UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1994
--------------
Commission file number 1-1072
------
Potomac Electric Power Company
- ----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
District of Columbia and Virginia 53-0127880
- ----------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 Pennsylvania Avenue, N.W., Washington, D.C. 20068
- ----------------------------------------------------------------
(Address of principal executive office) (Zip Code)
(202) 872-2456
- ----------------------------------------------------------------
(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
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.
Class Outstanding at March 31, 1994
- ------------------------------- -----------------------------
Common Stock, $1 par value 117,944,331
TABLE OF CONTENTS
PART I - Financial Information Page
Item 1 - Consolidated Financial Statements
Consolidated Statements of Earnings and Retained Income.. 2
Consolidated Balance Sheets.............................. 3
Consolidated Statements of Cash Flows.................... 4
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies......... 5
(2) Income Taxes....................................... 8
(3) Capitalization..................................... 11
(4) Marketable Securities.............................. 15
(5) Commitments and Contingencies...................... 16
Report of Independent Accountants on Review of Interim
Financial Information.................................... 19
Item 2 - Management's Discussion and Analysis of Consolidated
Results of Operations and Financial Condition
Utility
Results of Operations.................................. 20
Capital Resources and Liquidity........................ 22
New Accounting Standards............................... 23
Nonutility Subsidiary
Results of Operations.................................. 23
Capital Resources and Liquidity........................ 25
PART II - Other Information
Item 1 - Legal Proceedings................................. 26
Item 4 - Submission of Matters to a Vote of Security
Holders......................................... 26
Item 5 - Other Information
Other Financing Arrangements............................. 29
Base Rate Proceedings.................................... 29
Peak Load, Sales, Conservation and Energy Use Management
and Construction and Capacity Additions................ 31
Selected Nonutility Subsidiary Financial Information..... 34
Statistical Data......................................... 36
Item 6 - Exhibits and Reports on Form 8-K.................. 37
Signatures................................................. 37
Computation of Earnings Per Common Share................... 38
Computation of Ratios - Parent Company Only................ 39
Computation of Ratios - Fully Consolidated................. 40
Independent Accountants Awareness Letter................... 41
1
<TABLE>
Part I FINANCIAL INFORMATION
- ------ ---------------------
Item 1 CONSOLIDATED FINANCIAL STATEMENTS
- ------ ---------------------------------
POTOMAC ELECTRIC POWER COMPANY
Consolidated Statements of Earnings and Retained Income
(Unaudited)
-------------------------------------------------------
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, March 31,
-------------------- ----------------------
1994 1993 1994 1993
--------- --------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Revenue
Sales of electricity $ 372,595 $ 329,971 $1,739,059 $1,566,143
Other electric revenue 2,315 1,265 7,057 6,141
--------- --------- ---------- ----------
Total Operating Revenue 374,910 331,236 1,746,116 1,572,284
Interchange deliveries 18,134 8,219 32,677 42,783
--------- --------- ---------- ----------
Total Revenue 393,044 339,455 1,778,793 1,615,067
--------- --------- ---------- ----------
Operating Expenses
Fuel 113,132 88,026 379,388 352,844
Purchased energy 39,332 36,902 175,886 160,598
Capacity purchase payments 32,559 23,813 105,033 95,158
Other operation 52,279 49,697 210,396 204,434
Maintenance 24,220 20,902 96,986 88,303
--------- --------- ---------- ----------
Total Operation and Maintenance 261,522 219,340 967,689 901,337
Depreciation and amortization 42,697 39,190 167,115 152,500
Income taxes 3,973 (1,244) 115,393 79,331
Other taxes 47,516 45,547 203,220 195,154
--------- --------- ---------- ----------
Total Operating Expenses 355,708 302,833 1,453,417 1,328,322
--------- --------- ---------- ----------
Operating Income 37,336 36,622 325,376 286,745
--------- --------- ---------- ----------
Other Income
Nonutility Subsidiary
Income 33,009 31,317 141,033 154,113
Expenses, including interest
and income taxes (30,804) (29,060) (115,984) (129,095)
--------- --------- ---------- ----------
Net earnings from nonutility
subsidiary 2,205 2,257 25,049 25,018
Allowance for other funds
used during construction 3,220 3,635 12,826 16,146
Other, net 2,828 3,576 9,474 5,683
--------- --------- ---------- ----------
Total Other Income 8,253 9,468 47,349 46,847
--------- --------- ---------- ----------
Income Before Utility Interest Charges 45,589 46,090 372,725 333,592
--------- --------- ---------- ----------
Utility Interest Charges
Long-term debt 31,486 34,655 132,324 135,087
Other 2,268 1,102 7,066 5,222
Allowance for borrowed funds
used during construction (2,579) (2,711) (9,615) (12,471)
--------- --------- ---------- ----------
Net Utility Interest Charges 31,175 33,046 129,775 127,838
--------- --------- ---------- ----------
Net Income 14,414 13,044 242,950 205,754
Dividends on Preferred Stock 4,146 4,113 16,289 15,100
--------- --------- ---------- ----------
Earnings for Common Stock 10,268 8,931 226,661 190,654
Retained Income at Beginning of Period 839,433 802,774 765,043 755,138
Dividends on Common Stock (48,895) (46,885) (191,846) (182,254)
Subsidiary Marketable Securities Net
Unrealized (Loss) Gain, Net of Tax (3,078) 223 (2,130) 1,505
--------- --------- ---------- ----------
Retained Income at End of Period $ 797,728 $ 765,043 $ 797,728 $ 765,043
========= ========= ========== ==========
Average Common Shares
Outstanding (000's) 117,876 114,402 116,496 113,184
Earnings Per Common Share $0.09 $0.08 $1.95 $1.68
Cash Dividends Per Common Share <F1> $0.415 $0.410 $1.645 $1.610
Book Value Per Share $16.25 $15.66
Dividend Payout Ratio 84.4% 95.8%
Effective Federal Income Tax Rate 18.0% 24.7%
<F1> In January 1994, the Company increased the quarterly dividend from 41 cents
per share to 41.5 cents per share. The first quarter 1994 dividend was paid
on March 31, 1994, to stockholders of record on February 25, 1994. The
resulting indicated annual dividend rate is $1.66 per share.
2
</TABLE>
<TABLE>
POTOMAC ELECTRIC POWER COMPANY
Consolidated Balance Sheets
(Unaudited at March 31, 1994 and 1993)
------------------------------------------
<CAPTION>
March 31, December 31, March 31,
ASSETS 1994 1993 1993
------ ------------- ------------- -------------
(Thousands of Dollars)
<S> <C> <C> <C>
Property and Plant - at original cost
Electric plant in service $ 5,290,934 $ 5,252,736 $ 5,049,946
Construction work in progress 409,304 373,665 341,993
Electric plant held for future use 31,777 33,644 34,766
Nonoperating property 6,962 5,096 3,722
------------- ------------- -------------
5,738,977 5,665,141 5,430,427
Accumulated depreciation (1,559,937) (1,533,999) (1,465,233)
------------- ------------- -------------
Net Property and Plant 4,179,040 4,131,142 3,965,194
------------- ------------- -------------
Current Assets
Cash and cash equivalents 11,774 7,439 7,535
Customer accounts receivable, less allowance
for uncollectible accounts of $2,576, $2,748
and $2,510 109,083 100,973 100,085
Other accounts receivable, less allowance for
uncollectible accounts of $300 31,588 53,454 28,858
Accrued unbilled revenues 60,854 71,497 56,480
Prepaid taxes 34,306 30,531 38,666
Other prepaid expenses 8,754 6,053 4,491
Material and supplies - at average cost
Fuel 63,291 61,973 88,328
Construction and maintenance 69,300 70,262 77,720
------------- ------------- -------------
Total Current Assets 388,950 402,182 402,163
------------- ------------- -------------
Deferred Charges
Income taxes recoverable through future rates, net 247,264 233,431 190,010
Insurance claim related to litigation settlement - - 38,260
Other 252,945 233,573 160,627
------------- ------------- -------------
Total Deferred Charges 500,209 467,004 388,897
------------- ------------- -------------
Nonutility Subsidiary Assets
Cash and cash equivalents 1,911 2,625 3,927
Marketable securities 489,059 466,153 419,400
Investment in finance leases 356,538 358,524 446,411
Operating lease equipment, net of accumulated
depreciation of $93,192, $85,302 and $63,197 561,205 565,443 558,879
Receivables 88,689 84,726 86,105
Other investments 163,389 163,911 132,540
Other assets 19,297 23,750 35,628
------------- ------------- -------------
Total Nonutility Subsidiary Assets 1,680,088 1,665,132 1,682,890
------------- ------------- -------------
Total Assets $ 6,748,287 $ 6,665,460 $ 6,439,144
============= ============= =============
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization
Common stock $ 117,944 $ 117,798 $ 114,831
Other common equity 1,799,176 1,837,411 1,683,940
Serial preferred stock 125,441 125,442 125,476
Redeemable serial preferred stock 145,153 147,000 148,500
Long-term debt 1,641,811 1,589,621 1,621,052
------------- ------------- -------------
Total Capitalization 3,829,525 3,817,272 3,693,799
------------- ------------- -------------
Current Liabilities
Long-term debt and preferred stock
redemption due within one year 60,000 17,977 126,610
Short-term debt 282,950 294,615 82,050
Accounts payable and accrued expenses 165,427 174,842 204,059
Other 105,804 103,633 90,157
------------- ------------- -------------
Total Current Liabilities 614,181 591,067 502,876
------------- ------------- -------------
Deferred Credits
Income taxes 805,270 780,723 718,182
Investment tax credits 70,993 71,906 74,508
Other 24,700 28,916 26,106
------------- ------------- -------------
Total Deferred Credits 900,963 881,545 818,796
------------- ------------- -------------
Nonutility Subsidiary Liabilities
Long-term debt 1,080,094 1,027,705 937,746
Short-term notes payable 104,850 126,250 253,400
Deferred taxes and other 218,674 221,621 232,527
------------- ------------- -------------
Total Nonutility Subsidiary Liabilities 1,403,618 1,375,576 1,423,673
------------- ------------- -------------
Total Capitalization and Liabilities $ 6,748,287 $ 6,665,460 $ 6,439,144
============= ============= =============
3
</TABLE>
<TABLE>
POTOMAC ELECTRIC POWER COMPANY
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, March 31,
----------------------- -----------------------
1994 1993 1994 1993
--------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating Activities
Income from utility operations $ 12,209 $ 10,787 $ 217,901 $ 180,736
Adjustments to reconcile income to net
cash from operating activities:
Depreciation and amortization 42,697 39,190 167,115 152,500
Deferred income taxes and investment tax credits 13,907 9,672 31,946 32,233
Allowance for funds used during construction (5,799) (6,346) (22,441) (28,617)
Changes in materials and supplies (356) 10,696 33,457 5,617
Changes in accounts receivable and accrued unbilled revenues 24,399 5,102 (16,102) (7,913)
Changes in accounts payable (1,709) (9,624) 7,475 (22,142)
Changes in other current assets and liabilities (16,345) (13,385) 1,355 2,858
Changes in deferred conservation and energy use management costs (16,705) (6,993) (67,427) (27,998)
Net other operating activities (11,208) (10,088) (40,167) (12,229)
Nonutility subsidiary:
Net earnings 2,205 2,257 25,049 25,018
Deferred income taxes 4,005 16,310 (45,119) 9,002
Changes in other assets and net other operating activities 4,572 (12,738) 74,207 (6,470)
--------- --------- --------- ---------
Net Cash From Operating Activities 51,872 34,840 367,249 302,595
--------- --------- --------- ---------
Investing Activities
Total investment in property and plant (83,388) (68,224) (338,115) (337,818)
Allowance for funds used during construction 5,799 6,346 22,441 28,617
--------- --------- --------- ---------
Net investment in property and plant (77,589) (61,878) (315,674) (309,201)
Nonutility subsidiary:
Purchase of marketable securities (72,056) (51,878) (274,391) (247,835)
Proceeds from sale or redemption of marketable securities 44,169 30,813 207,651 184,921
Investment in leased equipment (3,652) (1,094) (34,918) (13,537)
Proceeds from sale or disposition of leased equipment - - 120,529 44,092
Purchase of other investments (4,354) (1,487) (47,495) (6,676)
Proceeds from sale or distribution of other investments 4,508 - 4,508 40,135
Investment in promissory notes - (402) (1,226) (402)
Proceeds from promissory notes 1,111 465 3,659 17,889
--------- --------- --------- ---------
Net Cash Used by Investing Activities (107,863) (85,461) (337,357) (290,614)
--------- --------- --------- ---------
Financing Activities
Dividends on common stock (48,895) (46,885) (191,846) (182,254)
Dividends on preferred stock (4,146) (4,113) (16,289) (15,100)
Issuance of common stock 3,666 13,696 85,971 81,464
Issuance of preferred stock - - - 50,000
Redemption of preferred stock (2,457) - (3,957) (890)
Issuance of long-term debt 178,411 152,481 547,194 355,439
Reacquisition and retirement of long-term debt (84,367) (113,448) (599,367) (179,470)
Short-term debt, net (11,665) 20,450 200,900 (68,670)
Other financing activities (1,925) (6,651) (21,472) (9,943)
Nonutility subsidiary:
Issuance of long-term debt 115,000 160,630 318,023 352,267
Repayment of long-term debt (62,610) (111,411) (198,276) (364,797)
Short-term debt, net (21,400) (10,115) (148,550) (30,300)
--------- --------- --------- ---------
Net Cash From (Used By) Financing Activities 59,612 54,634 (27,669) (12,254)
--------- --------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 3,621 4,013 2,223 (273)
Cash and Cash Equivalents at Beginning of Period 10,064 7,449 11,462 11,735
--------- --------- --------- ---------
Cash and Cash Equivalents at End of Period $ 13,685 $ 11,462 $ 13,685 $ 11,462
========= ========= ========= =========
Cash paid for interest (net of capitalized interest) and income taxes:
Interest (including nonutility subsidiary
interest of $34,764, $33,829, $77,491 and $84,600) $ 66,856 $ 70,546 $ 203,265 $ 207,121
Income taxes $ 4,730 $ 3,017 $ 69,454 $ 50,714
Nonutility subsidiary noncash transactions:
Promissory note received in exchange for equipment $ - $ - $ - $ 10,000
Consolidation of majority-owned subsidiaries $ - $ - $ 35,320 $ -
4
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
The Company's utility operations are regulated by the
Maryland and District of Columbia public service commissions and,
as to its wholesale business, the Federal Energy Regulatory
Commission (FERC). The Company complies with the Uniform System
of Accounts prescribed by the FERC and adopted by the Maryland
and District of Columbia regulatory commissions. In conformity
with generally accepted accounting principles, the accounting
policies and practices applied by the regulatory commissions in
the determination of rates for utility operations are also
employed for financial reporting purposes.
Certain 1993 amounts have been reclassified to conform to
the current year presentation.
A description of significant accounting policies follows:
Principles of Consolidation
- ---------------------------
The consolidated financial statements combine the financial
results of the Company and all majority-owned subsidiaries. The
Company's principal subsidiary is Potomac Capital Investment
Corporation (PCI). All material intercompany balances and
transactions have been eliminated.
Total Revenue
- -------------
Revenue is accrued for service rendered but unbilled as of
the end of each month. The Company includes in revenue the
amounts received for sales to other utilities relating to pooling
and interconnection agreements. Amounts received for such
interchange deliveries are a component of the Company's fuel
rates.
In each jurisdiction, the Company's rate schedules include
fuel rates. The fuel rate provisions are designed to provide for
separately stated fuel billings which cover applicable net fuel
and interchange costs or changes in applicable net fuel and
interchange costs from levels incorporated in base rates.
Differences between applicable net fuel and interchange costs
incurred and fuel rate revenue billed in any given period are
accounted for as other current assets or other current
liabilities in those cases where specific provision has been made
by the appropriate regulatory commission for the resolution of
such differences within one year. Where no such provision has
5
been made, the differences are accounted for as other deferred
charges or other deferred credits pending regulatory
determination.
Leasing Transactions
- --------------------
Income from PCI investments in direct finance and leveraged
lease transactions, in which PCI is an equity participant, is
reported using the financing method. In accordance with the
financing method, investments in leased property are recorded as
a receivable from the lessee to be recovered through the
collection of future rentals. For direct finance leases,
unearned income is amortized to income over the lease term at a
constant rate of return on the net investment. Income, including
investment tax credits on leveraged equipment leases, is
recognized over the life of the lease at a level rate of return
on the positive net investment.
PCI investments in equipment under operating leases are
stated at cost less accumulated depreciation. Depreciation is
recorded on a straight line basis over the equipment's estimated
useful life.
Property and Plant
- ------------------
The cost of additions to, and replacements or betterments
of, retirement units of property and plant is capitalized. Such
cost includes material, labor, the capitalization of an Allowance
for Funds Used During Construction (AFUDC) and applicable
indirect costs, including engineering, supervision, payroll
taxes and employee benefits. The original cost of depreciable
units of plant retired, together with the cost of removal, net of
salvage, is charged to accumulated depreciation. Routine repairs
and maintenance are charged to operating expenses as incurred.
The Company uses separate depreciation rates for each
electric plant account. The rates, which vary from jurisdiction
to jurisdiction, were equivalent to a system-wide composite
depreciation rate of approximately 3.1% for 1994 and 1993, and 3%
for 1992.
Conservation and Energy Use Management
- --------------------------------------
In general, the Company accounts for energy conservation
expenditures as a deferred charge, and amortizes the costs over
five to ten years. District of Columbia conservation costs
receive rate base treatment, with a capital cost recovery factor
6
accrued on the unamortized balance in excess of amounts included
in rate base. See Part II, Item 5, Base Rate Proceedings for
additional information. In Maryland, conservation costs are
currently recovered through a surcharge included in base rates.
Allowance for Funds Used During Construction
- --------------------------------------------
In general, the Company capitalizes AFUDC with respect to
investments in Construction Work in Progress with the exception
of expenditures required to comply with federal, state or local
environmental regulations (pollution control projects), which are
included in rate base without capitalization of AFUDC. The
Company accrues a capital cost recovery factor on the retail
jurisdictional portion of certain pollution control projects
related to compliance with the Clean Air Act (CAA). The base for
calculating this return is the amount by which the retail
jurisdictional CAA expenditure balance exceeds the CAA balance
included in rate base in the Company's most recently completed
base rate proceeding.
The jurisdictional AFUDC capitalization rates are determined
as prescribed by the FERC. The effective capitalization rate was
approximately 8.5% compounded semiannually, for the three months
ended March 31, 1994, and approximately 8.7% and 9.1% in 1993 and
1992, respectively.
Cash and Cash Equivalents
- -------------------------
For purposes of the consolidated financial statements, cash
and cash equivalents include cash on hand, money market funds and
commercial paper with maturities of three months or less.
Nonutility Subsidiary Receivables
- ---------------------------------
The Company's nonutility subsidiary uses the direct write-
off method of accounting when a receivable is deemed to be
uncollectible in lieu of an allowance for doubtful accounts. The
amounts were not material.
Income Taxes
- ------------
Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 109 entitled
"Accounting for Income Taxes" which requires the use of an asset
and liability approach for financial reporting and accounting for
deferred income taxes. Deferred taxes are being recorded for all
temporary differences based upon currently enacted tax rates.
7
<TABLE>
(2) INCOME TAXES
- ----------------
Provision for Income Taxes Charged to Continuing Operations
- -----------------------------------------------------------
<CAPTION>
Three Months Ended
March 31,
--------------------------
1994 1993
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Utility current tax expense
Federal $ (8,985) $ (11,660)
State and local (1,212) (1,542)
----------- -----------
Total utility current tax expense (10,197) (13,202)
----------- -----------
Utility deferred tax expense
Federal 12,869 8,700
State and local 1,951 1,839
Investment tax credits (913) (867)
----------- -----------
Total utility deferred tax expense 13,907 9,672
----------- -----------
Total utility income tax expense 3,710 (3,530)
----------- -----------
Nonutility subsidiary current tax expense
Federal (7,063) (8,024)
----------- -----------
Nonutility subsidiary deferred tax expense
Federal 4,293 5,864
State and local (288) (250)
----------- -----------
Total nonutility subsidiary deferred tax expense 4,005 5,614
----------- -----------
Total nonutility subsidiary income tax expense (3,058) (2,410)
----------- -----------
Total consolidated income tax expense 652 (5,940)
Income taxes included in other income (3,321) (4,696)
----------- -----------
Income taxes included in utility operating expenses $ 3,973 $ (1,244)
=========== ===========
8
</TABLE>
<TABLE>
Reconciliation of Consolidated Income Tax Expense
- -------------------------------------------------
<CAPTION>
Three Months Ended
March 31,
--------------------------
1994 1993
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Income before income taxes $ 15,066 $ 7,104
=========== ===========
Utility income tax at federal
statutory rate $ 5,572 $ 2,467
Increases (decreases) resulting from
Depreciation 1,840 1,233
Removal costs (1,108) (823)
Allowance for funds used during
construction (946) (1,054)
Other (1,256) (4,682)
State income taxes, net of federal effect 521 196
Tax Credits (913) (867)
----------- -----------
Total utility income tax expense 3,710 (3,530)
----------- -----------
Nonutility subsidiary income tax at federal
statutory rate (299) (52)
Increases (decreases) resulting from
Dividends received deduction (2,043) (1,977)
Other (428) (131)
State income taxes, net of federal effect (288) (250)
----------- -----------
Total nonutility subsidiary income tax expense (3,058) (2,410)
----------- -----------
Total consolidated income tax expense 652 (5,940)
Income taxes included in other income (3,321) (4,696)
----------- -----------
Income taxes included in utility operating expenses $ 3,973 $ (1,244)
=========== ===========
9
</TABLE>
<TABLE>
Components of Consolidated Deferred Tax Liabilities (Assets)
- ------------------------------------------------------------
<CAPTION>
March 31,
--------------------------
1994 1993
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Utility deferred tax liabilities (assets)
Depreciation and other book to tax
basis differences $ 693,127 $ 615,987
Rapid amortization of certified pollution
control facilities 30,029 39,561
Deferred taxes on amounts to be collected
through future rates 93,911 70,456
Property taxes 10,180 10,163
Deferred fuel 7,802 1,237
Prepayment premium on debt retirement 10,965 9,727
Deferred ITC (26,961) (27,627)
Contributions in aid of construction (23,888) (22,078)
Other 22,506 27,530
----------- -----------
Total utility deferred tax liabilities (net) 817,671 724,956
Current portion of utility deferred tax liabilities
(included in Other current liabilities) 12,401 6,774
----------- -----------
Total utility deferred tax liabilities (net) - noncurrent $ 805,270 $ 718,182
=========== ===========
Nonutility subsidiary deferred tax liabilities (assets)
Finance leases $ 126,485 $ 165,241
Operating lease depreciation 119,212 89,492
Reversal of previously accrued taxes related
to partnerships (7,480) -
Alternative minimum tax (76,904) (69,232)
Other (16,605) 5,733
----------- -----------
Total nonutility subsidiary deferred tax liabilities (net),
(included in Deferred taxes and other) $ 144,708 $ 191,234
=========== ===========
10
</TABLE>
Pursuant to SFAS No. 109, regulated enterprises recognize
regulatory assets and liabilities for income taxes to be
recovered from or returned to customers in future rates.
Accordingly, as of March 31, 1994, the Company has recorded
additional deferred income taxes and a net regulatory asset of
$247.3 million. No valuation allowance for deferred tax assets
was required or recorded at March 31, 1994. The adoption of SFAS
No. 109 increased net income for the three and twelve months
ended March 31, 1993 by approximately $2.8 million which is
reflected on the Consolidated Statements of Earnings and Retained
Income in "Other, net."
The Tax Reform Act of 1986 repealed the Investment Tax
Credit (ITC) for property placed in service after December 31,
1985, except for certain transition property. ITC previously
earned on utility property continues to be normalized over the
remaining service lives of the related assets.
The Company and its subsidiaries file a consolidated federal
income tax return. The Company's federal income tax liabilities
for all years through 1991 have been finally determined. The
Company is of the opinion that the final settlement of its
federal income tax liabilities for subsequent years will not have
a material adverse effect on its financial position.
(3) CAPITALIZATION
--------------
Common Equity
- -------------
At March 31, 1994, 117,944,331 shares of the Company's $1
par value Common Stock were outstanding. A total of 200 million
shares is authorized.
As of March 31, 1994, 2,783,222 shares of Common Stock were
reserved for issuance under the Shareholder Dividend Reinvestment
Plan (DRP). The DRP permits additional cash investments by plan
participants limited to one investment per month of not less than
$25 and not more than $5,000. Also, as of March 31, 1994, 99,867
shares of Common Stock were reserved for issuance under the
Employee Savings Plans; and shares reserved for conversion of
debentures were 2,771,633 and 3,392,500 for the 7% and 5%
Convertible Debentures, respectively.
11
Serial Preferred, Redeemable Serial Preferred and Preference
- ------------------------------------------------------------
Stock
-----
At March 31, 1994, the Company had outstanding 5,411,876
shares of its $50 par value Serial Preferred Stock, including the
Redeemable Serial Preferred Stock. A total of 11,211,044 shares
is authorized. At March 31, 1994, the aggregate annual dividend
requirements on the Serial Preferred Stock and the Redeemable
Serial Preferred Stock were approximately $5.8 million and $10.3
million, respectively. Also, the Company has a total of
8,800,000 shares of cumulative, $25 par value, Preference Stock
authorized and unissued.
The Company's $2.44 Convertible Preferred Stock, 1966 Series
(8,825 shares outstanding at March 31, 1994) is convertible into
Common Stock of the Company at $8.51 per share. The estimated
fair value of this series, based on quoted market prices was $1.1
million and $1.5 million at March 31, 1994 and 1993,
respectively.
At March 31, 1994, the Company had outstanding one million
shares of its Serial Preferred Stock, Auction Series A. The
annual dividend rate is 3.01% ($1.505) for the period March 1,
1994 through May 31, 1994. For the period December 1, 1993
through February 28, 1994, the annual dividend rate was 3.02%
($1.51). The average rate at which dividends were paid during
the 12 months ended March 31, 1994 was 2.79% ($1.39). The
estimated fair value of this series at March 31, 1994 and 1993,
was the carrying amount.
The estimated fair value at March 31, 1994 and 1993, for the
remaining Serial Preferred Stock (excluding the Redeemable Serial
Preferred Stock) was $56.3 million and $59.2 million,
respectively, based on discounted cash flows using current rates
for preferred stock with similar terms.
At March 31, 1994, the Company had outstanding 903,051
shares of $50 par value Redeemable Serial Preferred Stock, the
$3.37 (6.74%) Series of 1987. The shares are subject to
mandatory redemption beginning June 1993, at par, through the
operation of a sinking fund, of not less than 30,000 nor more
than 60,000 shares annually. Sinking fund requirements through
1998 with respect to the Redeemable Serial Preferred Stock are
$1.2 million in 1996 and $1.5 million annually thereafter.
At March 31, 1994, the Company had outstanding one million
shares of $50 par value Redeemable Serial Preferred Stock, the
$3.89 (7.78%) Series of 1991. The shares are subject to
mandatory redemption, at par, through the operation of a sinking
12
fund which will redeem not less than 165,000 nor more than
330,000 shares annually, beginning June 1, 2001, and 175,000
shares on June 1, 2006.
In addition, the Company has issued and outstanding one
million shares of $50 par value Redeemable Serial Preferred
Stock, the $3.40 (6.80%) Series of 1992. The shares are subject
to mandatory redemption, at par, through the operation of a
sinking fund which will redeem 50,000 shares annually, beginning
September 1, 2002, with the remaining shares redeemed on
September 1, 2007.
The estimated fair value of the Company's Redeemable Series
Preferred Stock, excluding amounts due within one year, was
$151.7 million and $159.2 million based on quoted market prices
at March 31, 1994 and 1993, respectively.
Long-Term Debt
- --------------
The Company's long-term debt at March 31, 1994, is
summarized below:
(Thousands of Dollars)
First Mortgage Bonds $1,326,600
Convertible Debentures 183,467
Notes Payable 225,000
Net Unamortized Discount (33,256)
Current Portion (60,000)
----------
Net Utility Long-Term Debt $1,641,811
==========
Nonutility Subsidiary Long-Term Debt $1,080,094
==========
At March 31, 1994, the aggregate annual interest requirement
on the Company's long-term debt, including debt due within one
year, was approximately $120 million. The aggregate amounts of
maturities and sinking fund requirements for the Company's long-
term debt outstanding as of March 31, 1994 are $60 million in
1994, $44 million in 1995, $6 million in 1996, $56 million in
1997 and $50 million in 1998. At March 31, 1994, long-term debt
due within one year consisted of $43 million of 9-3/4% First
Mortgage Bonds, $15 million of 5-1/4% First Mortgage Bonds, and
$2 million of 5-5/8% First Mortgage Bonds.
13
On February 24, 1994, the Company issued $42.5 million of
5-3/8% First Mortgage Bonds due 2024, in conjunction with the
sale at 99% by Montgomery County, Maryland of a like amount of
the County's Pollution Control Revenue Refunding Bonds. Proceeds
were applied toward the redemption of the Company's $15 million
6-1/2% First Mortgage Bonds due 2004, $20 million 6-1/2% First
Mortgage Bonds due 2007 and $7.5 million 6-5/8% First Mortgage
Bonds due 2009, at 101% of their principal amount plus accrued
interest, and a like amount of the County's Pollution Control
Revenue Bonds.
On February 24, 1994, the Company issued $38.3 million of
5-3/8% First Mortgage Bonds due 2024, in conjunction with the
sale at 98.896% by Alexandria, Virginia of a like amount of the
City's Pollution Control Revenue Refunding Bonds. Proceeds were
applied toward the redemption of the Company's $38.3 million
6-1/8% First Mortgage Bonds due 2007, at par plus accrued
interest, and a like amount of the City's Pollution Control
Revenue Bonds.
On March 24, 1994, the Company announced that it will
redeem, on May 2, 1994, the remaining $43 million of 9-3/4% First
Mortgage Bonds due 2019, at 106.03% of the principal amount plus
accrued interest.
The estimated fair value of the fixed rate First Mortgage
Bonds, excluding amounts due within one year, in the aggregate,
was $1.2 billion and $1.3 billion at March 31, 1994 and 1993,
respectively. The estimated fair value of the Convertible
Debentures, in the aggregate, was $169 million and $175.2 million
at March 31, 1994 and 1993, respectively. The estimated fair
value at March 31, 1994 and 1993, was based on the current market
price or for issues with no market price available, was based on
discounted cash flows using current rates for bonds with similar
terms and remaining maturities. At March 31, 1994, the estimated
fair value of the Adjustable Rate series First Mortgage Bonds,
based on the current market price was $53.3 million. The
carrying value was considered to be the estimated fair value of
this bond series at March 31, 1993.
At March 31, 1994 and 1993, the estimated fair value of the
Medium-Term Notes, excluding amounts due within one year, in the
aggregate, was $222.5 million and $136.8 million, respectively,
based on discounted cash flows using current rates for notes with
similar terms and remaining maturities.
Nonutility Subsidiary Long-Term Debt
- ------------------------------------
Long-term debt at March 31, 1994 consisted primarily of
unsecured borrowings from institutional lenders maturing at
various dates between May 1994 and July 2003. The interest rates
14
of such borrowings range from 3.69% to 10.10%. The weighted
average effective interest rate was 7.33% at March 31, 1994 and
7.74% at March 31, 1993. Annual aggregate principal repayments
on these borrowings are $105.8 million in 1994, $180.4 million in
1995, $168.5 million in 1996, $103.8 million in 1997, $142.3
million in 1998 and $301 million thereafter through 2003. Also
included in long-term debt is $78.3 million of non-recourse debt
of which $16.5 million is payable in monthly installments with
maturity on April 30, 1994, and the remainder due in monthly
installments with final maturities in 2002 and 2011.
At March 31, 1994 and 1993, the fair value of long-term
debt, including non-recourse debt, was estimated to be $1.1
billion and $982.9 million, respectively. These estimates were
based on current rates offered to similar companies for debt with
similar remaining maturities.
(4) MARKETABLE SECURITIES
---------------------
In January 1994, the Company adopted SFAS No. 115 entitled
"Accounting for Certain Investments in Debt and Equity
Securities." The Company's marketable securities, all of which
are classified as available-for-sale as defined in SFAS No. 115,
consist primarily of investment grade preferred stocks with
mandatory redemption features. Pursuant to SFAS No. 115, net
unrealized gains and losses on such securities are reflected, net
of tax, in stockholders' equity. The gross unrealized losses are
shown below:
For the three
As of months ended
March 31, 1994 March 31, 1994
----------------------- --------------
Gross
Carrying Market Unrealized
Value Value Losses
---------- ---------- --------------
(Thousands of Dollars)
Mandatory redeemable
preferred stock $ 493,513 $ 488,541 $ (4,972)
Debt securities 518 518 -
Equity securities 3 - (3)
---------- ---------- -------------
Total $ 494,034 $ 489,059 $ (4,975)
========== ========== =============
15
In determining gross realized gains and losses on sales or
maturities of securities, specific identification is used.
During the three months ended March 31, 1994 proceeds of $44.2
million were received through the sales of securities which
generated gross realized gains of $1.6 million and gross realized
losses of $1.6 million.
At March 31, 1994, the final contractual maturities (in
thousands of dollars) for mandatorily redeemable preferred stock
were as follows:
Within one year $ 2,890
One to five years 64,898
Five to ten years 115,094
Over ten years 311,152
----------
494,034
Less gross unrealized
losses (4,975)
----------
$ 489,059
==========
(5) COMMITMENTS AND CONTINGENCIES
-----------------------------
On April 4, 1994, the Company filed an application for
reconsideration with the District of Columbia Public Service
Commission for reconsideration of various determinations in the
Commission's March 4, 1994 Order in Formal Case No. 929. An
unfavorable ruling on the Company's application would reduce 1994
income. See Part II, Item 5, Base Rate Proceedings for
additional information.
As discussed in the 1993 Form 10-K, in August 1993, the
Company was served with Amended Complaints filed in three
jurisdictions (Prince George's County, Baltimore City, and
Baltimore County) in separate ongoing, consolidated proceedings
each denominated "In re: Personal Injury Asbestos Cases". The
Company (and other defendants) were brought into these cases on a
theory of premises liability under which plaintiffs argue that
the Company was negligent in not providing a safe work
environment for employees of its contractors who allegedly were
exposed to asbestos while working on the Company's property.
Initially, a total of approximately four hundred and forty-eight
(448) individual plaintiffs added the Company to their
Complaints. While the pleadings are not entirely clear, it
16
appears that each plaintiff seeks $2 million in compensatory
damages and $4 million in punitive damages from each defendant.
In a related proceeding in the Baltimore City case, the Company
was served, September 1993, with a third party complaint by Owens
Corning Fiberglass, Inc. (Owens Corning) alleging that Owens
Corning was in the process of settling approximately 700
individual asbestos-related cases and seeking a judgment for
contribution against the Company on the same theory of alleged
negligence set forth above in the plaintiffs' case.
Subsequently, Pittsburgh Corning Corp. (Pittsburgh Corning) filed
a third party complaint against the Company, seeking contribution
for the same plaintiffs involved in the Owens Corning third party
complaint. Since the filings, a number of individual suits have
been disposed of without any payment by the Company. The claims
by Pittsburgh Corning and Owens Corning were disposed of in March
1994 and April 1994, respectively, without any payment by the
Company. While the aggregate amount specified in the remaining
suits would exceed $1 billion, the Company believes the amounts
are greatly exaggerated as were the claims already disposed of.
The amount of total liability, if any, and any related insurance
recovery cannot be precisely determined at this time; however,
based on information and relevant circumstances known at this
time, the Company does not believe these suits will have a
material adverse effect on its financial position.
The Company is involved in other legal and administrative
(including environmental) proceedings before various courts and
agencies with respect to matters arising in the ordinary course
of business. Management is of the opinion that the final
disposition of these proceedings will not have a material adverse
effect on the Company's financial position or results of
operations.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
The information furnished in the accompanying Consolidated
Statements of Earnings and Retained Income, Consolidated Balance
Sheets and Consolidated Statements of Cash Flows reflects all
adjustments (which consist only of normal recurring accruals)
which are, in the opinion of management, necessary to a fair
presentation of the results of operations for the interim
periods. The accompanying consolidated financial statements and
notes thereto should be read in conjunction with the consolidated
financial statements and notes included in the Company's 1993
Annual Report to the Securities and Exchange Commission on Form
10-K.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
17
This Quarterly Report on Form 10-Q, including the report of
Price Waterhouse (on page 19) will automatically be incorporated
by reference in the Prospectuses constituting part of the
Company's Registration Statements on Form S-3 (Registration Nos.
33-48524, 33-58810 and 33-50377 and Form S-8 (Registration No.
33-36798 filed under the Securities Act of 1933. Such report of
Price Waterhouse, however, is not a "report" or "part of the
Registration Statement" within the meaning of Sections 7 and 11
of the Securities Act of 1933 and the liability provisions of
Section 11(a) of such Act do not apply.
18
INDEPENDENT ACCOUNTANTS REPORT
To the Board of Directors
and Shareholders of
Potomac Electric Power Company
We have reviewed the accompanying consolidated balance sheets of
Potomac Electric Power Company and consolidated subsidiaries (the
Company) at March 31, 1994 and 1993 and the related consolidated
statements of earnings and retained income for the three and
twelve month periods then ended and the consolidated statements
of cash flows for the three and twelve month periods then ended.
These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying financial
information for it to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of December
31, 1993, and the related consolidated statement of earnings and
consolidated statement of cash flows for the year then ended (not
presented herein); and in our report dated January 21, 1994, we
expressed an unqualified opinion, with an explanatory paragraph
for a change in accounting principles, on those consolidated
financial statements. In our opinion, the information set forth
in the accompanying consolidated balance sheet information as of
December 31, 1993, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been
derived.
/s/ Price Waterhouse
Price Waterhouse
Washington, D.C.
May 2, 1994
19
Part I FINANCIAL INFORMATION
- ------ ---------------------
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
- ------ ----------------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
UTILITY
- -------
RESULTS OF OPERATIONS
- ---------------------
TOTAL REVENUE
Total revenue increased for the three and twelve months
ended March 31, 1994, as compared to the corresponding periods in
1993. The increases in revenue from sales of electricity for the
three and twelve month periods were primarily due to increases in
kilowatt-hour sales of 5.2% and 5.7% for the three and twelve
months ended March 31, 1994, respectively, over the corresponding
periods in 1993, increases in fuel rate revenue and the effects
of the 1992 and 1993 base rate increases in Maryland. The
increase in kilowatt-hour sales for the three months ended March
31, 1994, was primarily attributable to the impact of severe
weather in January 1994 which resulted in record-breaking low
temperatures. Heating degree days for the quarter were 7.5%
above the corresponding period in 1993 and 13.2% above the 20-
year average. The increase in kilowatt-hour sales for the twelve
months ended March 31, 1994, was primarily attributable to hotter
than average weather during the summer cooling season as well as
the colder than average weather during the first quarter of 1994.
Cooling degree hours during the twelve months ended March 31,
1994 were 97% above the corresponding period in 1993 and 22%
above the 20-year average. Interchange deliveries increased for
the three months ended March 31, 1994 and decreased for the
twelve months ended March 31, 1994, reflecting the amount of
energy delivered to the Pennsylvania-New Jersey-Maryland (PJM)
Interconnection.
20
Rate orders received by the Company during 1994 and 1993
provided for changes in annual base rate revenue as shown in the
table below:
Rate
Increase % Effective
Regulatory Jurisdiction ($000)* Change Date
- ----------------------- ---------- ------- ---------------
District of Columbia $25,400 3.8% March/June 1994
Federal - Wholesale 2,600 2.3 January 1994
Maryland 27,000 3.0 November 1993
Maryland 7,254 .9 June 1993
Federal - Wholesale 3,801 3.1 January 1993
* See Part II, Item 5, Base Rate Proceedings for additional
information.
On April 4, 1994, the Company filed an application for
reconsideration with the District of Columbia Public Service
Commission for reconsideration of various determinations in the
Commission's March 4, 1994 Order in Formal Case No. 929. An
unfavorable ruling on the Company's application would reduce 1994
income. See Part II, Item 5, Base Rate Proceedings for
additional information.
OPERATING EXPENSES
Fuel and purchased energy increased for the three and twelve
months ended March 31, 1994, as compared to the corresponding
periods ended March 31, 1993. Fuel expense increased for the
three and twelve months ended March 31, 1994, primarily as the
result of a 15.6% and 5.5% increase, respectively, in net
generation due to increased customer usage caused by the extreme
weather in the first quarter of 1994 and the summer of 1993. The
increase in purchased energy for three months ended reflects
changes in the levels and prices of energy purchased from PJM and
other utilities. The increase for the twelve months ended was
due primarily to increased purchases of low-cost energy from PJM.
The unit fuel costs for the comparative periods ended March
31, were as follows:
Three Twelve
Months Ended Months Ended
------------ -------------
1994 1993 1994 1993
---- ---- ---- ----
System Average
Fuel Cost per MBTU $2.13 $1.87 $1.98 $1.85
21
The increases in the system average unit fuel cost for the
three and twelve months ended March 31, 1994 resulted from
increased use of major cycling and peaking generation units which
burn higher cost fuels. The Company's major cycling and certain
peaking units can burn natural gas or oil, adding flexibility in
selecting the most cost-effective fuel mix.
For the twelve month periods ended March 31, 1994 and 1993,
the Company obtained 74% and 84%, respectively, of its system
generation from coal based upon percentage of Btus.
Capacity purchase payments increased for the three and
twelve months ended March 31, 1994, as compared to the
corresponding periods in 1993, primarily as the result of a
January 1, 1994 increase in the cost of capacity under agreements
with Ohio Edison and Allegheny Power System (APS). The cost of
capacity increased from $12,380 per megawatt, per month, in
effect from 1987 to 1993, to $18,060 per megawatt, per month,
plus an allocation of fixed operating and maintenance expenses.
Operating expenses other than fuel, purchased energy and
capacity purchase payments increased for the three and twelve
months ended March 31, 1994 as compared to the corresponding
periods ended March 31, 1993. The increases were principally
attributable to income taxes, due to a higher federal income tax
rate which became effective in 1993, and higher taxable income;
depreciation and amortization expense, due to additional
investment in property and plant and amortization of increased
amounts of conservation program costs; maintenance expense, due
to increased expenditures for maintenance of production
facilities; and other taxes, due to changes in the levels of
operating revenue and plant investment upon which taxes are
based.
See Part I, Item I, Notes to the Consolidated Financial
Statements, (5) Commitments and Contingencies for additional
information.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
The Company's investment in property and plant, at original
cost before accumulated depreciation, was $5.7 billion at March
31, 1994, an increase of $73.8 million from the investment at
December 31, 1993 and an increase of $308.6 million from the
investment at March 31, 1993. Cash invested in property and
plant construction, excluding AFUDC, amounted to $77.6 million
for the three months ended March 31, 1994 and $315.7 million for
the twelve months then ended.
22
See Part I, Item I, Notes to Consolidated Financial
Statements, (3) Capitalization for information with respect to
financing activity.
At March 31, 1994, the Company's capital structure,
excluding short-term debt, long-term debt and serial preferred
stock redemptions due within one year, and nonutility subsidiary
debt, consisted of 42.9% long-term debt, 3.3% serial preferred
stock, 3.8% redeemable serial preferred stock and 50% common
equity.
Cash (used by) from utility operations, after dividends, was
$(12) million for the three months ended March 31, 1994 and $105
million for the twelve months then ended as compared with $(22)
million and $77.7 million, respectively, for the same periods
ended March 31, 1993.
Outstanding utility short-term debt totaled $282.9 million
at March 31, 1994, a decrease of $11.7 million from the $294.6
million outstanding at December 31, 1993 and an increase of
$200.9 million from the $82 million outstanding at March 31,
1993.
NEW ACCOUNTING STANDARDS
- ------------------------
Effective January 1, 1994, the Company adopted SFAS No. 112
entitled "Employers' Accounting for Postemployment Benefits,"
which requires the accrual of the expected cost of providing
benefits to former or inactive employees after employment but
before retirement. The adoption of this pronouncement did not
have a material effect on the Company's consolidated financial
statements.
Also on January 1, 1994, the Company adopted SFAS No. 115
entitled, "Accounting for Certain Investments in Debt and Equity
Securities." See the Marketable Securities discussion included
in Part I, Item 1, Notes to Consolidated Financial Statements,
(4) Marketable Securities.
NONUTILITY SUBSIDIARY
- ---------------------
RESULTS OF OPERATIONS
- ---------------------
PCI's net earnings totaled $2.2 million and $25 million for
each of the three and twelve months ended March 31, 1994 and
March 31, 1993, respectively. PCI contributed $.02 and $.22 per
share for the three and twelve months ended March 31, 1994,
respectively, to PEPCO's consolidated earnings per share,
unchanged from the corresponding periods ended March 31, 1993.
23
PCI generates income primarily from its leasing activities
and securities investments. Revenue from leasing activities,
which includes rental income, gains on asset sales, interest
income and fees totaled $24.5 million and $118.4 million for the
three and twelve months ended March 31, 1994 compared to $20.4
million and $111.6 million for the same periods ended in 1993.
The increase in income from leasing activities in 1994 versus
1993 was primarily due to an increase in asset sales and fee
income. All of PCI's aircraft are on lease at this time. At
March 31, 1994, a portion ($182 million carrying value) of PCI's
leasing portfolio consisted of short term usage based operating
leases with monthly rental income dependent upon hours used.
Under certain recent short term aircraft leases, PCI is
responsible for estimated operating and maintenance expenses
exceeding amounts provided therefor by the lessees. Such leases
include provisions for early termination.
PCI's marketable securities portfolio contributed pre-tax
income of $8.4 million and $37.9 million for the three and twelve
months ended March 31, 1994 compared to $8.9 million and $39.3
million for the same periods ended March 31, 1993, respectively.
Net realized gains included in marketable securities income
totaled $6.4 million for the twelve months ended March 31, 1994
and $.5 million and $8.3 million for the three and twelve month
periods ended March 31, 1993, respectively.
Other income decreased $2 million and $18.4 million for the
three and twelve months ended March 31, 1994, respectively, over
the same periods in 1993. The decrease for the three month
period was due primarily to a pre-tax write-off of approximately
$1.5 million as a result of agreements settling lawsuits related
to PCI's construction and operation of a municipally owned waste-
to-energy facility. The reduction in other income for the twelve
month period was the result of a pre-tax writedown of
approximately $13.5 million related to the termination of
obligations with respect to a real estate limited partnership
interest.
Expenses, before income taxes, which include interest,
depreciation and operating and administration and general
expenses totaled $33.9 million and $161.7 million for the three
and twelve months ended March 31, 1994, respectively, compared to
$31.5 million and $128.6 million for the same periods in 1993.
The increase in the three month period was due primarily to
increased interest expense as a result of an increase in interest
rates. The increase for the twelve month period was due
primarily to expenses related to a partnership transaction and
increased operating expenses incurred for aircraft under usage
based leases or which were not under lease during part of the
twelve month period.
24
PCI had income tax credits of $3.1 million and $45.7 million
for the three and twelve month periods ended March 31, 1994,
respectively, compared with an income tax credit of $2.4 million
and income tax expense of $.4 million for the corresponding
periods in 1993. Tax credits increased for the three month
period ended March 31, 1994 over 1993, primarily due to greater
dividends earned over the prior year and taxed at a lower tax
rate. The $45.3 million increase in tax credits for the twelve
month period ended March 31, 1994 over March 31, 1993 was
attributable to a second quarter 1993 partnership transaction,
whereby PCI contributed aircraft, subject to direct finance
leases, to a majority-owned partnership resulting in future cash
savings of $37.4 million. As a result of this transaction, PCI's
obligation for previously accrued deferred taxes was reduced,
resulting in after tax earnings of $21.3 million, after provision
for all costs of the transaction. The excess deferred taxes were
recognized as a reduction in income tax expense. The twelve
month increase in tax credits for 1994 over 1993 was offset by an
August 1993 charge to earnings of $5.1 million to adjust PCI's
deferred taxes for the higher rate contained in the Omnibus
Budget Reconciliation Act of 1993.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
Investments in leased equipment of $3.7 million for the
three month period ended March 31, 1994 were for refurbishment
and modification of existing aircraft and $34.9 million for the
twelve month period ended March 31, 1994 reflect the purchase of
a new MD-11 aircraft placed on a long-term leveraged lease at the
same time that older equipment under lease by the same carrier
was sold for proceeds of $108.1 million and a pre-tax gain of
$6.2 million.
At March 31, 1994, PCI had two aircraft on lease to Hawaiian
Airlines (Hawaiian) which had filed for bankruptcy protection
under Chapter 11 of the Bankruptcy Code. Hawaiian has made all
of its scheduled monthly rent payments. In April 1994, PCI
requested and Hawaiian returned the two aircraft which PCI has
leased to another carrier commencing in May 1994.
PCI's outstanding short-term debt totaled $104.9 million at
March 31, 1994, a decrease of $21.3 million from the $126.2
million outstanding at December 31, 1993 and a decrease of $148.5
million from the $253.4 million outstanding at March 31, 1993.
During the three and twelve months ended March 31, 1994, PCI
issued $115 million and $318 million, respectively, in long-term
debt, including non-recourse debt, and debt repayments totaled
$62.6 million and $198.3 million, respectively for those same
periods. During the twelve month period ended March 31, 1994,
25
PCI assumed $22.6 million in debt as a result of the purchase of
minority interests and subsequent consolidation of two entities
previously accounted for under the equity method. At March 31,
1994, PCI had $285 million available under its Medium-Term Note
Program and $345 million of unused short-term bank credit lines.
PCI paid the Company a $15 million dividend in January 1994
resulting in cumulative dividends of $91 million paid since PCI's
inception. PCI remains adequately capitalized to support future
business plans, which are designed to supplement utility earnings
and build long-term value.
Part II OTHER INFORMATION
- ------- -----------------
Item 1 LEGAL PROCEEDINGS
- ------ -----------------
See Part I, Item I, Notes to the Consolidated Financial
Statements, (5) Commitments and Contingencies, for information on
Personal Injury Asbestos Cases.
Part II
- ------
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
(a) Annual meeting of shareholders held April 27, 1994.
(b) (1) Directors who were elected at the annual meeting:
For Term Expiring in 1995:
John M. Derrick, Jr. Votes cast for: 99,625,678
Votes withheld: 2,022,082
For Term Expiring in 1997:
Richard E. Marriott Votes cast for: 98,690,057
Votes withheld: 2,957,703
David O. Maxwell Votes cast for: 99,089,933
Votes withheld: 2,557,827
Floretta D. McKenzie Votes cast for: 98,260,144
Votes withheld: 3,387,616
Edward F. Mitchell Votes cast for: 99,539,335
Votes withheld: 2,108,425
26
(2) Directors whose terms of office continued after the
annual meeting:
Roger R. Blunt, Sr. Peter F. O'Malley
A. James Clark Louis A. Simpson
H. Lowell Davis W. Reid Thompson
Ann D. McLaughlin
(c) (1) The following two shareholder proposals were
introduced:
(a) "RESOLVED: That the shareholders of PEPCO recommend
that the Board of Directors take the necessary steps to
reinstate the election of directors ANNUALLY, instead of the
staggered system which was recently adopted."
The following statement has been supplied by the
shareholder submitting this proposal:
"REASONS: Until recently, directors of PEPCO were
elected annually by all shareholders."
"The great majority of New York Stock Exchange
listed corporations elect all their directors each year.
"This insures that ALL directors will be more
accountable to ALL shareholders each year and to a certain
extent prevents the self-perpetuation of the Board."
"Last year the owners of 18,159,561 shares,
representing 22.6% of shares of voting, voted FOR this
proposal."
The shareholder proposal was defeated. There were
61,797,260 votes cast against the proposal, 18,615,156 votes cast
in support of the proposal, 3,361,179 votes abstaining and
17,874,165 broker nonvotes.
(b) "RESOLVED: That the shareholders of PEPCO recommend
that the Board of Directors institute a salary and
compensation ceiling such that as to future employment
contracts, no senior executive or director of the Company
receive a combined salary and other compensation which is
more than two times the salary provided to the President of
the United States, that is, no more than $400,000."
The following statement has been supplied by the
shareholder submitting this proposal:
"REASONS: There is a general consensus that
corporate officials are grossly overpaid and that this is
promulgated by the hands-off policy of Boards of Directors.
27
The recommended ceiling is sufficient to motivate any person
to do his best. There is no corporation which exceeds the
size and complexity of the United States government of which
the President is the chief executive officer. Even
government agencies exceed the size, as measured by
personnel and budget, of private corporations. The
President of the United States receives a salary of
$200,000; even agency heads and members of Congress are paid
only somewhat more than $100,000."
"The duties of the President of the United States
are not comparable to those of senior executive officers or
directors (the President has a much more demanding job).
While the President has many valuable compensations which
may exceed those of company executives, I use the salary of
the President only as a reference point for shareholders to
consider as they evaluate this resolution.
"Officers and directors of public corporations are
the employees and not the owners, except as they may be
shareholders in common with other stockholders. The Boards
of Directors, a closed group which perpetuates itself,
determines who is to be selected to the Board and who is an
officer of the company, as well as the compensation to be
received. They should not give the appearance that they run
the corporations for their benefit and only incidentally for
the benefit of shareholders. They should not unnecessarily
drain away millions of dollars in salary, stock options and
other compensation. When the recommended ceiling is
exceeded, it may be an expression of greed and abuse of
power.
"There may be no direct correlation between the
profitability of a corporation and the compensation to
officers. In many corporations, compensation increases even
as profits fall. High compensation need not serve as an
incentive for a better run or more profitable corporation.
Many qualified people would gladly step in and do as good a
job as the incumbent officers of the Corporation and would
have no hesitation serving under the aforementioned ceiling
on compensation.
"Any officer who believes he can better the
corporation should be sufficiently motivated to purchase
stock on the open market or to receive stock options as part
of his salary and compensation package. To remain
competitive in world markets we must cut our costs and not
overcompensate directors and officers.
"Last year a similar proposal received 18.2% of the
stockholder's vote."
28
The shareholder proposal was defeated. There were
63,611,227 votes cast against the proposal, 16,041,369 votes cast
in support of the proposal, 4,126,079 votes abstaining and
17,869,085 broker nonvotes.
Item 5 OTHER INFORMATION
- ------ -----------------
OTHER FINANCING ARRANGEMENTS - Credit Agreements
- ------------------------------------------------
The Company has, with respect to its utility operations, $90
million in revolving credit agreements with 11 banks and
conventional bank line of credit agreements of $200.5 million
with 20 banks, all of which were unused during 1994 and 1993.
PCI maintains a minimum 100 percent line of credit back-up for
its outstanding commercial paper issuances, all of which were
unused during 1994 and 1993.
BASE RATE PROCEEDINGS
- ---------------------
Maryland
- --------
In October 1993, pursuant to a settlement agreement, the
Commission authorized a $27 million, or 3%, increase in base rate
revenue effective November 1, 1993. The settlement included a
new system composite depreciation rate of approximately 3.1%, up
from the 3% rate previously in effect. Prior to the settlement,
the Company had filed updated cost of service data which
demonstrated a need for a $49.9 million increase in Maryland base
rate revenue, based upon the requested return of 9.89% on average
rate base including a 12.75% return on common stock equity, 1993
federal tax legislation and the completed separate depreciation
case. In connection with the settlement agreement, no
determination was made with respect to rate of return. The rate
of return on common stock equity most recently determined for the
Company in a fully litigated rate case was 12.75% established by
the Commission in a June 1991 rate increase order.
District of Columbia
- --------------------
On March 4, 1994, the Commission authorized a $25.4 million,
or 3.8% increase in base rate revenue. Of the total increase,
$23.2 million became effective March 16, 1994. The remaining
$2.2 million is scheduled to become effective on June 5, 1994,
contingent on the June 1, 1994 in-service date of the final
segment of a 500-kilovolt transmission line which will provide
additional links in the transmission systems of the Company,
29
Baltimore Gas and Electric Company and Virginia Power. The
authorized rates are based on a 9.05% rate of return on average
rate base, including an 11% return on common stock equity. The
Commission approved the Company's proposal for including future
changes in purchased capacity costs in fuel adjustment clause
billings. Furthermore, the Commission authorized an accounting
change for post-retirement benefit costs consistent with SFAS No.
106 entitled "Employer's Accounting for Postretirement Benefits
Other Than Pensions." The Commission adopted a three-year phase-
in approach for inclusion of increased postretirement benefit
costs in the Company's rates. In addition, the Commission
reversed its longstanding practice of including Electric Plant
Held for Future Use in rate base and ordered the Company to
accrue AFUDC on plant held for future use. The order increased
test period revenue by $3 million, which reduced the Company's
revenue requirement, to reflect 20% of the cumulative effect of a
1992 accounting change related to unbilled revenue applicable to
the District of Columbia. The Commission's decision to adopt an
unbilled revenue adjustment may require the Company to establish
a regulatory liability of up to $5.9 million on an after tax
basis. The Commission rejected the Company's proposed Demand
Side Management (DSM) surcharge. Consistent with prior
decisions, the order included $5.3 million in base rates to
recognize DSM program costs without provision for lost revenue
between rate cases. In addition, the Commission found that the
Company had not adequately supported $5.5 million, or 25% of
conservation expenditures during the test year and therefore
disallowed recovery of those costs in base rates. Subsequent to
the test period in the case, the Company has expended
approximately $23 million on conservation in the District of
Columbia. The Commission's decision to disallow certain DSM
program costs may require the Company to write off more than $5.5
million ($3.2 million after taxes) in 1994. On April 4, 1994, the
Company filed a request for reconsideration of the decision. A
Commission decision on reconsideration is expected by early May
1994.
Federal - Wholesale
- -------------------
The Company has a 10-year full service power supply contract
with the Southern Maryland Electric Cooperative, Inc. (SMECO), a
wholesale customer. The contract period is to be extended for
an additional year on January 1 of each year, unless notice is
given by either party of termination of the contract at the end
of the 10-year period. The full service obligation can be
reduced by SMECO by up to 20% of its annual requirements with a
five-year advance notice for each such reduction. SMECO rates
were increased by $2.6 million and $3.8 million effective January
1, 1994 and 1993, respectively. Rate increases of $2.3 million
and $4.2 million are scheduled to become effective on January 1,
1995 and 1996, respectively.
30
Federal - Interchange and Purchased Energy
- ------------------------------------------
The Company's generating and transmission facilities are
interconnected with the other members of the Pennsylvania-New
Jersey-Maryland Interconnection (PJM) and other utilities. The
pricing of most PJM internal economy energy transactions is based
upon "split savings" so that the price of such energy is halfway
between the cost that the purchaser would incur if the energy
were supplied by its own sources and the cost of production to
the company actually supplying the energy.
In addition to PJM interchange activity, the Company has
interconnection agreements with Allegheny Power System (APS) and
Virginia Power. These agreements provide a mechanism and the
flexibility to purchase power from these parties or from others
with whom they are interconnected on an as-needed basis in
amounts mutually agreed to from time-to-time pursuant to
negotiated rates, terms and conditions.
Pursuant to the Company's long-term capacity purchase
agreements with Ohio Edison and APS, the Company is purchasing
450 megawatts of capacity and associated energy through the year
2005. The monthly capacity commitment under this agreement,
excluding an allocation of fixed operating and maintenance cost,
was $12,380 per megawatt through 1993, $18,060 per megawatt
effective 1994 through 1998 and $25,620 per megawatt from 1999
through 2005.
PEAK LOAD, SALES, CONSERVATION AND ENERGY USE MANAGEMENT
- --------------------------------------------------------
AND CONSTRUCTION AND CAPACITY ADDITIONS
---------------------------------------
Peak Load and Sales Data
- ------------------------
Kilowatt-hour sales for the three and twelve month periods
ended March 31, 1994, increased 5.2% and 5.7%, respectively, as
compared to sales for the corresponding periods ended March 31,
1993. The increases in sales reflect higher customer usage due
to the impact of severe weather in January 1994 which resulted in
record-breaking low temperatures and warmer than average weather
during the summer of 1993 as compared to cooler than average
weather in 1992. Heating degree days in January 1994 were 43%
above January 1993 and 20% above the 20-year average for this
period. Cooling degree hours in 1993 were 97% above the
corresponding period in 1992, and were 22% above the 20-year
average weather for this period. Assuming future weather
conditions approximate historical averages, the Company expects
its compound annual growth in kilowatt-hour sales to range
between 1% and 2% over the next decade.
31
The 1993 summer peak demand was 5,754 megawatts, 3.8% higher
than the 1992 peak demand of 5,546 megawatts and .3% below the
all-time summer peak demand of 5,769 megawatts which occurred in
July 1991. The Company's present generation capability,
including capacity purchase contracts, is 6,576 megawatts. To
meet the 1993 summer peak demand, the Company had 201 megawatts
available from its dispatchable energy use management program.
Based on average weather conditions, the Company estimates that
its peak demand will grow at a compound annual rate of
approximately 1%, reflecting continuing emphasis on conservation
and energy use management programs and anticipated service area
growth trends. The new winter peak demand of 5,010 megawatts was
established in January 1994, which was 11.1% above the previous
all-time winter peak demand of 4,511 megawatts which occurred in
December 1989.
Conservation and Energy Use Management
- --------------------------------------
The Company's conservation and energy use management
programs are designed to curb growth in demand in order to defer
the need for construction of additional generating capacity and
to cost-effectively increase the efficiency of energy use. The
Company offers an extensive array of comprehensive conservation
programs for its customers in the District of Columbia and
Maryland and continues to aggressively identify, design, and test
additional energy-efficient conservation measures and
technologies.
The Company recovers the cost of its conservation programs
in its Maryland jurisdiction through a rate surcharge which
permits the Company to earn a return on its conservation
investment while receiving compensation for lost revenue. The
cost recovery mechanism also allows the Company to earn a
performance bonus for reaching or exceeding established goals.
The surcharge is adjusted periodically to reflect the Company's
growing conservation commitment. The District of Columbia Public
Service Commission has established a framework for earning a
return on approved conservation investments, and incentives for
achieving demand side management goals within base rate cases.
During the next five years, the Company plans to expend an
estimated $525 million to encourage the efficient use of electric
energy and to reduce the need to build new generating facilities.
It is estimated that peak load reductions of approximately 390
megawatts have been achieved to date from conservation and energy
use management programs and that additional peak load reductions
of more than 500 megawatts will be achieved in the next five
years.
32
Construction and Capacity Additions
- -----------------------------------
The Company's construction expenditures, excluding AFUDC, are
projected to total $1.3 billion for the five-year period 1994
through 1998 which includes $203 million of estimated Clean Air
Act (CAA) expenditures. Making use of the flexibilities in its
long-term construction plan, the Company reduced projected
expenditures for the five years 1994 through 1998 by a total of
$315 million from amounts previously planned. The construction
reductions and deferrals were associated with lower rates of
projected growth in usage of electricity resulting in large part
from implementing economical conservation programs. The Company
plans to finance its construction program through funds provided
by operations and external financing.
Although it is not possible to forecast specific impacts of
the National Energy Act legislation enacted during 1992, the
Company has substantial flexibility to anticipate and deal with
changing conditions and increased competition in the generation
and transmission of electricity. Since the early 1980s, the
Company has pursued strategies which achieve flexibility through
conservation and energy use management, extension of the useful
life of generating equipment, cost-effective purchase of capacity
and energy and preservation of scheduling flexibility to add new
generating capacity in relatively small increments to meet
changing requirements. The Company is a low-cost energy producer
with customer prices which compare favorably with regional and
national averages.
The Company has developed cost-effective plans for complying
with the CAA which require the reduction of sulfur dioxide and
nitrogen oxides emissions in two phases to achieve prescribed
standards. The Company anticipates capital expenditures totaling
$203 million over the next five years and has received regulatory
approval in Maryland and the District of Columbia for its plans
for compliance with Phase I requirements of the CAA and for
inclusion of the costs of compliance in its ratemaking cost of
service. The Company has also received approval for inclusion of
sulfur dioxide allowance expenses in its fuel adjustment clause.
The Company's construction schedule is flexible in order to
accommodate changes in future growth and the addition of
nonutility generation. Currently, no additional generating units
are scheduled until after the year 2003.
The Company's agreement for a project with Panda Energy
Corporation for a 230-megawatt gas-fueled combined-cycle
cogeneration project in Prince George's County, Maryland, which
is scheduled for service in 1996, is currently before the
Maryland Public Service Commission for issuance of a certificate
33
of convenience and necessity. In addition, a 40-megawatt
resource recovery facility is now under construction in
Montgomery County, Maryland, with which the Company has a
contract. The Company currently projects that contracted
nonutility generation and the Company's commitment to
conservation and energy use management will provide adequate
reserve margins to meet customers' needs for the next decade.
SELECTED NONUTILITY SUBSIDIARIES FINANCIAL INFORMATION
- ------------------------------------------------------
Selected (unaudited) financial information of the Company's
principal consolidated nonutility subsidiary, Potomac Capital
Investment Corporation (PCI) and its subsidiaries, is presented
below. The Company's equity investment in PCI, which was reduced
by a $15 million dividend in January 1994, and a $14 million
dividend in February 1993, was $275 million and $267.1 million at
March 31, 1994 and 1993, respectively.
34
<TABLE>
Consolidated Statements of Earnings:
- -----------------------------------
<CAPTION>
Three Twelve
Months Ended Months Ended
March 31, March 31,
------------------- ------------------
1994 1993 1994 1993
-------- -------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Income
Leasing activities $ 24,540 $ 20,375 $118,391 $111,618
Marketable securities 8,359 8,859 37,917 39,345
Other 110 2,083 (15,275) 3,150
-------- -------- -------- --------
33,009 31,317 141,033 154,113
-------- -------- -------- --------
Expenses
Interest 20,500 18,721 79,639 82,061
Administrative and general 2,510 2,366 14,783 9,451
Depreciation and
operating 10,852 10,383 67,288 37,137
Income tax expense (3,058) (2,410) (45,726) 446
-------- -------- -------- --------
30,804 29,060 115,984 129,095
-------- -------- -------- --------
Net earnings from
nonutility subsidiary $ 2,205 $ 2,257 $ 25,049 $ 25,018
======== ======== ======== ========
Per share contribution to
earnings of the Company $.02 $.02 $.22 $.22
==== ==== ==== ====
35
</TABLE>
<TABLE>
STATISTICAL DATA
- ----------------
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, March 31,
--------------------------------- -------------------------------------
1994 1993 % Change 1994 1993 % Change
-------- -------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue from Sales
------------------
of Electricity
--------------
(Thousands of Dollars)
Residential $120,798 $104,790 15.3 $ 522,104 $ 440,831 18.4
General Service 152,608 137,604 10.9 762,241 705,881 8.0
Large Power Service 56,711 51,520 10.1 302,419 286,181 5.7
Street Lighting 3,634 3,536 2.8 13,703 12,707 7.8
Rapid Transit 6,326 5,418 16.8 25,015 23,134 8.1
Wholesale 32,518 27,103 20.0 113,577 97,409 16.6
-------- -------- ---------- ----------
System $372,595 $329,971 12.9 $1,739,059 $1,566,143 11.0
======== ======== ========== ==========
Energy Sales
------------
(Millions of KWH)
Residential 1,936 1,799 7.6 6,877 6,247 10.1
General Service 2,668 2,562 4.1 10,966 10,501 4.4
Large Power Service 1,196 1,178 1.5 5,250 5,173 1.5
Street Lighting 45 46 (2.2) 163 165 (1.2)
Rapid Transit 102 91 12.1 382 362 5.5
Wholesale 692 633 9.3 2,386 2,178 9.6
-------- -------- ---------- ----------
System 6,639 6,309 5.2 26,024 24,626 5.7
======== ======== ========== ==========
Average System Revenue
----------------------
per KWH (cents per KWH) 5.61 5.23 7.3 6.68 6.36 5.0
-----------------------
System Peak Demand
------------------
(Thousands of KW)
Summer - - 5,754 5,546
Winter - - 5,010 4,368
Net Generation
--------------
(Millions of KWH) 5,614 4,858 19,901 18,864
Fuel Mix (% of Btu)
-------------------
Coal (%) 63 83 74 84
Oil (%) 36 16 23 12
Gas (%) 1 1 3 4
Fuel Cost per MBtu
------------------
System Average $2.13 $1.87 $1.98 $1.85
Weather Data
------------
Heating Degree Days 2,510 2,334 4,414 4,344
20 Year Average 2,218 3,988
Cooling Degree Hours - - 13,250 6,732
20 Year Average 12 10,871
Heating Degree Days - The daily difference in degrees by which the
mean temperature is below 65 degrees Fahrenheit (dry bulb).
Cooling Degree Hours - The daily sum of the differences, by hours, by
which the temperature (effective temperature) for each hour exceeds
71 degrees Fahrenheit (effective temperature).
36
</TABLE>
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
(a) Exhibits
Exhibit 11 - Computation of Earnings Per Common
Share - filed herewith.
Exhibit 12 - Computation of ratios - filed
herewith.
Exhibit 15 - Letter re unaudited interim
financial information - filed
herewith.
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed by the
Company on January 28, 1994, providing detailed
information and audited consolidated financial
statements. The item reported on such Form 8-K
was Item 7 (Financial Statements, Pro-Forma
Financial Information and Exhibits.)
SIGNATURES
----------
Pursuant to the 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.
Potomac Electric Power Company
------------------------------
Registrant
By /s/ D. R. Wraase
------------------------------
(D. R. Wraase)
Senior Vice President,
Finance and Accounting
May 2, 1994
- -----------
DATE
37
<TABLE>
Exhibit 11 Computations of Earnings Per Common Share <F1>
- ---------- ------------------------------------------
The following is the basis for the computation of primary and fully
diluted earnings per common share for the twelve months ended March 31, 1994
and the twelve months ended December 31, 1993 and 1992:
<CAPTION>
March 31, December 31, December 31,
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Average shares outstanding for
computation of primary earnings
per common share 116,496,270 115,639,668 112,389,698
============ ============ ============
Average shares outstanding for
fully diluted computation:
Average shares outstanding 116,496,270 115,639,668 112,389,698
Additional shares resulting from:
Conversion of Serial Preferred
Stock, $2.44 Convertible Series
of 1966 (the "Convertible
Preferred Stock") 51,891 51,967 57,542
Conversion of 7% Convertible
Debentures 2,533,279 2,546,858 2,603,912
Conversion of 5% Convertible
Debentures 3,392,500 3,392,500 1,130,833
------------ ------------ ------------
Average shares outstanding for
computation of fully diluted
earnings per common share 122,473,940 121,630,993 116,181,985
============ ============ ============
Earnings applicable to common
stock, before cumulative effect
of accounting change $226,661,000 $225,324,000 $186,368,000
Cumulative effect of accounting
change, net of income taxes - - 16,022,000
------------ ------------ ------------
Earnings applicable to common stock,
as reported 226,661,000 225,324,000 202,390,000
Add: Dividends paid or accrued on
Convertible Preferred Stock 21,000 22,000 24,000
Interest paid or accrued on
Convertible Debentures,
net of related taxes 6,539,000 6,548,000 4,303,000
------------ ------------ ------------
Earnings applicable to common stock,
including cumulative effect of
accounting change and assuming
conversion of convertible securities $233,221,000 $231,894,000 $206,717,000
============ ============ ============
Primary earnings per common share
Before cumulative effect $1.95 $1.95 $1.66
Cumulative effect - - 0.14
----- ----- -----
Total $1.95 $1.95 $1.80
===== ===== =====
Fully diluted earnings per common share
Before cumulative effect $1.90 $1.91 $1.64
Cumulative effect - - 0.14
----- ----- -----
Total $1.90 $1.91 $1.78
===== ===== =====
<F1> This calculation is submitted in accordance with Regulation S-K
item 601 (b) (11) although not required by footnote 2 to paragraph 14
of APB No. 15 because it results in dilution of less than 3%.
38
</TABLE>
<TABLE>
Exhibit 12 Computation of Ratios
- ---------- ---------------------
The computations of the coverage of fixed charges, excluding the
cumulative effect of the 1992 accounting change, before income taxes, and the
coverage of combined fixed charges and preferred dividends for the twelve
months ended March 31, 1994 and for each of the preceding five years on the
basis of parent company operations only, are as follows.
<CAPTION>
Twelve
Months For The Year Ended December 31,
Ended -----------------------------------------------------
Mar. 31,
1994 1993 1992 1991 1990 1989
--------- --------- --------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Net income before cumulative effect
of accounting change $217,901 $216,478 $172,599 $186,813 $165,199 $183,487
Taxes based on income 114,464 107,223 76,965 80,988 70,962 92,593
-------- -------- -------- -------- -------- --------
Income before taxes and cumulative effect
of accounting change 332,365 323,701 249,564 267,801 236,161 276,080
-------- -------- -------- -------- -------- --------
Fixed charges:
Interest charges 139,390 141,393 138,097 138,512 127,386 113,305
Interest factor in rentals 5,942 5,859 6,140 5,690 4,237 4,338
-------- -------- -------- -------- -------- --------
Total fixed charges 145,332 147,252 144,237 144,202 131,623 117,643
-------- -------- -------- -------- -------- --------
Income before income taxes, cumulative
effect of accounting change and
fixed charges $477,697 $470,953 $393,801 $412,003 $367,784 $393,723
======== ======== ======== ======== ======== ========
Coverage of fixed charges 3.29 3.20 2.73 2.86 2.79 3.35
==== ==== ==== ==== ==== ====
Preferred dividend requirements $16,289 $16,255 $14,392 $12,298 $10,598 $9,235
-------- -------- -------- -------- -------- --------
Ratio of pre-tax income to net income 1.53 1.50 1.45 1.43 1.43 1.50
---- ---- ---- ---- ---- ----
Preferred dividend factor $24,922 $24,383 $20,868 $17,586 $15,155 $13,853
-------- -------- -------- -------- -------- --------
Total fixed charges and preferred dividends $170,254 $171,635 $165,105 $161,788 $146,778 $131,496
======== ======== ======== ======== ======== ========
Coverage of combined fixed charges
and preferred dividends 2.81 2.74 2.39 2.55 2.51 2.99
==== ==== ==== ==== ==== ====
39
</TABLE>
<TABLE>
Exhibit 12 Computation of Ratios
- ---------- ---------------------
The computations of the coverage of fixed charges, excluding the
cumulative effect of the 1992 accounting change, before income taxes, and the
coverage of combined fixed charges and preferred dividends for the twelve
months ended March 31, 1994 and for each of the preceding five years on a
fully consolidated basis are as follows.
<CAPTION>
Twelve
Months For The Year Ended December 31,
Ended -----------------------------------------------------
Mar. 31,
1994 1993 1992 1991 1990 1989
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(Thousands of Dollars)
Net income before cumulative effect
of accounting change $242,950 $241,579 $200,760 $210,164 $170,234 $214,587
Taxes based on income 68,737 62,145 79,481 80,737 63,360 99,766
-------- -------- -------- -------- -------- --------
Income before taxes and cumulative effect
of accounting change 311,687 303,724 280,241 290,901 233,594 314,353
-------- -------- -------- -------- -------- --------
Fixed charges:
Interest charges 220,933 221,312 226,453 225,323 199,469 165,709
Interest factor in rentals 9,309 9,257 6,599 6,080 4,559 4,705
-------- -------- -------- -------- -------- --------
Total fixed charges 230,242 230,569 233,052 231,403 204,028 170,414
-------- -------- -------- -------- -------- --------
Nonutility subsidiary capitalized interest (1,904) (2,059) (2,200) (6,542) - -
-------- -------- -------- -------- -------- --------
Income before income taxes, cumulative
effect of accounting change and
fixed charges $540,025 $532,234 $511,093 $515,762 $437,622 $484,767
======== ======== ======== ======== ======== ========
Coverage of fixed charges 2.35 2.31 2.19 2.23 2.14 2.84
==== ==== ==== ==== ==== ====
Preferred dividend requirements $16,289 $16,255 $14,392 $12,298 $10,598 $9,235
-------- -------- -------- -------- -------- --------
Ratio of pre-tax income to net income 1.28 1.26 1.40 1.38 1.37 1.46
---- ---- ---- ---- ---- ----
Preferred dividend factor $20,850 $20,481 $20,149 $16,971 $14,519 $13,483
-------- -------- -------- -------- -------- --------
Total fixed charges and preferred dividends $251,092 $251,050 $253,201 $248,374 $218,547 $183,897
======== ======== ======== ======== ======== ========
Coverage of combined fixed charges
and preferred dividends 2.15 2.12 2.02 2.08 2.00 2.64
==== ==== ==== ==== ==== ====
40
</TABLE>
Exhibit 15
May 2, 1994
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sirs:
We are aware that Potomac Electric Power Company has incorporated
by reference our report dated May 2, 1994 (issued pursuant to
the provisions of Statement on Auditing Standards No. 71) in the
Prospectuses constituting parts of the Registration Statements
(Number 33-36798) on Form S-8 filed on September 12, 1990 and
(Numbers 33-48524, 33-58810 and 33-50377) on Form S-3 filed on June
10, 1992, February 26, 1993, and September 23, 1993, respectively.
We are also aware of our responsibilities under the Securities Act
of 1933.
Very truly yours,
/s/ Price Waterhouse
Price Waterhouse
Washington, D.C.
41
