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...September 30, 1997..........
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from.........to...................
Commission file number..................1-1401...................
.......................PECO Energy Company.......................
(Exact name of registrant as specified in its charter)
..........Pennsylvania................ 23-0970240................
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
....2301 Market Street, Philadelphia, PA..........19103..........
(Address of principal executive offices) (Zip Code)
........................(215)841-4000............................
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date:
The Company had 222,542,087 shares of common stock outstanding on September
30, 1997.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Millions of Dollars)
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
September 30, September 30,
1997 1996 1997 1996
OPERATING REVENUES
<S> <C> <C> <C> <C>
Electric $1,232.2 $1,069.1 $3,146.1 $2,958.2
Gas 46.0 41.1 327.8 311.9
--------- ---------- --------- ----------
TOTAL OPERATING REVENUES 1,278.2 1,110.2 3,473.9 3,270.1
--------- ---------- --------- ----------
OPERATING EXPENSES
Fuel and Energy Interchange 354.1 226.0 954.2 736.8
Operation 243.0 268.6 690.5 730.1
Maintenance 70.8 79.5 221.5 254.6
Depreciation 143.5 113.7 433.6 346.8
Income Taxes 129.4 98.0 296.0 273.2
Other Taxes 78.7 75.8 234.3 230.8
--------- ---------- --------- ----------
TOTAL OPERATING EXPENSES 1,019.5 861.6 2,830.1 2,572.3
--------- ---------- --------- ----------
OPERATING INCOME 258.7 248.6 643.8 697.8
--------- ---------- --------- ----------
OTHER INCOME AND DEDUCTIONS
Allowance for Other Funds Used
During Construction 2.2 1.8 9.7 7.8
Salem Litigation Settlement -- -- 69.8 --
Income Taxes 1.4 1.8 (23.3) 2.0
Other, Net (5.2) (3.2) (14.3) (6.4)
--------- ---------- --------- ----------
TOTAL OTHER INCOME AND DEDUCTIONS (1.6) 0.4 41.9 3.4
--------- ---------- --------- ----------
INCOME BEFORE INTEREST CHARGES 257.1 249.0 685.7 701.2
--------- ---------- --------- ----------
INTEREST CHARGES
Long-Term Debt 79.6 80.6 239.3 250.7
Company Obligated Mandatorily Redeemable
Preferred Securities of a Partnership 7.7 6.6 21.3 20.0
Other Interest 13.6 13.9 40.0 38.9
--------- ---------- --------- ----------
TOTAL INTEREST CHARGES 100.9 101.1 300.6 309.6
Allowance for Borrowed Funds
Used During Construction (1.8) (1.9) (8.7) (7.3)
--------- ---------- --------- ----------
NET INTEREST CHARGES 99.1 99.2 291.9 302.3
NET INCOME 158.0 149.8 393.8 398.9
PREFERRED STOCK DIVIDENDS 4.5 4.5 13.5 13.5
--------- ---------- --------- ----------
EARNINGS APPLICABLE TO COMMON STOCK $153.5 $145.3 $380.3 $385.4
========= ========== ========= ==========
AVERAGE SHARES OF COMMON STOCK
OUTSTANDING (Millions) 222.5 222.5 222.5 222.5
EARNINGS PER AVERAGE COMMON
SHARE (Dollars) $0.69 $0.65 $1.71 $1.73
DIVIDENDS PER COMMON SHARE (Dollars) $0.45 $0.435 $1.35 $1.305
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(Unaudited)
ASSETS
UTILITY PLANT
<S> <C> <C>
Plant at Original Cost $15,280.7 $14,945.0
Less Accumulated Provision for Depreciation 5,404.0 5,047.0
--------- ---------
9,876.7 9,898.0
Nuclear Fuel, net 153.4 199.6
Construction Work in Progress 609.6 661.8
Leased Property, net 186.7 182.1
--------- ---------
10,826.4 10,941.5
--------- ---------
CURRENT ASSETS
Cash and Temporary Cash Investments 67.7 29.2
Accounts Receivable, net
Customer 38.2 19.2
Other 155.5 74.4
Inventories, at average cost
Fossil Fuel 79.9 84.6
Materials and Supplies 112.8 119.8
Deferred Energy Costs - Gas 15.2 30.0
Other 120.0 63.2
--------- ---------
589.3 420.4
--------- ---------
DEFERRED DEBITS AND OTHER ASSETS
Recoverable Deferred Income Taxes 2,324.4 2,325.7
Deferred Limerick Costs 324.4 361.8
Deferred Non-Pension Postretirement Benefits Costs 222.5 233.5
Deferred Energy Costs - Electric 93.9 92.0
Investments 536.7 432.6
Loss on Reacquired Debt 266.3 283.8
Other 181.3 169.3
--------- ---------
3,949.5 3,898.7
--------- ---------
TOTAL $15,365.2 $15,260.6
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
(continued on next page)
3
<PAGE>
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
(continued)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
CAPITALIZATION AND LIABILITIES
(Unaudited)
<S> <C> <C>
CAPITALIZATION
Common Shareholders' Equity
Common Stock (No Par) $3,517.6 $3,517.6
Other Paid-In Capital 1.2 1.3
Retained Earnings 1,204.9 1,127.0
Preferred and Preference Stock
Without Mandatory Redemption 199.4 199.4
With Mandatory Redemption 92.7 92.7
Company Obligated Mandatorily Redeemable
Preferred Securities of a Partnership 352.1 302.2
Long-Term Debt 3,713.5 3,935.5
--------- ---------
9,081.4 9,175.7
--------- ---------
CURRENT LIABILITIES
Notes Payable, Bank 157.5 287.5
Long-Term Debt Due Within One Year 491.5 283.3
Capital Lease Obligations Due Within One Year 55.8 49.4
Accounts Payable 217.0 213.0
Taxes Accrued 139.2 71.5
Interest Accrued 86.5 82.0
Dividends Payable 27.7 22.4
Other 113.0 94.3
--------- ---------
1,288.2 1,103.4
--------- ---------
DEFERRED CREDITS AND OTHER LIABILITIES
Capital Lease Obligations 130.9 132.7
Deferred Income Taxes 3,740.6 3,745.2
Unamortized Investment Tax Credits 322.6 336.1
Pension Obligation 224.5 224.5
Non-Pension Postretirement Benefits Obligation 344.3 315.1
Other 232.7 227.9
--------- ---------
4,995.6 4,981.5
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
--------- ---------
TOTAL $15,365.2 $15,260.6
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Millions of Dollars)
9 Months Ended
September 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $393.8 $398.9
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 494.4 404.2
Deferred Income Taxes (1.0) 106.9
Deferred Energy Costs 12.9 (22.6)
Salem Litigation Settlement (69.8) --
Changes in Working Capital:
Accounts Receivable (30.3) 39.8
Inventories 11.7 4.5
Accounts Payable 4.0 (119.9)
Other Current Assets and Liabilities 34.1 (54.6)
Other Items Affecting Operations 42.0 53.0
------ ------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 891.8 810.2
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Plant (362.1) (331.6)
Increase in Investments (104.1) (91.1)
------ ------
NET CASH FLOWS USED BY INVESTING ACTIVITIES (466.2) (422.7)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Short-Term Debt (130.0) 281.7
Issuance of Common Stock -- 11.2
Issuance of Long-Term Debt 17.2 35.6
Retirement of Long-Term Debt (33.3) (397.5)
Loss on Reacquired Debt 17.5 18.8
Issuance of Company Obligated Mandatorily
Redeemable Preferred Securities of a Partnership 50.0 (0.1)
Dividends on Preferred and Common Stock (314.0) (306.9)
Change in Dividends Payable 5.3 9.6
Other Items Affecting Financing 0.2 0.3
------ ------
NET CASH FLOWS USED BY FINANCING ACTIVITIES (387.1) (347.3)
------ ------
INCREASE IN CASH AND CASH EQUIVALENTS 38.5 40.2
------ ------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 29.2 20.6
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $67.7 $60.8
====== ======
See Notes to Condensed Consolidated Financial Statements.
5
<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
September 30, 1997 and for the three and nine months then ended are unaudited,
but include all adjustments that PECO Energy Company (Company) considers
necessary for a fair presentation of such financial statements. All adjustments
are of a normal, recurring nature except the settlement of the litigation
against Public Service Electric and Gas Company (PSE&G) with respect to the
shutdown of Salem Generating Station (Salem) described in note 2. The year-end
condensed consolidated balance sheet data were derived from audited financial
statements but do not include all disclosures required by generally accepted
accounting principles. Certain prior-year amounts have been reclassified for
comparative purposes. These notes should be read in conjunction with the Notes
to Consolidated Financial Statements in the Company's 1996 Annual Report to
Shareholders, which are incorporated by reference in the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.
2. SHUTDOWN OF SALEM GENERATING STATION
PSE&G, the operator of Salem Units No. 1 and No. 2, which are 42.59%
owned by the Company, removed the units from service in the second quarter of
1995. On August 30, 1997, PSE&G informed the Company that Unit No. 2 returned to
commercial operation. PSE&G expects that Unit No. 1 will return to service in
the first quarter of 1998. Because the timing of Unit No. 1's restart is subject
to satisfactory completion of the restart plan requirements, as determined by
PSE&G and the Nuclear Regulatory Commission, no assurance can be given that the
projected restart date will be met.
In accordance with a May 9, 1997 settlement agreement, PSE&G has agreed
to pay the Company $69.8 million on December 31, 1997 to settle a suit filed on
March 5, 1996 against PSE&G concerning the shutdown of Salem. During June 1997,
the Company recorded into income $69.8 million ($41.0 million net of income
taxes) to reflect the settlement. In addition, the settlement agreement provides
that if the outage exceeds 64 reactor unit months PSE&G will pay the Company
$1.1 million per reactor unit month. A reactor unit month is a month during the
current outage in which a unit is off-line. As of September 30, 1997, the Salem
outage totaled 55 reactor unit months.
For the three and nine months ended September 30, 1997, the Company
recorded in the accompanying Statements of Income as Fuel and Energy Interchange
$27 and $84 million, respectively, of replacement power costs and recorded as
Maintenance $12 and $39 million, respectively, of maintenance costs relating to
the shutdown of Salem. For the three and nine months ended September 30, 1996,
the Company recorded in the accompanying Statements of Income as Fuel and Energy
Interchange $27 and $65 million, respectively, of replacement power costs and
recorded as Maintenance $14 and $45 million, respectively, of maintenance costs
relating to the shutdown of Salem. For the year ending December 31, 1997, the
Company expects to incur and expense approximately $155 million of costs related
to the shutdown.
6
<PAGE>
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
proposed, 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 all of the Company's estimated net transition and stranded costs
through a Competitive Transition Charge (CTC) and/or Intangible Transition
Charge (ITC).
On August 27, 1997, the Company and various intervenors in the
Company's restructuring proceeding filed with the PUC a Joint Petition for
Partial Settlement (Pennsylvania Plan) in the Company's restructuring
proceeding. The Pennsylvania Plan proposes, among other things: the recovery and
amortization of $5.5 billion in stranded assets and costs through a CTC or an
ITC over a period commencing with the approval of the Pennsylvania Plan by the
PUC until December 31, 2008; a write-off of at least $2 billion of stranded
costs; PUC approval to securitize up to $4 billion of authorized stranded costs;
separation of the ownership and operation of the Company's generation facilities
by establishment of a separate corporate entity or entities; a rate reduction of
10% for all customers effective September 1, 1998 and guaranteed through
December 31, 2000; a rate cap on generation rates through December 31, 2008; and
customer choice of electric generation supply phased in for all customers in
three steps: one-third of the peak load of each customer class on January 1,
1999, one-third on January 2, 1999 (one day later) and the remainder on January
2, 2000.
On October 7, 1997, an affiliate of an out-of-state,
Pennsylvania-licensed electric supplier, which is opposing the Pennsylvania
Plan, requested that the PUC consider an alternative plan to implement
competition in the Company's service territory. On October 9, 1997, the PUC
granted the Motion to Consolidate in order to take into account this alternative
plan in deciding whether to approve the Pennsylvania Plan. The Company will
oppose the alternative plan. For additional information, see "PART II. OTHER
INFORMATION. ITEM 5. OTHER INFORMATION" in this Quarterly Report on Form 10-Q.
If the Pennsylvania Plan is approved by the PUC without modification,
the Company will discontinue accounting for the generation portion of its
business under Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation," and expects to take
an extraordinary charge of at least $2.1 billion representing stranded
regulatory assets that will not be recoverable through the CTC or ITC.
The Company cannot predict what decision the PUC will ultimately reach
in the Company's restructuring proceeding or what impact that decision will
ultimately have on the Company's future financial condition, results of
operations or the common stock dividend. If the Pennsylvania Plan is not
7
<PAGE>
approved by the PUC without modification, the Company will reassert its request
for full recovery of its net transition and stranded costs, including regulatory
assets, which the Company currently estimates will be $7.5 billion. If the PUC
does not approve the Pennsylvania Plan, the Company believes that it will be
given the opportunity to seek full recovery of its retail electric stranded
costs and that recovery of its regulatory assets is probable under the
provisions of the Competition Act. The Company's financial condition and results
of operations could be materially affected to the extent the Company is not
ultimately permitted to recover its retail electric stranded costs, as a charge
against earnings will be recognized. The PUC is scheduled to issue a decision on
the Pennsylvania Plan in December 1997.
On January 22, 1997, the Company filed with the PUC an application
under the Competition Act to securitize $3.6 billion of stranded costs. On May
22, 1997, the PUC issued an order authorizing the Company to securitize $1.1
billion of its stranded and related transaction and use of proceeds costs.
Thirteen intervenors subsequently appealed the PUC's decision. If the
Pennsylvania Plan is approved without modification, the Company will be
permitted to securitize up to a total of $4 billion of stranded costs. Issuance
of transition bonds by the Company will depend on the resolution of all pending
appeals and the satisfactory issuance of a pending ruling by the Internal
Revenue Service.
For additional information regarding the Competition Act and the
Company's securitization filing, see note 3 of Notes to Consolidated Financial
Statements for the year ended December 31, 1996.
4. SALES OF ACCOUNTS RECEIVABLE
The Company is party to an agreement with a financial institution under
which it can sell with limited recourse an undivided interest, adjusted daily,
in up to $425 million of designated accounts receivable through November 14,
2000. At September 30, 1997, the Company had sold a $425 million interest in
accounts receivable under this agreement. The Company retains the servicing
responsibility for these receivables. At September 30, 1997, the average annual
service-charge rate, computed on a daily basis on the portion of the accounts
receivable sold but not yet collected, was 5.61%.
By terms of this agreement, under certain circumstances, a portion of
Limerick Generating Station (Limerick) deferred costs may be included in the
pool of eligible receivables. At September 30, 1997, $17.7 million of Deferred
Limerick Costs were included in the pool of eligible receivables.
5. DECLARATORY ACCOUNTING ORDER
On October 1, 1996, the Company implemented changes approved by the PUC
to the estimated depreciable lives of certain of the Company's electric plant.
As a result, depreciation and amortization on certain assets associated with
Limerick increased by approximately $100 million per year while depreciation and
amortization on certain other Company assets decreased by approximately $10
million per year, for a net increase of approximately $90 million per year. For
the three and nine months ended September 30, 1997, the Company expensed an
additional $23 and $70 million, respectively, for increased depreciation and
amortization related to this order.
8
<PAGE>
6. STOCK REPURCHASE
During 1997, the Company's Board of Directors authorized the repurchase
of up to 25 million shares of its common stock from time to time through
open-market, privately negotiated and/or other types of transactions in
conformity with the rules of the Securities and Exchange Commission.
Pursuant to these authorizations, the Company has entered into forward
purchase agreements to be settled from time to time, at the Company's election,
on either a physical, net share or net cash basis. The amount at which these
agreements can be settled is dependent principally upon the market price of the
Company's common stock as compared to the forward purchase price per share and
the number of shares to be settled. If these agreements were settled on a net
share basis at September 30, 1997, the Company would have received approximately
910,000 shares of Company common stock.
7. SUBSEQUENT FINANCINGS
On October 1, 1997, the Company redeemed at par all $61.9 million
outstanding $7.96 Series Cumulative Preferred Stock. The shares were redeemed
primarily with the proceeds from the $50 million of Trust Receipts, representing
8% Company Obligated Mandatorily Redeemable Preferred Securities of a
Partnership, Series C, issued through PECO Energy Capital Trust II in June 1997.
On October 7, 1997, the Company entered into a $900 million unsecured
credit facility with a group of banks and terminated an existing $400 million
unsecured revolving credit facility with a group of banks and formal and
informal lines of bank credit aggregating $110 million. The credit facility is
composed of a $450 million 364-day credit agreement and a $450 million
three-year revolving credit agreement. The Company plans to use the credit
facility principally to support the Company's commercial paper program which was
expanded from $300 million to $600 million.
8. COMMITMENTS AND CONTINGENCIES
Except as described below, the information regarding the Company's
capital commitments, nuclear insurance, nuclear decommissioning and spent fuel
storage, energy purchases, environmental issues and litigation at September 30,
1997 is substantially the same as described in note 4 of Notes to Consolidated
Financial Statements for the year ended December 31, 1996.
As previously reported, the Company has identified 27 sites where
former manufactured gas plant (MGP) activities have or may have resulted in
actual site contamination. As of September 30, 1997, the Company had accrued $28
million for environmental investigation and remediation costs, including $15
million for MGP investigation and remediation that currently can be reasonably
estimated. The Company cannot predict whether it will incur other significant
liabilities for additional investigation and remediation costs at these or
additional sites identified by the Company, environmental agencies or others, or
whether all such costs will be recoverable from third parties.
9
<PAGE>
The Company periodically reviews its investments to determine that they
are properly valued in its financial statements. Due to circumstances involved
in the Federal Communication Commission's auctioning of the personal
communications systems "C-block" licenses, the Company continues to closely
monitor the value of its telecommunications investments. The Company believes
that these investments are not impaired, but will continue to assess
developments in this area.
10
<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. Under the provisions of the Competition Act, the
Company's unbundled charges for transmission- and distribution-related services
will be capped for 4-1/2 years from December 31, 1996; until recovery of the
Company's net stranded and transition costs, the Company will be subject to a
rate cap (which cannot extend beyond December 31, 2005) in which the total
charges to customers for generation cannot exceed rates in place as of December
31, 1996, subject to certain exceptions.
On 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 all of the Company's estimated net transition and
stranded costs. The Company's filing proposed to collect the net transition and
stranded costs over a period of up to ten years through annual Competitive
Transition Charges (CTC) and/or Intangible Transition Charges (ITC).
On August 27, 1997, the Company and various intervenors in the
Company's restructuring proceeding filed with the PUC a Joint Petition for
Partial Settlement (Pennsylvania Plan) in the Company's restructuring
proceeding. The Pennsylvania Plan proposes, among other things: the recovery and
amortization of $5.5 billion in stranded assets and costs through a CTC or an
ITC commencing with the approval of the Pennsylvania Plan by the PUC until
December 31, 2008; a write-off of at least $2 billion of stranded costs; PUC
approval to securitize up to $4 billion of authorized stranded costs; separation
of the ownership and operation of the Company's generation facilities by
establishment of a separate corporate entity or entities; a rate reduction of
10% for all customers effective September 1, 1998 and guaranteed through
December 31, 2000; a rate cap on transmission and distribution rates through
December 31, 2003; a rate cap on generation rates through December 31, 2008; and
customer choice of electric generation supply phased in for all customers in
three steps: one-third of the peak load of each customer class on January 1,
1999, one-third on January 2, 1999 (one day later) and the remainder on January
2, 2000. The Pennsylvania Plan must be approved by the PUC without modification
to become effective. The PUC is scheduled to issue a decision on the
Pennsylvania Plan in December 1997.
On October 7, 1997, an affiliate of an out-of-state,
Pennsylvania-licensed electric supplier, which is opposing the Pennsylvania
Plan, requested that the PUC consider an alternative plan to implement
competition in the Company's service territory. On October 9, 1997, the PUC
granted the Motion to Consolidate in order to take into account this alternative
plan in deciding whether to approve the Pennsylvania Plan. The Company will
oppose the alternative plan. For additional information, see "PART II. OTHER
INFORMATION. ITEM 5. OTHER INFORMATION" in this Quarterly Report on Form 10-Q.
11
<PAGE>
If the Pennsylvania Plan is approved by the PUC, the Company will not
fully recover its retail electric stranded costs and will take an extraordinary
charge of at least $2.1 billion representing stranded regulatory assets. If the
Pennsylvania Plan is not approved without modification by the PUC, the Company
will reassert its request for full recovery of its net transition and stranded
costs, including regulatory assets, which the Company currently estimates to be
$7.5 billion. The amount of recovery is subject to the decision of the PUC in
the Company's restructuring proceeding. If the PUC does not approve the
Pennsylvania Plan without modification, the Company believes that it will be
given the opportunity to seek full recovery of its retail electric stranded
costs and that recovery of its regulatory assets is probable under the
provisions of the Competition Act. The Company's financial condition and results
of operations could be materially affected to the extent the Company does not
ultimately recover its retail electric stranded costs, as a charge against
earnings will be recognized.
The Company expects that its future liquidity and capital resources
will be reduced as a result of the Competition Act. The Company is pursuing a
strategy to reduce its stranded costs and the associated capitalization, which
would reduce the Company's liquidity and capital resource requirements. The
Company cannot predict the level of stranded-cost recovery that 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. For
further information, see note 3 of Notes to Condensed Consolidated Financial
Statements in this Quarterly Report on Form 10-Q under "PART I. FINANCIAL
INFORMATION. ITEM 1. FINANCIAL STATEMENTS" and the Company's Current Report on
Form 8-K dated August 27, 1997.
* * * *
Total construction expenditures, primarily for utility plant, are
estimated to be $560 million for 1997 and $1.6 billion for the period 1998
through 2001. The estimated expenditures include the Company's share of the
remaining expenditures relating to the replacement of Salem Generating Station
(Salem) Unit No. 1 steam generators, including installation and the cost of
disposal of the four old steam generators.
The Company's construction program is subject to periodic review and
revision to reflect changes in economic conditions and other appropriate
factors. Certain facilities under construction and to be constructed may require
permits and licenses which the Company has no assurance will be granted.
For the period 1997 through 2000, the Company also plans to invest
approximately $200 to $300 million in new ventures, principally for its
Telecommunications Group.
* * * *
For a discussion of commitments and contingencies relating to
environmental matters, see note 4 of Notes to Consolidated Financial
12
<PAGE>
Statements for the year ended December 31, 1996 and note 8 of Notes to Condensed
Consolidated Financial Statements in this Quarterly Report on Form 10-Q under
"PART I. FINANCIAL INFORMATION. ITEM 1. FINANCIAL STATEMENTS."
* * * *
For the year ended December 31, 1997, the Company expects to incur
replacement power and additional maintenance costs of approximately $155 million
as a result of the Salem shutdown. See note 2 of Notes to Condensed Consolidated
Financial Statements in this Quarterly Report on Form 10-Q under "PART I.
FINANCIAL INFORMATION. ITEM 1. FINANCIAL STATEMENTS" and "PART II. OTHER
INFORMATION. ITEM 5. OTHER INFORMATION."
* * * *
The Company has and will continue to make modifications to its computer
software systems and applications to ensure that year 2000 transactions can be
processed. Expenditures for these modifications will be expensed as incurred and
are not expected to have a material impact on the Company's results of
operations or financial position.
* * * *
On October 1, 1997, the Company redeemed at par all $61.9 million
outstanding $7.96 Series Cumulative Preferred Stock. The shares were redeemed
primarily with the proceeds from the $50 million of Trust Receipts, representing
8% Company Obligated Mandatorily Redeemable Preferred Securities of a
Partnership, Series C, issued through PECO Energy Capital Trust II in June 1997.
* * * *
At September 30, 1997, the Company and its subsidiaries had outstanding
$158 million of notes payable, including $70 million of commercial paper. At
September 30, 1997, the Company had formal and informal lines of bank credit
aggregating $110 million. At September 30, 1997, the Company and its
subsidiaries had no short-term investments.
* * * *
On October 7, 1997, the Company terminated a $400 million unsecured
revolving credit facility with a group of banks and formal and informal lines of
bank credit aggregating $110 million and entered into a $900 million unsecured
credit facility with a group of banks. This credit facility is composed of a
$450 million 364-day credit agreement and a $450 million revolving three-year
credit agreement. The Company plans to use the credit facility principally to
support the Company's commercial paper program which was expanded from $300
million to $600 million.
* * * *
The Company's Ratio of Earnings to Fixed Charges (Mortgage Method) for
the twelve months ended September 30, 1997 was 4.52 times compared to 4.47 times
for the corresponding period in 1996. The Company's Ratio of
13
<PAGE>
Earnings to Combined Fixed Charges and Preferred Stock Dividends (Articles of
Incorporation Method) for the twelve months ended September 30, 1997, was 2.49
times compared to 2.53 times for the corresponding period in 1996. For the nine
months ended September 30, 1997, the Company's Ratio of Earnings to Fixed
Charges (SEC Method) (Exhibit 12-1) and Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends (SEC Method) (Exhibit 12-2) were 3.58
times and 3.29 times, respectively, compared to 3.35 times and 3.31 times,
respectively, for the corresponding period in 1996. See the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 (1996 Form 10-K) under
"PART I. ITEM 1. BUSINESS-Capital Requirements and Financing Activities," for a
discussion of the ratio methods.
* * * *
As previously disclosed, the Company's Board of Directors authorized
the repurchase of up to 25 million shares of its common stock from time to time
through open market, privately negotiated and/or other types of transactions in
conformity with the rules of the Securities and Exchange Commission (SEC).
The Company has entered into forward purchase agreements to be settled
from time to time, at the Company's election, on either a physical, net share or
net cash basis. The amount at which these agreements can be settled is dependent
principally upon the market price of the Company's common stock as compared to
the forward purchase price per share and the number of shares to be settled. If
these agreements were settled on a net share basis at September 30, 1997, the
Company would have received approximately 910,000 shares of Company common
stock.
* * * *
Except for the historical information contained herein, certain of the
matters discussed in this Quarterly Report on Form 10-Q (Report) are
forward-looking statements which are subject to risks and uncertainties. The
factors that could cause actual results to differ materially include those
discussed herein as well as those listed in notes 2, 3 and 8 of Notes to
Condensed Consolidated Financial Statements and other factors discussed in the
Company's filings with the SEC. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this Report. The Company undertakes no obligation to publicly release any
revision to these forward-looking statements to reflect events or circumstances
after the date of this Report.
* * * *
14
<PAGE>
RESULTS OF OPERATIONS
EARNINGS
Earnings per average common share outstanding for the three and nine
months ended September 30, 1997 were $0.69 and $1.71 per share, respectively,
compared to $0.65 and $1.73 per share for the corresponding periods in 1996. The
increase in third quarter 1997 earnings was due to higher electric revenues net
of fuel of $0.10 per share primarily due to sales to other utilities, and from
lower operating and maintenance costs of $0.08 per share. Offsetting these
benefits was increased depreciation of $0.12 per share resulting primarily from
the increased depreciation and amortization of assets associated with Limerick
Generating Station (Limerick) and related deferred tax impacts.
The decrease in earnings for the nine months ended September 30, 1997
was primarily due to increased depreciation of $0.35 per share resulting
primarily from the increased depreciation and amortization of assets associated
with Limerick and related deferred tax impacts and milder weather of $0.12 per
share in 1997. These decreases were partially offset by the recognition of
income from the Salem litigation settlement of $0.18 per share; lower operating
and maintenance costs of $0.17 per share; higher electric revenues net of fuel
of $0.09 per share primarily due to sales to other utilities; and lower interest
expense due to the Company's program to refinance higher interest rate debt,
which added $0.03 per share.
* * * *
OPERATING REVENUES
Electric revenues increased 15% and 6% for the three and nine months
ended September 30, 1997, respectively, compared to the corresponding periods in
1996 primarily due to higher sales to other utilities.
Gas revenues increased 12% and 5% for the three and nine months ended
September 30, 1997, respectively, compared to the corresponding periods in 1996.
The increase was primarily due to higher revenues from sales to commercial,
house heating and residential customers due to higher purchased gas-clause
revenues charged in 1997 compared to 1996, partially offset by lower sales due
primarily to milder weather conditions in 1997. For the nine months ended
September 30, 1997, this increase was partially offset by reduced sales to
interruptible customers as they switched to transportation service.
* * * *
FUEL AND ENERGY INTERCHANGE
Fuel and energy interchange expenses increased 57% and 30% for the
three and nine months ended September 30, 1997, respectively, compared to the
corresponding periods in 1996 primarily due to additional interchange purchases
needed for increased sales to other utilities. Also contributing to the
nine-month increase was a one-time billing credit in 1996 from a non-utility
generator and higher replacement power costs resulting from the shutdown of
Salem.
* * * *
15
<PAGE>
OPERATING AND MAINTENANCE
Operating and maintenance expenses decreased 10% and 7% for the three
and nine months ended September 30, 1997, respectively, compared to the
corresponding periods in 1996. The decreases were primarily due to lower
electric distribution system expenses, lower uncollectibles and lower other
administrative and general expenses. Also contributing to the decrease for the
nine months ended September 30, 1997 were lower nuclear generating station
expenses.
* * * *
DEPRECIATION
Depreciation expense increased 26% and 25% for the three and nine
months ended September 30, 1997, respectively, compared to the corresponding
periods in 1996 primarily due to increased depreciation and amortization of
assets associated with Limerick.
* * * *
INCOME TAXES
Income taxes charged to operating expenses increased 32% and 8% for the
three and nine months ended September 30, 1997 compared to the corresponding
periods in 1996. The increase for the three months ended September 30, 1997 was
primarily due to higher pre-tax income and reduced tax depreciation benefits
from plant and regulatory assets which are not fully normalized for ratemaking
purposes. The increase for the nine months ended September 30, 1997 was
primarily due to reduced tax depreciation benefits from plant and regulatory
assets which are not fully normalized for ratemaking purposes, partially offset
by a decrease in pre-tax income.
* * * *
OTHER TAXES
Other taxes charged to operating expenses increased 4% and 2% for the
three and nine months ended September 30, 1997 compared to the corresponding
periods in 1996. The increase for the three months ended September 30, 1997 was
primarily due to increased real estate and gross receipts taxes. The increase
for the nine months ended September 30, 1997 was primarily due to increased
capital stock and gross receipts taxes.
* * * *
OTHER INCOME AND DEDUCTIONS
Other income and deductions was substantially unchanged for the three
months ended September 30, 1997 and increased substantially for the nine months
ended September 30, 1997 compared to the corresponding periods in 1996. The
increase for the nine months ended September 30, 1997 was primarily due to the
settlement reached with Public Service Electric and Gas Company (PSE&G) in the
second quarter of 1997 related to the shutdown of Salem.
* * * *
16
<PAGE>
NET INTEREST CHARGES
Net interest charges were substantially unchanged for the three months
ended September 30, 1997 and decreased 3% for the nine months ended September
30, 1997 compared to the corresponding periods in 1996. The decrease for the
nine months ended September 30, 1997 was primarily due to the Company's ongoing
program to reduce and refinance higher-cost, long-term debt.
* * * *
PREFERRED DIVIDENDS
Preferred stock dividends were unchanged for the three and nine months
ended September 30, 1997 compared to the corresponding periods in 1996.
* * * *
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported in the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, on July 31, 1997, the plaintiffs in the class
action suit against the Company involving the 1987 amendment to the Company's
Service Annuity Plan filed a petition for review with the United States Supreme
Court of the decision by the United States Court of Appeals for the Third
Circuit. On October 14, 1997, the Supreme Court denied the plaintiffs' petition.
* * * *
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. In accordance with the court's
schedule, Westinghouse filed a motion for summary judgment on October 1, 1997.
* * * *
ITEM 5. OTHER INFORMATION
As previously reported in the 1996 Form 10-K, the Company was scheduled
to meet with the Nuclear Regulatory Commission (NRC) regarding the Company's
plans for the resolution of the Thermo-Lag issue. The Company met with the NRC
on August 5, 1997. As a result of the meeting, the NRC staff concluded that the
Company is making reasonable progress toward resolving the Thermo-Lag issue.
* * * *
As previously disclosed, Salem Units No. 1 and No. 2, operated by
PSE&G, were taken out of service in the second quarter of 1995. On August 30,
1997, PSE&G informed the Company that Unit No. 2 returned to commercial
operation. PSE&G expects that Unit No. 1 will return to service in the first
quarter of 1998. Because the timing of Unit No. 1's restart is subject to
satisfactory completion of the restart plan requirements, as determined by PSE&G
and the NRC, no assurance can be given that the projected restart date will be
met. The inability to successfully return Unit No. 1 to continuous, safe
operation could have a material adverse effect on the Company's financial
condition and results of operations.
* * * *
The Company has been informed by PSE&G that, on July 8, 1997, a
predecisional enforcement conference was held with the NRC to discuss apparent
violations at Salem. These apparent violations were identified in May and June
1997, and concern emergency core cooling system switchover and related residual
heat removal system (RHR) flow issues, and Appendix R (fire protection) issues.
In a letter dated October 8, 1997, the NRC informed PSE&G that a Level III
violation was cited for the issues surrounding the RHR system and Level IV
violations were cited for the two
18
<PAGE>
Appendix R issues. There was no civil penalty issued by the NRC.
* * * *
The Company has been informed by PSE&G that a predecisional enforcement
conference has been scheduled for December 9, 1997 to discuss allegations
concerning security program issues which occurred at Salem in 1996. PSE&G cannot
predict what other actions, if any, the NRC may take in this matter.
* * * *
On October 7, 1997, Enron Energy Services Power, Inc. (Enron), an
affiliate of an out-of-state, Pennsylvania-licensed electric supplier which is
opposing the Pennsylvania Plan, requested that the PUC consider an alternative
plan to implement competition in the Company's service territory. The
alternative plan proposes, among other things; a larger initial rate cut than
proposed in the Pennsylvania Plan; energy and capacity initially priced at 3.48
cents per kilowatthour (kWh); the Company's issuance of $5.5 billion in
transition bonds and the sale to Enron or its designee at a 9.66% coupon rate;
the appointment of Enron as default service-provider in the Company's service
territory; and a long-term purchased power agreement between Enron and the
Company. On October 9, 1997, the PUC granted the Motion to Consolidate in order
to take into account this alternative plan in deciding whether to approve the
Pennsylvania Plan. The Company and other supporters of the Pennsylvania Plan
will vigorously oppose the alternative plan on the grounds that it is seriously
flawed, procedurally inappropriate and not in the best interests of
Pennsylvania.
* * * *
On August 29, 1997, the PUC issued a final order outlining the
guidelines for Retail Access Pilot Programs (Pilot Programs) in Pennsylvania.
Among other things, these Pilot Programs guidelines provide for: participation
of 5% of the peak load of each customer class; residential and commercial
customers to be given a $0.03/kWh energy credit and a 13% reduction in the
regulated portion of their bills; industrial customers to be given a $0.027/kWh
energy credit and a 10% reduction in the regulated portion of their bills; an
open enrollment period for all customers in each rate class interested in
participating in the Pilot Programs from September 15, 1997 through September
29, 1997; PUC-approved electric generation suppliers to begin marketing to
potential customers immediately and complete marketing to potential customers by
October 25, 1997; Pilot Programs' service to begin on November 1, 1997 and last
through December 31, 1998.
Approximately 400,000 customers applied to participate in the Pilot
Program. In a lottery held by an independent third party, approximately 75,000
customers were chosen to participate in the Company's Pilot Program.
* * * *
By letter dated August 5, 1997, the Company was notified by the NRC of
the issuance of a Notice of Violation and Proposed Imposition of Civil
19
<PAGE>
Penalty in the amount of $80,000 relating to falsification of surveillance
records at Limerick in 1996. These incidents were identified and investigated by
the Company and the findings were provided to the NRC. The Company has taken
corrective actions and, on September 4, 1997, paid the fine.
* * * *
On August 1, 1997, the Company reached a settlement on all outstanding
issues regarding its Purchase Gas Cost (PGC) No. 14 rates for the period
December 1, 1997 to November 30, 1998, which reflects a $0.0731 per thousand
cubic feet (mcf) decrease in natural gas sales rates. PGC No. 14 will become
effective December 1, 1997, subject to PUC approval.
* * * *
On June 2, 1997 and June 9, 1997, in response to requests from the
Federal Energy Regulatory Commission, the other utility members of the PJM
Interconnection L.L.C. (PJM) and the Company, respectively, filed separate
restructuring proposals regarding PJM.
* * * *
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
12-1 - Statement regarding computation of ratio of
earnings to fixed charges.
12-2 - Statement regarding computation of ratio of
earnings to combined fixed charges and preferred
stock dividends.
27 - Financial Data Schedule.
(b) Reports on Form 8-K filed during the reporting period:
Report, dated July 10, 1997, reporting information under "ITEM 5.
OTHER EVENTS" relating to the Company's decision to terminate
an offer to purchase an interest in River Bend Nuclear
Station.
Report, dated July 18, 1997, reporting information under "ITEM 5.
OTHER EVENTS" regarding the Company's filing of rebuttal
testimony with the Pennsylvania Public Utility Commission
supporting its comprehensive restructuring plan to implement
full customer choice of electric generation supply.
Report, dated July 30, 1997, reporting information under "ITEM 5.
OTHER EVENTS" regarding a motion filed with the Pennsylvania
Public Utility Commission for a continuance of hearings in the
Company's restructuring proceeding.
Report, dated August 13, 1997, reporting information under "ITEM 5.
OTHER EVENTS" regarding a motion filed with the Pennsylvania
Public Utility Commission for a Suspension of the
Administrative Schedule in the Company's restructuring
proceeding.
Report, dated August 27, 1997, reporting information under "ITEM 5.
OTHER EVENTS" regarding a Joint Petition for Partial
Settlement
20
<PAGE>
filed with the Pennsylvania Public Utility Commission in the
Company's restructuring proceeding.
Reports on Form 8-K filed subsequent to the reporting period:
None
21
<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/ Michael J. Egan
--------------------------
Michael J. Egan
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: October 31, 1997
22
EXHIBIT 12-1
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
SEC METHOD
($000)
9 MONTHS
ENDED
09/30/97
NET INCOME $393,884
ADD BACK:
- - INCOME TAXES:
OPERATING INCOME 296,019
NON-OPERATING INCOME 23,274
--------
NET TAXES 319,293
- - FIXED CHARGES:
INTEREST APPLICABLE TO DEBT 269,885
ANNUAL RENTALS 6,439
--------
TOTAL FIXED CHARGES 276,324
ADJUSTED EARNINGS INCLUDING AFUDC $989,501
========
RATIO OF EARNINGS TO FIXED CHARGES 3.58
========
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)
9 MONTHS
ENDED
09/30/97
NET INCOME $393,884
ADD BACK:
- - INCOME TAXES:
OPERATING INCOME 296,019
NON-OPERATING INCOME 23,274
--------
NET TAXES 319,293
- - FIXED CHARGES:
INTEREST APPLICABLE TO DEBT 269,885
ANNUAL RENTALS 6,439
--------
TOTAL FIXED CHARGES 276,324
EARNINGS REQUIRED FOR PREFERRED DIVIDENDS:
DIVIDENDS ON PREFERRED STOCK 13,527
ADJUSTMENT TO PREFERRED DIVIDENDS* 10,965
--------
24,492
FIXED CHARGES AND PREFERRED DIVIDENDS $300,816
========
EARNINGS BEFORE INCOME TAXES AND
FIXED CHARGES $989,501
========
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS 3.29
========
* ADDITIONAL CHARGE EQUIVALENT TO EARNINGS REQUIRED
TO ADJUST DIVIDENDS ON PREFERRED STOCK TO A PRE-TAX BASIS
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