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 June 30, 1997
-------------
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) 872-2000
- ----------------------------------------------------------------
(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 June 30, 1997
- -------------------------- ----------------------------
Common Stock, $1 par value 118,500,614
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....................................... 10
(3) Capitalization..................................... 13
(4) Fair Value of Financial Instruments................ 15
(5) Marketable Securities.............................. 17
(6) Commitments and Contingencies...................... 18
Report of Independent Accountants on Review of Interim
Financial Information.................................. 26
Item 2 - Management's Discussion and Analysis of Consolidated
Results of Operations and Financial Condition
Utility
Proposed Merger Update................................. 27
Results of Operations.................................. 29
Capital Resources and Liquidity........................ 31
New Accounting Standards............................... 32
Nonutility Subsidiary
Results of Operations.................................. 32
Capital Resources and Liquidity........................ 35
PART II - Other Information
Item 1 - Legal Proceedings................................. 36
Item 5 - Other Information
Other Financing Arrangements............................. 36
Base Rate Proceedings.................................... 36
Restructuring of the Bulk Power Market................... 40
Competition.............................................. 41
Peak Load, Sales, Conservation, and Construction and
Generating Capacity.................................... 43
Selected Nonutility Subsidiary Financial Information..... 45
Statistical Data......................................... 48
Unaudited Pro Forma Combined Condensed Financial
Information............................................ 49
Item 6 - Exhibits and Reports on Form 8-K.................. 57
Signatures................................................. 58
Computations of Earnings Per Common Share.................. 59
Computation of Ratios - Parent Company Only................ 60
Computation of Ratios - Fully Consolidated................. 61
Independent Accountants Awareness Letter................... 62
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
Six Months Ended Twelve Months Ended
June 30,
June 30, June 30,
--------------------
- -------------------- ----------------------
1997 1996
1997 1996 1997 1996
--------- ---------
- --------- --------- ---------- -----------
(Thousands of Dollars)
<S> <C> <C> <C>
<C> <C> <C>
Revenue
Sales of electricity $ 437,924 $ 461,002 $
807,577 $ 843,578 $1,788,739 $1,857,355
Other electric revenue 1,631 1,703
6,464 4,399 12,182 9,166
--------- ---------
- --------- --------- ---------- ----------
Total Operating Revenue 439,555 462,705
814,041 847,977 1,800,921 1,866,521
Interchange deliveries 11,416 39,075
25,990 90,396 111,048 137,686
--------- ---------
- --------- --------- ---------- ----------
Total Revenue 450,971 501,780
840,031 938,373 1,911,969 2,004,207
--------- ---------
- --------- --------- ---------- ----------
Operating Expenses
Fuel 78,195 74,805
156,702 167,518 316,976 369,801
Purchased energy 44,376 79,195
95,450 160,497 270,932 266,059
Capacity purchase payments 36,781 32,583
72,725 64,861 133,649 126,085
Other operation 53,296 56,263
105,132 111,982 216,476 224,577
Maintenance 23,907 21,267
45,080 42,694 93,910 91,680
--------- ---------
- --------- --------- ---------- ----------
Total Operation and Maintenance 236,555 264,113
475,089 547,552 1,031,943 1,078,202
Depreciation and amortization 56,801 54,675
114,401 110,076 227,340 219,474
Income taxes 27,763 37,808
33,058 45,979 121,164 140,044
Other taxes 49,232 49,841
94,641 95,396 199,611 201,433
--------- ---------
- --------- --------- ---------- ----------
Total Operating Expenses 370,351 406,437
717,189 799,003 1,580,058 1,639,153
--------- ---------
- --------- --------- ---------- ----------
Operating Income 80,620 95,343
122,842 139,370 331,911 365,054
--------- ---------
- --------- --------- ---------- ----------
Other Income
Nonutility Subsidiary
Income 28,665 31,783
68,472 49,096 134,342 117,038
Loss on assets held for disposal - -
- (12,320) (424) (12,320)
Expenses, including interest
and income taxes (27,209) (22,736)
(53,566) (25,261) (113,633) (97,726)
--------- ---------
- --------- --------- ---------- ----------
Net earnings from nonutility
subsidiary 1,456 9,047
14,906 11,515 20,285 6,992
Allowance for other funds used during
construction and capital cost recovery factor 1,681 1,660
3,341 3,397 6,516 6,657
Other, net 1,638 1,613
2,324 3,368 3,414 2,334
--------- ---------
- --------- --------- ---------- ----------
Total Other Income 4,775 12,320
20,571 18,280 30,215 15,983
--------- ---------
- --------- --------- ---------- ----------
Income Before Utility Interest Charges 85,395 107,663
143,413 157,650 362,126 381,037
--------- ---------
- --------- --------- ---------- ----------
Utility Interest Charges
Long-term debt 34,104 33,291
68,847 66,725 135,228 133,687
Other 3,406 4,102
5,505 7,889 11,448 14,382
Allowance for borrowed funds used during
construction and capital cost recovery factor (2,239) (1,983)
(4,045) (3,951) (7,630) (9,220)
--------- ---------
- --------- --------- ---------- ----------
Net Utility Interest Charges 35,271 35,410
70,307 70,663 139,046 138,849
--------- ---------
- --------- --------- ---------- ----------
Net Income 50,124 72,253
73,106 86,987 223,080 242,188
Dividends on Preferred Stock 4,137 4,137
8,282 8,297 16,590 16,673
--------- ---------
- --------- --------- ---------- ----------
Earnings for Common Stock 45,987 68,116
64,824 78,690 206,490 225,515
Retained Income at Beginning of Period 730,197 695,521
760,285 742,296 711,726 689,475
Dividends on Common Stock (49,156) (49,153)
(98,304) (98,305) (196,610) (196,610)
Subsidiary Marketable Securities Net
Unrealized Gain (Loss), Net of Tax 1,213 (2,758)
1,436 (10,955) 6,635 (6,654)
--------- ---------
- --------- --------- ---------- ----------
Retained Income at End of Period $ 728,241 $ 711,726 $
728,241 $ 711,726 $ 728,241 $ 711,726
========= =========
========= ========= ========== ==========
Average Common Shares
Outstanding (000's) 118,500 118,496
118,500 118,496 118,499 118,493
Earnings Per Common Share $0.39 $0.57
$0.55 $0.66 $1.74 $1.90
Cash Dividends Per Common Share $0.415 $0.415
$0.83 $0.83 $1.66 $1.66
Book Value Per Share
$15.67 $15.53
Dividend Payout Ratio
95.4% 87.4%
Effective Federal Income Tax Rate
25.2% 22.1%
2
</TABLE>
<TABLE>
POTOMAC ELECTRIC POWER COMPANY
Consolidated Balance Sheets
(Unaudited at June 30, 1997 and 1996)
------------------------------------------
<CAPTION>
June 30,
December 31, June 30,
ASSETS 1997
1996 1996
------ -------------
------------- -------------
(Thousands of Dollars)
<S> <C>
<C> <C>
Property and Plant - at original cost
Electric plant in service $ 6,299,044
$ 6,232,049 $ 6,141,899
Construction work in progress 78,450
62,469 69,035
Electric plant held for future use 4,190
4,152 4,115
Nonoperating property 22,976
22,921 22,771
-------------
------------- -------------
6,404,660
6,321,591 6,237,820
Accumulated depreciation (1,961,519)
(1,898,342) (1,829,828)
-------------
------------- -------------
Net Property and Plant 4,443,141
4,423,249 4,407,992
-------------
------------- -------------
Current Assets
Cash and cash equivalents 7,640
2,174 6,312
Customer accounts receivable, less allowance
for uncollectible accounts of $661, $1,298
and $1,443 164,006
128,600 163,924
Other accounts receivable, less allowance for
uncollectible accounts of $300 29,633
38,490 37,015
Accrued unbilled revenue 94,973
70,214 121,915
Prepaid taxes 105
34,202 3,427
Other prepaid expenses 6,892
4,613 11,535
Material and supplies - at average cost
Fuel 63,834
68,232 80,254
Construction and maintenance 67,931
69,541 69,852
-------------
------------- -------------
Total Current Assets 435,014
416,066 494,234
-------------
------------- -------------
Deferred Charges
Income taxes recoverable through future rates, net 239,435
238,467 239,806
Conservation costs, net 229,010
233,793 234,869
Unamortized debt reacquisition costs 54,149
55,552 56,956
Other 171,758
159,139 118,899
-------------
------------- -------------
Total Deferred Charges 694,352
686,951 650,530
-------------
------------- -------------
Nonutility Subsidiary Assets
Cash and cash equivalents 19,111
804 -
Marketable securities 289,293
377,237 409,194
Investment in finance leases 486,049
484,972 477,813
Operating lease equipment, net of accumulated
depreciation of $137,492, $117,705 and $99,257 179,337
199,124 252,197
Assets held for disposal 3,700
10,300 20,200
Receivables, less allowance for uncollectible
accounts of $6,000 47,981
87,745 77,631
Other investments 186,906
193,002 187,201
Other assets 14,280
12,436 15,599
-------------
------------- -------------
Total Nonutility Subsidiary Assets 1,226,657
1,365,620 1,439,835
-------------
------------- -------------
Total Assets $ 6,799,164
$ 6,891,886 $ 6,992,591
=============
============= =============
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization
Common stock $ 118,501
$ 118,500 $ 118,497
Other common equity 1,738,619
1,770,692 1,722,167
Serial preferred stock 125,293
125,298 125,307
Redeemable serial preferred stock 141,000
142,500 142,500
Long-term debt 1,727,065
1,767,598 1,718,361
-------------
------------- -------------
Total Capitalization 3,850,478
3,924,588 3,826,832
-------------
------------- -------------
Other Non-Current Liabilities
Capital lease obligations 161,702
162,936 164,113
-------------
------------- -------------
Total Other Non-Current Liabilities 161,702
162,936 164,113
-------------
------------- -------------
Current Liabilities
Long-term debt and preferred stock
redemption due within one year 100,985
152,445 100,985
Short-term debt 311,600
131,390 327,515
Accounts payable and accrued expenses 158,846
179,289 188,622
Capital lease obligations due within one year 20,772
20,772 20,772
Other 81,710
83,135 82,675
-------------
------------- -------------
Total Current Liabilities 673,913
567,031 720,569
-------------
------------- -------------
Deferred Credits
Income taxes 1,001,460
973,642 907,032
Investment tax credits 59,133
60,958 62,782
Other 40,561
35,658 37,026
-------------
------------- -------------
Total Deferred Credits 1,101,154
1,070,258 1,006,840
-------------
------------- -------------
Nonutility Subsidiary Liabilities
Long-term debt 912,709
996,232 978,911
Short-term notes payable -
51,650 159,330
Deferred taxes and other 99,208
119,191 135,996
-------------
------------- -------------
Total Nonutility Subsidiary Liabilities 1,011,917
1,167,073 1,274,237
-------------
------------- -------------
Total Capitalization and Liabilities $ 6,799,164
$ 6,891,886 $ 6,992,591
=============
============= =============
3
</TABLE>
<TABLE>
POTOMAC ELECTRIC POWER COMPANY
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------
<CAPTION>
Six
Months Ended Twelve Months Ended
June
30, June 30,
- ----------------------- -----------------------
1997
1996 1997 1996
---------
--------- --------- ---------
(Thousands of Dollars)
<S> <C>
<C> <C> <C>
Operating Activities
Income from utility operations $ 58,200
$ 75,472 $ 202,795 $ 235,196
Adjustments to reconcile income to net
cash from operating activities:
Depreciation and amortization 114,401
110,076 227,340 219,474
Deferred income taxes and investment tax credits 25,350
11,492 95,354 43,508
Deferred conservation costs (17,752)
(26,965) (40,191) (69,667)
Allowance for funds used during construction
and capital cost recovery factor (7,386)
(7,348) (14,146) (15,877)
Changes in materials and supplies 6,008
(16,406) 18,341 (8,995)
Changes in accounts receivable and accrued unbilled revenue (51,308)
(75,011) 34,242 (42,099)
Changes in accounts payable (20,405)
15,675 (22,456) 20,175
Changes in other current assets and liabilities 29,630
41,222 (5,734) 2,472
Net other operating activities (17,860)
(6,856) (59,678) (35,808)
Nonutility subsidiary:
Net earnings 14,906
11,515 20,285 6,992
Deferred income taxes (25,612)
(36,287) (25,723) (15,282)
Loss on assets held for disposal -
12,320 424 12,320
Changes in other assets and net other operating activities 33,866
34,483 35,641 63,746
---------
--------- --------- ---------
Net Cash From Operating Activities 142,038
143,382 466,494 416,155
---------
--------- --------- ---------
Investing Activities
Total investment in property and plant (99,554)
(91,932) (201,658) (202,721)
Allowance for funds used during construction
and capital cost recovery factor 7,386
7,348 14,146 15,877
---------
--------- --------- ---------
Net investment in property and plant (92,168)
(84,584) (187,512) (186,844)
Nonutility subsidiary:
Purchase of marketable securities (23,133)
(11,252) (31,561) (35,152)
Proceeds from sale or redemption of marketable securities 119,472
117,242 169,758 129,638
Investment in leased equipment (7,480)
(3,056) (7,480) (150,462)
Proceeds from sale or disposition of leased equipment -
3,658 - 3,658
Proceeds from assets held for disposal 2,200
29,354 7,000 29,354
Proceeds from sale of assets 2,700
285 2,415 6,251
Purchase of other investments (19,293)
(1,996) (40,295) (3,251)
Proceeds from sale or distribution of other investments 5,559
1,604 37,822 2,319
Investment in promissory notes (12)
(4,388) 131 (8,922)
Proceeds from promissory notes 52,992
7,643 62,024 12,079
---------
--------- --------- ---------
Net Cash From (Used by) Investing Activities 40,837
54,510 12,302 (201,332)
---------
--------- --------- ---------
Financing Activities
Dividends on common stock (98,304)
(98,305) (196,610) (196,610)
Dividends on preferred stock (8,282)
(8,297) (16,590) (16,673)
Redemption of preferred stock (1,500)
- (1,500) -
Issuance of long-term debt 8,090
- 107,590 172,754
Reacquisition and retirement of long-term debt (101,460)
(26,300) (101,480) (126,217)
Short-term debt, net 180,210
69,050 (15,915) (26,485)
Other financing activities (2,683)
(2,573) (5,467) (13,757)
Nonutility subsidiary:
Issuance of long-term debt -
78,000 105,000 185,000
Repayment of long-term debt (83,523)
(146,573) (174,052) (244,142)
Short-term debt, net (51,650)
(64,020) (159,333) 23,330
---------
--------- --------- ---------
Net Cash Used By Financing Activities (159,102)
(199,018) (458,357) (242,800)
---------
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 23,773
(1,126) 20,439 (27,977)
Cash and Cash Equivalents at Beginning of Period 2,978
7,438 6,312 34,289
---------
--------- --------- ---------
Cash and Cash Equivalents at End of Period $ 26,751
$ 6,312 $ 26,751 $ 6,312
=========
========= ========= =========
Cash paid for interest (net of capitalized interest) and income taxes:
Interest (including nonutility subsidiary
interest of $37,275, $43,682, $76,982 and $96,982) $ 103,712
$ 111,887 $ 208,791 $ 230,954
Income taxes $ 1,826
$ 2,559 $ 27,750 $ 44,594
4
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
The Company is engaged in the generation, transmission,
distribution and sale of electric energy in the Washington, D.C.
metropolitan area. The Company's retail service territory
includes all of the District of Columbia and major portions of
Montgomery and Prince George's counties in suburban Maryland.
Potomac Capital Investment Corporation (PCI), the Company's
wholly owned subsidiary, was formed in 1983 to provide a vehicle
to conduct the Company's ongoing nonutility businesses.
Effective April 30, 1996, the Company reorganized its nonutility
subsidiaries whereby PEPCO Enterprises, Inc. (PEI) became a
subsidiary of PCI. PCI's principal investments have been in
aircraft and power generation equipment, equipment leasing and
marketable securities, primarily preferred stock with mandatory
redemption features. PCI is also involved with activities,
through PEI, which provide telecommunication and energy services.
In addition, PCI has investments in real estate properties in the
Washington, D.C. metropolitan area.
The Company's utility operations are regulated by the
Maryland and District of Columbia Public Service Commissions and
its wholesale business by 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. Based upon the
regulatory framework in which it operates, the Company currently
applies the provisions of Statement of Financial Accounting
Standards (SFAS) No. 71 entitled "Accounting for the Effects of
Certain Types of Regulation" in accounting for certain deferred
charges and credits to be recognized in future customer billings
pursuant to regulatory authorization, principally deferred income
taxes, unamortized conservation costs and unamortized debt
reacquisition costs.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates and
assumptions.
5
Certain 1996 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 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 of energy, and resales of purchased
energy, to other utilities and to power marketers. 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
been made, the differences are accounted for as other deferred
charges or other deferred credits pending regulatory
determination.
In the District of Columbia, pre-July 1993 conservation
costs receive rate base treatment. Conservation expenditures for
the period July 1993 to December 1994 are recovered through a
surcharge mechanism which initially became effective July 11,
1995, and which is scheduled to be updated annually on June 1 to
recover 1995 and subsequent conservation expenditures, including
a capital cost recovery factor (CCRF), which is a mechanism that
enables the Company to earn a return on certain costs,
principally unamortized Demand Side Management (DSM) costs not in
rate base. A procedure has been established to consider lost
revenue without the need for base rate proceedings. In Maryland,
conservation costs are recovered through a surcharge rate which
reflects amortization of program costs, including costs in the
year during which the surcharge commences, a CCRF, incentives,
6
applicable taxes and estimated lost revenue. The surcharge is
established annually in a collaborative process with the recovery
of lost revenue subject to an earnings test performed on a
quarterly basis.
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, except that assets
held for disposal are carried at estimated fair value less
estimated costs to sell. Depreciation is recorded on a straight
line basis over the equipment's estimated useful life. No
depreciation is taken on assets held for disposal.
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 1997, 1996 and 1995.
7
Conservation
- ------------
In general, the Company accounts for conservation
expenditures in connection with its DSM program as a deferred
charge, and amortizes the costs over five years in Maryland and
ten years in the District of Columbia. At June 30, 1997,
unamortized conservation costs totaled $90.3 million in Maryland
and $138.7 million in the District of Columbia.
Allowance for Funds Used During Construction and Capital Cost
- -------------------------------------------------------------
Recovery Factor
---------------
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
jurisdictional AFUDC capitalization rates are determined as
prescribed by the FERC. The effective capitalization rates were
approximately 7.5%, compounded semiannually, for the six months
ended June 30, 1997, and approximately 7.4% in 1996 and 7.9% in
1995, compounded semiannually.
In Maryland, the Company accrues a CCRF on the retail
jurisdictional portion of certain pollution control expenditures
related to compliance with the Clean Air Act (CAA). The base for
calculating this return is the amount by which the Maryland
jurisdictional CAA expenditure balance exceeds the CAA balance
being recovered in base rates. The CCRF rate for Maryland is
9.46%. In the District of Columbia, the carrying costs of CAA
expenditures not in rate base are recovered through a base rate
surcharge.
Amortization of Debt Issuance and Reacquisition Costs
- -----------------------------------------------------
The Company defers and amortizes expenses incurred in
connection with the issuance of long-term debt, including
premiums and discounts associated with such debt, over the lives
of the respective issues. Costs associated with the
reacquisition of debt are also deferred and amortized over the
lives of the new issues.
8
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 original maturities of three months or
less.
New Accounting Standards
- ------------------------
On June 30, 1997, the Financial Accounting Standards Board
issued Statements of Financial Accounting Standards Nos. 130 and
131 entitled "Reporting Comprehensive Income" and "Disclosures
about Segments of an Enterprise and Related Information",
respectively. Both of these statements will become effective for
calendar year 1998 financial statements. The Company is
evaluating these statements to determine the impact on its
reporting and disclosure requirements.
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.
9
<TABLE>
(2) INCOME TAXES
- ----------------
Provision for Income Taxes
- --------------------------
<CAPTION>
Three Months Ended
Six Months Ended Twelve Months Ended
June 30,
June 30, June 30,
----------------------
----------------------- ----------------------
1997 1996
1997 1996 1997 1996
---------- ---------
--------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C>
<C> <C> <C> <C>
Utility current tax expense
Federal $ 13,125 $ 23,234
$ 6,683 $ 31,753 $ 22,166 $ 87,294
State and local 1,802 3,569
952 4,346 2,886 12,090
---------- ---------
--------- --------- --------- ---------
Total utility current tax expense 14,927 26,803
7,635 36,099 25,052 99,384
---------- ---------
--------- --------- --------- ---------
Utility deferred tax expense
Federal 12,123 11,208
23,525 11,487 86,799 41,391
State and local 1,866 1,202
3,650 1,830 12,204 5,767
Investment tax credits (912) (913)
(1,825) (1,825) (3,649) (3,650)
---------- ---------
--------- --------- --------- ---------
Total utility deferred tax expense 13,077 11,497
25,350 11,492 95,354 43,508
---------- ---------
--------- --------- --------- ---------
Total utility income tax expense 28,004 38,300
32,985 47,591 120,406 142,892
---------- ---------
--------- --------- --------- ---------
Nonutility subsidiary current tax expense
Federal (4,055) (5,005)
3,151 (9,039) (6,062) (36,691)
---------- ---------
--------- --------- --------- ---------
Nonutility subsidiary deferred tax expense
Federal (3,880) (1,561)
(24,068) (36,289) (24,152) (19,744)
---------- ---------
--------- --------- --------- ---------
Total nonutility subsidiary income tax credit (7,935) (6,566)
(20,917) (45,328) (30,214) (56,435)
---------- ---------
--------- --------- --------- ---------
Total consolidated income tax expense 20,069 31,734
12,068 2,263 90,192 86,457
Income taxes included in other income (7,694) (6,074)
(20,990) (43,716) (30,972) (53,587)
---------- ---------
--------- --------- --------- ---------
Income taxes included in utility operating expenses $ 27,763 $ 37,808
$ 33,058 $ 45,979 $ 121,164 $ 140,044
========== =========
========= ========= ========= =========
10
</TABLE>
<TABLE>
Reconciliation of Consolidated Income Tax Expense
- -------------------------------------------------
<CAPTION>
Three Months Ended
Six Months Ended Twelve Months Ended
June 30,
June 30, June 30,
----------------------
----------------------- ----------------------
1997 1996
1997 1996 1997 1996
---------- --------
--------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C>
<C> <C> <C> <C>
Income before income taxes $ 70,193 $ 103,987
$ 85,174 $ 89,250 $ 313,272 $ 328,645
========== =========
========= ========= ========= =========
Utility income tax at federal
statutory rate $ 26,836 35,527
$ 31,915 $ 43,072 $ 113,120 $ 132,331
Increases (decreases) resulting from
Depreciation 2,522 2,543
5,044 5,085 9,826 9,761
Removal costs (1,794) (1,170)
(3,186) (1,478) (5,282) (5,783)
Allowance for funds used during
construction 160 146
365 280 776 548
Other (1,192) (934)
(2,319) (1,475) (3,961) (1,449)
State income taxes, net of federal effect 2,384 3,101
2,991 3,932 9,808 11,524
Tax credits (912) (913)
(1,825) (1,825) (3,881) (4,040)
---------- ---------
--------- --------- --------- ---------
Total utility income tax expense 28,004 38,300
32,985 47,591 120,406 142,892
---------- ---------
--------- --------- --------- ---------
Nonutility subsidiary income tax at federal
statutory rate (2,268) 868
(2,104) (11,835) (3,475) (17,305)
Increases (decreases) resulting from
Dividends received deduction (1,196) (4,408)
(2,718) (6,044) (3,788) (10,255)
Reversal of previously accrued deferred taxes - (5,193)
(10,125) (28,699) (12,230) (28,699)
Other (4,471) 2,167
(5,970) 1,250 (10,721) (176)
---------- ---------
--------- --------- --------- ---------
Total nonutility subsidiary income tax credit (7,935) (6,566)
(20,917) (45,328) (30,214) (56,435)
---------- ---------
--------- --------- --------- ---------
Total consolidated income tax expense 20,069 31,734
12,068 2,263 90,192 86,457
Income taxes included in other income (7,694) (6,074)
(20,990) (43,716) (30,972) (53,587)
---------- ---------
--------- --------- --------- ---------
Income taxes included in utility operating expenses $ 27,763 $ 37,808
$ 33,058 $ 45,979 $ 121,164 $ 140,044
========== =========
========= ========= ========= =========
11
</TABLE>
<TABLE>
Components of Consolidated Deferred Tax Liabilities (Assets)
- ------------------------------------------------------------
<CAPTION>
June 30, Dec. 31,
June 30,
1997 1996
1996
---------- ----------
----------
(Thousands of
Dollars)
<S> <C> <C>
<C>
Utility deferred tax liabilities (assets)
Depreciation and other book to tax
basis differences $ 845,159 $ 821,656
$ 794,312
Rapid amortization of certified pollution
control facilities 24,036 24,816
26,068
Deferred taxes on amounts to be collected
through future rates 90,650 90,284
90,790
Property taxes 13,094 12,664
12,132
Deferred fuel (14,964) (14,663)
(12,954)
Prepayment premium on debt retirement 20,493 21,025
21,543
Deferred investment tax credit (22,388) (23,079)
(23,769)
Contributions in aid of construction (29,176) (28,719)
(27,551)
Contributions to pension plan 16,170 16,170
11,803
Conservation costs (demand side management) 45,764 41,106
-
Other 22,218 21,653
20,050
---------- ---------
--------
Total utility deferred tax liabilities (net) 1,011,056 982,913
912,424
Current portion of utility deferred tax liabilities
(included in Other Current Liabilities) 9,596 9,271
5,392
---------- ---------
---------
Total utility deferred tax liabilities
(net) - non-current $1,001,460 $ 973,642
$ 907,032
========== =========
=========
Nonutility subsidiary deferred tax liabilities (assets)
Finance leases $ 140,216 $ 144,667
$ 161,744
Operating leases 39,861 57,006
31,682
Alternative minimum tax (97,109) (97,109)
(88,664)
Other (46,739) (43,496)
(43,987)
---------- ---------
---------
Total nonutility subsidiary deferred tax liabilities
(net), (included in Deferred taxes and other) $ 36,229 $ 61,068
$ 60,775
========== =========
=========
12
</TABLE>
(3) CAPITALIZATION
--------------
Common Equity
- -------------
At June 30, 1997, 118,500,614 shares of the Company's $1 par
value Common Stock were outstanding. A total of 200 million
shares is authorized. As of June 30, 1997, 2,324,721 shares were
reserved for issuance under the Shareholder Dividend Reinvestment
Plan; 1,221,624 shares were reserved for issuance under the
Employee Savings Plans; and 2,769,412 and 3,392,500 shares were
reserved for conversion of the 7% and 5% Convertible Debentures,
respectively. Under the Stock Option Agreement with Baltimore
Gas and Electric Company, 23,579,900 shares could become
issuable, contingent upon specific events associated with
termination of the Merger Agreement. (See Note 6 - Commitments
and Contingencies for additional information.)
Serial Preferred, Redeemable Serial Preferred and Preference
- ------------------------------------------------------------
Stock and Long-Term Debt
------------------------
At June 30, 1997, the Company had outstanding 5,345,547
shares of its $50 par value Serial Preferred Stock, including the
Redeemable Serial Preferred Stock. A total of 11,125,649 shares
is authorized. At June 30, 1997, the aggregate annual dividend
requirements on the Serial Preferred Stock and the Redeemable
Serial Preferred Stock were approximately $6.6 million and $10.1
million, respectively. Also, the Company has a total of
8,800,000 shares of cumulative, $25 par value, Preference Stock
authorized and unissued.
The Company's $2.44 Convertible Preferred Stock, 1966 Series
(5,851 shares outstanding at June 30, 1997) is convertible into
Common Stock at $8.51 per share.
At June 30, 1997, the Company had outstanding one million
shares of its Serial Preferred Stock, Auction Series A. The
annual dividend rate is 4.5% ($2.25) for the period June 1, 1997,
through August 31, 1997. For the period March 1, 1997, through
May 31, 1997, the annual dividend rate was 3.92% ($1.96). The
average rate at which dividends were paid during the twelve
months ended June 30, 1997, was 4.14% ($2.07).
At June 30, 1997, 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; one million
shares of the $3.40 (6.80%) Series of 1992 on which the sinking
fund requirement commences September 1, 2002; and 839,696 shares
of the $3.37 (6.74%) Series of 1987 on which the sinking fund
13
requires redemption, beginning June 1993, at par, of not less
than 30,000 nor more than 60,000 shares annually. Sinking fund
requirements through 2001 with respect to the three series of
Redeemable Serial Preferred Stock are $1 million in 1998, $1.5
million in 1999 through 2000 and $9.8 million in 2001.
The Company's Long-Term Debt at June 30, 1997, is summarized
below:
(Thousands of Dollars)
First Mortgage Bonds $1,341,800
Convertible Debentures 178,907
Notes Payable 333,090
Net Unamortized Discount (26,732)
Current Portion (100,000)
----------
Net Utility Long-Term Debt $1,727,065
==========
Nonutility Subsidiary Long-Term Debt $ 912,709
==========
At June 30, 1997, the aggregate annual interest requirement
on the Company's long-term debt, including debt due within one
year, was $126.5 million; and the aggregate amounts of long-term
debt maturities are $50 million in 1997, $50 million in 1998, $45
million in 1999, $100 million in 2000 and $165 million in 2001.
At June 30, 1997, long-term debt due within one year consisted of
$50 million of 9.08% Medium-Term Notes and $50 million of 4-3/8%
First Mortgage Bonds.
On May 26 and May 28, 1997, the Company redeemed, at
maturity, $100 million of 6.66% - 6.73% Medium-Term Notes.
Nonutility Subsidiary Long-Term Debt
- ------------------------------------
Long-term debt at June 30, 1997, consisted primarily of
unsecured borrowings from institutional lenders maturing at
various dates between 1997 and 2003. The interest rates of such
borrowings ranged from 5% to 10.1%. The weighted average
effective interest rate was 7.44% at June 30, 1997, 7.44% at
December 31, 1996, and 7.29% at June 30, 1996. Annual aggregate
principal repayments on these borrowings are $114 million in
1997, $300.7 million in 1998, $170 million in 1999, $115 million
in 2000, $54 million in 2001 and $98.5 million thereafter. Also
included in long-term debt is $60.5 million of non-recourse debt
which is due in monthly installments with final maturities in
1999, 2001, 2002 and 2011.
14
<TABLE>
(4) FAIR VALUE OF FINANCIAL INSTRUMENTS
- ---------------------------------------
The estimated fair values of the Company's financial instruments at
June 30, 1997, December 31, 1996, and June 30, 1996, are shown below.
<CAPTION>
June 30, December 31,
June 30,
1997 1996
1996
--------------------------
- ------------------------- -------------------------
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 $ 125,293 119,468 125,298
113,285 125,307 110,157
========== ========= =========
========= ========= =========
Redeemable serial
preferred stock $ 141,000 142,901 142,500
146,491 142,500 143,496
========== ========= =========
========= ========= =========
Long-term debt
First mortgage bonds $1,277,803 1,262,424 1,327,389
1,319,976 1,326,975 1,291,083
Medium-term notes $ 281,050 278,457 272,788
274,242 223,152 216,888
Convertible debentures $ 168,212 171,368 167,421
171,880 168,234 170,092
---------- --------- ---------
- --------- --------- ---------
Total long-term debt $1,727,065 1,712,249 1,767,598
1,766,098 1,718,361 1,678,063
========== ========= =========
========= ========= =========
Nonutility Subsidiary
Assets
Marketable securities $ 289,293 289,293 377,237
377,237 409,194 409,194
========== ========= =========
========= ========= =========
Notes receivable $ 34,253 29,734 72,251
71,593 64,298 62,168
========== ========= =========
========= ========= =========
Liabilities
Long-term debt $ 912,709 916,229 996,232
1,011,814 978,911 993,426
========== ========= =========
========= ========= =========
15
</TABLE>
The methods and assumptions below were used to estimate, at
June 30, 1997, December 31, 1996, and June 30, 1996, 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, excluding amounts
due within one year, 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.
The carrying amounts of all other financial instruments
approximate fair value.
16
(5) MARKETABLE SECURITIES
---------------------
PCI's marketable securities are classified as available-for-
sale for financial reporting purposes. Investment grade
preferred stocks with mandatory redemption features made up 86%
of the portfolio at June 30, 1997. Net unrealized gains or
losses on such securities are reflected, net of tax, in
stockholders' equity. The net unrealized gains (losses) are
shown below:
As of June 30, 1997
-------------------------------------
Net
Market Unrealized
Cost Value Gain
--------- --------- -----------
(Thousands of Dollars)
Mandatory redeemable
preferred stock $ 285,443 $ 289,293 $ 3,850
========= ========= =========
As of December 31, 1996
-------------------------------------
Net
Market Unrealized
Cost Value Gain (Loss)
--------- --------- -----------
(Thousands of Dollars)
Mandatory redeemable
preferred stock $ 375,595 $ 377,237 $ 1,642
Equity securities 3 - (3)
--------- --------- ---------
Total $ 375,598 $ 377,237 $ 1,639
========= ========= =========
As of June 30, 1996
-------------------------------------
Net
Market Unrealized
Cost Value Loss
--------- --------- -----------
(Thousands of Dollars)
Mandatory redeemable
preferred stock $ 415,550 $ 409,194 $ (6,356)
Equity securities 3 - (3)
--------- --------- ---------
Total $ 415,553 $ 409,194 $ (6,359)
========== ========= =========
17
Included in net unrealized gains and losses are gross
unrealized gains of $9 million and gross unrealized losses of
$5.1 million at June 30, 1997; gross unrealized gains of $9.9
million and gross unrealized losses of $8.3 million at
December 31, 1996; and gross unrealized gains of $6.1 million and
gross unrealized losses of $12.5 million at June 30, 1996.
At June 30, 1997, the contractual maturities for mandatory
redeemable preferred stock are $4.8 million within one year,
$90.6 million from one to five years, $88.2 million from five to
10 years and $101.8 million for over 10 years.
In determining gross realized gains and losses on sales or
calls of securities, specific identification is used. A summary
of realized gains and losses is shown below.
Three Months Six Months Twelve Months
Ended Ended Ended
June 30, June 30, June 30,
-------------- -------------- --------------
1997 1996 1997 1996 1997 1996
------ ------ ------ ------ ------ ------
(Thousands of Dollars)
Gross realized
gains $ 928 $ 244 $6,812 $2,505 $8,973 $2,911
Gross realized
losses - (121) (623) (792) (882) (956)
------ ------ ------ ------ ------ ------
Net gain $ 928 $ 123 $6,189 $1,713 $8,091 $1,955
====== ====== ====== ====== ====== ======
(6) COMMITMENTS AND CONTINGENCIES
-----------------------------
Proposed Merger
- ---------------
The Company entered into an Agreement and Plan of Merger
with Baltimore Gas and Electric Company (BGE) in September 1995.
This Agreement provides for a strategic business combination in
which each company will merge into Constellation Energy
Corporation (Constellation Energy), a newly formed company, to
create an integrated, non-holding company structure (the Merger).
Each outstanding share of the Company's common stock will be
converted into the right to receive .997 of a share of common
stock of Constellation Energy and each outstanding share of BGE
common stock will be converted into the right to receive one
share of Constellation Energy's common stock. This transaction
is expected to qualify as a tax-free exchange of shares for the
holders of each company's common stock and as a pooling of
interests for accounting purposes. Constellation Energy will
18
serve a population of approximately 4.5 million with
approximately 1.8 million electric customers and over 557,000
natural gas customers. Preliminary estimates indicate that
savings from the combined utility systems will approximate $1.3
billion over 10 years following the Merger. These savings are
net of costs to achieve, which are presently estimated to be
approximately $150 million. Approximately two-thirds of the
projected savings are expected to result from reduced labor
costs, with the remaining savings split between nonfuel
purchasing and corporate and administrative programs. The
allocation of the net savings between customers and shareholders
of Constellation Energy will be determined in regulatory
proceedings. The applications for approval of the Merger, filed
with the various regulatory commissions, set forth the proposed
plans for Constellation Energy to share the benefits of the
Merger with customers in the District of Columbia and Maryland.
The proposal included: 1) a freeze on base electric rates until
at least January 1, 2000, 2) a unique bill credit for all
customers if Constellation Energy achieves certain financial
targets, 3) an array of economic development incentives, and 4)
programs to address the energy needs of low-income customers.
The development of estimated savings resulting from the Merger
was based upon assumptions which involve judgments with respect
to, among other things, future national and regional economic and
competitive conditions, inflation rates, regulatory treatment,
weather conditions, financial market conditions, interest rates,
future business decisions and other uncertainties, all of which
are difficult to predict and many of which are beyond the control
of the Company and BGE. Accordingly, while the Company believes
that such assumptions are reasonable for purposes of the
development of estimates of potential savings, there can be no
assurance that such assumptions will approximate actual
experience or that all such savings will be realized. If the
Merger is not completed, a substantial portion of Merger related
costs would be written off as a charge against the Company's
results of operations. At June 30, 1997, the Company had
deferred $37.1 million in costs related to the Merger.
Shareholders of the Company and BGE, at separate special
meetings during March 1996, approved the Merger Agreement. The
Company and BGE filed a joint Application for Authorization and
Approval of the Merger with the FERC on January 11, 1996, and
with the Maryland and District of Columbia Public Service
Commissions on April 8, 1996.
The District of Columbia Commission conducted hearings on
the proposed Merger in February and March 1997. The case was
placed before the District of Columbia Commission for decision in
March 1997.
On April 16, 1997, FERC announced its finding that the
proposed Merger would be in the public interest and approved the
transaction without conditions. FERC held that the Merger would
19
not adversely affect competition in the long- or short-term
wholesale capacity markets. In addition, FERC indicated that
evaluation of the effect of the Merger on retail markets would be
left to the Maryland and District of Columbia Public Service
Commissions.
Also on April 16, 1997, the Maryland Public Service
Commission unanimously approved the proposed Merger and ordered
Constellation Energy to reduce rates by $56 million ($44 million
for BGE and $12 million for PEPCO), beginning on the effective
date of the Merger, with base rates to be frozen for three years
thereafter. The reductions are premised on an 11.4% return on
equity (ROE). In addition, the Commission ordered that 50% of
earnings above an 11.4% ROE be used to further reduce customer
rates. The Company and BGE believe that the Maryland Order
contains elements that must be revised for the Merger to take
place. The two companies proposed a regulatory plan designed to
share Merger benefits equitably between shareholders and
customers. In addition to ordering the rate decrease, the Order
also denies the two companies the opportunity to recover the full
costs for purchased power contracts previously approved by the
Commission. The Maryland Order would put in place a plan that
would eliminate any reasonable opportunity for shareholders to
share in the benefits.
On May 2, 1997, the companies filed a request for
reconsideration of the Maryland Order. In the request, the
companies detailed areas of the Order that need to be revised for
the Merger to proceed and proposed a modified plan to address
these concerns. Highlights of this modified plan include: 1) a
$26 million rate reduction for Constellation Energy's Maryland
customers upon completion of the Merger, followed by a four-year
base-rate freeze, 2) a comprehensive surcharge that permits full
cost recovery of power purchase contracts the Commission had
previously approved, 3) a synergy sharing mechanism premised on
an 11.9% ROE that splits Merger benefits on a 50/50 basis between
customers and investors, allowing further customer rate
reductions if the new company's operations result in additional
savings, and 4) an opportunity for recovery of Merger costs over
the four-year, base-rate freeze period via the synergy sharing
mechanism. Under this proposal, Constellation Energy would write
off Merger costs in the year the Merger is consummated. There
can be no assurance that the Commission will grant the request
for reconsideration or that the Commission's Order will be
changed.
On May 1, 1997, the International Brotherhood of Electrical
Workers (IBEW) Local 1900 filed an appeal of the Maryland
Commission's decision with the Circuit Court of Baltimore County.
In view of the Commission's conclusion that, under Maryland law,
the IBEW's appeal divested it of authority to consider the
Application for Rehearing, the joint applicants filed a motion
requesting the Circuit Court to remand the case to the
20
Commission. On July 8, 1997, the Circuit Court of Baltimore
County decided to hold its ruling on the motion for remand until
July 28, 1997 while the Maryland Commission corrected a
computational error contained in its April 16, 1997 Order. On
July 14, 1997, the Company's and BGE's Chief Executive Officers
filed sworn affidavits in the Court stating that the Merger
cannot proceed unless other aspects of the Commission's Order
were modified. The affidavits stated that even if adjusted for
the computational error, the original order does not provide an
adequate financial basis upon which the companies could proceed
to consummate the Merger. On July 28, 1997, the Circuit Court
accepted the correction of the computational error, denied the
motion for rehearing and established a procedural schedule for
consideration of the IBEW's appeal, which culminates in a hearing
on October 20, 1997.
The Company is unable to predict when final decisions will
be reached by the Maryland and District of Columbia Public
Service Commissions or the Circuit Court of Baltimore County.
The Merger will not proceed unless the regulatory approvals
conform to the fundamental requirement that shareholders have a
reasonable opportunity to share in the expected benefits of the
Merger.
The waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act was terminated on January 29, 1997. If the
Merger is not completed by January 28, 1998, a new Hart-Scott-
Rodino filing would be required. The Nuclear Regulatory
Commission has approved the transfer of BGE's ownership interest
in the operating licenses for the two generating units at the
Calvert Cliffs Nuclear Power Plant to Constellation Energy at the
effective time of the Merger. In addition, the Merger has been
approved by the State Corporation Commission of Virginia and the
Pennsylvania Public Utility Commission.
If the Merger Agreement is terminated by either the Company
or BGE due to a material breach by the other party, the breaching
party must pay the non-breaching party, as liquidated damages,
$10 million in cash in respect of out-of-pocket expenses. The
Merger Agreement also requires payment of a termination fee of
$75 million in cash, plus $10 million in cash in respect of out-
of-pocket expenses, by one party to the other if the Merger
Agreement is terminated under certain circumstances including, if
either the Company or BGE terminates the Merger Agreement after
the Board of Directors of the other party withdraws or adversely
modifies its recommendation of the transaction. The termination
fees payable by the Company under these provisions and the
aggregate amount which could be payable by the Company upon a
required repurchase of an option (or shares of common stock
issued pursuant to the exercise of the option) granted by the
Company to BGE in connection with entry into the Merger Agreement
may not exceed $125 million in the aggregate.
21
The Company has approved, in conjunction with the Merger
with BGE, a severance plan for all exempt and non-bargaining unit
employees who are not offered a position in Constellation Energy.
Such employees will receive two weeks of pay per year of service,
with a minimum payment of eight weeks of pay. In addition,
employees will receive company-sponsored health and dental
insurance for two weeks per year of service, with a minimum of
eight weeks of insurance coverage; employees will also not be
obligated to reimburse the Company for tuition payments made by
the Company on their behalf within two years of termination.
An extension of the current 1993 Labor Agreement between the
Company and Local 1900 of the IBEW was ratified by the Union
members in December 1995. The 1995 Agreement extends the 1993
Agreement, which was due to expire on June 1, 1996, for two years
or until the effective date of the Merger with BGE, whichever
occurs first. This Agreement provides severance benefits,
previously approved by the Company for exempt and non-bargaining
unit employees, for all union members and provided for a lump-sum
payment of 2% of base pay on January 5, 1996, a lump-sum payment
of 1% of base pay on June 7, 1996, and a lump-sum payment of 3%
of base pay on June 6, 1997.
On March 31, 1997, the Company signed a contract to purchase
land in downtown Washington, D.C. to build a $90 million regional
headquarters for Constellation Energy.
Environmental Contingencies
- ---------------------------
As discussed in the March 31, 1997 Form 10-Q, the Company
received notice in December 1995 from the U.S. Environmental
Protection Agency (EPA) that it is a Potentially Responsible
Party (PRP) under the Comprehensive Environmental Response
Compensation and Liability Act (CERCLA or Superfund) with respect
to the release or threatened release of radioactive and mixed
radioactive and hazardous wastes at a site in Denver, Colorado,
operated by RAMP Industries, Inc. Evidence indicates that the
Company's connection to the site arises from an agreement with a
vendor to package, transport and dispose of two laboratory
instruments containing small amounts of radioactive material at a
Nevada facility. While the Company cannot predict its liability
at this site, the Company believes that it will not have a
material adverse effect on its financial position or results of
operations.
As discussed in the March 31, 1997 Form 10-Q, the Company
received notice from the EPA in October 1995 that it, along with
several hundred other companies, may be a PRP in connection with
the Spectron Superfund Site located in Elkton, Maryland. The
site was operated as a hazardous waste disposal, recycling, and
processing facility from 1961 to 1988. A group of PRPs allege,
based on records they have collected, that the Company's share of
22
liability at this site is .0042%. The EPA has also indicated
that a de minimis settlement is likely to be appropriate for this
site. While the outcome of negotiations and the ultimate
liability with respect to this site cannot be predicted, the
Company believes that its liability at this site will not have a
material adverse effect on its financial position or results of
operations.
As also discussed in the March 31, 1997 Form 10-Q, 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
PRPs, the Company is responsible for 12% of the costs of the
RI/FS. Total costs of the RI/FS and associated activities prior
to the issuance of a Record of Decision (ROD) by the EPA,
including legal fees, are currently estimated to be $7.5 million.
The Company has paid $.9 million as of June 30, 1997. The report
included a number of possible remedies, the estimated costs of
which range from $2 million to $90 million. In July 1995, the
EPA announced its proposed remedial action plan for the site and
indicated it will accept comments on the plan from any interested
parties. The EPA's estimate of the costs associated with
implementation of the plan is approximately $17 million. The
Company cannot predict whether the EPA will include the plan in
its ROD as proposed or make changes as a result of comments
received. In addition, the Company cannot estimate the total
extent of the EPA's administrative and oversight costs. To date,
the Company has accrued $1.7 million for its share of this
contingency.
As also discussed in the March 31, 1997 Form 10-Q, during
1993 the Company was served with Amended Complaints filed in
three jurisdictions (Prince George's County, Baltimore City and
Baltimore County), in separate ongoing, consolidated proceedings
each denominated "In re: Personal Injury Asbestos Case." 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 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.
23
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 initial filings in 1993, approximately 50
individual suits have been filed against 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. In 1995 and 1996, approximately 400
of the individual plaintiffs have dismissed their claims against
the Company. No payments were made by the Company in connection
with the dismissals. While the aggregate amount specified in the
remaining suits would exceed $400 million, 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.
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.
24
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
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 1996
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 26) 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 33-61379) and Form S-8
(Registration Nos. 33-36798, 33-53685 and 33-54197), in the Joint
Proxy Statement/Prospectus constituting part of the Registration
Statement on Form S-4 (Registration No. 33-64799) of
Constellation Energy Corporation and in the Prospectuses
constituting parts of the Registration Statements on Form S-3
(Registration Nos. 333-24705 and 333-24855) of Constellation
Energy Corporation 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.
25
REPORT OF INDEPENDENT ACCOUNTANTS
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 June 30, 1997 and 1996, and the related consolidated
statements of earnings and retained income for the three, six and
twelve month periods then ended and the consolidated statements
of cash flows for the six 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, 1996, 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 17, 1997, we
expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet information as of
December 31, 1996, 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.
August 13, 1997
26
Part I FINANCIAL INFORMATION
- ------ ---------------------
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
- ------ ----------------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
UTILITY
- -------
PROPOSED MERGER UPDATE
- ----------------------
Shareholders of the Company and BGE, at separate special
meetings during March 1996, approved the Merger to form
Constellation Energy.
The District of Columbia Commission conducted hearings on
the proposed Merger in February and March 1997. The case was
placed before the District of Columbia Commission for decision in
March 1997.
On April 16, 1997, FERC announced its finding that the
proposed Merger would be in the public interest and approved the
transaction without conditions. FERC held that the Merger would
not adversely affect competition in the long- or short-term
wholesale capacity markets. In addition, FERC indicated that
evaluation of the effect of the Merger on retail markets would be
left to the Maryland and District of Columbia Public Service
Commissions.
Also on April 16, 1997, the Maryland Public Service
Commission unanimously approved the proposed Merger and ordered
Constellation Energy to reduce rates by $56 million ($44 million
for BGE and $12 million for PEPCO), beginning on the effective
date of the Merger, with base rates to be frozen for three years
thereafter. The reductions are premised on an 11.4% return on
equity (ROE). In addition, the Commission ordered that 50% of
earnings above an 11.4% ROE be used to further reduce customer
rates. The Company and BGE believe that the Maryland Order
contains elements that must be revised for the Merger to take
place. The two companies proposed a regulatory plan designed to
share Merger benefits equitably between shareholders and
customers. In addition to ordering the rate decrease, the Order
also denies the two companies the opportunity to recover the full
costs for purchased power contracts previously approved by the
Commission. The Maryland Order would put in place a plan that
would eliminate any reasonable opportunity for shareholders to
share in the benefits.
On May 2, 1997, the companies filed a request for
reconsideration of the Maryland Order. In the request, the
companies detailed areas of the Order that need to be revised for
the Merger to proceed and proposed a modified plan to address
27
these concerns. Highlights of this modified plan include: 1) a
$26 million rate reduction for Constellation Energy's Maryland
customers upon completion of the Merger, followed by a four-year
base-rate freeze, 2) a comprehensive surcharge that permits full
cost recovery of power purchase contracts the Commission had
previously approved, 3) a synergy sharing mechanism premised on
an 11.9% ROE that splits Merger benefits on a 50/50 basis between
customers and investors, allowing further customer rate
reductions if the new company's operations result in additional
savings, and (4) an opportunity for recovery of Merger costs over
the four-year, base-rate freeze period via the synergy sharing
mechanism. Under this proposal, Constellation Energy would write
off Merger costs in the year the Merger is consummated. There
can be no assurance that the Commission will grant the request
for reconsideration or that the Commission's Order will be
changed.
On May 1, 1997, IBEW Local 1900 filed an appeal of the
Maryland Commission's decision with the Circuit Court of
Baltimore County. In view of the Commission's conclusion that,
under Maryland law, the IBEW's appeal divested it of authority to
consider the Application for Rehearing, the joint applicants
filed a motion requesting the Circuit Court to remand the case to
the Commission. On July 8, 1997, the Circuit Court of Baltimore
County decided to hold its ruling on the motion for remand until
July 28, 1997 while the Maryland Commission corrected a
computational error contained in its April 16, 1997 Order. On
July 14, 1997, the Company's and BGE's Chief Executive Officers
filed sworn affidavits in the Court stating that the Merger
cannot proceed unless other aspects of the Commission's Order
were modified. The affidavits stated that even if adjusted for
the computational error, the original order does not provide an
adequate financial basis upon which the companies could proceed
to consummate the Merger. On July 28, 1997, the Circuit Court
accepted the correction of the computational error, denied the
motion for rehearing and established a procedural schedule for
consideration of the IBEW's appeal, which culminates in a hearing
on October 20, 1997.
The Company is unable to predict when final decisions will
be reached by the Maryland and District of Columbia Public
Service Commissions or the Circuit Court of Baltimore County.
The Merger will not proceed unless the regulatory approvals
conform to the fundamental requirement that shareholders have a
reasonable opportunity to share in the expected benefits of the
Merger.
The waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act was terminated on January 29, 1997. If the
Merger is not completed by January 28, 1998, a new Hart-Scott-
Rodino filing would be required. The Nuclear Regulatory
Commission has approved the transfer of BGE's ownership interest
in the operating licenses for the two generating units at the
28
Calvert Cliffs Nuclear Power Plant to Constellation Energy at the
effective time of the Merger. In addition, the Merger has been
approved by the State Corporation Commission of Virginia and the
Pennsylvania Public Utility Commission. If the Merger is not
completed, a substantial portion of Merger related costs would be
written off as a charge against the Company's results of
operations. At June 30, 1997, the Company has deferred $37.1
million in costs related to the Merger.
See Part I, Item 1, Notes to Consolidated Financial
Statements, (6) Commitments and Contingencies, for additional
information.
RESULTS OF OPERATIONS
- ---------------------
TOTAL REVENUE
Total revenue decreased for the three, six and twelve months
ended June 30, 1997, as compared to the corresponding periods in
1996. The decrease in revenue from sales of electricity for the
three, six and twelve months ended June 30, 1997, was primarily
due to decreases in kilowatt-hour sales of 3.9%, 4.3% and 4.8%
from the corresponding periods ended June 30, 1996. The decline
in sales reflects milder than average weather in each calendar
quarter in the twelve months ended June 30, 1997. The weather in
the corresponding quarters in the prior twelve months was more
severe than average in the third quarter of 1995 as well as the
first and second quarters of 1996.
Total revenue also reflects the effects of the Maryland
Demand Side Management (DSM) surcharge tariff. Effective June 6,
1997, the surcharge tariff rate was lowered, which will reduce
annual revenue by approximately $17 million, reflecting the
Company's efforts to narrow conservation program offerings and
limit conservation spending. In the second quarter of 1997, the
Company recorded a $1.6 million bonus, which was awarded for
exceeding 1996 energy saving goals under the conservation
incentive provision of the tariff. In the third quarter of 1996,
the Company recorded an $8.9 million bonus, which was awarded for
exceeding 1995 energy saving goals.
Interchange deliveries decreased for the three, six and
twelve months ended June 30, 1997. These decreases principally
reflect changes in the levels of activity in purchase-for-resale
agreements under the Company's wholesale power sales tariff.
Beginning in January 1997 through March 1997, and pursuant to
FERC's Order No. 888, the Company implemented an open access
transmission tariff and terminated the purchase-for-resale
agreements. Under the open access transmission tariff, the
Company received revenue from service agreements, classified as
"Other electric revenue", which totaled $1.4 million in the six
and twelve months ended June 30, 1997. In addition, interchange
29
deliveries include revenue from bilateral energy transactions and
the sale of short-term generating capacity, which totaled
approximately $.9 million and $6.7 million for the three and six
months ended June 30, 1997, respectively. The benefits derived
from interchange deliveries and revenue under the open access
transmission tariff are passed through to the Company's customers
through a fuel adjustment clause.
Recent rate orders received by the Company provided for
changes in annual base rate revenue as shown in the table below:
Rate
(Decrease)
Increase % Effective
Regulatory Jurisdiction ($000) Change Date
- ----------------------- ---------- ------- ---------------
Federal - Wholesale $(2,000) (1.7)% January 1996
District of Columbia 27,900 3.8 July 1995
Federal - Wholesale 2,300 1.8 January 1995
OPERATING EXPENSES
Fuel and purchased energy decreased for the three, six and
twelve months ended June 30, 1997, as compared to the
corresponding periods ended June 30, 1996. Fuel expenses
increased for the three months ended June 30, 1997, as compared
to the corresponding period in 1996, due to an increase in the
system average fuel cost; partially offset by a 2.5% decrease in
net generation. Fuel expense decreased for the six and twelve
months ended June 30, 1997, as compared to the corresponding
periods in 1996, primarily due to decreases of 11% and 16.5%,
respectively, in net generation; partially offset by increases in
the system average fuel cost. The decrease in purchased energy
for the three and six months ended and increase for the twelve
months ended June 30, 1997, reflect changes in levels and prices
of energy purchased from the Pennsylvania-New Jersey-Maryland
Interconnection Association (PJM) and other utilities, primarily
the purchases related to the power sales tariff interchange
transactions.
The unit fuel costs for the comparative periods ended June
30, were as follows:
Three Six Twelve
Months Ended Months Ended Months Ended
June 30, June 30, June 30,
------------ ------------ ------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
System Average
Fuel Cost per MBTU $1.89 $1.78 $1.86 $1.80 $1.82 $1.77
30
System average unit fuel cost increased for the three, six
and twelve months ended June 30, 1997, as compared to the
corresponding periods in 1996. The increases were primarily
attributable to an increase in the cost of coal, partially offset
by a decrease in the usage of higher-cost residual oil.
For the twelve month periods ended June 30, 1997 and 1996,
the Company obtained 90% and 86%, respectively, of its system
generation from coal based upon percentage of Btus. The
Company's major cycling and certain peaking units can burn either
natural gas or oil, adding flexibility in selecting the most
cost-effective fuel mix.
Capacity purchase payments increased for the three, six and
twelve months ended June 30, 1997, as compared to the
corresponding periods in 1996. These increases reflect capacity
payments made under the Panda contract, which commenced January
1, 1997; partially offset by a slight decrease in fixed operating
and maintenance expense associated with the capacity agreements
with Ohio Edison and Allegheny Power System (APS).
Operating expenses other than fuel, purchased energy and
capacity purchase payments decreased for the three, six and
twelve months ended June 30, 1997, as compared to the
corresponding periods in 1996. The decreases were principally
due to a decline in other operation expenses resulting from lower
labor and benefits costs, and decreased income taxes due to lower
taxable income; partially offset by increased depreciation and
amortization expense primarily due to additional investment in
property and plant.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
The Company's investment in property and plant, at original
cost before accumulated depreciation, was $6.4 billion at
June 30, 1997, an increase of $83.1 million from the investment
at December 31, 1996, and an increase of $166.8 million from the
investment at June 30, 1996. Cash invested in property and plant
construction, excluding AFUDC and CCRF, amounted to $92.2 million
for the six months ended June 30, 1997, and $187.5 million for
the twelve months then ended.
At June 30, 1997, the Company's capital structure, excluding
short-term debt, long-term debt and serial preferred stock
redemption due within one year, and nonutility subsidiary debt,
consisted of 44.9% long-term debt, 3.2% serial preferred stock,
3.7% redeemable serial preferred stock and 48.2% common equity.
31
Cash from utility operations, after dividends, was $12.3
million for the six months ended June 30, 1997, and $222.7
million for the twelve months then ended as compared with $14.7
million and $135.1 million, respectively, for the corresponding
periods ended June 30, 1996.
Outstanding utility short-term debt totaled $311.6 million
at June 30, 1997, an increase of $180.2 million from the $131.4
million outstanding at December 31, 1996, and a decrease of $15.9
million from the $327.5 million outstanding at June 30, 1996.
See the discussion included in Note (3) of the Notes to
Consolidated Financial Statements, Capitalization, for additional
information.
NEW ACCOUNTING STANDARDS
- ------------------------
See the discussion included in Note (1) of the Notes to
Consolidated Financial Statements, Summary of Significant
Accounting Policies.
NONUTILITY SUBSIDIARY
- ---------------------
RESULTS OF OPERATIONS
- ---------------------
PCI's earnings for the three, six and twelve months ended
June 30, 1997 were $1.5 million ($.01 per share), $14.9 million
($.13 per share) and $20.3 million ($.17 per share),
respectively, compared with $9 million ($.07 per share), $11.5
million ($.10 per share) and $7 million ($.06 per share) for the
corresponding periods ended June 30, 1996. Net earnings for the
three months ended June 30, 1997, were less than the
corresponding period in the prior year primarily as a result of a
second quarter 1996 $6.5 million pretax ($4.2 million after-tax)
reversal of previously accrued repair and maintenance expense
related to aircraft placed on a long-term, net lease. Rental
income from operating leases also decreased for the three months
ended June 30, 1997, as compared to the corresponding period in
1996. The improvement in net earnings for the six and twelve
months ended June 30, 1997, over the corresponding periods in
1996 was primarily the result of first quarter 1996 writedowns of
aircraft held for disposal and other investments. During the
first six months of 1997, two L-1011 airframes and one L-1011
aircraft were sold, at book value, from the joint venture which
was formed in the fourth quarter of 1995 to assist PCI with the
disposition and management of certain aircraft. As a result of
joint venture operations for the six months ended June 30, 1997,
PCI's obligation for previously accrued deferred income taxes was
reduced, resulting in after-tax earnings of $7.4 million after
the provision for transaction costs. The remaining portfolio of
assets held for disposal at June 30, 1997, was $3.7 million.
32
Results for the first six months ended June 30, 1997, also
include capital gains totaling $4 million net of taxes, related
primarily to tender offers accepted by PCI that reduced the cost
basis of its preferred stock marketable securities portfolio by
$113.3 million. Purchases of preferred stock during the six
months ended June 30, 1997, totaled $23.1 million. The cost
basis of the marketable securities portfolio at June 30, 1997,
was $285.4 million and market value was $289.3 million.
On July 31, 1997, an aircraft owned by PCI and on long-term
leveraged lease to Federal Express Corporation crash-landed at
Newark International Airport. Based on information provided by
Federal Express, there was no loss of life or serious injury
resulting from the accident; however, the aircraft is a total
loss. The aircraft, which has a book value of $28.4 million at
June 30, 1997, is fully insured and PCI expects full recovery of
its investment.
On August 6, 1997, PCI announced an agreement with RCN
Telecom Services, Inc. (RCN) of Princeton, New Jersey to form a
joint venture that will provide Washington, D.C. area residents
and businesses a package of local and long distance telephone,
cable television, Internet and other telecommunications services
from a single source. PCI and RCN each intend to invest up to
$150 million over a three-year period in order to serve customers
over an advanced fiber optic network. The joint venture will be
equally owned and managed by PCI and RCN. This agreement is
subject to the satisfaction of a number of conditions, including
the receipt of certain regulatory approvals and the execution of
mutually satisfactory definitive agreements. No assurances can
be given that the transaction will be consummated.
For the three, six and twelve months ended June 30, 1997,
PCI generated income primarily from its leasing activities and
securities investments. Income from leasing activity, which
includes rental income, gains on asset sales, interest income and
fees totaled $14.6 million, $35.8 million and $80.4 million for
the three, six and twelve months ended June 30, 1997,
respectively, compared to $23.1 million, $47.1 million and $101.8
million for the corresponding periods in 1996. The decrease for
all three periods ending June 30, compared to the corresponding
periods in 1996, was primarily due to reduced rental income from
operating leases. PCI's marketable securities portfolio
contributed pretax income of $6.1 million, $17.9 million and $34
million for the three, six and twelve months ended June 30, 1997,
respectively, compared to $7.5 million, $17.5 million and $35.1
million for the corresponding periods in 1996, which results
include net realized gains of $.9 million, $6.2 million and $8.1
million for the three, six and twelve months ended June 30, 1997,
compared to $.1 million, $1.7 million and $2 million for the
three, six and twelve months ended June 30, 1996, respectively.
33
Other income was $7.9 million, $14.8 million and $19.9
million for the three, six and twelve months ended June 30, 1997,
respectively, compared to $1.2 million, a loss of $15.5 million
and a loss of $19.8 million for the corresponding periods ending
June 30, 1996. The increase in other income for the three months
ended June 30, 1997, over the corresponding three months ended
June 30, 1996, was primarily the result of revenue earned from
investments made by Pepco Enterprises, Inc. (PEI), a wholly owned
subsidiary, which the Company contributed to PCI in the second
quarter of 1996. PEI has business interests that include
telecommunications, liquefied natural gas storage facilities,
underground cable construction and maintenance services and an
energy management services company. Other income for the three,
six and twelve months ended June 30, 1997, includes $6.4 million,
$11.8 million and $12.6 million, respectively, in revenue from
PEI activities. Net income from PEI for the three, six and
twelve months ended June 30, 1997, was $.1 million, $.7 million
and $1.5 million, respectively. In addition to the favorable
impact from PEI revenue, the increase in other income for the six
and twelve month periods in 1997 over the same periods in 1996 is
primarily the result of the first quarter 1996 writedowns of
PCI's investments in solar electric generating systems (SEGS),
real estate and oil and natural gas. Included in the twelve
months ended June 30, 1997 results is a $8.8 million pretax gain
($6.7 million after-tax) related to the sale of PCI's $2.8
million (20%) interest in a Florida-based technology company
during the fourth quarter of 1996.
Expenses, before income taxes, which include interest,
depreciation and operating, and administrative and general
expenses totaled $35.1 million, $74.5 million and $144.3 million
for the three, six and twelve months ended June 30, 1997,
respectively, compared to $29.3 million, $82.9 million and $166.5
million for the corresponding periods in 1996. The increase in
expenses, before income taxes for the three months ended June 30,
1997, over the corresponding period in 1996 was primarily the
result of the second quarter 1996 reversal of previously accrued
repair and maintenance expense totaling $6.5 million, and three
months ended June 30, 1997 operating expenses of PEI totaling
$6.2 million. Despite an increase resulting from inclusion of
PEI operating expenses of $10.7 million for the six and twelve
months ended June 30, 1997, total expenses before income taxes
decreased during the six and twelve months ended June 30, 1997,
compared to the same periods in 1996, primarily due to the $12.3
million pretax first quarter 1996 writedown of assets held for
disposal. Interest expense also decreased for the three, six and
twelve months ended June 30, 1997, over the corresponding periods
in 1996 as a result of reduced debt, as proceeds from sales of
marketable securities and aircraft have been used to pay down
debt.
34
PCI had income tax credits of $7.9 million, $20.9 million
and $30.2 million for the three, six and twelve months ended June
30, 1997, respectively, and $6.6 million, $45.3 million and $56.4
million for the corresponding periods ending June 30, 1996. The
increase in income tax credits for the three months ended June
30, 1997, over the three months ended June 30, 1996, was
primarily due to a pretax loss in 1997. The decrease in income
tax credits for the six and twelve month periods ended June 30,
1997, over the corresponding periods in 1996, was primarily the
result of deferred tax reversals of $23.5 million and $5.2
million during the first and second quarters of 1996,
respectively, compared to $10.1 million in the first quarter and
no reversal in the second quarter of 1997.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
A $289.3 million securities portfolio at June 30, 1997,
consisting primarily of investment grade preferred stocks,
provides PCI with liquidity and investment flexibility. During
the first six months of 1997, PCI reduced the cost basis of its
marketable securities portfolio by $90.2 million as the result of
calls and acceptance of tender offers (approximately $113.3
million) offset by purchases of $23.1 million. PCI's fixed rate
portfolio is sensitive to fluctuations in interest rates. The
reduced size of the preferred stock portfolio lessens the impact
of future fluctuations in interest rates, while still maintaining
a substantial portfolio for liquidity purposes. The proceeds
from the securities activity during the first six months were
used primarily to pay down short-term debt and acquire short-term
investments. During the first quarter of 1997, PCI received
$25.8 million in cash proceeds from the sale of notes receivable
from World Airways (World) and recorded an after-tax charge to
earnings of $.4 million. PCI also received $15.7 million in cash
proceeds during the second quarter of 1997 for the early
redemption of a note receivable related to a 1996 sale of an
aircraft engine leasing subsidiary. The sale and early
redemption of the notes further reduces PCI's exposure to the
ongoing credit risk associated with the airline industry as well
as the inherent uncertainty regarding the future value of the
aircraft and engines which secured the repayment of the notes.
PCI had no short-term debt outstanding at June 30, 1997,
compared to the $51.7 million outstanding at December 31, 1996,
and the $159.3 million outstanding at June 30, 1996. During the
three, six and twelve months ended June 30, 1997, PCI issued no
medium-term notes, and debt repayments totaled $76.8 million,
$83.5 million and $174.1 million, respectively. At June 30,
1997, PCI had $236.3 million available under its Medium-Term Note
Program and $400 million of unused bank credit lines.
35
Part II OTHER INFORMATION
- ------- -----------------
Item 1 LEGAL PROCEEDINGS
- ------ -----------------
See Part I, Item 1, Notes to Consolidated Financial
Statements, (6) Commitments and Contingencies, for information on
various legal proceedings.
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 1997 and 1996.
BASE RATE PROCEEDINGS
- ---------------------
Maryland
- --------
Effective June 6, 1997, the Maryland Demand Side Management
surcharge tariff rate was reduced. The new surcharge tariff rate
will reduce annual revenue by approximately $17 million,
reflecting the Company's efforts to narrow conservation program
offerings and limit conservation spending. The surcharge
includes provisions for the recovery of lost revenue,
amortization of pre-1997 actual program expenditures plus the
initial amortization of 1997 projected program expenditures, a
CCRF of 9.46% on unamortized balances and an incentive bonus for
exceeding energy saving goals. In the second quarter of 1997,
the Company recorded a $1.6 million bonus, awarded for exceeding
1996 energy saving goals. In the third quarter of 1996, the
Company recorded an $8.9 million bonus for exceeding 1995 energy
saving goals.
On May 16, 1997, the Company filed a request for rehearing
of the Maryland Public Service Commission's denial, in connection
with its Order approving the Merger, of a purchased capacity
surcharge designed to recover changes in the level of purchased
capacity costs under Commission-approved contracts from levels
included in base rates. The filing seeks recovery of capacity
payments associated with a 25-year agreement with Panda-
Brandywine, L.P. (Panda) for a 230-megawatt gas-fueled combined-
cycle cogeneration project, as well as future increases in both
the Panda and Ohio Edison purchased power contracts. Capacity
payments to Panda commenced in January 1997, and are estimated to
36
total approximately $20 million in 1997. The estimated Maryland
portion of these payments is $10.5 million. (See Part I, Item I,
Notes to Consolidated Financial Statements, (6) Commitments and
Contingencies, for additional information).
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 Formal Case No. 939, the District of Columbia Public
Service Commission, in June 1995, authorized a $27.9 million, or
3.8%, increase in base rate revenue effective July 1995. The
authorized rates are based on a 9.09% rate of return on average
rate base, including an 11.1% return on common stock equity and a
capital structure which excludes short-term debt. In addition,
the Commission approved the Company's Least-Cost Plan filed in
June 1994. A four-year DSM spending cap for the period 1995-1998
was approved, consistent with the Company's proposal to narrow
the scope of DSM activities by discontinuing operation of certain
DSM programs and by reducing expenditures on the remaining
programs. This will enable the Company to implement cost-
effective DSM programs while limiting the impact of such programs
on the price of electricity. An Environmental Cost Recovery
Rider (ECRR) was approved to provide for full cost recovery of
actual DSM program expenditures, through a billing surcharge.
Costs will be amortized over 10 years, with a return on
unamortized amounts by means of a CCRF computed at the authorized
rate of return. The initial rate, which reflects actual costs
expended from July 1993 through December 1994, resulted in
additional annual revenue of approximately $15 million. Although
the Commission denied the Company's request to recover "lost
revenue" due to DSM programs, through a surcharge, a process has
been established whereby the Company can seek recovery of lost
revenue in a separate proceeding. The Commission also increased
the time period for filing Least-Cost Planning cases from two to
three years. In June 1996 and June 1997, the Company filed
Applications for Authority with the Commission to revise its
ECRR. The latest proposed rate seeks recovery of actual costs
expended during 1995 and 1996, and is expected to increase annual
revenue by approximately $9 million. No action has been taken by
the Commission on the revised ECRR. Subsequent rate updates are
scheduled to be filed annually on June 1 to reflect the prior
year's actual costs, subject to the annual surcharge recovery
limit within the four-year spending cap for the period 1995-1998
(amounts spent in excess of the annual surcharge recovery limit,
but within the four-year spending cap, are deferred for future
recovery). Remaining allowable expenditures under the spending
cap totaled $12.8 million at June 30, 1997. Pre-July 1993 DSM
costs receive base rate treatment.
37
Federal - Wholesale
- -------------------
The Company has a 10-year full service power supply contract
with 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.
Pursuant to an agreement for the years 1996 through 1998,
SMECO rates were reduced by $2 million effective January 1, 1996,
with an additional $2.5 million rate reduction scheduled to
become effective January 1, 1998. SMECO has agreed not to give
the Company a notice of reduction or termination of service prior
to December 15, 1998.
Federal - Interchange and Purchased Energy
- ------------------------------------------
The Company participates in wholesale capacity, energy and
transmission purchases and sales transactions, the savings from
which are passed along to customers. In compliance with FERC
Order No. 888, the Company provided transmission service with its
open access tariff from January 1, 1997 until April 1, 1997. On
February 28, 1997, the FERC ordered the PJM member companies to
implement a poolwide open access transmission tariff based on a
proposal made by PJM supporting companies in December 1996.
Since April 1, 1997, all transmission service in PJM has been
administered by the PJM Interconnection Office. Revenue from
transmission sales during January through March 1997 totaled
approximately $1.4 million and there have been no sales since
April 1, 1997.
The Company's generating and transmission facilities are
interconnected with those of other members of the PJM power pool
and other utilities. Historically, the pricing of most PJM-
dispatched internal economy energy transactions was based upon
"split savings" whereby such energy was priced 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. On April 1, 1997, PJM
members implemented an interim restructuring plan which provides
for poolwide transmission service under a pool tariff and a bid-
price based energy market whereby all energy that clears through
the market is priced at the margin. In the initial phase of
this plan, bids are being based on cost. Bilateral transactions
are also permitted. The restructured PJM is now a Limited
Liability Corporation governed by an independent board of
directors with membership open to eligible entities.
38
In addition to interchange with PJM, the Company is actively
participating in the emerging bilateral energy sales marketplace.
The Company's wholesale power sales tariff allows both sales from
Company-owned generation and sales of energy purchased by the
Company from other market participants. Over 40 utilities and
marketers have executed service agreements allowing them to
arrange purchases under this tariff. The Company has also
executed service agreements allowing it to purchase energy under
other market participants' power sales tariffs. These agreements
greatly expand the opportunities for economic transactions. The
Company's Power Sales Tariff also allows for the sale of
generating capacity on a short-term basis. The Company sold
capacity to PECO Energy (PECO) in the amount of 150 megawatts
during January 1997 and 100 megawatts per month for the period of
February through May 1997. In addition, on April 24, 1997, the
Company signed an agreement to sell capacity to Delmarva Power &
Light Co. in the amount of 100 megawatts per month for the period
June 1, 1997, through May 31, 1998. Revenue from capacity and
energy transactions totaled approximately $.9 million and $6.7
million for the three and six months ended June 30, 1997,
respectively, and are included as components of interchange
deliveries.
The Company continues to purchase energy from Ohio Edison
under the Company's 1987 long-term capacity purchase agreements
with Ohio Edison and APS, and from the Northeast Maryland Waste
Disposal Authority under an avoided cost-based purchase agreement
for a 32-megawatt Montgomery County Resource Recovery Facility.
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.
Capacity payments for the Montgomery County Resource Recovery
facility are not expected to commence until after the year 2000.
In August 1996, the Company began purchasing energy from the
Panda facility, pursuant to a 25-year power purchase agreement
for 230 megawatts of capacity supplied by a gas-fueled combined-
cycle cogenerator. The Panda facility achieved full commercial
operation in October 1996. Capacity payments under this
agreement commenced in January 1997. The capacity expense under
these agreements, including an allocation of a portion of Ohio
Edison's fixed operating and maintenance costs, was $35.4 million
and $70 million for the three and six months ended June 30, 1997,
and is estimated at $141 million for 1997. Commitments under
these agreements are estimated at $139 million for 1998, $200
million for 1999 and 2000, $211 million for 2001 and $212 million
for 2002.
The Company has a purchase agreement with Southern Maryland
Electric Cooperative, Inc. (SMECO), through 2015, for 84
megawatts of capacity supplied by a combustion turbine installed
and owned by SMECO at the Company's Chalk Point Generating
Station. The Company is responsible for all costs associated
39
with operating and maintaining the facility. The capacity
payment to SMECO is approximately $5.5 million per year.
RESTRUCTURING OF THE BULK POWER MARKET
- --------------------------------------
In April 1996, the FERC issued its Final Rulemaking Orders
No. 888 and No. 889. Both rulemakings address achieving greater
competition in the wholesale energy market. Order No. 888
required utilities to file open access transmission tariffs by
July 9, 1996. Such filing was made by the Company and was
accepted by the FERC. Order No. 889 required utilities to
establish or participate in an Open Access Same-Time Information
System (OASIS) which requires transmission owners to post certain
transmission availability, pricing and service information on an
open-access communications medium such as the Internet. On
January 3, 1997, the Company's OASIS became operational.
Subsequently, on April 1, 1997, PJM implemented an OASIS on
behalf of the PJM transmission owners which replaced the
Company's OASIS. Order No. 889 also required the Company to
establish a code of conduct that complies with FERC's prescribed
standards in order to separate utilities' transmission system
operations and wholesale marketing functions. The Company's
filed code of conduct became effective on January 3, 1997.
On July 24, 1996, nine of the ten PJM member companies (the
Supporting Companies), excluding PECO, filed, with the FERC, a
comprehensive proposal including the contracts and tariff that
would establish an Independent System Operator (ISO) to
administer transmission service under a PJM control area
transmission tariff and operate the energy market in a manner
that assures comparable treatment for all participants. Under
the Supporting Companies' proposal, reliability of the pool will
be maintained under an installed capacity obligation. The ISO
will administer a bid-priced energy spot market that will also
accommodate bilateral transactions, and the ISO will provide
transmission service on a poolwide basis. In early August 1996,
PECO filed a competing plan opposing certain key features of the
Supporting Companies' proposal.
On November 13, 1996, the FERC found that it could not
accept either the Supporting Companies' proposal or PECO's
opposing proposal. Consequently, FERC ordered the PJM members to
amend their proposals to comport with Order No. 888 on ISOs and
to attempt to reach a consensus with other stakeholders. At a
minimum, FERC ordered that PJM file a poolwide pro forma open
access transmission tariff by December 31, 1996, and amend
existing PJM pooling agreements for compatibility with the Order.
On December 31, 1996, the PJM member companies filed a joint
response to FERC's Order. This compliance filing established a
single poolwide transmission tariff and modified the membership
and governance provisions of the PJM Agreement. The PJM members
40
noted areas of disagreement in the filing and indicated that the
compliance filing was an interim solution until a more
comprehensive proposal could be developed.
On February 28, 1997, the FERC ruled on areas of
disagreement between the PJM members and ordered that PJM
implement an open access transmission tariff and a bid-based
energy market by March 1, 1997. A new PJM Operating Agreement
was filed on March 31, 1997, superseding the original PJM
Agreement. This Agreement opens PJM's membership to eligible
entities. PJM formed a Limited Liability Corporation on March
31, 1997, and the members have elected an independent board of
directors to govern the PJM Interconnection Office. The PJM
members subsequently moved the implementation date to April 1,
1997. PJM stakeholders continued to meet until the end of May,
1997 in order to develop an Independent System Operator. In
early June 1997, the Supporting Companies and PECO each filed
with the FERC separate proposals for the development of an
Independent System Operator.
PJM has many years of experience in providing economically
efficient transmission and generation services throughout the
mid-Atlantic region, and has achieved for its members, including
the Company, significant cost savings through shared generating
reserves and integrated operations. The PJM members are working
to transform today's coordinated cost-based pool dispatch into a
priced-based regional energy market operating under a standard of
transmission service comparability. These changes are not
expected to have a material effect on the operating results of
the Company.
COMPETITION
- -----------
The electric utility industry is subject to increasing
competitive pressures, stemming from a combination of increasing
independent power production 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.
Pursuant to an August 1995 order in a generic proceeding
dealing with electric industry structure and the advent of
competition, the Maryland Public Service Commission found that
competition at the wholesale level holds the greatest potential
41
for producing significant benefits, while competition at the
retail level would carry many potential problems with difficult-
to-find solutions. The Commission stated that it was intrigued
by a restructuring concept suggested by the Company, which calls
for functionally dividing the utility into generation and
transmission/distribution segments. The Commission encouraged
the Company to develop the concept further and suggested that
other electric utilities in the state develop similar proposals
specific to their competitive positions. In October 1996, the
Maryland Commission reopened the generic proceeding to review
regulatory and competitive issues affecting the electricity
industry. The Commission cited the evolving nature of the
electric industry as the basis for continuing its investigation.
As part of this investigation, the Commission directed its Staff
to submit a report on or before May 31, 1997, containing, among
other things, recommendations regarding regulatory and
competitive issues facing the electric industry in Maryland. The
Commission also directed the four major electric utilities in
Maryland to prepare unbundled cost studies and model unbundled
retail service tariffs prior to August 1, 1997.
On May 30, 1997, the Commission Staff issued its report,
recommending that all Maryland customers be given a choice of
electricity suppliers beginning April, 2001. The Staff
recommends a three step process for implementing customer choice.
Starting in April 1998, all investor-owned utilities in Maryland
would begin sending customers bills that itemize the costs of
specific services such as generation, transmission and delivery
of electricity. Next, up to 20 percent of the utilities'
customers would be offered the option of enrolling in one of two
pilot customer choice programs starting at the end of 1998 and
1999, respectively. Lastly, all customers of Maryland investor-
owned utilities would have the option to choose their supplier of
electricity, with service beginning April 2, 2001. Under the
plan, one of the choices available to customers would be a
regulated power supplier. For now, existing utilities would
continue to provide customers with distribution-related services
such as billing and metering, at prices regulated by the Maryland
Commission. Further unbundling would be considered later. The
Staff also recommended that utilities be permitted to recover
prudently incurred stranded costs. In comments provided to the
Commission on the Staff report, the Company reaffirmed its full
support for customer choice for Maryland electric customers and
provided key principles that should be used as guidelines for the
effective introduction of electric customer choice. The
principles include the concept that Maryland companies should not
be put at a competitive disadvantage by customer choice, that
competition should not be regulated, and that the benefits of
customer choice should not be oversold. Hearings are scheduled
to begin in August 1997, following which certain actions must be
taken by the Maryland legislature and the Public Service
Commission before the recommendations can take effect.
42
The District of Columbia Public Service Commission initiated
a proceeding to investigate issues regarding electricity industry
structure and competition in late 1995. In September 1996, the
Commission issued an order designating the issues to be examined
in the proceeding. Initial comments regarding the designated
issues were filed with the Commission in January 1997, and reply
comments were filed in March 1997.
PEAK LOAD, SALES, CONSERVATION, AND CONSTRUCTION
- ------------------------------------------------
AND GENERATING CAPACITY
-----------------------
Peak Load and Sales Data
- ------------------------
Kilowatt-hour sales decreased 3.9%, 4.3% and 4.8%, for the
three, six and twelve months ended June 30, 1997, respectively,
as compared to sales for the corresponding periods in 1996. The
decline in sales reflects milder than average weather in each
calendar quarter in the twelve months ended June 30, 1997. The
weather in the corresponding quarters in the prior twelve months
was more severe than average in the third quarter of 1995 as well
as the first and second quarters of 1996. 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.
Through August 11, 1997, the 1997 summer peak demand was
5,689 megawatts. This compares with the 1996 summer peak demand
of 5,288 megawatts, and the all-time summer peak demand of 5,769
megawatts which occurred in July 1991. The Company's present
generation capability, including capacity purchase contracts, is
6,706 megawatts. To meet the 1997 summer peak demand, the
Company had approximately 265 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 1.5%,
reflecting continuing success with demand side management (DSM)
and energy use management (EUM) programs and anticipated service
area growth trends. The 1996-1997 winter season peak demand of
4,632 megawatts was 7.5% below the all-time winter peak demand of
5,010 megawatts which was established in January 1994.
Conservation
- ------------
The Company's DSM and 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 customer rates and bills, the Company has, since
1994, phased out several conservation programs and reduced rebate
43
levels for others. By narrowing its conservation offerings and
limiting conservation spending, the Company expects to continue
to encourage its customers to use energy efficiently without
significantly increasing electricity prices.
In Maryland, the Company invested approximately $12.8
million and $28.7 million in DSM programs for the six and twelve
months ended June 30, 1997, respectively. The Company recovers
the costs of Maryland DSM programs through a base 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 $1.6
million in 1997, based on 1996 performance, which followed a
bonus of $8.9 million in 1996, based on 1995 performance. As
expected, the performance bonus in 1997 was significantly lower
than amounts awarded in prior years, reflecting reduced DSM
program expenditures. Investment in District of Columbia DSM
programs totaled approximately $2.1 million and $9.6 million for
the six and twelve months ended June 30, 1997, respectively.
These DSM costs are amortized over ten years with an accrued
return on unamortized costs.
The Company estimates that peak load reductions of over 700
megawatts have been achieved to date from DSM and EUM programs
and that additional peak load reductions of approximately 400
megawatts will be achieved in the next five years. The Company
also estimates that, in 1996, energy savings of more than 1.6
billion kilowatt-hours were realized through operation of its DSM
and EUM programs. See the discussions included in Summary of
Significant Accounting Policies, Total Revenue, and Base Rate
Proceedings, for additional information.
Construction and Generating Capacity
- ------------------------------------
Construction expenditures, excluding AFUDC and CCRF, are
projected to total $1.2 billion for the five-year period 1997
through 2001, which includes $18 million of estimated Clean Air
Act (CAA) expenditures. In 1997, construction expenditures are
projected to total $215 million, which includes $4 million of
estimated CAA expenditures. The Company plans to finance its
construction program primarily through funds provided by
operations. Actual construction expenditures during the period
1997 through 2001 may vary from projections once the Merger with
BGE becomes effective.
The Company has implemented cost-effective plans for
complying with Phase I of the Acid Rain portion of the CAA which
requires the reduction of sulfur dioxide and nitrogen oxides
emissions to achieve prescribed standards. Boiler burner
equipment for nitrogen oxides emissions control has been replaced
44
and the use of lower-sulfur coal has been instituted at the
Company's Phase I affected stations, Chalk Point and Morgantown.
Anticipated capital expenditures for complying with the second
phase of the CAA total $18 million over the next five years.
Plans for complying with the second phase of the CAA are being
reviewed in anticipation of the pending Merger with BGE. If
economical, continued use of lower-sulfur coal, cofiring with
natural gas and the purchase of sulfur dioxide (SO2) emission
allowances is expected. Nitrogen oxides emissions reductions
will be achieved by installing control equipment in the most
cost-effective manner after considering the characteristics of
each of the merged company's boilers. In addition to the Acid
Rain portion of the CAA, the State of Maryland and District of
Columbia are required, by Title I of the CAA, to achieve
compliance with ambient air quality standards for ground-level
ozone. This provision is likely to result in further nitrogen
oxides emissions reductions from the Company's boilers; however,
the extent of reductions and associated cost cannot be estimated
at this time.
A 32-megawatt municipally financed resource recovery
facility in Montgomery County, Maryland, began commercial
operation in August 1995. The Company has been purchasing energy
under the agreement covering this project without capacity
payment obligations, which are not expected to commence until
after the year 2000. In addition, the Company has a 25-year
agreement with Panda for a 230-megawatt gas-fueled combined-cycle
cogeneration project in Prince George's County, Maryland. The
Panda facility achieved full commercial operation in October
1996. The Company 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. In 1995, the
Maryland Public Service Commission issued an order that requires
electric utilities to competitively procure future capacity
resources. The Company believes that completion of the first
combined-cycle unit at its Station H facility in Dickerson,
Maryland, currently scheduled for 2004, is likely to be the most
cost-effective alternative for the next increment of capacity.
This will add a steam cycle to the two existing combustion
turbine units.
SELECTED NONUTILITY SUBSIDIARY FINANCIAL INFORMATION
- ----------------------------------------------------
The Company's wholly owned nonutility subsidiary, Potomac
Capital Investment Corporation (PCI), was organized in late 1983
to provide a vehicle to conduct the Company's ongoing nonutility
businesses. The principal assets of PCI are portfolios of
securities and equipment leases, and to a lesser extent real
estate and other investments. The $289.3 million securities
portfolio, consisting primarily of investment grade preferred
stocks, provides PCI with significant liquidity and flexibility
45
to participate in additional investment opportunities. The
Company's equity investment in PCI was $215.2 million, $196.3
million and $183.1 million, at June 30, 1997, December 31, 1996,
and June 30, 1996, respectively.
On August 6, 1997, PCI announced an agreement with RCN
Telecom Services, Inc. (RCN) of Princeton, New Jersey to form a
joint venture to provide local and long-distance telephone, cable
television, Internet and other telecommunications services to
Washington, D.C. area residents and businesses. PCI and RCN each
intend to invest up to $150 million to provide these services
over an advanced fiber optic network.
See Item 2 (Management's Discussion and Analysis of
Consolidated Results of Operations) for additional information.
46
<TABLE>
Consolidated Statements of Earnings:
- -----------------------------------
<CAPTION>
Three Six
Twelve
Months Ended Months Ended
Months Ended
June 30, June 30,
June 30,
----------------------
- ---------------------- ----------------------
1997 1996 1997 1996
1997 1996
-------- --------- --------
- --------- -------- ---------
(Thousands of
Dollars)
<S> <C> <C> <C> <C>
<C> <C>
Income
Leasing activities $ 14,646 $ 23,138 $ 35,761 $
47,055 $ 80,367 $ 101,764
Marketable securities 6,132 7,466 17,874
17,524 34,040 35,077
Other 7,887 1,179 14,837
(15,483) 19,935 (19,803)
-------- --------- --------
- --------- -------- ---------
28,665 31,783 68,472
49,096 134,342 117,038
-------- --------- --------
- --------- -------- ---------
Expenses
Interest 17,523 20,844 36,549
42,973 77,018 89,491
Administrative and general 2,356 3,677 8,710
9,040 15,199 14,090
Depreciation and
operating 15,265 4,781 29,224
18,576 51,630 50,580
Loss on assets held for
disposal - - -
12,320 424 12,320
Income tax credit (7,935) (6,566) (20,917)
(45,328) (30,214) (56,435)
-------- --------- --------
- --------- -------- ---------
27,209 22,736 53,566
37,581 114,057 110,046
-------- --------- --------
- --------- -------- ---------
Net earnings from
nonutility subsidiary $ 1,456 $ 9,047 $ 14,906 $
11,515 $ 20,285 $ 6,992 <F1>
======== ========= ========
========= ======== =========
Per share contribution
to earnings of the
Company $ .01 $ .07 $ .13 $
.10 $ .17 $ .06 <F1>
===== ===== =====
===== ===== =====
<FN>
<F1> Reflects non-recurring, noncash, after-tax charges of $5.2 million ($.04 per
share)
for the twelve months ended June 30, 1996, related to the 1995 plan with
respect to the
aircraft equipment leasing business.
</FN>
47
</TABLE>
<TABLE>
STATISTICAL DATA
- ----------------
<CAPTION>
Three Months Ended
Twelve Months Ended
June 30,
June 30,
---------------------------------
- -------------------------------------
1997 1996 % Change
1997 1996 % Change
-------- -------- --------
- ---------- ---------- --------
<S> <C> <C> <C> <C>
<C> <C>
Revenue from Sales
------------------
of Electricity
--------------
(Thousands of Dollars)
Residential $119,812 $131,305 (8.8) $
524,896 $ 566,870 (7.4)
General Service 270,804 282,848 (4.3)
1,068,188 1,089,205 (1.9)
Large Power Service <F1> 8,990 9,391 (4.3)
35,414 36,431 (2.8)
Street Lighting 2,910 2,827 2.9
12,643 12,322 2.6
Rapid Transit 7,038 6,917 1.7
28,690 28,712 (0.1)
Wholesale 28,370 27,714 2.4
118,908 123,815 (4.0)
-------- --------
- ---------- ----------
System $437,924 $461,002 (5.0)
$1,788,739 $1,857,355 (3.7)
======== ========
========== ==========
Energy Sales
------------
(Millions of KWH)
Residential 1,390 1,521 (8.6)
6,493 7,121 (8.8)
General Service 3,688 3,772 (2.2)
15,100 15,586 (3.1)
Large Power Service <F1> 160 172 (7.0)
675 716 (5.7)
Street Lighting 34 35 (2.9)
164 165 (0.6)
Rapid Transit 99 99 -
408 415 (1.7)
Wholesale 558 569 (1.9)
2,504 2,609 (4.0)
-------- --------
- ---------- ----------
System 5,929 6,168 (3.9)
25,344 26,612 (4.8)
======== ========
========== ==========
Average System Revenue
----------------------
per KWH (cents per KWH) 7.39 7.47 (1.1)
7.06 6.98 1.1
-----------------------
System Peak Demand<F2>
------------------
(Thousands of KW)
Summer - -
5,689 5,732
Winter - -
4,632 4,831
Net Generation
--------------
(Millions of KWH) 4,042 4,146
17,005 20,373
Fuel Mix (% of Btu)
-------------------
Coal (%) 86 90
90 86
Oil (%) 5 6
5 7
Gas (%) 9 4
5 7
Fuel Cost per MBtu
------------------
System Average $1.89 $1.78
$1.82 $1.77
Weather Data
------------
Heating Degree Days 462 399
3,871 4,591
20 Year Average 325
4,036
Cooling Degree Hours 1,988 3,446
7,789 13,072
20 Year Average 2,656
11,130
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 a voltage of 66KV or higher.
<F2> At June 30, 1997, the generation capability, including capacity purchase
contracts,
was 6,706 MW.
</FN>
48
</TABLE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
- ------------------------------------------------------------
The following unaudited pro forma condensed information
combines the historical consolidated balance sheets and
statements of income of Potomac Electric Power Company and
Baltimore Gas and Electric Company, including their respective
subsidiaries, after giving effect to the proposed Merger of the
two companies into Constellation Energy Corporation. As
previously disclosed, the Merger is expected to close as soon as
all necessary regulatory approvals, on terms satisfactory to
PEPCO and BGE, are obtained. As of the date of this filing, the
Merger has not closed. The unaudited pro forma combined
condensed balance sheet at June 30, 1997, gives effect to the
Merger as if it had occurred at June 30, 1997. The unaudited pro
forma combined condensed statement of income for the six months
ended June 30, 1997, gives effect to the Merger as if it had
occurred at January 1, 1997. These statements are prepared on
the basis of accounting for the Merger as a pooling of interests
and are based on the assumptions set forth in the notes thereto.
Constellation Energy Corporation was formed September 22, 1995,
and has no assets or operations. Therefore, Constellation Energy
Corporation has no financial statements and, in turn, there has
been no audit of such statements.
The following pro forma financial information has been
prepared from, and should be read in conjunction with, the
historical consolidated financial statements and related notes
thereto of PEPCO and BGE, which are contained in their respective
1934 Act reports for prior periods. The following information is
not necessarily indicative of the financial position or operating
results that would have occurred if the Merger had been
consummated on the dates, or at the beginning of the periods, for
which the Merger is being given effect nor is it necessarily
indicative of future financial position or operating results.
The following unaudited pro forma combined condensed
financial information of Constellation Energy Corporation is set
forth below:
Balance Sheet as of June 30, 1997
Income Statement for the Six Months Ended June 30, 1997
Notes to Unaudited Pro Forma Combined Condensed Financial
Statements
The following PEPCO financial information is also set forth
below:
Reclassifying Balance Sheet as of June 30, 1997
Reclassifying Income Statement for the Six Months Ended
June 30, 1997
49
Other Information
- -----------------
Both PEPCO and BGE file annual and quarterly reports with
the Securities and Exchange Commission (SEC). These are
available at the SEC's public reference rooms in Washington, D.C.
and New York, New York (call 1-800-SEC-0330 for more
information); and at the SEC's web site at http://www.sec.gov.
50
<TABLE>
CONSTELLATION ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
----------------------------------------------------
<CAPTION>
PEPCO
BGE (As Reclassified)
Pro Forma Pro Forma
(As Reported) (See Note 1)
Adjustments Combined
-------------- -----------------
- ------------- -------------
<S> <C> <C>
<C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents $ 271,212 $ 26,751
$ - $ 297,963
Accounts Receivable - net 400,483 302,340
- 702,823
Materials and Supplies 166,320 131,765
- 298,085
Prepayments and Other 207,229 6,997
- 214,226
------------- ----------------
- ------------ ------------
Total Current Assets 1,045,244 467,853
- 1,513,097
------------- ----------------
- ------------ ------------
Investments and Other Assets
Notes Receivable - 34,253
- 34,253
Real Estate Projects 440,846 72,627
- 513,473
Power Generation Systems 404,868 968
- 405,836
Financial Instruments 127,980 -
- 127,980
Marketable Securities 40,679 289,293
- 329,972
Investment in Finance Leases 29,378 486,049
- 515,427
Operating Lease Equipment - net - 179,337
- 179,337
Assets Held for Disposal - 3,700
- 3,700
Other Investments 405,327 113,311
- 518,638
------------- ----------------
- ------------ ------------
Total Investments and Other Assets 1,449,078 1,179,538
- 2,628,616
------------- ----------------
- ------------ ------------
Utility Plant
Plant in Service
Electric 6,644,436 6,299,044
- 12,943,480
Gas 813,672 -
- 813,672
Common 544,790 -
- 544,790
------------- ----------------
- ------------ ------------
Total Plant in Service 8,002,898 6,299,044
- 14,301,942
Accumulated Depreciation (2,715,425) (1,960,616)
- (4,676,041)
------------- ----------------
- ------------ ------------
Net Plant in Service 5,287,473 4,338,428
- 9,625,901
Construction Work in Progress 158,600 78,450
- 237,050
Nuclear Fuel - net 128,427 -
- 128,427
Other Plant - net 25,470 26,263
- 51,733
------------- ----------------
- ------------ ------------
Net Utility Plant 5,599,970 4,443,141
- 10,043,111
------------- ----------------
- ------------ ------------
Deferred Charges
Regulatory Assets 464,514 466,376
- 930,890
Other 108,475 183,123
- 291,598
------------- ----------------
- ------------ ------------
Total Deferred Charges 572,989 649,499
- 1,222,488
------------- ----------------
- ------------ ------------
Total Assets $ 8,667,281 $ 6,740,031
$ - $ 15,407,312
============= ================
============ ============
LIABILITIES AND CAPITALIZATION
Current Liabilities
Short-term Borrowings $ 116,900 $ 311,600
$ - $ 428,500
Current Portion of Long-term Debt,
Preferred Stock and Preference Stock 324,783 478,485
- 803,268
Accounts Payable 147,536 209,781
- 357,317
Other 223,782 102,482
- 326,264
------------- ----------------
- ------------ ------------
Total Current Liabilities 813,001 1,102,348
- 1,915,349
------------- ----------------
- ------------ ------------
Deferred Credits and Other Liabilities
Deferred Income Taxes 1,276,242 1,037,690
- 2,313,932
Capital Lease Obligations - 161,702
- 161,702
Pension and Postemployment Benefits 180,530 -
- 180,530
Other 103,141 52,604
- 155,745
------------- ----------------
- ------------ ------------
Total Deferred Credits and Other
Liabilities 1,559,913 1,251,996
- 2,811,909
------------- ----------------
- ------------ ------------
Capitalization
Long-term Debt 3,162,147 2,262,274
- 5,424,421
Preferred Stock - 266,293
- 266,293
Preference Stock 323,000 -
- 323,000
Common Shareholders' Equity 2,809,220 1,857,120
- 4,666,340
------------- ----------------
- ------------ ------------
Total Capitalization 6,294,367 4,385,687
- 10,680,054
------------- ----------------
- ------------ ------------
Total Liabilities and Capitalization $ 8,667,281 $ 6,740,031
$ - $ 15,407,312
============= ================
============ ============
<FN>
See accompanying Notes to Unaudited Pro Forma Combined
Condensed Financial Statements.
</FN>
51
</TABLE>
<TABLE>
CONSTELLATION ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME
STATEMENT
SIX MONTHS ENDED JUNE 30, 1997
(In thousands, except per share amounts)
- -------------------------------------------------------
<CAPTION>
PEPCO
BGE (As Reclassified)
Pro Forma Pro Forma
(As Reported) (See Note 5)
Adjustments Combined
------------- -----------------
------------ -------------
<S> <C> <C>
<C> <C>
Revenue
Electric $ 1,015,362 $ 840,031
$ - $ 1,855,393
Gas 306,046
- - - 306,046
Diversified businesses 312,714 68,472
- 381,186
------------ -----------------
----------- ------------
Total Revenue 1,634,122 908,503
- 2,542,625
------------ -----------------
----------- ------------
Operating Expenses
Electric fuel and purchased energy 248,008 324,877
- 572,885
Gas purchased for resale 181,421
- - - 181,421
Operations 265,031 105,132
- 370,163
Maintenance 102,195 45,080
- 147,275
Diversified business expenses 316,643 37,934
- 354,577
Depreciation and amortization 170,786 114,401
- 285,187
Taxes other than income taxes 107,323 94,641
- 201,964
------------ -----------------
----------- ------------
Total Operating Expenses 1,391,407 722,065
- 2,113,472
------------ -----------------
----------- ------------
Income from Operations 242,715 186,438
- 429,153
Total Other Income 2,016 5,592
- 7,608
------------ -----------------
----------- ------------
Income Before Interest and Income Taxes 244,731 192,030
- 436,761
Net Interest Expense 110,784 106,856
- 217,640
------------ -----------------
----------- ------------
Income Before Income Taxes 133,947 85,174
- 219,121
Income Taxes 46,866 12,068
- 58,934
------------ -----------------
----------- ------------
Net Income 87,081 73,106
- 160,187
Preferred and Preference Stock Dividends 15,758 8,282
- 24,040
------------ -----------------
----------- ------------
Earnings Applicable to Common Stock $ 71,323 $ 64,824
$ - $ 136,147
============ =================
=========== ============
Average Shares of Common Stock Outstanding 147,667 118,500
265,812
Earnings Per Share of Common Stock $0.48 $0.55
$0.51
<FN>
See accompanying Notes to Unaudited Pro Forma Combined
Condensed Financial Statements.
</FN>
52
</TABLE>
Notes to Unaudited Pro Forma Combined Condensed Financial
- ---------------------------------------------------------
Statements
- ----------
1. The revenue, expenses, assets, and liabilities of PEPCO's
nonregulated subsidiaries have been reclassified to conform
with the presentation used by BGE. The effect of accounting
policy differences are immaterial and have not been adjusted
in the pro forma combined condensed financial statements.
2. Pro forma per common share amounts give effect to the
conversion of each share of PEPCO and BGE Common Stock into
.997 share and 1 share, respectively, of Constellation Energy
Corporation Common Stock. The pro forma combined condensed
financial statements are presented as if the companies were
combined during all periods included therein.
3. The allocation between PEPCO and BGE and their customers of
the estimated cost savings resulting from the Merger, net of
the costs incurred to achieve such savings, will be subject
to regulatory review and approval. None of these estimated
cost savings, the costs to achieve such savings, or
transaction costs have been reflected in the pro forma
combined condensed financial statements.
4. Intercompany transactions between PEPCO and BGE during the
periods presented were not material and, accordingly, no pro
forma adjustments were made to eliminate such transactions.
5. The PEPCO reclassifying information reflects the
reclassifying entries necessary to adjust PEPCO's
consolidated balance sheet and statement of income
presentation to be consistent with the presentation expected
to be used by Constellation Energy Corporation.
53
<TABLE>
POTOMAC ELECTRIC POWER COMPANY
RECLASSIFYING BALANCE SHEET
JUNE 30, 1997
(In Thousands)
------------------------------
<CAPTION>
PEPCO PEPCO
PEPCO
(As Reported)
(Reclasses) (As Reclassified)
--------------
- -------------- -----------------
<S> <C> <C>
<C>
ASSETS
Current Assets
Cash and Cash Equivalents $ 7,640 $
19,111 $ 26,751
Accounts Receivable - net -
302,340 302,340
Customer Accounts Receivable - net 164,006
(164,006) -
Other Accounts Receivable - net 29,633
(29,633) -
Accrued Unbilled Revenue 94,973
(94,973) -
Materials and Supplies -
131,765 131,765
Fuel 63,834
(63,834) -
Construction and Maintenance 67,931
(67,931) -
Prepayments and Other -
6,997 6,997
Prepaid Taxes 105
(105) -
Other Prepaid Expenses 6,892
(6,892) -
-------------
- ------------- ----------------
Total Current Assets 435,014
32,839 467,853
-------------
- ------------- ----------------
Investments and Other Assets
Notes Receivable -
34,253 34,253
Real Estate Projects -
72,627 72,627
Power Generation Systems -
968 968
Marketable Securities -
289,293 289,293
Investment in Finance Leases -
486,049 486,049
Operating Lease Equipment - net -
179,337 179,337
Assets Held for Disposal -
3,700 3,700
Other Investments -
113,311 113,311
-------------
- ------------- ----------------
Total Investments and Other Assets -
1,179,538 1,179,538
-------------
- ------------- ----------------
Utility Plant
Plant in Service
Electric 6,299,044
- 6,299,044
Construction Work in Progress 78,450
(78,450) -
Electric Plant Held for Future Use 4,190
(4,190) -
Nonoperating Property 22,976
(22,976) -
-------------
- ------------- ----------------
Total Plant in Service 6,404,660
(105,616) 6,299,044
Accumulated Depreciation (1,961,519)
903 (1,960,616)
Construction Work in Progress -
78,450 78,450
Other Plant - net -
26,263 26,263
-------------
- ------------- ----------------
Net Utility Plant 4,443,141
- 4,443,141
-------------
- ------------- ----------------
Deferred Charges
Regulatory Assets -
466,376 466,376
Income Taxes Recoverable through Future Rates, net 239,435
(239,435) -
Conservation Costs, net 229,010
(229,010) -
Unamortized Debt Reacquisition Costs 54,149
(54,149) -
Other 171,758
11,365 183,123
-------------
- ------------- ----------------
Total Deferred Charges 694,352
(44,853) 649,499
-------------
- ------------- ----------------
Nonutility Subsidiary Assets
Cash and Cash Equivalents 19,111
(19,111) -
Marketable Securities 289,293
(289,293) -
Investment in Finance Leases 486,049
(486,049) -
Operating Lease Equipment - net 179,337
(179,337) -
Assets Held for Disposal 3,700
(3,700) -
Receivables - net 47,981
(47,981) -
Other Investments 186,906
(186,906) -
Other Assets 14,280
(14,280) -
-------------
- ------------- ----------------
Total Nonutility Subsidiary Assets 1,226,657
(1,226,657) -
-------------
- ------------- ----------------
Total Assets $ 6,799,164 $
(59,133) $ 6,740,031
=============
============= ================
54
</TABLE>
<TABLE>
POTOMAC ELECTRIC POWER COMPANY
RECLASSIFYING BALANCE SHEET
JUNE 30, 1997
(In Thousands)
------------------------------
<CAPTION>
PEPCO
PEPCO PEPCO
(As Reported)
(Reclasses) (As Reclassified)
--------------
- ------------ -----------------
<S> <C> <C>
<C>
LIABILITIES AND CAPITALIZATION
Current Liabilities
Short-term Borrowings $ 311,600 $
- $ 311,600
Current Portion of Long-term Debt and Preferred Stock 100,985
377,500 478,485
Accounts Payable and Accrued Expenses 158,846
50,935 209,781
Capital Lease Obligations Due within One Year 20,772
(20,772) -
Other 81,710
20,772 102,482
-------------
- ----------- ----------------
Total Current Liabilities 673,913
428,435 1,102,348
-------------
- ----------- ----------------
Deferred Credits and Other Liabilities
Deferred Income Taxes 1,001,460
36,230 1,037,690
Deferred Investment Tax Credits 59,133
(59,133) -
Capital Lease Obligations -
161,702 161,702
Other 40,561
12,043 52,604
-------------
- ----------- ----------------
Total Deferred Credits and Other Liabilities 1,101,154
150,842 1,251,996
-------------
- ----------- ----------------
Other Non-Current Liabilities
Capital Lease Obligations 161,702
(161,702) -
-------------
- ----------- ----------------
Total Other Non-Current Liabilities 161,702
(161,702) -
-------------
- ----------- ----------------
Capitalization
Long-term Debt 1,727,065
535,209 2,262,274
Preferred Stock -
266,293 266,293
Serial Preferred Stock 125,293
(125,293) -
Redeemable Serial Preferred Stock 141,000
(141,000) -
Common Shareholders' Equity -
1,857,120 1,857,120
Common Stock 118,501
(118,501) -
Other Common Equity 1,738,619
(1,738,619) -
-------------
- ----------- ----------------
Total Capitalization 3,850,478
535,209 4,385,687
-------------
- ----------- ----------------
Nonutility Subsidiary Liabilities
Long-term Debt 912,709
(912,709) -
Deferred Taxes and Other 99,208
(99,208) -
-------------
- ----------- ----------------
Total Nonutility Subsidiary Liabilities 1,011,917
(1,011,917) -
-------------
- ----------- ----------------
Total Liabilities and Capitalization $ 6,799,164 $
(59,133) $ 6,740,031
=============
=========== ================
55
</TABLE>
<TABLE>
POTOMAC ELECTRIC POWER COMPANY
RECLASSIFYING STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1997
(In thousands, except per share amounts)
----------------------------------------
<CAPTION> PEPCO
PEPCO PEPCO
(As Reported)
(Reclasses) (As Reclassified)
-------------
- ------------- -----------------
<S> <C> <C>
<C>
Electric $ 840,031 $
- $ 840,031
Diversified businesses -
68,472 68,472
------------
- ------------ ----------------
Total Revenue 840,031
68,472 908,503
------------
- ------------ ----------------
Operating Expenses
Electric fuel and purchased energy -
324,877 324,877
Fuel 156,702
(156,702) -
Purchased energy 95,450
(95,450) -
Capacity purchase payments 72,725
(72,725) -
Operations 105,132
- 105,132
Maintenance 45,080
- 45,080
Diversified business expenses -
37,934 37,934
Depreciation and amortization 114,401
- 114,401
Income taxes 33,058
(33,058) -
Taxes other than income taxes 94,641
- 94,641
------------
- ------------ ----------------
Total Operating Expenses 717,189
4,876 722,065
------------
- ------------ ----------------
Income from Operations 122,842
63,596 186,438
------------
- ------------ ----------------
Other Income
Nonutility Subsidiary Income 68,472
(68,472) -
Expenses, including interest and income taxes (53,566)
53,566 -
------------
- ------------ ----------------
Net earnings from nonutility subsidiary 14,906
(14,906) -
Allowance for other funds used during construction
and capital cost recovery factor 3,341
- 3,341
Other, net 2,324
(73) 2,251
------------
- ------------ ----------------
Total Other Income 20,571
(14,979) 5,592
------------
- ------------ ----------------
Income Before Interest and Income Taxes 143,413
48,617 192,030
------------
- ------------ ----------------
Interest Expense
Interest on debt 68,847
- 68,847
Other 5,505
- 5,505
Subsidiary interest expense -
36,549 36,549
Allowance for borrowed funds used during construction
and capital cost recovery factor (4,045)
- (4,045)
------------
- ------------ ----------------
Net Interest Expense 70,307
36,549 106,856
------------
- ------------ ----------------
Income before income taxes 73,106
12,068 85,174
------------
- ------------ ----------------
Income taxes - Utility -
33,058 33,058
Income taxes - Nonoperating -
(73) (73)
Income taxes - Subsidiary -
(20,917) (20,917)
------------
- ------------ ----------------
Total Income Taxes -
12,068 12,068
------------
- ------------ ----------------
Net Income 73,106
- 73,106
Preferred Dividends 8,282
- 8,282
------------
- ------------ ----------------
Earnings Applicable to Common Stock $ 64,824 $
- $ 64,824
============
============ ================
Average Shares of Common Stock Outstanding 118,500
118,500
Earnings Per Share of Common Stock $0.55
$0.55
56
</TABLE>
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
(a) Exhibits
Exhibit 3 - By-Laws of the Company
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 April 7, 1997, providing unaudited pro
forma combined condensed financial information of
Baltimore Gas and Electric Company (BGE) and
Potomac Electric Power Company (PEPCO), after
giving effect to the proposed Merger of the two
companies into Constellation Energy Corporation.
The item reported on such Form 8-K was Item 5
(Other Events).
A Current Report on Form 8-K was filed by the
Company on April 17, 1997, providing details on the
Federal Energy Regulatory Commission's approval of
the proposed Merger between the Company and BGE;
and on the plan of the two companies to file a
Request for Reconsideration of the Maryland Public
Service Commission's Merger Order. The item
reported on such Form 8-K was Item 5 (Other
Events).
A Current Report on Form 8-K was filed by the
Company on May 5, 1997, providing details of the
Company's and BGE's Application for Rehearing of
Maryland Public Service Commission's Merger Order.
The item reported on such Form 8-K was Item 5
(Other Events).
57
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 and
Chief Financial Officer
August 13, 1997
- ---------------
DATE
58
<TABLE>
Exhibit 11 Computations of Earnings Per Common Share
- ---------- -----------------------------------------
The following is the basis for the computation of primary and fully
diluted earnings per common share for the twelve months ended June 30, 1997,
and the twelve months ended December 31, 1996 and 1995:
<CAPTION>
June 30, December 31,
December 31,
1997 1996
1995
------------- ------------
- ------------
<S> <C> <C> <C>
Average shares outstanding for
computation of primary earnings
per common share 118,498,718 118,496,683
118,412,478
============ ============
============
Average shares outstanding for
fully diluted computation:
Average shares outstanding 118,498,718 118,496,683
118,412,478
Additional shares resulting from:
Conversion of Serial Preferred
Stock, $2.44 Convertible Series
of 1966 (the "Convertible
Preferred Stock") 34,404 34,986
38,255
Conversion of 7% Convertible
Debentures 2,364,559 2,418,579
2,469,639
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 124,290,181 124,342,748
124,312,872
============ ============
============
Earnings applicable to common stock $206,490,000 $220,356,000
$77,540,000
Add: Dividends paid or accrued on
Convertible Preferred Stock 14,000 15,000
16,000
Interest paid or accrued on
Convertible Debentures,
net of related taxes 6,358,000 6,416,000
6,475,000
------------ ------------
- ------------
Earnings applicable to common stock,
assuming conversion of convertible
securities $212,862,000 $226,787,000
$84,031,000
============ ============
============
Primary earnings per common share $1.74 $1.86
$0.65
Fully diluted earnings per common share $1.71 $1.82
$0.68
<FN>
The valuation is not required by footnote 2 to paragraph 14 of APB No. 15
for the the twelve months ended June 30, 1997 and December 31, 1996
because it results in dilution of less than 3%. In addition, this
calculation is submitted in accordance with Regulation S-K item 601
(b)(11) although it is contrary to paragraph 40 of APB No. 15 because it
produces an antidilutive result for the twelve months ended December 31,
1995.
</FN>
59
</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 June
30, 1997, and for each of the preceeding five years on the basis of parent
company operations only, are as follows.
<CAPTION>
Twelve
Months For The
Year Ended December 31,
Ended
- ---------------------------------------------------------
June 30,
1997 1996 1995
1994 1993 1992
--------- --------- ---------
--------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
<C> <C> <C>
Net income before cumulative effect
of accounting change $202,795 $220,066 $218,788
$208,074 $216,478 $172,599
Taxes based on income 120,406 135,011 129,439
116,648 107,223 76,965
--------- --------- ---------
--------- --------- ---------
Income before taxes and cumulative effect
of accounting change 323,201 355,077 348,227
324,722 323,701 249,564
--------- --------- ---------
--------- --------- ---------
Fixed charges:
Interest charges 146,676 146,939 146,558
139,210 141,393 138,097
Interest factor in rentals 23,374 23,560 23,431
6,300 5,859 6,140
--------- --------- ---------
--------- --------- ---------
Total fixed charges 170,050 170,499 169,989
145,510 147,252 144,237
--------- --------- ---------
--------- --------- ---------
Income before income taxes, cumulative
effect of accounting change and
fixed charges $493,251 $525,576 $518,216
$470,232 $470,953 $393,801
========= ========= =========
========= ========= =========
Coverage of fixed charges 2.90 3.08 3.05
3.23 3.20 2.73
==== ==== ====
==== ==== ====
Preferred dividend requirements $16,590 $16,604 $16,851
$16,437 $16,255 $14,392
--------- --------- ---------
--------- --------- ---------
Ratio of pre-tax income to net income 1.59 1.61 1.59
1.56 1.50 1.45
--------- --------- ---------
--------- --------- ---------
Preferred dividend factor $26,378 $26,732 $26,793
$25,642 $24,383 $20,868
--------- --------- ---------
--------- --------- ---------
Total fixed charges and preferred dividends $196,428 $197,231 $196,782
$171,152 $171,635 $165,105
========= ========= =========
========= ========= =========
Coverage of combined fixed charges
and preferred dividends 2.51 2.66 2.63
2.75 2.74 2.39
==== ==== ====
==== ==== ====
</TABLE>
60
<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 June
30, 1997, 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
- ---------------------------------------------------------
June 30,
1997 1996 1995
1994 1993 1992
--------- --------- ---------
--------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
<C> <C> <C>
Net income before cumulative effect
of accounting change $223,080 $236,960 $94,391
$227,162 $241,579 $200,760
Taxes based on income 90,192 80,386 43,731
93,953 62,145 79,481
--------- --------- ---------
--------- --------- ---------
Income before taxes and cumulative effect
of accounting change 313,272 317,346 138,122
321,115 303,724 280,241
--------- --------- ---------
--------- --------- ---------
Fixed charges:
Interest charges 224,243 231,029 238,724
224,514 221,312 226,453
Interest factor in rentals 23,515 23,943 26,685
9,938 9,257 6,599
--------- --------- ---------
--------- --------- ---------
Total fixed charges 247,758 254,972 265,409
234,452 230,569 233,052
--------- --------- ---------
--------- --------- ---------
Nonutility subsidiary capitalized interest (550) (649) (529)
(521) (2,059) (2,200)
--------- --------- ---------
--------- --------- ---------
Income before income taxes, cumulative
effect of accounting change and
fixed charges $560,480 $571,669 $403,002
$555,046 $532,234 $511,093
======== ======== ========
======== ======== ========
Coverage of fixed charges 2.26 2.24 1.52
2.37 2.31 2.19
==== ==== ====
==== ==== ====
Preferred dividend requirements $16,590 $16,604 $16,851
$16,437 $16,255 $14,392
--------- --------- ---------
--------- --------- ---------
Ratio of pre-tax income to net income 1.40 1.34 1.46
1.41 1.26 1.40
--------- --------- ---------
--------- --------- ---------
Preferred dividend factor $23,226 $22,249 $24,602
$23,176 $20,481 $20,149
--------- --------- ---------
--------- --------- ---------
Total fixed charges and preferred dividends $270,984 $277,221 $290,011
$257,628 $251,050 $253,201
======== ======== ========
======== ======== ========
Coverage of combined fixed charges
and preferred dividends 2.07 2.06 1.39
2.15 2.12 2.02
==== ==== ====
==== ==== ====
</TABLE>
61
Exhibit 15
August 13, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We are aware that Potomac Electric Power Company has incorporated
by reference our report dated August 13, 1997, (issued pursuant
to the provisions of Statement on Auditing Standards No. 71) in
the Prospectuses constituting parts of the Registration
Statements (Registration Nos. 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 (Registration Nos. 33-58810 and 33-61379)
on Form S-3 filed on February 26, 1993 and July 28, 1995,
respectively, in the Joint Proxy Statement/Prospectus
constituting part of the Registration Statement (Registration No.
33-64799) on Form S-4 of Constellation Energy Corporation filed
on December 7, 1995, and in the Prospectuses constituting parts
of the Registration Statements on Form S-3 (Registration Nos.
333-24705 and 333-24855) of Constellation Energy Corporation
filed on April 7, 1997, and April 9, 1997, 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.
62
========================================
By-Laws
of
POTOMAC ELECTRIC POWER COMPANY
WASHINGTON, D. C.
As amended through
July 24, 1997
=================================================================
POTOMAC ELECTRIC POWER COMPANY
BY-LAWS
______
ARTICLE I
SECTION 1. The annual meeting of the stockholders of the
Company shall be held on such day, at such time and place within or
without the District of Columbia as the Board of Directors or the
Executive Committee shall designate for the purpose of electing
directors and of transacting such other business as may properly be
brought before the meeting.
At an annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual meeting, business
must be specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board, otherwise
properly brought before the meeting by or at the direction of the
Board, or otherwise properly brought before the meeting by a
stockholder. In addition to any other applicable requirements, for
business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof
in writing to the Secretary of Potomac Electric Power Company. To
be timely, a stockholder's notice must be received at the principal
executive offices of the Company not less than 50 days nor more
than 75 days prior to the meeting; provided, however, that in the
event that less than 65 days' notice or prior public disclosure of
the date of the meeting is given or made to stockholders, notice by
the stockholder to be timely must be so received not later than the
close of business on the fifteenth day following the day on which
such notice of the date of the annual meeting was mailed or such
public disclosure was made, whichever first occurs. A
stockholder's notice to the Secretary shall set forth (i) a brief
description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and record address of the stockholder
proposing such business, (iii) the class and number of shares of
the Company that are beneficially owned by the stockholder, and
(iv) any material interest of the stockholder in such business.
Notwithstanding anything in the By-Laws to the contrary, no
business shall be conducted at the annual meeting except in
accordance with the procedures set forth in this Article I, Section
1; provided, however, that nothing in this Article I, Section 1
shall be deemed to preclude discussion by any stockholder of any
business properly brought before the annual meeting in accordance
with such procedures.
The Chairman of an annual meeting shall, if the facts warrant,
determine that business was not properly brought before the meeting
in accordance with the provisions of this Article I, Section 1, and
if he should so determine, he shall so declare to the meeting and
any such business not properly brought before the meeting shall not
be transacted.
SECTION 2. Special meetings of the stockholders, when called,
shall be held at such time and place within or without the District
of Columbia and may be called by the Board of Directors, or the
Executive Committee, or the holders of record of not less than one-
fifth of all the outstanding shares entitled to vote at the
meeting, or, if the meeting is for the purpose of enabling the
holders of the Serial Preferred Stock of the Company to elect
directors upon the conditions set forth in the Articles of
Incorporation of the Company, such meeting shall be called as
therein provided.
SECTION 3. Written notice stating the place, day and hour of
each meeting of the stockholders and the purpose or purposes for
which the meeting is called shall be given not less than ten days
(or such longer period as may be prescribed by law) and not more
than fifty days before the date of the meeting to each stockholder
of record entitled to vote at the meeting, by depositing such
notice in the United States mail addressed to the respective
stockholders at their addresses as they appear on the records of
the Company, with postage thereon prepaid.
In connection with the first election of a portion of the
members of the Board of Directors by the holders of the Serial
Preferred Stock upon accrual of such right, as provided in the
Articles of Incorporation of the Company, the Company shall prepare
and mail to the holders of the Serial Preferred Stock entitled to
vote thereon such proxy forms, communications and documents as may
be deemed appropriate for the purpose of soliciting proxies for the
election of directors by the holders of the Serial Preferred Stock.
The Secretary or an Assistant Secretary of the Company shall
cause to be made, at least ten days before each meeting of
stockholders, a complete list of the stockholders entitled to vote
at such meeting or any adjournment thereof, with the address of and
the number of shares held by each. Such list, for a period of ten
days prior to such meeting, shall be kept on file at the principal
place of business of the Company and shall be subject to inspection
for any proper purpose by any stockholder at any time during usual
business hours. Such list shall also be produced and kept open at
the time and place of the meeting and shall be subject to the
inspection for any proper purpose of any stockholder during the
whole time of the meeting.
SECTION 4. At each meeting of stockholders the holders of
record of a majority of the outstanding shares entitled to vote at
such meeting, represented in person or by proxy, shall constitute
a quorum, except as otherwise provided by law or by the Articles of
Incorporation of the Company. The affirmative vote of the holders
of a majority of the shares represented at a duly organized meeting
at which a quorum was present at the time of organization, and
entitled to vote on the subject matter, shall be the act of the
stockholders, unless the vote of the holders of a greater number,
or voting by classes, is required by law or by the Articles of
Incorporation of the Company and except that in elections of
directors those receiving the greatest numbers of votes shall be
deemed elected even though not receiving a majority. If a meeting
cannot be organized because a quorum has not attended, the holders
of a majority of the shares represented at the meeting may adjourn
the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall have been
obtained, when any business may be transacted which might have been
transacted at the meeting as first convened had there been a
quorum.
SECTION 5. Meetings of the stockholders shall be presided
over by the Chairman of the Board or, if he is not present, by the
President or, if neither is present, by a Vice Chairman or, if no
such officer is present, by a chairman to be chosen at the meeting.
The Secretary of the Company or, if he is not present, an Assistant
Secretary of the Company or, if neither is present, a secretary to
be chosen at the meeting, shall act as Secretary of the meeting.
SECTION 6. Each stockholder entitled to vote at any meeting
may so vote either in person or by proxy executed in writing by the
stockholder or by his duly authorized attorney-in-fact and shall be
entitled to one vote on each matter submitted to a vote for each
share of stock of the Company having voting power thereon
registered in his name at the date fixed for the determination of
the stockholders entitled to vote at the meeting.
SECTION 7. At all elections of directors the voting shall be
by ballot. At all such elections, the Chairman of the meeting
shall appoint two inspectors of election, unless such appointment
shall be unanimously waived by the stockholders present in person
or represented by proxy at the meeting and entitled to vote for the
election of directors. No director or candidate for the office of
director shall be appointed as such inspector. The inspectors,
before entering upon the discharge of their duties, shall take and
subscribe an oath or affirmation faithfully to execute the duties
of inspector at such meeting with strict impartiality and according
to the best of their ability, and shall take charge of the polls
and after the balloting shall make a certificate of the result of
the vote taken.
SECTION 8. In order to determine who are stockholders of the
Company for any proper purpose, the Board of Directors either may
close the stock transfer books or, in lieu thereof, may fix in
advance a date as the record date for such determination, such date
in any case to be not more than fifty days (and, in the case of a
meeting of stockholders, not less than ten days or such longer
period as may be required by law) prior to the date on which the
particular action, requiring such determination, is to be taken.
When such a record date has been so fixed for the determination of
stockholders entitled to vote at a meeting, such determination
shall apply to any adjournment thereof.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. The Board of Directors of the Company shall
consist of twelve persons, each of whom shall be a stockholder of
the Company. The directors shall be divided into three classes,
designated Class I, Class II, and Class III. Each of the classes
shall have four directors. At the 1987 annual meeting of
stockholders, Class I directors shall be elected for a one-year
term, Class II directors for a two-year term, and Class III
directors for a three-year term. At each succeeding annual meeting
of stockholders beginning in 1988, successors to the class of
directors whose term expires at that annual meeting shall be
elected for a three-year term. Except as otherwise provided in the
Articles of Incorporation of the Company and in these By-Laws, the
directors shall hold office until the annual meeting of the
stockholders for the year in which their respective terms expire
and until their respective successors shall have been elected and
qualified. No person shall be eligible for election as a director
after he shall have attained his seventieth birthday, and no person
shall be eligible to serve as a director beyond the next annual
meeting after he shall have attained his seventieth birthday. No
director who is a full time employee of the Company shall be
eligible to serve as a director beyond the next annual meeting
after termination of his employment with the Company, provided,
that (a) this provision shall not apply to a director who is
serving or has served as Chief Executive Officer and (b) a director
serving at the time of termination of employment as Vice Chairman
shall be permitted to continue as director until the expiration of
his three-year term. Seven members of the Board shall constitute
a quorum for the transaction of business, but if any meeting of the
Board cannot be organized because a quorum has not attended, a
majority of those present may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until
a quorum shall have been obtained, when any business may be
transacted which might have been transacted at the meeting as first
convened had there been a quorum. The acts of a majority of the
directors present at a meeting at which a quorum is present shall,
except as otherwise provided by law, by the Articles of
Incorporation of the Company, or by these By-Laws, be the acts of
the Board of Directors.
Only persons who are nominated in accordance with the
following procedures shall be eligible for election as Directors.
Nominations of persons for election to the Board of the Company may
be made at the annual meeting of stockholders by or at the
direction of the Board of Directors, by any nominating committee or
person appointed by the Board, or by any stockholder of the Company
entitled to vote for the election of Directors at the meeting who
complies with the notice procedures set forth in this Article II,
Section 1. Such nominations, other than those made by or at the
direction of the Board, shall be made pursuant to timely notice in
writing to the Secretary of Potomac Electric Power Company. To be
timely, a stockholder's notice shall be received at the principal
executive offices of the Company not less than 50 days nor more
than 75 days prior to the meeting; provided, however, that in the
event that less than 65 days' notice or prior public disclosure of
the date of the meeting is given or made to stockholders, notice by
the stockholder to be timely must be so received not later than the
close of business on the fifteenth day following the day on which
such notice of the date of the meeting was mailed or such public
disclosure was made, whichever first occurs. Such stockholder's
notice to the Secretary shall set forth (a) as to each person whom
the stockholder proposes to nominate for election or reelection as
a Director, (i) the name, age, business address and residence
address of the person, (ii) the principal occupation or employment
of the person, (iii) the class and number of shares of capital
stock of the Company that are beneficially owned by the person and
(iv) any other information relating to the person that is required
to be disclosed in solicitations for proxies for election of
Directors pursuant to Section 14(a) of the Securities Exchange Act
of 1934, as amended; and (b) as to the stockholder giving the
notice (i) the name and record address of the stockholder and (ii)
the class and number of shares of capital stock of the Company that
are beneficially owned by the stockholder. The Company may require
any proposed nominee to furnish such other information as may
reasonably be required by the Company to determine the eligibility
of such proposed nominee to serve as Director of the Company. No
person shall be eligible for election as a Director of the Company
unless nominated in accordance with the procedures set forth
herein.
The Chairman of the meeting shall, if the facts warrant,
determine that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so
declare to the meeting and the defective nomination shall be
disregarded.
The Board of Directors, as soon as is reasonably practicable
after the initial election of Directors by the stockholders in each
year, shall elect one of its number Chairman of the Board, who may
be, but is not required to be, an officer and employee of the
Company.
SECTION 2. Any vacancy, from any cause other than an increase
in the number of Directors, occurring among the directors shall be
filled without undue delay by a majority of the remaining directors
who were elected, or whose predecessors in office were elected, by
the same class of stockholders as that which elected the last
incumbent of the vacant directorship. The term of any director
elected by the remaining directors to fill a vacancy (other than
one caused by an increase in the number of directors) shall expire
at the next stockholders' meeting at which directors are elected.
SECTION 3. Regular meetings of the Board of Directors shall
be held at the office of the Company in the District of Columbia
(unless otherwise fixed by resolution of the Board) at such time as
may from time to time be fixed by resolution of the Board. Special
meetings of the Board may be held upon call of the Executive
Committee, or the Chairman of the Board, or the President, or a
Vice Chairman, by oral, telegraphic or written notice, setting
forth the time and place (either within or without the District of
Columbia) of the meeting, duly served on or sent or mailed to each
director not less than two days before the meeting. A meeting of
the Board may be held without notice, immediately after, and at the
same place as, the annual meeting of the stockholders. A waiver in
writing of any notice, signed by a director, whether before or
after the time stated therein, shall be deemed equivalent to the
giving of such notice to such director. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting
of the Board need be specified in any notice, or waiver of notice,
of such meeting.
SECTION 4. Meetings of the Board of Directors shall be
presided over by the Chairman of the Board or, if he is not
present, by the President or, if neither is present, by a Vice
Chairman or, if no such officer is present, by a chairman to be
chosen at the meeting. The Secretary of the Company or, if he is
not present, an Assistant Secretary of the Company or, if neither
is present, a secretary to be chosen at the meeting, shall act as
secretary of the meeting.
SECTION 5. The Board of Directors may, by resolution or
resolutions adopted by not less than the number of directors
necessary to constitute a quorum of the Board, designate an
Executive Committee consisting of not less than three nor more than
seven directors. Except as otherwise provided by law, the
Executive Committee shall have and may exercise, when the Board is
not in session, all of the powers of the Board in the management of
the property, business and affairs of the Company; but the
Executive Committee shall not have power to fill vacancies in the
Board, or to change the membership of, or to fill vacancies in, the
Executive Committee, or to adopt, alter, amend, or repeal by-laws
of the Company. The Board shall have the power at any time to fill
vacancies in, to change the membership of, or to dissolve, the
Executive Committee. The Executive Committee may make rules for
the conduct of its business and fix the time and place of its
meetings, and may appoint such committees and assistants as it
shall from time to time deem necessary. A majority of the members
of the Executive Committee shall constitute a quorum, and the acts
of a majority of the members of the Committee present at a meeting
at which a quorum is present shall be the acts of said Committee.
All action taken by the Executive Committee shall be reported to
the Board at its regular meeting next succeeding the taking of such
action.
SECTION 6. The Board of Directors may also, by resolution or
resolutions adopted by not less than the number of directors
necessary to constitute a quorum of the Board, designate one or
more other committees, each such committee to consist of such
number of directors as the Board may from time to time determine,
which, to the extent provided in said resolution or resolutions,
shall have and may exercise such limited authority as the Board may
authorize. Such committee or committees shall have such name or
names as the Board may from time to time determine. The Board
shall have the power at any time to fill vacancies in, to change
the membership of, or to dissolve, any such committee. A majority,
or such other number as the Board may designate, of the members of
any such committee shall constitute a quorum. Each such committee
may make rules for the conduct of its business and fix the time and
place of its meetings unless the Board shall otherwise provide.
All action taken by any such committee shall be reported to the
Board at its regular meeting next succeeding the taking of such
action, unless otherwise directed.
SECTION 7. The Board of Directors shall fix the compensation
to be paid to each director who is not a salaried employee of the
Company for serving as a director and for attendance at meetings of
the Board and committees thereof, and may authorize the payment to
directors of expenses incurred in attending any such meeting or
otherwise incurred in connection with the business of the Company.
This By-Law shall not be construed to preclude any Director from
serving the Company in any other capacity and receiving
compensation therefor.
SECTION 8. At a special meeting called expressly for such
purpose (i) any director elected by the holders of the Serial
Preferred Stock, or elected by directors to fill a vacancy among
the directors elected by the holders of such stock, may be removed,
only for cause, by a vote of the holders of a majority of the
shares of Serial Preferred Stock, and the resulting vacancy may be
filled, for the unexpired term of the director so removed, by a
vote of the holders of such Stock; and (ii) any director elected by
the holders of the Common Stock, or elected by directors to fill a
vacancy among the directors elected by the holders of such stock,
may be removed, only for cause, by a vote of the holders of a
majority of the shares of Common Stock, and the resulting vacancy
may be filled, for the unexpired term of the director so removed,
by a vote of the holders of such Stock.
SECTION 9. With respect to a Company officer, director, or
employee, the Company shall indemnify, and with respect to any
other individual the Company may indemnify, any person who was or
is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding (an "Action"),
whether civil, criminal, administrative, arbitrative or
investigative (including an Action by or in the right of the
Company) by reason of the fact that he is or was a director,
officer, employee or agent of the Company, or is or was serving at
the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such Action; except
in relation to matters as to which he shall be finally adjudged in
such Action to have knowingly violated the criminal law or be
liable for willful misconduct in the performance of his duty to the
Company. The termination of any Action by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not of itself create a presumption that the
person was guilty of willful misconduct.
Any indemnification (unless ordered by a court) shall be made
by the Company only as authorized in the specific case upon a
determination that indemnification of the director, officer,
employee or agent is proper in the circumstances because he has met
the applicable standard of conduct set forth above. In the case of
any director, such determination shall be made: (1) by the Board
of Directors by a majority vote of a quorum consisting of directors
who were not parties to such Action; or (2) if such a quorum is not
obtainable, by majority vote of a committee duly designated by the
Board of Directors (in which designation directors who are parties
may participate) consisting solely of two or more directors not at
the time parties to the proceeding; or (3) by special legal counsel
selected by the Board of Directors or its committee in the manner
prescribed by clause (1) or (2) of this paragraph, or if such a
quorum is not obtainable and such a committee cannot be designated,
by majority vote of the Board of Directors, in which selection
directors who are parties may participate; or (4) by vote of the
shareholders, in which vote shares owned by or voted under the
control of directors, officers and employees who are at the time
parties to the Action may not be voted. In the case of any
officer, employee, or agent other than a director, such
determination may be made (i) by the Board of Directors or a
committee thereof; (ii) by the Chairman of the Board of the Company
or, if the Chairman is a party to such Action, the President of the
Company, or (iii) such other officer of the Company, not a party to
such Action, as such person specified in clause (i) or (ii) of this
paragraph may designate. Authorization of indemnification and
evaluation as to reasonableness of expenses shall be made in the
same manner as the determination that indemnification is
permissible, except that if the determination is made by special
legal counsel, authorization of indemnification and evaluation as
to reasonableness of expenses shall be made by those entitled
hereunder to select such legal counsel.
Expenses incurred in defending an Action for which
indemnification may be available hereunder shall be paid by the
Company in advance of the final disposition of such Action as
authorized in the manner provided in the preceding paragraph,
subject to execution by the person being indemnified of a written
undertaking to repay such amount if and to the extent that it shall
ultimately be determined by a court that such indemnification by
the Company is not permitted under applicable law.
It is the intention of the Company that the indemnification
set forth in this Section 9 of Article II, shall be applied to no
less extent than the maximum indemnification permitted by law. In
the event that any right to indemnification or other right
hereunder may be deemed to be unenforceable or invalid, in whole or
in part, such unenforceability or invalidity shall not affect any
other right hereunder, or any right to the extent that it is not
deemed to be unenforceable. The indemnification provided herein
shall be in addition to, and not exclusive of, any other rights to
which those indemnified may be entitled under any by-law,
agreement, vote of stockholders, or otherwise, and shall continue
as to a person who has ceased to be a director, officer, employee,
or agent and inure to the benefit of such person's heirs,
executors, and administrators.
SECTION 10. The Board of Directors may, in its discretion, at
any time elect one or more persons to the position of Advisory
Director, to serve as such during the pleasure of the Board, but no
person shall be eligible to serve as an Advisory Director beyond
the next annual meeting after he shall have attained his seventy-
second birthday. Advisory Directors so elected by the Board shall
be entitled to attend, and take part in discussions at, meetings of
the Board of Directors, but shall not be considered members of the
Board for quorum or voting purposes. Advisory Directors shall
receive the same compensation as members of the Board.
SECTION 11. In any proceeding brought by a stockholder in the
right of the Company or brought by or on behalf of the stockholders
of the Company, no monetary damages shall be assessed against an
officer or director. The liability of an officer or director shall
not be limited as provided in this section if the officer or
director engaged in willful misconduct or a knowing violation of
the criminal law.
ARTICLE III
OFFICERS
SECTION 1. The Board of Directors, as soon as reasonably
practicable after the initial election of directors by stockholders
in each year, shall elect a President, may elect one or more Vice
Chairmen and shall elect one or more Vice Presidents (who may be
given such other descriptive titles as the Board may specify), a
Secretary, a Treasurer and a Comptroller, and from time to time may
elect such Assistant Secretaries, Assistant Treasurers, Assistant
Comptrollers and other officers, and appoint such other agents, as
it may deem desirable. Any two or more offices may be held by the
same person, except the offices of President and Secretary. The
Board of Directors shall elect the Chairman of the Board or one of
the above officers Chief Executive Officer of the Company.
SECTION 2. The term of office of all officers shall be until
the next succeeding annual election of officers and until their
respective successors shall have been elected and qualified; but
any officer or agent elected or appointed by the Board of Directors
may be removed, with or without cause, by the affirmative vote of
a majority of the members of the Board whenever in their judgment
the best interests of the Company will be served thereby. Such
removal shall be without prejudice to contract rights, if any, of
the person so removed. Election or appointment of an officer or
agent shall not of itself create contract rights. Unless
specifically authorized by resolution of the Board of Directors, no
agreement for the employment of any officer for a period longer
than one year shall be made.
SECTION 3. Subject to such limitations as the Board of
Directors or the Executive Committee may from time to time
prescribe, the officers of the Company shall each have such
authority and perform such duties in the management of the
property, business and affairs of the Company as by custom
generally pertain to their respective offices, as well as such
authority and duties as from time to time may be conferred by the
Board of Directors, the Executive Committee or the Chief Executive
Officer.
SECTION 4. The salaries of all officers, employees and agents
of the Company shall be determined and fixed by the Board of
Directors, or pursuant to such authority as the Board may from time
to time prescribe.
ARTICLE IV
CERTIFICATES OF STOCK
SECTION 1. The shares of the capital stock of the Company
shall be represented by certificates, provided that the Board of
Directors of the Company may provide by resolution that some or all
of the shares of any or all of its classes or series of capital
stock may be uncertificated shares. Except as otherwise expressly
provided by law, the rights and obligations of the holders of
uncertificated shares and the rights and obligations of the holders
of certificates representing shares of the same class and series
shall be identical. Shares of the capital stock of the Company
that are evidenced by certificates shall be in such form as the
Board of Directors may from time to time prescribe. Such
certificates shall be signed by the President or a Vice President
and by the Secretary or an Assistant Secretary, shall be sealed
with the seal of the Company, or a facsimile thereof, shall be
countersigned and registered in such manner, if any, as the Board
may by resolution prescribe. Where such a certificate is
countersigned by a transfer agent (other than the Company or an
employee of the Company), or by a transfer clerk and registered by
a registrar, the signatures thereon of the President or Vice
President and the Secretary or Assistant Secretary may be
facsimiles. In case any officer who has signed or whose facsimile
signature has been placed upon any such certificate shall have
ceased to be such officer before such certificate is issued, it may
be issued by the Company with the same effect as if such officer
had not ceased to hold such office at the date of its issue.
SECTION 2. The shares of the capital stock of the Company
shall be transferable on the books of the Company by the holders
thereof in person or by duly authorized attorney, and, if
represented by certificates, upon surrender and cancellation of the
certificates evidencing such shares, with duly executed assignment
and power of transfer endorsed thereon or attached thereto, and
with such proof of the authenticity of the signatures as the
Company or its agents may reasonably require and, if
uncertificated, upon receipt of appropriate instructions.
SECTION 3. No certificate evidencing shares of the capital
stock of the Company shall be issued in place of any certificate
alleged to have been lost, stolen, or destroyed, except upon
production of such evidence of the loss, theft or destruction, and
upon such indemnification of the Company and its agents by such
person or persons and in such manner, as the Board of Directors may
from time to time prescribe.
ARTICLE V
CHECKS, NOTES, CONTRACTS, ETC.
All checks and drafts on the Company's bank accounts, bills of
exchange, promissory notes, acceptances, obligations, other
instruments for the payment of money, and endorsements other than
for deposit in a bank account of the Company shall be signed by the
Treasurer or an Assistant Treasurer and shall be countersigned by
the Chief Executive Officer, the President, a Vice Chairman or a
Vice President, unless otherwise authorized by the Board of
Directors; provided that checks drawn on the Company's dividend
and/or special accounts may bear the manual signature, or the
facsimile signature, affixed thereto by a mechanical device, of
such officer or agent as the Board of Directors shall authorize.
All contracts, bonds and other agreements and undertakings of
the Company shall be executed by the Chief Executive Officer, the
President, a Vice Chairman or a Vice President and by such other
officer or officers, if any, as may be designated, from time to
time, by the Board of Directors and, in the case of any such
document required to be under seal, the corporate seal shall be
affixed thereto and attested by the Secretary or an Assistant
Secretary.
Whenever any instrument is required by this Article to be
signed by more than one officer of the Company, no person shall so
sign in more than one capacity.
ARTICLE VI
FISCAL YEAR
The fiscal year of the Company shall begin on the first day of
January in each year and shall end on the thirty-first day of
December following.
ARTICLE VII
OFFICES
The principal office of the Company shall be situated in the
District of Columbia. The registered office of the Company in
Virginia shall be situated in the County of Fairfax. The Company
may have such other offices at such places, within the District of
Columbia, the Commonwealth of Virginia, or elsewhere, as shall be
determined from time to time by the Board of Directors or by the
Chief Executive Officer.
ARTICLE VIII
AMENDMENTS
Except as otherwise provided by law, the Board of Directors
may alter, amend, or repeal the By-Laws of the Company, or adopt
new By-Laws, at any meeting of the Board, by the affirmative vote
of not less than the number of directors necessary to constitute a
quorum of the Board.
<TABLE> <S> <C>
<ARTICLE> UT
<SUBSIDIARY>
<NUMBER> 1
<NAME> POTOMAC CAPITAL INVESTMENT CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,421,068
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 435,014
<TOTAL-DEFERRED-CHARGES> 694,352
<OTHER-ASSETS> 1,248,730
<TOTAL-ASSETS> 6,799,164
<COMMON> 118,501
<CAPITAL-SURPLUS-PAID-IN> 1,010,378
<RETAINED-EARNINGS> 728,241
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,857,120
141,000
125,293
<LONG-TERM-DEBT-NET> 1,727,065
<SHORT-TERM-NOTES> 0<F1>
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 311,600<F1>
<LONG-TERM-DEBT-CURRENT-PORT> 100,000
985
<CAPITAL-LEASE-OBLIGATIONS> 161,702
<LEASES-CURRENT> 20,772
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,353,627
<TOT-CAPITALIZATION-AND-LIAB> 6,799,164
<GROSS-OPERATING-REVENUE> 840,031
<INCOME-TAX-EXPENSE> 33,058
<OTHER-OPERATING-EXPENSES> 684,131
<TOTAL-OPERATING-EXPENSES> 717,189
<OPERATING-INCOME-LOSS> 122,842
<OTHER-INCOME-NET> 20,571
<INCOME-BEFORE-INTEREST-EXPEN> 143,413
<TOTAL-INTEREST-EXPENSE> 70,307
<NET-INCOME> 73,106
8,282
<EARNINGS-AVAILABLE-FOR-COMM> 64,824
<COMMON-STOCK-DIVIDENDS> 98,304
<TOTAL-INTEREST-ON-BONDS> 126,500<F2>
<CASH-FLOW-OPERATIONS> 142,038
<EPS-PRIMARY> $.55
<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 June 30, 1997.
<F3>No material dilution would occur if all the convertible preferred stock and
debentures were converted into common stock.
</FN>
</TABLE>
