $14 and $27 million, respectively, of maintenance costs relating to
the shutdown of Salem. For the three and six months ended June 30, 1996, the
Company recorded in the accompanying Statements of Income as Fuel and Energy
Interchange $20 and $38 million, respectively, of replacement power costs and
recorded as Maintenance $19 and $31 million, respectively, of maintenance costs
relating to the shutdown of Salem. For the year ending December 31, 1997, the
Company expects to incur and expense approximately $155 million of costs related
to the shutdown.
3. RATE MATTERS
On April 1, 1997, the Company filed with the Pennsylvania Public
Utility Commission (PUC) a comprehensive restructuring plan detailing its
proposal to implement full customer choice of electric generation supplier. The
filing is required under the provisions of the Pennsylvania Electricity
Generation Consumer Choice and Competition Act (Competition Act), which requires
the unbundling of electric services into separate generation, transmission and
distribution services with open retail competition for generation. The filing
proposes, among other things, procedures to implement direct customer access,
beginning in 1999, to all licensed electric generation suppliers; unbundled
rates for generation, transmission, distribution and other services; and the
recovery of $6.8 billion in net transition and stranded costs through a
Competitive Transition Charge or Intangible Transition Charge.
On July 18, 1997, the Company filed with the PUC rebuttal testimony in
its restructuring proceeding. The testimony responds to previously filed
alternative restructuring proposals submitted by various intervening parties in
the proceeding. Among the proposals submitted by intervenors were
recommendations that the PUC reduce the Company's recoverable costs and customer
rates through various methods, including but not limited to reductions to the
Company's estimated stranded generation costs; recommendations that shareholders
absorb a percentage of stranded generation costs; and recommendations that
shareholders forgo a return on their investment. The rebuttal testimony
quantifies the Company's estimate of the impact of the proposals on its future
financial condition and results of operations.
On July 30, 1997, the Company and various other parties filed with the
PUC a Motion for Continuance of Hearings in the Company's Restructuring
Proceeding. The purpose of the two-week continuance is to facilitate the
discussions among parties to produce an acceptable settlement of various issues.
The PUC granted the Motion on July 31, 1997. The Company cannot predict whether
these discussions will produce an acceptable settlement.
The Company cannot predict what decision the PUC will ultimately reach
in the Company's restructuring proceeding or what impact that decision will
ultimately have on the Company's future financial condition, results of
operations or the common stock dividend. The PUC is scheduled to issue a final
decision in the case in January 1998.
On January 22, 1997, the Company filed with the PUC an application
under the Competition Act to securitize $3.6 billion of stranded costs. On May
22, 1997, the PUC issued an order authorizing the Company to securitize $1.1
billion of its stranded and related transaction and use of proceeds costs at
this time. Thirteen intervenors subsequently appealed the PUC's decision.
Issuance of transition bonds by the Company will depend on the resolution of all
pending appeals and the satisfactory issuance of a pending ruling by the
Internal Revenue Service.
For additional information regarding the Competition Act and the
Company's securitization filing, see note 3 of Notes to Consolidated Financial
Statements for the year ended December 31, 1996.
4. NEW ACCOUNTING PRONOUNCEMENTS
Given the changing regulatory environment in the utility industry, the
continued application of Statement of Financial Accounting Standards (SFAS) No.
71, "Accounting for the Effects of Certain Types of Regulation" for regulated
enterprises is receiving significant attention from the Securities and Exchange
Commission (SEC). The Financial Accounting Standards Board (FASB) is addressing
the matter through its Emerging Issues Task Force (EITF) Issue No. 97-4,
"Deregulation of the Pricing of Electricity - Issues Related to the Application
of FASB Statements No. 71, Accounting for the Effects of Certain Types of
Regulation, and No. 101, Regulated Enterprises - Accounting for the
Discontinuation of Application of FASB Statement No. 71." The EITF tentatively
agreed that a) an entity should cease to apply SFAS No. 71 no later than the
date the specific deregulation plan is enacted and the details of that plan are
known, and b) both stranded costs and regulated assets and liabilities should
continue to be recognized to the extent that the transition plan provides for
their recovery through the regulated transmission and distribution portion of
the business. In addition, the EITF tentatively agreed that these entities
should separately disclose information about both the regulated and unregulated
portions of their business. This does not preclude discontinuation at an earlier
point in time if the entity does not believe that it meets the criteria of SFAS
No. 71. The Company believes that it continues to meet the criteria of SFAS No.
71.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" to establish standards for reporting and display of comprehensive income
and its components in financial statements. The new standard requires an entity
to a) classify items of other comprehensive income by their nature in a
financial statement and b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid in
capital in the equity section of a statement of financial position. The new
standard is effective for fiscal years beginning after December 15, 1997. The
Company will adopt SFAS No. 130 in 1998. Adoption of SFAS No. 130 will not
materially affect the Company's financial condition or results of operations.
The Company is evaluating the impact on its disclosures.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information" to establish standards for reporting
information about operating segments in annual financial statements and to
require reporting of selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographical areas and major
customers. The new standard is effective for fiscal years beginning after
December 15, 1997. Adoption of SFAS No. 131 will not materially affect the
Company's financial condition or results of operations. The Company is
evaluating the impact on its operating segment disclosures.
5. SALES OF ACCOUNTS RECEIVABLE
The Company is party to an agreement with a financial institution under
which it can sell with limited recourse an undivided interest, adjusted daily,
in up to $425 million of designated accounts receivable through November 14,
2000. At June 30, 1997, the Company had sold a $425 million interest in accounts
receivable under this agreement. The Company retains the servicing
responsibility for these receivables. At June 30, 1997, the average annual
service-charge rate, computed on a daily basis on the portion of the accounts
receivable sold but not yet collected, was 5.61%.
By terms of this agreement, under certain circumstances, a portion of
Limerick Generating Station (Limerick) deferred costs may be included in the
pool of eligible receivables. At June 30, 1997, $19.4 million of Deferred
Limerick Costs were included in the pool of eligible receivables.
6. DECLARATORY ACCOUNTING ORDER
On October 1, 1996, the Company implemented changes approved by the PUC
to the estimated depreciable lives of certain of the Company's electric plant.
As a result, depreciation and amortization on certain assets associated with
Limerick increased by approximately $100 million per year while depreciation and
amortization on certain other Company assets decreased by approximately $10
million per year, for a net increase of approximately $90 million per year. For
the three and six months ended June 30, 1997, the Company expensed an additional
$23 and $46 million, respectively, for increased depreciation and amortization
related to this order.
7. STOCK REPURCHASE
On June 23, 1997, the Company's Board of Directors authorized the
repurchase of up to twenty million shares of its common stock from time to time
through open market, privately negotiated and/or other types of transactions in
conformity with the rules of the SEC. This authorization is in addition to the
authorization granted by the Board in April 1997 to repurchase up to five
million shares of common stock pursuant to the April authorization.
The Company has entered into forward purchase agreements to be settled
from time to time, at the Company's election, on either a physical, net share or
net cash basis. The amount at which these agreements can be settled is dependent
principally upon the market price of the Company's common stock as compared to
the forward purchase price per share and the number of shares to be settled. If
these agreements were settled on a net share basis at June 30, 1997, the Company
would have received approximately 310,000 shares of Company common stock.
8. COMMITMENTS AND CONTINGENCIES
Except as described below, the information regarding the Company's
capital commitments, nuclear insurance, nuclear decommissioning and spent fuel
storage, energy purchases, environmental issues and litigation at June 30, 1997
is substantially the same as described in note 4 of Notes to Consolidated
Financial Statements for the year ended December 31, 1996.
As previously reported, the Company has identified 27 sites where
former manufactured gas plant (MGP) activities have or may have resulted in
actual site contamination. As of June 30, 1997, the Company had accrued $29
million for environmental investigation and remediation costs, including $15
million for MGP investigation and remediation that currently can be reasonably
estimated. The Company cannot predict whether it will incur other significant
liabilities for additional investigation and remediation costs at these or
additional sites identified by the Company, environmental agencies or others, or
whether all such costs will be recoverable from third parties.
The Company periodically reviews its investments to determine that they
are properly valued in its financial statements. Due to circumstances involved
in the Federal Communication Commission's auctioning of the personal
communications systems "C-block" licenses, the Company continues to closely
monitor the value of its telecommunications investments. The Company believes
that these investments are not impaired, but will continue to assess
developments in this area.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company's future financial condition and its future operating
results are substantially dependent upon the effects of the Pennsylvania
Electricity Generation Consumer Choice and Competition Act (Competition Act) and
other competitive initiatives. On April 1, 1997, the Company filed with the
Pennsylvania Public Utility Commission (PUC) a comprehensive restructuring plan
detailing its proposal to implement full customer choice of electric generation
supplier, including the recovery of $6.8 billion in net transition and stranded
costs. The Company's filing proposes to collect the net transition and stranded
costs over a period of up to ten years through annual competitive transition
charges and/or intangible transition charges. Under the provisions of the
Competition Act, the Company's unbundled charges for transmission- and
distribution-related services will be capped for 4-1/2 years from December 31,
1996; until recovery of the Company's net stranded and transition costs, the
Company will be subject to a rate cap (which cannot extend beyond December 31,
2005) in which the total charges to customers for generation cannot exceed rates
in place as of December 31, 1996, subject to certain exceptions.
On July 30, 1997, the Company and various other parties filed with the
PUC a Motion for Continuance of Hearings in the Company's Restructuring
Proceeding. The purpose of the two-week continuance is to facilitate the
discussions among parties to produce an acceptable settlement of various issues.
The PUC granted the Motion on July 31, 1997. The Company cannot predict whether
these discussions will produce an acceptable settlement.
The Company believes that it will be given the opportunity for full
recovery of its retail electric stranded costs. The amount of recovery is
subject to the decision of the PUC in the Company's restructuring proceeding.
The Company's financial condition and results of operations could be materially
effected to the extent the Company is not ultimately permitted to recover its
retail electric stranded costs.
The Company expects that its future liquidity and capital resources
will be reduced as a result of the Competition Act. The Company is pursuing a
strategy to reduce its stranded costs and the associated capitalization, which
would reduce the Company's liquidity and capital resource requirements. The
Company cannot predict the level of stranded-cost recovery which will be
permitted under the Competition Act, the impact of any such recovery on the
Company's capitalization or whether internally generated cash will continue to
meet or exceed the Company's capital requirements and dividend payments.
* * * *
Given the changing regulatory environment in the utility industry, the
continued application of Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" for regulated
enterprises is receiving significant attention from the Securities and Exchange
Commission (SEC). The Financial Accounting Standards Board (FASB) is addressing
the matter through its Emerging Issues Task Force Issue No. 97-4, "Deregulation
of the Pricing of Electricity - Issues Related to the Application of FASB
Statements No. 71, Accounting for the Effects of Certain Types of Regulation,
and No. 101, Regulated Enterprises - Accounting for the Discontinuation of
Application of FASB Statement No. 71." For additional information see note 4 of
Notes to Condensed Consolidated Financial Statements in this Quarterly Report on
Form 10-Q under "PART I. FINANCIAL INFORMATION. ITEM 1. FINANCIAL STATEMENTS."
* * * *
On July 18, 1997, the Company filed with the PUC rebuttal testimony in
its restructuring proceeding. The testimony responds to previously filed
alternative restructuring proposals submitted by various intervening parties in
the proceeding. The rebuttal testimony quantifies the Company's estimate of the
impact of the proposals on its future financial condition and results of
operations. The PUC is scheduled to issue a final decision in the case in
January 1998. For further information, see note 3 of Notes to Condensed
Consolidated Financial Statements in this Quarterly Report on Form 10-Q under
"PART I. FINANCIAL INFORMATION. ITEM 1. FINANCIAL STATEMENTS" and the Company's
Current Report on Form 8-K dated July 18, 1997.
* * * *
Total construction expenditures, primarily for utility plant, are
estimated to be $560 million for 1997 and $1.6 billion for the period 1998
through 2001. The estimated expenditures include the Company's share of the
remaining expenditures relating to the replacement of Salem Generating Station
(Salem) Unit No. 1 steam generators, including installation and the cost of
disposal of the four old steam generators.
The Company's construction program is subject to periodic review and
revision to reflect changes in economic conditions and other appropriate
factors. Certain facilities under construction and to be constructed may require
permits and licenses which the Company has no assurance will be granted.
For the period 1997 through 2000, the Company also plans to invest
approximately $200 to $300 million in new ventures, principally through its
Telecommunications Group.
* * * *
For a discussion of commitments and contingencies relating to
environmental matters, see note 4 of Notes to Consolidated Financial Statements
for the year ended December 31, 1996 and note 8 of Notes to Condensed
Consolidated Financial Statements in this Quarterly Report on Form 10-Q under
"PART I. FINANCIAL INFORMATION. ITEM 1. FINANCIAL STATEMENTS."
* * * *
For the year ended December 31, 1997, the Company expects to incur
replacement power and additional maintenance costs of approximately $155 million
as a result of the Salem shutdown. See note 2 of Notes to Condensed Consolidated
Financial Statements in this Quarterly Report on Form 10-Q under "PART I.
FINANCIAL INFORMATION. ITEM 1. FINANCIAL STATEMENTS" and "PART II. OTHER
INFORMATION. ITEM 5. OTHER INFORMATION."
* * * *
The Company has and will continue to make modifications to its computer
software systems and applications to ensure that year 2000 transactions can be
processed. Expenditures for these modifications will be expensed as incurred and
are not expected to have a material impact on the Company's results of
operations or financial position.
* * * *
On June 5, 1997, the Indiana County (Pennsylvania) Industrial
Development Authority issued for the benefit of the Company $17.24 million
floating rate, tax-exempt pollution control bonds due June 1, 2027. The proceeds
from the issuance of the bonds were used on June 10, 1997 to refund short-term
tax-exempt bank loans.
* * * *
On June 6, 1997, the Company issued $50 million of Trust Receipts,
representing 8% Cumulative Monthly Income Preferred Securities, Series C,
through PECO Energy Capital Trust II (Trust). The sole assets of the Trust are
8% Cumulative Monthly Income Preferred Securities, Series C, issued by PECO
Energy Capital L.P., a Delaware limited partnership of which a wholly owned
subsidiary of the Company is the sole general partner. Proceeds from the
issuance will be used by the Company in connection with its redemption of $50
million aggregate liquidation value of the Company's outstanding depositary
shares each representing a one-fourth interest in a share of $7.96 Cumulative
Preferred Stock, after such depositary shares become subject to redemption at
the election of the Company on October 1, 1997.
* * * *
At June 30, 1997, the Company and its subsidiaries had outstanding $352
million of notes payable, including $264 million of commercial paper. The
Company has formal and informal lines of bank credit aggregating $275 million.
At June 30, 1997, the Company and its subsidiaries had no short-term
investments.
* * * *
The Company's Ratio of Earnings to Fixed Charges (Mortgage Method) for
the twelve months ended June 30, 1997 was 4.31 times compared to 4.72 times for
the corresponding period in 1996. The Company's Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends (Articles of Incorporation Method)
for the twelve months ended June 30, 1997, was 2.35 times compared to 2.63 times
for the corresponding period in 1996. For the six months ended June 30, 1997,
the Company's Ratio of Earnings to Fixed Charges (SEC Method) (Exhibit 12-1) and
Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (SEC
Method) (Exhibit 12-2) were 3.32 times and 3.05 times, respectively, compared to
3.20 times and 2.97 times, respectively, for the corresponding period in 1996.
See the Company's Annual Report on Form 10-K for the year ended December 31,
1996 (1996 Form 10-K) under "PART I. ITEM 1. BUSINESS-Capital Requirements and
Financing Activities," for a discussion of the ratio methods.
* * * *
On June 23, 1997, the Company's Board of Directors authorized the
repurchase of up to twenty million shares of its common stock from time to time
through open market, privately negotiated and/or other types of transactions in
conformity with the rules of the SEC. This authorization is in addition to the
authorization granted by the Board in April 1997 to repurchase up to five
million shares of common stock pursuant to the April authorization.
The Company has entered into forward purchase agreements to be settled
from time to time, at the Company's election, on either a physical, net share or
net cash basis. The amount at which these agreements can be settled is dependent
principally upon the market price of the Company's common stock as compared to
the forward purchase price per share and the number of shares to be settled. If
these agreements were settled on a net share basis at June 30, 1997, the Company
would have received approximately 310,000 shares of Company common stock.
* * * *
Except for the historical information contained herein, certain of the
matters discussed in this Quarterly Report on Form 10-Q (Report) are
forward-looking statements which are subject to risks and uncertainties. The
factors that could cause actual results to differ materially include those
discussed herein as well as those listed in notes 2, 3 and 8 of Notes to
Condensed Consolidated Financial Statements and other factors discussed in the
Company's filings with the SEC. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this Report. The Company undertakes no obligation to publicly release any
revision to these forward-looking statements to reflect events or circumstances
after the date of this Report.
* * * *
RESULTS OF OPERATIONS
EARNINGS
Earnings per average common share outstanding for the three and six
months ended June 30, 1997 were $0.53 and $1.02 per share, respectively,
compared to $0.43 and $1.08 per share for the corresponding periods in 1996. The
increase in second quarter 1997 earnings was due primarily to the recognition of
the settlement of litigation arising from the Salem outage, which added $0.18
per share, and from lower operating and maintenance costs, which added $0.05 per
share. Offsetting these benefits were increased depreciation of $0.08 per share
primarily resulting from the increase in depreciation and amortization of assets
associated with Limerick Generating Station (Limerick); the negative effects of
cooler weather compared to last year of $0.03 per share; and additional fuel
costs resulting from the ongoing shutdown of Salem of $0.02 per share.
The decline in earnings for the six months ended June 30, 1997 was
primarily due to increased depreciation of $0.15 per share primarily resulting
from the increase in depreciation and amortization of assets associated with
Limerick; milder weather conditions compared to last year of $0.09 per share;
and ongoing costs resulting from the shutdown of Salem of $0.04 per share. These
decreases were partially offset by the recognition of the Salem litigation
settlement of $0.18 per share and lower operating and maintenance costs, which
added $0.09 per share. The balance is primarily due to reduced tax depreciation
benefits from plant and regulatory assets which are not fully normalized for
ratemaking.
* * * *
OPERATING REVENUES
Electric revenues increased 3% and 1% for the three and six months
ended June 30, 1997, respectively, compared to the corresponding periods in 1996
primarily due to higher sales to other utilities. This increase was partially
offset by lower residential revenues, primarily due to milder weather
conditions.
Gas revenues increased 20% and 4% for the three and six months ended
June 30, 1997, respectively, compared to the corresponding periods in 1996. The
increase was primarily due to higher revenues from sales to commercial, house
heating and residential customers due to higher purchased gas-clause revenues
charged in 1997 compared to 1996, partially offset by lower sales due primarily
to milder weather conditions in 1997. For the six months ended June 30, 1997,
this increase was partially offset by reduced sales to interruptible customers
as they switched to transportation service.
* * * *
FUEL AND ENERGY INTERCHANGE EXPENSES
Fuel and energy interchange expenses increased 26% and 17% for the
three and six months ended June 30, 1997, respectively, compared to the
corresponding periods in 1996 primarily due to additional interchange purchases
needed for increased sales to other utilities and higher replacement power costs
resulting from the shutdown of Salem. Also contributing to the six-month
increase was a one-time billing credit in 1996 from a non-utility generator.
* * * *
OPERATING AND MAINTENANCE EXPENSES
Operating and maintenance expenses decreased 7% and 6% for the three
and six months ended June 30, 1997, respectively, compared to the corresponding
periods in 1996. The decreases were primarily due to lower electric distribution
system operating and maintenance expenses, lower operating and maintenance
expenses at Company-operated nuclear plants and lower administrative and general
expenses.
* * * *
DEPRECIATION
Depreciation expense increased 27% and 24% for the three and six months
ended June 30, 1997, respectively, compared to the corresponding periods in 1996
primarily due to increased depreciation and amortization of assets associated
with Limerick.
* * * *
INCOME TAXES
Income taxes charged to operating expenses increased 2% for the three
months ended June 30, 1997 compared to the corresponding period in 1996 and
decreased 5% for the six months ended June 30, 1997 compared to the
corresponding period in 1996. The increase for the three months ended June 30,
1997 was primarily due to reduced tax depreciation benefits from plant and
regulatory assets which are not fully normalized for ratemaking, partially
offset by a decrease in pre-tax income. The decrease for the six months ended
June 30, 1997 was primarily due to a decrease in pre-tax income, which was
partially offset by reduced tax depreciation benefits from plant and regulatory
assets which are not fully normalized for ratemaking.
* * * *
OTHER TAXES
Other taxes charged to operating expenses decreased 2% for the three
months ended June 30, 1997 compared to the corresponding period in 1996 and were
substantially unchanged for the six months ended June 30, 1997 compared to the
corresponding period in 1996. The decrease for the three months ended June 30,
1997 was primarily due to decreased payroll taxes.
* * * *
OTHER INCOME AND DEDUCTIONS
Other income and deductions increased substantially for the three and
six months ended June 30, 1997 compared to the corresponding periods in 1996.
This increase was primarily due to the settlement reached with Public Service
Electric and Gas Company (PSE&G) in the second quarter of 1997 related to the
shutdown of Salem.
* * * *
NET INTEREST CHARGES
Net interest charges decreased 4% and 5% for the three and six months
ended June 30, 1997, respectively, compared to the corresponding periods in 1996
primarily due to the Company's ongoing program to reduce and refinance
higher-cost, long-term debt. For the six months ended June 30, 1997, this
decrease was partially offset by increased interest charges on short-term
borrowings.
* * * *
PREFERRED DIVIDENDS
Preferred stock dividends were unchanged for the three and six months ended
June 30, 1997 compared to the corresponding period in 1996.
* * * *
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported in the 1996 Form 10-K, on October 1, 1996, the
United States Court of Appeals for the Third Circuit (Third Circuit) reversed a
lower court ruling and held for the Company in a class action suit against the
Company involving the Company's 1987 amendment to the Company's Service Annuity
Plan. Three plaintiffs who were members of the class filed a motion for
reconsideration with the Third Circuit, which was denied. On July 31, 1997 the
plaintiffs filed a petition for review with the United States Supreme Court.
* * * *
As previously reported in the 1996 Form 10-K, the Company and the three
other co-owners of Salem filed suit in February 1996 in the United States
District Court for the District of New Jersey against Westinghouse Electric
Corporation seeking damages to recover the cost of replacing the steam
generators at Salem Units No. 1 and No. 2. The case is still in discovery.
* * * *
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Information regarding the submission of matters to a vote of security
holders was presented in the Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997 (March 31, 1997 Form 10-Q).
* * * *
ITEM 5. OTHER INFORMATION
On May 9, 1997, the Nuclear Regulatory Commission (NRC) issued its
periodic Systematic Assessment of Licensee Performance (SALP) for Limerick for
the period April 2, 1995 to March 29, 1997. Limerick achieved ratings of "1,"
the highest of the three rating categories, in the areas of Operations,
Maintenance and Plant Support. The area of Engineering achieved a rating of "2."
The NRC stated that the overall performance of Limerick remained
excellent. Strong management involvement and conservative decision making were
exhibited in day-to-day activities. Self-assessment and quality assurance
activities continued to be effective. The Performance Enhancement Process
continued to be an effective program for identifying, evaluating and correcting
issues with appropriate thresholds and priorities. Oversight and independent
review committees contributed to the corrective actions program effectiveness.
While noting strengths in design, analysis and modifications, the NRC
stated that earlier engineering intervention could have prevented equipment
problems that resulted in a number of plant trips and forced shutdowns. The NRC
also noted that management has recognized this performance weakness and has
initiated remedial actions. The Company continues to take actions to improve
performance at Limerick.
On July 17, 1997, the NRC issued its periodic SALP Report for Peach
Bottom Atomic Power Station (Peach Bottom) for the period October 15, 1995 to
June 7, 1997. Peach Bottom achieved ratings of "1," in the areas of Plant
Operations, Maintenance and Plant Support. The area of Engineering achieved a
rating of "2." Overall, the NRC observed excellent performance at Peach Bottom
during the assessment period. The NRC stated that station management provided
excellent oversight and control of engineering activities throughout the period.
The NRC noted that, while overall engineering performance was good, there were
several instances where operating procedures, surveillances, and tests were not
consistent with the design and licensing bases. The Company continues to take
actions to improve performance at Peach Bottom.
* * * *
As previously disclosed, Salem Units No. 1 and No. 2, operated by PSE&G,
were taken out of service in the second quarter of 1995. On August 6, 1997,
PSE&G informed the Company that it received final approval from the NRC to
restart Unit No. 2. PSE&G has indicated that it will begin restart activities
and that it expects that Unit No. 2 will return to service in the third quarter
of 1997. PSE&G expects that Unit No. 1 will return to service in late 1997.
Restart of Unit No. 1 is also subject to NRC approval. The inability to
successfully return these units to continuous, safe operation could have a
material adverse effect on the Company's financial condition and results of
operations.
* * * *
On March 27, 1997, gas competition legislation was introduced in the
Pennsylvania General Assembly. The legislation calls for gas utilities to submit
restructuring plans to the PUC that would totally unbundle natural gas supply
from distribution service by April 1, 1999. As of that date, gas utilities would
no longer provide traditional bundled sales service. Although the legislation is
loosely modeled after the electric competition legislation, it is less complex
and contains no provisions for pilots, phase-in, stranded costs, securitization,
rate caps, or tax adjustments. Legislative hearings on the proposed legislation
are ongoing and are scheduled through the third quarter of 1997.
* * * *
As previously reported in the March 31, 1997 Form 10-Q, the Utility
Workers Union of America (UWUA) had filed objections, which were subsequently
withdrawn, to the March 24, 1997 election conducted by the National Labor
Relations Board (NLRB) in which PECO Nuclear employees voted not to be
represented by a union. In addition, the UWUA had filed unfair labor practice
charges with the NLRB. On July 23, 1997, the NLRB certified the results of the
election. The NLRB, however, has issued a complaint against the Company
regarding the unfair labor practice charges. A hearing
before an administrative law judge is set for December 1, 1997.
* * * *
As previously reported in the Current Report on Form 8-K dated May 22,
1997, the Company's Consumers Energy Services Group employees voted not to be
represented by a union in secret balloting conducted by the NLRB. On June 2,
1997, the NLRB certified the results of this election.
* * * *
On May 23, 1997, the Company's Board of Directors elected President and
Chief Executive Officer, Corbin A. McNeill, Jr., to the additional position of
Chairman of the Board. Mr. McNeill assumed the position on July 1, 1997, and
succeeded Joseph F. Paquette, Jr., who retired from the Company. Mr. Paquette
will remain on the Board of Directors and will serve as Chairman of the Board's
Executive Committee.
* * * *
On July 15, 1997, the Company's single-hour peak load reached 7,390
megawatts (MW), surpassing the previous peak of 7,244 MW set on August 4, 1995.
Also, on July 15, 1997, the single-hour peak load for the PJM Interconnection
L.L.C. reached 49,820 MW. The PJM's previous peak was 48,750 MW set on August 2,
1995.
* * * *
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
12-1 - Statement regarding computation of ratio of
earnings to fixed charges.
12-2 - Statement regarding computation of ratio of
earnings to combined fixed charges and preferred
stock dividends.
27 - Financial Data Schedule.
(b) Reports on Form 8-K filed during the reporting period:
Report, dated April 1, 1997, reporting information under
"ITEM 5. OTHER EVENTS" relating to the Company's intention to
repurchase common stock and relating to the Company's filing
with the Pennsylvania Public Utility Commission of a
comprehensive restructuring plan detailing the Company's
proposed plan to implement full customer choice of electric
generation supply.
Report, dated April 14, 1997, reporting information under
"ITEM 5. OTHER EVENTS" relating to a recommended decision and
an alternative recommendation issued by the Pennsylvania Public
Utility Commission's Administrative Law Judge assigned to the
Company's application for securitizing a portion of its
stranded and other costs.
Report, dated April 25, 1997, reporting information under
"ITEM 5. OTHER EVENTS" relating to the results of the National
Labor Relations Board's certification election for the
Company's Power Generation Group.
Report, dated May 8, 1997, reporting information under "ITEM 5. OTHER
EVENTS" relating to the polling of the Pennsylvania Public
Utility Commissioners regarding the Company's application for
securitizing a portion of its stranded and other costs.
Report, dated May 12, 1997, reporting information under "ITEM 1. LEGAL
PROCEEDINGS" relating to the settlement of the litigation
regarding Salem Generating Station operated by Public Service
Electric and Gas Company and reporting information under "ITEM
5. OTHER EVENTS" relating to the preliminary decision of the
Pennsylvania Public Utility Commission regarding the Company's
and other utilities' electric competition pilot programs.
Report, dated May 22, 1997, reporting information under "ITEM 5. OTHER
EVENTS" relating to the results of the National Labor Relations
Board's certification election for the Company's Consumer
Energy Services Group, and also under "ITEM 5. OTHER EVENTS",
relating to the Pennsylvania Public Utility Commission's order
allowing the Company to securitize $1.1 billion of its stranded
and other costs.
Report, dated June 23, 1997, reporting information under "ITEM 5. OTHER
EVENTS" relating to the Company's intention to repurchase its
common stock.
Report, dated June 24, 1997, reporting information under "ITEM 5. OTHER
EVENTS" relating to the formation of EnergyOne, L.L.C.
Reports on Form 8-K filed subsequent to the reporting period:
Report, dated July 10, 1997, reporting information under "ITEM 5.
OTHER EVENTS" relating to the Company's decision to terminate
an offer to purchase an interest in River Bend Nuclear
Station.
Report, dated July 18, 1997, reporting information under "ITEM 5. OTHER
EVENTS" regarding the Company's filing of rebuttal testimony
with the Pennsylvania Public Utility Commission supporting its
comprehensive restructuring plan to implement full customer
choice of electric generation supply.
Report, dated July 31, 1997, reporting information under "ITEM 5.
OTHER EVENTS" regarding a motion filed with the Pennsylvania
Public Utility Commission for a continuance of hearings in the
Company's restructuring proceeding.
Signatures
Pursuant to 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.
PECO ENERGY COMPANY
/s/ Kenneth G. Lawrence
--------------------------
Kenneth G. Lawrence
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: August 11, 1997