SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1998
--------------
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 March 31, 1998
- -------------------------- -----------------------------
Common Stock, $1 par value 118,527,287
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) Comprehensive Income............................... 5
(2) Income Taxes....................................... 6
(3) Capitalization and Fair Value of Financial
Instruments...................................... 9
(4) Commitments and Contingencies...................... 13
Report of Independent Accountants on Review of Interim
Financial Information.................................. 14
Item 2 - Management's Discussion and Analysis of Consolidated
Results of Operations and Financial Condition
Forward Looking Statements............................... 15
Utility
Results of Operations.................................. 16
Capital Resources and Liquidity........................ 18
Nonutility Subsidiary
Results of Operations.................................. 19
Capital Resources and Liquidity........................ 21
New Accounting Standards................................. 22
PART II - Other Information
Item 1 - Legal Proceedings................................. 23
Item 4 - Submission of Matters to a Vote of
Security Holders................................ 23
Item 5 - Other Information
Other Financing Arrangements............................. 25
Base Rate Proceedings.................................... 25
Restructuring of the Bulk Power Market................... 27
Competition.............................................. 27
Peak Load, Sales, Conservation, and Construction and
Generating Capacity.................................... 28
Selected Nonutility Subsidiary Financial Information..... 30
Statistical Data......................................... 32
Item 6 - Exhibits and Reports on Form 8-K.................. 33
Signatures................................................. 34
Computations of Earnings Per Common Share.................. 35
Computation of Ratios - Parent Company Only................ 36
Computation of Ratios - Fully Consolidated................. 37
Independent Accountants Awareness Letter................... 38
1
<TABLE>
Part I FINANCIAL INFORMATION
- ------ ---------------------
Item 1 CONSOLIDATED FINANCIAL STATEMENTS
- ------ ---------------------------------
POTOMAC ELECTRIC POWER COMPANY
Consolidated Statements of Earnings and Retained Income
(Unaudited)
-------------------------------------------------------
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, March 31,
-------------------- ----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
(Thousands of Dollars except Per Share Data)
<S> <C> <C> <C> <C>
Revenue
Sales of electricity $ 366,306 $ 369,653 $1,796,453 $1,811,818
Other electric revenue 3,537 4,833 9,733 12,252
--------- --------- ---------- ----------
Total Operating Revenue 369,843 374,486 1,806,186 1,824,070
Interchange deliveries 10,546 14,574 48,653 138,708
--------- --------- ---------- ----------
Total Revenue 380,389 389,060 1,854,839 1,962,778
--------- --------- ---------- ----------
Operating Expenses
Fuel 82,015 78,507 323,127 313,586
Purchased energy 40,428 51,074 189,915 305,751
Capacity purchase payments 39,962 35,944 154,930 129,452
Other operation 55,962 51,836 224,416 219,443
Maintenance 20,012 21,173 94,091 91,270
--------- --------- ---------- ----------
Total Operation and Maintenance 238,379 238,534 986,479 1,059,502
Depreciation and amortization 58,822 57,600 233,263 225,215
Income taxes 1,488 5,295 113,924 131,208
Other taxes 45,829 45,409 202,141 200,219
--------- --------- ---------- ----------
Total Operating Expenses 344,518 346,838 1,535,807 1,616,144
--------- --------- ---------- ----------
Operating Income 35,871 42,222 319,032 346,634
--------- --------- ---------- ----------
Other Income (Loss)
Nonutility Subsidiary
Income 36,063 39,807 121,396 137,460
Loss on assets held for disposal - - (2,022) (424)
Expenses, including interest
and income taxes (29,745) (26,357) (109,425) (109,160)
--------- --------- ---------- ----------
Net earnings from nonutility
subsidiary 6,318 13,450 9,949 27,876
Allowance for other funds used during
construction and capital cost recovery factor 250 1,660 5,298 6,495
Write-off of merger costs - - (52,533) -
Other, net 818 686 24,153 3,388
--------- --------- ---------- ----------
Total Other Income (Loss) 7,386 15,796 (13,133) 37,759
--------- --------- ---------- ----------
Income Before Utility Interest Charges 43,257 58,018 305,899 384,393
--------- --------- ---------- ----------
Utility Interest Charges
Long-term debt 34,427 34,744 135,250 134,416
Other 2,500 2,098 11,537 12,144
Allowance for borrowed funds used during
construction and capital cost recovery factor (1,202) (1,806) (7,268) (7,375)
--------- --------- ---------- ----------
Net Utility Interest Charges 35,725 35,036 139,519 139,185
--------- --------- ---------- ----------
Net Income 7,532 22,982 166,380 245,208
Dividends on Preferred Stock 4,140 4,145 16,573 16,590
--------- --------- ---------- ----------
Earnings for Common Stock 3,392 18,837 149,807 228,618
Retained Income at Beginning of Period 734,318 760,285 730,197 695,521
Dividends on Common Stock (49,158) (49,148) (196,625) (196,607)
Subsidiary Marketable Securities, Net
Unrealized Gain, Net of Tax 1,623 223 6,796 2,665
--------- --------- ---------- ----------
Retained Income at End of Period $ 690,175 $ 730,197 $ 690,175 $ 730,197
========= ========= ========== ==========
Basic Average Common Shares
Outstanding (000's) 118,511 118,499 118,503 118,498
Basic Earnings Per Common Share $0.03 $0.16 $1.26 $1.93
Diluted Average Common Shares
Outstanding (000's) 118,511 118,534 124,280 124,332
Diluted Earnings Per Common Share $0.03 $0.16 $1.26 $1.89
Cash Dividends Per Common Share $0.415 $0.415 $1.66 $1.66
Book Value Per Share $15.35 $15.69
Dividend Payout Ratio 131.7% 86.0%
Effective Federal Income Tax Rate 27.4% 25.9%
2
</TABLE>
<TABLE>
POTOMAC ELECTRIC POWER COMPANY
Consolidated Balance Sheets
(Unaudited at March 31, 1998 and 1997)
--------------------------------------
<CAPTION>
March 31, December 31, March 31,
ASSETS 1998 1997 1997
------ ------------- ------------- -------------
(Thousands of Dollars)
<S> <C> <C> <C>
Property and Plant - at original cost
Electric plant in service $ 6,401,759 $ 6,392,750 $ 6,244,707
Construction work in progress 97,951 94,309 74,292
Electric plant held for future use 4,253 4,231 4,170
Nonoperating property 22,827 22,824 22,976
------------- ------------- -------------
6,526,790 6,514,114 6,346,145
Accumulated depreciation (2,046,399) (2,027,780) (1,920,609)
------------- ------------- -------------
Net Property and Plant 4,480,391 4,486,334 4,425,536
------------- ------------- -------------
Current Assets
Cash and cash equivalents 6,118 5,630 1,263
Customer accounts receivable, less allowance
for uncollectible accounts of $2,171, $2,102
and $673 115,813 116,554 119,047
Other accounts receivable, less allowance for
uncollectible accounts of $300 35,106 32,256 30,491
Accrued unbilled revenue 63,640 69,259 62,976
Prepaid taxes 16,827 33,740 18,004
Other prepaid expenses 4,777 7,599 3,599
Material and supplies - at average cost
Fuel 56,164 59,434 74,243
Construction and maintenance 69,423 68,128 69,026
------------- ------------- -------------
Total Current Assets 367,868 392,600 378,649
------------- ------------- -------------
Deferred Charges
Income taxes recoverable through future rates, net 236,691 238,125 238,517
Conservation costs, net 217,093 221,528 229,684
Unamortized debt reacquisition costs 52,043 52,745 54,851
Other 158,538 148,900 168,268
------------- ------------- -------------
Total Deferred Charges 664,365 661,298 691,320
------------- ------------- -------------
Nonutility Subsidiary Assets
Cash and cash equivalents 4,473 422 53,280
Marketable securities 265,207 302,522 310,473
Investment in finance leases 461,541 463,592 493,761
Operating lease equipment, net of accumulated
depreciation of $123,478, $153,541 and $127,856 147,436 163,289 188,974
Assets held for disposal - - 5,900
Receivables, less allowance for uncollectible
accounts of $6,000 39,618 64,243 66,622
Other investments 171,236 162,865 185,880
Other assets 13,416 10,392 16,133
Deferred income taxes 51,014 - -
------------- ------------- -------------
Total Nonutility Subsidiary Assets 1,153,941 1,167,325 1,321,023
------------- ------------- -------------
Total Assets $ 6,666,565 $ 6,707,557 $ 6,816,528
============= ============= =============
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization
Common stock $ 118,527 $ 118,501 $ 118,497
Other common equity 1,700,539 1,744,527 1,740,630
Serial preferred stock 125,000 125,290 125,297
Redeemable serial preferred stock 141,000 141,000 142,500
Long-term debt 1,902,200 1,901,486 1,718,310
------------- ------------- -------------
Total Capitalization 3,987,266 4,030,804 3,845,234
------------- ------------- -------------
Other Non-Current Liabilities
Capital lease obligations 159,729 160,406 162,322
------------- ------------- -------------
Total Other Non-Current Liabilities 159,729 160,406 162,322
------------- ------------- -------------
Current Liabilities
Long-term debt and preferred stock
redemption due within one year 985 52,054 200,985
Short-term debt 225,000 131,375 173,540
Accounts payable and accrued expenses 174,163 185,893 143,565
Capital lease obligations due within one year 20,772 20,772 20,772
Other 89,184 92,293 79,939
------------- ------------- -------------
Total Current Liabilities 510,104 482,387 618,801
------------- ------------- -------------
Deferred Credits
Income taxes 1,033,509 1,029,318 986,453
Investment tax credits 56,396 57,308 60,045
Other 19,458 19,034 39,398
------------- ------------- -------------
Total Deferred Credits 1,109,363 1,105,660 1,085,896
------------- ------------- -------------
Nonutility Subsidiary Liabilities
Long-term debt 702,293 830,458 989,480
Short-term notes payable 113,195 7,685 1,000
Deferred taxes and other 84,615 90,157 113,795
------------- ------------- -------------
Total Nonutility Subsidiary Liabilities 900,103 928,300 1,104,275
------------- ------------- -------------
Total Capitalization and Liabilities $ 6,666,565 $ 6,707,557 $ 6,816,528
============= ============= =============
3
</TABLE>
<TABLE>
POTOMAC ELECTRIC POWER COMPANY
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, March 31,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating Activities
Income from utility operations $ 1,214 $ 9,532 $ 156,431 $ 217,332
Adjustments to reconcile income to net
cash from operating activities:
Depreciation and amortization 58,822 57,600 233,263 225,215
Deferred income taxes and investment tax credits 6,216 12,275 54,486 93,775
Deferred conservation costs (7,017) (7,644) (33,916) (41,219)
Allowance for funds used during construction
and capital cost recovery factor (1,452) (3,466) (12,566) (13,870)
Changes in materials and supplies 1,974 (5,496) 17,682 (6,534)
Changes in accounts receivable and accrued unbilled revenue 3,510 24,790 (2,045) 21,364
Changes in accounts payable (16,047) (21,180) 11,521 (17,406)
Changes in other current assets and liabilities 19,762 (1,165) 18,467 3,168
Changes in deferred merger costs - (4,546) 33,555 (26,941)
Net other operating activities (11,898) (5,324) (61,225) (23,899)
Nonutility subsidiary:
Net earnings 6,318 13,450 9,949 27,876
Deferred income taxes (52,104) (21,738) (94,125) (23,412)
Loss on assets held for disposal - - 2,022 424
Changes in other assets and net other operating activities 24,781 28,565 59,932 31,045
--------- --------- --------- ---------
Net Cash From Operating Activities 34,079 75,653 393,431 466,918
--------- --------- --------- ---------
Investing Activities
Total investment in property and plant (38,294) (42,609) (227,429) (195,108)
Allowance for funds used during construction
and capital cost recovery factor 1,452 3,466 12,566 13,870
--------- --------- --------- ---------
Net investment in property and plant (36,842) (39,143) (214,863) (181,238)
Nonutility subsidiary:
Purchase of marketable securities (500) (23,133) (12,470) (31,561)
Proceeds from sale or redemption of marketable securities 40,316 95,502 69,814 149,853
Investment in leased equipment - (7,480) - (10,536)
Proceeds from sale or disposition of leased equipment 11,000 - 39,484 3,658
Proceeds from sale of assets held for disposal - - - 9,654
Proceeds from sale of assets - 1,600 5,700 1,315
Purchase of other investments (12,641) (15,963) (17,281) (38,029)
Proceeds from sale or distribution of other investments 2,665 4,723 16,672 37,205
Investment in promissory notes - (12) - (1,664)
Proceeds from promissory notes - 30,019 34,101 44,714
--------- --------- --------- ---------
Net Cash From (Used By) Investing Activities 3,998 46,113 (78,843) (16,629)
--------- --------- --------- ---------
Financing Activities
Dividends on common stock (49,158) (49,148) (196,625) (196,607)
Dividends on preferred stock (4,140) (4,145) (16,573) (16,590)
Redemption of preferred stock (64) - (1,564) -
Issuance of long-term debt - - 182,267 99,500
Reacquisition and retirement of long-term debt (51,069) (1,460) (201,071) (26,480)
Short-term debt, net 93,625 42,150 51,460 (113,400)
Other financing activities (77) (196) (1,442) (4,823)
Nonutility subsidiary:
Issuance of long-term debt 10,660 - 50,660 105,000
Repayment of long-term debt (138,825) (6,752) (337,847) (185,058)
Short-term debt, net 105,510 (50,650) 112,195 (72,233)
--------- --------- --------- ---------
Net Cash Used By Financing Activities (33,538) (70,201) (358,540) (410,691)
--------- --------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 4,539 51,565 (43,952) 39,598
Cash and Cash Equivalents at Beginning of Period 6,052 2,978 54,543 14,945
--------- --------- --------- ---------
Cash and Cash Equivalents at End of Period $ 10,591 $ 54,543 $ 10,591 $ 54,543
========= ========= ========= =========
Cash paid for interest (net of capitalized interest) and income taxes:
Interest (including nonutility subsidiary
interest of $27,374, $31,331, $67,535 and $79,920) $ 67,181 $ 73,246 $ 196,689 $ 211,421
Income taxes $ - $ 1,761 $ 10,714 $ 27,732
4
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
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 1997
Annual Report to the Securities and Exchange Commission on Form
10-K.
Certain 1997 amounts have been reclassified to conform to
the current year presentation.
(1) COMPREHENSIVE INCOME
--------------------
Effective January 1, 1998, the Company implemented Statement
of Financial Accounting Standards (SFAS) No. 130 entitled
"Reporting Comprehensive Income." This pronouncement establishes
standards for reporting and display of comprehensive income and
its components. The Company's components of comprehensive income
are net income, and unrealized gains and losses on marketable
securities. Comprehensive income totaled $9.2 million and $173.2
million for the three and twelve months ended March 31, 1998,
compared to $23.2 million and $247.9 million in the corresponding
periods ended March 31, 1997.
5
<TABLE>
(2) INCOME TAXES
- ----------------
Provision for Income Taxes
- --------------------------
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, March 31,
------------------------- -----------------------
1998 1997 1998 1997
---------- ---------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Utility current tax expense
Federal $ (3,500) $ (6,443) $ 35,195 $ 32,273
State and local (1,066) (851) 4,476 4,653
---------- ---------- --------- ---------
Total utility current tax expense (4,566) (7,294) 39,671 36,926
---------- ---------- --------- ---------
Utility deferred tax expense
Federal 5,549 11,403 50,424 85,885
State and local 1,579 1,784 7,711 11,539
Investment tax credits (912) (912) (3,649) (3,649)
---------- ---------- --------- ---------
Total utility deferred tax expense 6,216 12,275 54,486 93,775
---------- ---------- --------- ---------
Total utility income tax expense 1,650 4,981 94,157 130,701
---------- ---------- --------- ---------
Nonutility subsidiary current tax expense
Federal 14,241 7,206 37,456 (7,012)
Nonutility subsidiary deferred tax expense
Federal (14,705) (20,188) (56,788) (21,833)
---------- ---------- --------- ---------
Total nonutility subsidiary income tax expense (464) (12,982) (19,332) (28,845)
---------- ---------- --------- ---------
Total consolidated income tax expense 1,186 (8,001) 74,825 101,856
Income taxes included in other income (302) (13,296) (39,099) (29,352)
---------- ---------- --------- ---------
Income taxes included in utility operating expenses $ 1,488 $ 5,295 $ 113,924 $ 131,208
========== ========== ========= =========
6
</TABLE>
<TABLE>
Reconciliation of Consolidated Income Tax Expense
- -------------------------------------------------
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, March 31,
------------------------- -----------------------
1998 1997 1998 1997
---------- ------------ --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Income before income taxes $ 8,718 $ 14,981 $ 241,205 $ 347,064
========== ========== ========= =========
Utility income tax at federal
statutory rate $ 1,003 $ 5,079 $ 87,707 $ 121,811
Increases (decreases) resulting from
Depreciation 2,765 2,522 11,096 9,847
Removal costs (1,259) (1,392) (5,769) (4,658)
Allowance for funds used during
construction 213 205 867 762
Other (494) (1,128) (3,797) (3,705)
State income taxes, net of federal effect 334 607 7,921 10,525
Tax credits (912) (912) (3,868) (3,881)
---------- ---------- --------- ---------
Total utility income tax expense 1,650 4,981 94,157 130,701
---------- ---------- --------- ---------
Nonutility subsidiary income tax at federal
statutory rate 2,049 164 (3,285) (339)
Decreases resulting from
Dividends received deduction (1,235) (1,522) (5,132) (7,000)
Reversal of previously accrued deferred taxes - (10,125) - (17,423)
Other (1,278) (1,499) (10,915) (4,083)
---------- ---------- --------- ---------
Total nonutility subsidiary income tax credit (464) (12,982) (19,332) (28,845)
---------- ---------- --------- ---------
Total consolidated income tax expense 1,186 (8,001) 74,825 101,856
Income taxes, included in other income (302) (13,296) (39,099) (29,352)
---------- ---------- --------- ---------
Income taxes included in utility operating expenses $ 1,488 $ 5,295 $ 113,924 $ 131,208
========== ========== ========= =========
7
</TABLE>
<TABLE>
Components of Consolidated Deferred Tax Liabilities (Assets)
- ------------------------------------------------------------
<CAPTION>
Mar. 31, Dec. 31, Mar. 31,
1998 1997 1997
---------- ---------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
Utility deferred tax liabilities (assets)
Depreciation and other book to tax
basis differences $ 877,258 $ 869,343 $ 832,877
Rapid amortization of certified pollution
control facilities 25,395 25,445 24,426
Deferred taxes on amounts to be collected
through future rates 89,611 90,154 90,302
Property taxes 13,574 13,525 12,878
Deferred fuel (6,082) (7,369) (14,855)
Prepayment premium on debt retirement 19,696 19,962 20,759
Deferred investment tax credit (21,351) (21,697) (22,733)
Contributions in aid of construction (30,233) (30,054) (28,811)
Contributions to pension plan 18,157 18,157 16,170
Conservation costs (demand side management) 47,105 48,041 43,435
Other 19,328 21,683 21,701
---------- ---------- ---------
Total utility deferred tax liabilities, net 1,052,458 1,047,190 996,149
Current portion of utility deferred tax liabilities
(included in Other Current Liabilities) 18,949 17,872 9,696
---------- ---------- ---------
Total utility deferred tax liabilities, net - non-current $1,033,509 $1,029,318 $ 986,453
========== ========== =========
Nonutility subsidiary deferred tax liabilities (assets)
Finance leases $ 112,885 $ 119,448 $ 142,572
Operating leases 23,949 28,823 39,192
Alternative minimum tax (97,109) (97,109) (97,109)
Assets with a tax basis greater than book basis (38,882) 0 0
Other (51,857) (50,947) (45,204)
---------- ---------- ---------
Total nonutility subsidiary deferred tax liabilities
(assets), net $ (51,014) $ 215 $ 39,451
========== ========== =========
8
</TABLE>
(3) CAPITALIZATION AND FAIR VALUE OF FINANCIAL INSTRUMENTS
------------------------------------------------------
Common Equity
- -------------
At March 31, 1998, 118,527,287 shares of the Company's $1
par value Common Stock were outstanding. A total of 200 million
shares is authorized. As of March 31, 1998, 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.
Serial Preferred, Redeemable Serial Preferred and Preference
- ------------------------------------------------------------
Stock and Long-Term Debt
------------------------
At March 31, 1998, the Company had outstanding 5,339,696
shares of its $50 par value Serial Preferred Stock, including the
Redeemable Serial Preferred Stock. A total of 11,095,501 shares
is authorized. At March 31, 1998, the aggregate annual dividend
requirements on the Serial Preferred Stock and the Redeemable
Serial Preferred Stock were approximately $6.3 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.
At March 31, 1998, the Company had outstanding one million
shares of its Serial Preferred Stock, Auction Series A. The
annual dividend rate is 4.087% ($2.0435) for the period March 1,
1998, through May 31, 1998. For the period December 1, 1997,
through February 28, 1998, the annual dividend rate was 4.374%
($2.187). The average rate at which dividends were paid during
the twelve months ended March 31, 1998, was 4.26% ($2.13).
At March 31, 1998, 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
requires redemption, beginning June 1993, at par, of not less
than 30,000 nor more than 60,000 shares annually.
On March 1, 1998, the Company redeemed the remaining 1,278
shares of serial preferred stock, $2.44 convertible series of
1966, at $50 per share.
9
On April 22, 1998, the Company announced the redemption on
June 1, 1998, of 60,000 shares of serial preferred stock, $3.37
series of 1987, at $50 per share for sinking fund purposes. The
Company further announced the redemption on June 1, 1998, in
accordance with their terms of all of the 779,696 shares
remaining after the sinking fund redemption of serial preferred
stock, $3.37 series of 1987, at $51.13 per share; all of the
500,000 shares of serial preferred stock, $3.82 series of 1969,
at $51.00 per share; and all of the 1,000,000 shares of $3.89
series of 1991, at $53.89 per share. Sinking fund requirements
through 2002 with respect to the one series of Redeemable Serial
Preferred Stock that will remain outstanding following the above
redemptions are $2.5 million in 2002.
The estimated fair values of the Company's financial
instruments at March 31, 1998, are summarized below:
Carrying Fair
Amount Value
---------- ----------
(Thousands of Dollars)
Utility
Capitalization and Liabilities
Serial preferred stock $ 125,000 $ 125,298
========== ==========
Redeemable serial preferred stock $ 141,000 $ 146,270
========== ==========
Long-term debt
First mortgage bonds (net of
unamortized premium and
discount of $14,141) $1,452,659 $1,493,501
Medium-term notes (net of
unamortized discount of $1,884) 281,206 289,953
Convertible debentures (net of
unamortized discount of $9,501) 168,335 175,435
---------- ----------
Total long-term debt $1,902,200 $1,958,889
========== ==========
Nonutility Subsidiary
Assets
Marketable securities $ 265,207 $ 265,207
========== ==========
Notes receivable $ 26,433 $ 22,997
========== ==========
Liabilities
Long-term debt $ 702,293 $ 710,554
========== ==========
10
At March 31, 1998, the aggregate annual interest requirement
on the Company's long-term debt, including debt due within one
year, was $130.4 million; and the aggregate amounts of long-term
debt maturities are $45 million in 1999, $100 million in 2000,
$165 million in 2001 and $190 million in 2002.
On February 15, 1998, the Company redeemed, at maturity, $50
million of 4-3/8% First Mortgage Bonds.
Nonutility Subsidiary Long-Term Debt
- ------------------------------------
Long-term debt at March 31, 1998, consisted primarily of
unsecured borrowings from institutional lenders. The interest
rates of such borrowings ranged from 5% to 10.1%. The weighted
average effective interest rate was 7.41% at March 31, 1998,
7.48% at December 31, 1997, and 7.45% at March 31, 1997. Annual
aggregate principal repayments on these borrowings are $163.7
million in 1998, $170 million in 1999, $122.5 million in 2000,
$71.5 million in 2001, $93 million in 2002 and $31.2 million
thereafter. Also included in long-term debt is $50.4 million of
non-recourse debt which is due in monthly installments with final
maturities in 2001, 2002 and 2011.
Nonutility Subsidiary Contractual Maturities
- --------------------------------------------
At March 31, 1998, the contractual maturities for mandatory
redeemable preferred stock are $4.5 million within one year,
$104.1 million from one to five years, $88.3 million from five to
10 years and $55.4 million for over 10 years.
11
<TABLE>
- ----------------------------------
Reconciliations of the numerator and denominator for basic and
diluted earnings per common share are shown below.
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, March 31,
1998 1997 1998 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
(Thousands except Per Share Data)
Income (Numerator):
Earnings applicable to common stock $3,392 $18,837 $149,807 $228,618
Add: Dividends paid or accrued on
Convertible Preferred Stock - <F1> 4 13 15
Interest paid or accrued on
Convertible Debentures,
net of related taxes - <F1> - <F1> 6,343 6,406
------- ------- -------- --------
Earnings applicable to common stock,
assuming conversion of convertible
securities $3,392 $18,841 $156,163 $235,039
======= ======= ======== ========
Shares (Denominator):
Average shares outstanding for
computation of basic earnings
per common share 118,511 118,499 118,503 118,498
======= ======= ======== ========
Average shares outstanding for
diluted computation:
Average shares outstanding 118,511 118,499 118,503 118,498
Additional shares resulting from:
Conversion of Serial Preferred
Stock, $2.44 Convertible Series
of 1966 (the "Convertible
Preferred Stock") - <F1> 35 29 35
Conversion of 7% Convertible
Debentures - <F1> - <F1> 2,355 2,406
Conversion of 5% Convertible
Debentures - <F1> - <F1> 3,393 3,393
------- ------- -------- --------
Average shares outstanding for
computation of diluted
earnings per common share 118,511 118,534 124,280 124,332
======= ======= ======== ========
Basic earnings per common share $0.03 $0.16 $1.26 $1.93
Diluted earnings per common share $0.03 $0.16 $1.26 $1.89
<FN>
<F1> These amounts are not reflected in the computation of diluted EPS
because the effects are antidilutive and would increase diluted EPS.
</FN>
12
</TABLE>
(4) COMMITMENTS AND CONTINGENCIES
-----------------------------
Labor Agreement
- ---------------
In January 1998, the Company and Local 1900 of the
International Brotherhood of Electrical Workers, extended their
1993 Labor Agreement, which was due to expire on June 1, 1998,
for one year. Members of Local 1900 received a 2.5% lump sum
payment in February 1998, which totaled $2.9 million. All other
provisions of the 1993 agreement remain the same.
On April 22, 1998, the Company announced that it is offering
a targeted severance plan to exempt, non-bargaining and
bargaining unit employees who lose employment due to corporate
restructuring and/or job consolidations. The severance will
first be offered on a voluntary basis to full-time employees in
job classifications in which the Company expects reductions, and
will ultimately be offered to all employees who involuntarily
lose employment. Participants will receive two weeks of pay per
year of service, with a minimum payment of eight weeks of pay.
In addition, participants will receive subsidized health and
dental insurance for one month for every two years of service,
with a maximum of eighteen months of insurance coverage.
Applicable costs for employees who accept the Company's offer
will be accrued in the second quarter of 1998.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
This Quarterly Report on Form 10-Q, including the report of
Price Waterhouse LLP (on page 14) will automatically be
incorporated by reference in the Prospectuses constituting parts
of the Company's Registration Statements on Forms S-3 (Numbers
33-58810, 33-61379, 333-33495 and 333-51241) and Forms S-8
(Numbers 33-36798, 33-53685 and 33-54197), filed under the
Securities Act of 1933. Such report of Price Waterhouse LLP,
however, is not a "report" or "part of the Registration
Statement" within the meaning of Sections 7 and 11 of the
Securities Act of 1933 and the liability provisions of Section
11(a) of such Act do not apply.
13
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 subsidiary (the
Company) at March 31, 1998 and 1997, and the related consolidated
statements of earnings and retained income for the three and
twelve month periods then ended and the consolidated statements
of cash flows for the three and twelve month periods then ended.
These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying financial
information for it to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of December
31, 1997, 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 16, 1998, 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, 1997, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been
derived.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Washington, D.C.
May 13, 1998
14
Part I FINANCIAL INFORMATION
- ------ ---------------------
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
- ------ ----------------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
FORWARD LOOKING STATEMENTS
- --------------------------
This Management's Discussion and Analysis of Consolidated
Results of Operations and Financial Condition contains forward
looking statements, as defined by the Private Securities
Litigation Act of 1995, with regard to matters that could have an
impact on the future operations, financial results or financial
condition of the Company. These statements are based on the
current expectations, estimates or projections of management and
are not guarantees of future performance. Actual results may
differ materially from those anticipated by the forward looking
statements, depending on the occurrence or nonoccurrence of
future events or conditions that are difficult to predict and
generally are beyond the control of the Company. All such
forward looking statements relating to the following matters are
qualified by the cautionary statements below and contained
elsewhere herein.
GROWTH IN DEMAND, SALES AND CAPACITY TO FULFILL DEMAND
The actual growth in demand for and sales of electricity
within the Company's service territory may vary from the
statements made concerning the anticipated growth in demand and
sales, depending upon a number of factors, including weather
conditions, the competitive environment, general economic
conditions and the demographics of the Company's service
territory. Future construction expenditures (including the need
to construct additional generation capacity) may vary from the
projections, depending on the accuracy of management's
expectations regarding growth in demand for and sales of
electricity, regulatory developments and the evolution of the
competitive marketplace for electricity.
COMPETITION
Increased competition will have an impact on future results
of operations, which may be adverse, and will depend, among other
factors, upon governmental policies and regulatory actions,
including those of the Federal Energy Regulatory Commission
(FERC) and the Maryland and District of Columbia public service
commissions, future economic conditions and the influence exerted
by emerging market forces over the structure of the electric
industry.
15
UTILITY
- -------
RESULTS OF OPERATIONS
- ---------------------
TOTAL REVENUE
Total revenue decreased for the three and twelve months
ended March 31, 1998, as compared to the corresponding periods in
1997. The decrease in revenue from sales of electricity for the
three month period ended March 31, 1998, compared to the
corresponding period in 1997, was primarily due to unusually mild
weather, which resulted in a 2% decrease in kilowatt-hour sales
from the corresponding 1997 period. As measured in heating
degree days, the winter weather in the first quarter of 1998 was
4% warmer than in 1997 and 17% warmer than the 20-year average.
Although kilowatt-hour sales for the twelve months ending March
31, 1998, were unchanged from the corresponding period in 1997,
revenue from the sale of electricity decreased, reflecting the
reduction in the Maryland Demand Side Management (DSM) surcharge
tariff, partially offset by an increase of 2.6% in Maryland base
rates pursuant to a November 1997 settlement agreement. The
decrease in the Maryland DSM surcharge tariff, which became
effective June 6, 1997, 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 for achieving 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 for
achieving 1995 energy saving goals.
Interchange deliveries decreased for the three and twelve
months ended March 31, 1998, as compared to the corresponding
periods in 1997. The decrease for the three month period ended
March 31, 1998, reflects the decrease in the level of bilateral
energy transactions under the Company's wholesale power sales
tariff. The decrease for the twelve month period ended March 31,
1998, reflects the termination in January 1997, of purchase-for-
resale agreements, where the Company purchased energy from one
party for the purpose of selling that energy to a third party.
In January 1997, the Company implemented an open access
transmission tariff (OATT) and in April 1997, the Pennsylvania-
New Jersey-Maryland Interconnection LLC (PJM) implemented an OATT
on behalf of its transmission owners, replacing the Company's
tariff. Under these tariffs, the Company has received point-to-
point transmission service revenue, which is classified as "Other
electric revenue," and which totaled $.2 million and $1 million
in the three and twelve months ended March 31, 1998, and $1.4
million for each corresponding period in 1997. The benefits
derived from interchange deliveries, capacity sales in the
16
District of Columbia 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 $(2,500) (1.8)% January 1998
Maryland 24,000 2.6 November 1997
See Part II, Item 5, Base Rate Proceedings, for additional
information.
OPERATING EXPENSES
Fuel and purchased energy decreased for the three and twelve
months ended March 31, 1998, as compared to the corresponding
periods ended March 31, 1997. Fuel expense increased for the
three and twelve months ended March 31, 1998, as compared to the
corresponding periods in 1997, primarily due to increases of 8.7%
and 9.3%, respectively, in net generation. The decrease in
purchased energy for the three months ended March 31, 1998,
reflects changes in levels and prices of energy purchased from
PJM and other utilities and power marketers. The decrease in
purchased energy for the twelve months ended March 31, 1998,
reflects the termination in January 1997, of purchase-for-resale
agreements.
The unit fuel costs for the comparative periods ended
March 31, were as follows:
Three Twelve
Months Ended Months Ended
March 31, March 31,
------------- -------------
1998 1997 1998 1997
----- ----- ----- -----
System Average
Fuel Cost per MBTU $1.79 $1.83 $1.83 $1.80
System average unit fuel cost decreased for the three months
ended March 31, 1998, as compared to the corresponding period in
1997, primarily due to a decrease in the cost of residual oil and
an increase in the percent of residual oil's contribution to the
fuel mix. System average unit fuel cost increased for the twelve
months ended March 31, 1998, as compared to the corresponding
period in 1997, due to an increase in the cost of coal.
17
For the twelve month periods ended March 31, 1998 and 1997,
the Company obtained 89% and 90%, 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 and
twelve months ended March 31, 1998, as compared to the
corresponding periods in 1997. These increases reflect capacity
payments made under the Panda contract, which commenced January
1, 1997.
Operating expenses other than fuel, purchased energy and
capacity purchase payments increased for the three and twelve
months ended March 31, 1998, as compared to the corresponding
periods in 1997, primarily due to increases in other operation
and maintenance expenses resulting from increased labor costs,
and increases in depreciation and amortization expense associated
with additional investment in property and plant; partially
offset by decreased income taxes due to lower taxable income.
As discussed in the 1997 Form 10-K, the Company has
implemented an approach to address compliance with year 2000
processing requirements of its computer systems. The preliminary
target date for completion of the necessary modifications is mid-
1999. The costs of expected modifications will be approximately
$10 million, and will be charged to expense as incurred; through
March 31, 1998, $2.1 million has been charged to expense.
Approximately $.9 million has been expensed in the three months
ended March 31, 1998.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
The Company's investment in property and plant, at original
cost before accumulated depreciation, was $6.5 billion at
March 31, 1998, an increase of $12.7 million from the investment
at December 31, 1997, and an increase of $180.6 million from the
investment at March 31, 1997. Cash invested in property and
plant construction, excluding AFUDC and CCRF, amounted to $36.8
million for the three months ended March 31, 1998, and $214.9
million for the twelve months then ended.
At March 31, 1998, the Company's capital structure,
excluding short-term debt and serial preferred stock redemption
due within one year, and nonutility subsidiary debt, consisted of
47.7% long-term debt, 3.1% serial preferred stock, 3.6%
redeemable serial preferred stock and 45.6% common equity.
18
Cash from utility operations, after dividends, was $1.8
million for the three months ended March 31, 1998, and $202.5
million for the twelve months then ended as compared with $2.1
million and $217.8 million, respectively, for the corresponding
periods ended March 31, 1997.
The Company's current annual dividend on common stock is
$1.66 per share. The dividend rate is determined by the
Company's Board of Directors and takes into consideration, among
other factors, current and possible future developments which may
affect the Company's income and cash flow levels. The Company
has no current plans to change the dividend; however, there can
be no assurance that the $1.66 dividend rate will be in effect in
the future.
On March 1, 1998, the Company redeemed the remaining 1,278
shares of serial preferred stock, $2.44 convertible series of
1966, at $50 per share.
On April 22, 1998, the Company announced the redemption on
June 1, 1998, of 60,000 shares of serial preferred stock, $3.37
series of 1987, at $50 per share for sinking fund purposes. The
Company further announced the redemption on June 1, 1998, in
accordance with their terms of all of the 779,696 shares
remaining after the sinking fund redemption of serial preferred
stock, $3.37 series of 1987, at $51.13 per share; all of the
500,000 shares of serial preferred stock, $3.82 series of 1969,
at $51.00 per share; and all of the 1,000,000 shares of $3.89
series of 1991, at $53.89 per share.
On February 19, 1998, the Company applied for a 10.5%
increase in the Maryland fuel rate. The proposed rate became
effective March 1, 1998, subject to refund.
Outstanding utility short-term debt totaled $225 million at
March 31, 1998, an increase of $93.6 million from the $131.4
million outstanding at December 31, 1997, and an increase of
$51.5 million from the $173.5 million outstanding at March 31,
1997. See the discussion included in Note (3) of the Notes to
Consolidated Financial Statements, Capitalization and Fair Value
of Financial Instruments, for additional information.
NONUTILITY SUBSIDIARY
- ---------------------
RESULTS OF OPERATIONS
- ---------------------
PCI's earnings for the three and twelve months ended March
31, 1998 were $6.3 million ($.05 per share) and $9.9 million
($.08 per share), respectively, compared with $13.5 million ($.11
per share) and $27.9 million ($.24 per share) for the same
periods ended March 31, 1997. The decreases in earnings for the
19
three and twelve months ended March 31, 1998, from the
corresponding periods in 1997, were primarily the result of first
quarter 1997 joint venture operations that reduced PCI's
obligation for previously accrued deferred income taxes,
resulting in after-tax earnings of $7.4 million after the
provision for transaction costs; and capital gains which totaled
$5.3 million pre-tax ($3.4 million after-tax) and $7.3 million
pre-tax ($4.7 million after-tax) for the three and twelve month
periods ended March 31, 1997, respectively, compared to zero and
$1.6 million pre-tax ($1 million after-tax) for the corresponding
periods in 1998. During the first quarter of 1998, PCI sold a B-
747 aircraft on lease to Continental Airlines and recorded after-
tax earnings of $1.3 million. Also during the first quarter of
1998, PCI sold undeveloped land and recorded an after-tax gain of
$2 million.
Currently, PCI generates income primarily from its leasing
activities and securities investments. Income from leasing
activities, which includes rental income, gains on asset sales,
interest income and fees, totaled $21.7 million and $76.2 million
for the three and twelve months ended March 31, 1998,
respectively, compared to $21.1 million and $88.9 million for the
corresponding periods in 1997. The increase for the three month
period ended March 31, 1998, over the corresponding period in
1997 was primarily due to the gain on sale of the B-747 aircraft
in the first quarter of 1998 offset by a decrease in interest
income as a result of sales of aircraft notes receivable during
1997. The decrease for the twelve-month period ended March 31,
1998, from the corresponding period in 1997 was primarily due to
reduced interest income and rental income. PCI's marketable
securities portfolio contributed pre-tax income of $4.6 million
and $21.5 million for the three and twelve months ended March 31,
1998, respectively, compared to $11.7 million and $35.4 million
for the corresponding periods in 1997. These results include net
realized gains of zero and $1.6 million for the three and twelve
months ended March 31, 1998, respectively, compared to $5.3
million and $7.3 million for the three and twelve months ended
March 31, 1997, respectively. Securities income also decreased
for the three and twelve months ended March 31, 1998, due to a
decrease in dividend income as a result of the reduction in the
preferred stock portfolio.
Other income increased by $2.8 million and $10.5 million for
the three and twelve months ended March 31, 1998, respectively,
compared to the corresponding periods in 1997. The increase for
the three months ended March 31, 1998, over the corresponding
period in 1997 was primarily the result of the $3.1 million gain
on the sale of real estate during the first quarter of 1998. The
increase for the twelve month period ended March 31, 1998, over
the corresponding period in 1997, was due to the real estate sale
and to an increase in revenue of approximately $8.8 million
related to PCI's operating subsidiary Pepco Services, Inc.
20
Expenses before income taxes, which include interest,
depreciation and operating, and administrative and general
expenses totaled $30.2 million and $130.8 million for the three
and twelve months ended March 31, 1998, respectively, compared to
$39.3 million and $138.4 million for the corresponding periods in
1997. The decreases during the three and twelve months ended
March 31, 1998, compared to the corresponding periods in 1997,
were primarily due to decreased interest expense as a result of
reduced debt outstanding, as proceeds from sales of aircraft and
marketable securities were used to pay down debt. Expenses
before income taxes for the three and twelve months ended March
31, 1998, also decreased from the corresponding periods in 1997
due to the reductions in administrative and general expenses
relating primarily to one-time transactions closed during 1996
and the first quarter of 1997.
PCI had income tax credits of $.5 million and $19.3 million
for the three and twelve months ended March 31, 1998,
respectively, compared to $13 million and $28.8 million for the
corresponding periods in 1997. The decreases in income tax
credits for the three and twelve month periods ended March 31,
1998 from 1997 were primarily the result of first quarter 1997
joint venture operations that reduced previously accrued deferred
taxes by $10.1 million.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
PCI has a $265.2 million securities portfolio, consisting
primarily of fixed-rate electric utility preferred stocks.
During the first quarter of 1998, PCI had a net reduction in the
cost basis of its marketable securities portfolio of $39.8
million, primarily as the result of calls and acceptance of
tender offers of approximately $40.3 million offset by purchases
of $.5 million. The reduced size of the preferred stock
portfolio lessens the impact of future fluctuations in interest
rates. The proceeds from securities activity during the first
quarter of 1998 were used to pay down short-term debt. PCI also
received $11 million in cash proceeds from the sale of a B-747
aircraft during the first quarter of 1998. In April 1998, PCI
sold two aircraft, a B-747 on operating lease to United Airlines
and an MD-82 on direct finance lease to Continental Airlines, for
$50.3 million and recorded an after-tax gain of $4.1 million.
PCI had short-term debt outstanding of $113.2 million at
March 31, 1998, compared to $7.7 million at December 31, 1997 and
$1 million at March 31, 1997. During 1998, PCI issued $10.7
million in long-term debt, including non-recourse debt, and debt
repayments totaled $138.8 million. At March 31, 1998, PCI had
$187.3 million available under its Medium-Term Note Program and
$400 million of unused bank credit lines. PCI completed a new
series Medium-Term Note facility during April 1998, providing up
to $700 million of future debt issuances.
21
As of March 31, 1998, PCI has invested $12.5 million of its
total $150 million commitment to Starpower Communications, LLC, a
joint venture with RCN Telecom Services, Inc. (RCN) of Princeton,
N.J. Starpower has recently launched its local and long distance
telephone and dial-up internet service in the Washington, D.C.
area and will add video and high speed internet as it builds out
its fiber optic network.
NEW ACCOUNTING STANDARDS
- ------------------------
Effective January 1, 1998, the Company implemented Statement
of Financial Accounting Standards (SFAS) No. 130 entitled
"Reporting Comprehensive Income." See the discussion included in
Note (1) of the Notes of Consolidated Financial Statements.
In February 1998, the Financial Accounting Standards Board
issued SFAS No. 132 entitled "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which will become
effective for the Company's 1998 calendar year financial
statements. SFAS No. 132 will standardize, consolidate and
supersede the disclosure requirements of SFAS No. 87 (Employers'
Accounting for Pensions), SFAS No. 88 (Employers' Accounting for
Settlements and Curtailments of Deferred Pension Plans and for
Termination Benefits) and SFAS No. 106 (Employers' Accounting for
Postretirement Benefits Other Than Pensions). SFAS No. 132 does
not impact liability recognition or measurement.
In March 1998, the Accounting Standards Executive Committee
of the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1 entitled "Accounting for the
Costs of Computer Software Developed or Obtained for Internal
Use." This pronouncement will become effective January 1, 1999.
The Company is evaluating SOP 98-1 to determine the impact, if
any, on its accounting for internal use software costs.
22
Part II OTHER INFORMATION
- ------- -----------------
Item 1 LEGAL PROCEEDINGS
- ------ -----------------
See the discussion of Environmental Matters under Item 1 -
Business of the Company's 1997 Form 10-K.
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
(a) Annual meeting of shareholders held April 22, 1998.
(b) (1) Directors who were elected at the annual meeting:
For Term Expiring in 1999:
Edmund B. Cronin, Jr. Votes cast for: 103,044,821
Votes withheld: 3,828,171
For Term Expiring in 2001:
John M. Derrick, Jr. Votes cast for: 102,941,206
Votes withheld: 3,931,786
Peter F. O'Malley Votes cast for: 102,899,133
Votes withheld: 3,973,859
Louis A. Simpson Votes cast for: 102,968,688
Votes withheld: 3,904,304
Dennis R. Wraase Votes cast for: 102,972,320
Votes withheld: 3,900,672
(2) Directors whose terms of office continued after the
annual meeting:
Roger R. Blunt, Sr. Ann D. McLaughlin
Richard E. Marriott Edward F. Mitchell
David O. Maxwell A. Thomas Young
Floretta D. McKenzie
(c) Approval of Long-Term Incentive Plan:
The proposal passed. There were 92,569,739 votes cast in
favor of the proposal, 11,501,895 votes cast against the
proposal, 2,800,553 votes abstaining and 805 broker
nonvotes.
23
(d) The following two shareholder proposals were introduced:
(1) "RESOLVED: That the shareholders of PEPCO recommend
that the Board of Directors take the necessary steps to
reinstate the election of directors ANNUALLY, instead of the
staggered system which was recently adopted."
The following statement has been supplied by the
shareholder submitting this proposal:
"REASONS: Until recently, directors of PEPCO were
elected annually by all shareholders."
"The great majority of New York Stock Exchange
listed corporations elect all their directors each year."
"This insures that ALL directors will be more
accountable to ALL shareholders each year and to a certain
extent prevents the self-perpetuation of the Board."
"Last year the owners of 28,159,771 shares,
representing 33.7% of shares voting, voted FOR this
proposal."
The shareholder proposal was defeated. There were
57,776,384 votes cast against the proposal, 28,275,236 votes cast
in support of the proposal, 3,971,094 votes abstaining and
16,850,278 broker nonvotes.
(2) "BE IT RESOLVED: That the stockholders of Potomac
Electric Power Co. (PEPCO), ("Company"), assembled in annual
meeting in person and by proxy, hereby request that the
Board of Directors to take the steps necessary to provide
for cumulative voting in the election of directors, which
means each stockholder shall be entitled to as many votes as
shall equal the number of shares he or she owns, multiplied
by the number of directors to be elected, and he or she may
cast all of such votes for a single candidate, or any two or
more candidates as he or she may see fit."
The following statement has been supplied by the
shareholder submitting this proposal:
"REASONS: Cumulative voting is one of the few ways
stockholders can attempt to elect members who they believe
represent their views."
"Cumulative voting maximizes a stockholder's voting
power by allowing him or her to concentrate their votes for
a single nominee or combination of nominees. For example,
PEPCO has a Classified Board, which means that only four
directors are elected in any given year. Without cumulative
24
voting, the owners of 13% of the company's stock do not have
a realistic chance of electing a director. They would only
be able to cast their 13% for each nominee. However, with
cumulative voting, those same owners would be able to
actually elect a nominee by lumping all of their votes for
that nominee."
"Even if dissident stockholders do not have enough
votes to elect nominees, cumulative voting ensures that
management and the Board will consider their views."
The shareholder proposal was defeated. There were
64,214,375 votes cast against the proposal, 21,146,705 votes cast
in support of the proposal, 4,643,214 votes abstaining and
16,868,698 broker nonvotes.
Item 5 OTHER INFORMATION
- ------ -----------------
OTHER FINANCING ARRANGEMENTS - Credit Agreements
- ------------------------------------------------
The Company and PCI satisfy their short-term financing
requirements through the sale of commercial promissory notes.
The Company and PCI maintain minimum 100 percent lines of credit
back-up, in the amounts of $225 million and $400 million,
respectively, for their outstanding commercial promissory notes.
These lines of credit were unused during 1998 and 1997.
BASE RATE PROCEEDINGS
- ---------------------
Maryland
- --------
As discussed in the 1997 Form 10-K, on November 25, 1997,
the Maryland Public Service Commission authorized a $24 million,
or 2.6%, increase in base rate revenues effective with bills
rendered on and after November 30, 1997. Also, effective June 6,
1997, the Maryland DSM surcharge tariff was lowered, which will
reduce annual revenues by approximately $17 million.
District of Columbia
- --------------------
As discussed in the 1997 Form 10-K, the District of Columbia
Public Service Commission authorized a $27.9 million, or 3.8%,
increase in base rate revenues, effective July 1995.
25
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 with SMECO for the years 1996
through 1998, a rate reduction of $2.5 million became 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. On April 7, 1998, SMECO issued a request for proposals
for power supply resources to replace existing requirements
purchases in the event it exercises its rights to reduce
purchases from the Company, pursuant to terms of the existing
contract or earlier, either through negotiated reductions in the
required notice periods or through other means. Under the notice
of reduction provision, SMECO may reduce its obligation to
purchase capacity and energy from the Company by an amount not
exceeding 20% per year of its anticipated total system
requirements. Based on its projected load requirements and with
the appropriate five calendar year notice, SMECO estimates that
it could purchase approximately 150 MW of capacity and associated
energy from market suppliers beginning January 1, 2004.
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 January 1997, the
Company terminated purchase-for-resale agreements, where the
Company purchased energy from one party (recording a
corresponding expense within Purchased energy) for the purpose of
selling that energy to a third party (and recording corresponding
revenue within Interchange deliveries). Since April 1, 1997, all
transmission service in PJM has been administered by the PJM
Office of the Interconnection. 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, and the Company has executed service
agreements allowing it to purchase energy under other market
participants' power sales tariffs. The Company's power sales
26
tariff also allows for the sale of generating capacity on a
short-term basis. The Company is selling capacity to Conectiv
(formerly Delmarva Power & Light Company) in the amount of 100
megawatts per month for the period June 1, 1997, through May 31,
1998; and to Northeast Utilities Service Company (NUSCO) in the
amount of 35 megawatts per month during the period November 1,
1997 through December 31, 1998. Revenues from capacity and
bilateral energy transactions totaled approximately $3.6 million
and $8.9 million for the three and twelve months ended March 31,
1998, respectively, and $5.8 million and $6.5 million for the
corresponding periods in 1997, 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 agreement
with Ohio Edison and Allegheny Energy, Inc. (AEI). The Company
is 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 Company
also purchases energy from the Northeast Maryland Waste Disposal
Authority under an avoided cost-based purchase agreement.
RESTRUCTURING OF THE BULK POWER MARKET
- --------------------------------------
See the discussion of the Restructuring of the Bulk Power
Market under Item 1 - Business of the Company's 1997 Form 10-K.
COMPETITION
- -----------
As discussed in the 1997 Form 10-K, the Company is currently
engaged in regulatory proceedings in Maryland where the Public
Service Commission has outlined steps and established dates for
the phase-in implementation of competition. In the District of
Columbia, the Public Service Commission is considering various
issues regarding electric industry structure and competition but
has not rendered a decision. In the session of the Maryland
General Assembly which was concluded in April 1998, legislation
was proposed to expedite the transition to full retail
competition before several critical issues including tax reform,
consumer protection and stranded cost treatment were resolved.
Although no industry-restructuring legislation was passed during
the session, the Company expects that similar legislation may be
proposed when the General Assembly reconvenes in January 1999.
In reconfiguring utility operations into generation,
distribution and transmission business units, the Company has
decided not to seek to become a larger generation company. The
Company's generating assets are relatively small and it is
expected that through future consolidations, there will remain
only a few large generating companies in the country. The
27
Company's immediate focus will be on increasing the performance
and profitability of its existing generation in the deregulated
wholesale market. For the longer term, the Company intends to
explore whether it should establish joint partnerships with other
utilities' generating business units, create strategic alliances,
stay as it is or divest the generating assets. In the area of
transmission, which remains under federal regulation, the Company
believes it has certain strengths and skills. The Company
intends to continue to evaluate the cost effectiveness of its
transmission system with a view to expanding profit potential,
including the possibility of adding to the Company's transmission
assets. In the area of distribution, which continues to be
regulated at the local level, the Company believes it has
valuable assets and skills and intends to continue to enhance its
profitability locally and leverage its skills elsewhere.
PEAK LOAD, SALES, CONSERVATION, AND CONSTRUCTION
- ------------------------------------------------
AND GENERATING CAPACITY
-----------------------
Peak Load and Sales Data
- ------------------------
Kilowatt-hour sales decreased 2% for the three months ended
March 31, 1998, compared to sales in the corresponding period of
1997. As measured in heating degree days, the winter weather in
the first quarter of 1998 was 4% warmer than in 1997 and 17%
warmer than the 20-year average. Kilowatt-hour sales remained
unchanged for the twelve months ended March 31, 1998 and 1997,
respectively, reflecting a 4% decline in cooling degree hours
offset by a .8% increase in the average number of customers.
Assuming future weather conditions approximate historical
averages, the Company expects its compound annual growth in
kilowatt-hour sales to range between 1% and 2% over the next
decade.
The 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,
excluding short-term capacity transactions, is 6,806 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
anticipated service area growth trends. The 1997-1998 winter
season peak demand of 4,076 megawatts was 18.6% below the
all-time winter peak demand of 5,010 megawatts which was
established in January 1994.
28
Conservation
- ------------
Effective March 25, 1998, the Maryland Public Service
Commission approved a proposal supported by the Company to
discontinue operation of all but one DSM program in Maryland.
The Company received permission to substantially reduce rebates
paid to program participants for the single remaining program.
The effects of retail competition and updated research
information on the programs' net benefits support the
discontinuance of these programs. In Maryland, the Company
invested approximately $5.1 million and $23.6 million in DSM
programs for the three and twelve months ended March 31, 1998,
respectively, and $5.5 million and $28.5 million for
corresponding periods in 1997. The Company recovers the costs of
Maryland DSM programs through a base rate surcharge.
Investment in District of Columbia DSM programs totaled
approximately $.8 million and $5.2 million for the three and
twelve months ended March 31, 1998, respectively, and $.8 million
and $11.8 million for the corresponding periods in 1997. These
DSM costs are amortized over ten years with an accrued return on
unamortized costs. Annually the Company is permitted to file an
application to update the amount of recovery of conservation
expenditures; however, the Public Service Commission is not
required to act, nor has it acted, on such requests. A proposal
by the Company to eliminate DSM programs operated within the
District of Columbia was filed with the Public Service Commission
in March 1998, and is pending.
Construction and Generating Capacity
- ------------------------------------
Construction expenditures, excluding AFUDC and CCRF, are
projected to total $845 million for the five-year period 1998
through 2002, which includes approximately $75 million of
estimated Clean Air Act (CAA) expenditures. In 1998,
construction expenditures are projected to total $175 million,
which includes $10 million of estimated CAA expenditures. The
Company plans to finance its construction program primarily
through funds provided by operations.
The Company has a purchase agreement with 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 with operating and maintaining the facility. The
capacity payment to SMECO is approximately $5.5 million per year.
29
The Company continues to purchase 450 megawatts of capacity
and associated energy from Ohio Edison under a 1987 long-term
capacity purchase agreement with Ohio Edison and AEI. 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 Company also continues to
purchase capacity and associated energy from a 32-megawatt
municipally financed resource recovery facility in Montgomery
County, Maryland. This purchase has facilitated the sale of 35
megawatts of capacity to NUSCO. The capacity expense under these
agreements, including an allocation of a portion of Ohio Edison's
fixed operating and maintenance costs, was $38.6 million for the
three months ended March 31, 1998, and is estimated at $144
million for 1998. Commitments under these agreements are
estimated at $202 million for 1999, $203 million for 2000, $211
million for 2001, $209 million for 2002 and $210 million for
2003.
The Company projects that existing contracts for nonutility
generation and the emerging wholesale market for generation
resources will provide adequate reserve margins to meet
customers' needs well beyond the year 2000.
SELECTED NONUTILITY SUBSIDIARY FINANCIAL INFORMATION
- ----------------------------------------------------
The Company's wholly owned subsidiary, Potomac Capital
Investment Corporation (PCI), was organized in late 1983 to
provide a vehicle to conduct the Company's ongoing nonutility
investment programs and businesses. The principal assets of PCI
are portfolios of securities and equipment leases, and to a
lesser extent real estate and other investments. The $265.2
million securities portfolio, consisting primarily of investment
grade preferred stocks, provides PCI with significant liquidity
and flexibility to participate in additional investment
opportunities. The Company's equity investment in PCI was $234.9
million, $227 million and $210.2 million, at March 31, 1998,
December 31, 1997, and March 31, 1997, respectively.
30
<TABLE>
Consolidated Statements of Earnings:
- -----------------------------------
<CAPTION>
Three Twelve
Months Ended Months Ended
March 31, March 31,
---------------------- ----------------------
1998 1997 1998 1997
-------- --------- --------- ---------
(Thousands of Dollars except Per Share Amounts)
<S> <C> <C> <C> <C>
Income
Leasing activities $ 21,711 $ 21,115 $ 76,180 $ 88,859
Marketable securities 4,613 11,742 21,512 35,374
Other 9,739 6,950 23,704 13,227
-------- -------- --------- ---------
36,063 39,807 121,396 137,460
-------- -------- --------- ---------
Expenses
Interest 15,396 19,026 65,329 80,339
Administrative and general 3,221 6,354 10,356 16,520
Depreciation and operating 11,592 13,959 53,072 41,146
Loss on assets held for
disposal - - 2,022 424
Income tax credit (464) (12,982) (19,332) (28,845)
-------- -------- --------- ---------
29,745 26,357 111,447 109,584
-------- -------- --------- ---------
Net earnings from
nonutility subsidiary $ 6,318 $ 13,450 $ 9,949 $ 27,876
======== ======== ========= =========
Per share contribution to
earnings of the Company $ .05 $ .11 $ .08 $ .24
===== ===== ===== =====
31
</TABLE>
<TABLE>
STATISTICAL DATA
- ----------------
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, March 31,
--------------------------------- -------------------------------------
1998 1997 % Change 1998 1997 % Change
-------- -------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue from Sales
------------------
of Electricity
--------------
(Thousands of Dollars)
Residential $113,968 $113,809 0.1 $ 525,811 $ 536,389 (2.0)
General Service 205,607 208,359 (1.3) 1,070,833 1,080,233 (0.9)
Large Power Service <F1> 6,987 7,342 (4.8) 35,121 35,815 (1.9)
Street Lighting 3,621 3,281 10.4 13,265 12,560 5.6
Rapid Transit 6,861 6,553 4.7 29,170 28,569 2.1
Wholesale 29,262 30,309 (3.5) 122,253 118,252 3.4
-------- -------- ---------- ----------
System $366,306 $369,653 (0.9) $1,796,453 $1,811,818 (0.8)
======== ======== ========== ==========
Energy Sales
------------
(Millions of KWH)
Residential 1,707 1,729 (1.3) 6,542 6,624 (1.2)
General Service 3,551 3,655 (2.8) 15,203 15,183 0.1
Large Power Service <F1> 167 176 (5.1) 689 687 0.3
Street Lighting 46 46 - 166 165 0.6
Rapid Transit 101 100 1.0 413 409 1.0
Wholesale 692 683 1.3 2,570 2,515 2.2
-------- -------- ---------- ----------
System 6,264 6,389 (2.0) 25,583 25,583 -
======== ======== ========== ==========
Average System Revenue
----------------------
per KWH (cents per KWH) 5.85 5.79 1.0 7.02 7.08 (0.8)
-----------------------
System Peak Demand <F2>
------------------
(Thousands of KW)
Summer - - 5,689 5,288
Winter - - 4,076 4,632
Net Generation
--------------
(Millions of KWH) 4,709 4,333 18,698 17,109
Fuel Mix (% of Btu)
-------------------
Coal (%) 90 92 89 90
Oil (%) 9 7 7 6
Gas (%) 1 1 4 4
Fuel Cost per MBtu
------------------
System Average $1.79 $1.83 $1.83 $1.80
Weather Data
------------
Heating Degree Days 1,851 1,924 3,853 3,808
20 Year Average 2,230 3,994
Cooling Degree Hours 71 - 8,883 9,247
20 Year Average 10 11,117
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 March 31, 1998, the net generation capability, excluding
short-term capacity transactions, was 6,806 MW.
</FN>
32
</TABLE>
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
(a) Exhibits
Exhibit 11 - Computation of Earnings Per Common
Share - filed herewith.
Exhibit 12 - Computation of ratios - filed
herewith.
Exhibit 15 - Letter re unaudited interim
financial information - filed
herewith.
Exhibit 27 - Financial data schedule - filed
herewith.
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed by the
Company on January 26, 1998, providing detailed
information and audited consolidated financial
statements. The item reported on such Form 8-K
was Item 7 (Financial Statements, Pro-Forma
Financial Information and Exhibits).
33
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
May 13, 1998
- ------------
DATE
34
Exhibit 11 Computations of Earnings Per Common Share
- ---------- -----------------------------------------
See the information included in Note (3) of the Notes to
Consolidated Financial Statements, Capitalization and Fair Value
of Financial Instruments.
35
<TABLE>
Exhibit 12 Computation of Ratios
- ---------- ---------------------
The computations of the coverage of fixed charges before income taxes, and
the coverage of combined fixed charges and preferred dividends for the twelve
months ended March 31, 1998, and for each of the preceding five years, on the
basis of parent company operations only, are as follows.
<CAPTION>
Twelve
Months For The Year Ended December 31,
Ended ---------------------------------------------------------
Mar. 31,
1998 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Net income $156,431 $164,749 $220,066 $218,788 $208,074 $216,478
Taxes based on income 94,157 97,487 135,011 129,439 116,648 107,223
--------- --------- --------- --------- --------- ---------
Income before taxes 250,588 262,236 355,077 348,227 324,722 323,701
--------- --------- --------- --------- --------- ---------
Fixed charges:
Interest charges 146,787 146,703 146,939 146,558 139,210 141,393
Interest factor in rentals 23,620 23,616 23,560 23,431 6,300 5,859
--------- --------- --------- --------- --------- ---------
Total fixed charges 170,407 170,319 170,499 169,989 145,510 147,252
--------- --------- --------- --------- --------- ---------
Income before income taxes and fixed charges $420,995 $432,555 $525,576 $518,216 $470,232 $470,953
========= ========= ========= ========= ========= =========
Coverage of fixed charges 2.47 2.54 3.08 3.05 3.23 3.20
==== ==== ==== ==== ==== ====
Preferred dividend requirements $16,573 $16,579 $16,604 $16,851 $16,437 $16,255
--------- --------- --------- --------- --------- ---------
Ratio of pre-tax income to net income 1.60 1.59 1.61 1.59 1.56 1.50
--------- --------- --------- --------- --------- ---------
Preferred dividend factor $26,517 $26,361 $26,732 $26,793 $25,642 $24,383
--------- --------- --------- --------- --------- ---------
Total fixed charges and preferred dividends $196,924 $196,680 $197,231 $196,782 $171,152 $171,635
========= ========= ========= ========= ========= =========
Coverage of combined fixed charges
and preferred dividends 2.14 2.20 2.66 2.63 2.75 2.74
==== ==== ==== ==== ==== ====
36
</TABLE>
<TABLE>
Exhibit 12 Computation of Ratios
- ---------- ---------------------
The computations of the coverage of fixed charges before income taxes, and
the coverage of combined fixed charges and preferred dividends for the twelve
months ended March 31, 1998, and for each of the preceding five years, on a fully
consolidated basis, are as follows.
<CAPTION>
Twelve
Months For The Year Ended December 31,
Ended ---------------------------------------------------------
Mar. 31,
1998 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Net income $166,380 $181,830 $236,960 $94,391 $227,162 $241,579
Taxes based on income 74,824 65,669 80,386 43,731 93,953 62,145
--------- --------- --------- --------- --------- ---------
Income before taxes 241,204 247,499 317,346 138,122 321,115 303,724
--------- --------- --------- --------- --------- ---------
Fixed charges:
Interest charges 212,661 216,156 231,029 238,724 224,514 221,312
Interest factor in rentals 23,690 23,687 23,943 26,685 9,938 9,257
--------- --------- --------- --------- --------- ---------
Total fixed charges 236,351 239,843 254,972 265,409 234,452 230,569
--------- --------- --------- --------- --------- ---------
Nonutility subsidiary capitalized interest (539) (493) (649) (529) (521) (2,059)
--------- --------- --------- --------- --------- ---------
Income before income taxes and fixed charges $477,016 $486,849 $571,669 $403,002 $555,046 $532,234
========= ========= ========= ========= ========= =========
Coverage of fixed charges 2.02 2.03 2.24 1.52 2.37 2.31
==== ==== ==== ==== ==== ====
Preferred dividend requirements $16,573 $16,579 $16,604 $16,851 $16,437 $16,255
--------- --------- --------- --------- --------- ---------
Ratio of pre-tax income to net income 1.45 1.36 1.34 1.46 1.41 1.26
--------- --------- --------- --------- --------- ---------
Preferred dividend factor $24,031 $22,547 $22,249 $24,602 $23,176 $20,481
--------- --------- --------- --------- --------- ---------
Total fixed charges and preferred dividends $260,382 $262,390 $277,221 $290,011 $257,628 $251,050
========= ========= ========= ========= ========= =========
Coverage of combined fixed charges
and preferred dividends 1.83 1.86 2.06 1.39 2.15 2.12
==== ==== ==== ==== ==== ====
37
</TABLE>
Exhibit 15
May 13, 1998
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 May 13, 1998, (issued pursuant to
the provisions of Statement on Auditing Standards No. 71) in the
Prospectuses constituting parts of the Registration Statements on
Forms S-8 (Numbers 33-36798, 33-53685 and 33-54197) filed on
September 12, 1990, May 18, 1994 and June 17, 1994, respectively,
and on Forms S-3 (Numbers 33-58810, 33-61379, 333-33495 and 333-
51241) filed on February 26, 1993, July 28, 1995, August 13, 1997
and April 28, 1998, 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.
38
<TABLE> <S> <C>
<ARTICLE> UT
<SUBSIDIARY>
<NUMBER> 1
<NAME> POTOMAC CAPITAL INVESTMENT CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,458,351
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 367,868
<TOTAL-DEFERRED-CHARGES> 664,365
<OTHER-ASSETS> 1,175,981
<TOTAL-ASSETS> 6,666,565
<COMMON> 118,527
<CAPITAL-SURPLUS-PAID-IN> 1,010,364
<RETAINED-EARNINGS> 690,175
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,819,066
141,000
125,000
<LONG-TERM-DEBT-NET> 1,902,200
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 225,000<F1>
<LONG-TERM-DEBT-CURRENT-PORT> 0
985
<CAPITAL-LEASE-OBLIGATIONS> 159,729
<LEASES-CURRENT> 20,772
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,272,813
<TOT-CAPITALIZATION-AND-LIAB> 6,666,565
<GROSS-OPERATING-REVENUE> 380,389
<INCOME-TAX-EXPENSE> 1,488
<OTHER-OPERATING-EXPENSES> 343,030
<TOTAL-OPERATING-EXPENSES> 344,518
<OPERATING-INCOME-LOSS> 35,871
<OTHER-INCOME-NET> 7,386
<INCOME-BEFORE-INTEREST-EXPEN> 43,257
<TOTAL-INTEREST-EXPENSE> 35,725
<NET-INCOME> 7,532
4,140
<EARNINGS-AVAILABLE-FOR-COMM> 3,392
<COMMON-STOCK-DIVIDENDS> 49,158
<TOTAL-INTEREST-ON-BONDS> 130,400<F2>
<CASH-FLOW-OPERATIONS> 34,079
<EPS-PRIMARY> $0.03<F3>
<EPS-DILUTED> $0.03
<FN>
<F1>Included on the Balance Sheet in the caption "Short-term debt."
<F2>Total annualized interest costs for all utility long-term debt
outstanding at March 31, 1998.
<F3>Effective December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128 entitled "Earnings per
Share." Accordingly, the Company's Earnings per share for the
three months ended March 31, 1998 are as follows: Basic $0.03;
Diluted $0.03.
</FN>
</TABLE>
