UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended...March 31, 1997..........
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period
from.........to...................
Commission file number..................1-1401...................
.......................PECO Energy Company.......................
(Exact name of registrant as specified in its charter)
..........Pennsylvania................ 23-0970240................
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
....2301 Market Street, Philadelphia, PA..........19103..........
(Address of principal executive offices) (Zip Code)
........................(215)841-4000............................
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date:
The Company had 222,542,087 shares of common stock outstanding on
April 30, 1997.
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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)
<CAPTION>
3 Months Ended
March 31,
--------------------------------
1997 1996
---------- ----------
<S> <C> <C>
OPERATING REVENUES
Electric $ 970.5 $ 973.7
Gas 192.9 196.8
---------- ----------
TOTAL OPERATING REVENUES 1,163.4 1,170.5
---------- ----------
OPERATING EXPENSES
Fuel and Energy Interchange 334.0 299.5
Operation 224.4 231.0
Maintenance 77.5 85.4
Depreciation 142.5 116.7
Income Taxes 93.6 103.9
Other Taxes 83.0 80.7
---------- ----------
TOTAL OPERATING EXPENSES 955.0 917.2
---------- ----------
OPERATING INCOME 208.4 253.3
---------- ----------
OTHER INCOME AND DEDUCTIONS
Allowance for Other Funds Used
During Construction 2.4 3.0
Income Taxes 1.9 0.6
Other, net (2.4) (3.0)
---------- ----------
TOTAL OTHER INCOME AND DEDUCTIONS 1.9 0.6
---------- ----------
INCOME BEFORE INTEREST CHARGES 210.3 253.9
---------- ----------
INTEREST CHARGES
Long-Term Debt 80.0 88.7
Company Obligated Mandatorily Redeemable
Preferred Securities of a Partnership 6.7 6.7
Other Interest 12.8 10.9
---------- ----------
TOTAL INTEREST CHARGES 99.5 106.3
Allowance for Borrowed Funds
Used During Construction (2.2) (2.7)
---------- ----------
NET INTEREST CHARGES 97.3 103.6
---------- ----------
NET INCOME 113.0 150.3
PREFERRED STOCK DIVIDENDS 4.5 4.5
---------- ----------
EARNINGS APPLICABLE TO COMMON STOCK $ 108.5 $ 145.8
========== ==========
AVERAGE SHARES OF COMMON STOCK
OUTSTANDING (Millions) 222.5 222.4
EARNINGS PER AVERAGE COMMON
SHARE (Dollars) $ 0.49 $ 0.65
DIVIDENDS PER COMMON SHARE (Dollars) $ 0.45 $ 0.435
See Notes to Condensed Consolidated Financial Statements.
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<TABLE>
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
UTILITY PLANT
Plant at Original Cost $ 15,116.7 $ 14,945.0
Less Accumulated Provision for Depreciation 5,177.2 5,047.0
------------- -------------
9,939.5 9,898.0
Nuclear Fuel, net 186.8 199.6
Construction Work in Progress 589.6 661.8
Leased Property, net 175.7 182.1
------------- -------------
10,891.6 10,941.5
------------- -------------
CURRENT ASSETS
Cash and Temporary Cash Investments 39.7 29.2
Accounts Receivable, net
Customer 37.0 19.2
Other 70.2 74.4
Inventories, at average cost
Fossil Fuel 55.1 84.6
Materials and Supplies 115.9 119.8
Deferred Energy Costs - Gas 18.1 30.0
Other 190.6 63.2
------------- -------------
526.6 420.4
------------- -------------
DEFERRED DEBITS AND OTHER ASSETS
Recoverable Deferred Income Taxes 2,355.3 2,325.7
Deferred Limerick Costs 349.3 361.8
Deferred Non-Pension Postretirement Benefits Costs 229.8 233.5
Deferred Energy Costs - Electric 97.5 92.0
Investments 465.7 432.6
Loss on Reacquired Debt 277.9 283.8
Other 164.7 169.3
------------- -------------
3,940.2 3,898.7
------------- -------------
TOTAL $ 15,358.4 $ 15,260.6
============= =============
See Notes to Condensed Consolidated Financial Statements.
(continued on next page)
</TABLE>
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<TABLE>
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
(continued)
<CAPTION>
March 31, December 31,
1997 1996
<S> <C> <C>
CAPITALIZATION AND LIABILITIES ------------- -------------
(Unaudited)
CAPITALIZATION
Common Shareholders' Equity
Common Stock (No Par) $ 3,517.1 $ 3,517.6
Other Paid-In Capital 1.3 1.3
Retained Earnings 1,135.4 1,127.0
Preferred and Preference Stock
Without Mandatory Redemption 199.4 199.4
With Mandatory Redemption 92.7 92.7
Company Obligated Mandatorily Redeemable
Preferred Securities of a Partnership 302.2 302.2
Long-Term Debt 3,936.2 3,935.5
------------- -------------
9,184.3 9,175.7
------------- -------------
CURRENT LIABILITIES
Notes Payable, bank 302.5 287.5
Long-Term Debt Due Within One Year 283.3 283.3
Capital Lease Obligations Due Within One Year 52.5 49.4
Accounts Payable 126.3 213.0
Taxes Accrued 164.9 71.5
Interest Accrued 88.4 82.0
Dividends Payable 29.8 22.4
Other 127.4 94.3
------------- -------------
1,175.1 1,103.4
------------- -------------
DEFERRED CREDITS AND OTHER LIABILITIES
Capital Lease Obligations 123.2 132.7
Deferred Income Taxes 3,767.5 3,745.2
Unamortized Investment Tax Credits 331.6 336.1
Pension Obligation 224.5 224.5
Non-Pension Postretirement Benefits Obligation 324.8 315.1
Other 227.4 227.9
------------- -------------
4,999.0 4,981.5
------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
------------- -------------
TOTAL $ 15,358.4 $ 15,260.6
============= =============
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Millions of Dollars)
<CAPTION>
3 Months Ended
March 31,
---------------------------------
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 113.0 $ 150.3
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 149.9 133.7
Deferred Income Taxes (4.7) 39.5
Deferred Energy Costs 6.4 (8.1)
Changes in Working Capital:
Accounts Receivable (13.6) 7.3
Inventories 33.4 8.2
Accounts Payable (86.7) (59.6)
Other Current Assets and Liabilities 5.5 (67.6)
Other Items Affecting Operations 18.0 42.0
---------- ----------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 221.2 245.7
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Plant (101.4) (57.7)
Increase in Investments (33.1) (81.8)
---------- ----------
NET CASH FLOWS USED BY INVESTING ACTIVITIES (134.5) (139.5)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Short-Term Debt 15.0 174.9
Issuance of Common Stock - 10.5
Repurchase of Common Stock (0.5) -
Issuance of Long-Term Debt - 34.0
Retirement of Long-Term Debt - (184.4)
Loss on Reacquired Debt 5.9 6.7
Dividends on Preferred and Common Stock (104.7) (104.3)
Change in Dividends Payable 7.4 10.3
Other Items Affecting Financing 0.7 (3.0)
---------- ----------
NET CASH FLOWS USED BY FINANCING ACTIVITIES (76.2) (55.3)
---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 10.5 50.9
---------- ----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 29.2 20.6
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 39.7 $ 71.5
========== ==========
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements as of
March 31, 1997 and for the three months then ended are unaudited, but include
all adjustments that PECO Energy Company (Company) considers necessary for a
fair presentation of such financial statements. All adjustments are of a normal,
recurring nature, except for a one-time credit 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. Certain prior-year amounts have been
reclassified for comparative purposes. These notes should be read in conjunction
with the Notes to Consolidated Financial Statements in the Company's 1996 Annual
Report to Shareholders, which are incorporated by reference in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 (1996 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 in the second quarter of 1995. At that time, PSE&G informed the
Nuclear Regulatory Commission (NRC) that it had determined to keep the Salem
units shut down pending review and resolution of certain equipment and
management issues and NRC agreement that each unit is sufficiently prepared to
restart. PSE&G estimates the projected restart of Unit No. 2 to occur in the
third quarter of 1997 and of Unit No. 1 to occur in late 1997. Because the
timing of restart of the Salem units is subject to satisfactory completion of
the requirements of the restart plan, as determined by PSE&G and the NRC, no
assurance can be given that the projected restart dates will be met. For
additional information regarding the shutdown of Salem, see "PART II. OTHER
INFORMATION. ITEM 5. OTHER INFORMATION" in this Quarterly Report on Form 10-Q.
<PAGE>
For the three months ended March 31, 1997 and 1996, the Company
recorded in the accompanying Statements of Income as Fuel and Energy Interchange
$29 and $18 million, respectively, of replacement power costs and $13 and $12
million, respectively, of Maintenance related to the shutdown of Salem. For the
year ended December 31, 1997, the Company expects to incur and expense
approximately $125 million for increased costs related to the shutdown.
3. RATE MATTERS
On April 1, 1997, the Company filed with the Pennsylvania Public
Utility Commission (PUC) a comprehensive restructuring plan detailing its
proposal to implement full customer choice of electric generation supplier. The
filing is required under the provisions of the Pennsylvania Electricity
Generation Consumer Choice and Competition Act (Competition Act), which requires
the unbundling of electric services into separate generation, transmission and
distribution services with open retail competition for generation. The filing
proposes, among other things, procedures to implement direct customer access,
beginning in 1999, to all licensed electric generation suppliers; unbundled
rates for generation, transmission, distribution and other services; and the
recovery of $6.8 billion in net transition and stranded costs through a
Competitive Transition Charge or Intangible Transition Charge.
On January 22, 1997, the Company filed with the PUC an application
under the Competition Act for securitizing $3.6 billion of stranded costs. On
April 14, 1997, a PUC Administrative Law Judge (ALJ) issued a non-binding
decision recommending that the Company's request to securitize a portion of its
stranded costs at this time be denied. The ALJ's recommended decision was based
on the insufficient time available for the PUC to evaluate the proposal under
the expedited review provision expressly provided for in the Competition Act. In
the event the PUC does not agree with the legal basis of his opinion, the ALJ
alternatively recommended that the Company be authorized to securitize $328
million of its stranded costs at this time. On April 23, 1997, the Company filed
exceptions to the recommended decision. On May 8, 1997, the PUC conducted a
non-binding polling of the Commissioners regarding the Company's application. If
the PUC adopts a final order consistent with the polling, the Company would be
<PAGE>
authorized to securitize $1.1 billion of its stranded and related transaction
and use of proceeds costs at this time consisting of the following items: $607
million of generation plant; $373 million of regulatory assets; $96 million of
1996 deferred fuel balance; and $22 million of issuance and use-of-proceeds
costs (for debt and preferred stock). The PUC is required to issue an order by
May 22, 1997.
The PUC Commissioners deferred without prejudice all other aspects of
the Company's securitization application. The Company continues to believe that
it will be given the opportunity for full recovery of its retail electric
stranded costs. The Company expects that the PUC will consider any further
securitization of stranded and other costs in connection with the Company's
restructuring plan. Although an order regarding that filing is required by
December 31, 1997, the Company has agreed to extend the time period for a PUC
order to January 8, 1998. To the extent the Company is not ultimately permitted
by the PUC to recover its retail electric stranded costs, this amount could
result in a charge to earnings.
For additional information regarding the Competition Act and the
Company's securitization filing, see note 3 of Notes to Consolidated Financial
Statements for the year ended December 31, 1996.
4. NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," to simplify the existing computational guidelines for the earnings per
share (EPS) information provided in financial statements, to revise the
disclosure requirements and to increase the comparability of EPS data on an
international basis. The new standard is effective for fiscal years beginning
after December 15, 1997. Adoption of SFAS No. 128 will not impact the Company's
amount of EPS currently reported for financial statement purposes, and there
would be no difference in the amounts calculated as basic EPS and dilutive EPS.
5. SALES OF ACCOUNTS RECEIVABLE
The Company is party to an agreement with a financial institution under
which it sold with limited recourse an undivided interest, adjusted daily, in up
to $425 million of designated accounts receivable through November 14, 2000. At
<PAGE>
March 31, 1997, the Company had sold a $425 million interest in accounts
receivable under this agreement. The Company retains the servicing
responsibility for these receivables. At March 31, 1997, the average annual
service-charge rate, computed on a daily basis on the portion of the accounts
receivable sold but not yet collected, was 5.43%.
By the 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, 1997, $21.1 million of Deferred
Limerick Costs were included in the pool of eligible receivables.
6. DECLARATORY ACCOUNTING ORDER
On October 1, 1996, the Company implemented changes approved by the PUC
to the estimated depreciable lives of certain of the Company's electric plant.
As a result, depreciation and amortization on certain assets associated with
Limerick increased by approximately $100 million per year while depreciation and
amortization on certain other Company assets decreased by approximately $10
million per year, for a net increase of approximately $90 million per year. For
the three months ended March 31, 1997, the Company expensed an additional $23
million of increased depreciation and amortization related to this order.
7. COMMITMENTS AND CONTINGENCIES
Except as described below, the information regarding the Company's
capital commitments, nuclear insurance, nuclear decommissioning and spent- fuel
storage, energy purchases, environmental issues and litigation at March 31, 1997
is substantially the same as described in note 4 of Notes to Consolidated
Financial Statements for the year ended December 31, 1996.
As previously reported, the Company has identified 27 sites where
former manufactured gas plant (MGP) activities have or may have resulted in
actual site contamination. As of March 31, 1997, the Company had accrued $29
million for environmental investigation and remediation costs, including $16
million for MGP investigation and remediation that currently can be reasonably
estimated. The Company cannot predict whether it will incur other significant
liabilities for additional investigation and remediation costs at these or
additional sites identified by the Company, environmental agencies or others, or
<PAGE>
whether such costs will be recoverable from third parties.
8. SUBSEQUENT EVENTS
On April 1, 1997, the Board of Directors authorized the repurchase of
up to five million shares of the Company's common stock from time to time in
open market, privately negotiated and/or other types of transactions in
conformity with the rules of the Securities and Exchange Commission.
* * * *
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company's future financial condition and its future operating
results are substantially dependent upon the effects of the Pennsylvania
Electricity Generation Consumer Choice and Competition Act (Competition Act) and
other competitive initiatives. On April 1, 1997, the Company filed with the
Pennsylvania Public Utility Commission (PUC) a comprehensive restructuring plan
detailing its proposal to implement full customer choice of electric generation
supplier, including the recovery of $6.8 billion in net transition and stranded
costs.
In its restructuring filing, the Company estimates that its net
electric generation-related costs at December 31, 1998 will be $9.7 billion
including $2.6 billion of regulatory and other deferred charges, $32 million of
other transition costs, $237 million of under-funded nuclear decommissioning
costs and $127 million of costs for retiring fossil generating plants. The
Company estimates that the market value of its existing generating facilities at
December 31, 1998 will be $2.9 billion. This estimate is based on the expected
net after-tax margin of each generating unit over its remaining life, discounted
to a present value basis as of December 31, 1998 (at the Company's after-tax
cost of capital of 8.41%). The Company's restructuring filing proposes the
recovery of the resulting $6.8 billion of net stranded and transition costs over
a period of up to ten years through annual competitive transition charges and/or
intangible transition charges of approximately $1.4 billion. Under the
provisions of the Competition Act, the Company's unbundled charges for
transmission- and distribution- related services will be capped for 4-1/2 years
from December 31, 1996; until recovery of the Company's net stranded and
transition costs, the Company will be subject to a rate cap (which cannot extend
beyond December 31, 2005) in which the total charges to customers for generation
cannot exceed rates in place as of December 31, 1996, subject to certain
exceptions.
The Company continues to believe that it will be given the opportunity
for full recovery of its retail electric stranded costs. The amount of recovery
is subject to the decision of the PUC in the Company's restructuring filing. To
the extent the Company is not ultimately permitted by the PUC to recover its
<PAGE>
retail electric stranded costs, this amount could result in a charge to
earnings.
The Company expects that its future liquidity and capital resources
will be reduced as a result of the Competition Act. The Company is pursuing a
strategy to reduce its stranded costs and the associated capitalization roughly
in proportion to the current capitalization, which would reduce the Company's
liquidity and capital resource requirements. The Company cannot predict the
level of stranded-cost recovery which will be permitted under the Competition
Act, the impact of any such recovery on the Company's capitalization or whether
internally generated cash will continue to meet or exceed the Company's capital
requirements and dividend payments.
* * * *
Given the changing regulatory environment in the utility industry, the
continued application of Statement of Financial Accounting Standards (SFAS) No.
71, "Accounting for the Effects of Certain Types of Regulation" for regulated
enterprises is receiving significant attention from the Securities and Exchange
Commission (SEC). The Financial Accounting Standards Board, through its Emerging
Issues Task Force (EITF), has undertaken the initiative to develop
implementation guidance for SFAS No. 71 and SFAS No. 101, "Regulated Enterprises
- - Accounting for the Discontinuance of SFAS No. 71." The EITF has announced its
intention to discuss this issue at its May 22, 1997 meeting. The Company cannot
predict the outcome of the deliberations on this accounting guidance.
* * * *
Total construction program expenditures, primarily for utility plant,
are estimated to be $560 million for 1997 and $1.6 billion for the period 1998
through 2001. The estimated expenditures include the Company's share of the
remaining expenditures relating to the replacement of Unit No. 1 steam
generators, including installation and the cost of disposal of the four old
steam generators at Salem Generating Station (Salem). For additional
information, see "PART II. OTHER INFORMATION. ITEM 5. OTHER INFORMATION" in this
Quarterly Report on Form 10-Q.
The Company's construction program is subject to periodic review and
revision to reflect changes in economic conditions and other appropriate
factors. Certain facilities under construction and to be constructed may require
<PAGE>
permits and licenses which the Company has no assurance will be granted.
For the period 1997 through 2000, the Company also plans to invest
approximately $200 to $300 million in new ventures, principally through its
Telecommunications Group.
* * * *
For a discussion of commitments and contingencies relating to
environmental matters, see note 4 of Notes to Consolidated Financial Statements
for the year ended December 31, 1996 and note 7 of Notes to Condensed
Consolidated Financial Statements in this Quarterly Report on Form 10-Q under
"PART 1. FINANCIAL INFORMATION. ITEM 1. FINANCIAL STATEMENTS."
* * * *
For the year ended December 31, 1997, the Company expects to incur
replacement power and additional maintenance costs of approximately $125 million
as a result of the Salem shutdown. 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."
* * * *
At March 31, 1997, the Company and its subsidiaries had outstanding
$303 million of short-term borrowings, including $215 million of commercial
paper. The Company has formal and informal lines of bank credit aggregating $275
million. At March 31, 1997, the Company and its subsidiaries had no short-term
investments.
* * * *
The Company's Ratio of Earnings to Fixed Charges (Mortgage Method) for
the twelve months ended March 31, 1997 was 4.20 times compared to 5.07 times for
the corresponding period in 1996. The Company's Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends (Articles of Incorporation Method)
for the twelve months ended March 31, 1997, was 2.38 times compared to 2.79
times for the corresponding period in 1996. For the three months ended March 31,
1997, 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 3.24 times and 2.97 times, respectively, compared to 3.59 times and 3.33
<PAGE>
times, respectively, for the corresponding period in 1996. See the Company's
Annual Report on Form 10-K for the period ended December 31, 1996 (1996 Form
10-K) under "PART I. ITEM 1. BUSINESS-Capital Requirements and Financing
Activities," for a discussion of the ratio methods.
* * * *
On April 1, 1997, the Board of Directors authorized the repurchase of
up to five million shares of the Company's common stock from time to time in
open market, privately negotiated and/or other types of transactions in
conformity with the rules of the SEC. The Company's repurchase of shares is not
dependent on the proceedings currently before the PUC under the Competition Act.
* * * *
Except for the historical information contained herein, certain of the
matters discussed in this Report are forward-looking statements which are
subject to risks and uncertainties. The factors that could cause actual results
to differ materially include those discussed herein as well as those listed in
notes 3 and 7 of Notes to Condensed Consolidated Financial Statements and other
factors discussed in the Company's filings with the SEC. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date of this Report. The Company undertakes no obligation to
publicly release any revision to these forward-looking statements to reflect
events or circumstances after the date of this Report.
* * * *
RESULTS OF OPERATIONS
EARNINGS
Earnings per average common share outstanding for the three months
ended March 31, 1997 were $0.49 per share compared to $0.65 per share for the
corresponding period in 1996. The decline in first quarter 1997 earnings was due
primarily to increased fuel and energy interchange expense of $0.09 per share,
resulting primarily from additional interchange purchases needed for increased
sales to other utilities and higher replacement power costs due to the shutdown
of Salem; to milder weather conditions of $0.06 per share; and to increased
depreciation of assets associated with Limerick Generating Station (Limerick) of
$0.06 per share. These decreases were partially offset by lower operating and
<PAGE>
maintenance expenses at Company-operated nuclear plants and lower administrative
and general expenses.
* * * *
OPERATING REVENUES
Electric revenues were substantially unchanged for the three months
ended March 31, 1997 compared to the corresponding period in 1996. Residential,
commercial and industrial revenues decreased slightly, primarily due to milder
weather conditions, partially offset by increased revenue from increased sales
to other utilities.
Gas revenues decreased 2% for the three months ended March 31, 1997
compared to 1996. The decrease was primarily due to reduced sales to
interruptible customers as they switched to transportation service. This
decrease was partially offset by higher revenues from sales to other commercial,
house heating and residential customers due to higher fuel-clause revenues
charged in 1997 compared to 1996, despite lower sales due to milder weather in
1997.
* * * *
FUEL AND ENERGY INTERCHANGE EXPENSES
Fuel and energy interchange expenses increased 12% for the three months
ended March 31, 1997 compared to the corresponding period in 1996 primarily due
to additional interchange purchases needed for increased sales to other
utilities and higher replacement power costs resulting from the shutdown of
Salem. Also contributing to this increase was a one-time billing credit in 1996
from a non-utility generator.
* * * *
OPERATING AND MAINTENANCE EXPENSES
Operating and maintenance expenses decreased 5% for the three months
ended March 31, 1997 compared to the corresponding period in 1996. The decrease
was primarily due to lower operating and maintenance expenses at the
Company-operated nuclear plants and lower administrative and general expenses.
* * * *
DEPRECIATION
Depreciation expense increased 22% for the three months ended March 31,
1997 compared to the corresponding period in 1996 primarily due to
<PAGE>
increased depreciation and amortization of assets associated with Limerick.
* * * *
INCOME TAXES
Income taxes charged to operating expenses decreased 10% for the three
months ended March 31, 1997 compared to the corresponding period in 1996
primarily due to a decrease in pre-tax income. The decrease was partially offset
by reduced tax depreciation benefits from plant and regulatory assets which are
not fully normalized for ratemaking.
* * * *
OTHER TAXES
Other taxes charged to operating expenses increased 3% for the three
months ended March 31, 1997 compared to the corresponding period in 1996
primarily due to increased capital stock and payroll taxes. These increases were
partially offset by decreased gross receipts taxes resulting from lower retail
revenue and decreased real estate taxes.
* * * *
OTHER INCOME AND DEDUCTIONS
Other income and deductions were substantially unchanged for the three
months ended March 31, 1997 compared to the corresponding period in 1996.
* * * *
TOTAL INTEREST CHARGES
Total interest charges decreased 6% for the three months ended March
31, 1997 compared to the corresponding period in 1996 primarily due to the
Company's ongoing program to reduce and refinance higher-cost, long-term debt,
partially offset by increased interest charges on short-term borrowings.
* * * *
PREFERRED DIVIDENDS
Preferred stock dividends were unchanged for the three months ended March
31, 1997 compared to the corresponding period in 1996.
* * * *
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported in the 1996 Form 10-K, on October 1, 1996, the
United States Court of Appeals for the Third Circuit reversed a lower court
ruling and held for the Company in a class action suit against the Company
involving the Company's 1990 Early Retirement Plan. The plaintiffs' petition for
review by the United States Supreme Court was denied on March 17, 1997.
* * * *
As previously reported in the 1996 Form 10-K, 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.
On April 21, 1997, the Supreme Court of Pennsylvania (Supreme Court) issued its
opinion on the appeal regarding the issue of "whether the `business judgment
rule' permits the board of directors of a Pennsylvania corporation to terminate
derivative lawsuits brought by minority shareholders." The Supreme Court, in a
unanimous opinion, held that the business judgment rule is the law of
Pennsylvania, that the lower courts committed error and that an independent
board may terminate shareholder derivative actions. The Supreme Court also
established a procedure for determining whether the criteria for application of
the business judgment rule have been met in a specific case, reversed the orders
of the Court of Common Pleas and remanded the matter to the Court of Common
Pleas for further proceedings consistent with its opinion.
* * * *
As previously reported in the 1996 Form 10-K, the Company and the three
other co-owners of Salem filed suit in February 1996 in the United States
District Court for the District of New Jersey against Westinghouse Electric
Corporation seeking damages to recover the cost of replacing the steam
generators at Salem Units No. 1 and No. 2. The case is scheduled to go to trial
at the end of May 1997.
* * * *
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 9, 1997, the Company held its 1997 Annual Meeting of
Shareholders.
<PAGE>
The following Class I directors of the Company were re-elected for
terms expiring in 2000:
Votes For Votes Withheld
Richard G. Gilmore 183,956,308 6,949,110
Richard H. Glanton 182,353,582 8,551,836
Joseph J. McLaughlin 184,211,500 6,693,918
Corbin A. McNeill, Jr. 184,334,741 6,570,677
Robert Subin 184,461,809 6,443,609
The incumbent Class II directors, with terms expiring in 1998, are
Susan W. Catherwood, G. Fred DiBona, Jr., R. Keith Elliott, John M. Palms and
Joseph F. Paquette, Jr. The incumbent Class III directors, with terms expiring
in 1999, are M. Walter D'Alessio, James A. Hagen, Kinnaird R. McKee and Ronald
Rubin.
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 1997, was approved with 187,387,615 common shares
(84.20% of common shares outstanding) voting for; 1,450,476
common shares (0.65% of common shares outstanding) voting
against; and 2,063,227 common shares (0.93% of common shares
outstanding) abstaining;
(2) A management proposal for approval of a Management Incentive
Compensation Plan, to make the Awards performance-based in
order to satisfy the requirements of Section 162(m) of the
Internal Revenue Code and to provide flexibility in executive
compensation practices as the electric utility industry
becomes more competitive, was passed with 151,860,576 common
shares (68.24% of common shares outstanding) voting for;
15,104,744 common shares (6.79% of common shares outstanding)
voting against; 4,930,705 common shares (2.22% of common
shares outstanding) abstaining; and 19,009,393 common shares
(8.54% of common shares outstanding) broker non-votes;
(3) A management proposal for approval of an amended Long-Term
Incentive Plan, to make the Grants performance-based in order
to satisfy the requirements of Section 162(m) of the Internal
<PAGE>
Revenue Code and to provide flexibility in executive
compensation practices as the electric utility industry
becomes more competitive, was passed with 143,771,099 common
shares (64.60% of common shares outstanding) voting for;
21,281,159 common shares (9.56% of common shares outstanding)
voting against; 5,407,059 common shares (2.43% of common
shares outstanding) abstaining; and 20,446,101 common shares
(9.19% of common shares outstanding) broker non-votes;
(4) 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 21,459,815 common shares (9.64% of common shares
outstanding) voting for; 140,320,103 common shares (63.05% of
common shares outstanding) voting against; 8,379,396 common
shares (3.77% of common shares outstanding) abstaining; and
20,746,104 common shares (9.32% of common shares outstanding)
broker non-votes; and
(5) A shareholder proposal for term limits for members of the
Board of Directors which would not exceed six years was
defeated with 13,942,453 common shares (6.27% of common shares
outstanding) voting for; 147,952,386 common shares (66.48% of
common shares outstanding) voting against; 8,564,475 common
shares (3.85% of common shares outstanding) abstaining; and
20,446,104 common shares (9.19% of common shares outstanding)
broker non-votes.
* * * *
ITEM 5. OTHER INFORMATION
As previously disclosed, Salem Units No. 1 and No. 2, operated by
Public Service Electric and Gas Company (PSE&G), were taken out of service in
the second quarter of 1995. PSE&G has informed the Company that the NRC
Readiness Assessment Team Inspection for Unit No. 2, a requirement for Unit No.
2 restart, will commence in early June 1997. PSE&G expects that Salem Unit No. 2
will return to service in the third quarter of 1997. PSE&G expects that Salem
Unit No. 1 will return to service in late 1997. Restart of each Salem Unit is
subject to NRC approval. The cost of replacement of Unit No. 1 steam generators,
including installation and the cost of disposal of the four old steam
generators, is estimated to be $180 million (the Company's share is $77
<PAGE>
million). The inability to successfully return these units to continuous, safe
operation could have a material adverse effect on the Company's financial
condition and results of operations.
The Company expects to incur and expense approximately $125 million in
1997 for replacement power and operating and maintenance expense related to the
Salem shutdown. The estimated cost of replacement power for Salem in 1997 is $95
million; the estimated cost of replacement power per Salem unit per month is $5
million. Operating and maintenance expense related to the shutdown of Salem for
1997 is still estimated to be $30 million.
* * * *
As previously reported in the Company's Current Report on Form 8-K
dated February 27, 1997, the Company has made an offer to acquire from Cajun
Electric Power Cooperative, Inc. (Cajun) a thirty percent ownership interest in
River Bend Nuclear Station, a 936 megawatt unit which is majority owned and
operated by subsidiaries of Entergy Corp. The Company would be entitled to the
electric output from the unit in proportion to its ownership interest and would
be responsible for sharing in ongoing costs proportionate to its interest. The
offer is conditioned on, among other things, the receipt by the Company of a
fund to fully cover the Company's estimated share of the costs of
decommissioning the unit. On April 24, 1997, the Company's offer was submitted
for approval to the United States Bankruptcy Court for the Middle District of
Louisiana, which is overseeing the bankruptcy of Cajun.
* * * *
As previously reported in the Company's Current Report on Form 8-K
dated April 1, 1997, on that date, the Company filed with the PUC a
comprehensive restructuring plan detailing its proposal to implement full
customer choice of electric generation supplier. The filing is required under
the provisions of the Competition Act, which requires the unbundling of electric
services into separate generation, transmission and distribution services with
open retail competition for generation. The filing proposes, among other things,
procedures to implement direct customer access, beginning in 1999, to all
licensed electric generation suppliers; unbundled rates for generation,
transmission, distribution and other services; and the recovery of $6.8 billion
in net transition and stranded costs through a Competitive Transition Charge or
<PAGE>
Intangible Transition Charge, which will not increase customer bills. Under the
Competition Act, the PUC is required to issue an order accepting, modifying, or
rejecting the Company's restructuring plan by December 31, 1997. The Company has
agreed to extend the time period for a PUC order to January 8, 1998. If the PUC
rejects the Company's restructuring plan, the Company would be required to file
a revised plan addressing the PUC's objections within 30 days of the PUC order
and the PUC would be required to issue a final order within 45 days of the
filing of the revised plan.
As previously reported in the Company's Current Report on Form 8-K
dated January 23, 1997, on January 22, 1997, the Company filed with the PUC an
application for securitizing $3.6 billion of stranded costs. On April 14, 1997,
a PUC Administrative Law Judge (ALJ) issued a non-binding decision recommending
that the Company's request to securitize a portion of its stranded costs at this
time be denied. The ALJ's recommended decision was based on the insufficient
time available for the PUC to evaluate the proposal under the expedited review
provision expressly provided for in the Competition Act. In the event the PUC
does not agree with the legal basis of his opinion, the ALJ alternatively
recommended that the Company be authorized to securitize $328 million of its
stranded costs at this time. On April 23, 1997, the Company filed exceptions to
the recommended decision. On May 8, 1997, the PUC conducted a non-binding
polling of the Commissioners regarding the Company's application. If the PUC
adopts a final order consistent with the polling, the Company would be
authorized to securitize $1.1 billion of its stranded and related transaction
and use of proceeds costs at this time consisting of the following items: $607
million of generation plant; $373 million of regulatory assets; $96 million of
1996 deferred fuel balance; and $22 million of issuance and use-of-proceeds
costs (for debt and preferred stock). The PUC is required to issue an order by
May 22, 1997.
The PUC Commissioners deferred without prejudice all other aspects of
the Company's securitization application. The Company expects that the PUC will
consider any further securitization of stranded and other costs in connection
with the Company's restructuring plan.
For additional information regarding the Competition Act and the
Company's securitization filing, see note 3 of Notes to Consolidated
<PAGE>
Financial Statements for the year ended December 31, 1996.
* * * *
On March 27, 1997, gas competition legislation was introduced in the
Pennsylvania General Assembly. The legislation calls for gas utilities to submit
to the PUC restructuring plans that would totally unbundle natural gas supply
from distribution service by April 1, 1999. As of that date, gas utilities would
no longer provide traditional bundled sales service. Although the legislation is
loosely modeled after the Competition Act, it is less complex and contains no
provisions for pilots, phase-in, stranded costs, securitization, rate caps, or
tax adjustments. Legislative hearings on the proposed legislation are scheduled
for late May 1997.
* * * *
As previously reported in the 1996 Form 10-K, on October 2, 1995, the
Utility Workers Union of America, AFL-CIO (UWUA), filed a petition seeking
certification of a bargaining unit consisting of all production and maintenance
employees of the Consumer Energy Services Group (CESG). On April 23, 1997, the
National Labor Relations Board (NLRB) issued its decision that a bargaining unit
consisting of job classifications with the Power Delivery and Customer Services
Divisions of CESG would be appropriate. On April 30, 1997, the NLRB established
May 21, 1997 as the date for the UWUA/CESG election. As a result of the
restructuring of the Company, which will result in the combining of Power
Delivery, Customer Service and the Gas Services Group into one organization, on
May 2, 1997, the Company requested the NLRB to reconsider its decision regarding
employees eligible to vote in the election and include employees in the Gas
Services Group. On May 9, 1997, the Acting Regional Director of the NLRB denied
the Company's request. On May 13, 1997, the Company appealed this decision to
the NLRB in Washington, DC. The UWUA has filed a motion opposing the Company's
appeal.
* * * *
As previously reported in the Current Report on Form 8-K dated April
25, 1997, the Company's Power Generation Group employees voted not to be
represented by a union in secret balloting conducted by the NLRB. On May 6,
1997, the NLRB certified the results of this election.
* * * *
<PAGE>
As previously reported in the 1996 Form 10-K, on July 9, 1996, the
Company executed a consent decree in which the Company agreed to pay the New
Jersey Department of Environmental Protection and Energy (NJDEPE) approximately
$240,000 in exchange for a release from liability at the Gloucester
Environmental Management Services, Inc. (GEMS) site. On January 2, 1997, the
consent decree was entered with the United States District Court for the
District of New Jersey. The Company has made the required payment to the NJDEPE.
* * * *
As previously reported in the 1996 Form 10-K, the Company was named as
a defendant in the Superfund matter involving the Greer Landfill in South
Carolina. The plaintiff's motion to dismiss the complaint against the Company
was granted, although the third-party defendants' cross-claims against the
Company remain. The Company is currently involved in settlement discussions with
the third-party defendants.
* * * *
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 January 23, 1997, reporting information under
"ITEM 5. OTHER EVENTS" relating to the Company's filing with
the Pennsylvania Public Utility Commission regarding the
Company's application for securitizing a portion of its
stranded and other costs through the issuance of Transition
Bonds.
Report, dated January 24, 1997, reporting information under
"ITEM 5. OTHER EVENTS" relating to Salem Generating Station
operated by Public Service Electric and Gas Company.
<PAGE>
Report, dated January 30, 1997, reporting information under
"ITEM 5. OTHER EVENTS" relating to Salem Generating Station
operated by Public Service Electric and Gas Company.
Report, dated February 21, 1997, reporting information under
"ITEM 5. OTHER EVENTS" relating to the National Labor Relations
Board's decision regarding certification elections.
Report, dated February 27, 1997, reporting information under
"ITEM 5. OTHER EVENTS" relating to the Company filing its
electric competition pilot program, the National Labor
Relations Board's order setting the date for a certification
election and the Company's offer to purchase an interest in a
nuclear operating facility.
Report, dated March 25, 1997, reporting information under
"ITEM 5. OTHER EVENTS" relating to the results of the National
Labor Relations Board's certification election.
Reports on Form 8-K (filed subsequent to the reporting period):
Report, dated April 1, 1997, reporting information under
"ITEM 5. OTHER EVENTS" relating to the Company's intention to
repurchase common stock and relating to the Company's filing
with the Pennsylvania Public Utility Commission of a
comprehensive restructuring plan detailing the Company's
proposed plan to implement full customer choice of electric
generation supply.
Report, dated April 14, 1997, reporting information under
"ITEM 5. OTHER EVENTS" relating to a recommended decision and
an alternative recommendation issued by the Pennsylvania Public
Utility Commission's Administrative Law Judge assigned to the
Company's application for securitizing a portion of its
stranded and other costs.
Report, dated April 25, 1997, reporting information under
"ITEM 5. OTHER EVENTS" relating to the results of the National
Labor Relations Board's certification election.
<PAGE>
Report, dated May 8, 1997, reporting information under "ITEM 5. OTHER
EVENTS" relating to the polling of the Pennsylvania Public
Utility Commissioners regarding the Company's application for
securitizing a portion of its stranded and other costs.
Report, dated May 12, 1997, reporting information under "ITEM 1. LEGAL
PROCEEDINGS" relating to the settlement of the litigation
regarding Salem Generating Station operated by Public Service
Electric and Gas Company and reporting information under "ITEM
5. OTHER EVENTS" relating to the preliminary decision of the
Pennsylvania Public Utility Commission regarding the Company's
and other utilities' electric competition pilot programs.
<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, 1997
EXHIBIT 12-1
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
SEC METHOD
($000)
3 MONTHS
ENDED
03/31/97
--------
NET INCOME $112,999
ADD BACK:
- - INCOME TAXES:
OPERATING INCOME 93,566
NON-OPERATING INCOME (1,879)
-------
NET TAXES 91,687
- - FIXED CHARGES:
INTEREST APPLICABLE TO DEBT 89,384
ANNUAL RENTALS 1,995
-------
TOTAL FIXED CHARGES 91,379
ADJUSTED EARNINGS INCLUDING AFUDC $296,065
========
RATIO OF EARNINGS TO FIXED CHARGES 3.24
====
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
03/31/97
--------
NET INCOME $112,999
ADD BACK:
- - INCOME TAXES:
OPERATING INCOME 93,566
NON-OPERATING INCOME (1,879)
-------
NET TAXES 91,687
- - FIXED CHARGES:
INTEREST APPLICABLE TO DEBT 89,384
ANNUAL RENTALS 1,995
-------
TOTAL FIXED CHARGES 91,379
EARNINGS REQUIRED FOR PREFERRED DIVIDENDS:
DIVIDENDS ON PREFERRED STOCK 4,509
ADJUSTMENT TO PREFERRED DIVIDENDS* 3,659
-------
8,168
FIXED CHARGES AND PREFERRED DIVIDENDS $99,547
=======
EARNINGS BEFORE INCOME TAXES AND
FIXED CHARGES $296,065
========
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS 2.97
====
* ADDITIONAL CHARGE EQUIVALENT TO EARNINGS REQUIRED
TO ADJUST DIVIDENDS ON PREFERRED STOCK TO A PRE-TAX BASIS
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