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 September 30, 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 September 30, 1994
- ---------------------------- ---------------------------------
Common Stock, $1 par value 118,147,495
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.................................... 20
Item 2 - Management's Discussion and Analysis of Consolidated
Results of Operations and Financial Condition
Utility
Results of Operations.................................. 21
Capital Resources and Liquidity........................ 24
Nonutility Subsidiary
Results of Operations.................................. 26
Capital Resources and Liquidity........................ 28
PART II - Other Information
Item 1 - Legal Proceedings................................. 29
Item 5 - Other Information
Other Financing Arrangements............................. 29
Base Rate Proceedings.................................... 29
Peak Load, Sales, Conservation, and
Construction and Generating Capacity................... 33
Environmental Matters.................................... 35
Selected Nonutility Subsidiaries Financial Information... 36
Statistical Data......................................... 38
Item 6 - Exhibits and Reports on Form 8-K.................. 39
Signatures................................................. 39
Computation of Earnings Per Common Share................... 40
Computation of Ratios - Parent Company Only................ 41
Computation of Ratios - Fully Consolidated................. 42
Independent Accountants Awareness Letter................... 43
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 Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
-------------------- ---------------------- ----------------------
1994 1993 1994 1993 1994 1993
--------- --------- ---------- ---------- ---------- -----------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Revenue
Sales of electricity $ 603,073 $ 608,841 $1,432,601 $1,353,627 $1,775,409 $1,666,678
Other electric revenue 1,950 1,699 5,763 4,301 7,469 6,251
--------- --------- ---------- ---------- ---------- ----------
Total Operating Revenue 605,023 610,540 1,438,364 1,357,928 1,782,878 1,672,929
Interchange deliveries 2,453 3,721 29,607 15,481 36,890 31,925
--------- --------- ---------- ---------- ---------- ----------
Total Revenue 607,476 614,261 1,467,971 1,373,409 1,819,768 1,704,854
--------- --------- ---------- ---------- ---------- ----------
Operating Expenses
Fuel 90,916 98,116 307,907 268,716 393,473 353,238
Purchased energy 63,820 60,435 135,719 134,342 174,833 169,087
Capacity purchase payments 33,024 23,584 97,422 71,779 121,931 95,183
Other operation 51,531 50,384 150,575 148,583 209,806 202,135
Maintenance 21,066 21,831 66,604 65,155 95,117 87,784
--------- --------- ---------- ---------- ---------- ----------
Total Operation and Maintenance 260,357 254,350 758,227 688,575 995,160 907,427
Depreciation and amortization 47,576 41,802 133,066 121,188 175,485 159,506
Income taxes 77,603 85,065 121,800 112,502 119,474 109,453
Other taxes 61,484 61,089 160,074 155,670 205,656 200,261
--------- --------- ---------- ---------- ---------- ----------
Total Operating Expenses 447,020 442,306 1,173,167 1,077,935 1,495,775 1,376,647
--------- --------- ---------- ---------- ---------- ----------
Operating Income 160,456 171,955 294,804 295,474 323,993 328,207
--------- --------- ---------- ---------- ---------- ----------
Other Income
Nonutility Subsidiary
Income 35,552 40,696 102,603 98,858 143,086 147,974
Expenses, including interest
and income taxes (30,952) (41,157) (95,661) (77,840) (132,061) (113,960)
--------- --------- ---------- ---------- ---------- ----------
Net earnings (loss) from nonutility
subsidiary 4,600 (461) 6,942 21,018 11,025 34,014
Allowance for other funds
used during construction 1,309 3,006 7,315 10,315 10,242 16,447
Other, net 2,145 4,004 627 7,881 2,966 8,846
--------- --------- ---------- ---------- ---------- ----------
Total Other Income 8,054 6,549 14,884 39,214 24,233 59,307
--------- --------- ---------- ---------- ---------- ----------
Income Before Utility Interest Charges 168,510 178,504 309,688 334,688 348,226 387,514
--------- --------- ---------- ---------- ---------- ----------
Utility Interest Charges
Long-term debt 32,269 34,966 95,107 103,793 126,806 138,135
Other 2,975 1,091 8,638 3,743 10,796 4,311
Allowance for borrowed funds
used during construction (1,436) (2,224) (7,466) (7,585) (9,626) (10,418)
--------- --------- ---------- ---------- ---------- ----------
Net Utility Interest Charges 33,808 33,833 96,279 99,951 127,976 132,028
--------- --------- ---------- ---------- ---------- ----------
Net Income 134,702 144,671 213,409 234,737 220,250 255,486
Dividends on Preferred Stock 4,126 4,040 12,341 12,201 16,394 16,310
--------- --------- ---------- ---------- ---------- ----------
Earnings for Common Stock 130,576 140,631 201,068 222,536 203,856 239,176
Retained Income at Beginning of Period 800,385 791,862 839,433 802,774 884,768 831,842
Dividends on Common Stock (48,956) (47,725) (146,758) (141,714) (194,881) (187,228)
Subsidiary Marketable Securities Net
Unrealized (Loss) Gain, Net of Tax (4,250) - (15,988) 1,172 (15,988) 978
--------- --------- ---------- ---------- ---------- ----------
Retained Income at End of Period $ 877,755 $ 884,768 $ 877,755 $ 884,768 $ 877,755 $ 884,768
========= ========= ========== ========== ========== ==========
Average Common Shares
Outstanding (000's) 118,048 115,898 117,957 115,081 117,791 114,763
Earnings Per Common Share $1.11 $1.21 $1.70 $1.93 $1.73 $2.08
Cash Dividends Per Common Share $0.415 $0.410 $1.245 $1.230 $1.655 $1.630
Book Value Per Share $16.93 $16.90
Dividend Payout Ratio 95.7% 78.4%
Effective Federal Income Tax Rate 25.5% 17.8%
2
</TABLE>
<TABLE>
POTOMAC ELECTRIC POWER COMPANY
Consolidated Balance Sheets
(Unaudited at September 30, 1994 and 1993)
------------------------------------------
<CAPTION>
September 30, December 31, September 30,
ASSETS 1994 1993 1993
------ ------------- ------------- -------------
(Thousands of Dollars)
<S> <C> <C> <C>
Property and Plant - at original cost
Electric plant in service $ 5,526,960 $ 5,252,736 $ 5,198,820
Construction work in progress 318,362 373,665 337,442
Electric plant held for future use 17,831 33,644 34,836
Nonoperating property 7,542 5,096 3,722
------------- ------------- -------------
5,870,695 5,665,141 5,574,820
Accumulated depreciation (1,615,037) (1,533,999) (1,511,256)
------------- ------------- -------------
Net Property and Plant 4,255,658 4,131,142 4,063,564
------------- ------------- -------------
Current Assets
Cash and cash equivalents 1,853 7,439 3,472
Customer accounts receivable, less allowance
for uncollectible accounts of $2,620, $2,748
and $3,010 159,894 100,973 173,598
Other accounts receivable, less allowance for
uncollectible accounts of $300 26,836 53,454 202,577
Accrued unbilled revenue 105,940 71,497 105,296
Prepaid taxes 48,400 30,531 30,248
Other prepaid expenses 11,391 6,053 8,610
Material and supplies - at average cost
Fuel 71,467 61,973 69,627
Construction and maintenance 72,647 70,262 75,711
------------- ------------- -------------
Total Current Assets 498,428 402,182 669,139
------------- ------------- -------------
Deferred Charges
Income taxes recoverable through future rates, net 250,270 233,431 226,670
Conservation costs, net 143,162 87,328 66,842
Other 157,106 146,245 178,786
------------- ------------- -------------
Total Deferred Charges 550,538 467,004 472,298
------------- ------------- -------------
Nonutility Subsidiary Assets
Cash and cash equivalents 8,980 2,625 35,409
Marketable securities 480,123 466,153 464,939
Investment in finance leases 414,525 358,524 360,880
Operating lease equipment, net of accumulated
depreciation of $108,778, $85,302 and $77,883 544,134 565,443 547,550
Receivables 76,518 84,726 75,063
Other investments 153,479 163,911 141,125
Other assets 19,023 23,750 24,596
------------- ------------- -------------
Total Nonutility Subsidiary Assets 1,696,782 1,665,132 1,649,562
------------- ------------- -------------
Total Assets $ 7,001,406 $ 6,665,460 $ 6,854,563
============= ============= =============
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization
Common stock $ 118,147 $ 117,798 $ 116,808
Other common equity 1,882,517 1,837,411 1,857,150
Serial preferred stock 125,414 125,442 125,448
Redeemable serial preferred stock 145,063 147,000 147,000
Long-term debt 1,768,296 1,589,621 1,648,182
------------- ------------- -------------
Total Capitalization 4,039,437 3,817,272 3,894,588
------------- ------------- -------------
Current Liabilities
Long-term debt and preferred stock
redemption due within one year 17,000 17,977 296,610
Short-term debt 232,675 294,615 77,800
Accounts payable and accrued expenses 228,831 174,842 250,740
Other 113,420 103,633 102,464
------------- ------------- -------------
Total Current Liabilities 591,926 591,067 727,614
------------- ------------- -------------
Deferred Credits
Income taxes 831,063 780,723 770,764
Investment tax credits 69,169 71,906 72,773
Other 29,703 28,916 27,683
------------- ------------- -------------
Total Deferred Credits 929,935 881,545 871,220
------------- ------------- -------------
Nonutility Subsidiary Liabilities
Long-term debt 1,132,170 1,027,705 1,116,345
Short-term notes payable 94,590 126,250 13,300
Deferred taxes and other 213,348 221,621 231,496
------------- ------------- -------------
Total Nonutility Subsidiary Liabilities 1,440,108 1,375,576 1,361,141
------------- ------------- -------------
Total Capitalization and Liabilities $ 7,001,406 $ 6,665,460 $ 6,854,563
============= ============= =============
3
</TABLE>
<TABLE>
POTOMAC ELECTRIC POWER COMPANY
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------
<CAPTION>
Nine Months Ended Twelve Months Ended
September 30, September 30,
----------------------- -----------------------
1994 1993 1994 1993
--------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating Activities
Income from utility operations $ 206,467 $ 213,719 $ 209,225 $ 221,472
Adjustments to reconcile income to net
cash from operating activities:
Depreciation and amortization 133,066 121,188 175,485 159,506
Deferred income taxes and investment tax credits 33,790 24,925 36,575 35,980
Allowance for funds used during construction (14,781) (17,900) (19,868) (26,865)
Changes in materials and supplies (11,879) 31,406 1,224 29,334
Changes in accounts receivable and accrued unbilled revenue (66,746) (117,634) 15,489 (33,404)
Changes in accounts payable 8,273 7,423 409 (15,893)
Changes in other current assets and liabilities 28,548 71,126 (36,708) 33,011
Changes in deferred conservation costs (69,166) (36,966) (91,840) (47,296)
Net other operating activities (11,212) (66,556) 16,670 (59,913)
Nonutility subsidiary:
Net earnings 6,942 21,018 11,025 34,014
Deferred income taxes 1,366 (39,358) 7,910 (48,929)
Changes in other assets and net other operating activities 38,803 72,201 23,844 62,758
--------- --------- --------- ---------
Net Cash From Operating Activities 283,471 284,592 349,440 343,775
--------- --------- --------- ---------
Investing Activities
Total investment in property and plant (234,831) (235,022) (322,761) (342,037)
Allowance for funds used during construction 14,781 17,900 19,868 26,865
--------- --------- --------- ---------
Net investment in property and plant (220,050) (217,122) (302,893) (315,172)
Nonutility subsidiary:
Purchase of marketable securities (119,077) (177,694) (195,596) (261,935)
Proceeds from sale or redemption of marketable securities 80,263 117,243 157,315 190,970
Investment in leased equipment (64,182) (30,466) (66,076) (31,575)
Proceeds from sale or disposition of leased equipment 1,150 120,529 1,150 164,621
Purchase of other investments (6,785) (9,833) (41,580) (11,765)
Proceeds from sale or distribution of other investments 15,425 - 15,080 461
Investment in promissory notes (79) (1,563) (144) (1,563)
Proceeds from promissory notes 3,560 2,406 4,167 15,420
--------- --------- --------- ---------
Net Cash Used by Investing Activities (309,775) (196,500) (428,577) (250,538)
--------- --------- --------- ---------
Financing Activities
Dividends on common stock (146,758) (141,714) (194,881) (187,228)
Dividends on preferred stock (12,341) (12,201) (16,394) (16,310)
Issuance of common stock 7,447 68,857 34,592 82,875
Redemption of preferred stock (2,547) (1,500) (2,547) (1,550)
Issuance of long-term debt 302,999 348,453 475,810 348,453
Reacquisition and retirement of long-term debt (127,392) (288,448) (467,392) (324,448)
Short-term debt, net (61,940) 16,200 154,875 57,800
Other financing activities (5,199) (15,163) (16,233) (16,664)
Nonutility subsidiary:
Issuance of long-term debt 239,750 363,653 239,750 399,720
Repayment of long-term debt (135,286) (144,582) (237,781) (316,257)
Short-term debt, net (31,660) (250,215) 81,290 (164,170)
--------- --------- --------- ---------
Net Cash From (Used By) Financing Activities 27,073 (56,660) 51,089 (137,779)
--------- --------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 769 31,432 (28,048) (44,542)
Cash and Cash Equivalents at Beginning of Period 10,064 7,449 38,881 83,423
--------- --------- --------- ---------
Cash and Cash Equivalents at End of Period $ 10,833 $ 38,881 $ 10,833 $ 38,881
========= ========= ========= =========
Cash paid for interest (net of capitalized interest) and income taxes:
Interest (including nonutility subsidiary
interest of $75,119, $70,202, $81,473 and $79,057) $ 170,093 $ 173,092 $ 203,958 $ 209,786
Income taxes $ 15,277 $ 21,074 $ 61,944 $ 68,686
Nonutility subsidiary noncash transactions:
Promissory note received in exchange for equipment $ - $ - $ - $ 10,000
Consolidation of majority-owned subsidiaries $ - $ 11,320 $ 24,000 $ 11,320
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
- ------------
In general, the Company accounts for conservation
expenditures in connection with its demand side management (DSM)
program 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 accrued
6
on the unamortized balance in excess of amounts included in rate
base. In Maryland, conservation costs are recovered through a
surcharge included in base rates which reflects current year
expenditures and lost revenue.
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 7.7% compounded semiannually for the nine months
ended September 30, 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 Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1994 1993 1994 1993
----------- ----------- ----------- -----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Utility current tax expense
Federal $ 56,543 $ 60,619 $ 74,121 $ 77,105
State and local 7,915 9,209 10,249 10,958
----------- ----------- ----------- -----------
Total utility current tax expense 64,458 69,828 84,370 88,063
----------- ----------- ----------- -----------
Utility deferred tax expense
Federal 12,275 13,870 31,604 23,163
State and local 1,723 1,591 4,923 4,364
Investment tax credits (912) (867) (2,737) (2,602)
----------- ----------- ----------- -----------
Total utility deferred tax expense 13,086 14,594 33,790 24,925
----------- ----------- ----------- -----------
Total utility income tax expense 77,544 84,422 118,160 112,988
----------- ----------- ----------- -----------
Nonutility subsidiary current tax expense
Federal (18,730) (3,132) (22,416) (4,026)
----------- ----------- ----------- -----------
Nonutility subsidiary deferred tax expense
Federal 17,135 8,228 2,456 (38,842)
State and local (222) 482 (1,091) (865)
----------- ----------- ----------- -----------
Total nonutility subsidiary deferred tax expense 16,913 8,710 1,365 (39,707)
----------- ----------- ----------- -----------
Total nonutility subsidiary income tax expense (1,817) 5,578 (21,051) (43,733)
----------- ----------- ----------- -----------
Total consolidated income tax expense 75,727 90,000 97,109 69,255
Income taxes included in other income (1,876) 4,935 (24,691) (43,247)
----------- ----------- ----------- -----------
Income taxes included in utility operating expenses $ 77,603 $ 85,065 $ 121,800 $ 112,502
=========== =========== =========== ===========
8
</TABLE>
<TABLE>
Reconciliation of Consolidated Income Tax Expense
- -------------------------------------------------
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1994 1993 1994 1993
----------- ----------- ----------- -----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Income before income taxes $ 210,429 $ 234,671 $ 310,518 $ 303,992
=========== =========== =========== ===========
Utility income tax at federal
statutory rate $ 72,676 $ 80,344 $ 113,619 $ 114,348
Increases (decreases) resulting from
Depreciation 1,941 1,725 5,690 4,881
Removal costs (966) (950) (3,296) (2,778)
Allowance for funds used during
construction (264) (1,052) (2,002) (3,610)
Other (1,196) (2,391) (3,018) (5,008)
State income taxes, net of federal effect 6,265 7,020 9,904 9,959
Tax Credits (912) (867) (2,737) (2,602)
Cumulative effect of tax rate change - 593 - (2,202)
----------- ----------- ----------- -----------
Total utility income tax expense 77,544 84,422 118,160 112,988
----------- ----------- ----------- -----------
Nonutility subsidiary income tax at federal
statutory rate 974 1,791 (4,938) (7,950)
Increases (decreases) resulting from
Dividends received deduction (2,120) (1,711) (6,269) (5,651)
Reversal of previously accrued deferred taxes - (1,025) (6,547) (35,883)
Other (449) (384) (2,206) (281)
State income taxes, net of federal effect (222) 313 (1,091) (562)
Cumulative effect of tax rate change - 6,594 - 6,594
----------- ----------- ----------- -----------
Total nonutility subsidiary income tax expense (1,817) 5,578 (21,051) (43,733)
----------- ----------- ----------- -----------
Total consolidated income tax expense 75,727 90,000 97,109 69,255
Income taxes included in other income (1,876) 4,935 (24,691) (43,247)
----------- ----------- ----------- -----------
Income taxes included in utility operating expenses $ 77,603 $ 85,065 $ 121,800 $ 112,502
=========== =========== =========== ===========
9
</TABLE>
<TABLE>
Components of Consolidated Deferred Tax Liabilities (Assets)
- ------------------------------------------------------------
<CAPTION>
September 30,
--------------------------
1994 1993
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Utility deferred tax liabilities (assets)
Depreciation and other book to tax
basis differences $ 716,282 $ 664,440
Rapid amortization of certified pollution
control facilities 29,171 38,781
Deferred taxes on amounts to be collected
through future rates 95,053 86,215
Property taxes 10,709 10,043
Deferred fuel 4,768 2,926
Prepayment premium on debt retirement 12,427 9,659
Deferred ITC (26,268) (27,680)
Contributions in aid of construction (23,826) (22,538)
Other 24,068 16,758
----------- -----------
Total utility deferred tax liabilities (net) 842,384 778,604
Current portion of utility deferred tax liabilities
(included in Other current liabilities) 11,321 7,840
----------- -----------
Total utility deferred tax liabilities (net) - noncurrent $ 831,063 $ 770,764
=========== ===========
Nonutility subsidiary deferred tax liabilities (assets)
Finance leases $ 126,738 $ 128,194
Operating lease depreciation 114,687 102,076
Reversal of previously accrued taxes related
to partnerships (16,030) (16,843)
Alternative minimum tax (75,610) (67,460)
Other (15,399) (9,912)
----------- -----------
Total nonutility subsidiary deferred tax liabilities (net),
(included in Deferred taxes and other) $ 134,386 $ 136,055
=========== ===========
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 September 30, 1994, the Company has recorded
additional deferred income taxes and a net regulatory asset of
$250.3 million. No valuation allowance for deferred tax assets
was required or recorded at September 30, 1994. The adoption of
SFAS No. 109 increased net income for the nine and twelve months
ended September 30, 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 September 30, 1994, 118,147,495 shares of the Company's
$1 par value Common Stock were outstanding. A total of 200
million shares is authorized.
As of September 30, 1994, 2,583,222 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
September 30, 1994, 1,299,867 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 September 30, 1994, the Company had outstanding 5,409,537
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 September 30, 1994, the aggregate annual
dividend requirements on the Serial Preferred Stock and the
Redeemable Serial Preferred Stock were approximately $6.2 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
(8,286 shares outstanding at September 30, 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 $.9 million and $1.5 million at September 30, 1994 and
1993, respectively.
At September 30, 1994, the Company had outstanding one
million shares of its Serial Preferred Stock, Auction Series A.
The annual dividend rate is 3.82% ($1.91) for the period
September 1, 1994 through November 30, 1994. For the period
June 1, 1994 through August 31, 1994, the annual dividend rate
was 3.75% ($1.873). The average rate at which dividends were
paid during the 12 months ended September 30, 1994 was 3.212%
($1.606). The estimated fair value of this series at September
30, 1994 and 1993, was the carrying value.
The estimated fair value at September 30, 1994 and 1993, for
the remaining Serial Preferred Stock (excluding the Redeemable
Serial Preferred Stock) was $51.2 million and $63.6 million,
respectively, based on discounted cash flows using current rates
of preferred stock with similar terms.
At September 30, 1994, the Company had outstanding 901,251
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
$1.1 million in 1996 and $1.5 million annually thereafter.
At September 30, 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
12
sinking 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 Serial
Preferred Stock, excluding amounts due within one year, was $140
million and $162 million based on quoted market prices at
September 30, 1994 and 1993, respectively.
Long-Term Debt
- --------------
The Company's long-term debt at September 30, 1994, is
summarized below:
(Thousands of Dollars)
First Mortgage Bonds $1,283,600
Convertible Debentures 183,442
Notes Payable 350,000
Net Unamortized Discount (31,746)
Current Portion (17,000)
----------
Net Utility Long-Term Debt $1,768,296
==========
Nonutility Subsidiary Long-Term Debt $1,132,170
==========
At September 30, 1994, the aggregate annual interest
requirement on the Company's long-term debt, including debt due
within one year, was approximately $123.6 million. The aggregate
amounts of maturities and sinking fund requirements for the
Company's long-term debt outstanding as of September 30, 1994 are
$17 million in 1994, $44 million in 1995, $31 million in 1996,
$156 million in 1997 and $50 million in 1998. At September 30,
1994, long-term debt due within one year consisted of $15 million
of 5-1/4% First Mortgage Bonds and $2 million of 5-5/8% First
Mortgage Bonds.
13
The estimated fair value of the fixed rate First Mortgage
Bonds, excluding amounts due within one year, in the aggregate,
was $1.1 billion and $1.2 billion at September 30, 1994 and 1993,
respectively. The estimated fair value of the Convertible
Debentures, in the aggregate, was $158.6 million and $177.8
million at September 30, 1994 and 1993, respectively. The
estimated fair value at September 30, 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
September 30, 1994, the estimated fair value of the Adjustable
Rate series First Mortgage Bonds, based on the current market
price was $52.8 million. The carrying value was considered to be
the estimated fair value of this bond series at September 30,
1993.
At September 30, 1994 and 1993, the estimated fair value of
the Medium-Term Notes, excluding amounts due within one year, in
the aggregate, was $330.9 million and $140.6 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 September 30, 1994 consisted primarily of
unsecured borrowings from institutional lenders maturing at
various dates between October 1994 and November 2003. The
interest rates of such borrowings range from 3.69% to 10.10%.
The weighted average effective interest rate was 7.42% at
September 30, 1994 and 7.41% at September 30, 1993. Annual
aggregate principal repayments on these borrowings are $37.1
million remaining in 1994, $260.5 million in 1995, $173.5 million
in 1996, $123.5 million in 1997, $157.3 million in 1998 and $306
million thereafter through 2003. Also included in long-term debt
is $74.3 million of non-recourse debt which is due in monthly
installments with final maturities in 2001, 2002 and 2011.
At September 30, 1994 and 1993, the fair value of long-term
debt, including non-recourse debt, was approximately $1.1 billion
and $1.2 billion, respectively. These estimates were based on
current rates offered to similar companies for debt with similar
remaining maturities.
14
(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:
As of September 30, 1994
---------------------------------------
Gross
Market Unrealized
Cost Value Losses
---------- ---------- -------------
(Thousands of Dollars)
Mandatory redeemable
preferred stock $505,687 $480,123 $(25,564)
Equity securities 3 - (3)
-------- -------- --------
Total $505,690 $480,123 $(25,567)
======== ======== ========
As of September 30, 1993
-------------------------
Market
Cost Value
---------- ----------
(Thousands of Dollars)
Mandatory redeemable
preferred stock $462,098 $488,808
Debt securities 2,307 633
Equity securities 534 213
-------- --------
Total $464,939 $489,654
======== ========
15
At September 30, 1994, the final contractual maturities (in
thousands of dollars) for mandatory redeemable preferred stock
were as follows:
Within one year $ 10,308
One to five years 102,878
Five to ten years 149,036
Over ten years 243,465
--------
505,687
Less gross unrealized
losses (25,564)
--------
$480,123
========
In determining gross realized gains and losses on sales or
maturities of securities, specific identification is used. Gross
realized gains and losses are shown below.
Three Months Nine Months
Ended Ended
September 30, 1994 September 30, 1994
------------------ ------------------
(Thousands of Dollars)
Gross realized gains $ 560 $ 2,863
Gross realized losses (127) (1,542)
Recognized losses - (598)
------------------ ------------------
Net gain $ 433 $ 723
================== ==================
Net recognized gains of $3.1 million and $5.2 million were
included in income from marketable securities for the three and
nine months ended September 30, 1993, respectively.
(5) COMMITMENTS AND CONTINGENCIES
-----------------------------
In July 1994, the Company filed a Petition for Review with
the District of Columbia Court of Appeals related to the
Commission's decisions in Formal Case No. 929. Oral arguments
are scheduled for December 1994. See Part II, Item 5, Base Rate
Proceedings for additional information.
16
In September 1994, the Company announced a Voluntary
Severance Program (VSP) to reduce staffing levels. As an
incentive to voluntarily sever employment, the VSP offers a
severance payment to any full time employee with five or more
years of service with the Company, based on two weeks of pay for
each year of service, not to exceed 52 weeks of pay.
Approximately 4,400 of the Company's employees are eligible to
participate in this program. At this time, the Company is unable
to predict the number of employees who will choose to participate
in the VSP. Actual costs and savings will be known at the end of
the voluntary sign-up period, scheduled to occur during the
fourth quarter of 1994.
As discussed in the 1993 Form 10-K and the June 30, 1994
Form 10-Q, 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 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, in 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 plaintiff's 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 third
party complaints involving Pittsburgh Corning and Owens Corning
were dismissed by the Baltimore City Court 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.
17
The Company is participating with certain other potentially
responsible parties (PRPs) in a Remedial Investigation/
Feasibility Study (RI/FS) with respect to a site in Philadelphia,
Pennsylvania. Pursuant to an agreement among the participating
PRPs, the Company is responsible for 12% of the costs of the
RI/FS. Total costs of the RI/FS, including legal fees, are
currently estimated to be $5.6 million. The Company has paid
$632,000 as of September 30, 1994. On October 14, 1994 an RI/FS
report was submitted to the EPA. A number of possible remedies
are included, the estimated costs of which range from $2 million
to $90 million. While a remedy near the lower end of the range
is possible, the Company cannot predict what remedy may be
acceptable to the EPA. In addition, the Company cannot estimate
the extent of the EPA's administrative and oversight costs. As
of September 30, 1994, the Company has accrued approximately $1.7
million for its share of this contingency.
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.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
18
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.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
This Quarterly Report on Form 10-Q, including the report of
Price Waterhouse LLP (on page 20) will automatically be
incorporated by reference in the Prospectuses constituting part
of the Company's Registration Statements on Form S-3
(Registration Nos. 33-58810 and 33-50377) and Form S-8
(Registration Nos. 33-36798, 33-53685 and 33-54197) filed under
the Securities Act of 1933. Such report of Price Waterhouse LLP,
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.
19
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 September 30, 1994 and 1993 and the related
consolidated statements of earnings and retained income for the
three, nine and twelve month periods then ended and the
consolidated statements of cash flows for the nine 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 LLP
Price Waterhouse LLP
Washington, D.C.
October 28, 1994
20
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 decreased for the three months ended September
30, 1994, as compared to the corresponding period in 1993. The
decrease in revenue from sales of electricity for the three month
period reflects a 5.6% decline in kilowatt-hour sales, partially
offset by a 6.9% increase in fuel rate revenue and the effects of
1993 base rate increases in Maryland and a 1994 base rate
increase in the District of Columbia. Mild weather during the
summer billing months of June through October has an adverse
effect on revenues. The decline in kilowatt-hour sales reflects
decreased customer usage due to below average summer temperatures
during August and September 1994 compared to unseasonably warmer
weather during the same period in 1993. Cooling degree hours for
the three months ended September 30, 1994 were 29.9% below the
corresponding period in 1993 and 8.4% below the 20-year average.
Total revenue increased for the nine and twelve months ended
September 30, 1994, as compared to the corresponding periods in
1993. The increases in revenue from sales of electricity for the
nine and twelve month periods were primarily attributable to
increases in fuel rate revenue for each period, the effects of
1993 base rate increases in Maryland, the 1994 base rate increase
in the District of Columbia, and revenue of $5 million associated
with the conservation incentive provision of the Company's Demand
Side Management (DSM) surcharge tariff. Kilowatt-hour sales were
unchanged for the nine months ended September 30, 1994 as
compared to the corresponding period in 1993, and up slightly for
the twelve months ended September 30, 1994. Kilowatt-hour sales
for the nine and twelve months ended September 30, 1994 reflect
decreased customer usage due to cooler than average summer
temperatures during August and September 1994. Cooling degree
hours for the nine and twelve months ended September 30, 1994
were 13.5% and 13.3% below the corresponding periods in 1993,
respectively, and 6.2% and 5.5% above the 20-year averages,
respectively. Interchange deliveries decreased for the three
months and increased for the nine and twelve months ended
September 30, 1994, reflecting the amount of energy delivered to
the Pennsylvania-New Jersey-Maryland (PJM) Interconnection
Association.
21
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 $26,692 3.9% 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 September 30, 1994, the Company filed an application with
the Commission requesting an increase of $67 million, or 9%, in
annual base rate revenue in the District of Columbia.
In July 1994, the Company filed a Petition for Review with
the District of Columbia Court of Appeals related to the
Commission's March and May 1994 decisions in Formal Case No. 929.
Oral arguments are scheduled for December 1994. See Part II,
Item 5, Base Rate Proceedings for additional information.
OPERATING EXPENSES
Fuel and purchased energy decreased for the three months and
increased for the nine and twelve months ended September 30,
1994, as compared to the corresponding periods ended September
30, 1993. Fuel expense increased for the nine and twelve months
ended September 30, 1994, primarily as the result of increases in
net generation of 4.8% and 2.4%, respectively, due to increased
customer usage caused by warmer than average weather in June
1994, record-breaking low temperatures in January 1994 and hotter
than average summer weather during 1993. The decrease in fuel
expense for the three months ended September 30, 1994, reflects
an 11.4% decrease in net generation resulting from decreased
customer usage of electricity due to cooler than average weather
in August and September 1994. The increases in purchased energy
for the three, nine and twelve months ended reflect changes in
the levels and prices of energy purchased from PJM and other
utilities.
22
The unit fuel costs for the comparative periods ended
September 30, were as follows:
Three Nine Twelve
Months Ended Months Ended Months Ended
------------ ------------ ------------
1994 1993 1994 1993 1994 1993
---- ---- ---- ---- ---- ----
System Average
Fuel Cost
per MBTU $1.89 $1.96 $1.99 $1.88 $1.98 $1.88
The increases in the system average unit fuel cost for the
nine and twelve months ended September 30, 1994 resulted from
increased use of major cycling and peaking generation units which
burn higher cost fuels. The decrease in the system average unit
fuel cost for the three months ended September 30, 1994 was
primarily attributable to decreased net generation due to
decreased customer usage of electricity. 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 September 30, 1994 and
1993, the Company obtained 73% and 82%, respectively, of its
system generation from coal based upon percentage of Btus.
Capacity purchase payments increased for the three, nine and
twelve months ended September 30, 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.
In addition, effective June 1, 1994 through May 31, 1995, the
Company is purchasing 147 megawatts of capacity from Pennsylvania
Power & Light Company at a total cost of $3 million.
Operating expenses other than fuel, purchased energy and
capacity purchase payments increased for the nine and twelve
months ended September 30, 1994 as compared to the corresponding
periods ended September 30, 1993, and decreased slightly for the
three months ended September 30, 1994. The increases for the
nine and twelve months ended September 30, 1994 were principally
attributable to increased depreciation and amortization expense
due to additional investment in property and plant and the
amortization of increased amounts of conservation program costs;
income taxes; and other taxes, primarily due to changes in the
levels of operating revenue. The 8.4% increase in maintenance
expense for the twelve months ended September 30, 1994 resulted
from increased expenditures for maintenance of production
facilities.
23
The Company has worked diligently to contain and reduce
costs while maintaining reliable electric service and operating
performance. To further reduce future costs, the Company, in
September 1994, announced a Voluntary Severance Program (VSP) to
reduce staffing levels. These future cost reductions will keep
customer rates as low as possible, allow the Company to retain
its position as a low-cost producer of electricity and prepare
the Company for the more competitive energy marketplace of the
future. As an incentive to voluntarily sever employment, the VSP
offers a severance payment to any full time employee with five or
more years of service with the Company, based on two weeks of pay
for each year of service, not to exceed 52 weeks of pay.
Approximately 4,400 of the Company's employees are eligible to
participate in this program. At this time, the Company is unable
to predict the number of employees who will choose to participate
in the VSP. Actual costs and savings will be known at the end of
the voluntary sign-up period, scheduled to occur during the
fourth quarter of 1994.
See "Legal Proceedings," under Part II, Item 1, Other
Information, for additional information.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
The Company's investment in property and plant, at original
cost before accumulated depreciation, was $5.9 billion at
September 30, 1994, an increase of $205.6 million from the
investment at December 31, 1993 and an increase of $295.9 million
from the investment at September 30, 1993. Cash invested in
property and plant construction, excluding AFUDC, amounted to
$220 million for the nine months ended September 30, 1994 and
$302.9 million for the twelve months then ended.
See Part I, Item I, Notes to Consolidated Financial
Statements, (3) Capitalization for information with respect to
financing activity.
At September 30, 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 43.8% long-term debt, 3.1% serial preferred
stock, 3.6% redeemable serial preferred stock and 49.5% common
equity.
24
On October 27, 1994, the Board of Directors declared a
quarterly Common Stock dividend of 41-1/2 cents per share,
payable December 30, 1994. The Company is strongly committed to
maintaining this dividend rate, which was most recently increased
in January 1994. Approximately 80% of the Company is owned by
individual investors for whom dividend continuity is a vital
concern. The Company ranks favorably in customer price
comparisons and other barometers of competitive position,
including the absence of industrial customers and the stability
of its service area. The Company estimates that its cash flow
will continue to strengthen and does not anticipate any events or
conditions that would cause it to consider a dividend reduction.
Cash from utility operations, after dividends, was $77.3
million for the nine months ended September 30, 1994 and $95.4
million for the twelve months then ended as compared with $76.8
million and $92.4 million, respectively, for the same periods
ended September 30, 1993.
In September 1994, the Company filed for an increase in the
Maryland fuel rate. The proposed Fuel Billing Rate includes an
adjustment for a deferred fuel amortization charge which is
designed to recover, over a twelve month period, approximately
$28.5 million of unrecovered fuel costs.
Outstanding utility short-term debt totaled $232.7 million
at September 30, 1994, a decrease of $61.9 million from the
$294.6 million outstanding at December 31, 1993 and an increase
of $154.9 million from the $77.8 million outstanding at September
30, 1993.
THE COVE POINT JOINT VENTURE
- ----------------------------
In November 1993, the joint venture partnership formed by
subsidiaries of the Company and Columbia Gas System, Inc. (the
Partnership) to own and operate natural gas storage and
terminaling facilities at Cove Point, Maryland, and an 87-mile
natural gas pipeline that extends from Cove Point to Loudoun,
Virginia, filed a request with the FERC for approval of a natural
gas peak storage project, including market based rates. During
September 1994, the Partnership received an order from the FERC
granting final approval of the project on the basis of cost-of-
service rates rather than market based rates. On October 12,
1994, the Partnership filed a motion for reconsideration with the
FERC regarding the Commission's cost-of-service rate base
determination. The Partnership is now awaiting the FERC's
decision on the motion for reconsideration.
25
NONUTILITY SUBSIDIARY
- ---------------------
RESULTS OF OPERATIONS
- ---------------------
PCI's net earnings totaled $4.6 million, $6.9 million and
$11 million for the three, nine and twelve months ended September
30, 1994, respectively, compared with a net loss of $.5 million,
and net earnings of $21 million and $34 million for the same
periods ended September 30, 1993. PCI contributed $.04, $.06 and
$.09 per share for the three, nine and twelve months ended
September 30, 1994, respectively, compared to no contribution,
$.18 and $.29 per share, respectively, during the corresponding
periods ended September 30, 1993. PCI's earnings for the three
months ended September 30, 1994 increased $5.1 million over the
corresponding period in 1993 primarily due to an August 1993
charge of $5.1 million to adjust PCI's deferred taxes for the
higher corporate income tax rate specified in the Omnibus Budget
Reconciliation Act of 1993, a September 1993 after tax write-off
of $5.6 million related to the termination of obligations with
respect to a real estate limited partnership interest and a
reduction in operating and maintenance expenses due to the timing
of expenditures in 1993 and collection of reserves in 1994
relating to PCI's aircraft operating lease portfolio. These
events were partially offset by a decrease in leasing income.
PCI's net earnings for the nine and twelve months ended
September 30, 1994 decreased over the corresponding periods ended
September 30, 1993 primarily due to the completion of a
transaction, during the second quarter 1993, whereby PCI
contributed aircraft to a majority owned partnership resulting in
future cash savings of $37.4 million. The terms of the
partnership agreement had the effect of reducing PCI's obligation
for previously accrued deferred taxes 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 in the second quarter of 1993.
In addition to transaction timing considerations, net
earnings for the twelve month period ended September 30, 1994
were lower than earnings for the corresponding period ended in
1993 as the result of increased operating and maintenance
expenses for certain aircraft. Because of the current
unavailability of satisfactory long-term leases, at September 30,
1994 a portion ($267 million carrying value) of PCI's leasing
portfolio consisted of short-term, and in some cases, usage-based
operating leases with monthly rentals and maintenance payments
dependent upon hours used. Of the $267 million of equipment on
short-term or usage-based leases, five L-1011 aircraft on lease
to TWA ($74 million carrying value) are expected to be returned
26
to PCI in the fourth quarter of 1994 at the end of their
scheduled lease terms. Most of the usage-based and short-term
leases include provisions for early termination by PCI. Under
these leases, PCI is responsible for future operating and
maintenance expenses exceeding amounts provided therefor by
lessees and, through September 30, 1994, PCI has provided net
charges of $8.5 million (before tax) against earnings to
establish reserves against such future estimated expenses. To
eliminate the uncertainties associated with such short-term and
usage-based leases, PCI is aggressively seeking either to replace
these leases with arrangements providing more favorable lease
terms or to sell the equipment on satisfactory terms. The
ability to do so will depend upon aircraft market conditions.
The aircraft leasing industry is highly competitive in all of its
phases and the profitability of PCI's aircraft leasing business
will continue to be dependent upon aircraft market conditions
including, among other things, the terms upon which aircraft can
be sold or leased, the value of the equipment in the leasing
portfolio and the creditworthiness of the lessees of PCI's
aircraft which include both domestic and foreign commercial
airlines, air cargo and express delivery operators.
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 $25.2 million, $73.6 million and $108.8
million for the three, nine and twelve months ended September 30,
1994 compared to $35.4 million, $79.1 million and $113.7 million
for the corresponding periods in 1993. The decrease in income
from leasing activities in 1994 over the corresponding periods in
1993 was primarily due to sales of leased equipment during the
third quarter of 1993 which resulted in pre-tax gains of $7.3
million.
PCI's marketable securities portfolio contributed pre-tax
income of $9.1 million, $26.4 million and $36.4 million for the
three, nine and twelve months ended September 30, 1994,
respectively, compared to $9.7 million, $28.4 million and $43
million for the same periods ended September 30, 1993. The
decrease in 1994 from 1993 was primarily due to a decrease in net
realized gains from the sale or disposition of securities.
Other income increased for the three, nine and twelve month
periods ended September 30, 1994 over 1993 as a result of a
second quarter 1993 write-down 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 administrative and general
expenses totaled $32.8 million, $116.7 million and $154.5 million
for the three, nine and twelve months ended September 30, 1994,
27
respectively, compared to $35.6 million, $121.6 million and
$154.3 million over the same periods in 1993. Expenses, before
income taxes, for the three and nine month periods ended
September 30, 1994 decreased over the corresponding periods in
1993 primarily due to the timing of charges for aircraft repairs
and maintenance, and expenses related to the second quarter 1993
aircraft partnership transaction, respectively. The decrease in
expenses, before income taxes, for the three and nine months
ended September 30, 1994 over 1993 reflects an increase in
interest expense.
During the three, nine and twelve months ended September 30,
1994, PCI recognized income tax benefits of $1.8 million, $21.1
million and $22.4 million, respectively, compared with income tax
expense of $5.6 million for the three months ended September 30,
1993 and benefits of $43.7 million and $40.3 million for the nine
and twelve months ended September 30, 1993. Income tax benefits
increased for the quarter ended September 30, 1994 over 1993
primarily due to the August 1993 charge to income tax expense of
$5.1 million as a result of the increase in the corporate income
tax rate and income tax benefits decreased for the nine and
twelve month periods ended September 30, 1994 over 1993 as a
result of the second quarter 1993 aircraft partnership
transaction.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
Investments in leased equipment of $61.1 million, $64.2
million and $66.1 million for the three, nine and twelve month
periods ended September 30, 1994 included $60 million for a one-
third undivided interest in a recently-constructed 650 MW
baseload, coal and gas fired power plant located in The
Netherlands which was purchased and leased back under a long term
leveraged lease to a Dutch electric utility. The remaining
investment for each of the three periods ended September 30, 1994
was for the refurbishment and modification of existing aircraft.
PCI's outstanding short-term debt totaled $94.6 million at
September 30, 1994, a decrease of $31.6 million from the $126.2
million outstanding at December 31, 1993 and an increase of $81.3
million from the $13.3 million outstanding at September 30, 1993.
During the three, nine and twelve months ended September 30,
1994, PCI issued $29.8 million, $239.8 million and $239.8
million, respectively, in long-term debt. Debt repayments for
the three, nine and twelve months ended September 30, 1994 were
$50.2 million, $135.3 million and $237.8 million, respectively.
During the twelve month period ended September 30, 1994, PCI
assumed $22.6 million in debt as a result of the purchase of
minority interests and subsequent consolidation of two entities
28
previously accounted for under the equity method. At September
30, 1994, PCI had $160.3 million available under its Medium-Term
Note Program and $320 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. Also see Part II, Item 5, Base
Rate Proceedings, for information about a Petition for Review
filed by the Company with the District of Columbia Court of
Appeals, in July 1994, related to the District of Columbia
Public Service Commission's rate orders. In addition, see Part
II, Item 5, Environmental Matters, for updated information on
pending environmental proceedings.
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 $160.5 million
with 14 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, which was 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. In connection with the
settlement agreement, no determination was made with respect to
29
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.
The Company's operating revenue for the nine and twelve
months ended September 30, 1994, includes approximately $5
million associated with the conservation incentive provision of
the Company's DSM surcharge tariff. This incentive was awarded
to the Company for achieving specified 1993 energy savings goals.
District of Columbia
- --------------------
On September 30, 1994, the Company filed an application with
the Commission requesting an increase of $67 million, or 9%, in
annual base rate revenue. The request is based upon a 1994
calendar year test period using six months of actual data and a
return of 9.92% on average rate base, including a 12.75% return
on common stock equity. The requested rates are based upon
current costs of providing service to District of Columbia
customers including increased expenditures for new pollution
control facilities to comply with the Clean Air Act Amendments
and the Company's Control Center Replacement project which will
be placed in service in November 1994. The rates filed by the
Company include conservation program expenditures through June
1993. In accordance with Commission directives, subsequent
conservation program expenditures are included in the Demand Side
Management (DSM) cost recovery mechanism proposed by the Company
in its pending Least-Cost Planning proceeding filed in June 1994.
It is expected that both proceedings will be concluded during the
second quarter 1995.
In May 1994, the Commission ruled on the applications for
reconsideration of its March 1994 rate order in Formal Case No.
929. The Commission's original order authorized the Company to
increase its base rates by a total of $25.4 million in two steps:
an increase of $23.2 million effective March 16, 1994 and an
increase of $2.2 million effective June 5, 1994. The order on
reconsideration authorized an additional "step 2" base rate
increase of $1.3 million resulting in a total base rate increase
of $26.7 million. Of the "step 2" increase, $3 million was
contingent on the June 1, 1994 in-service date of the final
segment of a 500 kilovolt transmission line which provides links
in the transmission systems of the Company, Baltimore Gas and
Electric Company and Virginia Power. This transmission line
segment was placed in service prior to June 1, 1994. The
authorized rates are based on a 9.05% rate of return on average
rate base, including an 11% return on common stock equity.
30
The Commission's initial order approved the Company's
proposal for including future changes in purchased capacity costs
in fuel adjustment billings. 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. Furthermore, the
Commission authorized an accounting change for postretirement
benefit costs consistent with SFAS No. 106 entitled "Employer's
Accounting for Postretirement Benefits Other Than Pensions" and
adopted a three-year phase-in approach for inclusion of these
increased costs in the Company's rates. In June 1994, the
Company established a regulatory asset for the increase in post
retirement benefit costs of $.6 million on an after tax basis
which will be amortized over a three year period.
The initial order 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 initial decision to adopt an unbilled
revenue adjustment, supplemented by its subsequent decisions in
response to the Company's application for reconsideration and
motion for clarification, has required the Company to establish
in June 1994 a regulatory liability of $2.5 million on an after
tax basis which will be amortized in 1995 and 1996.
The Commission's initial decision rejected the Company's
proposed DSM surcharge and, consistent with prior decisions,
included $5.3 million in base rates to recognize DSM program
costs without provision for lost revenue between rate cases. In
addition, the initial decision and subsequent decisions in
response to the Company's application for reconsideration and
motion for clarification, disallowed the recovery of 25% of test
period DSM program expenditures which required the Company to
write off $2.2 million on an after tax basis in June 1994. In
its order on reconsideration, the Commission stated that in the
future the appropriate forum for consideration of DSM cost
recovery would be during the Company's least-cost resource
planning cases, which the Company files on a two-year cycle.
Under this new process, DSM program approval and cost recovery
will be linked together in one proceeding. Subsequent to the
test period in the case, the Company has expended approximately
$47 million on conservation in the District of Columbia.
In July 1994, the Company filed a Petition for Review with
the District of Columbia Court of Appeals related to the
Commission's decisions in Formal Case No. 929 to disallow the
recovery of 25% of test period DSM program expenditures and to
reject an adjustment to reflect increases in employee benefit
costs. Oral arguments are scheduled for December 1994.
31
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.
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 Association (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. In addition, effective June 1, 1994 through May
31, 1995, the Company is purchasing, at a total cost of $3
million, 147 megawatts of capacity from Pennsylvania Power &
Light Company.
32
PEAK LOAD, SALES, CONSERVATION, AND CONSTRUCTION
- ------------------------------------------------
AND GENERATING CAPACITY
-----------------------
Peak Load and Sales Data
- ------------------------
Kilowatt-hour sales decreased 5.6% for the three months
ended September 30, 1994 and increased slightly for the nine and
twelve month periods ended September 30, 1994, as compared to
sales for the corresponding periods ended September 30, 1993.
Cooler than average weather during August and September 1994,
compared to warmer than average weather during 1993, resulted in
decreased customer usage of electricity. Cooling degree hours
for the quarter were 30% below the corresponding period in 1993,
and were 8% below the 20-year average 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.
The 1994 summer peak demand of 5,660 megawatts occurred on
July 6, 1994. This compares with the 1993 summer peak demand of
5,754 megawatts, and 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
6,723 megawatts. To meet the 1994 summer peak demand, the
Company also had 256 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 all-
time winter peak demand of 5,010 megawatts was established in
January 1994 compared with the previous winter peak demand of
4,511 megawatts which occurred in December 1989.
Conservation
- ------------
The Company's conservation and energy use management (EUM)
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.
33
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
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.
During the next five years, the Company plans to expend an
estimated $250 million on conservation programs to encourage the
efficient use of electric energy and to reduce the need to build
new generating facilities. This represents a reduction of
approximately $121 million from amounts previously planned.
Other expenditures in connection with EUM programs are recovered
through the fuel adjustment clause, inclusion of plant investment
in rate base, and as operating expenses. It is estimated that
peak load reductions of approximately 390 megawatts have been
achieved to date from conservation and EUM programs and that
additional peak load reductions of more than 435 megawatts will
be achieved in the next five years.
Construction and Generating Capacity
- ------------------------------------
The Company's construction expenditures, excluding AFUDC, are
projected to total $1.1 billion for the five-year period 1994
through 1998 which includes $174 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 an
additional $145 million, bringing the total reduction to $460
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
34
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
$174 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 emission allowance expenses in its fuel adjustment
clause.
A 40-megawatt resource recovery facility with which the
Company has a contract is now under construction in Montgomery
County, Maryland. In addition, the Company has an agreement with
Panda Energy Corporation for a 230-megawatt gas-fueled combined-
cycle cogeneration project in Prince George's County, Maryland.
This project is currently before the Maryland Public Service
Commission for issuance of a certificate of convenience and
necessity. These nonutility generation projects are expected to
begin operating in 1995 and 1996, respectively. In 2004, the
Company plans to complete the first combined-cycle unit at its
Station H facility in Dickerson, Maryland, by adding a steam
cycle to the two combustion turbine units, one of which was
installed in 1992 and one of which was installed in 1993. The
Company currently projects that existing contracts for nonutility
generation and the Company's commitment to conservation will
provide adequate reserve margins to meet customers' needs well
beyond the year 2000.
ENVIRONMENTAL MATTERS
- ---------------------
The following is an update to the Environmental Matters
discussion in the Company's 1993 Form 10-K and the June 30, 1994
Form 10-Q.
Toxic Substances
- ---------------
The Company was notified by the U.S. Environmental
Protection Agency (EPA) on December 18, 1987, that it, along with
five other utilities and eight non-utilities, is a potentially
responsible party (PRP) under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended
35
(CERCLA or Superfund), in connection with the polychlorinated
biphenyl compounds (PCBs) contamination of soil, ground water and
surface water occurring at a Philadelphia, Pennsylvania site
owned by an unaffiliated company. Additional PRPs have since
been identified and the number is continuously subject to change.
In the early 1970s, the Company sold scrap transformers, some of
which may have contained some level of PCBs, to a metal reclaimer
operating at the site. The Company and nine other PRPs executed
an Administrative Order by Consent (ACO) with the EPA and the
performance of a Remedial Investigation/Feasibility Study (RI/FS)
is in progress. Pursuant to an agreement among the participating
PRPs, the Company is responsible for 12% of the costs of the
RI/FS. It is currently estimated that the PRPs' cost of
compliance with the ACO, including the RI/FS and legal fees, will
be approximately $5.6 million. The Company has paid $632,000 as
of September 30, 1994. On October 14, 1994 an RI/FS report was
submitted to the EPA. A number of possible remedies are
included, the estimated costs of which range from $2 million to
$90 million. While a remedy near the lower end of the range is
possible, the Company cannot predict what remedy may be
acceptable to the EPA. In addition, the Company cannot estimate
the extent of the EPA's administrative and oversight costs. As
of September 30, 1994, the Company has accrued approximately $1.7
million for its share of this contingency.
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 $266.8 million and $286.8 million
at September 30, 1994 and 1993, respectively.
36
<TABLE>
Consolidated Statements of Earnings:
- -----------------------------------
<CAPTION>
Three Nine Twelve
Months Ended Months Ended Months Ended
September 30, September 30, September 30,
------------------- ------------------ ------------------
1994 1993 1994 1993 1994 1993
-------- -------- -------- -------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Income
Leasing activities $ 25,199 $ 35,406 $ 73,625 $ 79,065 $108,786 $113,742
Marketable securities 9,092 9,692 26,353 28,392 36,378 42,957
Other 1,261 (4,402) 2,625 (8,599) (2,078) (8,725)
-------- -------- -------- -------- -------- --------
35,552 40,696 102,603 98,858 143,086 147,974
-------- -------- -------- -------- -------- --------
Expenses
Interest 21,739 20,089 62,552 58,359 82,054 78,951
Administrative and general 2,551 2,752 7,555 9,851 12,344 11,525
Depreciation and
operating 8,479 12,738 46,605 53,363 60,059 63,783
Income tax (credit) expense (1,817) 5,578 (21,051) (43,733) (22,396) (40,299)
-------- -------- -------- -------- -------- --------
30,952 41,157 95,661 77,840 132,061 113,960
-------- -------- -------- -------- -------- --------
Net earnings (loss) from
nonutility subsidiary $ 4,600 $ (461) $ 6,942 $ 21,018 $ 11,025 $ 34,014
======== ======== ======== ======== ======== ========
Per share contribution to
earnings of the Company $.04 $ - $.06 $.18 $.09 $.29
==== ==== ==== ==== ==== ====
37
</TABLE>
<TABLE>
STATISTICAL DATA
- ----------------
<CAPTION>
Three Months Ended Twelve Months Ended
September 30, September 30,
--------------------------------- -------------------------------------
1994 1993 % Change 1994 1993 % Change
-------- -------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue from Sales
------------------
of Electricity
--------------
(Thousands of Dollars)
Residential $181,291 $191,730 (5.4) $ 528,013 $ 493,136 7.1
General Service 268,114 265,973 0.8 778,694 737,003 5.7
Large Power Service 110,390 107,607 2.6 312,623 294,233 6.3
Street Lighting 3,363 3,254 3.3 14,023 13,329 5.2
Rapid Transit 8,010 6,883 16.4 27,162 23,530 15.4
Wholesale 31,905 33,394 (4.5) 114,894 105,447 9.0
-------- -------- ---------- ----------
System $603,073 $608,841 (0.9) $1,775,409 $1,666,678 6.5
======== ======== ========== ==========
Energy Sales
------------
(Millions of KWH)
Residential 1,825 2,048 (10.9) 6,712 6,681 0.5
General Service 3,018 3,148 (4.1) 10,844 10,829 0.1
Large Power Service 1,489 1,545 (3.6) 5,194 5,267 (1.4)
Street Lighting 36 36 - 163 164 (0.6)
Rapid Transit 108 96 12.5 399 366 9.0
Wholesale 612 638 (4.1) 2,388 2,299 3.9
-------- -------- ---------- ----------
System 7,088 7,511 (5.6) 25,700 25,606 0.4
======== ======== ========== ==========
Average System Revenue
----------------------
per KWH (cents per KWH) 8.51 8.11 4.9 6.91 6.51 6.1
-----------------------
System Peak Demand
------------------
(Thousands of KW)
Summer - - 5,660 5,754
Winter - - 5,010 4,368
Net Generation
--------------
(Millions of KWH) 4,709 5,314 19,848 19,380
Fuel Mix (% of Btu)
-------------------
Coal (%) 77 72 73 82
Oil (%) 8 21 21 15
Gas (%) 15 7 6 3
Fuel Cost per MBtu
------------------
System Average $1.89 $1.96 $1.98 $1.88
Weather Data
------------
Heating Degree Days 5 33 4,311 4,249
20 Year Average 22 3,940
Cooling Degree Hours 7,501 10,707 11,468 13,223
20 Year Average 8,187 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).
38
</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.
Exhibit 27 - Financial data schedule -
filed herewith.
(b) Reports on Form 8-K
None.
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
October 28, 1994
- ----------------
DATE
39
<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 September 30, 1994
and the twelve months ended December 31, 1993 and 1992:
<CAPTION>
September 30, December 31, December 31,
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Average shares outstanding for
computation of primary earnings
per common share 117,791,174 115,639,668 112,389,698
============ ============ ============
Average shares outstanding for
fully diluted computation:
Average shares outstanding 117,791,174 115,639,668 112,389,698
Additional shares resulting from:
Conversion of Serial Preferred
Stock, $2.44 Convertible Series
of 1966 (the "Convertible
Preferred Stock") 48,722 51,967 57,542
Conversion of 7% Convertible
Debentures 2,532,354 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 123,764,750 121,630,993 116,181,985
============ ============ ============
Earnings applicable to common
stock, before cumulative effect
of accounting change $203,856,000 $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 203,856,000 225,324,000 202,390,000
Add: Dividends paid or accrued on
Convertible Preferred Stock 20,000 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 $210,415,000 $231,894,000 $206,717,000
============ ============ ============
Primary earnings per common share
Before cumulative effect $1.73 $1.95 $1.66
Cumulative effect - - 0.14
----- ----- -----
Total $1.73 $1.95 $1.80
===== ===== =====
Fully diluted earnings per common share
Before cumulative effect $1.70 $1.91 $1.64
Cumulative effect - - 0.14
----- ----- -----
Total $1.70 $1.91 $1.78
===== ===== =====
<FN>
<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%.
</FN>
40
</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 September 30, 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 -----------------------------------------------------
Sept. 30,
1994 1993 1992 1991 1990 1989
--------- --------- --------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Net income before cumulative effect
of accounting change $209,225 $216,478 $172,599 $186,813 $165,199 $183,487
Taxes based on income 112,396 107,223 76,965 80,988 70,962 92,593
-------- -------- -------- -------- -------- --------
Income before taxes and cumulative effect
of accounting change 321,621 323,701 249,564 267,801 236,161 276,080
-------- -------- -------- -------- -------- --------
Fixed charges:
Interest charges 137,602 141,393 138,097 138,512 127,386 113,305
Interest factor in rentals 6,216 5,859 6,140 5,690 4,237 4,338
-------- -------- -------- -------- -------- --------
Total fixed charges 143,818 147,252 144,237 144,202 131,623 117,643
-------- -------- -------- -------- -------- --------
Income before income taxes, cumulative
effect of accounting change and
fixed charges $465,439 $470,953 $393,801 $412,003 $367,784 $393,723
======== ======== ======== ======== ======== ========
Coverage of fixed charges 3.24 3.20 2.73 2.86 2.79 3.35
==== ==== ==== ==== ==== ====
Preferred dividend requirements $16,394 $16,255 $14,392 $12,298 $10,598 $9,235
-------- -------- -------- -------- -------- --------
Ratio of pre-tax income to net income 1.54 1.50 1.45 1.43 1.43 1.50
---- ---- ---- ---- ---- ----
Preferred dividend factor $25,247 $24,383 $20,868 $17,586 $15,155 $13,853
-------- -------- -------- -------- -------- --------
Total fixed charges and preferred dividends $169,065 $171,635 $165,105 $161,788 $146,778 $131,496
======== ======== ======== ======== ======== ========
Coverage of combined fixed charges
and preferred dividends 2.75 2.74 2.39 2.55 2.51 2.99
==== ==== ==== ==== ==== ====
41
</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 September 30, 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 -----------------------------------------------------
Sept. 30,
1994 1993 1992 1991 1990 1989
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(Thousands of Dollars)
Net income before cumulative effect
of accounting change $220,250 $241,579 $200,760 $210,164 $170,234 $214,587
Taxes based on income 89,999 62,145 79,481 80,737 63,360 99,766
-------- -------- -------- -------- -------- --------
Income before taxes and cumulative effect
of accounting change 310,249 303,724 280,241 290,901 233,594 314,353
-------- -------- -------- -------- -------- --------
Fixed charges:
Interest charges 220,882 221,312 226,453 225,323 199,469 165,709
Interest factor in rentals 9,730 9,257 6,599 6,080 4,559 4,705
-------- -------- -------- -------- -------- --------
Total fixed charges 230,612 230,569 233,052 231,403 204,028 170,414
-------- -------- -------- -------- -------- --------
Nonutility subsidiary capitalized interest (1,226) (2,059) (2,200) (6,542) - -
-------- -------- -------- -------- -------- --------
Income before income taxes, cumulative
effect of accounting change and
fixed charges $539,635 $532,234 $511,093 $515,762 $437,622 $484,767
======== ======== ======== ======== ======== ========
Coverage of fixed charges 2.34 2.31 2.19 2.23 2.14 2.84
==== ==== ==== ==== ==== ====
Preferred dividend requirements $16,394 $16,255 $14,392 $12,298 $10,598 $9,235
-------- -------- -------- -------- -------- --------
Ratio of pre-tax income to net income 1.41 1.26 1.40 1.38 1.37 1.46
---- ---- ---- ---- ---- ----
Preferred dividend factor $23,116 $20,481 $20,149 $16,971 $14,519 $13,483
-------- -------- -------- -------- -------- --------
Total fixed charges and preferred dividends $253,728 $251,050 $253,201 $248,374 $218,547 $183,897
======== ======== ======== ======== ======== ========
Coverage of combined fixed charges
and preferred dividends 2.13 2.12 2.02 2.08 2.00 2.64
==== ==== ==== ==== ==== ====
42
</TABLE>
Exhibit 15
October 28, 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 October 28, 1994 (issued pursuant
to the provisions of Statement on Auditing Standards No. 71) in
the Prospectuses constituting parts of the Registration
Statements (Numbers 33-36798, 33-53685 and 33-54197) on Form S-8
filed on September 12, 1990, May 18, 1994 and June 17, 1994,
respectively, and (Numbers 33-58810 and 33-50377) on Form S-3
filed on 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 LLP
Price Waterhouse LLP
Washington, D.C.
43
<TABLE> <S> <C>
<ARTICLE> UT
<SUBSIDIARY>
<NUMBER> 1
<NAME> POTOMAC CAPITAL INVESTMENT CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,255,658
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 498,428
<TOTAL-DEFERRED-CHARGES> 550,538
<OTHER-ASSETS> 1,696,782
<TOTAL-ASSETS> 7,001,406
<COMMON> 118,147
<CAPITAL-SURPLUS-PAID-IN> 1,004,762<F1>
<RETAINED-EARNINGS> 877,755<F1>
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,000,664
145,063
125,414
<LONG-TERM-DEBT-NET> 1,768,296
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 232,675<F2>
<LONG-TERM-DEBT-CURRENT-PORT> 17,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,712,294
<TOT-CAPITALIZATION-AND-LIAB> 7,001,406
<GROSS-OPERATING-REVENUE> 1,467,971
<INCOME-TAX-EXPENSE> 121,800
<OTHER-OPERATING-EXPENSES> 1,051,367
<TOTAL-OPERATING-EXPENSES> 1,173,167
<OPERATING-INCOME-LOSS> 294,804
<OTHER-INCOME-NET> 14,884
<INCOME-BEFORE-INTEREST-EXPEN> 309,688
<TOTAL-INTEREST-EXPENSE> 96,279
<NET-INCOME> 213,409
12,341
<EARNINGS-AVAILABLE-FOR-COMM> 201,068
<COMMON-STOCK-DIVIDENDS> 146,758
<TOTAL-INTEREST-ON-BONDS> 123,600<F3>
<CASH-FLOW-OPERATIONS> 283,471
<EPS-PRIMARY> $1.70
<EPS-DILUTED> 0<F4>
<FN>
<F1>Included on the Balance Sheet in the caption "Other common equity."
<F2>Included on the Balance Sheet in the caption "Short-term debt."
<F3>Includes all debt classified as Long-Term Debt. (See Note 3 - Capitalization)
<F4>No material dilution would occur if all the convertible preferred stock and
debentures were converted into common stock.
</FN>
</TABLE>
