UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1995
--------------
Commission file number 1-1072
------
Potomac Electric Power Company
- ----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
District of Columbia and Virginia 53-0127880
- ----------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 Pennsylvania Avenue, N.W., Washington, D.C. 20068
- ----------------------------------------------------------------
(Address of principal executive office) (Zip Code)
(202) 872-2456
- ----------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for the past
90 days. Yes /X/. No / /.
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Class Outstanding at March 31, 1995
- ------------------------------- -----------------------------
Common Stock, $1 par value 118,348,594
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) Fair Value of Financial Instruments................ 14
(5) Marketable Securities.............................. 16
(6) Commitments and Contingencies...................... 18
Report of Independent Accountants on Review of Interim
Financial Information.................................... 21
Item 2 - Management's Discussion and Analysis of Consolidated
Results of Operations and Financial Condition
Utility
Results of Operations.................................. 22
Capital Resources and Liquidity........................ 25
The Cove Point Joint Venture........................... 26
Nonutility Subsidiary
Results of Operations.................................. 26
Capital Resources and Liquidity........................ 30
PART II - Other Information
Item 1 - Legal Proceedings................................. 30
Item 4 - Submission of Matters to a Vote of Security
Holders......................................... 31
Item 5 - Other Information
Other Financing Arrangements............................. 32
Base Rate Proceedings.................................... 32
Peak Load, Sales, Conservation and Construction and
Generating Capacity.................................... 34
Selected Nonutility Subsidiary Financial Information..... 37
Statistical Data......................................... 39
Item 6 - Exhibits and Reports on Form 8-K.................. 40
Signatures................................................. 40
Computation of Earnings Per Common Share................... 41
Computation of Ratios - Parent Company Only................ 42
Computation of Ratios - Fully Consolidated................. 43
Independent Accountants Awareness Letter................... 44
1
<TABLE>
Part I FINANCIAL INFORMATION
- ------ ---------------------
Item 1 CONSOLIDATED FINANCIAL STATEMENTS
- ------ ---------------------------------
POTOMAC ELECTRIC POWER COMPANY
Consolidated Statements of Earnings and Retained Income
(Unaudited)
-------------------------------------------------------
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, March 31,
-------------------- ----------------------
1995 1994 1995 1994
--------- --------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Revenue
Sales of electricity $ 361,171 $ 372,595 $1,771,640 $1,739,059
Other electric revenue 2,262 2,315 7,483 7,057
--------- --------- ---------- ----------
Total Operating Revenue 363,433 374,910 1,779,123 1,746,116
Interchange deliveries 1,476 18,134 15,816 32,677
--------- --------- ---------- ----------
Total Revenue 364,909 393,044 1,794,939 1,778,793
--------- --------- ---------- ----------
Operating Expenses
Fuel 83,541 113,132 363,139 379,388
Purchased energy 42,639 39,332 176,691 175,886
Capacity purchase payments 32,461 32,559 127,724 105,033
Other operation 58,236 52,279 212,063 210,396
Maintenance 22,827 24,220 91,221 96,986
--------- --------- ---------- ----------
Total Operation and Maintenance 239,704 261,522 970,838 967,689
Depreciation and amortization 47,660 42,697 184,949 167,115
Income taxes (421) 3,973 115,465 115,393
Other taxes 47,148 47,516 205,713 203,220
--------- --------- ---------- ----------
Total Operating Expenses 334,091 355,708 1,476,965 1,453,417
--------- --------- ---------- ----------
Operating Income 30,818 37,336 317,974 325,376
--------- --------- ---------- ----------
Other Income
Nonutility Subsidiary
Income 33,885 33,009 147,882 141,033
Expenses, including interest
and income taxes (38,259) (30,804) (135,373) (115,984)
--------- --------- ---------- ----------
Net (loss) earnings from
nonutility subsidiary (4,374) 2,205 12,509 25,049
Allowance for other funds
used during construction 355 3,220 6,259 12,826
Other, net 2,890 2,828 4,108 9,474
--------- --------- ---------- ----------
Total Other Income (1,129) 8,253 22,876 47,349
--------- --------- ---------- ----------
Income Before Utility Interest Charges 29,689 45,589 340,850 372,725
--------- --------- ---------- ----------
Utility Interest Charges
Long-term debt 32,306 31,486 128,221 132,324
Other 3,299 2,268 12,840 7,066
Allowance for borrowed funds
used during construction (1,944) (2,579) (8,987) (9,615)
--------- --------- ---------- ----------
Net Utility Interest Charges 33,661 31,175 132,074 129,775
--------- --------- ---------- ----------
Net (Loss) Income (3,972) 14,414 208,776 242,950
Dividends on Preferred Stock 4,241 4,146 16,532 16,289
--------- --------- ---------- ----------
(Loss) Earnings for Common Stock (8,213) 10,268 192,244 226,661
Retained Income at Beginning of Period 830,524 839,433 797,728 765,043
Dividends on Common Stock (49,046) (48,895) (195,905) (191,846)
Subsidiary Marketable Securities Net
Unrealized Gain (Loss), Net of Tax 12,527 (3,078) (8,275) (2,130)
--------- --------- ---------- ----------
Retained Income at End of Period $ 785,792 $ 797,728 $ 785,792 $ 797,728
========= ========= ========== ==========
Average Common Shares
Outstanding (000's) 118,249 117,876 118,098 116,496
(Loss) Earnings Per Common Share ($0.07) $0.09 $1.63 $1.95
Cash Dividends Per Common Share $0.415 $0.415 $1.660 $1.645
Book Value Per Share $16.16 $16.25
Dividend Payout Ratio 101.8% 84.4%
Effective Federal Income Tax Rate 25.6% 18.0%
2
</TABLE>
<TABLE>
POTOMAC ELECTRIC POWER COMPANY
Consolidated Balance Sheets
(Unaudited at March 31, 1995 and 1994)
------------------------------------------
<CAPTION>
March 31, December 31, March 31,
ASSETS 1995 1994 1994
------ ------------- ------------- -------------
(Thousands of Dollars)
<S> <C> <C> <C>
Property and Plant - at original cost
Electric plant in service $ 5,796,930 $ 5,765,210 $ 5,290,934
Construction work in progress 176,103 147,224 409,304
Electric plant held for future use 18,288 18,041 31,777
Nonoperating property 7,555 7,556 6,962
------------- ------------- -------------
5,998,876 5,938,031 5,738,977
Accumulated depreciation (1,674,666) (1,639,771) (1,559,937)
------------- ------------- -------------
Net Property and Plant 4,324,210 4,298,260 4,179,040
------------- ------------- -------------
Current Assets
Cash and cash equivalents 1,984 7,198 11,774
Customer accounts receivable, less allowance
for uncollectible accounts of $2,221, $2,432
and $2,576 109,059 107,351 109,083
Other accounts receivable, less allowance for
uncollectible accounts of $300 30,290 57,128 31,588
Accrued unbilled revenues 55,992 67,543 60,854
Prepaid taxes 37,722 34,352 34,306
Other prepaid expenses 4,442 5,448 8,754
Material and supplies - at average cost
Fuel 60,341 73,671 63,291
Construction and maintenance 72,619 72,447 69,300
------------- ------------- -------------
Total Current Assets 372,449 425,138 388,950
------------- ------------- -------------
Deferred Charges
Income taxes recoverable through future rates, net 240,569 251,357 247,264
Conservation costs, net 180,871 161,204 102,598
Unamortized debt reacquisition costs 56,096 56,725 54,993
Other 111,086 98,783 99,888
------------- ------------- -------------
Total Deferred Charges 588,622 568,069 504,743
------------- ------------- -------------
Nonutility Subsidiary Assets
Cash and cash equivalents 256 - 1,911
Marketable securities 490,211 473,608 489,059
Investment in finance leases 397,720 410,327 356,538
Operating lease equipment, net of accumulated
depreciation of $124,975, $116,832 and $93,192 542,775 544,064 561,205
Receivables, less allowance for uncollectible
accounts of $5,000, $5,000 and $0 77,426 76,426 88,689
Other investments 132,857 147,313 163,389
Other assets 22,221 22,551 19,297
------------- ------------- -------------
Total Nonutility Subsidiary Assets 1,663,466 1,674,289 1,680,088
------------- ------------- -------------
Total Assets $ 6,948,747 $ 6,965,756 $ 6,752,821
============= ============= =============
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization
Common stock $ 118,349 $ 118,248 $ 117,944
Other common equity 1,793,972 1,837,050 1,799,176
Serial preferred stock 125,405 125,409 125,441
Redeemable serial preferred stock 143,562 143,563 145,153
Long-term debt 1,727,848 1,723,399 1,641,811
------------- ------------- -------------
Total Capitalization 3,909,136 3,947,669 3,829,525
------------- ------------- -------------
Other Non-Current Liabilities
Capital lease obligation 136,290 136,723 -
------------- ------------- -------------
Total Other Non-Current Liabilities 136,290 136,723 -
------------- ------------- -------------
Current Liabilities
Long-term debt due within one year 40,000 45,445 60,000
Short-term debt 237,525 189,600 282,950
Accounts payable and accrued expenses 164,560 175,258 165,788
Capital lease obligation due within one year 15,233 15,233 -
Other 106,984 107,405 109,977
------------- ------------- -------------
Total Current Liabilities 564,302 532,941 618,715
------------- ------------- -------------
Deferred Credits
Income taxes 850,752 848,456 805,270
Investment tax credits 67,344 68,256 70,993
Other 26,796 31,766 24,700
------------- ------------- -------------
Total Deferred Credits 944,892 948,478 900,963
------------- ------------- -------------
Nonutility Subsidiary Liabilities
Long-term debt 1,153,753 1,140,505 1,080,094
Short-term notes payable 27,400 48,400 104,850
Deferred taxes and other 212,974 211,040 218,674
------------- ------------- -------------
Total Nonutility Subsidiary Liabilities 1,394,127 1,399,945 1,403,618
------------- ------------- -------------
Total Capitalization and Liabilities $ 6,948,747 $ 6,965,756 $ 6,752,821
============= ============= =============
3
</TABLE>
<TABLE>
POTOMAC ELECTRIC POWER COMPANY
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, March 31,
----------------------- -----------------------
1995 1994 1995 1994
--------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating Activities
Income from utility operations $ 402 $ 12,209 $ 196,267 $ 217,901
Adjustments to reconcile income to net
cash from operating activities:
Depreciation and amortization 47,660 42,697 184,949 167,115
Deferred income taxes and investment tax credits 12,140 13,907 42,874 31,946
Allowance for funds used during construction (2,299) (5,799) (15,246) (22,441)
Changes in materials and supplies 13,158 (356) (369) 33,457
Changes in accounts receivable and accrued unbilled revenue 36,681 24,399 6,184 (16,102)
Changes in accounts payable (14,716) (1,709) (4,750) 7,475
Changes in other current assets and liabilities 981 (11,811) 6,032 5,889
Changes in deferred conservation costs (25,510) (17,776) (100,238) (69,928)
Net other operating activities (16,085) (14,671) (1,054) (42,200)
Nonutility subsidiary:
Net (loss) earnings (4,374) 2,205 12,509 25,049
Deferred income taxes (2,531) 4,005 (150) (45,119)
Changes in other assets and net other operating activities 14,584 4,572 57,660 74,207
--------- --------- --------- ---------
Net Cash From Operating Activities 60,091 51,872 384,668 367,249
--------- --------- --------- ---------
Investing Activities
Total investment in property and plant (63,977) (83,388) (297,478) (338,115)
Allowance for funds used during construction 2,299 5,799 15,246 22,441
--------- --------- --------- ---------
Net investment in property and plant (61,678) (77,589) (282,232) (315,674)
Nonutility subsidiary:
Purchase of marketable securities (2,069) (72,056) (57,348) (274,391)
Proceeds from sale or redemption of marketable securities 6,322 44,169 44,597 207,651
Investment in leased equipment (6,618) (3,652) (75,100) (34,918)
Proceeds from sale or disposition of leased equipment - - 1,150 120,529
Purchase of other investments (624) (4,354) (3,461) (47,495)
Proceeds from sale or distribution of other investments 14,807 4,508 28,728 4,508
Investment in promissory notes - - (542) (1,226)
Proceeds from promissory notes 1,669 1,111 5,460 3,659
--------- --------- --------- ---------
Net Cash Used by Investing Activities (48,191) (107,863) (338,748) (337,357)
--------- --------- --------- ---------
Financing Activities
Dividends on common stock (49,046) (48,895) (195,905) (191,846)
Dividends on preferred stock (4,241) (4,146) (16,532) (16,289)
Issuance of common stock 1,894 3,666 7,512 85,971
Redemption of preferred stock - (2,457) (1,590) (3,957)
Issuance of long-term debt 15,840 178,411 140,427 547,194
Reacquisition and retirement of long-term debt (17,483) (84,367) (77,538) (599,367)
Proceeds from sale and leaseback of control center system - - 152,000 -
Short-term debt, net 47,925 (11,665) (45,425) 200,900
Other financing activities (3,995) (1,925) (16,522) (21,472)
Nonutility subsidiary:
Issuance of long-term debt 75,000 115,000 246,750 318,023
Repayment of long-term debt (61,752) (62,610) (173,092) (198,276)
Short-term debt, net (21,000) (21,400) (77,450) (148,550)
--------- --------- --------- ---------
Net Cash (Used By) From Financing Activities (16,858) 59,612 (57,365) (27,669)
--------- --------- --------- ---------
Net (Decrease) Increase in Cash and Cash Equivalents (4,958) 3,621 (11,445) 2,223
Cash and Cash Equivalents at Beginning of Period 7,198 10,064 13,685 11,462
--------- --------- --------- ---------
Cash and Cash Equivalents at End of Period $ 2,240 $ 13,685 $ 2,240 $ 13,685
========= ========= ========= =========
Cash paid for interest (net of capitalized interest) and income taxes:
Interest (including nonutility subsidiary
interest of $37,709, $34,764, $86,669 and $77,491) $ 77,427 $ 66,856 $ 214,162 $ 203,265
Income taxes $ 2,646 $ 4,730 $ 49,284 $ 69,454
Nonutility subsidiary noncash transactions:
Consolidation of majority-owned subsidiaries $ - $ - $ - $ 35,320
4
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
The Company's utility operations are regulated by the
Maryland and District of Columbia public service commissions and,
as to its wholesale business, the Federal Energy Regulatory
Commission (FERC). The Company complies with the Uniform System
of Accounts prescribed by the FERC and adopted by the Maryland
and District of Columbia regulatory commissions. In conformity
with generally accepted accounting principles, the accounting
policies and practices applied by the regulatory commissions in
the determination of rates for utility operations are also
employed for financial reporting purposes.
Certain 1994 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 related 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, purchased capacity in the District of
Columbia, and emission allowance costs in the Company's retail
jurisdictions, or changes in the applicable costs from levels
incorporated in base rates. Differences between applicable net
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 1995, 1994 and 1993.
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
on the unamortized balance in excess of amounts included in rate
6
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 rates
were approximately 8% compounded semiannually, for the three
months ended March 31, 1995, and approximately 7.6% in 1994 and
8.7% in 1993, compounded semiannually.
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
- ---------------------------------
PCI, the Company's nonutility subsidiary, continuously
monitors its receivables and establishes an allowance for
doubtful accounts against its notes receivable, when deemed
appropriate, on a specific identification basis. The direct
write-off method is used when trade receivables are deemed
uncollectible.
Income Taxes
- ------------
The Company's accounting for income taxes is in accordance
with 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 Twelve Months Ended
March 31, March 31,
-------------------------- --------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Utility current tax expense
Federal $ (11,397) $ (8,985) $ 60,983 $ 71,682
State and local (1,452) (1,212) 8,372 10,131
----------- ----------- ----------- -----------
Total utility current tax expense (12,849) (10,197) 69,355 81,813
----------- ----------- ----------- -----------
Utility deferred tax expense
Federal 11,469 12,869 40,670 30,953
State and local 1,583 1,951 5,853 5,212
Investment tax credits (912) (913) (3,649) (3,515)
----------- ----------- ----------- -----------
Total utility deferred tax expense 12,140 13,907 42,874 32,650
----------- ----------- ----------- -----------
Total utility income tax expense (709) 3,710 112,229 114,463
----------- ----------- ----------- -----------
Nonutility subsidiary current tax expense
Federal (3,234) (7,063) (25,486) (12,061)
----------- ----------- ----------- -----------
Nonutility subsidiary deferred tax expense
Federal (3,055) 4,293 (590) (32,931)
State and local - (288) 150 (734)
----------- ----------- ----------- -----------
Total nonutility subsidiary deferred tax expense (3,055) 4,005 (440) (33,665)
----------- ----------- ----------- -----------
Total nonutility subsidiary income tax expense (6,289) (3,058) (25,926) (45,726)
----------- ----------- ----------- -----------
Total consolidated income tax expense (6,998) 652 86,303 68,737
Income taxes included in other income (6,577) (3,321) (29,162) (46,656)
----------- ----------- ----------- -----------
Income taxes included in utility operating expenses $ (421) $ 3,973 $ 115,465 $ 115,393
=========== =========== =========== ===========
8
</TABLE>
<TABLE>
Reconciliation of Consolidated Income Tax Expense
- -------------------------------------------------
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, March 31,
-------------------------- --------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
(Loss) income before income taxes $ (10,970) $ 15,066 $ 295,079 $ 311,687
=========== =========== =========== ===========
Utility income tax at federal
statutory rate $ (107) $ 5,572 $ 107,974 $ 116,400
Increases (decreases) resulting from
Depreciation 2,248 1,840 8,430 5,703
Removal costs (1,231) (1,108) (4,209) (4,670)
Allowance for funds used during
construction 165 (946) (1,300) (3,744)
Other (1,038) (1,256) (3,957) (3,051)
State income taxes, net of federal effect 166 521 9,328 10,011
Tax Credits (912) (913) (4,037) (3,919)
Cumulative effect of tax rate change - - - (2,267)
----------- ----------- ----------- -----------
Total utility income tax expense (709) 3,710 112,229 114,463
----------- ----------- ----------- -----------
Nonutility subsidiary income tax at federal
statutory rate (3,732) (299) (4,695) (7,239)
Increases (decreases) resulting from
Dividends received deduction (2,201) (2,043) (8,645) (7,738)
Reversal of previously accrued deferred taxes - - (8,206) (35,904)
Other (356) (428) (4,530) (705)
State income taxes, net of federal effect - (288) 150 (734)
Cumulative effect of tax rate change - - - 6,594
----------- ----------- ----------- -----------
Total nonutility subsidiary income tax expense (6,289) (3,058) (25,926) (45,726)
----------- ----------- ----------- -----------
Total consolidated income tax expense (6,998) 652 86,303 68,737
Income taxes included in other income (6,577) (3,321) (29,162) (46,656)
----------- ----------- ----------- -----------
Income taxes included in utility operating expenses $ (421) $ 3,973 $ 115,465 $ 115,393
=========== =========== =========== ===========
9
</TABLE>
<TABLE>
Components of Consolidated Deferred Tax Liabilities (Assets)
- ------------------------------------------------------------
<CAPTION>
March 31, December 31, March 31,
1995 1994 1994
------------ ------------- ------------
(Thousands of Dollars)
<S> <C> <C> <C>
Utility deferred tax liabilities (assets)
Depreciation and other book to tax
basis differences $ 731,754 $ 723,248 $ 693,127
Rapid amortization of certified pollution
control facilities 28,640 29,018 30,029
Deferred taxes on amounts to be collected
through future rates 91,104 95,465 93,911
Property taxes 11,294 11,212 10,180
Deferred fuel (1,703) 177 7,802
Prepayment premium on debt retirement 21,475 21,537 10,965
Deferred investment tax credit (25,501) (25,922) (26,961)
Contributions in aid of construction (25,007) (24,954) (23,888)
Other 25,443 25,454 22,506
----------- ----------- -----------
Total utility deferred tax liabilities (net) 857,499 855,235 817,671
Current portion of utility deferred tax liabilities
(included in Other Current Liabilities) 6,747 6,779 12,401
----------- ----------- -----------
Total utility deferred tax liabilities (net) - noncurrent $ 850,752 $ 848,456 $ 805,270
=========== =========== ===========
Nonutility subsidiary deferred tax liabilities (assets)
Finance leases $ 132,604 $ 134,925 $ 126,485
Operating leases 112,413 117,782 119,212
Reversal of previously accrued taxes related
to partnerships (17,088) (16,385) (7,480)
Alternative minimum tax (77,167) (77,167) (76,904)
Other (10,422) (24,477) (16,605)
----------- ----------- -----------
Total nonutility subsidiary deferred tax liabilities (net),
(included in Deferred taxes and other) $ 140,340 $ 134,678 $ 144,708
=========== =========== ===========
10
</TABLE>
Certain provisions of SFAS No. 109, allow regulated
enterprises to recognize regulatory assets and liabilities for
income taxes to be recovered from or returned to customers in
future rates. No valuation allowance for deferred tax assets was
required or recorded at March 31, 1995.
The Tax Reform Act of 1986 repealed the Investment Tax
Credit (ITC) for property placed in service after December 31,
1985, except for certain transition property. ITC previously
earned on utility property continues to be normalized over the
remaining service lives of the related assets.
The Company and its subsidiaries file a consolidated federal
income tax return. The Company's federal income tax liabilities
for all years through 1991 have been finally determined. The
Company is of the opinion that the final settlement of its
federal income tax liabilities for subsequent years will not have
a material adverse effect on its financial position.
(3) CAPITALIZATION
--------------
Common Equity
- -------------
At March 31, 1995, 118,348,594 shares of the Company's $1
par value Common Stock were outstanding. A total of 200 million
shares is authorized.
As of March 31, 1995, 2,383,222 shares of Common Stock were
reserved for issuance under the Shareholder Dividend Reinvestment
Plan (DRP). The DRP permits additional cash investments by plan
participants limited to one investment per month of not less than
$25 and not more than $5,000. Also, as of March 31, 1995,
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.
Serial Preferred, Redeemable Serial Preferred and Preference
- ------------------------------------------------------------
Stock
-----
At March 31, 1995, the Company had outstanding 5,379,349
shares of its $50 par value Serial Preferred Stock, including the
Redeemable Serial Preferred Stock. A total of 11,159,434 shares
is authorized. At March 31, 1995, the aggregate annual dividend
requirements on the Serial Preferred Stock and the Redeemable
Serial Preferred Stock were approximately $6.8 million and $10.2
million, respectively. Also, the Company has a total of
8,800,000 shares of cumulative, $25 par value, Preference Stock
authorized and unissued.
11
The Company's $2.44 Convertible Preferred Stock, 1966 Series
(8,098 shares outstanding at March 31, 1995) is convertible into
Common Stock of the Company at $8.51 per share.
At March 31, 1995, the Company had outstanding one million
shares of its Serial Preferred Stock, Auction Series A. The
annual dividend rate is 4.90% ($2.45) for the period March 1,
1995 through May 31, 1995. For the period December 1, 1994
through February 28, 1995, the annual dividend rate was 4.833%
($2.4165). The average rate at which dividends were paid during
the 12 months ended March 31, 1995 was 4.01% ($2.005).
At March 31, 1995, the Company had outstanding three series
of $50 par value Redeemable Serial Preferred Stock. There are
one million shares of the $3.89 (7.78%) Series of 1991 on which
the sinking fund requirement commences June 1, 2001. There are
one million shares of the $3.40 (6.80%) Series of 1992 on which
the sinking fund requirement commences September 1, 2002. There
are 871,251 shares of the $3.37 (6.74%) Series of 1987 on which
the sinking fund requires redemption beginning June 1993, at par,
of not less than 30,000 nor more than 60,000 shares annually.
Sinking fund requirements through 1999 with respect to the three
series of Redeemable Serial Preferred Stock are $1.1 million in
1997 and $1.5 million annually thereafter.
Long-Term Debt
- --------------
The Company's long-term debt at March 31, 1995, is
summarized below:
(Thousands of Dollars)
First Mortgage Bonds $1,266,600
Convertible Debentures 181,929
Notes Payable 350,000
Net Unamortized Discount (30,681)
Current Portion (40,000)
----------
Net Utility Long-Term Debt $1,727,848
==========
Nonutility Subsidiary Long-Term Debt $1,153,753
==========
At March 31, 1995, 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 March 31, 1995 are $40 million in
12
1995, $25 million in 1996, $150 million in 1997, $50 million in
1998 and $45 million in 1999. At March 31, 1995, long-term debt
due within one year consisted of $40 million of 5% First Mortgage
Bonds.
On March 21, 1995, the Company issued $16 million of 5-3/4%
First Mortgage Bonds due 2010, in conjunction with the sale at
99% by Prince George's County, Maryland of a like amount of the
County's Pollution Control Revenue Refunding Bonds. Proceeds
were applied toward the redemption of the Company's $16 million
5-5/8% First Mortgage Bonds due 1997, at par plus accrued
interest, and a like amount of the County's Pollution Control
Revenue Bonds.
Nonutility Subsidiary Long-Term Debt
- ------------------------------------
Long-term debt at March 31, 1995 consisted primarily of
unsecured borrowings from institutional lenders maturing at
various dates between 1995 and 2003. The interest rates of such
borrowings ranged from 4.7% to 10.1%. The weighted average
effective interest rate was 7.46% at March 31, 1995, 7.47% at
December 31, 1994 and 7.33% at March 31, 1994. Annual aggregate
principal repayments on these borrowings are $208.3 million in
1995, $180.5 million in 1996, $135.5 million in 1997, $242.3
million in 1998, $126.5 million in 1999 and $189.5 million
thereafter. Also included in long-term debt is $71.1 million of
non-recourse debt which is due in monthly installments with final
maturities in 2001, 2002 and 2011.
13
<TABLE>
(4) Fair Value of Financial Instruments
- ---------------------------------------
The estimated fair values of the Company's financial instruments at
March 31, 1995, December 31, 1994 and March 31, 1994 are shown below.
<CAPTION>
March 31, December 31, March 31,
1995 1994 1994
-------------------------- ------------------------- -------------------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
----------- ---------- ---------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Utility
Capitalization and Liabilities
Serial preferred stock $ 125,405 105,386 125,409 102,102 125,441 107,394
========== ========= ========= ========= ========= =========
Redeemable serial
preferred stock $ 143,562 134,008 143,563 134,008 145,153 151,726
========== ========= ========= ========= ========= =========
Long-term debt
First Mortgage Bonds $1,212,111 1,144,575 1,208,076 1,093,208 1,250,730 1,214,804
Medium-Term Notes $ 347,786 336,285 347,712 324,223 222,928 222,459
Convertible Debentures $ 167,951 157,359 167,611 146,098 168,153 169,037
---------- --------- --------- --------- --------- ---------
Total long-term debt $1,727,848 1,638,219 1,723,399 1,563,529 1,641,811 1,606,300
========== ========= ========= ========= ========= =========
Nonutility Subsidiary
Assets
Marketable securities $ 490,211 490,211 473,608 473,608 489,059 489,059
========== ========= ========= ========= ========= =========
Notes receivable $ 59,609 58,856 61,278 58,616 59,527 63,100
========== ========= ========= ========= ========= =========
Liabilities
Long-term debt $1,153,753 1,156,223 1,140,505 1,122,638 1,080,094 1,100,000
========== ========= ========= ========= ========= =========
14
</TABLE>
The methods and assumptions below were used to estimate, at
March 31, 1995, December 31, 1994 and March 31, 1994, the fair
value of each class of financial instruments shown above for
which it is practicable to estimate that value.
The fair value of the Company's long-term debt, which
includes First Mortgage Bonds, Medium-Term Notes and Convertible
Debentures, excluding amounts due within one year, 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 similar issues with similar terms and remaining maturities.
The fair value of the Company's Serial Preferred Stock,
including Redeemable Serial Preferred Stock, was based on quoted
market prices or discounted cash flows using current rates of
preferred stock with similar terms.
The fair value of PCI's Marketable Securities was based on
quoted market prices.
The fair value of PCI's Notes Receivable was based on
discounted future cash flows using current rates and similar
terms.
The fair value of PCI's long-term debt, including non-
recourse debt, was based on current rates offered to similar
companies for debt with similar remaining maturities.
15
(5) MARKETABLE SECURITIES
---------------------
SFAS No. 115 entitled, "Accounting for Certain Investments
in Debt and Equity Securities," was adopted by PCI in January
1994. PCI'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 net unrealized losses are shown below:
As of March 31, 1995
---------------------------------------
Net
Market Unrealized
Cost Value Losses
---------- ---------- --------------
(Thousands of Dollars)
Mandatory redeemable
preferred stock $ 507,674 $ 490,211 $ (17,463)
Equity securities 3 - (3)
---------- ---------- ------------
Total $ 507,677 $ 490,211 $ (17,466)
========== ========== ============
As of December 31, 1994
---------------------------------------
Net
Market Unrealized
Cost Value Losses
---------- ---------- --------------
(Thousands of Dollars)
Mandatory redeemable
preferred stock $ 511,791 $ 473,608 $ (38,183)
Equity securities 3 - (3)
---------- ---------- ------------
Total $ 511,794 $ 473,608 $ (38,186)
========== ========== ============
16
As of March 31, 1994
---------------------------------------
Net
Market Unrealized
Cost Value Losses
---------- ---------- --------------
(Thousands of Dollars)
Mandatory redeemable
preferred stock $ 493,513 $ 488,541 $ (4,972)
Debt securities 518 518 -
Equity securities 3 - (3)
---------- ---------- ------------
Total $ 494,034 $ 489,059 $ (4,975)
========== ========== ============
Included in net unrealized losses are gross unrealized
losses of $22.8 million and gross unrealized gains of $5.3
million at March 31, 1995; gross unrealized losses of $40 million
and gross unrealized gains of $1.8 million at December 31, 1994;
and gross unrealized losses of $11.2 million and gross unrealized
gains of $6.2 million at March 31, 1994.
At March 31, 1995, the final contractual maturities (in
thousands of dollars) for mandatory redeemable preferred stock
were as follows:
Within one year $ 11,513
One to five years 47,543
Five to ten years 178,062
Over ten years 270,556
--------
507,674
Less net unrealized
losses (17,463)
--------
$490,211
========
In determining gross realized gains and losses on sales or
maturities of securities, specific identification is used. A
summary of realized gains and losses is shown below.
Three Months Three Months
Ended Ended
March 31, 1995 March 31, 1994
-------------- --------------
(Thousands of Dollars)
Gross realized gains $ 147 $ 1,589
Gross realized losses (10) (997)
Recognized losses - (598)
--------- --------
Net gain (loss) $ 137 $ (6)
========= ========
17
(6) COMMITMENTS AND CONTINGENCIES
-----------------------------
Environmental Contingencies
- ---------------------------
As discussed in the 1994 Form 10-K, the Company was served
in August 1993, 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 plaintiffs' case.
Subsequently, Pittsburgh Corning Corp. (Pittsburgh Corning) filed
a third party complaint against the Company, seeking contribution
for the same plaintiffs involved in the Owens Corning third party
complaint. Since the filings, a number of individual suits have
been disposed of without any payment by the Company. The third
party complaints involving Pittsburgh Corning and Owens Corning
were dismissed by the Baltimore City Court during 1994 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. However an unfavorable decision rendered against the
Company could have a material adverse effect on results of
operations in the fiscal year in which a decision is rendered.
As also discussed in the 1994 Form 10-K, a Remedial
Investigation/Feasibility Study (RI/FS) report was submitted to
the EPA in October 1994, with respect to a site in Philadelphia,
Pennsylvania. Pursuant to an agreement among the participating
potentially responsible parties, the Company is responsible for
18
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 $.8 million as of March 31, 1995. The
report includes a number of possible remedies, 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 total extent of the
EPA's administrative and oversight costs. To date, the Company
has accrued approximately $1.7 million for its share of this
contingency.
Litigation
- ----------
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 in July 1994. An order on appeal is
expected in the second quarter of 1995. See Part II, Item 5,
Base Rate Proceedings for additional information.
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.
Other
- -----
Subsidiaries of the Company and the Columbia Gas System,
Inc. have formed a joint venture partnership (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 County, Virginia. A Company
subsidiary has committed to loan the Partnership $15 million to
recommission certain existing facilities and for new
construction. As of March 31, 1995, the remaining $11.2 million
of the loan commitment is yet to be drawn upon by the
Partnership.
Nonutility Subsidiary
- ---------------------
See discussion of PCI in Part I, Item 2, Management's
Discussion and Analysis of Consolidated Results of Operations and
Financial Condition.
19
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 1994
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 21) 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.
20
INDEPENDENT ACCOUNTANTS REPORT
To the Board of Directors
and Shareholders of
Potomac Electric Power Company
We have reviewed the accompanying consolidated balance sheets of
Potomac Electric Power Company and consolidated subsidiaries (the
Company) at March 31, 1995 and 1994 and the related consolidated
statements of earnings and retained income for the three and
twelve month periods then ended and the consolidated statements
of cash flows for the three and twelve month periods then ended.
These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying financial
information for it to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of December
31, 1994, 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 26, 1995, 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, 1994, 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.
May 1, 1995
21
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 March 31,
1995, as compared to the corresponding period in 1994. The
decrease in revenue from sales of electricity for the three month
period reflects a 5.8% decline in kilowatt-hour sales, partially
offset by a March 1994 base rate increase in the District of
Columbia. The decrease in kilowatt-hour sales for the three
months ended March 31, 1995, was primarily attributable to milder
weather in 1995, as compared to 1994 when record-breaking frigid
temperatures in January resulted in extraordinary high sales and
sent demand for electricity to new winter peaks. Heating degree
days for the quarter were 16% below the corresponding period in
1994 and 4% below the 20-year average.
Total revenue increased for the twelve months ended March
31, 1995, as compared to the corresponding period in 1994. The
increase in revenue from sales of electricity for the twelve
months ended March 31, 1995 was primarily attributable to the
increase in fuel rate revenue, the effects of 1993 base rate
increases in Maryland, the 1994 base rate increase in the
District of Columbia, and revenue of approximately $5 million
associated with the conservation incentive provision of the
Company's DSM surcharge tariff in its Maryland jurisdiction,
partially offset by a 3.3% decline in kilowatt-hour sales. The
decline in kilowatt-hour sales reflects decreased customer usage
of electricity during the 1994 summer cooling season (June
through October) due to mild weather during these months and mild
winter weather during the first quarter of 1995. Cooling degree
hours during the twelve months ended March 31, 1995 were 14%
below those in 1994 and 5% above the 20-year average.
Interchange deliveries decreased for the three and twelve months
ended March 31, 1995, reflecting the amount of energy delivered
to the Pennsylvania-New Jersey-Maryland Interconnection
Association (PJM).
22
Rate orders received by the Company during 1995 and 1994
provided for changes in annual base rate revenue as shown in the
table below:
Rate
Increase % Effective
Regulatory Jurisdiction ($000)* Change Date
- ----------------------- ---------- ------- ---------------
Federal - Wholesale $ 2,300 1.8% January 1995
District of Columbia 26,700 3.9 March/June 1994
Federal - Wholesale 2,600 2.3 January 1994
* See Part II, Item 5, Base Rate Proceedings for additional
information.
In its pending base rate proceeding with the District of
Columbia Public Service Commission, the Company further updated
its cost of service data filing, on February 21, 1995, to reduce
the base rate revenue increase request to $56.6 million, or 7.6%.
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. The Company expects to receive an
order on appeal in the second quarter of 1995. See Part II, Item
5, Base Rate Proceedings for additional information.
OPERATING EXPENSES
Fuel and purchased energy decreased for the three and twelve
months ended March 31, 1995, as compared to the corresponding
periods ended March 31, 1994. Fuel expense decreased for the
three and twelve months ended March 31, 1995, primarily as the
result of decreases in net generation of 21.7% and 9%,
respectively, due to decreased customer usage. The decrease in
customer usage for the three months ended March 31, 1995 was
caused by milder weather in 1995, as compared to 1994 when
record-breaking frigid temperatures in January sent demand for
electricity to new winter peaks. The decrease in customer usage
for the twelve months ended March 31, 1995 also reflects the mild
summer weather during the 1994 cooling season. The increases in
purchased energy for the three and twelve months ended March 31,
1995, reflect changes in the levels and prices of energy
purchased from PJM and other utilities.
23
The unit fuel costs for the comparative periods ended March
31, were as follows:
Three Twelve
Months Ended Months Ended
------------ -------------
1995 1994 1995 1994
---- ---- ---- ----
System Average
Fuel Cost per MBTU $1.82 $2.13 $1.86 $1.98
The decreases in the system average unit fuel cost for the
three and twelve months ended March 31, 1995 were primarily
attributable to decreased net generation due to decreased
customer usage of electricity and an increase in the actual
percent of coal contribution to the fuel mix. The Company's
major cycling and certain peaking units can burn natural gas or
oil, adding flexibility in selecting the most cost effective fuel
mix.
For the twelve month periods ended March 31, 1995 and 1994,
the Company obtained 83% and 74%, respectively, of its system
generation from coal based upon percentage of Btus.
Capacity purchase payments decreased slightly for the three
months ended and increased for the twelve months ended March 31,
1995, as compared to the corresponding periods in 1994. The
increase for the twelve months ended March 31, 1995 reflects a
January 1, 1994 increase in the cost of capacity under agreements
with Ohio Edison and Allegheny Power System (APS) and the 147
megawatts of capacity being purchased from Pennsylvania Power &
Light Company for a one year period June 1, 1994 through May 31,
1995. The cost of capacity, under the Ohio Edison and APS
agreements, increased from $12,380 per megawatt, per month, in
effect from 1987 to 1993, to $18,060 per megawatt, per month,
plus an allocation of fixed operating and maintenance expenses.
Operating expenses other than fuel, purchased energy and
capacity purchase payments increased for the three and twelve
months ended March 31, 1995 as compared to the corresponding
periods ended March 31, 1994. The increases were principally due
to increased depreciation and amortization expense due to
additional investment in property and plant and the amortization
of increased amounts of conservation program costs and a
nonrecurring charged of $7.4 million taken in January 1995 for
operating costs associated with the Company's Voluntary Severance
Program.
See "Legal Proceedings," under Part II, Item I, Other
Information, for additional information.
24
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
The Company's investment in property and plant, at original
cost before accumulated depreciation, was $6 billion at March 31,
1995, an increase of $60.8 million from the investment at
December 31, 1994 and an increase of $259.9 million from the
investment at March 31, 1994. Cash invested in property and
plant construction, excluding AFUDC, amounted to $61.7 million
for the three months ended March 31, 1995 and $282.2 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 March 31, 1995, the Company's capital structure,
excluding short-term debt, long-term debt due within one year,
and nonutility subsidiary debt, consisted of 44.2% long-term
debt, 3.2% serial preferred stock, 3.7% redeemable serial
preferred stock and 48.9% common equity.
The Company filed for a 5.3% increase in the Maryland fuel
rate, in September 1994, which became effective, subject to
refund, on November 1, 1994. The initial filing also included an
adjustment for a deferred fuel amortization charge to recover
over a twelve month period approximately $28.5 million of
previously unrecovered fuel costs incurred through July 31, 1994.
During the case, which is still pending, the Company updated the
proposed deferred fuel amortization, pursuant to a recommendation
of the Staff of the Maryland Public Service Commission, to
reflect a reduction in the unrecovered amount at October 31, 1994
to $21.1 million. Based on results for the period ended November
30, 1994, the Company, in January 1995, filed for a fuel rate
reduction in Maryland of 5.3%. Based on results for the period
ended February 28, 1995, the Company filed for an additional fuel
rate reduction in Maryland of 5.7% during April 1995. Final
orders in the filings are expected during the second quarter of
1995.
Cash (used by) from utility operations, after dividends, was
$(.9) million for the three months ended March 31, 1995 and
$102.2 million for the twelve months then ended as compared with
$(12) million and $105 million, respectively, for the same
periods ended March 31, 1994.
Outstanding utility short-term debt totaled $237.5 million
at March 31, 1995, an increase of $47.9 million from the $189.6
million outstanding at December 31, 1994 and a decrease of $45.4
million from the $282.9 million outstanding at March 31, 1994.
25
THE COVE POINT JOINT VENTURE
- ----------------------------
Subsidiaries of the Company and the Columbia Gas System,
Inc., have formed a joint venture partnership (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 County, Virginia. As of March
31, 1995, construction and recommissioning activities are on
schedule and the Partnership anticipates the new plant and
recommissioned facilities will be available for commercial
operation in the fall of 1995.
NONUTILITY SUBSIDIARY
- ---------------------
RESULTS OF OPERATIONS
- ---------------------
PCI incurred a net loss of $4.4 million for the three months
ended March 31, 1995 compared to earnings of $2.2 million for the
same period in 1994. Earnings for the twelve months ended March
31, 1995 and 1994 were $12.5 million and $25.0 million,
respectively. PCI's contribution to the Company's consolidated
earnings per share was a loss of $.04 and earnings of $.02 per
share for the three months ended March 31, 1995 and 1994,
respectively, and earnings of $.11 and $.22 per share for the
twelve months ended March 31, 1995 and 1994, respectively. The
decrease in net earnings for the three month period ended March
31, 1995 compared to the corresponding period in 1994 is
attributable to increased depreciation and operating expenses,
primarily the result of repair and maintenance expenses on
operating lease aircraft. The decrease in earnings for the
twelve months ended March 31, 1995, compared to the same period
in 1994, is primarily a result of a second quarter 1993
partnership transaction which reduced previously accrued deferred
income taxes and resulted in after tax earnings of $21.3 million.
At March 31, 1995, a portion ($258.8 million carrying value)
of PCI's aircraft leasing portfolio consisted of equipment not on
lease (four L-1011 aircraft returned by Trans World Airlines
(TWA) when leases expired in November 1994) and equipment on
short-term, and in some cases, usage-based operating leases with
monthly rentals and maintenance payments dependent upon hours
used. Under these leases, PCI is responsible for future
operating and maintenance expenses exceeding amounts provided
therefor by lessees and, during 1994, began accruing charges
against future repair and maintenance expenditures. Most of the
usage-based and short-term leases include provisions for early
termination by PCI if more favorable transactions become
available. In January 1995, because of the lessee's inability to
26
make timely rental payments and to satisfy other lease
obligations, Fortunair Canada returned one B747 aircraft
previously under short-term lease. PCI has subsequently re-
leased this aircraft in April 1995 to Air Atlanta-Icelandic for a
five month period. In January 1995, Continental Airlines
(Continental) announced its intention to seek the early
termination of all of its A-300 aircraft leases and rental
reductions under certain leases of other widebody aircraft.
Beginning in February 1995, Continental unilaterally reduced, by
approximately 50%, the amounts of rent paid to PCI for the lease
of one A-300 aircraft and six DC-10-30 aircraft (two of which are
owned jointly with another investor). Following negotiations in
April 1995, PCI reached an agreement with Continental for the
deferral of approximately 40% of aggregate monthly rentals from
the six DC-10-30 aircraft for a period of sixteen months,
commencing February 1995. The deferred amounts are to be repaid
over a three and one-half year period at 8% interest, commencing
June 1, 1996, at which time the aggregate deferred amount would
be approximately $20 million. With respect to the A-300
aircraft, which is expected to be returned to PCI later in 1995,
PCI is to be paid $10.3 million, in Continental securities, as
compensation for the early termination of the lease.
27
PCI's aircraft portfolio at March 31, 1995 is summarized
below.
- -----------------------------------------------------------------
Type of Aircraft Year of
Lease Type (a) Lessee Quantity Manufacture
- -----------------------------------------------------------------
Operating B747-200 United Airlines 2 1978
Continental
Airlines 1 1972
Air Club 1 1976
None (b) 1 1977
B747-200F Atlas Air 1 1976
DC-10-30 Continental
Airlines (c) 6 1973(5),1974
L1011-50 ING 2 1974
TWA 1 1975
L1011-100 None 4 1974,1975(3)
A300-B4 Continental
Airlines (d) 1 1979
F28-4000 USAir 2 1979,1980
Direct
Finance DC-10-30 Continental
Airlines 1 1979
MD-82 Continental
Airlines (c) 3 1982,1987(2)
B737-300 United Airlines (c) 4 1988
Leveraged B747-300 KLM (c) 1 1984
Singapore
Airlines (c) 1 1985
B757-200 Northwest Airlines 1 1986
MD-11F Federal Express 1 1993
- -----------------------------------------------------------------
(a) Includes aircraft in which PCI has a greater than 10%
ownership interest. Not included in PCI's balance sheet at
March 31, 1995 are two DC-10-30 aircraft on operating
lease to PCI which were sub-leased to Canadian Airlines in
March 1995.
(b) Aircraft went on lease in April 1995 to Air Atlanta -
Icelandic for a five month term.
(c) PCI owns a partial interest in certain of these aircraft.
(d) Expected to be returned in 1995.
PCI's aircraft leasing business has been adversely affected
by a lengthy economic downturn in the airline industry. There
can be no assurance that a recovery will occur or as to the
nature, extent or timing of any such recovery. Accordingly,
management continues to evaluate alternative strategies,
including the future role, if any, of aircraft equipment leasing
28
in providing a satisfactory contribution to consolidated
earnings, including actions which could have a nonrecurring
material adverse impact on the Company's earnings for 1995.
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 $23.8 million and $110.5 million for the
three and twelve months ended March 31, 1995 compared to $24.5
million and $118.4 million for the same periods ended in 1994.
The decrease in revenue for the three and twelve months ended
March 31, 1995 over the corresponding periods in 1994 was
primarily due to decreased rental income from operating lease
equipment.
PCI's marketable securities portfolio contributed pre-tax
income of $9.1 million and $35.9 million for the three and twelve
months ended March 31, 1995 compared to $8.4 million and $37.9
million for the same periods ended March 31, 1994, respectively.
Net realized gains included in marketable securities income
totaled approximately $.1 million and $.9 million for the three
and twelve months ended March 31, 1995, respectively, and $6.4
million for the twelve months ended March 31, 1994.
Other income increased $.8 million and $16.7 million for the
three and twelve months ended March 31, 1995, respectively, over
the corresponding periods in 1994. The increase for the three
month period ended March 31, 1995 was primarily due to a $1.5
million pre-tax writeoff during the first quarter of 1994 as a
result of agreements settling lawsuits related to PCI's
construction and operation of a municipally owned waste-to-energy
facility. The increase for the twelve month period ended March
31, 1995 was due primarily to a September 1993 pre-tax writedown
of approximately $13.5 million related to the termination of
obligations with respect to a real estate limited partnership
interest.
Expenses, before income taxes, which include interest,
depreciation and operating, and administrative and general
expenses totaled $44.5 million and $161.3 million for the three
and twelve months ended March 31, 1995, respectively, compared to
$33.9 million and $161.7 million for the same periods in 1994.
The increase for the three month period ended March 31, 1995 over
the corresponding period in 1994 was attributable to increased
depreciation and operating expenses, primarily the result of
repair and maintenance expenses for aircraft not under lease or
under usage-based leases.
PCI had income tax credits of $6.3 million and $25.9 million
for the three and twelve months ended March 31, 1995,
respectively, compared to income tax credits of $3.1 million and
$45.7 million for the corresponding periods in 1994. The
29
increase in income tax credits for the three month period ended
March 31, 1995 over the corresponding period in 1994 was the
result of lower pre-tax income in 1995. The decrease in the
income tax credit for the twelve month period ended March 31,
1995 over the corresponding period in 1994 is primarily the
result of the 1993 aircraft partnership transaction referred to
above.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
Investments in leased equipment of $6.6 million for the
three month period ended March 31, 1995 were for the purchase of
aircraft engines placed under operating leases. The investments
of $75.1 million in leased equipment for the twelve month period
ended March 31, 1995 also included $60 million for a one-third
undivided interest in a recently-constructed 650 megawatt (gross)
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. At March 31, 1995,
PCI has no commitments for the purchase of additional aircraft or
other equipment leasing assets.
PCI's outstanding short-term debt totaled $27.4 million at
March 31, 1995, a decrease of $21.0 million from the $48.4
million outstanding at December 31, 1994 and a decrease of $77.5
million from the $104.9 million outstanding at March 31, 1994.
During the three and twelve months ended March 31, 1995, PCI
issued $75 million and $246.8 million, respectively, in long-term
debt, including non-recourse debt, and debt repayments totaled
$61.8 million and $173.1 million, respectively, for those same
periods in 1995. At March 31, 1995, PCI had $128 million
available under its Medium-Term Note Program and $320 million of
unused short-term bank credit lines.
PCI paid the Company a $9 million dividend in January 1995
resulting in cumulative dividends of $100 million since PCI's
inception. PCI remains adequately capitalized to support future
business plans, which are designed to supplement utility earnings
and build long-term shareholder value.
Part II OTHER INFORMATION
- ------- -----------------
Item 1 LEGAL PROCEEDINGS
- ------ -----------------
See Part I, Item I, Notes to the Consolidated Financial
Statements, (6) Commitments and Contingencies, for information on
various legal proceedings. 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.
30
Part II
- ------
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
(a) Annual meeting of shareholders held April 26, 1995.
(b) (1) Directors who were elected at the annual meeting:
For Term Expiring in 1996:
A. Thomas Young Votes cast for: 101,023,240
Votes withheld: 2,319,753
For Term Expiring in 1998:
H. Lowell Davis Votes cast for: 101,059,047
Votes withheld: 2,283,946
John M. Derrick, Jr. Votes cast for: 101,004,831
Votes withheld: 2,338,162
Peter F. O'Malley Votes cast for: 100,831,312
Votes withheld: 2,511,681
Louis A. Simpson Votes cast for: 100,909,050
Votes withheld: 2,433,943
(2) Directors whose terms of office continued after the
annual meeting:
Roger R. Blunt, Sr. Floretta D. McKenzie
A. James Clark Ann D. McLaughlin
Richard E. Marriott Edward F. Mitchell
David O. Maxwell
(c) (1) The following shareholder proposal was introduced:
"RESOLVED: That the shareholders of PEPCO recommend
that the Board of Directors take the necessary steps to
reinstate the election of directors ANNUALLY, instead of the
staggered system which was recently adopted."
The following statement has been supplied by the
shareholder submitting this proposal:
"REASONS: Until recently, directors of PEPCO were
elected annually by all shareholders."
"The great majority of New York Stock Exchange
listed corporations elect all their directors each year.
31
"This insures that ALL directors will be more
accountable to ALL shareholders each year and to a certain
extent prevents the self-perpetuation of the Board."
"Last year the owners of 18,615,156 shares,
representing 23.1% of shares voting, voted FOR this
proposal."
The shareholder proposal was defeated. There were
60,770,136 votes cast against the proposal, 20,209,474 votes cast
in support of the proposal, 3,789,453 votes abstaining and
18,573,930 broker nonvotes.
Item 5 OTHER INFORMATION
- ------ -----------------
OTHER FINANCING ARRANGEMENTS - Credit Agreements
- ------------------------------------------------
The Company and PCI satisfy their short-term financing
requirements through the sale of commercial promissory notes.
The Company and PCI maintain minimum 100 percent lines of credit
back-up for their outstanding commercial promissory notes. These
lines of credit were unused during 1995 and 1994.
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
rate of return. The rate of return on common stock equity most
recently determined for the Company in a fully litigated rate
case was 12.75% established by the Commission in a June 1991 rate
increase order.
District of Columbia
- --------------------
In its pending base rate proceeding, the Company further
updated its cost of service data filing, on February 21, 1995, to
reduce the base rate revenue increase request to $56.6 million,
or 7.6%, based upon a 1994 calendar year test period and a return
of 9.89% on average rate base, including a 12.75% return on
common stock equity. The update was filed principally to reflect
the effect of the Company's Voluntary Severance Program (VSP).
32
This case was originally filed on September 30, 1994, requesting
a $67 million, or 9%, increase in base rate revenue. The Company
had previously updated its initial cost of service data filing to
reduce the request to $60.6 million to reflect subsequent events
which included the sale and leaseback of the Control Center
Replacement project, a reduction in the 1995 District of Columbia
income tax rate, an approved traffic signal maintenance
deregulation agreement with the District of Columbia and an
increase in the FICA tax wage base. On January 17, 1995, the
Commission staff filed testimony recommending a $37.1 million
rate increase, which was subsequently revised to $33.3 million
principally to reflect the effect of the Company's VSP. In
accordance with Commission directives, the Company has included
conservation program expenditures subsequent to June 1993 in the
proposed Environmental Cost Recovery Rider in its pending Least-
Cost Planning proceeding filed in June 1994. Evidentiary
hearings were completed in the rate case on March 22, 1995, final
briefs were filed on April 11, 1995 and the case is currently
before the Commission awaiting a decision, which is expected
during the second quarter of 1995. Evidentiary hearings in the
Energy Plan case were completed on April 7, 1995 and final briefs
are due on May 1, 1995.
The Commission ruled on the application for reconsideration
of its March 1994 rate order in May 1994. The Commission's
original order authorized the Company to increase its base rates
by a total of $25.4 million. 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.
The authorized rates are based on a 9.05% rate of return on
average rate base, including an 11% return on common stock
equity. The Company filed a Petition for Review with the
District of Columbia Court of Appeals related to the Commission's
decisions in this case in July 1994. The Company expects to
receive an order on appeal in the second quarter of 1995.
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 $2.3 million effective January 1, 1995 and $2.6
million effective January 1, 1994. Although a rate increase of
$4.2 million is scheduled to become effective on January 1, 1996,
such increase is subject to revision to reflect significant
reductions in the Company's purchased capacity costs which have
occurred subsequent to the rate agreement.
33
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 these agreements,
excluding an allocation of fixed operating and maintenance cost,
increased from $12,380 per megawatt through 1993 to $18,060 per
megawatt, effective January 1, 1994, with provision for
escalation in 1999. In addition, effective June 1, 1994 through
May 31, 1995, the Company is purchasing 147 megawatts of capacity
from Pennsylvania Power and Light Company at a total cost of $3
million.
PEAK LOAD, SALES, CONSERVATION, AND CONSTRUCTION
- ------------------------------------------------
AND GENERATING CAPACITY
-----------------------
Peak Load and Sales Data
- ------------------------
Kilowatt-hour sales for the three and twelve month periods
ended March 31, 1995, decreased 5.8% and 3.3%, respectively, as
compared to sales for the corresponding periods ended March 31,
1994. The decrease in sales for the three month period ended
March 31, 1995, reflects decreased customer usage due to milder
weather in 1995, as compared to 1994 when record-breaking frigid
temperatures in January resulted in extraordinarily high sales.
Heating degree days for the three month period ended March 31,
1995 were 16% below the corresponding period in 1994 and 4% below
the 20-year average weather for this period. The decline in
sales for the twelve months ended March 31, 1995 also reflects
34
the mild summer weather during the 1994 cooling season. 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 was 5,660 megawatts, 1.6% below
the 1993 summer peak demand of 5,754 megawatts and 1.9% below the
all-time summer peak demand of 5,769 megawatts which occurred in
July 1991. The Company's present generation capability,
including capacity purchase contracts, is 6,723 megawatts. To
meet the 1994 summer peak demand, the Company had 256 megawatts
available from its dispatchable energy use management programs.
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 1994-1995 winter season peak demand of 4,685
megawatts was 6.5% below the all-time winter peak demand of 5,010
megawatts which was established in January 1994.
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. To
reduce the near-term upward pressure on prices and total customer
bills, the Company has, since 1994, limited its current offering
of DSM programs to those with the strongest cost benefit results
and has reduced previously planned five-year conservation
expenditures by approximately $120 million. By narrowing its
conservation offerings, the Company expects to be able to
continue to encourage its customers to use energy efficiently
without significantly increasing electricity prices.
During 1994, the Company invested approximately $90 million
in energy conservation programs. The Company recovers the costs
of its conservation programs in its Maryland jurisdiction through
a rate surcharge which amortizes costs over a five year period
and permits the Company to earn a return on its conservation
investment while receiving compensation for lost revenue. In
addition, when the Company's performance exceeds its annual
goals, the Company earns a performance bonus. The Company was
awarded a bonus of approximately $5 million in 1994 based on its
1993 performance. In the District of Columbia, conservation
costs are amortized over 10 years with an accrued return on
unamortized costs. To date, such costs have been considered in
base rate cases.
35
During the next five years, the Company plans to expend an
estimated $370 million ($86 million in 1995) to encourage the
efficient use of electric energy and to reduce the need to build
new generating facilities. The Company also estimates that in
1994 energy savings of more than 810 million kilowatt-hours were
realized through operation of its conservation and energy use
management programs. It is further estimated that peak load
reductions of approximately 510 megawatts have been achieved to
date from conservation and energy use management programs and
that additional peak load reductions of approximately 395
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 1995
through 1999, which includes $165 million of estimated Clean Air
Act (CAA) expenditures. Making use of the flexibilities in its
long-term construction plan, the Company in 1994 reduced
projected expenditures for the five years 1995 through 1999 by
$190 million from amounts previously planned. This reduction
followed a $365 million reduction in 1993. The construction
reductions and deferrals are 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 primarily through funds
provided by operations.
The electric utility industry is subject to increasing
competitive pressures, stemming from a combination of increasing
independent power production, greater reliance upon long-distance
transmission, and regulatory and legislative initiatives intended
to increase bulk power competition, including the Energy Policy
Act of 1992. Since the early 1980s, the Company has pursued
strategies which achieve financial flexibility through
conservation and energy use management programs, extension of the
useful life of generating equipment, cost-effective purchases of
capacity and energy and preservation of scheduling flexibility to
add new generating capacity in relatively small increments. The
Company serves a unique and stable service territory and 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 requires the reduction of sulfur dioxide and
nitrogen oxides emissions in two phases to achieve prescribed
standards. Both the District of Columbia and Maryland
commissions have approved the Company's plans for meeting Phase I
requirements including cost recovery of investment and inclusion
36
of emission allowance expenses in the Company's fuel adjustment
clause. The Company anticipates capital expenditures totaling
$165 million over the next five years pursuant to Phase II plans.
A 36-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.
These nonutility generation projects are expected to begin
operating in 1995 and 1996, respectively. 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. Completion of the first combined-cycle unit at its Station
H facility in Dickerson, Maryland, is currently scheduled for
2004. This will add a steam cycle to the two existing combustion
turbine units.
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 $9 million dividend in January 1995, and a $15 million
dividend in January 1994, was $270 million and $275 million at
March 31, 1995 and 1994, respectively.
37
<TABLE>
Consolidated Statements of Earnings:
- -----------------------------------
<CAPTION>
Three Twelve
Months Ended Months Ended
March 31, March 31,
------------------- ------------------
1995 1994 1995 1994
-------- -------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Income
Leasing activities $ 23,826 $ 24,540 $110,548 $118,391
Marketable securities 9,145 8,359 35,934 37,917
Other 914 110 1,400 (15,275)
-------- -------- -------- --------
33,885 33,009 147,882 141,033
-------- -------- -------- --------
Expenses
Interest 22,313 20,500 86,596 79,639
Administrative and general 2,631 2,510 10,380 14,783
Depreciation and
operating 19,604 10,852 64,323 67,288
Income tax credit (6,289) (3,058) (25,926) (45,726)
-------- -------- -------- --------
38,259 30,804 135,373 115,984
-------- -------- -------- --------
Net (loss) earnings from
nonutility subsidiary $ (4,374) $ 2,205 $ 12,509 $ 25,049
======== ======== ======== ========
Per share contribution to
(loss) earnings of the Company $(.04) $.02 $.11 $.22
===== ==== ==== ====
38
</TABLE>
<TABLE>
STATISTICAL DATA
- ----------------
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, March 31,
--------------------------------- -------------------------------------
1995 1994 % Change 1995 1994 % Change
-------- -------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue from Sales
------------------
of Electricity
--------------
(Thousands of Dollars)
Residential $112,529 $120,798 (6.8) $ 517,390 $ 522,104 (0.9)
General Service 201,829 202,335 (0.3) 1,066,204 1,030,113 3.5
Large Power Service <F1> 7,289 6,984 4.4 36,006 34,547 4.2
Street Lighting 3,342 3,634 (8.0) 13,491 13,703 (1.5)
Rapid Transit 6,384 6,326 0.9 27,950 25,015 11.7
Wholesale 29,798 32,518 (8.4) 110,599 113,577 (2.6)
-------- -------- ---------- ----------
System $361,171 $372,595 (3.1) $1,771,640 $1,739,059 1.9
======== ======== ========== ==========
Energy Sales
------------
(Millions of KWH)
Residential 1,713 1,936 (11.5) 6,364 6,877 (7.5)
General Service 3,584 3,694 (3.0) 15,235 15,512 (1.8)
Large Power Service <F1> 171 170 0.6 685 704 (2.7)
Street Lighting 44 45 (2.2) 161 163 (1.2)
Rapid Transit 98 102 (3.9) 401 382 5.0
Wholesale 646 692 (6.6) 2,317 2,386 (2.9)
-------- -------- ---------- ----------
System 6,256 6,639 (5.8) 25,163 26,024 (3.3)
======== ======== ========== ==========
Average System Revenue
----------------------
per KWH (cents per KWH) 5.77 5.61 2.9 7.04 6.68 5.4
-----------------------
System Peak Demand
------------------
(Thousands of KW)
Summer - - 5,660 5,754
Winter - - 4,685 5,010
Net Generation
--------------
(Millions of KWH) 4,396 5,614 18,102 19,901
Fuel Mix (% of Btu)
-------------------
Coal (%) 86 63 83 74
Oil (%) 9 36 10 23
Gas (%) 5 1 7 3
Fuel Cost per MBtu
------------------
System Average $1.82 $2.13 $1.86 $1.98
Weather Data
------------
Heating Degree Days 2,120 2,510 3,569 4,414
20 Year Average 2,218 3,988
Cooling Degree Hours - - 11,454 13,250
20 Year Average 12 10,871
Heating Degree Days - The daily difference in degrees by which the
mean temperature is below 65 degrees Fahrenheit (dry bulb).
Cooling Degree Hours - The daily sum of the differences, by hours, by
which the temperature (effective temperature) for each hour exceeds
71 degrees Fahrenheit (effective temperature).
<FN>
<F1> Large Power Service customers are served at high voltage of 66KV or higher.
</FN>
39
</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
A Current Report on Form 8-K was filed by the
Company on January 27, 1995, providing detailed
information and audited consolidated financial
statements. The item reported on such Form 8-K
was Item 7 (Financial Statements, Pro-Forma
Financial Information and Exhibits.)
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Potomac Electric Power Company
------------------------------
Registrant
By /s/ D. R. Wraase
------------------------------
(D. R. Wraase)
Senior Vice President,
Finance and Accounting
May 1, 1995
- -----------
DATE
40
<TABLE>
Exhibit 11 Computations of Earnings Per Common Share <F1>
- ---------- ------------------------------------------
The following is the basis for the computation of primary and fully
diluted earnings per common share for the twelve months ended March 31, 1995
and the twelve months ended December 31, 1994 and 1993:
<CAPTION>
March 31, December 31, December 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Average shares outstanding for
computation of primary earnings
per common share 118,097,985 118,005,847 115,639,668
============ ============ ============
Average shares outstanding for
fully diluted computation:
Average shares outstanding 118,097,985 118,005,847 115,639,668
Additional shares resulting from:
Conversion of Serial Preferred
Stock, $2.44 Convertible Series
of 1966 (the "Convertible
Preferred Stock") 47,616 48,110 51,967
Conversion of 7% Convertible
Debentures 2,476,373 2,531,244 2,546,858
Conversion of 5% Convertible
Debentures 3,392,500 3,392,500 3,392,500
------------ ------------ ------------
Average shares outstanding for
computation of fully diluted
earnings per common share 124,014,474 123,977,701 121,630,993
============ ============ ============
Earnings applicable to common stock $192,244,000 $210,725,000 $225,324,000
Add: Dividends paid or accrued on
Convertible Preferred Stock 20,000 20,000 22,000
Interest paid or accrued on
Convertible Debentures,
net of related taxes 6,483,000 6,537,000 6,548,000
------------ ------------ ------------
Earnings applicable to common stock,
including cumulative effect of
accounting change and assuming
conversion of convertible securities $198,747,000 $217,282,000 $231,894,000
============ ============ ============
Primary earnings per common share $1.63 $1.79 $1.95
Fully diluted earnings per common share $1.60 $1.75 $1.91
<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>
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 March 31, 1995 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 -----------------------------------------------------
March 31,
1995 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Net income before cumulative effect
of accounting change $196,267 $208,074 $216,478 $172,599 $186,813 $165,199
Taxes based on income 112,229 116,648 107,223 76,965 80,988 70,962
-------- -------- -------- -------- -------- --------
Income before taxes and cumulative effect
of accounting change 308,496 324,722 323,701 249,564 267,801 236,161
-------- -------- -------- -------- -------- --------
Fixed charges:
Interest charges 141,061 139,210 141,393 138,097 138,512 127,386
Interest factor in rentals 7,647 6,300 5,859 6,140 5,690 4,237
-------- -------- -------- -------- -------- --------
Total fixed charges 148,708 145,510 147,252 144,237 144,202 131,623
-------- -------- -------- -------- -------- --------
Income before income taxes, cumulative
effect of accounting change and
fixed charges $457,204 $470,232 $470,953 $393,801 $412,003 $367,784
======== ======== ======== ======== ======== ========
Coverage of fixed charges 3.07 3.23 3.20 2.73 2.86 2.79
==== ==== ==== ==== ==== ====
Preferred dividend requirements $16,532 $16,437 $16,255 $14,392 $12,298 $10,598
-------- -------- -------- -------- -------- --------
Ratio of pre-tax income to net income 1.57 1.56 1.50 1.45 1.43 1.43
---- ---- ---- ---- ---- ----
Preferred dividend factor $25,955 $25,642 $24,383 $20,868 $17,586 $15,155
-------- -------- -------- -------- -------- --------
Total fixed charges and preferred dividends $174,663 $171,152 $171,635 $165,105 $161,788 $146,778
======== ======== ======== ======== ======== ========
Coverage of combined fixed charges
and preferred dividends 2.62 2.75 2.74 2.39 2.55 2.51
==== ==== ==== ==== ==== ====
42
</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 ened March 31, 1995 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 -----------------------------------------------------
March 31,
1995 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(Thousands of Dollars)
Net income before cumulative effect
of accounting change $208,776 $227,162 $241,579 $200,760 $210,164 $170,234
Taxes based on income 86,303 93,953 62,145 79,481 80,737 63,360
-------- -------- -------- -------- -------- --------
Income before taxes and cumulative effect
of accounting change 295,079 321,115 303,724 280,241 290,901 233,594
-------- -------- -------- -------- -------- --------
Fixed charges:
Interest charges 227,976 224,514 221,312 226,453 225,323 199,469
Interest factor in rentals 11,113 9,938 9,257 6,599 6,080 4,559
-------- -------- -------- -------- -------- --------
Total fixed charges 239,089 234,452 230,569 233,052 231,403 204,028
-------- -------- -------- -------- -------- --------
Nonutility subsidiary capitalized interest (319) (521) (2,059) (2,200) (6,542) -
-------- -------- -------- -------- -------- --------
Income before income taxes, cumulative
effect of accounting change and
fixed charges $533,849 $555,046 $532,234 $511,093 $515,762 $437,622
======== ======== ======== ======== ======== ========
Coverage of fixed charges 2.23 2.37 2.31 2.19 2.23 2.14
==== ==== ==== ==== ==== ====
Preferred dividend requirements $16,532 $16,437 $16,255 $14,392 $12,298 $10,598
-------- -------- -------- -------- -------- --------
Ratio of pre-tax income to net income 1.41 1.41 1.26 1.40 1.38 1.37
---- ---- ---- ---- ---- ----
Preferred dividend factor $23,310 $23,176 $20,481 $20,149 $16,971 $14,519
-------- -------- -------- -------- -------- --------
Total fixed charges and preferred dividends $262,399 $257,628 $251,050 $253,201 $248,374 $218,547
======== ======== ======== ======== ======== ========
Coverage of combined fixed charges
and preferred dividends 2.03 2.15 2.12 2.02 2.08 2.00
==== ==== ==== ==== ==== ====
43
</TABLE>
Exhibit 15
May 1, 1995
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sirs:
We are aware that Potomac Electric Power Company has incorporated
by reference our report dated May 1, 1995 (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.
44
<TABLE> <S> <C>
<ARTICLE> UT
<SUBSIDIARY>
<NUMBER> 1
<NAME> POTOMAC CAPITAL INVESTMENT CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,317,275
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 372,449
<TOTAL-DEFERRED-CHARGES> 588,622
<OTHER-ASSETS> 1,670,401
<TOTAL-ASSETS> 6,948,747
<COMMON> 118,349
<CAPITAL-SURPLUS-PAID-IN> 1,008,180
<RETAINED-EARNINGS> 785,792
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,912,321
143,562
125,405
<LONG-TERM-DEBT-NET> 1,727,848
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 237,525<F1>
<LONG-TERM-DEBT-CURRENT-PORT> 40,000
0
<CAPITAL-LEASE-OBLIGATIONS> 136,290
<LEASES-CURRENT> 15,233
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,610,563
<TOT-CAPITALIZATION-AND-LIAB> 6,948,747
<GROSS-OPERATING-REVENUE> 364,909
<INCOME-TAX-EXPENSE> (421)
<OTHER-OPERATING-EXPENSES> 334,512
<TOTAL-OPERATING-EXPENSES> 334,091
<OPERATING-INCOME-LOSS> 30,818
<OTHER-INCOME-NET> (1,129)
<INCOME-BEFORE-INTEREST-EXPEN> 29,689
<TOTAL-INTEREST-EXPENSE> 33,661
<NET-INCOME> (3,972)
4,241
<EARNINGS-AVAILABLE-FOR-COMM> (8,213)
<COMMON-STOCK-DIVIDENDS> (49,046)
<TOTAL-INTEREST-ON-BONDS> 123,600<F2>
<CASH-FLOW-OPERATIONS> 60,091
<EPS-PRIMARY> ($.07)
<EPS-DILUTED> 0<F3>
<FN>
<F1>Included on the Balance Sheet in the caption "Short-term debt."
<F2>Total annualized interest costs for all utility long-term debt outstanding
at March 31, 1995.
<F3>No material dilution would occur if all the convertible preferred stock and
debentures were converted into common stock.
</FN>
</TABLE>
