UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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...September 30, 1995............
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 221,976,072
shares of common stock outstanding on October 31, 1995.
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 9 Months Ended
September 30, September 30,
---------------------- -----------------------
1995 1994 1995 1994
-------- ------- -------- -------
OPERATING REVENUES
Electric $1,087.7 $1,000.5 $2,856.6 $2,807.5
Gas 37.5 40.6 285.8 313.6
-------- -------- -------- --------
TOTAL OPERATING REVENUES 1,125.2 1,041.1 3,142.4 3,121.1
-------- -------- -------- --------
OPERATING EXPENSES
Fuel and Energy Interchange 198.0 146.7 564.9 568.0
Other Operating 242.5 240.8 687.3 714.4
Early Retirement and Separation Programs -- 254.1 -- 254.1
Maintenance 73.6 76.9 229.0 253.5
Depreciation 113.5 110.6 337.6 328.6
Income Taxes 126.0 5.3 309.6 177.7
Other Taxes 80.0 78.2 233.1 233.2
-------- -------- -------- --------
TOTAL OPERATING EXPENSES 833.6 912.6 2,361.5 2,529.5
OPERATING INCOME 291.6 128.5 780.9 591.6
-------- -------- -------- --------
OTHER INCOME AND DEDUCTIONS
Allowance for Other Funds Used
During Construction 3.2 2.6 10.7 7.6
Gain on Sale of Subsidiary, Net -- -- 27.1 --
Income Taxes (0.3) (0.5) (2.6) (11.9)
Other, Net (2.5) (1.5) (0.2) 22.6
-------- -------- -------- --------
TOTAL OTHER INCOME AND DEDUCTIONS 0.4 0.6 35.0 18.3
-------- -------- -------- --------
INCOME BEFORE INTEREST CHARGES 292.0 129.1 815.9 609.9
-------- -------- -------- --------
INTEREST CHARGES
Long-Term Debt 95.6 96.5 291.7 288.5
Company Obligated Mandatorily Redeemable
Preferred Securities of a Partnership,
Which Holds Solely Subordinated
Debentures of the Company 4.9 3.6 14.9 3.6
Short-Term Debt 9.8 10.1 29.1 28.9
-------- -------- -------- --------
TOTAL INTEREST CHARGES 110.3 110.2 335.7 321.0
Allowance for Borrowed Funds
Used During Construction (2.6) (3.3) (9.7) (8.7)
-------- -------- -------- --------
NET INTEREST CHARGES 107.7 106.9 326.0 312.3
-------- -------- -------- --------
NET INCOME 184.3 22.2 489.9 297.6
Preferred Stock Dividends 6.1 9.6 18.2 31.2
-------- -------- -------- --------
EARNINGS APPLICABLE TO COMMON STOCK $ 178.2 $ 12.6 $ 471.7 $ 266.4
======== ======== ======== ========
AVERAGE SHARES OF COMMON STOCK
OUTSTANDING (Millions) 221.9 221.6 221.8 221.5
EARNINGS PER AVERAGE COMMON
SHARE (Dollars) $ 0.80 $ 0.06 $ 2.13 $ 1.20
DIVIDENDS PER COMMON SHARE (Dollars) $ 0.405 $ 0.38 $ 1.215 $ 1.14
See Notes to Condensed Consolidated Financial Statements
2
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
September 30, December 31,
1995 1994
(UNAUDITED)
------------ -----------
ASSETS
UTILITY PLANT
Plant at Original Cost $14,614.4 $14,414.6
Less Accumulated Provision for Depreciation 4,503.8 4,242.6
--------- ---------
10,110.6 10,172.0
Nuclear Fuel, Net 155.8 184.2
Construction Work in Progress 417.0 472.5
Leased Property, Net 180.2 174.6
--------- ---------
10,863.6 11,003.3
--------- ---------
CURRENT ASSETS
Cash and Temporary Cash Investments 198.6 47.0
Accounts Receivable, Net
Customer 111.2 97.0
Other 53.5 49.8
Inventories, at Average Cost
Fossil Fuel 116.0 72.8
Materials and Supplies 119.9 118.2
Deferred Energy Costs 20.2 (15.5)
Other 210.0 58.0
--------- ---------
829.4 427.3
--------- ---------
DEFERRED DEBITS AND OTHER ASSETS
Recoverable Deferred Income Taxes 2,077.5 2,138.1
Deferred Limerick Costs 395.8 413.9
Deferred Non-Pension Postretirement Benefits Costs 250.4 261.9
Investments 259.8 236.6
Loss on Reacquired Debt 306.4 320.9
Other 232.4 263.3
--------- ---------
3,522.3 3,634.7
--------- ---------
TOTAL $15,215.3 $15,065.3
========= =========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Shareholders' Equity
Common Stock (No Par) $ 3,499.4 $ 3,490.7
Other Paid-In Capital 1.3 1.3
Retained Earnings 1,011.5 810.5
Preferred and Preference Stock
Without Mandatory Redemption 277.4 277.4
With Mandatory Redemption 92.7 92.7
Company Obligated Mandatorily Redeemable Preferred Securities of a
Partnership, Which Holds Solely Subordinated Debentures
of the Company 221.3 221.3
Long-Term Debt 4,313.9 4,785.6
--------- ---------
9,417.5 9,679.5
--------- ---------
CURRENT LIABILITIES
Notes Payable, Bank -- 11.5
Long-Term Debt Due Within One Year 492.0 201.2
Capital Lease Obligations Due Within One Year 60.4 60.5
Accounts Payable 232.8 308.8
Taxes Accrued 258.7 87.2
Deferred Income Taxes 3.9 (12.0)
Interest Accrued 100.6 93.2
Dividends Payable 27.5 15.1
Other 95.2 85.6
--------- ---------
1,271.1 851.1
========= =========
(continued on next page)
3
(continued from prior page)
DEFERRED CREDITS AND OTHER LIABILITIES
Capital Lease Obligations 119.8 114.1
Deferred Income Taxes 3,239.3 3,225.9
Unamortized Investment Tax Credits 352.3 374.1
Pension Obligation for Early Retirement Plans 238.3 238.3
Non-Pension Postretirement Benefits Obligation 347.0 354.5
Other 230.0 227.8
--------- ---------
4,526.7 4,534.7
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 8)
--------- ---------
TOTAL $15,215.3 $15,065.3
========= =========
See Notes to Condensed Consolidated Financial Statements
4
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Millions of Dollars)
9 Months Ended
September 30,
---------------------
1995 1994
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 489.9 $ 297.6
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 390.1 386.2
Deferred Income Taxes 109.0 (24.4)
Gain on Sale of Subsidiary (58.7) --
Deferred Energy Costs (35.4) (13.0)
Changes in Working Capital:
Accounts Receivable (25.3) (12.9)
Inventories (45.1) 1.1
Accounts Payable (71.9) 49.9
Other Current Assets and Liabilities 36.3 (1.6)
Other Items Affecting Operations 35.1 194.4
------- -------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 824.0 877.3
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Plant (353.2) (328.4)
Proceeds from Sale of Subsidiary 150.0 --
Increase in Investments (23.4) (19.5)
------- -------
NET CASH FLOWS USED BY INVESTING ACTIVITIES (226.6) (347.9)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Short-Term Debt (11.5) (39.3)
Issuance of Common Stock 8.7 1.9
Retirement of Preferred Stock (0.1) (238.8)
Issuance of Company Obligated Mandatorily Redeemable
Preferred Securities of a Partnership, Which Holds
Solely Subordinated Debentures of the Company -- 221.3
Issuance of Long-Term Debt -- 145.1
Retirement of Long-Term Debt (184.7) (352.8)
Loss on Reacquired Debt 14.5 15.2
Dividends on Preferred and Common Stock (287.7) (281.5)
Change in Dividends Payable 12.4 8.7
Other Items Affecting Financing 2.6 (9.5)
------- -------
NET CASH FLOWS USED BY FINANCING ACTIVITIES (445.8) (529.7)
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 151.6 (0.3)
------- -------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 47.0 46.9
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 198.6 $ 46.6
======= =======
See Notes to Condensed Consolidated Financial Statements
5
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements 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 for the recognition of a one-time gain
of $58.7 million ($27.1 million net of taxes) in the second quarter of 1995
relating to the Company's sale of its Maryland retail electric subsidiary,
Conowingo Power Company, described in note 3. 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 year-end 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 Annual Report on Form 10-K for the year
ended December 31, 1994 (1994 Form 10-K).
2. SHUTDOWN OF SALEM GENERATING STATION (SALEM)
Public Service Electric and Gas Company (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 on May 16, 1995 and June 7, 1995, respectively. PSE&G informed the
Nuclear Regulatory Commission (NRC) at that time 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. PSE&G has informed the Company that Salem Units No. 1 and No. 2 are
expected to be out of
6
service until the second quarter of 1996. As a result of the shutdown, the
Company is incurring replacement power costs of approximately $6 million per
month. As of September 30, 1995, the Company had incurred and expensed $24
million of replacement power costs which are recorded as Fuel and Energy
Interchange in the accompanying statements of income for the three and nine
months ended September 30, 1995.
3. SALE OF SUBSIDIARY COMPANY COMPLETED
On June 19, 1995, the Company completed the sale of Conowingo Power Company
to Delmarva Power & Light Company (Delmarva) for $150 million. The transaction
also included a 10-year contract for the Company to sell power to Delmarva.
The Company's gain on the sale of $58.7 million ($27.1 million net of
taxes) was recorded in the second quarter of 1995. The sale did not involve the
Conowingo Hydroelectric Project, which is owned by two Company subsidiaries,
PECO Energy Power Company and Susquehanna Power Company.
4. SALES OF ACCOUNTS RECEIVABLE
The Company is party to an agreement with a financial institution under
which it can sell on a daily basis and with limited recourse an undivided
interest in up to $325 million of designated accounts receivable through January
24, 1996. At September 30, 1995, the Company had sold a $325 million interest in
accounts receivable under this agreement. The Company retains the servicing
responsibility for these receivables. At September 30, 1995, the average annual
service-charge rate, computed on a daily basis on the portion of the accounts
receivable sold but not yet collected, was 5.9%.
7
By terms of this agreement, under certain circumstances, a portion of
Deferred Limerick Generating Station (Limerick) Costs may be included in the
pool of eligible receivables. At September 30, 1995, $31 million of Deferred
Limerick Costs were included in the pool of eligible receivables.
5. NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which requires that long-lived assets and certain identifiable intangibles held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The new standard is effective for fiscal years beginning after
December 15, 1995. The Company does not expect the adoption of SFAS No. 121 to
have a material effect upon the Company's financial condition or results of
operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which encourages entities to recognize compensation costs for
stock-based employee compensation plans using the fair value based method of
accounting defined in SFAS No. 123, but allows for the continued use of the
intrinsic value based method of accounting prescribed by Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Entities
electing to continue using the accounting prescribed by APB Opinion No. 25 are
required to disclose pro forma net income and earnings per share as if the fair
value based method of accounting had been applied. The new standard is effective
for
8
fiscal years beginning after December 15, 1995. The Company currently accounts
for its stock-based employee compensation plan in accordance with APB Opinion
No. 25 and is evaluating the impact of SFAS No. 123, but does not expect it to
have a material effect upon the Company's financial condition or results of
operations.
6. PETITION FOR DECLARATORY ACCOUNTING ORDER
On October 27, 1995, the Company filed a petition for a declaratory
accounting order with the Pennsylvania Public Utility Commission (PUC)
requesting approval to increase Limerick-related depreciation and amortization
by $100 million per year, effective October 1, 1996. The requested order would
not affect customer rates. The $100 million consists of $72 million of increased
depreciation and $28 million of increased amortization of Limerick plant-related
regulatory assets. The filing was made to reflect the results of a recent study
of the estimated accounting life of Limerick. The Company expects, but cannot
assure, that the increased depreciation and amortization will be offset by
savings from the Company's ongoing cost reduction program.
7. SUBSEQUENT FINANCING
On October 27, 1995, the Company entered into a $175 million term loan
agreement with a group of banks and redeemed a like amount outstanding under an
existing $525 million revolving credit and term loan agreement.
8. COMMITMENTS AND CONTINGENCIES
The Price-Anderson Act, as amended (Price-Anderson Act), sets the limit of
liability of approximately $8.9 billion for claims that could arise from an
incident involving any licensed nuclear facility in the nation. The limit is
subject to change to reflect
9
the effects of inflation and changes in the number of licensed reactors. All
utilities with nuclear generating units, including the Company, have obtained
coverage for these potential claims through a combination of private insurances
of $200 million and mandatory participation in a financial protection pool.
Under the Price-Anderson Act, all nuclear reactor licensees can be assessed up
to $76 million per reactor per incident, payable at no more than $10 million per
reactor per incident per year. This assessment is subject to inflation, state
premium taxes and an additional surcharge of 5% if the total amount of claims
and legal costs exceeds the basic assessment. If the damages from an incident at
a licensed nuclear facility exceed $8.9 billion, the President of the United
States is to submit to Congress a plan for providing additional compensation to
the injured parties. Congress could impose further revenue-raising measures on
the nuclear industry to pay claims. The Price-Anderson Act and the extensive
regulation of nuclear safety by the NRC do not preempt claims under state law
for personal, property or punitive damages related to radiation hazards.
Although the NRC requires the maintenance of property insurance on nuclear
power plants in the amount of $1.06 billion or the amount available from private
sources, whichever is less, the Company maintains coverage in the amount of its
$2.75 billion proportionate share for each station. The Company's insurance
policies provide coverage for decontamination liability expense, premature
decommissioning and loss or damage to its nuclear facilities. These policies
require insurance proceeds first be applied to assure that, following an
accident, the facility is in a
10
safe and stable condition and can be maintained in such condition. Within 30
days of stabilizing the reactor, the licensee must submit a report to the NRC
which provides a clean-up plan, including the identification of all clean-up
operations necessary to decontaminate the reactor to permit either the
resumption of operations or decommissioning of the facility. Under the Company's
insurance policies, proceeds not already expended to place the reactor in a
stable condition must be used to decontaminate the facility. If the decision is
made to decommission the facility, a portion of the insurance proceeds will be
allocated to a fund which the Company is required by the NRC to maintain to
provide funds for decommissioning the facility. These proceeds would be paid to
the fund to make up any difference between the amount of money in the fund at
the time of the early decommissioning and the amount that would have been in the
fund if contributions had been made over the normal life of the facility. The
Company is unable to predict what effect these requirements may have on the
timing of the availability of insurance proceeds to the Company for the
Company's bondholders and the amount of such proceeds which would be available.
Under the terms of the various insurance agreements, the Company could be
assessed up to $48 million for losses incurred at any plant insured by the
insurance companies. The Company is self-insured to the extent that any losses
may exceed the amount of insurance maintained. Any such losses, if not recovered
through the ratemaking process, could have a material adverse effect on the
Company's financial condition or results of operations.
11
The Company is a member of an industry mutual insurance company which
provides replacement power cost insurance in the event of a major accidental
outage at a nuclear station. The policy contains a 21-week waiting period before
recovery of costs can commence. The premium for this coverage is subject to
assessment for adverse loss experience. The Company's maximum share of any
assessment is $14 million per year.
* * * *
On April 11, 1991, 33 former employees of the Company filed an amended
class action suit against the Company in the United States District Court for
the Eastern District of Pennsylvania (Eastern District Court) on behalf of
approximately 141 persons who retired from the Company between January and April
1990. The lawsuit, filed under the Employee Retirement Income Security Act
(ERISA), alleged that the Company fraudulently and/or negligently misrepresented
or concealed facts concerning the Company's 1990 Early Retirement Plan and thus
induced the plaintiffs to retire or not to defer retirement immediately before
the initiation of the 1990 Early Retirement Plan, thereby depriving the
plaintiffs of substantial pension and salary benefits. In June 1991, the
plaintiffs filed amended complaints adding additional plaintiffs. The lawsuit
named the Company, the Company's Service Annuity Plan (SAP) and two Company
officers as defendants. On May 13, 1994, the Eastern District Court issued a
decision, finding the Company liable to all plaintiffs who made inquiries about
any early retirement plan after March 12, 1990 and retired prior to April 1990.
In an order dated August 23, 1995, the Eastern District
12
Court awarded the plaintiffs $1.5 million. The Company has filed appeals from
the order and has accrued the amount of the award.
* * * *
On May 2, 1991, 37 former employees of the Company filed an amended class
action suit against the Company, the SAP and three former Company officers in
the Eastern District Court on behalf of 147 former employees who retired from
the Company between January and June 1987. The lawsuit was filed under ERISA and
concerned the August 1, 1987 amendment to the SAP. The plaintiffs claimed that
the Company concealed or misrepresented the fact that an amendment to the SAP
was planned to increase retirement benefits and, as a consequence, they retired
prior to the amendment to the SAP and were deprived of significant retirement
benefits. On May 13, 1994, the Eastern District Court issued a decision, finding
the Company liable to all plaintiffs who made inquiries about any pension
improvement after March 1, 1987 and retired prior to June 1987. In an order
dated August 23, 1995, the Eastern District Court awarded the plaintiffs $1.8
million. The Company has filed appeals from the order and has accrued the amount
of the award.
* * * *
As disclosed in note 3 of Notes to Consolidated Financial Statements for
the year ended December 31, 1994, the Company's share of the current estimated
cost for decommissioning nuclear generating stations, based on site-specific
studies approved for ratemaking purposes by the PUC, is $643 million expressed
in 1990 dollars. Under current rates, the Company collects approximately $20
million annually from customers for decommissioning the Company's nuclear units.
At September 30, 1995, the Company held
13
$196 million in trust accounts, representing amounts recovered from customers
and realized investment earnings thereon, to fund future decommissioning costs.
The Company's most recent estimate of its share of the cost to decommission its
nuclear units is $900 million in 1994 dollars. Any increase in the 1990
decommissioning cost estimate being recovered in base rates is to be recoverable
in the Company's next base rate case. As a result, the Company expects to
receive recovery of a higher level of decommissioning expense in its next base
rate proceeding. The staff of the Securities and Exchange Commission has
questioned the electric utility industry accounting practices regarding the
recognition, measurement and classification of decommissioning costs for nuclear
generating stations in financial statements. The FASB is currently reviewing the
accounting for liabilities associated with the closure and removal of long-lived
assets, including, but not limited to, nuclear- and fossil-generating stations,
and transmission and distribution equipment.
As disclosed in note 3 of Notes to Consolidated Financial Statements for
the year ended December 31, 1994, the Company recorded an estimated liability
and related regulatory asset of $59 million ($54 million as of September 30,
1995), reflecting the Company's share of the costs of decommissioning and
decontamination of the United States Department of Energy's nuclear enrichment
facilities which the Company is required to pay under the National Energy Policy
Act of 1992 (Energy Act). The Company is paying its share of such costs on an
installment basis through 2006 and is currently recovering these costs in rates
through the Energy Cost Adjustment clause.
14
The Company believes that the ultimate costs of decommissioning and
decontamination of its nuclear generating stations and any assessment under the
Energy Act will continue to be recoverable through rates, although such recovery
is not assured.
* * * *
The Company's operations have in the past and may in the future require
substantial capital expenditures in order to comply with environmental laws.
Additionally, under federal and state environmental laws, the Company is
generally liable for the costs of remediating environmental contamination of
property now or formerly owned by the Company or of property contaminated by
hazardous substances generated by the Company. The Company owns or leases a
substantial number of real estate parcels, including parcels on which its
operations or the operations of others may have resulted in contamination by
substances which are considered hazardous under environmental laws. The Company
is currently involved in a number of proceedings relating to sites where
hazardous substances have been deposited and may be subject to additional
proceedings in the future. An evaluation of all Company sites for potential
environmental clean-up liability is in progress, including approximately 20
sites where manufactured gas plant activities may have resulted in site
contamination. Past activities at several sites have resulted in actual site
contamination. The Company is presently engaged in performing detailed
evaluations of these sites to define the nature and extent of the contamination,
to determine the necessity of remediation and to identify possible remediation
alternatives. At September 30,
15
1995, the Company had accrued $22 million for various investigation and
remediation costs that currently can be reasonably estimated. The Company cannot
currently 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 through rates or from third parties.
* * * *
The Company is involved in various other litigation matters, the ultimate
outcomes of which, while uncertain, are not expected to have a material adverse
effect on the Company's financial condition or results of operations.
* * * *
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company's construction program is currently estimated to require
expenditures of approximately $495 million for 1995 and $1.8 billion from 1996
to 1999, all of which are expected to be financed from internal sources. The
Company's construction program is subject to periodic review and revision to
reflect changes in economic conditions, revised load forecasts 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.
* * * *
See 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 a discussion of commitments and contingencies
relating to environmental matters.
* * * *
The Company's future financial condition or results of operations may be
affected by increased competition among utilities and non-utility generators in
the power generation market and regulatory changes designed to encourage such
competition. To date, the Company's electric business, particularly sales to
large industrial customers and off-system sales, has been affected by increased
competition. The Company has responded to increased competition for
larger-volume industrial customers through the use of interruptible rates and
long-term contracts with cost-based rates. In the wholesale market, the Company
has increased its off-
17
system sales but increased competition has reduced the Company's margin for
these sales.
For information concerning initiatives by the Federal Energy Regulatory
Commission to encourage competition in the power generation market, see the
Company's Quarterly Report on Form 10-Q for the period ended March 31, 1995
(March 31, 1995 Form 10-Q)and for the period ended June 30, 1995 (June 30, 1995
Form 10-Q)under "PART II. OTHER INFORMATION, ITEM 5. OTHER INFORMATION." In
addition, see "PART II. OTHER INFORMATION, ITEM 5. OTHER INFORMATION," in this
Quarterly Report on Form 10-Q for a discussion of the investigation by the
Pennsylvania Public Utility Commission (PUC) into electric power competition
issues.
* * * *
For a discussion of the Company's petition for a declaratory accounting
order regarding Limerick Generating Station (Limerick) related depreciation and
amortization, see note 6 of Notes to Condensed Consolidated Financial Statements
in this Quarterly Report on Form 10-Q under "PART I. FINANCIAL INFORMATION, ITEM
1. FINANCIAL STATEMENTS." To the extent that offsetting savings from the
Company's ongoing cost reduction program are not achieved, the Company's future
results of operations will be negatively impacted.
* * * *
As a result of the Salem Generating Station (Salem) shutdown, the
Company expects to incur in 1995 replacement power and additional operating and
maintenance costs of approximately $64 million relating to the shutdown. See
note 2 of Notes to Condensed Consolidated Financial Statements of this Quarterly
Report on Form
18
10-Q under "PART I. FINANCIAL INFORMATION. ITEM 1. FINANCIAL STATEMENTS."
* * * *
On October 15, 1995, the Company redeemed all $71 million outstanding First
and Refunding Mortgage Bonds, 10% Series due 2019 at a price of 106.53%.
* * * *
On October 23, 1995, the Board of Directors of the Company voted to
increase the Company's quarterly common stock dividend from $0.405 per share to
$0.435 per share. The higher dividend will be payable December 20, 1995 to
shareholders of record on November 11, 1995. The new annual common stock
dividend level will be $1.74 per share.
* * * *
On October 27, 1995, the Company entered into a $175 million term loan
agreement with a group of banks and redeemed a like amount outstanding under an
existing $525 million revolving credit and term loan agreement.
* * * *
At September 30, 1995, the Company and its subsidiaries had no short-term
borrowings outstanding. The Company has formal and informal lines of bank credit
aggregating $352 million. At September 30, 1995, the Company and its
subsidiaries had $168 million of short-term investments.
* * * *
The Company's Ratio of Earnings to Fixed Charges (Mortgage Method) for the
twelve months ended September 30, 1995 was 4.76 times compared to 3.47 times for
the corresponding period ended
19
September 30, 1994. The Company's Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends (Articles of Incorporation Method) for the twelve
months ended September 30, 1995, was 2.62 times compared to 2.40 times for the
corresponding period ended September 30, 1994. For the nine months ended
September 30, 1995, the Company's Ratio of Earnings to Fixed Charges (SEC
Method) and Ratio of Earnings to Combined Fixed Charges and Preferred Stock
Dividends (SEC Method) were 3.64 times and 3.32 times, respectively. See the
Company's Annual Report on Form 10-K for the year ended December 31, 1994 (1994
Form 10-K) under "PART I. ITEM 1. BUSINESS-Capital Requirements and Financing
Activities," for a discussion of the ratio methods.
* * * *
RESULTS OF OPERATIONS
EARNINGS
Common stock earnings for the three and nine months ended September 30,
1995 were $0.80 and $2.13 per share, respectively, compared to $0.06 and $1.20
per share for the corresponding periods ended September 30, 1994.
The increase in earnings for the three months ended September 30, 1995 was
primarily attributable to the one-time charge in 1994 of $0.66 per share
associated with the Company's voluntary retirement and separation programs.
Earnings also increased by $0.10 per share due to higher electric sales
resulting primarily from warmer weather conditions in August 1995 and by $0.05
per share due to increased sales to other utilities. These increases were
partially offset by $0.06 per share due to the replacement power costs required
by the shutdown of Salem. See note 2 of Notes
20
to Condensed Consolidated Financial Statements of this Quarterly Report on Form
10-Q under "PART I. FINANCIAL INFORMATION, ITEM 1. FINANCIAL STATEMENTS."
The earnings increase for the nine months ended September 30, 1995 was
primarily due to the $0.66 per share one-time charge in the third quarter of
1994 associated with the Company's voluntary retirement and separation programs.
Earnings also increased by $0.15 per share due to lower non-fuel operating and
maintenance expenses primarily attributable to the Company's ongoing emphasis on
cost control and savings associated with the voluntary retirement and separation
programs, by $0.12 per share due to the June 1995 gain on the sale of Conowingo
Power Company (COPCO), by $0.08 per share due to fuel-related revenues
associated with sales to other utilities, by $0.04 per share from the retention
by the Company of a share of the energy savings resulting from the operation of
Limerick as provided by the 1991 Limerick Settlement Agreement and by $0.03 per
share due to the Company's ongoing debt and preferred stock refinancing program.
These increases were partially offset by $0.06 per share due to the replacement
power costs required by the shutdown of Salem, by $0.06 per share related to a
reduction in other income due to revenues recorded in 1994 from the receipt of
nuclear fuel from Shoreham Nuclear Power Station (Shoreham) and by $0.03 per
share due to milder weather conditions for the nine months ended September 30,
1995 as compared to the corresponding period ended September 30, 1994.
* * * *
21
OPERATING REVENUES
Electric revenues increased 8.7% and 1.7% for the three and nine months
ended September 30, 1995, respectively, compared to the corresponding periods
ended September 30, 1994. The increase for the three months ended September 30,
1995 was primarily due to increased sales to other utilities and higher retail
sales in August 1995 due to warmer weather conditions. The increase for the nine
months ended September 30, 1995 was primarily due to increased sales to other
utilities and small commercial customers.
Gas revenues decreased 7.6% and 8.9% for the three and nine months ended
September 30, 1995, respectively, compared to the corresponding periods ended
September 30, 1994. The decrease for the three months ended September 30, 1995
was primarily due to decreased sales to retail customers and lower fuel-clause
revenues. These decreases were partially offset by increased gas transported for
others and an increase in gas being used by the Company's electric generating
stations. The decrease for the nine months ended September 30, 1995 was
primarily due to decreased retail and small commercial sales resulting from
milder weather conditions in 1995. This decrease was partially offset by
increased gas transported for others and an increase in gas being used by the
Company's electric generating stations.
* * * *
FUEL AND ENERGY INTERCHANGE EXPENSES
Fuel and energy interchange expenses increased 35.0% and decreased 0.5%
for the three and nine months ended September 30,
22
1995, respectively, compared to the corresponding periods ended September 30,
1994. The increase for the three months ended September 30, 1995 was primarily
due to increased sales to other utilities and the replacement power costs
required by the shutdown of Salem. The decrease for the nine months ended
September 30, 1995 was primarily due to decreased gas sendout resulting from
milder weather conditions, and net credits to expense from the retention by the
Company of a share of the energy savings resulting from the operation of
Limerick and from certain energy sales to other utilities. These decreases were
partially offset by increased sales to other utilities and the replacement power
costs required by the shutdown of Salem.
* * * *
OPERATING AND MAINTENANCE EXPENSES
Operating and maintenance expenses decreased 44.7% and 25.0% for the three
and nine months ended September 30, 1995, respectively, compared to the
corresponding periods ended September 30, 1994 primarily due to the one-time
charge in the third quarter of 1994 associated with the Company's voluntary
retirement and separation programs and other continuing cost-control efforts. In
addition, for the nine months ended September 30, 1995, operating and
maintenance costs decreased due to the Company's continuing cost-control
efforts, including the savings associated with the Company's 1994 voluntary
retirement and separation programs as well as lower nuclear generating station
charges resulting from shorter refueling and maintenance outages at
Company-operated nuclear generation units. In addition, inventory and
environmental charges
23
were lower in 1995 as compared to the prior year. These decreases were partially
offset by increased process reengineering costs.
* * * *
DEPRECIATION
Depreciation expense increased 2.6% and 2.7% for the three and nine months
ended September 30, 1995, respectively, compared to the corresponding periods
ended September 30, 1994 primarily due to additions to plant in service.
* * * *
INCOME TAXES
Income taxes charged to operating expenses increased substantially for the
three and nine months ended September 30, 1995 compared to the corresponding
periods ended September 30, 1994 primarily due to higher operating income.
* * * *
OTHER TAXES
Other taxes charged to operating expenses increased by 2.3% and were
substantially unchanged for the three and nine months ended September 30, 1995,
respectively, compared to the corresponding periods ended September 30, 1994.
The increase for the three months ended September 30, 1995 was primarily due to
increased Pennsylvania gross receipts tax resulting from higher operating
revenues and higher real estate taxes.
* * * *
OTHER INCOME AND DEDUCTIONS
Other income and deductions were substantially unchanged and increased
substantially for the three and nine months ended September 30, 1995,
respectively, compared to the corresponding
24
periods ended September 30, 1994. The increase for the nine months ended
September 30, 1995, was primarily due to the gain recognized on the sale of
COPCO in June 1995 and decreased income taxes on other income, partially offset
by revenues recorded in 1994 from the receipt of nuclear fuel from Shoreham.
* * * *
TOTAL INTEREST CHARGES
Total interest charges increased 0.7% and 4.4% for the three and nine
months ended September 30, 1995, respectively, compared to the corresponding
periods ended September 30, 1994 primarily due to the July 1994 issuance of
Monthly Income Preferred Securities (recorded in the financial statements as
Company Obligated Mandatorily Redeemable Preferred Securities of a Partnership,
Which Holds Solely Subordinated Debentures of the Company).
* * * *
PREFERRED DIVIDENDS
Preferred stock dividends decreased 36.5% and 41.7% for the three and nine
months ended September 30, 1995 compared to the corresponding periods ended
September 30, 1994 due to redemptions of preferred stock in the third quarter of
1994 with the proceeds from the issuance of Monthly Income Preferred Securities.
* * * *
25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported in the 1994 Form 10-K, on May 13, 1994, the United
States District Court for the Eastern District of Pennsylvania (Eastern District
Court) issued a decision, finding the Company liable to certain plaintiffs in a
class action suit against the Company involving the Company's 1990 Early
Retirement Plan. In an order dated August 23, 1995, the Eastern District Court
awarded the plaintiffs $1.5 million. The Company has filed appeals from the
order.
* * * *
As previously reported in the 1994 Form 10-K, on May 13, 1994, the Eastern
District Court issued a decision, finding the Company liable to certain
plaintiffs in a class action suit against the Company involving the Company's
1987 amendment to the Company's Service Annuity Plan. In an order dated August
23, 1995, the Eastern District Court awarded the plaintiffs $1.8 million. The
Company has filed appeals from the order.
* * * *
As previously reported in the June 30, 1995 Form 10-Q, on June 29, 1995,
the Court of Common Pleas of Philadelphia County (Court of Common Pleas) denied
the Company's motion for summary judgment seeking the termination of the July
26, 1993 shareholder derivative suit regarding the Company's credit and
collections practices. On July 28, 1995, the Company filed a motion requesting
the court to, among other things, reconsider its decision. On August 28, 1995,
an order was entered certifying the case to the Superior Court of Pennsylvania
(Superior Court) and staying trial. On September 27,
26
1995, the Company filed a petition in the Superior Court for allowance of appeal
on the legal issues certified by the trial court.
On August 15, 1995, attorneys on behalf of the shareholders who had sent
the May 23, 1993 demand to the Company's Board of Directors, which was refused
on March 14, 1994, filed a derivative action in the Court of Common Pleas
asserting the same claims against several present and former officers regarding
the Company's credit and collections practice which are asserted in the July 26,
1993 shareholder derivative suit. On September 1, 1995, the Company filed
preliminary objections to the complaint. The plaintiffs subsequently amended
their complaint. The Company filed preliminary objections to the amended
complaint on September 29, 1995. On September 5, 1995, the Court ordered that
the suit be consolidated with the July 26, 1993 shareholder derivative suit for
discovery purposes only.
* * * *
ITEM 5. OTHER INFORMATION
As previously reported in the 1994 Form 10-K, the Company finalized an
agreement in 1994 to sell 140 megawatts of energy and capacity to Baltimore Gas
and Electric Company for a 25-year term beginning in 1997. In an order issued
September 19, 1995, the Federal Energy Regulatory Commission approved the
contract.
* * * *
As previously reported in the June 30, 1995 Form 10-Q, on August 2, 1995,
the United States Nuclear Regulatory Commission (NRC) held an enforcement
conference regarding three alleged violations identified by the NRC at Peach
Bottom Atomic Power
27
Station. In a letter dated August 17, 1995, the NRC stated that the inadequate
design control and testing which led to the degradation of emergency diesel
generator capabilities constituted a violation; however, because the Company
identified the issues, conducted a detailed root-cause evaluation and took
appropriate corrective actions, no civil penalty was proposed.
* * * *
The Company has been informed by PSE&G that, on October 5, 1995, plant
operators at Salem Unit No. 1 declared an alert because the overhead annunciator
panels located in the control room stopped functioning. On-site facilities and
the emergency news center were staffed and activated during the alert.
Contractors on site at the time were asked to leave the site. The panels were
declared fully operable after testing later that day, and the alert was
terminated and access to the site was fully restored. PSE&G and the NRC are
continuing to investigate this event. PSE&G cannot predict what action, if any,
the NRC may take on this matter.
* * * *
On September 22, 1995, the Company's Board of Directors created a new
strategic business unit, the Telecommunications Group, which is participating in
several joint ventures in newly emerging wireless personal communications
services businesses and other competitive telecommunications opportunities.
* * * *
As previously reported in the June 30, 1995 Form 10-Q, on August 4,
1995, the PUC released a report on electric power competition prepared by the
PUC's Bureau of Conservation, Economics and Energy Planning and the PUC's Law
Bureau. On September 27,
28
1995, the PUC issued an order setting forth a procedural schedule for the second
phase of its investigation into electric power competition issues. The PUC
directed that pre-filed testimony addressing the Staff's report, certain
questions attached to its order, and other issues be filed by November 6, 1995,
with hearings in December and January. Following the hearings, the PUC will
issue a final report to the Governor and Pennsylvania General Assembly. The PUC
expects to issue its report by April 1996.
* * * *
As previously reported in the June 30, 1995 Form 10-Q, the Company filed
Purchased Gas Cost No. 12 rates effective December 1, 1995 reflecting a $0.80
per thousand cubic feet (Mcf) reduction in natural gas rates. The Company has
settled with the principal parties on a $0.88 per Mcf reduction, which is
expected to result in a $44 million reduction in annual revenues. The settlement
is pending before the PUC. Beginning in 1996, the Company will adjust its
natural gas rates on a quarterly basis to report differences between projected
costs and actual costs.
* * * *
As previously reported in the 1994 Form 10-K and the June 30, 1995 Form
10-Q, on March 6, 1995, the Commonwealth Court of Pennsylvania (Commonwealth
Court) denied the Applications for Reargument filed by the PUC and other parties
of the incentive and "lost revenue" portion of the Commonwealth Court's decision
on Demand-Side Management. On April 6, 1995, the PUC appealed the
29
decision to the Supreme Court of Pennsylvania. On September 12, 1995, the
Supreme Court of Pennsylvania accepted the appeal and set a briefing schedule
for the fourth quarter of 1995.
* * * *
As previously reported in the 1994 Form 10-K and the June 30, 1995 Form
10-Q, on July 19, 1995, the United States Environmental Protection Agency (EPA)
issued a proposed plan for remediation of the Metal Bank of America site which
involves removal of contaminated soil, sediment and groundwater and which the
EPA estimates would cost approximately $17 million to implement. On October 18,
1995, the potentially responsible parties (PRPs) provided comments to the EPA on
the proposed plan which identified several inadequacies with the plan, including
substantial underestimations of the cost of implementation. The Company has
recorded $9 million for its share of the cost to implement the plan.
* * * *
As previously reported in the 1994 Form 10-K and the June 30, 1995 Form
10-Q, the Company entered into a settlement agreement with the EPA with respect
to a site (Jack's Creek/Sitkin Smelting Facility) located in Mifflin County,
Pennsylvania. The Company paid $6,000 to settle this matter.
* * * *
30
As previously reported in the 1994 Form 10-K, the Company has been notified
by a group of PRPs that the Company has been identified as having sent hazardous
substances to the Spectron site in Elkton, Maryland. On October 5, 1995, the
Company, along with over 500 other companies, received a General Notice from the
EPA requesting the companies to conduct a Remedial Investigation and Feasibility
Study at the site. The Company had previously been identified as a de minimis
PRP and paid $2,000 to settle an earlier phase.
* * * *
31
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 July 25, 1995, reporting information under "ITEM 5.
OTHER EVENTS" relating to Salem Nuclear Generating Station.
Report, dated August 14, 1995, reporting information under "ITEM
5. OTHER EVENTS" relating to the Company's proposal to merge with
PP&L Resources, Inc.
Reports on Form 8-K (filed subsequent to the reporting period):
Report, dated October 17, 1995, reporting information under "ITEM
5. OTHER EVENTS" relating to Salem Nuclear Generating Station.
Report, dated October 23, 1995, reporting information under "ITEM
5. OTHER EVENTS" relating to the Company's proposal to merge with
PP&L Resources, Inc.
Report, dated November 1, 1995, reporting information under "ITEM
5. OTHER EVENTS" relating to the withdrawal of the Company's
merger proposal with PP&L Resources, Inc.
32
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: November 14, 1995
33