UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 169,570,844 shares of common stock outstanding on May 5, 2000.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Millions, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
2000 1999
------- -------
<S> <C> <C>
OPERATING REVENUES
Electric $ 1,041 $ 1,035
Gas 202 217
Infrastructure Services 100 --
------- -------
Total Operating Revenues 1,343 1,252
------- -------
OPERATING EXPENSES
Fuel and Energy Interchange 457 453
Operating and Maintenance 390 292
Depreciation and Amortization 80 56
Taxes Other Than Income Taxes 67 75
------- -------
Total Operating Expenses 994 876
------- -------
OPERATING INCOME 349 376
------- -------
OTHER INCOME AND DEDUCTIONS
Interest Expense (104) (74)
Company Obligated Mandatorily Redeemable
Preferred Securities of a Partnership (2) (7)
Allowance for Funds Used During Construction 1 --
Equity in Earnings (Losses) of Unconsolidated Affiliates 4 (12)
Other, Net 14 (24)
------- -------
Total Other Income and Deductions (87) (117)
------- -------
INCOME BEFORE INCOME TAXES 262 259
INCOME TAXES 97 103
------- -------
NET INCOME 165 156
PREFERRED STOCK DIVIDENDS 3 3
------- -------
EARNINGS APPLICABLE TO COMMON STOCK $ 162 $ 153
======= =======
AVERAGE SHARES OF COMMON STOCK OUTSTANDING 181 223
======= =======
BASIC EARNINGS PER AVERAGE COMMON SHARE $ 0.89 $ 0.69
======= =======
DILUTIVE EARNINGS PER AVERAGE COMMON SHARE $ 0.89 $ 0.68
======= =======
DIVIDENDS PER AVERAGE COMMON SHARE $ 0.25 $ 0.25
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
2
<PAGE>
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 110 $ 228
Accounts Receivable, Net 594 692
Inventories, at average cost 176 206
Other 204 87
------- -------
Total Current Assets 1,084 1,213
------- -------
PROPERTY, PLANT AND EQUIPMENT, NET 5,080 5,045
DEFERRED DEBITS AND OTHER ASSETS
Competitive Transition Charge 5,260 5,275
Recoverable Deferred Income Taxes 638 638
Deferred Non-Pension Postretirement Benefits Costs 83 84
Investments 568 538
Loss on Reacquired Debt 69 71
Goodwill, Net 117 121
Other 132 135
------- -------
Total Deferred Debits and Other Assets 6,867 6,862
------- -------
TOTAL ASSETS $13,031 $13,120
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
(continued on next page)
3
<PAGE>
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions)
(continued)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------- --------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable, Bank $ 135 $ 163
Long-Term Debt Due Within One Year 151 128
Accounts Payable 251 429
Accrued Taxes 316 203
Accrued Interest 62 119
Deferred Income Taxes 14 15
Other 247 247
-------- --------
Total Current Liabilities 1,176 1,304
-------- --------
LONG-TERM DEBT 5,895 5,969
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred Income Taxes 2,417 2,411
Unamortized Investment Tax Credits 282 286
Pension Obligation 212 212
Non-Pension Postretirement Benefits Obligation 448 443
Other 385 401
-------- --------
Total Deferred Credits and Other Liabilities 3,744 3,753
-------- --------
COMPANY OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF A PARTNERSHIP 128 128
MANDATORILY REDEEMABLE PREFERRED STOCK 56 56
COMMITMENTS AND CONTINGENCIES (NOTE 6)
SHAREHOLDERS' EQUITY
Common Stock (No Par) 3,576 3,576
Preferred Stock 137 137
Other Paid-In Capital 3 1
Retained Earnings (Accumulated Deficit) 14 (103)
Treasury Stock, at cost (1,701) (1,705)
Accumulated Other Comprehensive Income 3 4
-------- --------
Total Shareholders' Equity 2,032 1,910
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 13,031 $ 13,120
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 165 $ 156
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 107 74
Deferred Income Taxes 9 (23)
Amortization of Investment Tax Credits (4) (4)
Deferred Energy Costs 12 29
Equity in Earnings (Losses) of Unconsolidated Affiliates (4) 12
Other Items Affecting Operations 6 75
Changes in Working Capital:
Accounts Receivable 98 (135)
Inventories 30 7
Accounts Payable (178) (39)
Accrued Taxes 113 171
Accrued Interest (57) 6
Other Current Assets and Liabilities (124) (147)
------- -------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 173 182
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Plant (121) (77)
Increase in Other Investments (43) (5)
------- -------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (164) (82)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Short-Term Debt (28) (457)
Issuance of Long-Term Debt 14 4,010
Retirement of Long-Term Debt (65) (263)
Common Stock Repurchase -- (696)
Loss on Reacquired Debt -- 2
Dividends on Preferred and Common Stock (48) (60)
Other Items Affecting Financing -- 19
------- -------
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES (127) 2,555
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (118) 2,655
------- -------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 228 48
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 110 $ 2,703
======= =======
</TABLE>
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
March 31, 2000 and for the three months then ended are unaudited, but include
all adjustments that PECO Energy Company (Company) considers necessary for a
fair presentation of such financial statements. All adjustments are of a normal,
recurring nature. 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 Item 8 of the
Company's Annual Report on Form 10-K for the year ended December 31, 1999, as
amended by Form 10-K/A filed on April 28, 2000.
2. MERGER WITH UNICOM CORPORATION
On September 22, 1999, the Company and Unicom Corporation (Unicom)
entered into an Agreement and Plan of Exchange and Merger providing for a merger
of equals. On January 7, 2000, the Agreement and Plan of Exchange and Merger was
amended and restated (Merger Agreement). The Merger Agreement has been approved
by both companies' Boards of Directors. The transaction will be accounted for as
a purchase with the Company as acquiror.
On March 24, 2000, the Company submitted for approval a joint petition
for settlement reached with various parties to the Company's proceeding before
the Pennsylvania Public Utility Commission involving the proposed merger with
Unicom. The Company reached agreement with advocates for residential, small
business and large industrial customers, and representatives of marketers,
environmentalists, municipalities and elected officials. Under the comprehensive
settlement agreement, the Company has agreed to $200 million in rate reductions
for all customers over the period January 1, 2002 through 2005 and extended rate
caps on the Company's retail electric distribution charges through December 31,
2006. The comprehensive settlement agreement also provides for electric
reliability and customer service standards, mechanisms to enhance competition
and customer choice, expanded assistance to low-income customers, extensive
funding for wind and solar energy and community education, nuclear safety
research funds, customer protection against nuclear costs outside of
Pennsylvania, and maintenance of charitable and civic contributions and
employment for the Company's headquarters in Philadelphia.
3. SEGMENT INFORMATION
The Company's segment information as of and for the three months ended
March 31, 2000 as compared to the same period in 1999 is as follows (in
millions):
6
<PAGE>
Quarter Ended March 31, 2000 as compared to the Quarter Ended March 31, 1999
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Intersegment
Distribution Generation Ventures Corporate Revenues Consolidated
------------ ---------- -------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
2000 $ 843 $ 561 $ 107(b) $ - $(168) $ 1,343
1999 $ 908 $ 541 $ 1 $ - $(198) $ 1,252
EBIT (a):
2000 $ 341 $ 35 $ (12) $ 3 $ 367
1999 $ 355 $ 59 $ (31) $ (43) $ 340
Total Assets:
March 31, 2000 $10,222 $1,767 $ 639 $ 403 $13,031
December 31, 1999 $10,293 $1,779 $ 640 $ 408 $13,120
<FN>
(a) EBIT - Earnings Before Interest and Income Taxes.
(b) Increase as compared to the prior year period is attributable to Exelon
Infrastructure Services acquisitions in the fourth quarter of 1999.
</FN>
</TABLE>
4. EARNINGS PER SHARE
Diluted earnings per average common share is calculated by dividing
earnings applicable to common stock by the average number of shares of common
stock outstanding after giving effect to stock options issuable under the
Company's stock option plans which are considered to be dilutive common stock
equivalents. The following table shows the effect of the stock options issuable
under the Company's stock option plans on the average number of shares used in
calculating diluted earnings per average common share (in millions of shares):
Three Months Ended
March 31,
---------------------
2000 1999
---- ----
Average Common Shares Outstanding 181 223
Assumed Exercise of Stock Options 2 2
------ ------
Potential Average Dilutive
Common Shares Outstanding 183 225
======= =======
5. 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 $275 million of designated accounts receivable until
November 2000. At March 31, 2000, the Company had sold a $275 million interest
in accounts receivable, consisting of a $222 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
7
<PAGE>
Extinguishment of Liabilities," and a $53 million interest in special agreement
accounts receivable which are accounted for as a long-term note payable. The
Company retains the servicing responsibility for these receivables. The
agreement requires the Company to maintain the $275 million interest, which, if
not met, requires the Company to deposit cash in order to satisfy such
requirements. At March 31, 2000, the Company met such requirements.
On May 8, 2000, the Company used a portion of the proceeds from the
Transition Bonds (See Note 8 - Subsequent Events) to repurchase $50 million of
the interest in accounts receivable including $10 million of special agreement
accounts receivable. This repurchase reduced the amount of accounts receivable
the Company could sell or finance with limited recourse under the agreement.
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 6 of Notes to Consolidated
Financial Statements for the year ended December 31, 1999.
The Company has identified 28 sites where former manufactured gas plant
(MGP) activities have or may have resulted in actual site contamination. As of
March 31, 2000, the Company had accrued $57 million for environmental
investigation and remediation costs, including $32 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.
At December 31, 1998, the Company incurred a charge of $125 million
($74 million, net of income taxes) for its Early Retirement and Separation
Program relating to 1,157 employees. The estimated cost of separation benefits
was approximately $47 million, of which $31 million was paid through March 31,
2000. The remaining $16 million is expected to be paid by June 2000. Retirement
benefits of approximately $78 million are being paid to the retirees over their
lives. All cash payments related to the early retirement and severance program
are expected to be funded through the assets of the Company's Service Annuity
Plan. Of the 1,157 employees, at March 31, 2000, 497 were eligible for and have
taken the retirement incentive program and 464 employees were terminated. The
remaining employees are scheduled for termination through the end of June 2000.
8
<PAGE>
At March 31, 2000, the Company had long-term commitments, in megawatt
hours (MWhs) and dollars, relating to the purchase and sale of energy, capacity
and transmission rights from unaffiliated utilities and others as expressed in
the tables below (in millions):
<TABLE>
<CAPTION>
Power Only
---------------------------------------------------------------------
Purchases Sales
--------------------------- --------------------------------
MWhs Dollars MWhs Dollars
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
2000 6 $ 150 17 $ 599
2001 8 149 13 524
2002 7 132 10 463
2003 7 139 6 234
2004 5 118 4 108
Thereafter 3 83 6 168
--------- --------
Total $ 771 $ 2,096
========= ========
Capacity Capacity Transmission
Purchases Sales Rights
in Dollars in Dollars in Dollars
---------- ---------- ----------
2000 $ 31 $ 24 $ 79
2001 84 31 57
2002 150 19 57
2003 178 14 18
2004 170 2 17
Thereafter 1,834 7 55
--------- ----------- --------
Total $ 2,447 $ 97 $ 283
========= =========== ========
</TABLE>
In the first quarter of 2000, the Company restructured an existing
power sales contract from a variable price with fixed capacity sales to a fixed
price power only contract which decreased the Company's commitments for capacity
sales and increased the Company's commitments for power only sales.
7. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
(SFAS No. 133) 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. In June 1999, the FASB issued SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133," (SFAS No. 137) which delayed the effective date for
SFAS No. 133 until fiscal years beginning after June 15, 2000. The Company
expects to adopt SFAS No. 133 in the first quarter of 2001. The Company is in
the process of evaluating the impact of SFAS No. 133 on its financial
statements.
9
<PAGE>
8. SUBSEQUENT EVENTS
On May 2, 2000, PECO Energy Transition Trust (PETT), an independent
statutory business trust organized under the laws of Delaware and a wholly owned
subsidiary of the Company, issued an additional $1 billion aggregate principal
amount of Transition Bonds (Transition Bonds) to securitize a portion of the
Company's authorized stranded cost recovery. As a result of this transaction,
the Company has securitized a total of $5 billion of its $5.26 billion of
stranded costs. The Transition Bonds are solely obligations of PETT, secured by
intangible transition property sold by the Company to PETT concurrently with the
issuance of the Transition Bonds and certain other related collateral.
The terms of the Transition Bonds are as follows:
<TABLE>
<CAPTION>
Expected
Approximate Final
Series 2000 Face Amount Interest Payment Termination
Class (millions) Rate Date Date
----- ---------- ---- ---- ----
<S> <C> <C> <C> <C>
A-1 $110 7.18% September 1, 2001 September 1, 2003
A-2 $140 7.30% September 1, 2002 September 1, 2004
A-3 $399 7.63% March 1, 2009 March 1, 2010
A-4 $351 7.65% September 1, 2009 September 1, 2010
</TABLE>
The Company is using the proceeds from the securitization to reduce the
Company's stranded costs and related capitalization. On May 3, 2000,
approximately $500 million of the proceeds from the Transition Bonds were used
to repurchase approximately 12 million shares of common stock through the
settlement of a forward purchase agreement that was entered into in January
2000. The remaining proceeds are expected to be used to purchase and/or redeem
First and Refunding Mortgage Bonds and to reduce other debt.
In February 2000, the Company entered into forward starting interest
rate swaps for a notional amount of $1 billion in anticipation of the issuance
of the Transition Bonds in the second quarter of 2000. On May 2, 2000, the
Company settled these forward starting interest rate swaps and paid the
counterparties approximately $12 million which was deferred and is being
amortized over the life of the Transition Bonds as an increase in interest
expense consistent with the Company's hedge accounting policy.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
On September 22, 1999, the Company and Unicom Corporation (Unicom)
entered into an Agreement and Plan of Exchange and Merger providing for a merger
of equals. On January 7, 2000, the Agreement and Plan of Exchange and Merger was
amended and restated (Merger Agreement). The Merger Agreement has been approved
by both companies' Boards of Directors. The transaction will be accounted for as
a purchase with the Company as acquiror. For additional information see "PART
II, ITEM 7. - MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - General," in the Company's 1999 Annual Report on Form
10-K as amended by Form 10-K/A filed on April 28, 2000.
On March 24, 2000, the Company submitted for approval a joint petition
for settlement reached with various parties to the Company's proceeding before
the Pennsylvania Public Utility Commission (PUC) involving the proposed merger
with Unicom. The Company reached agreement with advocates for residential, small
business and large industrial customers, and representatives of marketers,
environmentalists, municipalities and elected officials. Under the comprehensive
settlement agreement, the Company has agreed to $200 million in rate reductions
for all customers over the period January 1, 2002 through 2005 and extended rate
caps on the Company's retail electric distribution charges through December 31,
2006. The comprehensive settlement agreement also provides for electric
reliability and customer service standards, mechanisms to enhance competition
and customer choice, expanded assistance to low-income customers, extensive
funding for wind and solar energy and community education, nuclear safety
research funds, customer protection against nuclear costs outside of
Pennsylvania, and maintenance of charitable and civic contributions and
employment for the Company's headquarters in Philadelphia.
Retail competition for electric generation services began in
Pennsylvania on January 1, 1999. Effective January 1, 2000, all of the Company's
retail electric customers in its traditional service territory have the right to
choose their generation suppliers. At March 31, 2000, approximately 17% of the
Company's residential load, 45% of its commercial load and 63% of its industrial
load were purchasing generation service from an alternative electric generation
supplier. As of that date, Exelon Energy, the Company's alternative energy
supplier, was providing electric generation service to approximately 123,800
business and residential customers located throughout Pennsylvania.
11
<PAGE>
RESULTS OF OPERATIONS
Revenue and Expense Items as a
Percentage of Total Operating
Revenues Percentage Dollar Changes
2000 vs. 1999
-------------
March 31,
---------
2000 1999
---- ----
78% 83% Electric 1%
15% 17% Gas (7%)
7% -- Infrastructure Services 100%
----- -----
100% 100% Total Operating Revenues 7%
----- -----
34% 36% Fuel and Energy Interchange 1%
29% 23% Operating and Maintenance 34%
6% 5% Depreciation and Amortization 42%
5% 6% Taxes Other Than Income (11%)
----- -----
74% 70% Total Operating Expenses 13%
----- -----
26% 30% Operating Income (7%)
----- -----
(8%) (6%) Interest Charges 30%
Equity in Earnings (Losses) of
-- (1%) Unconsolidated Affiliates 135%
1% (2%) Other Income and Deductions 159%
----- -----
19% 21% Income Before Income Taxes 1%
7% 8% Income Taxes (6%)
----- -----
12% 13% Net Income 6%
===== =====
First Quarter 2000 Compared To First Quarter 1999
Operating Revenues
Electric revenues increased $6 million, or 1%, to $1,041 million for
the quarter ended March 31, 2000 compared to the same 1999 period. The increase
was attributable to higher revenues from the generation business unit of $55
million partially offset by lower revenues from the distribution business unit
of $49 million.
The increase from the generation business unit was primarily
attributable to $33 million from increased volume in Pennsylvania resulting from
the sale of competitive electric generation services by Exelon Energy and $22
million from increased wholesale revenues as a result of higher volume. The
decrease from the distribution business unit was primarily attributable to $31
million as a result of lower volume principally associated with the effects of
competition and $18 million related to the across-the-board rate reductions
mandated by the PUC Opinion and Order (Final Restructuring Order) approving a
joint petition and settlement of the Company's restructuring case.
12
<PAGE>
Gas revenues decreased $15 million, or 7%, to $202 million for the
quarter ended March 31, 2000 compared to the same 1999 period. The decrease was
primarily attributable to $10 million resulting from the elimination of the
gross receipts tax in connection with gas restructuring in Pennsylvania and $9
million as a result of lower prices. These decreases were partially offset by $1
million from increased volume in Pennsylvania resulting from the sale of
competitive gas supply services by Exelon Energy and $1 million of increased
transportation revenues.
Infrastructure services revenues increased $100 million as a result of
the Exelon Infrastructure Services (EIS) acquisitions in the fourth quarter of
1999.
Fuel and Energy Interchange Expense
Fuel and energy interchange expense increased $4 million, or 1%, to
$457 million for the quarter ended March 31, 2000 compared to the same 1999
period. The increase was attributable to higher fuel and energy interchange
expenses associated with the generation business unit of $23 million partially
offset by a $19 million decrease in fuel and energy interchange expenses
associated with the distribution business unit. As a percentage of revenue, fuel
and interchange expenses were 34% as compared to 36% in the comparable prior
year period.
The increase from the generation business unit was primarily
attributable to $42 million related to increased volume from Exelon Energy
sales, partially offset by $19 million of lower fuel and energy interchange
expense principally associated with lower internal generation as a result of
unplanned outages at two fossil generating plants. The decrease from the
distribution business unit was primarily attributable to $30 million as a result
of lower volume partially offset by an increase of $8 million in PJM
Interconnection, LLC ancillary charges.
Operating and Maintenance Expense
Operating and maintenance expense (O&M) increased $98 million, or 34%,
to $390 million for the quarter ended March 31, 2000 compared to the same 1999
period. As a percentage of revenue, operating and maintenance expenses were 29%
as compared to 23% in the same 1999 period. The ventures business unit's O&M
expenses increased $97 million related to the infrastructure services business
as a result of the EIS acquisitions in the fourth quarter of 1999. The
generation business unit's O&M expenses increased $4 million primarily as a
result of higher compensation expense of $14 million and additional marketing
expenses of $1 million. These increases were partially offset by $7 million
related to the abandonment of an information system implementation in 1999 and
additional joint-owner expense of $4 million as compared to the same 1999
period. In addition, the Company experienced $12 million of lower pension
expense as a result of the performance of the investments in the Company's
pension plan and $11 million of lower Year 2000 (Y2K) remediation expenditures.
These decreases were partially offset by $11 million of incremental merger
expenses and $6 million in compensation expense.
13
<PAGE>
Depreciation and Amortization Expense
Depreciation and amortization expense increased $24 million, or 42%, to
$80 million for the quarter ended March 31, 2000 compared to the same 1999
period. As a percentage of revenue, depreciation and amortization expense was 6%
as compared to 5% in the comparable prior year period. The increase was
primarily attributable to $15 million associated with the commencement of the
amortization of $5.26 billion of Competitive Transition Charges in 2000 in
accordance with the terms of the Final Restructuring Order. The increase also
included $5 million related to EIS depreciation expense, $3 million related to
plant in service and $1 million of goodwill amortization.
Taxes Other Than Income
Taxes other than income decreased $8 million, or 11%, to $67 million
for the quarter ended March 31, 2000 compared to the same 1999 period. As a
percentage of revenue, taxes other than income were 5%, as compared to 6%, in
the comparable prior year period. The decrease was primarily attributable to
lower real estate taxes of $5 million relating to a change in tax laws for
utility property in Pennsylvania and $3 million as a result of the elimination
of the gross receipts tax on gas sales partially offset by a net increase in
gross receipts tax on electric sales.
Interest Charges
Interest charges consist of interest expense, distributions on Company
Obligated Mandatorily Redeemable Preferred Securities of a Partnership and
Allowance for Funds Used During Construction. Interest charges increased $24
million to $105 million, or 30%, for the quarter ended March 31, 2000 compared
to the same 1999 period. As a percentage of revenue, interest charges were 8% as
compared to 6% in the comparable prior year period. The increase was primarily
attributable to interest on the transition bonds issued by PECO Energy
Transition Trust of $57 million, partially offset by the Company's reduction of
long-term debt with the proceeds of transition bonds, which reduced interest
charges by $33 million.
Equity in Earnings (Losses) of Unconsolidated Affiliates
Equity in earnings (losses) of unconsolidated affiliates increased $16
million, or 135%, to earnings of $4 million for the quarter ended March 31, 2000
as compared to losses of $12 million in the same 1999 period. The increase in
equity in earnings (losses) of unconsolidated affiliates was primarily
attributable to $12 million related to the Company's equity investment in
AmerGen Energy Company, LLC (AmerGen) as a result of the acquisitions of Three
Mile Island Unit No. 1 Nuclear Generating Facility and the Clinton Nuclear Power
Station which were acquired in December 1999 and improved performance of the
Company's telecommunications equity investments of $4 million as a result of
customer base growth.
14
<PAGE>
Other Income and Deductions
Other income and deductions excluding interest charges and equity in
earnings (losses) of unconsolidated affiliates increased $38 million, or 159%,
to $14 million for the quarter ended March 31, 2000 as compared to a loss of $24
million in the same 1999 period. The increase in other income and deductions was
primarily attributable to a $15 million write-off, in 1999, of the investment in
Grays Ferry Cogeneration Partnership in connection with the settlement of
litigation and other income in the first quarter of 2000 of $6 million from the
favorable settlement of litigation, an increase of $5 million from non-utility
operations and $4 million of additional interest income.
Income Taxes
The effective tax rate was 36.9% which was consistent with the
comparable prior year period.
Preferred Stock Dividends
Preferred stock dividends for the quarter ended March 31, 2000
decreased $0.6 million, or 18%, to $3 million as compared to the same 1999
period. The decrease was attributable to the retirement of $37 million of
Mandatorily Redeemable Preferred Stock in August 1999 with a portion of the
proceeds from the issuance of transition bonds.
Earnings
Earnings applicable to common stock increased $9 million, or 6%, to
$162 million in the first quarter of 2000. Earnings per average common share
increased $0.20 per share or 29%, to $0.89 per share in the first quarter of
2000, reflecting the increase in net income and a decrease in the weighted
average shares of common stock outstanding as a result of the use of proceeds
from the Company's April 1999 securitization of a portion of its stranded costs
recovery. The proceeds were used to retire higher cost debt and to repurchase
approximately 44 million shares of common stock.
DISCUSSION OF LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities decreased $9 million to
$173 million for the three months ended March 31, 2000 as compared to $182
million in the same 1999 period. The decrease was primarily attributable to less
cash generated by operations of $28 million, partially offset by an increase in
changes in working capital of $19 million. The increase in working capital was
principally related to improvement in cash collections of Exelon Energy accounts
receivable, partially offset by higher cash payments for accounts payable.
Cash flows used by investing activities were $164 million for the three
months ended March 31, 2000 as compared to $82 million in the same 1999 period.
The increase was attributable to capital expenditures and ventures business unit
investments.
Cash flows used in financing activities were $127 million for the three
months ended March 31, 2000, as compared to cash provided by financing
activities of $2,555 million in the same 1999 period. The decrease was primarily
attributable to the securitization of stranded cost recovery and the use of
related proceeds in March 1999.
15
<PAGE>
At March 31, 2000, the Company had outstanding $135 million of notes
payable which included $114 million of commercial paper and $21 million of lines
of credit. At March 31, 2000, the Company had available formal and informal
lines of bank credit aggregating $100 million and available revolving credit
facilities aggregating $900 million which support its commercial paper program.
At March 31, 2000, the Company had no short-term investments.
On March 16, 2000, the PUC issued an order approving a Joint Petition
for Full Settlement of PECO Energy Company's Application for Issuance of a
Qualified Rate Order (QRO) authorizing the Company to securitize up to an
additional $1 billion of its authorized stranded cost recovery. Under the terms
of the Joint Petition for Full Settlement, the Company, through its distribution
business unit, will provide its retail customers with rate reductions in the
total amount of $60 million beginning on January 1, 2001. This rate reduction
will be effective for calendar year 2001 only.
On May 2, 2000, PECO Energy Transition Trust (PETT), an independent
statutory business trust organized under the laws of Delaware and a wholly owned
subsidiary of the Company, issued an additional $1 billion aggregate principal
amount of Transition Bonds (Transition Bonds) to securitize a portion of the
Company's authorized stranded cost recovery. As a result of this transaction,
the Company has secruitized a total of $5 billion of its $5.26 billion of
stranded costs. The Transition Bonds are solely obligations of PETT, secured by
intangible transition property sold by the Company to PETT concurrently with the
issuance of the Transition Bonds and certain other related collateral. The
Company is using the proceeds from the securitization to reduce the Company's
stranded costs and related capitalization. On May 3, 2000, approximately $500
million of the proceeds from the Transition Bonds were used to repurchase
approximately 12 million shares of common stock through the settlement of a
forward purchase agreement that was entered into in January 2000. The remaining
proceeds are expected to be used to purchase and/or redeem First and Refunding
Mortgage Bonds and to reduce other debt. The Company currently estimates that
the issuance of the Transition Bonds, the application of the proceeds and the
2001 rate reduction will increase earnings per share by approximately $0.01 to
$0.02 in 2000 and reduce earnings per share by approximately $0.05 in 2001.
YEAR 2000 READINESS DISCLOSURE
During 1999, the Company successfully addressed, through its Year 2000
Project (Y2K Project), the issue resulting from computer programs using two
digits rather than four to define the applicable year and other programming
techniques that constrain date calculations or assign special meanings to
certain dates.
The current estimated total cost of the Y2K Project is $61 million, the
majority of which is attributable to testing. This estimate includes the
Company's share of Y2K costs for jointly owned facilities. The total amount
expended on the Y2K Project through March 31, 2000 was $57 million. The Company
is funding the Y2K Project from operating cash flows.
16
<PAGE>
The Company's systems experienced no Y2K difficulties on December 31,
1999 or since that date. The Company's operations have not, to date, been
adversely affected by any Y2K difficulties that suppliers or customers may have
experienced. The Company will continue to monitor its systems for potential Y2K
difficulties through the remainder of 2000.
For additional information regarding the Y2K Readiness Disclosure see
"PART II, ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Outlook" in the Company's Annual Report on Form 10-K
for the year 1999, as amended by Form 10-K/A dated April 28, 2000.
FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, certain of the
matters discussed in this Report are forward-looking statements, including the
estimated impact on earnings per share for 2000 and 2001 from the issuance of
Transition Bonds, the application of the proceeds thereof and the 2001 rate
reduction, and accordingly, 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 6, 7 and 8 of Notes to Condensed
Consolidated Financial Statements and other factors discussed in the Company's
filings with the Securities and Exchange Commission. 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.
17
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company uses a combination of fixed rate and variable rate debt to
reduce interest rate exposure. Interest rate swaps are used to adjust exposure
when deemed appropriate, based upon market conditions. These strategies attempt
to provide and maintain the lowest cost of capital.
In February 2000, the Company entered into forward starting interest
rate swaps for a notional amount of $1 billion in anticipation of the issuance
of the Transition Bonds in the second quarter of 2000. On May 2, 2000, the
Company settled these forward starting interest rate swaps and paid the
counterparties approximately $12 million which was deferred and is being
amortized over the life of the Transition Bonds as an increase in interest
expense consistent with the Company's hedge accounting policy.
At March 31, 2000, the Company's interest rate swaps, including the
interest rate swaps relating to the Transition Bonds referred to above, had a
fair market value of $88 million which was based on the present value difference
between the contracted rate and the market rates at March 31, 2000.
The aggregate fair value of the interest rate swaps that would have
resulted from a hypothetical 50 basis point decrease in the spot yield at March
31, 2000 is estimated to be $25 million. If the interest rate swaps had been
terminated at March 31, 2000, this estimated fair value represents the amount to
be paid by the counterparties to the Company.
The aggregate fair value of the interest rate swaps that would have
resulted from a hypothetical 50 basis point increase in the spot yield at March
31, 2000 is estimated to be $147 million. If the interest rate swaps had been
terminated at March 31, 2000, this estimated fair value represents the amount to
be paid by the counterparties to the Company.
There were no material changes in the quarter ended March 31, 2000 in
the Company's quantitative and qualitative disclosures about market risk
associated with commodity risk and equity price risk from December 31, 2000.
For information on Commodity Risk, Interest Rate Risk and Equity Price
Risk, see "PART II, ITEM 7A. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK," in the Company's 1999 Annual Report on Form 10-K as amended by
Form 10-K/A filed on April 28, 2000.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
As previously reported in the Form 8-K dated June 24, 1999, AmerGen
executed an agreement with Niagara Mohawk Power Corporation (NIMO) and New York
State Electric & Gas Corporation (NYSEG) to purchase their respective interests
in Nine Mile Point Unit 1 Nuclear Generating Facility and Nine Mile Point Unit 2
Nuclear Generating Facility. On May 11, 2000, AmerGen, NIMO and NYSEG terminated
the agreements executed as of June 23, 1999 in connection with the proposed
acquisition of NIMO's and NYSEG's interests in Nine Mile Point Unit 1 and Unit 2
Nuclear Generating Facilities.
19
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 - Financial Data Schedule.
(b) During the quarter ended March 31, 2000, the Company filed the
following Current Reports on Form 8-K:
Date of earliest event reported:
January 7, 2000 reporting information under "ITEM 5. OTHER
EVENTS" regarding the approval by the Board of Directors of
the Company and Unicom Corporation to accelerate the
repurchase of $1.5 billion in stock and adjust shareholder
consideration.
Date of earliest event reported:
January 13, 1999 reporting information under "ITEM 5. OTHER
EVENTS" regarding the provision of the Amended Merger
Agreement and additional information, including pro forma
financial information, about the transactions contemplated by
the Amended Merger Agreement before the Company commences
repurchases of shares of its common stock.
Date of earliest event reported:
March 21, 2000 reporting information under "ITEM 5. OTHER
EVENTS" regarding the issuance of an order by the Pennsylvania
Public Utility Commission approving a Joint Petition for Full
Settlement of PECO Energy Company's Application for Issuance
of a Qualified Rate Order authorizing the Company to
securitize up to an additional $1.0 billion of its authorized
recoverable stranded costs.
Date of earliest event reported:
March 24, 2000 reporting information under "ITEM 5. OTHER
EVENTS" regarding the filing with the PUC of a joint petition
for settlement reached with various parties to the Company's
proceeding before the PUC involving the proposed merger with
Unicom.
Subsequent to March 31, 2000 the Company filed the following
Current Reports on Form 8-K:
Date of earliest event reported:
May 2, 2000 reporting information under "ITEM 5. OTHER EVENTS"
regarding the completion of the sale of an additional $1
billion in transition bonds securitizing a portion of the
Company's stranded cost recovery.
20
<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
Vice President and
Senior Vice President and
Chief Financial Officer
(Chief Accounting Officer)
Date: May 15, 2000
21
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