UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended...June 30, 1998..........
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 222,896,403 shares of common stock outstanding on
June 30, 1998.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Millions of Dollars)
<CAPTION>
3 Months Ended 6 Months Ended
June 30, June 30,
----------------------- ----------------------
1998 1997 1998 1997
--------- ---------- --------- ---------
OPERATING REVENUES
<S> <C> <C> <C> <C>
Electric $1,132.5 $ 943.4 $2,127.8 $1,913.9
Gas 75.0 88.9 252.8 281.8
--------- ---------- --------- ---------
TOTAL OPERATING REVENUES 1,207.5 1,032.3 2,380.6 2,195.7
--------- ---------- --------- ---------
OPERATING EXPENSES
Fuel and Energy Interchange 350.9 266.1 720.6 600.1
Operating and Maintenance 262.1 296.3 544.1 598.2
Depreciation and Amortization 160.9 147.6 315.6 290.1
Taxes Other Than Income Taxes 71.8 72.6 153.9 155.6
--------- ---------- --------- ---------
TOTAL OPERATING EXPENSES 845.7 782.6 1,734.2 1,644.0
--------- ---------- --------- ---------
OPERATING INCOME 361.8 249.7 646.4 551.7
--------- ---------- --------- ---------
OTHER INCOME AND DEDUCTIONS
Interest Expense (88.8) (93.3) (176.0) (186.1)
Company Obligated Mandatorily Redeemable
Preferred Securities of a Partnership (8.1) (6.9) (15.8) (13.6)
Allowance for Funds Used During Construction 3.5 9.8 6.3 14.4
Settlement of Salem Litigation - 69.8 - 69.8
Other, Net (22.5) (6.7) (32.7) (9.1)
--------- ---------- --------- ---------
TOTAL OTHER INCOME AND DEDUCTIONS (115.9) (27.3) (218.2) (124.6)
--------- ---------- --------- ---------
INCOME BEFORE INCOME TAXES 245.9 222.4 428.2 427.1
--------- ---------- --------- ---------
INCOME TAXES 94.4 99.6 163.1 191.3
--------- ---------- --------- ---------
NET INCOME 151.5 122.8 265.1 235.8
PREFERRED STOCK DIVIDENDS 3.3 4.5 6.6 9.0
--------- ---------- --------- ---------
EARNINGS APPLICABLE TO COMMON STOCK $ 148.2 $ 118.3 $ 258.5 $ 226.8
========= ========== ========= =========
AVERAGE SHARES OF COMMON STOCK
OUTSTANDING (Millions) 222.7 222.5 222.6 222.5
BASIC AND DILUTIVE EARNINGS PER AVERAGE
COMMON SHARE (Dollars) $ 0.66 $ 0.53 $ 1.16 $ 1.02
DIVIDENDS PER AVERAGE COMMON SHARE (Dollars) $ 0.25 $ 0.45 $ 0.50 $ 0.90
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
(Unaudited)
ASSETS
UTILITY PLANT
<S> <C> <C>
Electric - Transmission & Distribution $ 3,663.6 $ 3,617.7
Electric - Generation 1,437.3 1,434.9
Gas 1,095.2 1,071.8
Common 309.9 302.7
---------- ----------
6,506.0 6,427.1
Less Accumulated Provision for Depreciation 2,786.3 2,690.8
---------- ----------
3,719.7 3,736.3
Nuclear Fuel, net 165.9 147.4
Construction Work in Progress 699.8 611.2
Leased Property, net 152.4 175.9
---------- ----------
4,737.8 4,670.8
---------- ----------
CURRENT ASSETS
Cash and Temporary Cash Investments 105.3 33.4
Accounts Receivable, net
Customer 169.3 173.3
Other 231.1 140.0
Inventories, at average cost
Fossil Fuel 79.4 84.9
Materials and Supplies 87.4 90.9
Deferred Generation Costs Recoverable in Current Rates 208.5 424.5
Deferred Energy Costs - Gas 8.6 35.7
Other 111.0 20.1
---------- ----------
1,000.6 1,002.8
---------- ----------
DEFERRED DEBITS AND OTHER ASSETS
Competitive Transition Charge 5,274.6 5,274.6
Recoverable Deferred Income Taxes 559.5 590.3
Deferred Non-Pension Postretirement Benefits Costs 94.2 97.4
Investments 531.7 515.8
Loss on Reacquired Debt 80.5 83.9
Other 109.4 121.0
---------- ----------
6,649.9 6,683.0
---------- ----------
TOTAL $ 12,388.3 $ 12,356.6
========== ==========
See Notes to Condensed Consolidated Financial Statements.
(continued on next page)
</TABLE>
<PAGE>
<TABLE>
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
(continued)
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
(Unaudited)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Shareholders' Equity
<S> <C> <C>
Common Stock (No Par) $ 3,527.0 $ 3,517.7
Other Paid-In Capital 1.2 1.2
Retained Deficit (649.9) (792.2)
Preferred and Preference Stock
Without Mandatory Redemption 137.5 137.5
With Mandatory Redemption 92.7 92.7
Company Obligated Mandatorily Redeemable
Preferred Securities of a Partnership 349.3 352.1
Long-Term Debt 3,593.7 3,853.1
---------- ----------
7,051.5 7,162.1
---------- ----------
CURRENT LIABILITIES
Notes Payable, Bank 346.0 401.5
Long-Term Debt Due Within One Year 498.5 247.1
Capital Lease Obligations Due Within One Year 77.1 55.8
Accounts Payable 295.6 306.9
Taxes Accrued 89.3 66.4
Interest Accrued 78.8 77.9
Dividends Payable 21.0 17.0
Deferred Income Taxes 85.9 185.7
Other 258.7 260.4
---------- ----------
1,750.9 1,618.7
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Capital Lease Obligations 75.3 120.1
Deferred Income Taxes 2,327.3 2,297.1
Unamortized Investment Tax Credits 309.0 318.1
Pension Obligation 211.6 211.6
Non-Pension Postretirement Benefits Obligation 342.0 324.8
Other 320.7 304.1
---------- ----------
3,585.9 3,575.8
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
TOTAL $ 12,388.3 $ 12,356.6
========== ==========
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>
6 Months Ended
June 30,
---------------------------------
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
NET INCOME $ 265.1 $ 235.8
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 343.0 327.7
Deferred Income Taxes (38.3) (11.7)
Deferred Energy Costs 27.1 15.5
Salem Litigation Settlement - (69.8)
Changes in Working Capital:
Accounts Receivable (87.1) (9.4)
Inventories 9.0 28.0
Accounts Payable (11.3) (48.5)
Other Current Assets and Liabilities (68.8) (88.3)
Other Items Affecting Operations 71.3 35.9
---------- ---------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 510.0 415.2
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Plant (229.1) (245.9)
Increase in Investments (35.8) (70.8)
---------- ----------
NET CASH FLOWS USED BY INVESTING ACTIVITIES (264.9) (316.7)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Short-Term Debt (55.5) 64.0
Issuance of Common Stock 9.3 -
Issuance of Long-Term Debt 6.4 17.2
Retirement of Long-Term Debt (15.9) (27.2)
Loss on Reacquired Debt 3.4 11.8
Issuance of Company Obligated Mandatorily
Redeemable Preferred Securities of a Partnership 78.1 50.0
Retirement of Company Obligated Mandatorily
Redeemable Preferred Securities of a Partnership (80.9) -
Dividends on Preferred and Common Stock (117.8) (209.3)
Change in Dividends Payable 4.0 6.5
Other Items Affecting Financing (4.3) 1.3
---------- ----------
NET CASH FLOWS USED BY FINANCING ACTIVITIES (173.2) (85.7)
---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 71.9 12.8
---------- ----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 33.4 29.2
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 105.3 $ 42.0
========== ==========
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 June
30, 1998 and for the three and six months then ended are unaudited, but include
all adjustments that PECO Energy Company (Company) considers necessary for a
fair presentation of such financial statements. All adjustments are of a normal,
recurring nature. 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
1997 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, 1997 (1997
Form 10-K).
2. RATE MATTERS
On May 14, 1998, the Pennsylvania Public Utility Commission (PUC)
issued a final order (Final Restructuring Order) approving a Joint Petition for
Settlement (Global Settlement) filed by the Company and numerous parties to the
Company's restructuring proceeding. The Final Restructuring Order and its
associated terms for restructuring supersede the restructuring orders issued by
the PUC in December 1997, January 1998 and February 1998 (Original Restructuring
Orders).
The Final Restructuring Order concludes the Company's restructuring
proceeding filed on April 1, 1997, pursuant to the Electricity Generation
Competition and Customer Choice Act (Competition Act). In its filing, the
Company identified $7.5 billion of stranded costs. The Final Restructuring Order
provides for the recovery of $5.26 billion of stranded costs over a 12-year
period beginning in 1999. The stranded cost balance will earn a return of
10.75%.
The Final Restructuring Order provides for the phase-in of customer
choice of electric generation suppliers (EGS) for all customers: one-third of
the peak load of each customer class on January 1, 1999; one-third on January 2,
1999 and the remainder on January 2, 2000. The order also establishes market
share thresholds to ensure that a preestablished minimum number of residential
and commercial customers choose their EGS. If less than 35% and 50% of
residential and commercial customers have chosen an EGS by January 1, 2001 and
January 1, 2003, respectively, then a number of customers sufficient to meet the
necessary threshold levels shall be randomly selected and assigned to licensed
suppliers through a PUC-determined process.
Beginning January 1, 1999, electric rates will be unbundled into a
transmission and distribution component, a "transition charge" for recovery of
stranded costs and an energy and capacity charge. Eligible customers who choose
an EGS will not be charged the energy and capacity charge and instead will
purchase their electric energy supply at market-based rates. Also, beginning
January 1, 1999, the Company will unbundle its retail electric rates for its
metering, meter reading and billing and collection services to provide credits
to those customers who elect to have an alternative supplier perform these
services.
In accordance with the Competition Act, the Final Restructuring Order
caps all customers' kilowatthour (kWh) rates at the year-end 1996 system-wide
<PAGE>
average of 9.96 cents/kWh through June 2005. On January 1, 1999, the Company
will reduce its retail electric rates by 8% from the 1996 system-wide average
rate. The rate decrease will become 6% from January 1, 2000 until January 1,
2001, when system-wide average rates will revert to 9.96 cents/kWh. The
transmission and distribution rate component will remain frozen at a system
average rate of 2.98 cents/kWh through June 30, 2005. Additionally, a generation
rate cap, defined as the sum of the transition charge and the shopping credit,
will remain in effect through 2010.
The Final Restructuring Order requires that on January 1, 2001, 20% of
all of the Company's residential customers, determined by random selection and
without regard to whether such customers are obtaining generation service from
an EGS, shall be assigned to a provider of last resort default supplier other
than the Company through a PUC-approved bidding process.
The Final Restructuring Order authorizes the Company to securitize up
to $4 billion of its recoverable stranded costs through the issuance of
transition bonds. The Company may issue the transition bonds at any time
following the PUC's May 14, 1998 issuance of a Qualified Rate Order. In
preparation for the issuance of transition bonds, the Company formed PECO Energy
Transition Trust, a special purpose entity which on June 26, 1998, filed with
the Securities and Exchange Commission (SEC) a registration statement for the
issuance of transition bonds. The Company has made no final determination
regarding the timing or amount of such issuance. The proceeds of the transition
bonds are required to be used principally to reduce qualified stranded costs and
related capitalization. The Company cannot predict the ultimate effect of the
issuance of transition bonds on its capital structure.
As previously reported in the 1997 Form 10-K, the Company filed
complaints in federal and state courts relating to the Original Restructuring
Orders. In addition, numerous other parties filed appeals and cross appeals of
the Original Restructuring Orders. In accordance with the terms of the Final
Restructuring Order, all appeals and cross-appeals filed by the signatories to
the Global Settlement have been placed in a pending but inactive status. Such
appeals and cross appeals will be permanently withdrawn at such time that the
Final Restructuring Order is no longer subject to administrative or judicial
challenge.
On June 12, 1998, an intervenor that was not a party to the Global
Settlement filed an appeal of the Final Restructuring Order to the Commonwealth
Court of Pennsylvania (Commonwealth Court). The basis of the appeal was that the
stranded cost provisions of the Competition Act violated the Commerce Clause of
the United States Constitution. On May 7, 1998, the Commonwealth Court had
unanimously rejected the same claim raised by the intervenor in another action
challenging the Competition Act. The intervenor has petitioned the Supreme Court
of Pennsylvania for allowance of appeal in that action.
3. RESTART 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. Unit No. 2 returned to commercial
operation in the third quarter of 1997 and Unit No. 1 returned to commercial
operation on April 17, 1998.
For the three and six months ended June 30, 1998, the Company recorded
in the accompanying Statements of Income as Fuel and Energy Interchange $3 and
$19 million, respectively, of replacement power costs and recorded as Operating
and Maintenance $3 and $11 million, respectively, of maintenance costs relating
to the shutdown of Salem. For the three and six months ended June 30, 1997, the
Company recorded in the accompanying Statements of Income as Fuel and Energy
Interchange $28 and $57 million, respectively, of replacement power costs and
recorded as Operating and Maintenance $14 and $27 million, respectively, of
maintenance costs relating to the shutdown of Salem. For the year ending
December 31, 1998, the Company expects to incur and expense approximately $35
million of costs related to the shutdown.
<PAGE>
4. SALES OF ACCOUNTS RECEIVABLE
The Company is party to an agreement with a financial institution,
under which it can sell or finance with limited recourse an undivided interest,
adjusted daily, in up to $425 million of designated accounts receivable until
November 2000. At June 30, 1998, the Company had sold a $425 million interest in
accounts receivable, consisting of a $306 million interest in accounts
receivable which the Company accounts for as a sale under Statement of Financial
Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," and a $119 million interest
in special agreement accounts receivable which were accounted for as a long-term
note payable. The Company retains the servicing responsibility for these
receivables. The agreement requires the Company to maintain its $425 million
interest, which, if not met, requires the Company to deposit cash in order to
satisfy such requirements. The Company, at June 30, 1998 met such requirements.
At June 30, 1998, the average annual service-charge rate, computed on a daily
basis on the portion of the accounts receivable sold but not yet collected, was
5.60%.
5. 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 SEC.
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 had been settled on a
net share basis at June 30, 1998, based on the closing price of the Company's
common stock on that date, the Company would have received approximately
2,357,000 shares of Company common stock.
6. COMMITMENTS AND CONTINGENCIES
For information regarding the Company's capital commitments, nuclear
insurance, nuclear decommissioning and spent fuel storage, energy commitments,
environmental issues and litigation, see note 5 of Notes to Consolidated
Financial Statements for the year ended December 31, 1997.
As previously reported, the Company has identified 27 sites where
former manufactured gas plant (MGP) activities have or may have resulted in
actual site contamination. As of June 30, 1998, the Company had accrued $62
million for environmental investigation and remediation costs, including $34
million for MGP investigation and remediation that currently can be reasonably
estimated. The Company cannot predict whether it will incur other significant
liabilities for additional investigation and remediation costs at these or
additional sites identified by the Company, environmental agencies or others, or
whether all such costs will be recoverable from third parties.
The Company periodically reviews its investments to determine whether
they are properly valued in its financial statements. As previously reported,
due to the changes in the electric deregulation environment throughout the
United States, the Company has been evaluating its investment in EnergyOne. In
June 1998, the Company determined that its investment in EnergyOne was impaired
and, accordingly, charged $10 million to Other Income and Deductions to write
off its investment in EnergyOne.
Under the Price-Anderson Act, all nuclear reactor licensees can be
assessed up to $79 million ($88 million, effective August 20, 1998) per reactor
per incident, payable at no more than $10 million per reactor, per incident, per
year. The change in the maximum assessment is the result of the inflation
adjustment, required under the Price-Anderson Act, for the period September 1993
to December 1997.
<PAGE>
7. ACCOUNTING MATTERS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," to establish accounting and reporting
standards for derivatives. The new standard requires recognizing all derivatives
as either assets or liabilities on the balance sheet at their fair value and
specifies the accounting for changes in fair value depending upon the intended
use of the derivative. The new standard is effective for fiscal years beginning
after June 15, 1999. The Company expects to adopt SFAS No. 133 in the first
quarter of 2000. The Company is in the process of evaluating the impact of SFAS
No. 133.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Electricity Generation Customer Choice and Competition Act
(Competition Act) was enacted in December 1996 providing for the restructuring
of the electric utility industry in Pennsylvania, including the deregulation of
utility generation operations and the institution of retail competition for
generation supply beginning in 1999. Pursuant to the Competition Act, in April
1997, the Company filed with the Pennsylvania Public Utility Commission (PUC) a
restructuring plan in which it identified $7.5 billion of retail electric
generation-related stranded costs. On May 14, 1998, the PUC entered an Opinion
and Order (Final Restructuring Order) which deregulates the Company's electric
generation operations and authorizes the Company to recover stranded costs of
$5.26 billion over 12 years beginning January 1, 1999. Additionally, the Final
Restructuring Order provides for the phase-in of customer choice between January
1, 1999 and January 2, 2000. Following completion of the phase-in, all of the
Company's customers will have the ability to choose their electric generation
supplier. For additional information concerning the Competition Act and Final
Restructuring Order, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company's Annual Report to
Shareholders for the year 1997; the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 (1997 Form 10-K) under "PART I. ITEM 1.
BUSINESS-Deregulation and Rate Matters"; and "PART II. ITEM 5. OTHER
INFORMATION" of the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998 (March 31, 1998 Form 10-Q) and under "PART I. ITEM 1.
FINANCIAL STATEMENTS" in this Quarterly Report on Form 10-Q (Report).
The rate reductions of the Final Restructuring Order (8% in 1999 and 6%
in 2000) are expected to reduce the Company's revenues from future retail
electric sales. The Company believes that its revenues from retail electric
sales will be further reduced by competition for electric generation services,
which will be available to two-thirds of its retail customers by January 2, 1999
and all retail customers by January 2, 2000.
In light of the expected impact on future revenues of the Final
Restructuring Order and competition for electric generation services, the
Company is continuing its cost management efforts through a Competitive Cost
Review (CCR). Through CCR, the Company is conducting an in-depth analysis and
assessment of all Company expenses, capital expenditures, programs, processes
and staffing levels. The goal of CCR is to achieve significant cost savings
while maintaining high levels of service quality, reliability, safety and
overall performance.
<PAGE>
In accordance with the cost-control targets of CCR, the Company is
committed to reducing annual operating and maintenance expense by at least $150
million by 2001. The expense reductions will be realized, in part, through the
elimination of approximately 1,200 positions over the next 12 to 18 months.
On April 8, 1998, the Board of Directors authorized the implementation
of a retirement incentive program and an enhanced severance benefit program to
accompany targeted workforce reductions. The retirement incentive program will
allow employees age 50 and older, who have been designated as excess or who are
in job classifications facing reduction, to retire from the Company. The
enhanced severance benefit program will provide non-retiring excess employees
with fewer than ten years of service, benefits equal to two weeks pay per year
of service. Non-retiring excess employees with more than ten years of service
will receive benefits equal to three weeks pay per year of service.
The Company anticipates that it will incur a one-time charge to
earnings in 1998 to recognize costs related to CCR; however, the magnitude of
such charge is not known at this time.
The Company's future financial condition and results of operations are
also affected by other factors, such as the operation of nuclear generating
facilities, wholesale sales, weather conditions and the Company's ability to
develop its investments in new ventures into profitable enterprises.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," to establish accounting and reporting
standards for derivatives. The new standard requires recognizing all derivatives
as either assets or liabilities on the balance sheet at their fair value and
specifies the accounting for changes in fair value depending upon the intended
use of the derivative. The new standard is effective for fiscal years beginning
after June 15, 1999. The Company expects to adopt SFAS No. 133 in the first
quarter of 2000. The Company is in the process of evaluating the impact of SFAS
No. 133.
RESULTS OF OPERATIONS
EARNINGS
Basic and dilutive earnings per average common share for the three and
six months ended June 30, 1998 were $0.66 and $1.16 per share, respectively,
compared to $0.53 and $1.02 per share in 1997. The increase in second quarter
earnings was due primarily to increased operating revenues net of related fuel
costs. Revenues from wholesale sales increased significantly compared to 1997.
Second quarter 1998 earnings also benefitted from the return to service
of Salem Generating Station (Salem), which decreased the cost of fuel purchases
and outage-related costs compared to 1997, decreased operating and maintenance
expense, which was due primarily to reduced costs at the Company's fossil
generating stations and improved performance by the Company in reducing
uncollectible expenses for the quarter. Income tax expense also decreased as a
result of full normalization of deferred taxes associated with electric
generation plant which results from the December 31, 1997 discontinuation of
regulatory accounting for electric generation plant. These factors were
partially offset by the benefit in 1997 of the recognition of the settlement of
litigation arising from the Salem outage, and in 1998, losses from investments
in subsidiaries, and higher depreciation expense due to the amortization and
recovery of certain assets during 1998, preceding the Company's transition to
market-based pricing of electric generation in 1999.
<PAGE>
The increase in earnings for the six months ended June 30, 1998 is
primarily due to increased wholesale revenues net of related fuel costs, the
return to service of the Salem units, continued containment of operating and
maintenance costs, and lower income taxes due to full normalization of deferred
taxes associated with electric generation plant which results from the December
31, 1997 discontinuation of regulatory accounting for electric generation plant.
These factors were partially offset by the benefit in 1997 of the recognition of
the Salem litigation settlement, and in 1998, losses from investments in
subsidiaries, increased depreciation expense and the negative impacts of milder
weather conditions in the first quarter.
OPERATING REVENUES
Electric revenues increased 20% and 11% for the three and six months
ended June 30, 1998, respectively, compared to 1997. The increase for the three
months was primarily due to higher revenues from wholesale sales resulting from
an increase in energy prices in the spot market as well as an increase in sales
volume. Also contributing to the increase was warmer weather conditions in the
second quarter of 1998 compared to 1997. Partially offsetting these increases
were lower average retail rates as a result of the customer choice pilot
program.
The increase for the six months was primarily due to an increase in
wholesale sales. Partially offsetting the increases for the six months were
lower average retail rates as a result of the customer choice pilot program. For
the six months, warmer weather conditions in the second quarter of 1998 were
fully offset by the milder weather conditions in the first quarter of 1998.
Gas revenues decreased 16% and 10% for the three and six months ended
June 30, 1998 compared to 1997 primarily due to a decrease in sales volume as a
result of milder weather conditions.
FUEL AND ENERGY INTERCHANGE
Fuel and energy interchange expense increased 32% and 20% for the three
and six months ended June 30, 1998 compared to 1997 primarily due to additional
off-system purchases associated with increased wholesale electric sales.
Although volume increased to meet the Company's sales commitments, the increase
in fuel and energy interchange was primarily due to an increase of the average
cost paid by the Company for purchased power. The increase was partially offset
by the return to service of Salem, which decreased the need to purchase power to
replace the output from these units.
OPERATING AND MAINTENANCE
Operating and maintenance expense decreased 12% and 9% for the three
and six months ended June 30, 1998 compared to 1997. The decrease for the three
and six months was primarily due to lower expenses at Salem due to the
conclusion of the outage, improved performance by the Company in reducing
uncollectible expenses and lower expenses at fossil generating units due to
cost-control efforts. Contributing to this decrease for the six months was lower
electric transmission and distribution system expenses.
DEPRECIATION EXPENSE
Depreciation expense increased 9% for the three and six months ended
June 30, 1998 compared to 1997, primarily due to the amortization of Deferred
Generation Costs Recoverable in Current Rates during 1998, preceding the
Company's transition to market-based pricing of electric generation in 1999.
Included in this amortization are charges that were included in Operating and
Maintenance expense and Interest Charges in 1997.
<PAGE>
OTHER INCOME AND DEDUCTIONS
Other income and deductions excluding interest charges decreased
substantially for the three and six months ended June 30, 1998 compared to 1997.
The decrease for the three and six months was primarily due to the second
quarter 1997 settlement reached with Public Service Electric and Gas Company
(PSE&G) related to the shutdown of Salem, and in 1998, increased losses from
investments in subsidiaries and the second quarter write-off of the Company's
investment in EnergyOne.
INTEREST CHARGES
Interest charges increased 3% for the three months ended June 30, 1998
compared to 1997 and were substantially unchanged for the six months ended June
30, 1998 compared to 1997. Interest charges increased for the three months
primarily due to a second quarter 1997 adjustment to record AFUDC on a project
not previously in AFUDC base, fewer projects in AFUDC base in 1998, higher
average short-term debt balances compared to 1997 and the replacement of $62
million of preferred stock with Company Obligated Mandatorily Redeemable
Preferred Securities of a Partnership (COMRPS) in the third quarter of 1997.
These increases were partially offset by lower amortization expense due to the
write-off of electric generation-related debt discounts at December 31, 1997 and
the Company's ongoing program to reduce and/or refinance higher cost, long-term
debt.
INCOME TAXES
Total income taxes decreased 5% and 15% for the three and six months
ended June 30, 1998 compared to 1997. The decrease for the three and six months
was primarily due to full normalization of deferred taxes associated with
electric generation plant which results from the December 31, 1997
discontinuation of regulatory accounting for electric generation plant. For the
three months, this decrease was partially offset by higher pre-tax income.
PREFERRED STOCK DIVIDENDS
Preferred stock dividends decreased 27% for the three and six months ended
June 30, 1998 compared to 1997, primarily due to the replacement of $62 million
of preferred stock with COMRPS in the third quarter of 1997.
DISCUSSION OF LIQUIDITY AND CAPITAL RESOURCES
Total construction expenditures, primarily for utility plant, are
estimated to be $600 million for 1998. The estimated expenditures include
approximately $150 million for new ventures, principally through the
Telecommunications Group. Due to the expected impact of the Final Restructuring
Order and competition for electric generating services on its future capital
resources, the Company is currently evaluating its capital commitments for 1999
and beyond. Certain facilities under construction and to be constructed may
require permits and licenses which the Company has no assurance will be granted.
At June 30, 1998, the Company and its subsidiaries had outstanding $346
million of notes payable, all of which were commercial paper. At June 30, 1998,
the Company had formal and informal lines of bank credit aggregating $100
million. At June 30, 1998, the Company and its subsidiaries had no short-term
investments.
As a result of an extraordinary charge to earnings in December 1997,
the Company did not meet the earnings test under the Mortgage required for the
issuance of additional bonds against property additions for the twelve months
ended June 30, 1998. In addition, the Company does not expect to meet the
earnings test under the Mortgage for any twelve-month period ending prior to
December 31, 1998. At June 30, 1998, the Company was entitled to issue
approximately $3.7 billion of mortgage bonds against previously retired mortgage
bonds without regard to the earnings and property additions tests.
<PAGE>
As a result of an extraordinary charge to earnings in December 1997,
the Company did not meet the earnings test of the Company's Amended and Restated
Articles of Incorporation (Articles), required for the issuance of additional
preferred stock without an affirmative vote of the holders of two-thirds of all
preferred shares outstanding, for the twelve months ended June 30, 1998. In
addition, the Company does not expect to meet the earnings test under the
Articles for any twelve-month period ending prior to December 31, 1998.
For the six months ended June 30, 1998, 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
3.47 times and 3.27 times, respectively, compared to 3.32 times and 3.05 times,
respectively, in 1997. See the 1997 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 had been settled on a net share basis at June 30, 1998, based
on the closing price of the Company's common stock on that date, the Company
would have received approximately 2,357,000 shares of Company common stock.
FORWARD-LOOKING STATEMENTS
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 2, 3 and 6 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported in the March 31, 1998 Form 10-Q, the Grays Ferry
Cogeneration Partnership sued the Company in the Court of Common Pleas in
Philadelphia County (Common Pleas Court) to enjoin the Company's termination of
the power purchase agreements relating to the Grays Ferry Cogeneration Project
(Project). On May 5, 1998, the Common Pleas Court entered a preliminary
injunction enjoining the Company from terminating the power purchase agreements
and requiring the Company to abide by all terms and conditions of the
agreements, including paying for electric energy and capacity at the contract
rates pending resolution of the litigation. In a separate action, on May 29,
1998, Westinghouse Power Generation, a lender to the Project, filed an action in
the Common Pleas Court against the Company alleging breach of contract arising
out of the Company's termination of the power purchase agreements. The Company
cannot predict the outcome of these matters.
On May 27, 1998, the United States Department of Justice, on behalf of
the Rural Utilities Service and the Chapter 11 Trustee for the Cajun Electric
Power Cooperative, Inc. (Cajun), filed an action claiming breach of contract
against the Company in the United States District Court for the Middle District
of Louisiana arising out of the Company's termination of the contract to
purchase Cajun's interest in the River Bend nuclear power plant.
The Company cannot predict the outcome of these matters.
See also "ITEM 5. OTHER INFORMATION."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Information regarding the submission of matters to a vote of security
holders is presented in the March 31, 1998 Form 10-Q.
ITEM 5. OTHER INFORMATION
As previously reported in the Company's Current Report on Form 8-K
dated May 14, 1998, the PUC approved a Joint Petition for Settlement (Global
Settlement) and entered the Final Restructuring Order. On June 12, 1998, an
intervenor that was not a party to the Global Settlement, filed an appeal of the
Final Restructuring Order to the Commonwealth Court of Pennsylvania
(Commonwealth Court). The basis of the appeal was that the stranded cost
provisions of the Competition Act violated the Commerce Clause of the United
States Constitution. On May 7, 1998, the Commonwealth Court had unanimously
rejected the same claim raised by the intervenor in another action challenging
the Competition Act. The intervenor has petitioned the Supreme Court of
Pennsylvania for allowance of appeal in that action.
In accordance with the terms of the Final Restructuring Order, all
appeals and cross-appeals filed by the signatories to the Global Settlement have
been placed in a pending but inactive status. Such appeals and cross appeals
will be withdrawn at such time that the Final Restructuring Order is no longer
subject to administrative or judicial challenge.
As previously reported in the 1997 Form 10-K and the March 31, 1998
Form 10-Q, the Nuclear Regulatory Commission (NRC) issued a Bulletin proposing
the installation of large capacity passive strainers to resolve the problem of
clogging of emergency core cooling system suction strainers experienced at some
GE Boiling Water Reactors. Strainers were installed at Unit No. 1 at the
Company's Limerick Generating Station (Limerick) during the April 1998 refueling
outage. Installation of strainers at Unit No. 2 at the Company's Peach Bottom
Atomic Power Station (Peach Bottom) and Limerick Unit No. 2 are scheduled for
the units' planned October 1998 and April 1999 refueling outages, respectively.
<PAGE>
As previously reported in the 1997 Form 10-K, in August 1997 the NRC
informed the Company that it was satisfied with the Company's progress in
addressing the Thermo-Lag 330 issue. On May 19, 1998, the NRC issued a
confirmatory order modifying the licenses for Limerick Units No. 1 and No. 2
requiring that the Company complete final implementation of corrective actions
on this matter by completion of the planned April 1999 refueling outage for
Limerick Unit No. 2. A similar order was issued for Peach Bottom Units No. 2 and
No. 3 with the implementation of corrective actions required by the completion
of the planned October 1998 refueling outage for Peach Bottom Unit No. 2.
By letter dated June 11, 1998, the NRC issued a notice of violation and
proposed imposition of civil penalty in the amount of $55,000 relating to the
operation and maintenance of the emergency cooling system at Peach Bottom Unit
No. 3. The incidents were identified and investigated by the Company, corrective
actions were promptly implemented and the matter was reported to the NRC. The
Company has agreed to pay the fine.
By letter dated July 7, 1998, the NRC issued a notice of violation and
proposed imposition of civil penalty in the amount of $55,000 relating to the
failure of certain valves at Limerick to operate in conformance with NRC
technical specifications and the Company's failure to promptly address the root
cause of these failures. The Company has taken corrective actions and has agreed
to pay the fine.
As previously reported in the 1997 Form 10-K, in December 1997, the
Environmental Protection Agency (EPA) finalized its record of decision (ROD) for
the Metal Bank of America site. On June 26, 1998, the EPA issued administrative
orders to each member of the group of potentially responsible parties (PRP
Group), including the Company, requiring that they perform the remedial work at
the site as described in the ROD. The EPA also issued administrative orders to
the owner/operator of the site and to several other parties who have not been
cooperating with the EPA and the PRP Group. The Company and the PRP Group are
evaluating their options. In a related matter, the United States District Court
for the Eastern District of Pennsylvania (Eastern District Court) has
reactivated a case brought by the EPA in the late 1980s against the
owner/operator of the site and several of the members of the PRP Group. This
suit could be a vehicle for deciding the ultimate liability of the
owner/operator for cleanup of the site. As a result, the Company is involved in
both the administrative proceeding and the Eastern District Court proceeding
relating to the site.
On July 1, 1998 the NRC closed the Confirmatory Action Letter (CAL) for
Salem Units No. 1 and No. 2 that had been issued in June of 1995. Through the
closure the NRC has indicated that PSE&G, the operator of Salem, has completed
all action items identified in the CAL.
As previously reported in the 1997 Form 10-K, in January 1997, the NRC
placed Salem Units No.1 and No.2 on the NRC Watch List and designated the units
as Category 2 facilities. The Company has been informed by PSE&G that, on July
29, 1998, the NRC removed the Salem units from the NRC Watch List and designated
the units as Category 1 facilities.
As previously reported in the 1997 Form 10-K, the NRC had proposed to
issue a generic letter which would require all nuclear plant operators to
provide the NRC with information concerning the operators' programs, planned or
implemented, to address Year 2000 computer and system issues at its facilities.
On May 11, 1998, the NRC issued a Generic Letter requiring (1) submission of a
written response within 90 days, indicating whether the operator has pursued and
continues to pursue implementation of Year 2000 programs and addressing the
program's scope, assessment process, plans for corrective actions, quality
assurance measures, contingency plans and regulatory compliance, and (2)
submission of a written response, no later than July 1, 1999, confirming that
<PAGE>
such facilities are Year 2000 ready, or will be Year 2000 ready, by the year
2000 with regard to compliance with the terms and conditions of the license(s)
and NRC regulations. The Company is in the process of preparing its written
response.
An Order was entered on July 17, 1998, by the PUC, instituting a formal
investigation by the Office of Administrative Law Judge on Year 2000 compliance
by jurisdictional fixed utilities and mission-critical service providers such as
the PJM Interconnection. The Order requires, (1) a written response to a list of
compliance program questions by August 6, 1998 and, (2) all jurisdictional fixed
utilities be Year 2000 compliant by March 31, 1999 or, if a utility determines
that mission-critical systems cannot be Year 2000 compliant on or before March
31, 1999, the utility is required to file a detailed contingency plan. The PUC
adopted the federal government's definition for Year 2000 compliance and further
defined Year 2000 compliance as a jurisdictional utility having all
mission-critical Year 2000 hardware and software updates and/or replacements
installed and tested on or before March 31, 1999. The Company is in the process
of preparing its written response.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
12-1 - Statement regarding computation of ratio of
earnings to fixed charges.
12-2 - Statement regarding computation of ratio of
earnings to combined fixed charges and preferred
stock dividends.
27 - Financial Data Schedule.
(b) Reports on Form 8-K filed during the reporting period:
Report, dated April 30, 1998 reporting information under "ITEM 5.
OTHER EVENTS" regarding the Company's filing of a Joint
Petition for Settlement with the Pennsylvania Public Utility
Commission regarding the Company's restructuring proceeding.
Report, dated May 14, 1998 reporting information under "ITEM 5. OTHER
EVENTS" regarding the Pennsylvania Public Utility Commission's
issuance of final order approving a Joint Petition for
Settlement in the Company's restructuring proceeding.
Report, dated May 22, 1998 reporting information under "ITEM 5. OTHER
EVENTS" regarding the Company's Competitive Cost Review
program.
Reports on Form 8-K filed subsequent to the reporting period:
Report, dated July 17, 1998 reporting information under "ITEM 5. OTHER
EVENTS" regarding AmerGen Energy Company, LLC, the joint
venture between the Company and British Energy, entering into
a Letter of Intent to purchase the Three Mile Island Unit No.
1 Nuclear Generating Station from GPU, Inc.
<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: July 30, 1998
EXHIBIT 12-1
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
SEC METHOD
($000)
6 MONTHS
ENDED
06/30/98
--------
NET INCOME $265,067
ADD BACK:
- - INCOME TAXES:
OPERATING INCOME 178,973
NON-OPERATING INCOME (15,843)
-------
NET TAXES 163,130
- - FIXED CHARGES:
INTEREST APPLICABLE TO DEBT 169,066
ANNUAL RENTALS 4,455
-------
TOTAL FIXED CHARGES 173,521
ADJUSTED EARNINGS INCLUDING AFUDC $601,718
========
RATIO OF EARNINGS TO FIXED CHARGES 3.47
====
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)
6 MONTHS
ENDED
06/30/98
--------
NET INCOME $265,067
ADD BACK:
- - INCOME TAXES:
OPERATING INCOME 178,973
NON-OPERATING INCOME (15,843)
-------
NET TAXES 163,130
- - FIXED CHARGES:
INTEREST APPLICABLE TO DEBT 169,066
ANNUAL RENTALS 4,455
-------
TOTAL FIXED CHARGES 173,521
EARNINGS REQUIRED FOR PREFERRED DIVIDENDS:
DIVIDENDS ON PREFERRED STOCK 6,555
ADJUSTMENT TO PREFERRED DIVIDENDS* 4,034
-------
10,589
FIXED CHARGES AND PREFERRED DIVIDENDS $184,110
=======
EARNINGS BEFORE INCOME TAXES AND
FIXED CHARGES $601,718
========
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS 3.27
====
* ADDITIONAL CHARGE EQUIVALENT TO EARNINGS REQUIRED
TO ADJUST DIVIDENDS ON PREFERRED STOCK TO A PRE-TAX BASIS
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