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...March 31, 1996............
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 222,510,267 shares of common stock outstanding on
April 30, 1996.
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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
March 31,
-------------------------
1996 1995
-------- --------
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OPERATING REVENUES
Electric $ 973.7 $ 881.4
Gas 196.8 177.2
-------- --------
TOTAL OPERATING REVENUES 1,170.5 1,058.6
-------- --------
OPERATING EXPENSES
Fuel and Energy Interchange 299.5 200.3
Other Operating 231.0 231.6
Maintenance 85.4 81.0
Depreciation 116.7 111.6
Income Taxes 103.9 98.0
Other Taxes 80.7 79.4
-------- --------
TOTAL OPERATING EXPENSES 917.2 801.9
-------- --------
OPERATING INCOME 253.3 256.7
-------- --------
OTHER INCOME AND DEDUCTIONS
Allowance for Other Funds Used
During Construction 3.0 4.3
Income Taxes 0.6 (1.3)
Other, Net (3.0) 1.7
-------- --------
TOTAL OTHER INCOME AND DEDUCTIONS 0.6 4.7
-------- --------
INCOME BEFORE INTEREST CHARGES 253.9 261.4
-------- --------
INTEREST CHARGES
Long-Term Debt 88.7 99.1
Company Obligated Mandatorily Redeemable
Preferred Securities of a Partnership,
Which Holds Solely Subordinated
Debentures of the Company 6.7 5.0
Short-Term Debt 10.9 9.5
-------- --------
TOTAL INTEREST CHARGES 106.3 113.6
Allowance for Borrowed Funds
Used During Construction (2.7) (4.2)
-------- --------
NET INTEREST CHARGES 103.6 109.4
-------- --------
NET INCOME 150.3 152.0
Preferred Stock Dividends 4.5 6.1
-------- --------
EARNINGS APPLICABLE TO COMMON STOCK $145.8 $145.9
======== ========
AVERAGE SHARES OF COMMON STOCK
OUTSTANDING (Millions) 222.4 221.7
EARNINGS PER AVERAGE COMMON
SHARE (Dollars) $0.65 $0.66
DIVIDENDS PER COMMON SHARE (Dollars) $0.435 $0.405
See Notes to Condensed Consolidated Financial Statements.
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PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
March 31, December 31,
1996 1995
(UNAUDITED)
----------- ----------
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ASSETS
UTILITY PLANT
Plant at Original Cost $14,759.3 $14,696.0
Less Accumulated Provision for Depreciation 4,740.8 4,623.7
---------- ----------
10,018.5 10,072.3
Nuclear Fuel, Net 178.2 191.1
Construction Work in Progress 487.6 494.2
Leased Property, Net 176.0 180.4
---------- ----------
10,860.3 10,938.0
---------- ----------
CURRENT ASSETS
Cash and Temporary Cash Investments 71.5 20.6
Accounts Receivable, Net
Customer 66.3 75.2
Other 73.6 72.0
Inventories, at Average Cost
Fossil Fuel 74.4 78.3
Materials and Supplies 119.1 123.4
Deferred Energy Costs 64.0 55.9
Other 191.9 60.8
---------- ----------
660.8 486.2
---------- ----------
DEFERRED DEBITS AND OTHER ASSETS
Recoverable Deferred Income Taxes 2,057.4 2,077.4
Deferred Limerick Costs 385.0 390.4
Deferred Non-Pension Postretirement Benefits Costs 244.4 248.1
Investments 378.7 296.9
Loss on Reacquired Debt 301.9 308.6
Other 187.9 215.0
---------- ----------
3,555.3 3,536.4
---------- ----------
TOTAL $15,076.4 $14,960.6
========== ==========
(continued on next page)
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PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
(Continued)
March 31, December 31,
1996 1995
(UNAUDITED)
----------- ----------
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CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Shareholders' Equity
Common Stock (No Par) $3,516.8 $3,506.3
Other Paid-In Capital 1.3 1.3
Retained Earnings 1,067.4 1,023.7
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, Which Holds Solely Subordinated Debentures of the Company 302.3 302.3
Long-Term Debt 4,199.0 4,198.3
---------- ----------
9,378.9 9,324.0
---------- ----------
CURRENT LIABILITIES
Notes Payable, Bank 174.9 ---
Long-Term Debt Due Within One Year 250.6 401.0
Capital Lease Obligations Due Within One Year 60.3 60.3
Accounts Payable 240.1 299.7
Taxes Accrued 140.9 107.6
Deferred Income Taxes 20.8 17.1
Interest Accrued 91.5 88.0
Dividends Payable 31.0 20.7
Other 109.5 82.8
---------- ----------
1,119.6 1,077.2
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Capital Lease Obligations 115.7 120.1
Deferred Income Taxes 3,329.5 3,312.6
Unamortized Investment Tax Credits 347.9 351.6
Pension Obligation for Early Retirement Plans 216.3 216.3
Non-Pension Postretirement Benefits Obligation 335.0 326.3
Other 233.5 232.5
---------- ----------
4,577.9 4,559.4
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 7)
---------- ----------
TOTAL $15,076.4 $14,960.6
========== ==========
See Notes to Condensed Consolidated Financial Statements.
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PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Millions of Dollars)
3 Months Ended
March 31,
----------------------------
1996 1995
-------- --------
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CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $150.3 $152.0
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 133.7 127.6
Deferred Income Taxes 39.5 32.3
Deferred Energy Costs (8.1) (10.6)
Changes in Working Capital:
Accounts Receivable 7.3 22.9
Inventories 8.2 11.5
Accounts Payable (59.6) (98.1)
Other Current Assets and Liabilities (67.6) (1.3)
Other Items Affecting Operations 53.4 5.9
-------- --------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 257.1 242.2
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Plant (69.1) (124.2)
Increase in Investments (81.8) (6.0)
-------- --------
NET CASH FLOWS USED BY INVESTING ACTIVITIES (150.9) (130.2)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Short-Term Debt 174.9 (11.5)
Issuance of Common Stock 10.5 4.2
Issuance of Long-Term Debt 34.0 --
Retirement of Long-Term Debt (184.4) (9.8)
Loss on Reacquired Debt 6.7 6.7
Dividends on Preferred and Common Stock (104.3) (95.8)
Change in Dividends Payable 10.3 13.0
Other Items Affecting Financing (3.0) 0.6
-------- --------
NET CASH FLOWS USED BY FINANCING ACTIVITIES (55.3) (92.6)
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 50.9 19.4
-------- --------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20.6 47.0
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $71.5 $66.4
======== ========
See Notes to Condensed Consolidated Financial Statements.
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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 a one-time adjustment of $19 million
to Fuel and Energy Interchange Expense on the Company's Income
Statement for the three months ended March 31, 1996 to reflect a
billing credit from a non-utility generator. 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. 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, 1995 (1995 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. Immediately following the shutdown
of Unit No. 2, 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
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issues, and NRC agreement that each unit is sufficiently
prepared to restart. PSE&G has informed the Company that Salem
Unit No. 2 is expected to be out of service until the
third quarter of 1996. PSE&G is evaluating several options
regarding Unit No. 1. For additional information regarding the
shutdown of Salem, see "PART II. OTHER INFORMATION. ITEM 5.
OTHER INFORMATION" of this Quarterly Report on Form 10-Q." The
Company estimated $18 million of replacement power costs and $12
million of maintenance costs for the three months ended March 31,
1996, which are reflected as Fuel and Energy Interchange and
Maintenance, respectively, in the accompanying Income Statement
for the three months ended March 31, 1996. The Company expects
to incur and expense approximately $103 million in 1996 for
increased costs related to the shutdown.
3. ADOPTION OF NEW ACCOUNTING STANDARDS
Effective January 1, 1996, the Company adopted 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, among other things, a write-
down of assets that are no longer probable of recovery through
future revenues. Also, effective January 1, 1996, the Company
adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." In adopting SFAS No. 123, the Company has
continued to use the intrinsic value based method of accounting
prescribed by Accounting Principles Board Opinion No. 25,
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"Accounting For Stock Issued to Employees." The adoption of
SFAS No. 121 and No. 123 has not affected the Company's financial
condition or results of operations.
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 $425 million of
designated accounts receivable through November 14, 2000. At
March 31, 1996, the Company had sold a $425 million interest in
accounts receivable under this agreement. The Company retains
the servicing responsibility for these receivables. At March 31,
1996, the average annual service-charge rate, computed on a daily
basis on the portion of the accounts receivable sold but not yet
collected, was 5.47%.
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 March
31, 1996, $28 million of Deferred Limerick Costs were included in
the pool of eligible receivables.
5. SUBSEQUENT FINANCING
On April 23, 1996, the Company entered into an $87.5 million
term loan agreement with a bank, the proceeds of which will be
used to repay borrowings under an existing $525 million revolving
credit and term loan agreement.
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6. DECLARATORY ACCOUNTING ORDER
On February 22, 1996, the Pennsylvania Public Utility
Commission (PUC) approved the Company's petition for a
declaratory accounting order to become effective October 1, 1996
regarding changes in the estimated depreciable lives of certain
of the Company's electric plant. As a result of this order,
depreciation and amortization on assets associated with Limerick
will increase by approximately $100 million per year while
depreciation and amortization on other Company assets will
decrease by approximately $10 million per year, for a net
increase of approximately $90 million per year. See note 3 of
Notes to Consolidated Financial Statements for the year ended
December 31, 1995.
7. COMMITMENTS AND CONTINGENCIES
The Price-Anderson Act sets the limit of liability for
claims that could arise from an incident involving any licensed
nuclear facility in the nation at approximately $8.9 billion.
This limit is subject to change by Congress to reflect 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 $79 million per reactor per incident, payable at
<page
no more than $10 million per reactor per incident per year. In
addition, Congress could impose revenue raising measures on the
nuclear industry to pay claims.
The Company also maintains coverage in the amount of its
$2.75 billion proportionate share for property insurance for each
station. The Company's insurance policies provide coverage for
decontamination liability expense, premature decommissioning and
loss or damage to its nuclear facilities. In the event of an
accident, insurance proceeds must first be used for reactor
stabilization and site decontamination. 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 to
maintain to provide for decommissioning the facility. The
Company is unable to predict 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 $46 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.
The Company is a member of an industry mutual insurance
company which provides replacement power cost insurance in the
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event of a major accidental outage at a nuclear station. The
Company's maximum share of any assessment is $14 million per
year.
* * * *
As disclosed in note 4 of Notes to Consolidated Financial
Statements for the year ended December 31, 1995, 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 to be collected over the life of each generating unit.
Under current rates, the Company collects and expenses
approximately $20 million annually from customers for
decommissioning the Company's ownership portion of its nuclear
units. At March 31, 1996, the Company held $238 million in trust
accounts, representing amounts recovered from customers and net
realized and unrealized investment earnings thereon, to fund
future decommissioning costs. The most recent estimate of the
Company's share of the cost to decommission its nuclear units is
approximately $1.2 billion in 1995 dollars. The Company will
ultimately seek to recover through the ratemaking process
increased decommissioning costs, although such recovery is not
assured. In February 1996, the Financial Accounting Standards
Board (FASB) issued an Exposure Draft entitled "Accounting for
Certain Liabilities Related to Closure or Removal of Long-Lived
Assets," which proposes, among other things, changes in the
recognition, measurement and classification of decommissioning
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costs for nuclear generating stations. The proposed statement,
if adopted, would be effective for years beginning after December
15, 1996. The Company is reviewing the Exposure Draft to
determine the effect on its financial condition and results of
operations. If current electric utility industry accounting
practices for decommissioning are changed, annual provisions for
decommissioning could be recorded as a liability rather than as
accumulated depreciation with recognition of an increase in the
cost of a related asset. The FASB is expected to issue a final
pronouncement by the end of 1996.
* * * *
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 and of property contaminated by
hazardous substances generated by the Company. The Company owns
or leases a 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. The Company has identified
23 sites where former manufactured gas plant activities may have
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resulted in site contamination. Past activities at several sites
have resulted in actual site contamination. The Company is
presently engaged in performing various levels of activities at
these sites, including initial evaluation to determine the
existence and nature of the contamination, detailed evaluation to
determine the extent of the contamination and the necessity and
possible methods of remediation, and implementation of
remediation. Seven of the sites are currently in the detailed
evaluation or remediation stage. As of March 31, 1996, the
Company had accrued $26 million for environmental 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.
* * * *
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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 $538 million for 1996 and
$1.6 billion for 1997 to 2000, all of which are expected to be
funded 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 7 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. Due to the Company's substantial investment in
plant, particularly Limerick Generating Station (Limerick), any
regulatory changes which do not provide for recovery of the
Company's investment could result in a substantial write-down of
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assets. To date, the Company's electric business, particularly
sales to large industrial customers and sales to other utilities,
has been affected by increased competition. For additional
information concerning competition, see the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 (1995
Form 10-K) and "PART II. OTHER INFORMATION. ITEM 5. OTHER
INFORMATION" of this Quarterly Report on Form 10-Q. 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.
* * * *
On February 22, 1996, the PUC approved the Company's
petition for a declaratory accounting order to become effective
October 1, 1996 regarding changes in the estimated depreciable
lives of certain of the Company's electric plant. As a result of
the order, depreciation and amortization on assets associated
with Limerick will increase by approximately $100 million per
year while depreciation and amortization on other Company assets
will decrease by approximately $10 million per year, for a net
increase of approximately $90 million per year. To the extent
that offsetting benefits from the Company's Competitive
Breakthrough Strategy are not achieved, the Company's future
results of operations will be negatively impacted. See note 3 of
Notes to Consolidated Financial Statements for the year ended
December 31, 1995 and note 6 of Notes to Condensed Consolidated
Financial Statements of this Quarterly Report on Form 10-Q under
<page
"PART I. FINANCIAL INFORMATION. ITEM 1. FINANCIAL STATEMENTS."
* * * *
As a result of the shutdown of Salem Generating Station
(Salem), the Company expects to incur in 1996 replacement power
and additional operating and maintenance costs of approximately
$103 million. See note 2 of Notes to Condensed Consolidated
Financial Statements of 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."
* * * *
For the forecast period 1996 through 2000, the Company plans
to invest approximately $125 million in joint ventures and other
telecommunications opportunities through its new
Telecommunications Group, all of which are expected to be funded
through internally generated funds. The Company's
telecommunications joint ventures are accounted for under the
equity method of accounting.
* * * *
For information concerning 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,"
and SFAS No. 123, "Accounting for Stock Based Compensation,"
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."
* * * *
<PAGE>
During the first quarter of 1996, the Company used
internally generated funds and the proceeds from short-term
borrowings to reduce long-term debt by $184 million. The Company
also issued $34 million of long-term debt, the proceeds of which
will be used to refund higher-cost debt.
* * * *
At March 31, 1996, the Company and its subsidiaries had $175
million of short-term borrowings outstanding. The Company has
formal and informal lines of bank credit aggregating $274
million. At March 31, 1996, the Company and its subsidiaries had
$1.5 million of short-term investments.
* * * *
The Company's Ratio of Earnings to Fixed Charges (Mortgage
Method) for the twelve months ended March 31, 1996 was 5.07 times
compared to 3.42 times for the corresponding period ended March
31, 1995. The Company's Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends (Articles of Incorporation
Method) for the twelve months ended March 31, 1996, was 2.79
times compared to 2.02 times for the corresponding period ended
March 31, 1995. For the three months ended March 31, 1996, 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 3.59 times and 3.33 times,
respectively compared to 3.27 times and 3.07 times, respectively,
for the corresponding period ended March 31, 1995. See the
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Company's 1995 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 months ended March 31,
1996 were $0.65 per share compared to $0.66 per share for the
corresponding period ended March 31, 1995. The decline in first
quarter earnings was due primarily to replacement power and
maintenance costs required by the shutdown of Salem. Partially
offsetting these expenses were higher revenues due to favorable
weather conditions and increased sales to other utilities.
* * * *
OPERATING REVENUES
Electric revenues increased 11% for the three months ended
March 31, 1996 compared to the corresponding period ended March
31, 1995 primarily due to higher retail sales resulting from
increased sales to other utilities and favorable weather
conditions.
Gas revenues increased 11% for the three months ended March
31, 1996 compared to the corresponding period ended March 31,
1995 primarily due to increased sales to retail customers from
more favorable weather conditions and higher levels of
<page
interruptible sales as transportation customers switched from
transportation service to interruptible service.
* * * *
FUEL AND ENERGY INTERCHANGE EXPENSES
Fuel and energy interchange expenses increased 50% for the
three months ended March 31, 1996 compared to the corresponding
period ended March 31, 1995 primarily due to increased purchases
for sales to other utilities, replacement power costs required by
the shutdown of Salem and higher output needed to meet retail
sales demand. These increases were partially offset by a one-
time adjustment to reflect a billing credit from a non-utility
generator.
* * * *
OPERATING AND MAINTENANCE EXPENSES
Operating and maintenance expenses increased 1% for the
three months ended March 31, 1996 compared to the corresponding
period ended March 31, 1995 primarily due to higher nuclear
generating station charges related to the shutdown of Salem and
higher customer expenses. The increase was partially offset by
slightly lower general and administrative expenditures and other
operation and maintenance expenses.
* * * *
<page
DEPRECIATION
Depreciation expense increased 5% for the three months ended
March 31, 1996 compared to the corresponding period ended March
31, 1995 primarily due to additions to plant in service.
* * * *
INCOME TAXES
Income taxes charged to operating expenses increased 6% for
the three months ended March 31, 1996 compared to the
corresponding period ended March 31, 1995 primarily due to an
increase in pre-tax income and reduced accelerated tax
depreciation benefits from plant assets which are not subject to
normalization for ratemaking.
* * * *
OTHER TAXES
Other taxes charged to operating expenses increased by 2%
for the three months ended March 31, 1996 compared to the
corresponding period ended March 31, 1995 due to increased gross
receipts taxes resulting from higher revenue.
* * * *
OTHER INCOME AND DEDUCTIONS
Other income and deductions decreased significantly for the
three months ended March 31, 1996 compared to the corresponding
period ended March 31, 1995 due primarily to a loss recorded in
the first quarter of 1996 from start-up activities of the
Company's telecommunications joint ventures (accounted for under
<page
the equity method) and a reduction in allowance for funds used
during construction.
* * * *
TOTAL INTEREST CHARGES
Total interest charges decreased 5% for the three months
ended March 31, 1996 compared to the corresponding period ended
March 31, 1995 primarily due to the Company's ongoing program to
reduce and refinance higher-cost, long-term debt, partially
offset by the replacement of preferred stock with Company
Obligated Mandatorily Redeemable Preferred Securities in the
fourth quarter of 1995.
* * * *
PREFERRED DIVIDENDS
Preferred stock dividends decreased 26% for the three months
ended March 31, 1996 compared to the corresponding period ended
March 31, 1995 due to the replacement of preferred stock with
Company Obligated Mandatorily Redeemable Preferred Securities in
the fourth quarter of 1995.
* * * *
<page
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, two shareholder derivative lawsuits
have been filed against several present and former officers of
the Company relating to the Company's past credit and collection
practices. The two suits have been consolidated. On February
23, 1996, the Company and the defendants filed a petition to
terminate the consolidated action on the basis of the March 14,
1994, Board of Directors' resolution refusing the shareholders'
demands to commence legal action against the defendants as not
being in the best interest of the Company and its shareholders.
* * * *
As previously reported in the 1995 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 (Westinghouse)
seeking damages to recover the cost of replacing the steam
generators at Salem Units No. 1 and 2. The suit alleges fraud
and breach of contract by Westinghouse in the sale, installation
and maintenance of the generators. Westinghouse filed an answer
and $2.5 million counterclaim on April 30, 1996.
* * * *
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 10, 1996, the Company held its 1996 Annual Meeting
of Shareholders.
<page
The following Class III directors of the Company were re-
elected for terms expiring in 1999:
Votes For: Votes Withheld:
M. Walter D'Alessio 179,945,256 3,990,183
James A. Hagen 180,069,083 3,866,356
Joseph C. Ladd 179,697,910 4,237,529
Kinnaird R. McKee 179,891,413 4,044,026
Ronald Rubin 179,983,218 3,952,221
The incumbent Class I directors, with terms expiring in
1997, are Richard G. Gilmore, Richard H. Glanton, Joseph J.
McLaughlin, Corbin A. McNeill, Jr. and Robert Subin. The
incumbent Class II directors, with terms expiring in 1998, are
Susan W. Catherwood, Nelson G. Harris, Edithe J. Levit, John M.
Palms and Joseph F. Paquette, Jr.
Other items voted on by holders of common stock at the
Annual Meeting were as follows:
(1) The appointment of the firm of Coopers & Lybrand
L.L.P., independent certified public accountants, as
auditors of the Company for 1996, was approved with
181,604,517 common shares (81.6% of common shares
outstanding) voting for; 1,002,013 common shares (0.4%
of common shares outstanding) voting against; and
1,328,909 common shares (0.6% of common shares
outstanding) abstaining;
<page
(2) A shareholder proposal requiring lawyers deriving
compensation from a law firm providing legal services to the
Company not be selected for the slate of endorsed candidates for
director, was defeated with 18,732,588 common shares (8.4% of
common shares outstanding) voting for; 137,110,242 common shares
(61.6% of common shares outstanding) voting against; 5,665,977
common shares (2.5% of common shares outstanding) abstaining; and
22,435,632 common shares (10.1% of common shares outstanding)
broker non-votes; and
(3) A shareholder proposal for term limits for members
of the Board of Directors which would not exceed six
years was defeated with 11,949,535 common shares (5.4%
of common shares outstanding) voting for; 144,198,213
common shares (64.8% of common shares outstanding)
voting against; 5,352,058 common shares (2.4% of common
shares outstanding) abstaining; and 22,435,632 common
shares (10.1% of common shares outstanding) broker non-
votes.
ITEM 5. OTHER INFORMATION
The Company has been informed by PSE&G that, while the
inspection of the steam generators at Salem Unit No. 1 is not
complete, partial results from eddy current inspections in
February 1996 show indications of degradation in a significant
number of tubes. PSE&G has removed several tubes for laboratory
examination to confirm the results of the inspections. PSE&G has
been evaluating several options which include repair of degraded
<page
tubes by sleeving at locations found to contain crack-like
indications, replacement of the steam generators with existing
unused steam generators from a utility that had previously
canceled a new plant or replacement of the steam generators with
new steam generators. These evaluations are expected to be
completed mid-May 1996. PSE&G estimates that implementation of
one or more of these options may enable the return to service of
Salem Unit No. 1 by mid-1997.
The Company has been informed by PSE&G that the preliminary
results of the inspection of Salem Unit No. 2 confirm that the
condition of the steam generators is well within current repair
limits. PSE&G had also removed several tubes from the Salem Unit
No. 2 steam generators for laboratory analysis to confirm the
results of testing. PSE&G expects that repairs to the Salem Unit
No. 2 steam generators will be completed in the second quarter of
1996 and that Unit No. 2 will return to service by the end of
August 1996.
PSE&G had planned to return Salem Unit No. 1 to service in
the second quarter of 1996 and Salem Unit No. 2 in the third
quarter of 1996. As a result of the extent of the previously
discovered degradation in the Salem Unit No. 1 steam generators,
PSE&G is focusing its efforts on the return of Salem Unit No. 2
to service by the end of August 1996. PSE&G expects that the
additional steam generator inspections and testing on Salem Unit
No. 2 will not affect the timing of its restart. The timing of
the restart is subject to completion of the requirements of the
<page
restart plan to the satisfaction of PSE&G and the NRC, which
encompasses a review and improvement of personnel, process and
equipment issues.
The Company has been informed by PSE&G that the restart plan
status is as follows:
Two of the five NRC Confirmatory Action Letter
requirements were recognized as complete by the NRC on
February 13, 1996. A third item has been addressed by
PSE&G and approval by the NRC is pending;
Comprehensive action plans concerning people and
process issues are approximately 90% complete; and
A detailed Salem Unit No. 2 schedule integrating
equipment maintenance, upgrades and testing has been
developed and work is on schedule.
Based on the above, PSE&G has informed the Company that it is not
aware of any constraints which would prevent Salem Unit No. 2
from returning to service by the end of August.
* * * *
The Company has been informed by PSE&G that meetings were
held with senior NRC officials on May 6th and 7th to discuss
performance at PSE&G-operated nuclear units including Salem. The
NRC acknowledged fundamental changes in PSE&G's nuclear business
unit and that those changes provided an overall positive
impression. The NRC said that PSE&G must demonstrate the
integrity of station design and licensing basis, a generic issue
presently being pursued by the NRC. The NRC staff indicated that
<page
it will continue to closely monitor performance at PSE&G- operated
nuclear units including Salem, including emergency preparedness
performance and the effectiveness of PSE&G's corrective action
program.
* * * *
As previously reported in the 1995 Form 10-K, on March 6,
1996, the Company filed its new Energy Cost Adjustment clause
(ECA) to become effective April 1, 1996. On March 28, 1996, the
PUC adopted a tentative order approving the new ECA. The
tentative order is subject to public comment until May 31, 1996.
If the tentative order becomes final, the new ECA would result in
an increase in annual revenue of $21.7 million.
* * * *
On April 24, 1996, the FERC issued final rules (Order No.
888) to become effective on July 9, 1996, requiring all public
utilities to file non-discriminatory open-access tariffs that
offer others the same transmission service they provide to
themselves. Transmission services covered by the final rule
include network and point-to-point services, as well as ancillary
services. The final rules include a pro forma tariff setting
minimum terms and conditions of service. Public utilities are
required both to offer service to others under the pro forma
tariff and to use the pro forma tariff for their own wholesale
energy sales and purchases. No later than December 31, 1996,
intra-pool transactions for power pools must be under a joint,
pool-wide pro forma tariff. The final rules also provide public
<page
utilities with the opportunity to seek full recovery of prudently
incurred, legitimate and verifiable wholesale stranded costs
resulting from customer use of open-access transmission service
to move to another supplier. To be eligible for recovery,
stranded costs must be associated with wholesale requirement
contracts signed before July 11, 1994. After that date, recovery
must be specifically provided for in the contract. The FERC
ruled that stranded costs should be recovered from a utility's
departing customers. The FERC also stated that if costs are
stranded by retail wheeling, utilities should look to the states
first to recover those costs. The FERC will become involved only
if state regulators lack authority under state law to provide for
stranded-cost recovery.
* * * *
As previously reported in the 1995 Form 10-K, the Company
had filed a tariff for network and point-to-point transmission
services and for market-based rates outside of the Pennsylvania-
New Jersey-Maryland Interconnection Association control area. On
March 28, 1996, the FERC approved the tariff, subject to
compliance with the final pro forma tariff terms and conditions
which have been adopted by the FERC in Order No.888.
* * * *
As previously reported in the 1995 Form 10-K, on June 5,
1995, a consent decree, which included the terms of a settlement
among the potentially responsible parties (PRPs) and the United
States Environmental Protection Agency (EPA) regarding the Maxey
<page
Flats disposal site, was filed with the United States District
Court for the Eastern District of Kentucky. On April 18, 1996,
the court entered the consent decree.
* * * *
As previously reported in the 1995 Form 10-K, the Company
had notified the EPA that it wished to participate with
approximately 100 other PRPs with allocated shares of less than
1% (by volume) in a settlement regarding the Berks
Associates/Douglassville site. On April 8, 1996, the de minimis
PRPs and the EPA entered into a consent decree in which the
Company would be required to pay $991,835. As part of the
settlement, the EPA has agreed not to sue, take administrative
action under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 and the Superfund
Amendments and Reauthorization Act of 1986 (collectively CERCLA)
for recovery of past or future response costs or seek injunctive
relief with respect to the site. In addition, the Commonwealth
of Pennsylvania has agreed not to sue the settling parties with
regard to the Commonwealth's share of liability for past and
future response costs at the site. The consent decree is subject
to review and approval by the United States District Court for
the Eastern District of Pennsylvania.
* * * *
<page
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 February 23, 1996, reporting information
under "ITEM 5. OTHER EVENTS" relating to Salem
Generating Station.
Reports on Form 8-K (filed subsequent to the reporting
period):
None.
<page
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: May 14, 1996
<<page>
<TABLE>
<CAPTION>
EXHIBIT 12-1
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
SEC METHOD
($000)
3 MONTHS
ENDED
03/31/96
--------------
<S> <C>
NET INCOME $150,280
ADD BACK:
- - INCOME TAXES:
OPERATING INCOME 103,909
NON-OPERATING INCOME (624)
-------
NET TAXES 103,285
- - FIXED CHARGES:
INTEREST APPLICABLE TO DEBT 95,961
ANNUAL RENTALS 2,299
-------
TOTAL FIXED CHARGES 97,990
ADJUSTED EARNINGS INCLUDING AFUDC $ 351,555
=========
RATIO OF EARNINGS TO FIXED CHARGES 3.59
====
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT 12-2
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS
SEC METHOD
($000)
3 MONTHS
ENDED
03/31/96
----------------
<S> <C>
NET INCOME $150,280
ADD BACK:
- - INCOME TAXES:
OPERATING INCOME 103,909
NON-OPERATING INCOME (624)
-------
NET TAXES 103,285
- - FIXED CHARGES:
INTEREST APPLICABLE TO DEBT 95,961
ANNUAL RENTALS 2,299
-------
TOTAL FIXED CHARGES 97,990
EARNINGS REQUIRED FOR PREFERRED DIVIDENDS:
DIVIDENDS ON PREFERRED STOCK 4,509
ADJUSTMENT TO PREFERRED DIVIDENDS* 3,099
-------
7,608
FIXED CHARGES AND PREFERRED DIVIDENDS $105,598
========
EARNINGS BEFORE INCOME TAXES AND
FIXED CHARGES $ 351,555
========
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS 3.33
====
* ADDITIONAL CHARGE EQUIVALENT TO EARNINGS REQUIRED
TO ADJUST DIVIDENDS ON PREFERRED STOCK TO A PRE-TAX BASIS
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 10860
<OTHER-PROPERTY-AND-INVEST> 379
<TOTAL-CURRENT-ASSETS> 661
<TOTAL-DEFERRED-CHARGES> 2687
<OTHER-ASSETS> 490
<TOTAL-ASSETS> 15076
<COMMON> 3517
<CAPITAL-SURPLUS-PAID-IN> 1
<RETAINED-EARNINGS> 1067
<TOTAL-COMMON-STOCKHOLDERS-EQ> 4586
93
199
<LONG-TERM-DEBT-NET> 4199
<SHORT-TERM-NOTES> 175
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 251
0
<CAPITAL-LEASE-OBLIGATIONS> 116
<LEASES-CURRENT> 60
<OTHER-ITEMS-CAPITAL-AND-LIAB> 5398
<TOT-CAPITALIZATION-AND-LIAB> 15076
<GROSS-OPERATING-REVENUE> 1171
<INCOME-TAX-EXPENSE> 104
<OTHER-OPERATING-EXPENSES> 813
<TOTAL-OPERATING-EXPENSES> 917
<OPERATING-INCOME-LOSS> 253
<OTHER-INCOME-NET> 1
<INCOME-BEFORE-INTEREST-EXPEN> 254
<TOTAL-INTEREST-EXPENSE> 104
<NET-INCOME> 150
5
<EARNINGS-AVAILABLE-FOR-COMM> 146
<COMMON-STOCK-DIVIDENDS> 97
<TOTAL-INTEREST-ON-BONDS> 89
<CASH-FLOW-OPERATIONS> 257
<EPS-PRIMARY> .65
<EPS-DILUTED> .65
</TABLE>
