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, 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 169,694,541 shares of common stock outstanding on
August 4, 2000.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Millions, except per share data)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ------------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Electric $ 1,129 $ 1,109 $ 2,170 $ 2,144
Gas 85 90 287 307
Infrastructure Services 159 -- 259 --
------- ------- ------- -------
TOTAL OPERATING REVENUES 1,373 1,199 2,716 2,451
------- ------- ------- -------
OPERATING EXPENSES
Fuel and Energy Interchange 469 501 926 954
Operating and Maintenance 445 342 835 634
Depreciation and Amortization 81 58 161 114
Taxes Other Than Income Taxes 63 45 130 120
------- ------- ------- -------
TOTAL OPERATING EXPENSES 1,058 946 2,052 1,822
------- ------- ------- -------
OPERATING INCOME 315 253 664 629
------- ------- ------- -------
OTHER INCOME AND DEDUCTIONS
Interest Expense (116) (114) (220) (188)
Company Obligated Mandatorily Redeemable
Preferred Securities of a Partnership (3) (8) (5) (15)
Allowance for Funds Used During Construction -- 2 1 2
Equity in Earnings (Losses) of Unconsolidated Affiliates (1) (11) 3 (23)
Other, Net 6 22 20 (2)
------- ------- ------- -------
TOTAL OTHER INCOME AND DEDUCTIONS (114) (109) (201) (226)
------- ------- ------- -------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 201 144 463 403
INCOME TAXES 77 47 174 150
------- ------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM 124 97 289 253
EXTRAORDINARY ITEM - NET OF INCOME TAXES (3) (27) (3) (27)
------- ------- ------- -------
NET INCOME 121 70 286 226
PREFERRED STOCK DIVIDENDS 2 4 5 7
------- ------- ------- -------
EARNINGS APPLICABLE TO COMMON STOCK $ 119 $ 66 $ 281 $ 219
======= ======= ======= =======
AVERAGE SHARES OF COMMON STOCK OUTSTANDING 174 192 178 208
======= ======= ======= =======
EARNINGS PER AVERAGE COMMON SHARE:
BASIC:
Income Before Extraordinary Item $ 0.70 $ 0.48 $ 1.60 $ 1.19
Extraordinary Item (0.02) (0.14) (0.02) (0.13)
------- ------- ------- -------
Net Income $ 0.68 $ 0.34 $ 1.58 $ 1.06
======= ======= ======= =======
DILUTED:
Income Before Extraordinary Item $ 0.70 $ 0.48 $ 1.59 $ 1.18
Extraordinary Income (0.02) (0.14) (0.02) (0.13)
------- ------- ------- -------
Net Income $ 0.68 $ 0.34 $ 1.57 $ 1.05
======= ======= ======= =======
DIVIDENDS PER AVERAGE COMMON SHARE $ 0.25 $ 0.25 $ 0.50 $ 0.50
======= ======= ======= =======
See Notes to Condensed Consolidated Financial Statements
</TABLE>
2
<PAGE>
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------- -------
(Unaudited)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and Cash Equivalents $ 263 $ 228
Accounts Receivable, Net 728 692
Inventories, at average cost 208 206
Other 172 87
------- -------
Total Current Assets 1,371 1,213
------- -------
PROPERTY, PLANT AND EQUIPMENT, NET 5,155 5,045
DEFERRED DEBITS AND OTHER ASSETS
Competitive Transition Charge 5,248 5,275
Recoverable Deferred Income Taxes 638 638
Deferred Non-Pension Postretirement Benefits Costs 81 84
Investments 603 538
Loss on Reacquired Debt 68 71
Goodwill, Net 194 121
Other 157 135
------- -------
Total Deferred Debits and Other Assets 6,989 6,862
------- -------
TOTAL ASSETS $13,515 $13,120
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions)
(continued)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- --------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C> <C>
Notes Payable, Bank $ 351 $ 163
Long-Term Debt Due Within One Year 220 128
Accounts Payable 290 429
Accrued Taxes 229 203
Accrued Interest 121 119
Deferred Income Taxes 14 15
Other 287 247
-------- --------
Total Current Liabilities 1,512 1,304
-------- --------
LONG-TERM DEBT 6,431 5,969
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred Income Taxes 2,426 2,411
Unamortized Investment Tax Credits 279 286
Pension Obligation 212 212
Non-Pension Postretirement Benefits Obligation 452 443
Other 410 401
-------- --------
Total Deferred Credits and Other Liabilities 3,779 3,753
-------- --------
COMPANY OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF A PARTNERSHIP 128 128
MANDATORILY REDEEMABLE PREFERRED STOCK 56 56
COMMITMENTS AND CONTINGENCIES (NOTE 7)
SHAREHOLDERS' EQUITY
Common Stock (No Par) 3,576 3,576
Preferred Stock 137 137
Other Paid-In Capital 3 1
Retained Earnings (Accumulated Deficit) 89 (103)
Treasury Stock, at cost (2,196) (1,705)
Accumulated Other Comprehensive Income -- 4
-------- --------
Total Shareholders' Equity 1,609 1,910
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 13,515 $ 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>
Six Months Ended June 30,
2000 1999
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Income $ 286 $ 226
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 228 149
Extraordinary Item (net of income taxes) 3 27
Deferred Income Taxes 17 (38)
Amortization of Investment Tax Credits (7) (7)
Deferred Energy Costs 15 56
Equity in Earnings (Losses) of Unconsolidated Affiliates (3) (23)
Other Items Affecting Operations (35) 98
Changes in Working Capital:
Accounts Receivable (13) (279)
Inventories (2) 3
Accounts Payable (126) 41
Accrued Taxes 32 17
Accrued Interest 2 43
Other Current Assets and Liabilities (58) (47)
------- -------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 339 266
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Plant (287) (244)
Exelon Infrastructure Services Acquisitions, net of cash acquired (91) --
Increase in Other Investments (71) (35)
------- -------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (449) (279)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Short-Term Debt 189 (299)
Issuance of Long-Term Debt 1,015 4,000
Retirement of Long-Term Debt (460) (1,203)
Common Stock Repurchase (496) (1,507)
Dividends on Preferred and Common Stock (93) (110)
Proceeds from Exercise of Stock Options -- 14
Other Items Affecting Financing (10) (16)
------- -------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 145 879
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 35 866
------- -------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 228 48
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 263 $ 914
======= =======
</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 June
30, 2000 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 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 June 22, 2000, the Pennsylvania Public Utility Commission (PUC)
approved the proposed merger between the Company and Unicom following the
submission, in March 2000, of the joint petition for settlement reached with
various parties to the Company's proceedings with the PUC involving the merger.
In the settlement, 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.
On June 27, 2000, at the 2000 Annual Meeting of Shareholders, the
Company's common shareholders approved the proposal to adopt the Merger
Agreement. On June 28, 2000, at the Unicom 2000 Annual Meeting of Shareholders,
Unicom's common shareholders approved the proposal to adopt the Merger
Agreement.
6
<PAGE>
3. SERIES 2000-A TRANSITION BONDS
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 (Series 2000-A 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 recovery. The transition bonds issued by PETT,
including the Series 2000-A 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 Series 2000-A Transition Bonds are as follows:
<TABLE>
<CAPTION>
Expected
Approximate Final
Series 2000-A 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, $502
million of the proceeds were used to settle a forward purchase agreement that
was entered into in January 2000 resulting in the repurchase of 12 million
shares of common stock. During May and June 2000, the Company used $463 million
to purchase and/or redeem First and Refunding Mortgage Bonds, to reduce other
debt, to repurchase accounts receivable and to pay transaction expenses. The
remaining proceeds were used to redeem First and Refunding Mortgage Bonds on
August 1, 2000.
During the second quarter of 2000, the Company incurred an
extraordinary charge of $3 million, net of tax, consisting of prepayment
premiums and the write-off of unamortized deferred financing costs associated
with the early retirement of 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 Series 2000-A 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 Series 2000-A Transition Bonds as an increase in
interest expense consistent with the Company's hedge accounting policy.
7
<PAGE>
4. SEGMENT INFORMATION
The Company's segment information as of and for the three and six
months ended June 30, 2000 as compared to the same periods in 1999 is as follows
(in millions):
Quarter Ended June 30, 2000 as compared to the Quarter Ended June 30, 1999
--------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Intersegment
Distribution Generation Ventures Corporate Revenues Consolidated
Revenues:
2000 $ 762 $ 657 $ 168 $ - $ (214) $ 1,373
1999 $ 738 $ 641 $ 1 $ - $ (181) $ 1,199
EBIT (a):
2000 $ 284 $ 95 $ (6) $ (53) $ 320
1999 $ 313 $ 11 $ (15) $ (45) $ 264
Six Months Ended June 30, 2000 as compared to Six Months Ended June 30, 1999
----------------------------------------------------------------------------
Revenues:
2000 $ 1,605 $ 1,218 $ 276 $ - $ (383) $ 2,716
1999 $ 1,647 $ 1,183 $ 1 $ - $ (380) $ 2,451
EBIT (a):
2000 $ 641 $ 146 $ (17) $ (83) $ 687
1999 $ 668 $ 53 $ (36) $ (81) $ 604
Total Assets:
June 30, 2000 $ 10,489 $ 1,813 $ 799 $ 414 $13,515
December 31, 1999 $ 10,294 $ 1,779 $ 640 $ 407 $13,120
(a) EBIT - Earnings Before Interest and Income Taxes.
</TABLE>
8
<PAGE>
5. 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):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average Common Shares Outstanding 174 192 178 208
Assumed Exercise of Stock Options 1 2 1 1
------ ------ ------ -----
Potential Average Dilutive
Common Shares Outstanding 175 194 179 209
======= ======= ======= =======
</TABLE>
6. 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 $225 million of designated accounts receivable until
November 2000. At June 30, 2000, the Company had sold a $225 million interest in
accounts receivable, consisting of a $187 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 $38 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 $225 million
interest, which, if not met, requires the Company to deposit cash in order to
satisfy such requirements. At June 30, 2000, the Company met such requirements.
In May 2000, the Company used a portion of the proceeds from the Series
2000-A Transition Bonds to repurchase $50 million of the interest in accounts
receivable, including $10 million of special agreement accounts receivable (See
Note 3 - Series 2000-A Transition Bonds). This repurchase reduced the amount of
accounts receivable the Company could sell or finance under the agreement.
7. COMMITMENTS AND CONTINGENCIES
For information regarding the Company's capital commitments, nuclear
insurance, nuclear decommissioning and spent fuel storage, energy commitments,
environmental issues and litigation, see Note 6 of Notes to Consolidated
Financial Statements for the year ended December 31, 1999.
9
<PAGE>
In July 2000, the Company signed an agreement with the Department of
Energy (DOE) under which the Company will be reimbursed for costs resulting from
the DOE's delay in accepting spent nuclear fuel. The agreement applies only to
the Company's Peach Bottom Atomic Power Station (Peach Bottom). The agreement
allows the Company to reduce the charges paid to the Nuclear Waste Fund to
reflect costs reasonably incurred by the Company due to the DOE's delay. In
accordance with the Nuclear Waste Policy Act of 1982 (NWPA), the Company pays
the DOE one mil ($.001) per kilowatthour of net nuclear generation for the cost
of nuclear fuel disposal. Past and future expenditures associated with Peach
Bottom's recently completed on-site dry storage facility are eligible for this
reduction in future DOE fees. Negotiations of settlements relating to the
Company's plants will be conducted on a plant-by-plant basis.
The Company has identified 28 sites where former manufactured gas plant
(MGP) activities have or may have resulted in actual site contamination. As of
June 30, 2000, the Company had accrued $56 million for environmental
investigation and remediation costs, including $31 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. Retirement benefits of approximately $78 million
are being paid to the retirees over their lives. All cash payments related to
the Early Retirement and Separation Program were funded through the assets of
the Company's Service Annuity Plan. The Early Retirement and Separation Program
terminated on June 30, 2000.
10
<PAGE>
At June 30, 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):
Power Only
---------------------------------------------------------
Purchases Sales
---------------------------------------------------------
MWhs Dollars MWhs Dollars
---------------------------------------------------------
2000 4 $ 62 12 $ 410
2001 7 149 13 527
2002 7 131 10 460
2003 7 138 6 233
2004 5 116 3 107
Thereafter 3 82 5 167
--------- ---------
Total $ 678 $ 1,904
========= =========
Capacity Capacity Transmission
Purchases Sales Rights
in Dollars in Dollars in Dollars
---------- ---------- ----------
2000 $ 26 $ 14 $ 51
2001 83 32 60
2002 149 21 63
2003 176 16 22
2004 167 3 21
Thereafter 1,833 10 79
---------- ---------- ----------
Total $ 2,434 $ 96 $ 296
========== ========== ==========
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.
In June 2000, the Company entered into a fixed-for-floating financial
swap in order to hedge the physical gas price risk for August and September 2000
associated with one of its tolling agreements. Pursuant to the swap transaction,
the Company will obtain a fixed price for natural gas based on a natural gas
index plus a premium. If the market price is above or below the fixed price, the
Company would either receive or pay the counterparty the difference between the
fixed price and the market price. As of June 30, 2000, no hedging gains or
losses have been deferred or recognized.
11
<PAGE>
8. 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 2000, the FASB issued SFAS No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB
Statement No. 133" (SFAS No. 138). This standard amends the accounting and
reporting standards of SFAS No. 133 for certain derivative instruments and
certain hedging activities. It also amends SFAS No. 133 for decisions made
arising from the Derivatives Implementation Group process. The Company expects
to adopt SFAS No. 133 and SFAS No. 138 on January 1, 2001. The Company is in the
process of evaluating the impact of SFAS No. 133 and SFAS No. 138 on its
financial statements.
9. EXELON INFRASTRUCTURE SERVICES, INC. ACQUISITIONS
In the second quarter of 2000, Exelon Infrastructure Services, Inc.
(EIS), an unregulated subsidiary of the Company, acquired the stock or assets of
four utility service contracting companies for an aggregate purchase price of
approximately $95 million, including stock of EIS. The acquisitions were
accounted for using the purchase method of accounting. The preliminary estimate
of the excess of purchase price over the fair value of net assets acquired was
approximately $77 million which is being amortized over 20 years.
10. SUBSEQUENT EVENTS
Sithe Energies Acquisition
On August 14, 2000, the Company signed a definitive agreement to
purchase 49.9 percent of Sithe Energies North America's outstanding common stock
for $682 million, with an option to purchase the remaining common stock
outstanding within two to five years, at a price to be determined based on
prevailing market conditions.
Oyster Creek Acquisition
In August 2000, AmerGen Energy Company, LLC (AmerGen), the joint
venture between the Company and British Energy, plc, completed the purchase of
Oyster Creek Nuclear Generating Facility from GPU, Inc. (GPU) for $10 million.
Under the terms of the agreement, GPU will fund outage costs not to exceed $89
million, including the cost of fuel, for a refueling outage scheduled for
October 2000. AmerGen will repay these costs to GPU in nine equal annual
installments beginning in August 2001. The sale provides for AmerGen to assume
full responsibility for the ultimate decommissioning of Oyster Creek. At the
closing of the sale, GPU provided funding for the decommissioning trust of $440
million. GPU will purchase the electricity generated by Oyster Creek at a fixed
price through March 2003.
12
<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. - MANAGEMENT'S 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 June 22, 2000, the Pennsylvania Public Utility Commission (PUC)
approved the proposed merger between the Company and Unicom following the
submission, in March 2000, of the joint petition for settlement reached with
various parties to the Company's proceedings with the PUC involving the merger.
In the settlement, 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.
On June 27, 2000, at the 2000 Annual Meeting of Shareholders, the
Company's common shareholders approved the proposal to adopt the Merger
Agreement. On June 28, 2000, at the Unicom 2000 Annual Meeting of Shareholders,
Unicom's common shareholders approved the proposal to adopt the Merger
Agreement.
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 June 30, 2000, approximately 18% of the
Company's residential load, 44% of its commercial load and 40% 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 112,000
business and residential customers located throughout Pennsylvania.
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
13
<PAGE>
Company, issued an additional $1 billion aggregate principal amount of
transition bonds (Series 2000-A Transition Bonds) to securitize a portion of the
Company's authorized stranded cost recovery. See Note 3 of Notes to Condensed
Consolidated Financial Statements.
In the second quarter of 2000, Exelon Infrastructure Services, Inc.
(EIS) acquired four additional infrastructure services companies. These
aquisitions, combined with EIS' acquisitions of six infrastructure services
companies in the fourth quarter of 1999, contributed to the growth in revenue
and operating and maintenance expenses in the quarterly and six month periods
ended June 30, 2000 as compared to the same prior year periods.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Revenue and Expense Items as a
Percentage of Total Operating
Revenues Percentage Dollar Changes
2000 vs. 1999
-------------------------
Quarter Six Months Quarter Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
-------- -------- -------- --------
2000 1999 2000 1999
---- ---- ---- ----
<C> <C> <C> <C> <S> <C> <C>
82% 92% 80% 87% Electric 2% 1%
6% 8% 11% 13% Gas (6%) (7%)
12% -- 9% -- Infrastructure Services 100% 100%
----- ----- ----- -----
100% 100% 100% 100% Total Operating Revenues 15% 11%
----- ----- ----- -----
34% 42% 34% 39% Fuel and Energy Interchange (6%) (3%)
32% 28% 31% 26% Operating and Maintenance 30% 32%
6% 5% 6% 5% Depreciation and Amortization 40% 41%
5% 4% 5% 5% Taxes Other Than Income 40% 8%
----- ----- ----- -----
77% 79% 76% 75% Total Operating Expenses 12% 13%
----- ----- ----- -----
23% 21% 24% 25% Operating Income 25% 6%
----- ----- ----- -----
(9%) (10%) (8%) (8%) Interest Charges (1%) 11%
Equity in Earnings (Losses) of
-- (1%) -- (1%) Unconsolidated Affiliates 91% 113%
1% 2% 1% -- Other, Net (73%) 1,100%
----- ----- ----- -----
Income Before Income Taxes and
15% 12% 17% 16% Extraordinary Item 40% 15%
6% 4% 6% 6% Income Taxes 64% 16%
----- ----- ----- -----
9% 8% 11% 10% Income Before Extraordinary Item 28% 14%
-- (2%) --% (1%) Extraordinary Items (89%) (89%)
----- ----- ----- -----
9% 6% 11% 9% Net Income 73% 27%
===== ===== ===== =====
</TABLE>
Second Quarter 2000 Compared To Second Quarter 1999
Operating Revenues
Electric revenues increased $20 million, or 2%, to $1,129 million for
the quarter ended June 30, 2000 compared to the same 1999 period. The increase
was attributable to higher revenues from the distribution business unit of $27
million partially offset by lower revenues from the generation business unit of
$7 million.
14
<PAGE>
The increase from the distribution business unit was primarily
attributable to $21 million as a result of additional volume from the effects of
weather conditions and $8 million related to a decrease in the rate reduction
from 8% to 6% on January 1, 2000 in accordance with the May 1998 PUC Opinion and
Order (Final Restructuring Order). The decrease from the generation business
unit was primarily attributable to lower sales of competitive electric
generation services by Exelon Energy of $27 million as a result of $40 million
from decreased volume partially offset by $13 million as a result of increased
prices. In addition, the termination of the operating agreement for the Clinton
Nuclear Power Station (Clinton) resulted in lower revenues of $14 million. As a
result of AmerGen Energy Company, LLC's (AmerGen) acquisition of Clinton in
December 1999, the operating agreement was terminated and accordingly, the
operations of Clinton have been included in Equity in Earnings (Losses) of
Unconsolidated Affiliates on the Company's Statements of Income since that date.
These decreases were partially offset by increased wholesale revenues of $28
million as a result of $48 million associated with higher prices partially
offset by $20 million associated with lower volume from existing customers.
Gas revenues decreased $5 million, or 6%, to $85 million for the
quarter ended June 30, 2000 compared to the same 1999 period. The decrease was
primarily attributable to $7 million as a result of lower prices and $6 million
resulting from the elimination of the gross receipts tax in connection with gas
restructuring in Pennsylvania. These decreases were partially offset by $8
million from increased volume.
Infrastructure services revenues increased $159 million as a result of
the EIS acquisitions which occurred in the fourth quarter of 1999 and the second
quarter of 2000.
Fuel and Energy Interchange Expense
Fuel and energy interchange expense decreased $32 million, or 6%, to
$469 million for the quarter ended June 30, 2000 compared to the same 1999
period. The decrease was attributable to lower fuel and energy interchange
expenses associated with the generation business unit of $24 million and the
distribution business unit of $8 million. As a percentage of revenue, fuel and
interchange expenses were 34% as compared to 42% in the comparable prior year
period.
The decrease from the generation business unit was attributable to $52
million principally related to decreased volume from Exelon Energy sales,
partially offset by $29 million of higher fuel and energy interchange expense
associated with increased distribution business unit volume primarily related to
the effect of weather conditions. The generation business unit is the primary
source of supply for the distribution business unit, accordingly, sales volume
changes at the distribution business unit have a direct impact on fuel expense
at the generation business unit. The decrease from the distribution business
unit was primarily attributable to a decrease of $6 million in PJM
Interconnection, LLC (PJM) ancillary charges.
Operating and Maintenance Expense
Operating and maintenance expense (O&M) increased $103 million, or 30%,
to $445 million for the quarter ended June 30, 2000 compared to the same 1999
period. As a percentage
15
<PAGE>
of revenue, operating and maintenance expenses were 32% as compared to 28% in
the same 1999 period. The ventures business unit's O&M expenses increased $145
million related to the infrastructure services business as a result of the EIS
acquisitions. The generation business unit's O&M expenses decreased $33 million
primarily as a result of lower O&M expenses related to the operating agreement
for Clinton of $25 million in 1999 and lower marketing expenses of $10 million
principally related to Exelon Energy. These increases were partially offset by
higher compensation expense of $2 million as compared to the same 1999 period.
In addition, the Company experienced a decrease in general corporate expenses
consisting of $11 million of lower pension expense as a result of the
performance of the investments in the Company's pension plan, $4 million of
lower Year 2000 (Y2K) remediation expenditures and $3 million in lower
compensation expense. These decreases were partially offset by an increase of $9
million in incremental merger expenses.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $23 million, or 40%, to
$81 million for the quarter ended June 30, 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 $12 million associated with the commencement of the
amortization of $5.26 billion of Competitive Transition Charges in 2000. The
increase also included $8 million related to EIS depreciation and amortization
expense and $3 million related to increased plant in service.
Taxes Other Than Income
Taxes other than income increased $18 million, or 40%, to $63 million
for the quarter ended June 30, 2000 compared to the same 1999 period. As a
percentage of revenue, taxes other than income were 5%, as compared to 4%, in
the comparable prior year period. The increase was primarily attributable to a
$22 million 1999 Capital Stock Tax credit related to an adjustment associated
with the impact of the 1997 restructuring charge on the Company's equity value.
The increase was partially offset by lower real estate taxes of $2 million
relating to a change in tax laws for utility property in Pennsylvania and $1
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 (COMRPS)
and Allowance for Funds Used During Construction (AFUDC). Interest charges
decreased $1 million, or 1%, to $119 million for the quarter ended June 30, 2000
compared to the same 1999 period. As a percentage of revenue, interest charges
were 9% as compared to 10% in the comparable prior year period. The decrease was
primarily attributable to the Company's reduction of long-term debt with the
proceeds of transition bonds which reduced interest charges by $15 million
partially offset by the interest on the transition bonds of $11 million and
lower AFUDC of $2 million.
16
<PAGE>
Equity in Earnings (Losses) of Unconsolidated Affiliates
Equity in earnings (losses) of unconsolidated affiliates increased $10
million, or 91%, to losses of $1 million for the quarter ended June 30, 2000 as
compared to losses of $11 million in the same 1999 period. The increase was
attributable to $8 million from the Company's equity investment in AmerGen as a
result of the acquisitions of Three Mile Island Unit No. 1 Nuclear Generating
Facility (TMI) and Clinton in December 1999 and $2 million from improved
performance of the Company's telecommunications equity investments as a result
of customer base growth.
Other Income and Deductions
Other income and deductions excluding interest charges and equity in
earnings (losses) of unconsolidated affiliates decreased $16 million, or 73%, to
income of $6 million for the quarter ended June 30, 2000 as compared to $22
million in the same 1999 period. The decrease in other income and deductions was
primarily attributable to a decrease in interest income of $16 million
principally related to earnings on unused transition bond proceeds in 1999.
Income Taxes
The effective tax rate was 38.3% for the quarter ended June 30, 2000 as
compared to 32.6% in the same 1999 period. The increase in the effective tax
rate was primarily a result of the disproportionate relationship of regulated
plant tax adjustments to income before income taxes and extraordinary item in
1999.
Extraordinary Items
During the second quarter of 2000, the Company incurred an
extraordinary charge of $3 million, net of tax, consisting of prepayment
premiums and the write-off of unamortized deferred financing costs associated
with the early retirement of debt with a portion of the proceeds from the
issuance of Series 2000-A Transition Bonds in May 2000.
During the second quarter of 1999, the Company incurred an
extraordinary charge of $27 million, net of tax, consisting of prepayment
premiums and the write-off of unamortized deferred financing costs associated
with the early retirement of debt with a portion of the proceeds from the
issuance of transition bonds in 1999.
Preferred Stock Dividends
Preferred stock dividends for the quarter ended June 30, 2000 decreased
$2 million, or 50%, to $2 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 $53 million, or 80%, to
$119 million in the second quarter of 2000. Earnings per average common share
increased $0.34 per share or 100%, to $0.68 per share in the second 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 and May 2000 stranded cost recovery
securitizations.
17
<PAGE>
Six Months Ended June 30, 2000 Compared To Six Months Ended June 30, 1999
Operating Revenues
Electric revenues increased $26 million, or 1%, to $2,170 million for
the six months ended June 30, 2000 compared to the same 1999 period. The
increase was attributable to higher revenues from the generation business unit
of $47 million partially offset by lower revenues from the distribution business
unit of $21 million.
The increase from the generation business unit was primarily
attributable to $48 million from increased wholesale revenues as a result of $93
million associated with higher prices partially offset by $45 million associated
with lower volume. In addition, the sale of competitive electric generation
services by Exelon Energy increased $7 million which was primarily attributable
to $15 million from increased prices partially offset by $8 million as a result
of decreased volume. These increases were partially offset by $14 million of
lower revenues related to the termination of the operating agreement for
Clinton. The decrease from the distribution business unit was primarily
attributable to a decrease of $30 million from lower volume from existing
customers principally as a result of Customer Choice and $11 million related to
the 8% across-the-board rate reduction in 1999 which did not take place until
the first full month of service in 1999. Accordingly, the six months ended June
30, 1999, included approximately five months of rate reduction at 8% as compared
to the current period which includes one month of rate reduction at 8% and five
months of rate reduction at 6%. These decreases were partially offset by an
increase of $20 million related to additional volume as a result of weather
conditions.
Gas revenues decreased $20 million, or 7%, to $287 million for the six
months ended June 30, 2000 compared to the same 1999 period. The decrease was
primarily attributable to $17 million as a result of lower prices and $15
million from the elimination of the gross receipts tax in connection with gas
restructuring in Pennsylvania. These decreases were partially offset by $11
million from increased volume from new and existing customers and $1 million of
additional volume as a result of weather conditions.
Infrastructure services revenues increased $259 million as a result of
the EIS acquisitions which occurred in the fourth quarter of 1999 and the second
quarter of 2000.
Fuel and Energy Interchange Expense
Fuel and energy interchange expense decreased $28 million, or 3%, to
$926 million for the six months ended June 30, 2000 compared to the same 1999
period. The decrease was attributable to lower fuel and energy interchange
expenses associated with the distribution business unit of $27 million and the
generation business unit of $1 million. As a percentage of revenue, fuel and
energy interchange expenses were 34% as compared to 39% in the comparable prior
year period.
The decrease from the distribution business unit was primarily
attributable to $31 million of lower PJM ancillary charges. The decrease from
the generation business unit was primarily attributable to lower fuel and energy
interchange expenses of $51 million principally related to decreased volume from
Exelon Energy sales partially offset by $38 million of higher fuel and energy
interchange expenses associated with increased cost to supply the distribution
18
<PAGE>
business unit's volume and $8 million of additional interchange expenses
associated with wholesale operations.
Operating and Maintenance Expense
O&M expense increased $201 million, or 32%, to $835 million for the six
months ended June 30, 2000 compared to the same 1999 period. As a percentage of
revenue, operating and maintenance expenses were 31% as compared to 26% in the
same 1999 period. The ventures business unit's O&M expenses increased $242
million related to the infrastructure services business as a result of the EIS
acquisitions. The generation business unit's O&M expenses decreased $29 million
primarily as a result of lower O&M expenses related to the operating agreement
for Clinton of $25 million in 1999, lower marketing expenses of $9 million, $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. These decreases were partially offset by higher compensation
expense of $16 million. In addition, the Company experienced a decrease in
general corporate expenses of $23 million from lower pension expense as a result
of the performance of the investments in the Company's pension plan and $15
million of lower Y2K remediation expenditures. These decreases were partially
offset by an increase of $20 million in incremental merger expenses.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $47 million, or 41%, to
$161 million for the six months ended June 30, 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 $27 million associated with the commencement of the
amortization of $5.26 billion of Competitive Transition Charges in 2000. The
increase also included $14 million related to EIS depreciation and amortization
expense and $6 million related to increased plant in service.
Taxes Other Than Income
Taxes other than income increased $10 million, or 8%, to $130 million
for the six months ended June 30, 2000 compared to the same 1999 period. As a
percentage of revenue, taxes other than income were 5% which was consistent with
the comparable prior year period. The increase was primarily attributable to a
$22 million 1999 Capital Stock Tax credit related to an adjustment associated
with the impact of the 1997 restructuring charge on the Company's equity value.
This increase was partially offset by lower real estate taxes of $7 million
relating to a change in tax laws for utility property in Pennsylvania and $4
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.
19
<PAGE>
Interest Charges
Interest charges consist of interest expense, distributions on COMRPS
and AFUDC. Interest charges increased $23 million, or 11%, to $224 million for
the six months ended June 30, 2000 compared to the same 1999 period. As a
percentage of revenue, interest charges were 8% which was consistent with the
comparable prior year period. The increase was primarily attributable to
interest on the transition bonds of $69 million, partially offset by the
Company's reduction of long-term debt with the proceeds of transition bonds,
which reduced interest charges by $50 million.
Equity in Earnings (Losses) of Unconsolidated Affiliates
Equity in earnings (losses) of unconsolidated affiliates increased $26
million, or 113%, to earnings of $3 million for the six months ended June 30,
2000 as compared to losses of $23 million in the same 1999 period. The increase
of $20 million was primarily attributable to the Company's equity investment in
AmerGen as a result of the acquisitions of TMI and Clinton in December 1999 and
$6 million from improved performance of the Company's telecommunications equity
investments as a result of customer base growth.
Other Income and Deductions
Other income and deductions excluding interest charges and equity in
earnings (losses) of unconsolidated affiliates increased $22 million to income
of $20 million for the six months ended June 30, 2000 as compared to a loss of
$2 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, an increase of $11 million from non-utility operations
and $6 million from the favorable settlement of litigation. These increases were
partially offset by a decrease in interest income on unused transition bond
proceeds of $14 million.
Income Taxes
The effective tax rate was 37.6% which was consistent with the
comparable prior year period.
Extraordinary Items
During the second quarter of 2000, the Company incurred an
extraordinary charge of $3 million, net of tax, consisting of prepayment
premiums and the write-off of unamortized deferred financing costs associated
with the early retirement of debt with a portion of the proceeds from the
issuance of Series 2000-A Transition Bonds in May 2000.
During the second quarter of 1999, the Company incurred an
extraordinary charge of $27 million, net of tax, consisting of prepayment
premiums and the write-off of unamortized deferred financing costs associated
with the early retirement of debt with a portion of the proceeds from the
issuance of transition bonds in 1999.
Preferred Stock Dividends
Preferred stock dividends for the six months ended June 30, 2000
decreased $2 million, or 29%, to $5 million as compared to the same 1999 period.
The decrease was attributable to the
20
<PAGE>
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 $62 million, or 28%, to
$281 million for the six months ended June 30, 2000. Earnings per average common
share increased $0.52 per share or 49%, to $1.58 per share for the six months
ended June 30, 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 and May 2000 stranded cost recovery
securitizations.
DISCUSSION OF LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities increased $73 million to
$339 million for the six months ended June 30, 2000 as compared to $266 million
in the same 1999 period. The increase was primarily attributable to an increase
in changes in working capital of $57 million and additional cash generated by
operations of $16 million. The increase in changes 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 $449 million for the six
months ended June 30, 2000 as compared to $279 million in the same 1999 period.
The increase was attributable to capital expenditures and ventures business unit
investments, including the acquisition of four infrastructure services
companies.
Cash flows provided by financing activities were $145 million for the
six months ended June 30, 2000, as compared to $879 million in the same 1999
period. The decrease was primarily attributable to the securitization of $4
billion of stranded cost recovery in March 1999 and the use of related proceeds
partially offset by the securitization of $1 billion of stranded cost recovery
in May 2000 and the use of related proceeds.
At June 30, 2000, the Company had outstanding $351 million of notes
payable which included $350 million of commercial paper and $1 million of lines
of credit. At June 30, 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 June 30, 2000, the Company had $33 million in 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.
21
<PAGE>
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 (Series 2000-A 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 cost recovery through the issuance by PETT of transition
bonds. 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 has used the proceeds from the securitization to reduce the Company's
stranded costs and related capitalization. On May 3, 2000, $502 million of the
proceeds from the Series 2000-A Transition Bonds were used to settle a forward
purchase agreement that was entered into in January 2000 resulting in the
repurchase of 12 million shares of common stock. During May and June 2000, the
Company used $451 million to purchase and/or redeem First and Refunding Mortgage
Bonds, to reduce other debt, to repurchase accounts receivable, and to pay
transaction expenses. The remaining proceeds were used to redeem First and
Refunding Mortgage Bonds on August 1, 2000. The Company currently estimates that
the issuance of the Series 2000-A 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.
In June 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 138 "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment of
FASB Statement No. 133" (SFAS No. 138). This standard amends the accounting and
reporting standards of SFAS No. 133 for certain derivative instruments and
certain hedging activities. It also amends SFAS No. 133 for decisions made
arising from the Derivatives Implementation Group process. The Company expects
to adopt SFAS No. 133 and SFAS No. 138 on January 1, 2001. The Company is in the
process of evaluating the impact of SFAS No. 133 and SFAS No. 138 on its
financial statements.
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 June 30, 2000 was $58 million. The Company
is funding the Y2K Project from operating cash flows.
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.
22
<PAGE>
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 filed on 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
Series 2000-A 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 7, 8, 9 and 10 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.
23
<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 Series 2000-A 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 Series 2000-A Transition Bonds as an increase in
interest expense consistent with the Company's hedge accounting policy.
At June 30, 2000, the Company's interest rate swaps had a fair market
value of $104 million which was based on the present value difference between
the contracted rate and the market rates at June 30, 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 June
30, 2000 is estimated to be $68 million. If the interest rate swaps had been
terminated at June 30, 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 June
30, 2000 is estimated to be $138 million. If the interest rate swaps had been
terminated at June 30, 2000, this estimated fair value represents the amount to
be paid by the counterparties to the Company.
There were no material changes in the six months ended June 30, 2000 in
the Company's quantitative and qualitative disclosures about market risk
associated with commodity risk, equity price risk and interest rate risk
associated with variable rate debt from December 31, 1999.
In June 2000, the Company entered into a fixed-for-floating financial
swap in order to hedge the physical gas price risk for August and September 2000
associated with one of its tolling agreements. Pursuant to the swap transaction,
the Company will obtain a fixed price for natural gas based on a natural gas
index plus a premium. If the market price is above or below the fixed price, the
Company would either receive or pay the counterparty the difference between the
fixed price and the market price, pursuant to the Company's hedge accounting
policy. As of June 30, 2000, no hedging gains or losses have been deferred or
recognized.
For information on Commodity Risk, Interest Rate Risk and Equity Price
Risk, see "PART II, ITEM 7A. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
24
<PAGE>
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.
25
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 27, 2000, the Company held its 2000 Annual Meeting of
Shareholders.
The Company's common shareholders voted to adopt the Merger Agreement
with 122,220,642 common shares (67.4% common shares outstanding) voting for;
3,100,290 common shares (1.7% common shares outstanding) voting against;
1,484,988 common shares (0.8% common shares outstanding) abstaining; and
25,969,869 common shares (14.3% common shares outstanding) broker non-voting.
The following Class I directors of the Company were re-elected for
terms expiring in 2003:
Votes For Votes Withheld
--------- --------------
Richard H. Glanton 149,827,925 2,947,864
Rosemarie B. Greco 149,879,958 2,895,831
Corbin A. McNeill, Jr. 150,148,603 2,627,186
Robert Subin 149,930,883 2,844,906
The incumbent Class II directors, with terms expiring in 2001, are
Susan W. Catherwood, G. Fred DiBona, Jr., R. Keith Elliott, John M. Palms and
Joseph F. Paquette, Jr. The incumbent Class III directors with terms expiring in
2002, are Daniel L. Cooper, M. Walter D'Alessio and Ronald Rubin.
Other items voted on by holders of common stock at the Annual Meeting
were as follows:
The appointment of the firm PricewaterhouseCoopers LLP, independent
certified public accountants, as auditors of the Company for 2000, was approved
with 150,596,449 common shares (83.0% of common shares outstanding) voting for;
722,268 common shares (0.4% of common shares outstanding) voting against; and
1,456,972 common shares (0.8% of common shares outstanding) abstaining.
The proposal to postpone or adjourn the annual meeting was not
submitted to shareholders for a vote.
26
<PAGE>
ITEM 5. OTHER INFORMATION
On August 3, 2000, the Nuclear Regulatory Commission approved the
request of the Company and Commonwealth Edison Company, a subsidiary of Unicom,
to transfer the licenses for both companies' nuclear plants to Exelon Generation
Company which will be the generating subsidiary of Exelon Corporation, the
corporation formed for the pending merger of the Company and Unicom.
As previously reported in the 1999 Form 10-K/A, on December 1, 1999,
the Company filed with the PUC a restructuring plan for the implementation of
gas deregulation and customer choice of gas service suppliers in its service
territory effective July 1, 2000. On June 29, 2000, the PUC approved a
Comprehensive Settlement of the Company's restructuring plan.
Low-level radioactive waste (LLRW) generated at Salem Generating
Station (Salem), Limerick Generating Station (Limerick), Peach Bottom, TMI and
Clinton is shipped to a disposal site located in Barnwell, South Carolina. On
July 1, 2000, New Jersey, Connecticut and South Carolina formed the Atlantic
Compact. The formation of the Atlantic Compact will ensure continued access to
the Barnwell LLRW disposal facility and adequate radioactive waste disposal for
Salem for the foreseeable future. Nuclear plants located in states that are not
members of the Atlantic Compact, including Peach Bottom, Limerick, TMI and
Clinton will have their access to Barnwell phased out over an eight-year period.
As previously reported in the 1999 Form 10-K/A, the Company has a
20.99% ownership interest in Keystone Station and a 20.72% ownership interest in
Conemaugh Station, coal-fired mine-mouth generating stations in western
Pennsylvania operated by Sithe Energy, Inc. In May 2000, Reliant Energy
purchased Sithe Energy's interest in those plants and now is the operator.
As previously reported in the Company's 1999 Form 10-K/A, under the
Nuclear Waste Policy Act of 1982 (NWPA), the United States Department of Energy
(DOE) is required to begin taking possession of all spent nuclear fuel generated
by the Company's nuclear units for disposal by no later than 1998. Based on
recent public pronouncements, it is not likely that a permanent disposal site
will be available for the industry before 2010, at the earliest. In July 2000,
the Company signed an agreement with the DOE under which the Company will be
reimbursed for costs resulting from the DOE's delay in accepting spent nuclear
fuel. The agreement applies only to Peach Bottom. The agreement allows the
Company to reduce the charges paid to the Nuclear Waste Fund to reflect costs
reasonably incurred by the Company due to the DOE's delay. In accordance with
the NWPA, the Company pays the DOE one mil ($.001) per kilowatthour of net
nuclear generation for the cost of nuclear fuel disposal. Past and future
expenditures associated with Peach Bottom's recently completed on-site dry
storage facility are eligible for this reduction in future DOE fees.
Negotiations of settlements relating to the Company's plants will be conducted
on a plant-by-plant basis.
27
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 - Financial Data Schedule.
(b) During the quarter ended June 30, 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.
Date of earliest event reported:
June 8, 2000 reporting information under "ITEM 5. OTHER
EVENTS" regarding the acquisition of four contracting
companies by EIS.
Date of earliest event reported:
June 22, 2000 reporting information under "ITEM 5. OTHER
EVENTS" regarding the approval of the Company's merger with
Unicom by the PUC.
Date of earliest event reported:
June 27, 2000 reporting information under "ITEM 5. OTHER
EVENTS" regarding the approval of the merger of the Company
with Unicom by the shareholders of the Company.
Subsequent to June 30, 2000 the Company filed the following Current Reports
on Form 8-K:
Date of earliest event reported:
August 8, 2000 reporting information under "ITEM 5. OTHER
EVENTS" regarding the sale of GPU, Inc.'s Oyster Creek Nuclear
Generating Facility to AmerGen for $10 million.
Date of earliest event reported:
August 14, 2000, reporting information under "ITEM 5. OTHER
EVENTS" regarding a definitive agreement for the Company to
purchase 49.9 percent of Sithe Energies North America's
outstanding common stock.
28
<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
(Chief Accounting Officer)
Date: August 14, 2000
29
