SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 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 September 30, 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...................... 15
Report of Independent Accountants on Review of Interim
Financial Information.................................. 17
Item 2 - Management's Discussion and Analysis of Consolidated
Results of Operations and Financial Condition
Forward Looking Statements............................... 18
Utility
Results of Operations.................................. 19
Year 2000 Compliance................................. 22
Capital Resources and Liquidity........................ 27
Nonutility Subsidiary
Results of Operations.................................. 29
Year 2000 Compliance................................. 30
Capital Resources and Liquidity........................ 31
PART II - Other Information
Item 1 - Legal Proceedings................................. 33
Item 5 - Other Information
Other Financing Arrangements............................. 33
Base Rate Proceedings.................................... 33
Restructuring of the Bulk Power Market................... 36
Competition.............................................. 36
Peak Load, Sales, Conservation, and Construction and
Generating Capacity.................................... 38
Selected Nonutility Subsidiary Financial Information..... 41
Statistical Data......................................... 43
Item 6 - Exhibits and Reports on Form 8-K.................. 44
Signatures................................................. 45
Computations of Earnings Per Common Share.................. 46
Computation of Ratios - Parent Company Only................ 47
Computation of Ratios - Fully Consolidated................. 48
Independent Accountants Awareness Letter................... 49
1
<TABLE>
Part I FINANCIAL INFORMATION
- ------ ---------------------
Item 1 CONSOLIDATED FINANCIAL STATEMENTS
- ------ ---------------------------------
POTOMAC ELECTRIC POWER COMPANY
Consolidated Statements of Earnings and Retained Income
(Unaudited)
-------------------------------------------------------
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
-------------------- ---------------------- ----------------------
1998 1997 1998 1997 1998 1997
--------- --------- ---------- ---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Revenue
Sales of electricity $ 665,241 $ 615,621 $1,508,426 $1,423,198 $1,885,028 $1,792,121
Other electric revenue 4,956 2,597 10,982 9,061 12,950 12,661
--------- --------- ---------- ---------- ---------- ----------
Total Operating Revenue 670,197 618,218 1,519,408 1,432,259 1,897,978 1,804,782
Interchange deliveries 80,579 14,824 140,276 40,814 152,143 82,004
--------- --------- ---------- ---------- ---------- ----------
Total Revenue 750,776 633,042 1,659,684 1,473,073 2,050,121 1,886,786
--------- --------- ---------- ---------- ---------- ----------
Operating Expenses
Fuel 127,466 92,953 302,208 249,655 372,171 316,739
Purchased energy 99,027 58,864 213,011 154,314 259,261 238,327
Capacity purchase payments 37,639 35,440 116,216 108,165 158,962 138,359
Other operation 61,349 55,187 174,754 160,319 234,725 216,608
Maintenance 22,971 22,717 67,250 67,797 94,705 93,351
--------- --------- ---------- ---------- ---------- ----------
Total Operation and Maintenance 348,452 265,161 873,439 740,250 1,119,824 1,003,384
Depreciation and amortization 62,314 59,581 179,990 173,982 238,050 229,949
Income taxes 91,851 82,222 129,150 115,280 131,600 121,798
Other taxes 62,159 59,578 159,492 154,219 206,993 199,506
--------- --------- ---------- ---------- ---------- ----------
Total Operating Expenses 564,776 466,542 1,342,071 1,183,731 1,696,467 1,554,637
--------- --------- ---------- ---------- ---------- ----------
Operating Income 186,000 166,500 317,613 289,342 353,654 332,149
--------- --------- ---------- ---------- ---------- ----------
Other Income (Loss)
Nonutility Subsidiary
Income 29,889 32,898 103,212 101,370 126,982 130,834
Expenses, including interest
and income taxes (26,112) (32,023) (86,973) (85,589) (109,443) (114,560)
--------- --------- ---------- ---------- ---------- ----------
Net earnings from nonutility
subsidiary 3,777 875 16,239 15,781 17,539 16,274
Allowance for other funds used during
construction and capital cost recovery factor 375 1,608 855 4,949 2,614 6,557
Write-off of merger costs - - - - (52,533) -
Other, net 748 1,429 2,785 3,753 23,053 3,986
--------- --------- ---------- ---------- ---------- ----------
Total Other Income (Loss) 4,900 3,912 19,879 24,483 (9,327) 26,817
--------- --------- ---------- ---------- ---------- ----------
Income Before Utility Interest Charges 190,900 170,412 337,492 313,825 344,327 358,966
--------- --------- ---------- ---------- ---------- ----------
Utility Interest Charges
Long-term debt 34,191 32,188 102,797 101,036 137,328 134,375
Distributions on preferred securities
of subsidiary company 2,304 - 3,380 - 3,380 -
Other 2,178 4,053 7,908 9,557 9,486 11,894
Allowance for borrowed funds used during
construction and capital cost recovery factor (873) (1,814) (3,194) (5,859) (5,207) (7,680)
--------- --------- ---------- ---------- ---------- ----------
Net Utility Interest Charges 37,800 34,427 110,891 104,734 144,987 138,589
--------- --------- ---------- ---------- ---------- ----------
Net Income 153,100 135,985 226,601 209,091 199,340 220,377
Dividends on preferred stock 1,955 4,157 9,490 12,439 13,630 16,595
Redemption premium on preferred stock 53 - 6,632 - 6,632 -
--------- --------- ---------- ---------- ---------- ----------
Earnings for Common Stock 151,092 131,828 210,479 196,652 179,078 203,782
Retained Income at Beginning of Period 696,571 728,241 734,318 760,285 815,448 796,946
Dividends on Common Stock (49,162) (49,155) (147,484) (147,459) (196,639) (196,613)
Subsidiary Marketable Securities Net
Unrealized Gain, Net of Tax 212 4,534 1,400 5,970 826 11,333
--------- --------- ---------- ---------- ---------- ----------
Retained Income at End of Period $ 798,713 $ 815,448 $ 798,713 $ 815,448 $ 798,713 $ 815,448
========= ========= ========== ========== ========== ==========
Basic Average Common Shares
Outstanding (000's) 118,527 118,501 118,522 118,500 118,517 118,500
Basic Earnings Per Common Share $1.27 $1.11 $1.78 $1.66 $1.51 $1.72
Diluted Average Common Shares
Outstanding (000's) 124,245 124,292 124,244 124,292 124,256 124,305
Diluted Earnings Per Common Share $1.23 $1.07 $1.73 $1.62 $1.49 $1.69
Cash Dividends Per Common Share $0.415 $0.415 $1.245 $1.245 $1.66 $1.66
Book Value Per Share $16.27 $16.41
Dividend Payout Ratio 109.9% 96.5%
Effective Federal Income Tax Rate 30.5% 25.8%
2
</TABLE>
<TABLE>
POTOMAC ELECTRIC POWER COMPANY
Consolidated Balance Sheets
(Unaudited at September 30, 1998 and 1997)
------------------------------------------
<CAPTION>
September 30, December 31, September 30,
ASSETS 1998 1997 1997
------ ------------- ------------- -------------
(Thousands of Dollars)
<S> <C> <C> <C>
Property and Plant - at original cost
Electric plant in service $ 6,492,267 $ 6,392,750 $ 6,335,130
Construction work in progress 72,614 94,309 84,901
Electric plant held for future use 4,295 4,231 4,210
Nonoperating property 40,685 22,824 22,750
------------- ------------- -------------
6,609,861 6,514,114 6,446,991
Accumulated depreciation (2,104,680) (2,027,780) (2,000,376)
------------- ------------- -------------
Net Property and Plant 4,505,181 4,486,334 4,446,615
------------- ------------- -------------
Current Assets
Cash and cash equivalents 12,788 5,630 2,916
Customer accounts receivable, less allowance
for uncollectible accounts of $2,286, $2,102
and $558 185,397 116,554 186,623
Other accounts receivable, less allowance for
uncollectible accounts of $300 39,864 32,256 25,117
Accrued unbilled revenue 117,438 69,259 88,071
Prepaid taxes 33,574 33,740 41,554
Other prepaid expenses 2,366 7,599 3,917
Material and supplies - at average cost
Fuel 44,749 59,434 60,432
Construction and maintenance 69,984 68,128 69,195
------------- ------------- -------------
Total Current Assets 506,160 392,600 477,825
------------- ------------- -------------
Deferred Charges
Income taxes recoverable through future rates, net 234,779 238,125 238,711
Conservation costs, net 205,436 221,528 224,464
Unamortized debt reacquisition costs 50,640 52,745 53,447
Other 155,125 148,900 196,614
------------- ------------- -------------
Total Deferred Charges 645,980 661,298 713,236
------------- ------------- -------------
Nonutility Subsidiary Assets
Cash and cash equivalents 16,019 422 10,087
Marketable securities 240,680 302,522 303,905
Investment in finance leases 442,224 463,592 460,021
Operating lease equipment, net of accumulated
depreciation of $114,392, $153,541 and $146,083 128,344 163,289 170,747
Receivables, less allowance for uncollectible
accounts of $5,000, $6,000 and $6,000 42,849 64,243 34,997
Other investments 122,320 162,865 182,581
Other assets 18,634 10,392 14,146
Deferred income taxes 74,052 - -
------------- ------------- -------------
Total Nonutility Subsidiary Assets 1,085,122 1,167,325 1,176,484
------------- ------------- -------------
Total Assets $ 6,742,443 $ 6,707,557 $ 6,814,160
============= ============= =============
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization
Common stock $ 118,527 $ 118,501 $ 118,501
Other common equity 1,810,317 1,744,527 1,825,700
Serial preferred stock 100,000 125,290 125,291
Redeemable serial preferred stock 50,000 141,000 141,000
Company obligated mandatorily redeemable preferred
securities of subsidiary trust which holds solely
parent junior subordinated debentures 125,000 - -
Long-term debt 1,858,590 1,901,486 1,727,707
------------- ------------- -------------
Total Capitalization 4,062,434 4,030,804 3,938,199
------------- ------------- -------------
Other Non-Current Liabilities
Capital lease obligations 158,336 160,406 161,057
------------- ------------- -------------
Current Liabilities
Long-term debt and preferred stock
redemption 45,000 52,054 50,985
Short-term debt 119,125 131,375 277,075
Accounts payable and accrued expenses 293,659 185,893 247,359
Capital lease obligations due within one year 20,772 20,772 20,772
Other 91,073 92,293 83,774
------------- ------------- -------------
Total Current Liabilities 569,629 482,387 679,965
------------- ------------- -------------
Deferred Credits
Income taxes 1,051,660 1,029,318 1,014,472
Investment tax credits 54,571 57,308 58,221
Other 23,252 19,034 30,842
------------- ------------- -------------
Total Deferred Credits 1,129,483 1,105,660 1,103,535
------------- ------------- -------------
Nonutility Subsidiary Liabilities
Long-term debt 558,142 830,458 863,167
Short-term notes payable 182,975 7,685 9,200
Deferred taxes and other 81,444 90,157 59,037
------------- ------------- -------------
Total Nonutility Subsidiary Liabilities 822,561 928,300 931,404
------------- ------------- -------------
Total Capitalization and Liabilities $ 6,742,443 $ 6,707,557 $ 6,814,160
============= ============= =============
3
</TABLE>
<TABLE>
POTOMAC ELECTRIC POWER COMPANY
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------
<CAPTION>
Nine Months Ended Twelve Months Ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating Activities
Income from utility operations $ 210,362 $ 193,310 $ 181,801 $ 204,103
Adjustments to reconcile income to net
cash from operating activities:
Depreciation and amortization 179,990 173,982 238,050 229,949
Deferred income taxes and investment tax credits 18,975 41,110 38,408 98,539
Deferred conservation costs (20,771) (26,243) (29,071) (36,296)
Allowance for funds used during construction
and capital cost recovery factor (4,049) (10,808) (7,821) (14,237)
Changes in materials and supplies 12,829 8,146 14,894 7,956
Changes in accounts receivable and accrued unbilled revenue (124,630) (62,507) (42,888) 33,281
Changes in accounts payable (6,362) (17,061) 17,087 (7,476)
Changes in other current assets and liabilities 122,374 75,275 44,640 32,416
Changes in deferred merger costs - (18,758) 47,767 (37,278)
Net other operating activities (7,636) (38,916) (23,556) (48,983)
Nonutility subsidiary:
Net earnings 16,239 15,781 17,539 16,274
Deferred income taxes (75,023) (46,624) (92,158) (56,023)
Changes in other assets and net other operating activities 23,197 31,243 57,692 50,465
--------- --------- --------- ---------
Net Cash From Operating Activities 345,495 317,930 462,384 472,690
--------- --------- --------- ---------
Investing Activities
Total investment in property and plant (150,019) (150,987) (230,775) (205,492)
Allowance for funds used during construction
and capital cost recovery factor 4,049 10,808 7,821 14,237
--------- --------- --------- ---------
Net investment in property and plant (145,970) (140,179) (222,954) (191,255)
Nonutility subsidiary:
Purchase of marketable securities (1,000) (35,103) (1,000) (35,103)
Proceeds from sale or redemption of marketable securities 66,897 124,517 67,380 151,639
Investment in leased equipment - (7,480) - (7,480)
Proceeds from sale or disposition of leased equipment 61,289 28,484 61,289 28,484
Proceeds from sale of assets - 7,300 - 7,015
Purchase of other investments (17,542) (20,451) (17,694) (38,949)
Proceeds from sale or distribution of other investments 32,669 6,107 45,292 25,781
Proceeds from promissory notes, net - 63,795 313 82,556
--------- --------- --------- ---------
Net Cash (Used by) From Investing Activities (3,657) 26,990 (67,374) 22,688
--------- --------- --------- ---------
Financing Activities
Dividends on common stock (147,484) (147,459) (196,639) (196,613)
Dividends on preferred stock (9,490) (12,439) (13,630) (16,595)
Redemption of preferred stock (123,680) (1,500) (123,680) (1,500)
Issuance of mandatorily redeemable preferred securities 125,000 - 125,000 -
Issuance of long-term debt - 8,090 174,177 107,590
Reacquisition and retirement of long-term debt (51,069) (151,460) (51,071) (151,460)
Short-term debt, net (12,250) 145,685 (157,950) 22,620
Other financing activities (3,085) (297) (4,164) (398)
Nonutility subsidiary:
Issuance of long-term debt 52,103 40,000 52,103 95,000
Repayment of long-term debt (324,418) (173,065) (357,127) (176,799)
Short-term debt, net 175,290 (42,450) 173,775 (172,108)
--------- --------- --------- ---------
Net Cash Used By Financing Activities (319,083) (334,895) (379,206) (490,263)
--------- --------- --------- ---------
Net Increase in Cash and Cash Equivalents 22,755 10,025 15,804 5,115
Cash and Cash Equivalents at Beginning of Period 6,052 2,978 13,003 7,888
--------- --------- --------- ---------
Cash and Cash Equivalents at End of Period $ 28,807 $ 13,003 $ 28,807 $ 13,003
========= ========= ========= =========
Cash paid for interest (net of capitalized interest of
$486, $350, $628 and $505) and income taxes:
Interest (including nonutility subsidiary
interest of $54,881, $67,104, $59,269 and $72,829) $ 165,670 $ 176,836 $ 191,589 $ 205,031
Income taxes (including nonutility subsidiary) $ 27,180 $ 12,475 $ 33,565 $ 37,631
4
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
BASIS OF PRESENTATION
- ---------------------
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
--------------------
The Company's components of comprehensive income are net
income, and unrealized gains and losses on marketable securities.
Comprehensive income totaled $153.3 million, $228 million and
$200.2 million for the three, nine and twelve months ended
September 30, 1998, compared to $140.5 million, $215.1 million
and $231.7 million in the corresponding periods ended September
30, 1997.
5
<TABLE>
(2) INCOME TAXES
- ----------------
Provision for Income Taxes
- --------------------------
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
----------------------- ----------------------- -----------------------
1998 1997 1998 1997 1998 1997
---------- ---------- ---------- --------- ---------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Utility current tax expense
Federal $ 70,303 $ 58,762 $ 98,011 $ 65,445 $ 64,819 $ 19,962
State and local 10,006 7,756 12,535 8,708 8,518 2,594
---------- ---------- ---------- ---------- ---------- ----------
Total utility current tax expense 80,309 66,518 110,546 74,153 73,337 22,556
---------- ---------- ---------- ---------- ---------- ----------
Utility deferred tax expense
Federal 11,519 14,572 18,129 38,097 36,310 89,609
State and local 980 2,100 3,583 5,750 5,748 12,579
Investment tax credits (912) (912) (2,737) (2,737) (3,650) (3,649)
---------- ---------- ---------- ---------- ---------- ----------
Total utility deferred tax expense 11,587 15,760 18,975 41,110 38,408 98,539
---------- ---------- ---------- ---------- ---------- ----------
Total utility income tax expense 91,896 82,278 129,521 115,263 111,745 121,095
---------- ---------- ---------- ---------- ---------- ----------
Nonutility subsidiary current tax expense
Federal 5,862 17,642 33,971 20,793 43,599 25,363
---------- ---------- ---------- ---------- ---------- ----------
Nonutility subsidiary deferred tax credit
Federal (8,357) (21,016) (36,362) (45,084) (53,549) (54,482)
---------- ---------- ---------- ---------- ---------- ----------
Total nonutility subsidiary income tax credit (2,495) (3,374) (2,391) (24,291) (9,950) (29,119)
---------- ---------- ---------- ---------- ---------- ----------
Total consolidated income tax expense 89,401 78,904 127,130 90,972 101,795 91,976
Income taxes included in other income (2,450) (3,318) (2,020) (24,308) (29,805) (29,822)
---------- ---------- ---------- ---------- ---------- ----------
Income taxes included in utility operating
expenses $ 91,851 $ 82,222 $ 129,150 $ 115,280 $ 131,600 $ 121,798
========== ========== ========== ========== ========== ==========
6
</TABLE>
<TABLE>
Reconciliation of Consolidated Income Tax Expense
- -------------------------------------------------
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
----------------------- ----------------------- -----------------------
1998 1997 1998 1997 1998 1997
---------- ---------- ---------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Income before income taxes $ 242,501 $ 214,889 $ 353,731 $ 300,063 $ 301,135 $ 312,353
========== ========== ========== ========== ========== ==========
Utility income tax at federal
statutory rate $ 84,427 $ 76,086 $ 118,959 $ 108,001 $ 102,741 $ 113,819
Increases (decreases) resulting from
Depreciation 2,765 2,522 8,294 7,566 11,581 9,806
Removal costs (1,296) (841) (4,585) (4,027) (6,460) (5,123)
Allowance for funds used during
construction 240 238 674 603 930 806
Other (469) (1,222) (1,561) (3,541) (2,452) (4,195)
State income taxes, net of federal effect 7,141 6,407 10,477 9,398 9,273 9,863
Tax credits (912) (912) (2,737) (2,737) (3,868) (3,881)
---------- ---------- ---------- ---------- ---------- ----------
Total utility income tax expense 91,896 82,278 129,521 115,263 111,745 121,095
---------- ---------- ---------- ---------- ---------- ----------
Nonutility subsidiary income tax at federal
statutory rate 448 (874) 4,847 (2,978) 2,656 (4,495)
Decreases resulting from
Dividends received deduction (1,027) (1,269) (3,385) (3,987) (4,817) (6,523)
Reversal of previously accrued deferred
taxes - - - (10,125) - (10,125)
Other (1,916) (1,231) (3,853) (7,201) (7,789) (7,976)
---------- ---------- ---------- ---------- ---------- ----------
Total nonutility subsidiary income tax credit (2,495) (3,374) (2,391) (24,291) (9,950) (29,119)
---------- ---------- ---------- ---------- ---------- ----------
Total consolidated income tax expense 89,401 78,904 127,130 90,972 101,795 91,976
Income taxes included in other income (2,450) (3,318) (2,020) (24,308) (29,805) (29,822)
---------- ---------- ---------- ---------- ---------- ----------
Income taxes included in utility operating
expenses $ 91,851 $ 82,222 $ 129,150 $ 115,280 $ 131,600 $ 121,798
========== ========== ========== ========== ========== ==========
7
</TABLE>
<TABLE>
Components of Consolidated Deferred Tax Liabilities (Assets)
- ------------------------------------------------------------
<CAPTION>
Sept. 30, Dec. 31, Sept. 30,
1998 1997 1997
---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
Utility deferred tax liabilities (assets)
Depreciation and other book to tax
basis differences $ 893,906 $ 869,343 $ 855,970
Rapid amortization of certified pollution
control facilities 24,615 25,445 23,646
Deferred taxes on amounts to be collected
through future rates 88,887 90,154 90,376
Property taxes 13,671 13,525 13,310
Deferred fuel (11,278) (7,369) (12,099)
Prepayment premium on debt retirement 19,165 19,962 20,228
Deferred investment tax credit (20,661) (21,697) (22,042)
Contributions in aid of construction (30,971) (30,054) (29,530)
Contributions to pension plan 18,157 18,157 16,170
Conservation costs (demand side management) 48,947 48,041 48,093
Other 20,692 21,683 22,882
---------- ---------- ----------
Total utility deferred tax liabilities, net 1,065,130 1,047,190 1,027,004
Current portion of utility deferred tax
liabilities (included in Other Current
Liabilities) 13,470 17,872 12,532
---------- ---------- ----------
Total utility deferred tax liabilities, net -
non-current $1,051,660 $1,029,318 $1,014,472
========== ========== ==========
Nonutility subsidiary deferred tax liabilities
(assets)
Finance leases $ 123,989 $ 119,448 $ 118,305
Operating leases 8,854 28,823 41,660
Alternative minimum tax (97,109) (97,109) (97,109)
Assets with a tax basis greater than book basis (43,847) - -
Other (65,939) (50,947) (45,197)
---------- ---------- ----------
Total nonutility subsidiary deferred tax
(assets) liabilities, net $ (74,052) $ 215 $ 17,659
========== ========== ==========
8
</TABLE>
(3) CAPITALIZATION AND FAIR VALUE OF FINANCIAL INSTRUMENTS
------------------------------------------------------
Common Equity
- -------------
At September 30, 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 September 30, 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, Company Obligated Mandatorily Redeemable Preferred
---------------------------------------------------------
Securities and Long-Term Debt
-----------------------------
On June 1, 1998, the Company redeemed 60,000 shares of
Serial Preferred Stock, $3.37 series of 1987, at $50 per share
for sinking fund purposes. The Company also redeemed in
accordance with their terms, 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 Serial Preferred
Stock, $3.89 series of 1991, at $53.89 per share. The redemption
totaled $123.7 million and includes $6.6 million in premiums.
At September 30, 1998, the Company had outstanding 3,000,000
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 September 30, 1998, the aggregate annual
dividend requirements on the Serial Preferred Stock and the
Redeemable Serial Preferred Stock were approximately $4.4 million
and $3.4 million, respectively. Also, the Company has a total of
8,800,000 shares of cumulative, $25 par value, Preference Stock
authorized and unissued.
At September 30, 1998, the Company had outstanding one
million shares of its Serial Preferred Stock, Auction Series A.
The annual dividend rate is 4.04% ($2.02) for the period
September 1, 1998, through November 30, 1998. For the period
June 1, 1998, through August 31, 1998, the annual dividend rate
was 4.1% ($2.05). The average rate at which dividends were paid
during the twelve months ended September 30, 1998, was 4.18%
($2.09).
9
At September 30, 1998, the Company had outstanding one
million shares of Redeemable Serial Preferred Stock, $3.40
(6.80%) Series of 1992, on which the sinking fund requirement
commences September 1, 2002. The sinking fund requirement in
2002 with respect to this series is $2.5 million.
In May 1998, Potomac Electric Power Company Trust I (Trust),
of which the Company owns all of the common securities, issued
$125 million of 7-3/8% Trust Originated Preferred Securities
(TOPrS). The proceeds from the sale of the TOPrS and from the
common securities of the Trust to the Company were used by the
Trust to purchase from the Company $128.9 million of 7-3/8%
Junior Subordinated Deferrable Interest Debentures, due June 1,
2038. The sole assets of the Trust are the Subordinated
Debentures. The Trust will use interest payments received on the
Subordinated Debentures to make quarterly cash distributions on
the TOPrS. Proceeds from the sale of the Subordinated Debentures
to the Trust were used by the Company to redeem three series of
serial preferred stock on June 1, 1998.
At September 30, 1998, the aggregate annual interest
requirement on the Company's long-term debt and Company obligated
mandatorily redeemable preferred securities of subsidiary trust,
including debt due within one year, was $139.6 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. At September 30, 1998, long-term debt due within one
year consisted of $45 million of 4-1/2% First Mortgage Bonds.
10
The estimated fair values of the Company's financial
instruments at September 30, 1998, net of amounts due within one
year, are summarized below:
Carrying Fair
Amount Value
---------- ----------
(Thousands of Dollars)
Utility
Capitalization and Liabilities
Serial preferred stock $ 100,000 $ 94,275
========== ==========
Redeemable serial preferred stock $ 50,000 $ 53,610
========== ==========
Company obligated mandatorily
redeemable preferred securities
of subsidiary trust which holds
solely parent junior subordinated
debentures $ 125,000 $ 130,000
========== ==========
Long-term debt
First mortgage bonds (net of
unamortized premium and
discount of $13,659) $1,408,141 $1,512,473
Medium-term notes (net of
unamortized discount of $1,782) 281,308 307,526
Convertible debentures (net of
unamortized discount of $8,695) 169,141 174,493
---------- ----------
Total long-term debt $1,858,590 $1,994,492
========== ==========
Nonutility Subsidiary
Assets
Marketable securities (primarily
mandatorily redeemable preferred
stock) $ 240,680 $ 240,680
========== ==========
Notes receivable $ 25,808 $ 22,606
========== ==========
Liabilities
Long-term debt $ 558,142 $ 570,268
========== ==========
The following methods and assumptions were used to estimate,
at September 30, 1998, the fair value of each class of financial
instrument shown above for which it is practicable to estimate
that value.
11
The fair values of the Company's Serial preferred stock,
Redeemable serial preferred stock and TOPrS were based on quoted
market prices or discounted cash flows using current rates of
preferred stock with similar terms.
The fair values of the Company's Long-term debt, which
includes First mortgage bonds, Medium-term notes and Convertible
debentures, excluding amounts due within one year, were based on
current market price, or for issues with no market price
available, were based on discounted cash flows using current
rates for similar issues with similar terms and remaining
maturities.
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.
12
Nonutility Subsidiary Long-Term Debt
- ------------------------------------
Long-term debt at September 30, 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 7.61% at September 30, 1998,
7.48% at December 31, 1997, and 7.48% at September 30, 1997.
Annual aggregate principal repayments on these borrowings are
$8.3 million remaining in 1998, $170 million in 1999, $122.5
million in 2000, $71.5 million in 2001, $93 million in 2002 and
$72.6 million thereafter. Also included in long-term debt is
$20.2 million of non-recourse debt which is due in monthly
installments with final maturities in 2002 and 2011.
Nonutility Subsidiary Contractual Maturities
- --------------------------------------------
At September 30, 1998, the contractual maturities for
mandatorily redeemable preferred stock are $5 million within one
year, $95.9 million from one to five years, $86.5 million from
five to 10 years and $40.2 million for over 10 years.
13
<TABLE>
Calculations of Earnings Per Share
- ----------------------------------
Reconciliations of the numerator and denominator for basic and
diluted earnings per common share are shown below.
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
1998 1997 1998 1997 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(Thousands except Per Share Data)
Income (Numerator):
Earnings applicable to common stock $151,092 $131,828 $210,479 $196,652 $179,078 $203,782
Add: Dividends paid or accrued on
Convertible Preferred Stock - 4 2 11 6 14
Interest paid or accrued on
Convertible Debentures,
net of related taxes 1,577 1,588 4,732 4,767 6,320 6,372
-------- -------- -------- -------- -------- --------
Earnings applicable to common stock,
assuming conversion of convertible
securities $152,669 $133,420 $215,213 $201,430 $185,404 $210,168
======== ======== ======== ======== ======== ========
Shares (Denominator):
Average shares outstanding for
computation of basic earnings
per common share 118,527 118,501 118,522 118,500 118,517 118,500
======== ======== ======== ======== ======== ========
Average shares outstanding for
diluted computation:
Average shares outstanding 118,527 118,501 118,522 118,500 118,517 118,500
Additional shares resulting from:
Conversion of Serial Preferred
Stock, $2.44 Convertible Series
of 1966 (the "Convertible
Preferred Stock") - 34 4 35 12 34
Conversion of 7% Convertible
Debentures 2,325 2,364 2,325 2,364 2,334 2,378
Conversion of 5% Convertible
Debentures 3,393 3,393 3,393 3,393 3,393 3,393
-------- -------- -------- -------- -------- --------
Average shares outstanding for
computation of diluted
earnings per common share 124,245 124,292 124,244 124,292 124,256 124,305
======== ======== ======== ======== ======== ========
Basic earnings per common share $1.27 $1.11 $1.78 $1.66 $1.51 $1.72
Diluted earnings per common share $1.23 $1.07 $1.73 $1.62 $1.49 $1.69
14
</TABLE>
(4) COMMITMENTS AND CONTINGENCIES
-----------------------------
Environmental Contingencies
- ---------------------------
As discussed in the June 30, 1998 Form 10-Q, in December
1987, the Company was notified by the Environmental Protection
Agency (EPA) that it, along with several other utilities and
nonutilities, is a Potentially Responsible Party (PRP) under the
Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended (CERCLA or Superfund), in connection with
the polychlorinated biphenyl compounds (PCBs) contamination of a
Philadelphia, Pennsylvania site owned by a nonaffiliated company.
In the early 1970's, the Company sold scrap transformers, some of
which may have contained some level of PCBs, to a metal reclaimer
operating at the site. In October 1994, a Remedial
Investigation/Feasibility Study including a number of possible
remedies was submitted to the EPA. In December 1997, the EPA
signed a Record of Decision (ROD) that set forth a selected
remedial action plan with estimated implementation costs of
approximately $17 million. On June 26, 1998, the EPA issued a
unilateral Administrative Order to the Company and twelve other
PRPs to conduct the design and actions called for in the ROD. To
date, the Company has accrued $1.7 million for its share of this
contingency.
As discussed in the June 30, 1998 Form 10-Q, in May 1998,
the State of Maryland issued final regulations entitled "Post
RACT Requirements for Nitrogen Oxides (NOx) Sources (NOx Budget
Proposal)", requiring a 65% reduction in NOx emissions at the
Company's Maryland generating units by May 1, 1999. The
regulations allow the purchase or trade of NOx emission
allowances to fulfill this obligation. The Company appealed this
regulation to the Circuit Court for Charles County, Maryland on
June 19, 1998, on the basis that the regulation does not provide
adequate time for the installation of NOx emission reduction
technology and that there is no functioning NOx allowance market.
On July 17, 1998, the case was moved to the Circuit Court for
Baltimore City and consolidated with a similar appeal filed by
Baltimore Gas and Electric Company. The Company predicts it is
unlikely that a market containing NOx allowances sufficient to
ensure compliance will be functioning by May 1999; presently,
only seven states have enacted the rules necessary to create such
a market. A preliminary plan for installing the best available
removal technology on the Company's largest coal-fired units
would require capital expenditures of approximately $173 million
and would yield NOx reductions of nearly 85% beginning in year
2004. The Company cannot predict the outcome of this litigation
and is evaluating its options in the event of an adverse
decision. Also, on September 24, 1998, the EPA issued rules for
15
reducing interstate transport of ozone. The Company's
preliminary plan for NOx reductions of 85% by 2004 appears to be
consistent with the EPA rules.
The Company's generating stations operate under National
Pollutant Discharge Eliminating System (NPDES) permits. A NPDES
renewal application submitted in July 1993 for the Benning
station is pending. NPDES permits were issued for the Potomac
River station in February 1994, the Morgantown station in
February 1995, the Dickerson station in August 1996 and the Chalk
Point station in September 1996. An NPDES renewal application
was submitted for the Potomac River station in August 1998.
Targeted Severance Plan
- -----------------------
As discussed in the June 30, 1998 Form 10-Q, the Company has
offered a targeted severance plan to exempt, non-bargaining and
bargaining unit employees who lose employment due to corporate
restructuring and/or job consolidations. Participants in the
plan will receive severance pay and subsidized health and dental
benefits. Through September 30, 1998, 155 employees have
participated in the plan on a voluntary basis. During the second
and third quarters of 1998, $3.7 million and $3.2 million,
respectively, in severance costs were expensed. In the future,
additional costs will be accrued as appropriate.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
This Quarterly Report on Form 10-Q, including the report of
PricewaterhouseCoopers LLP (on page 17) 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 333-66127) and Forms S-8
(Numbers 33-36798, 33-53685, 33-54197, 333-56683 and 333-57221),
filed under the Securities Act of 1933. Such report of
PricewaterhouseCoopers 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.
16
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 September 30, 1998 and 1997, and the related
consolidated statements of earnings and retained income for the
three, nine and twelve month periods then ended and the
consolidated statements of cash flows for the nine and twelve
month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying financial
information for it to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of December
31, 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/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Washington, D.C.
November 12, 1998
17
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 including potential changes
in environmental regulations, 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.
18
YEAR 2000 COMPLIANCE
The Company has implemented a 4-pronged approach to
accommodate the Year 2000. The phases being addressed are:
Corporate Applications Readiness, which includes all large core
business systems; Embedded Systems, which include all operating
and control systems; End-User Computing Systems, which are all
systems which are not considered core business systems but
contain date calculations; and Business Partners' Systems and
Vendor Supply-Chain Verification, which is intended to monitor
suppliers' compliance with Year 2000 processing. A database has
been developed to identify and track the progress of work on each
phase. The preliminary target date for completion of these
phases is mid-1999. The cost or consequences of a material
incomplete or untimely resolution of the Year 2000 problem could
adversely affect future operations, financial results or
financial condition of the Company.
UTILITY
- -------
RESULTS OF OPERATIONS
- ---------------------
TOTAL REVENUE
Total revenue increased for the three, nine and twelve
months ended September 30, 1998, as compared to the corresponding
periods in 1997. The increases in revenue from sales of
electricity for the periods ending September 30, 1998, resulted
primarily from increases in kilowatt-hour sales of 7.1%, 3.7% and
3.4% over the corresponding periods in 1997. Although weather,
as measured in cooling degree hours, in the second and third
quarters of 1998 was 18% hotter than in 1997, it was,
nevertheless, 7% cooler than the 20-year average. Weather in the
first quarter of 1998 was 4% milder than the first quarter of
1997 and 17% milder than the 20-year average. The increases in
revenue also reflect a 2.6% increase in Maryland base rates
pursuant to a November 1997 settlement agreement; partially
offset by rate reductions of $2.5 million (effective January 1,
1998) for wholesale service to the Southern Maryland Electric
Cooperative, Inc. (SMECO) and $17 million (effective June 1997)
in the Maryland Demand Side Management (DSM) surcharge tariff.
Effective September 21, 1998, the Maryland DSM surcharge
tariff was lowered, which will reduce annual revenues by
approximately $3 million, reflecting the Company's efforts to
reduce conservation program offerings and limit conservation
spending. In the third quarter of 1998, the Company recorded a
$1.3 million bonus, which was awarded for achieving 1997 energy
goals under the conservation incentive provision of the tariff;
in the second quarter of 1997, the Company recorded a $1.6
million bonus for achieving 1996 energy saving goals.
19
Interchange deliveries increased for the three, nine and
twelve months ended September 30, 1998, as compared to the
corresponding periods in 1997. The increases for the periods
reflect changes in levels and prices of energy delivered to the
Pennsylvania-New Jersey-Maryland Interconnection LLC (PJM) and
increases in the levels of bilateral energy transactions under
the Company's wholesale power sales tariff.
In January 1997, the Company implemented an open access
transmission tariff (OATT) and in April 1997, PJM implemented an
OATT on behalf of its transmission owners, replacing the
Company's tariff. Under these tariffs, the Company receives
point-to-point transmission service revenue, classified as "Other
electric revenue," which totaled $2.7 million, $3.5 million and
$3.6 million for the three, nine and twelve months ended
September 30, 1998, and $.6 million, $2 million and $2 million
for the corresponding periods in 1997. The benefits derived from
interchange deliveries, capacity sales in the District of
Columbia and revenue under the open access transmission tariff
are passed through to the Company's customers through fuel
adjustment clauses.
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.
As discussed in Item 5 "Other Information," the Company is
negotiating with SMECO to establish rates for the future which
could result in a new full-requirements agreement.
OPERATING EXPENSES
Fuel expense increased for the three, nine and twelve months
ended September 30, 1998, as compared to the corresponding
periods in 1997, primarily due to increases of 24.2%, 19.4% and
19.3%, respectively, in net generation; partially offset by
decreases in the system average unit cost of fuel discussed
below. The increases in purchased energy for the three, nine and
twelve months ended September 30, 1998, reflect changes in levels
and prices of energy purchased from PJM and other utilities and
power marketers.
20
The unit fuel costs for the comparative periods ended
September 30, were as follows:
Three Nine Twelve
Months Ended Months Ended Months Ended
September 30, September 30, September 30
------------- ------------- ------------
1998 1997 1998 1997 1998 1997
----- ----- ----- ----- ----- -----
System Average
Fuel Cost per MBTU $1.72 $1.81 $1.75 $1.84 $1.77 $1.82
System average unit fuel cost decreased for the three, nine
and twelve months ended September 30, 1998, as compared to the
corresponding periods in 1997, primarily due to decreases in the
costs of coal and residual oil.
For the twelve month periods ended September 30, 1998 and
1997, the Company obtained 84% 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, nine and
twelve months ended September 30, 1998, as compared to the
corresponding periods in 1997. These increases reflect
contractual escalations under existing purchase capacity
contracts with Ohio Edison and Panda-Brandywine (Panda).
Operating expenses other than fuel, purchased energy and
capacity purchase payments increased for the three, nine and
twelve months ended September 30, 1998, as compared to the
corresponding periods in 1997, primarily due to increases in
other operation and maintenance expenses associated with the
Company's targeted severance plan and Year 2000 remediation
costs, increases in depreciation and amortization expense
associated with additional investment in property and plant, and
increases in income taxes resulting from increased taxable
income.
21
Year 2000 Compliance
--------------------
The Company has implemented a 4-pronged approach to
accommodate the Year 2000. All phases are coordinated through a
Corporate Year 2000 Task Force comprised of representatives from
each Business Unit. The phases being addressed are as follows:
1. Corporate Applications (Information Technology)
Readiness: Corporate Applications are large core
systems such as Customer Information, Human Resources
and General Ledger, for which the Company's Computer
Services Group (CSG) has responsibility. Year 2000
modifications to these systems are being
programmed and tested by CSG.
2. Embedded Systems (Non-Information Technology
Processes): These systems include items such as
meters, power plant operating and control systems,
telecommunications systems and facilities-based
equipment (e.g. elevators). These products are being
evaluated and modified as required by the appropriate
internal end-user, in coordination with the systems'
vendors.
3. End-User Computing Systems (Non-Core [Departmental]
Business Systems): Corporate areas other than CSG
have developed systems, databases, spreadsheets, etc.
that contain date calculations. These products are
being evaluated and modified as required by the
appropriate end-user.
4. Business Partners' Systems and Vendor Supply-Chain
Verification: The Company is seeking to obtain Year
2000 assurances from numerous vendors who provide
products and services to the Company. This effort is
being jointly undertaken by the Company's Materials
Group and appropriate end-users.
The Task Force meets regularly to monitor the status of the
efforts of the Company's assigned staff, contractors, and vendors
in testing and remediating Year 2000 related issues. Task Force
Subcommittees are addressing additional Year 2000 related issues
including, but not limited to, customer communications, testing
procedures and business continuation and other contingency
planning.
As of September 30, 1998, approximately 95% of the 110
corporate Information Technology systems (7,891 programs) have
been upgraded and/or re-programmed. "Time Machine" testing using
a portion of the mainframe computer system partitioned for Year
2000 full-cycle testing is now in its second series of processing
22
applications; 65% of corporate Information Technology systems
have been tested in the time machine. A parallel LAN (local area
network) Year 2000 testing facility has been established, and
testing of LAN-based applications has commenced.
Assessments of critical operational systems containing
embedded systems were completed in October 1998 by teams of
vendors, contractors and Company personnel. Year 2000 upgrades
to the distributed control systems of Potomac River Units 1, 2, 4
and 5 have been completed and will be tested in November 1998.
The distributed control systems of Chalk Point Units 2 & 4 will
be remediated and tested in November and December 1998.
Remediation efforts are in process at other plants and areas of
the electric system. In addition to including Year 2000
remediation and testing as part of regularly scheduled plant
outages, special Year 2000 outages have been scheduled in the
fall of 1998 and winter and spring of 1999. Test scheduling is
more complex for embedded systems because of the difficulty
inherent in scheduling power plant outages to accommodate the
testing. In addition, some vendors are requesting that their
customers refrain from testing certain components because of the
potential difficulties in recovering from such tests. These
vendors have either advised that their product is Year 2000 ready
or have invited the Company to participate in testing at their
facilities. At this time, all affected plant units have outages
planned for Year 2000 testing. This differs from the original
plan to test one typical unit of each type. To accommodate this
change of scope, the completion date for all Year 2000 testing of
critical and high priority components has been revised to June
30, 1999. This target date may be impacted by the integration
testing plans and scheduled generation/ electric systems outage
decisions inherent in embedded systems processing. As of
November 12, 1998, it appears that all identified Year 2000
impacted processing components can be upgraded, modified or
otherwise made Year 2000 ready within acceptable time frames.
End-user computing systems comprise a relatively small
percentage of the required modification both in terms of number
and criticality. All activities remain on schedule to be
completed by mid-1999.
The Company is participating in an Electric Power Research
Institute sponsored consortium of approximately 100 organizations
and investor-owned utilities to coordinate vendor contacts and
product evaluation. Since many embedded systems are similar
across utilities, this cooperative effort should help to reduce
total time expended in this area and help ensure that the
Company's efforts are consistent with the efforts and practices
of other investor-owned utilities.
23
The United States Department of Energy requested that the
North American Electric Reliability Council (NERC) prepare a
comprehensive report outlining the efforts of electric power
supply and delivery systems to prepare for Year 2000. NERC
collected data from utilities on a voluntary basis, and issued a
report on September 17, 1998. The Company was among the first
30% of utilities to respond to NERC with the requested data.
Major challenges remain in several areas: maintaining
sufficient human resources to complete Year 2000 tasks;
evaluating integrated testing requirements for many embedded
systems, taking into account planned outages and operational
needs; and completing contingency planning for the variety of
scenarios which might occur. There are three potential areas of
resource constraints. First, as other companies and government
agencies gear up their Year 2000 remediation activities, the
competition for trained personnel (e.g. programmers) is becoming
stronger. The Company continues to operate effectively in the
employment and contracting marketplace, and is maintaining the
required level of resources. Second, as the Company continues to
reorganize to prepare for industry deregulation, there is a risk
of losing technically and functionally knowledgeable people to
remediate and test systems. However, operating areas have been
instructed to give increased attention to Year 2000 staffing
needs when making reorganization decisions. Third, the
availability of vendor resources to complete embedded system
assessments and produce in volume any required component upgrades
will be a concern.
Integration testing also presents a challenge because of
scheduling constraints and admonitions from some vendors
regarding the risks of testing. A careful evaluation of testing
options and vendor testing documentation must be made on a
component-by-component basis in order to determine the most
appropriate method for obtaining Year 2000 readiness.
Business continuation and contingency planning efforts are
in progress at several levels. Business Units responsible for
critical components and systems are preparing plans in case of
potential failures of individual components or systems. These
plans are referenced in the Year 2000 tracking database and will
be incorporated into the Company's Year 2000 Business Continuity
Plan.
In order to ensure adequate staffing for contingencies that
may arise, Company employees have been informed that vacation,
floating holidays, and other discretionary leave may not be
scheduled between December 26, 1999 and January 8, 2000.
The Company has embarked on a program to identify and
remediate problems that could affect service to customers. The
objective is to identify and minimize risk to critical business
functions and associated computer processes before the problems
24
impact Company operations. Recognizing that all contingency
plans should support business continuity, the Company has formed
a Business Continuity Plan Team to integrate contingency plans.
The Company's business continuity planning will go beyond
contingency planning to document actions to be taken, resources
required, and procedures to be followed to ensure the continued
availability of essential services, programs, and operations in
the event of unexpected interruptions.
The following steps will be used for business continuity
planning:
1. Identification of Year 2000 Operating Risks - Identify
sources of risk, both internal and external, which may
impact the Company's ability to sustain reliable
operations into the Year 2000 and beyond.
2. Review of Existing Operating Plans - Review existing
procedures to determine if a Year 2000-specific plan
should be incorporated.
3. Develop Risk Management Strategies - Perform an analysis
of, and make recommendations for, alternative methods of
continuing critical business functions.
4. Develop Year 2000 Emergency Plan and Enhance Existing
Plans - A separate Year 2000 plan will be developed
that will interface with the Company's Corporate
Emergency Response Plan (ERP). Modification and
enhancements to existing plans will include the
following: (a) Procedures to be followed before,
during, and after a disaster; (b) Inventories of
information needs in a disaster, such as emergency
personnel lists, supplier lists, etc.; (c) Vital records
risk level; (d) Analysis of means to mitigate risk; and
(e) Integration of Year 2000 into the ERP.
5. Validation Process - Tests will be conducted by the
Business Continuity Planning Team to include tabletop
exercises and drills on likely Year 2000 scenarios.
The Company's planning process includes a review of
emergency coordination interfaces with the community. For
example, a key facet of business continuity is the Company's
interface with various emergency management agencies. The
Company is participating with the Metropolitan Washington Council
of Governments, which is looking at public safety issues on a
regional basis using existing regional public safety and
emergency management organizations. The Company presented a
planning status report to the Council of Governments on November
5, 1998 and is also actively participating with county emergency
management agencies in Year 2000 planning and drills.
25
To assist in review and testing of business continuity
planning, the Company contracted with Binominal International and
LGS Group Inc. (LGS). Binominal International is known for its
contingency planning and disaster recovery expertise. Binominal
International will assist in the review and testing of business
continuity planning. LGS will provide the resources to assist
the Company in identifying and incorporating Year 2000 components
into the plan as they relate to critical applications. This will
consist of reviewing the ERP procedure and commenting on it with
respect to Year 2000. LGS is a leading international information
technology and management consulting firm.
The first draft of the Company's Business Continuity Plan is
scheduled to be completed by December 15, 1998.
The Company is working through the PJM Interconnection to
address risks related to the regional electric transmission
system. Such interconnected systems are critical to the
reliability of each interconnected electric service provider, as
the failure of one such interconnected provider to achieve Year
2000 readiness could disrupt others from providing electric
service. Should the regional electric transmission grid become
unstable, power outages could occur. The Company's existing
emergency system restoration plan is being reviewed for use in
the event of such Year 2000 system disruptions.
NERC has responsibility for overseeing the efforts of the
industry in the United States and is coordinating Year 2000
efforts and contingency planning within and between the ten
electric reliability councils throughout the United States.
Coordination in the Company's region is through PJM. PJM, along
with NERC, has set a deadline of December 31, 1998 for the
development of draft contingency plans. The Company provides
reports of its Year 2000 activities to NERC on a monthly basis.
Results show that the Company is on schedule to meet the NERC
target dates for Year 2000 readiness. The Company will
participate in NERC's planned 1999 drills.
The availability of telecommunications services is a major
concern to the Company. Telecommunications are integral to
maintaining electric system operations internally, within PJM,
and throughout the Northern American grid. Contingency planning
for various loss of telecommunications scenarios is underway.
The Company agrees with NERC's September 17, 1998 report to
the United States Department of Energy regarding the various Year
2000 scenarios that could occur. NERC has divided these into
"more probable scenario types," such as loss or unavailability of
a portion of generation, loss of a portion of system monitoring
and control functions, loss of voice communications, loss of a
portion of load, or uncharacteristic load; and "credible worst-
case scenarios," such as loss of a portion of transmission
26
facilities, underfrequency load shedding, and loss of intra- or
interregional communications. The Company's Business Continuity
Planning Team will be evaluating scenarios such as these and
developing appropriate response plans.
The Company has established a range of communications to
keep customers and suppliers informed of Year 2000 efforts.
During September 1998, Year 2000 briefing seminars were held for
many large customers. Individual meetings with several large
customers have also been held. A bill insert has been used to
advise customers of Year 2000 activities; future bill inserts
will be used as needed. A brochure for customers inquiring about
the Company's Year 2000 efforts is being finalized and will be
ready for distribution within one month. The brochure will be
posted on the Company's web page on the Internet, and the web
page will be updated periodically with the latest Year 2000
status information. An updated telephone script has been
developed for customer service representatives answering Year
2000 related telephone inquiries from customers.
The Company has contacted over 6,000 suppliers and vendors
to seek assurance that they will continue to provide goods and
services after December 1999. Follow-up contacts continue.
Identified essential suppliers will be defined as critical
dependencies in the draft Business Continuity Plan.
The cost or consequences of a material incomplete or
untimely resolution of the Year 2000 problem could adversely
affect future operations, financial results or financial
condition of the Company.
The cost of expected modifications will be approximately $14
million, and will be charged to expense as incurred; through
September 30, 1998, $4.7 million has been charged to expense.
Approximately $1.2 million and $3.4 million have been expensed in
the three and nine months ended September 30, 1998, respectively.
Approximately 70% of the total cost will be spent in 1998, and
the remainder in 1999. These estimates may change as additional
evaluations are completed and remediation and testing progresses.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
The Company's investment in property and plant, at original
cost before accumulated depreciation, was $6.6 billion at
September 30, 1998, an increase of $95.7 million from the
investment at December 31, 1997, and an increase of $162.9
million from the investment at September 30, 1997. Cash invested
in property and plant construction, excluding Allowance for Funds
Used During Construction and Capital Cost Recovery Factor,
amounted to $146 million for the nine months ended September 30,
1998, and $223 million for the twelve months then ended.
27
At September 30, 1998, the Company's capital structure,
excluding short-term debt, long-term debt due within one year and
nonutility subsidiary debt, consisted of 45.7% long-term debt,
2.5% serial preferred stock, 1.2% redeemable serial preferred
stock, 3.1% Company obligated redeemable preferred securities of
subsidiary trust and 47.5% common equity.
Cash from utility operations, after dividends, was $224.1
million for the nine months ended September 30, 1998, and $269
million for the twelve months then ended as compared with $157.6
million and $248.8 million, respectively, for the corresponding
periods ended September 30, 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.
In May 1998, Potomac Electric Power Company Trust I, of
which the Company owns all of the common securities, issued $125
million of 7-3/8% Trust Originated Preferred Securities.
In June 1998, the Company redeemed three series of serial
preferred stock. The redemption totaled $123.7 million and
includes $6.6 million in premiums.
Outstanding utility short-term debt totaled $119.1 million
at September 30, 1998, a decrease of $12.3 million from the
$131.4 million outstanding at December 31, 1997, and a decrease
of $158 million from the $277.1 million outstanding at September
30, 1997.
On August 14, 1998, the Company filed for a 5.3% decrease in
the Maryland fuel rate, which became effective beginning the
billing month of September 1998, subject to refund. Also, on
October 19, 1998, the Company filed for an additional 6.3%
decrease in the Maryland fuel rate, which became effective
beginning the billing month of November 1998, subject to refund.
Also see the discussion included in Note (3) of the Notes to
Consolidated Financial Statements, Capitalization and Fair Value
of Financial Instruments, for additional information.
28
NONUTILITY SUBSIDIARY
- ---------------------
RESULTS OF OPERATIONS
- ---------------------
Earnings for Potomac Capital Investment Corporation (PCI)
for the three, nine and twelve months ended September 30, 1998,
were $3.8 million ($.03 per share), $16.2 million ($.14 per
share) and $17.5 million ($.15 per share), respectively, compared
with $.9 million ($.01 per share), $15.8 million ($.13 per share)
and $16.3 million ($.14 per share) for the periods ended
September 30, 1997. Net earnings for the three, nine and twelve
months ended September 30, 1998, were greater than the
corresponding periods in 1997 primarily due to the sale of real
estate in the third quarter of 1998 which generated a pre-tax
gain of $9.1 million ($5.9 million after-tax); and to reduced
interest expense associated with a decrease in outstanding debt.
The increases for the nine and twelve months ended September 30,
1998, were partially offset by 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, and decreases in capital gains and dividend income
associated with the reduction in the preferred stock portfolio.
Currently, PCI generates income primarily from its leasing
activities and operating businesses. Income from leasing
activities, which includes rental income, gains on asset sales,
interest income and fees, totaled $15.5 million, $59.3 million
and $77.9 million for the three, nine and twelve months ended
September 30, 1998, respectively, compared to $21.3 million,
$57.1 million and $78.4 million for the corresponding periods in
1997. The decrease for the three months ended September 30,
1998, compared to the corresponding period in 1997, was primarily
the result of a decrease in rental income as a result of asset
sales and a decrease in interest income related to the sale of
aircraft notes during 1997. The increase for the nine months
ended September 30, 1998, compared to the corresponding period in
1997, was primarily due to the pre-tax gains on sales of aircraft
equipment of $2.9 million in the first quarter and $6.3 million
in the second quarter, offset by a decrease in rental income.
The decrease for the twelve months ended September 30, 1998,
compared to the corresponding period in 1997, was primarily due
to decreases in rental income and interest income, partially
offset by gains from sales of assets during the first and second
quarters of 1998. PCI's marketable securities portfolio
contributed pre-tax income of $3.9 million, $14.9 million and
$19.9 million for the three, nine and twelve months ended
September 30, 1998, respectively, compared to $5.8 million, $23.6
million and $31.8 million for the corresponding periods in 1997.
These results include net realized gains of zero, $2 million and
$1.9 million for the three, nine and twelve months ended
29
September 30, 1998, respectively, compared to $.7 million, $6.9
million and $8.1 million for the corresponding periods in 1997.
Securities income decreased for the three, nine and twelve months
ended September 30, 1998, due to decreases in dividend income as
a result of the reduction in the preferred stock portfolio.
Other income totaled $10.5 million, $28.9 million and $29.2
million for the three, nine and twelve months ended September 30,
1998, respectively, compared to $5.8 million, $20.7 million and
$20.6 million for the corresponding periods in 1997. The
increases for the three, nine and twelve months ended September
30, 1998, over the corresponding periods in 1997, were primarily
the result of a $9.1 million pre-tax gain on the sale of real
estate in the third quarter of 1998 and a $3.1 million pre-tax
gain on the sale of real estate during the first quarter of 1998.
Expenses before income taxes, which include interest,
depreciation and operating, and administrative and general
expenses totaled $28.6 million, $89.4 million and $119.4 million
for the three, nine and twelve months ended September 30, 1998,
respectively, compared to $35.4 million, $109.9 million and
$143.7 million for the corresponding periods in 1997. The
decreases during the three, nine and twelve months ended
September 30, 1998, 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, nine and
twelve months ended September 30, 1998, also decreased due to
reductions in depreciation and operating expenses resulting from
the sale of aircraft.
PCI had income tax credits of $2.5 million, $2.4 million and
$10 million for the three, nine and twelve months ended September
30, 1998, respectively, compared to income tax credits of $3.4
million, $24.3 million and $29.1 million for the corresponding
periods in 1997. The decreases in income tax credits for all
three periods were primarily the result of higher pre-tax income,
and for the nine and twelve month periods, the first quarter 1997
joint venture operations that reduced previously accrued deferred
taxes by $10.1 million.
Year 2000 Compliance
--------------------
In connection with Year 2000 compliance efforts, a PCI
representative sits on the Corporate Year 2000 Task Force. PCI
is following the utility's approach, as discussed previously, for
monitoring its in-house systems and PCI's systems have been
included in the overall Year 2000 Corporate Data Base. All PCI
in-house business systems remain on schedule to become Year 2000
compliant by mid-1999. Costs for these remediation efforts are
currently estimated at less than $50,000. In addition, PCI is
30
addressing potential Year 2000 issues with the operations of
businesses in which PCI has investment or operating interests.
The Corporate Year 2000 Task Force will be assisting PCI with its
examination and monitoring of Year 2000 issues involving these
strategic business interests. Issues include ascertaining
responsibility for and monitoring progress of any Year 2000
remediation efforts required for investment-based business and
embedded systems. Plans and progress reports have been received
for most such systems. Due to the significant nature of PCI's
planned investment in Starpower Communications, LLC (Starpower),
a joint venture with RCN Telecom Services, Inc. (RCN), PCI has
instituted a Starpower-specific Year 2000 Program. Starpower
receives significant support services from RCN which plans to
complete its formal Year 2000 Plan by the end of November 1998,
somewhat later than the original target completion date. PCI is
working with Starpower and RCN toward readiness of RCN-supplied
support systems, and other Starpower systems and operations with
Year 2000 requirements. A contingency plan is being developed in
the event that remediation efforts are not successfully completed
in a timely fashion. The cost or consequences of a material
incomplete or untimely resolution of the Year 2000 problem could
adversely affect PCI's future operations, financial results or
financial condition.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
PCI has a $240.7 million securities portfolio, consisting
primarily of fixed-rate electric utility preferred stocks.
During the first nine months of 1998, PCI had a net reduction in
the cost basis of its marketable securities portfolio of $64
million, primarily as the result of calls and acceptance of
tender offers of approximately $65 million offset by purchases of
$1 million. The reduced size of the preferred stock portfolio
lessens the impact of future fluctuations in interest rates. The
proceeds from securities activity during 1998 were used to pay
down 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. In September 1998, PCI sold real estate
and received $12.6 million in cash proceeds and recorded an
after-tax gain of $5.9 million.
PCI had short-term debt outstanding of $183 million at
September 30, 1998, compared to $7.7 million at December 31,
1997, and $9.2 million at September 30, 1997. During the three,
nine and twelve months ended September 30, 1998, PCI issued $29.1
million, $52.1 million and $52.1 million in long-term debt,
including non-recourse debt, and debt repayments totaled $45
million, $324.4 million and $357.1 million, respectively. At
31
September 30, 1998, PCI had $700 million available under its
Medium-Term Note Program and $400 million of unused bank credit
lines.
As of September 30, 1998, PCI has invested $12.5 million of
its total $150 million commitment to Starpower. 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. PCI expects that the joint venture will incur operating
losses initially, as it develops and expands its network and
customer base.
During the first quarter of 1998, RCN acquired Erols
Internet in a stock-for-stock exchange. The majority of Erols
customers (approximately 197,000 out of a total 316,000) are
located in Starpower's target market. These customers' accounts,
as well as certain associated network assets and related
liabilities, have been committed by RCN to Starpower. As a
result of this transaction, Starpower is amortizing the majority
of acquisition premium paid for its portion of the Erols business
over a five-year period commencing March 1998. PCI's annual net
of tax share of the amortization is estimated to be $5.5 million
for 1999. PCI's year-to-date share of the amortization, which
was recorded in the third quarter of 1998, had a negative after-
tax impact on earnings of $3.2 million.
On September 23, 1998, Starpower and the City of
Gaithersburg signed the first Open Video System (OVS) agreement
in the state of Maryland. This local approval allows Starpower
to offer Gaithersburg residents and businesses an alternate
choice in video programming and will pave the way for Starpower
to provide local phone, long-distance and high-speed Internet
access within the market. A 94-channel basic cable service
through an advanced fiber-optic network will be offered in mid-
1999. Also, on October 26, 1998, subject to Control Board
approval, Starpower and the District of Columbia signed an OVS
agreement to provide video programming, local phone, long-
distance and high-speed Internet access to District residents.
This agreement will enable Starpower to begin delivering service
over its fiber optic network to 9,000 residences by the end of
1998.
On September 9, 1998, Pepco Services, Inc., a wholly owned
subsidiary of PCI, purchased the assets and operations of
Gaslantic Corporation, a Maryland-based natural gas retail
marketing and advisory services company, for $4.2 million.
Gaslantic, currently based in Forest Hill, Maryland, specializes
in strategic fuel management for large gas users in the eastern
United States, and assists commercial, industrial and
institutional customers in obtaining the best fuel source,
32
transportation and price. The acquisition will enable Pepco
Services, Inc., to provide its customers with a wider array of
energy solutions.
Part II OTHER INFORMATION
- ------- -----------------
Item 1 LEGAL PROCEEDINGS
- ------ -----------------
See Part I, Item 1, Notes to Consolidated Financial
Statements, (4) Commitments and Contingencies. Also, see the
discussion of Environmental Matters under Item 1 - Business of
the Company's 1997 Form 10-K.
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 $165 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
- --------
In June 1998, the Company filed a rate increase request with
the Maryland Public Service Commission seeking to increase annual
revenue by $56.3 million, or 5.9%. The request was filed to
recover $30.3 million of increased capacity costs, beginning
January 1, 1999, under existing Commission-approved purchased
capacity contracts with Ohio Edison and Panda. These increases
result from contractual escalations and not from increased levels
of capacity. Additional items that make up the requested
increase are: amortization over five years of costs related to
the 1998 severance plan ($3.5 million); amortization over five
years of Year 2000 compliance costs ($1.2 million); an increase
in the authorized rate of return from 9% to 9.23% ($6.8 million);
other adjustments to conform to prior ratemaking determinations
($6.5 million); and a request to normalize tax effects of pre-
1981 plant removal costs ($8 million). The request was based on
a partially projected test period and a requested return on
equity of 12%. The request was updated on September 11, 1998,
using actual results to replace the partially projected data
included in the filing. The updated data indicated a revenue
increase requirement of $50.4 million.
33
On October 9, 1998, the Company along with the Maryland
People's Counsel, the Maryland Commission Staff, and all of the
other parties filed a joint motion with the Commission seeking
approval of a settlement agreement with respect to the Company's
application for a rate increase. Under the terms of the
settlement, the Company would increase its base rates by an
average of 2%, or $19 million annually, effective with services
rendered on and after December 1, 1998. The settlement is a
comprehensive settlement of all issues in the case and does not
include a specific rate of return determination. On October 28,
1998, the settlement agreement was accepted by the Hearing
Examiner in the case, and is scheduled to become a final Order of
the Commission on November 28, 1998. Previously, pursuant to a
November 1997 settlement agreement, the Commission authorized a
$24 million, or 2.6%, increase in base rate revenue effective
with bills rendered on and after November 30, 1997.
Effective September 21, 1998, the Maryland DSM surcharge
tariff was lowered, which will reduce annual revenues by
approximately $3 million, reflecting the Company's efforts to
reduce conservation program offerings and limit conservation
spending. The surcharge includes provisions for the recovery of
lost revenue, amortization of pre-1998 actual program
expenditures plus the initial amortization of 1998 projected
program costs, a return on unamortized program balances and an
incentive of $1.3 million awarded for achieving specified 1997
energy goals. In the second quarter of 1997, an incentive of
$1.6 million was awarded for achieving 1996 energy goals.
Maryland energy goals have been successively reduced to reflect
declining DSM expenditures.
District of Columbia
- --------------------
As discussed in the June 30, 1998 Form 10-Q, the District of
Columbia Public Service Commission authorized a $27.9 million, or
3.8%, increase in base rate revenues, effective July 1995.
In June 1997, the Company requested that the Commission
update the Environmental Cost Recovery Rider (ECRR) surcharge
tariff to include recovery of actual DSM expenditures incurred
during the period January 1995 through December 1996, increasing
annual revenue by approximately $9 million. This surcharge
includes both a conservation expenditure component and a
component for recovering certain costs associated with complying
with the Clean Air Act (CAA) amendments of 1990. The
conservation component is scheduled to be updated annually on
June 1 of each year, while the CAA component is updated
quarterly. In a June 1998 filing, the Company requested that
recovery of year 1997 DSM expenditures also be reflected within
the ECRR. On September 3, 1998, the Commission approved the
Company's June 1997 request for recovery of the January 1995
34
through December 1996 DSM expenditures, increasing annual revenue
by approximately $9 million. On October 30, 1998, the Company
updated its June 1998 request for 1997 DSM expenditures to
incorporate provisions of the Commission's September 3, 1998,
decision, which would increase annual revenue by approximately $3
million.
Federal - Wholesale
- -------------------
As discussed in the June 30, 1998 Form 10-Q, the Company has
a rolling-10-year power supply contract with SMECO, a wholesale
customer with a peak load of about 600 megawatts, to supply
SMECO's entire electricity requirements. SMECO issued a request
for proposals early in 1998. The Company is currently
negotiating with SMECO to establish rates for the future which
could result in a new full-requirements agreement.
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. Presently, all transmission
service in PJM is administered by the PJM Office of the
Interconnection. In addition to interchange with PJM, the
Company is actively participating in the bilateral energy sales
marketplace; numerous utilities and marketers have executed
service agreements allowing them to arrange purchases under the
Company's wholesale power sales 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 tariff also allows for the sale of generating
capacity on a short-term basis. Presently, the Company has
agreements for installed capacity sales through December 31,
1998, totaling 271 megawatts. Revenues from capacity and
bilateral energy transactions totaled approximately $35.2
million, $54.3 million and $57.1 million for the three, nine and
twelve months ended September 30, 1998, respectively, and $1.6
million, $8.3 million and $8.9 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.
35
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
- -----------
Maryland
- --------
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.
As discussed in the June 30, 1998 Form 10-Q, on July 1,
1998, the Company filed with the Commission (1) a quantification
of its Maryland jurisdictional generating, purchased power and
other costs that the Company projects would be stranded in a
competitive market for generating services; (2) a proposed method
for recovering such stranded costs through a non-bypassable
Competitive Transition Charge; (3) proposed unbundled rates for
retail service; and (4) a proposal to freeze retail rates from
the time competition begins until January 2004. This filing was
made in compliance with Orders issued by the Commission in
December 1997 that established a process for implementing retail
competition and provided for the phase-in of customer choice for
generation supply service beginning in July 2000 and ending with
all customers having choice in July 2002. The Company made
numerous assumptions in the filing, including assumptions as to
the outcome of its pending base rate case before the Commission,
the future price of electricity including fuel charges, future
revenues, the cost of transmission and distribution, and service
territory demographics, some or all of which may prove not to
have been accurate. This filing will be the subject of an
adjudicatory proceeding which is expected to conclude in
October 1999. In connection with the filing, the Company
reiterated its position that absent appropriate enabling
legislation by the Maryland General Assembly, the Commission
lacks the legal authority to implement the plan filed by the
Company, or any other restructuring plan providing for retail
competition.
The Commission's implementation process provides for a
15-month period to study the filing. After that period, the
Company will be required to file a restructuring plan in November
1999 which would take into account any restructuring legislation
enacted by the General Assembly, as well as the outcome of the
adjudicatory proceeding initiated by the Commission with respect
to the filing. Accordingly, the filing does not constitute the
Company's final restructuring plan.
36
If a competitive market for generation supply is implemented
in Maryland, the Company assumes that the Commission will follow
through on its commitment to provide a fair opportunity for the
Company to recover its prudently incurred stranded costs (the
total economic value of previously expected regulatory earnings
that will not be recovered in a deregulated energy market, having
a net after-tax present value of $600.4 million) and that the
stranded costs identified by the Company in the filing will be
determined to have been prudently incurred. The inability of the
Company to recover fully its stranded costs could have a material
adverse impact on the future earnings and cash flows of the
Company, and may result in consequences including, but not
limited to, increases in the cost of capital, increases in rates
for transmission and distribution services, exposure to
downgrades in credit ratings and involuntary layoffs of
employees.
On October 9, 1998, the Company and four other electric
utilities operating in Maryland - Allegheny Power, Choptank
Electric Cooperative, Inc., Conectiv and SMECO - filed separate
appeals in Baltimore City Circuit Court seeking a judicial review
of recent decisions by the Maryland Commission in which the
Commission asserted its authority to restructure the electric
utility industry without authorization from the state
legislature. The Company believes that the proper way to ensure
progress is for the legislature, in its 1999 session, to grant
the Commission authority to proceed. Accordingly, the utilities
have asked the court to defer action on the appeal until after
completion of the 1999 legislative session, which begins in
January 1999. The appeal complies with current state law that
allows a party to a Commission order only 30 days to appeal;
otherwise, the decision is final and not subject to court review.
District of Columbia
- --------------------
In September 1996, the District of Columbia Public Service
Commission issued an order designating the issues to be examined
regarding electric industry structure and competition. The
Company filed comments on the designated issues in early 1997,
and on August 31, 1998, the Commission Staff issued its proposal
for bringing choice of electric suppliers to District of Columbia
customers. The Staff's proposal is currently under the review of
the full Commission, which may ultimately reach different
conclusions. Pursuant to the Staff's recommendation, competition
would be phased in over a two-year period beginning January 1,
2001. Customers representing one-fifth of the electric load in a
particular customer class would be able to choose their electric
generation supplier at that time. On January 1, 2002, the
eligible group increases to one-half of any one customer class,
and all customers will then become eligible one year later. The
Staff proposed the establishment of working groups to address
issues such as conservation, environmental compliance, consumer
37
protection, provision of universal service, supplier
certification, and the need for legislation to pave the way for
choice. More difficult issues such as the design of unbundled
rates and stranded cost estimation and recovery would be
addressed in future adjudicatory proceedings. The Company
expects that the full Commission will issue an order in the near
future in response to the Staff report. Although not currently
required to do so, the Company intends to file a restructuring
plan related to its District of Columbia service territory by the
end of 1998.
PEAK LOAD, SALES, CONSERVATION, AND CONSTRUCTION
- ------------------------------------------------
AND GENERATING CAPACITY
-----------------------
Peak Load and Sales Data
- ------------------------
Kilowatt-hour sales increased 7.1%, 3.7% and 3.4% for the
three, nine and twelve months ended September 30, 1998, compared
to sales in the corresponding periods of 1997. Although weather,
as measured in cooling degree hours, in the second and third
quarters of 1998 was 18% hotter than in 1997, it was
nevertheless, 7% cooler than the 20-year average. Weather in the
first quarter of 1998 was 4% milder than the first quarter of
1997 and 17% milder than the 20-year average. Assuming future
weather conditions approximate historical averages, the Company
expects its compound annual growth in kilowatt-hour sales to be
approximately 2% over the next decade.
On June 26, 1998, the Company established an all-time summer
peak demand of 5,807 megawatts. This compares with the 1997
summer peak demand of 5,689 megawatts, and the prior 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. At the
time of the 1998 summer peak demand, the Company's energy use
management programs had the capability of reducing system demand
by an additional 242 megawatts. Based on average weather
conditions, the Company estimates that its peak demand will grow
at a compound annual rate of approximately 2%, 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.
38
Conservation
- ------------
On September 16, 1998, the Company received permission from
the Maryland Public Service Commission to decrease the DSM
surcharge effective with bills rendered on and after September
21, 1998, which will reduce annual revenue by approximately $3
million. The reduction in the surcharge rate reflects a decline
in the costs and scale of Maryland DSM programs. The Company
invested approximately $3.1 million, $13 million and $18.9
million in Maryland DSM programs for the three, nine and twelve
months ended September 30, 1998, respectively, and $5.4 million,
$18.2 million and $24.1 million for corresponding periods in
1997. The surcharge mechanism includes a provision for the
recovery of program cost amortization and permits the Company to
earn a return on its conservation investment while receiving
compensation for lost revenue. In addition, when energy savings
exceed annual goals, the Company earns a performance bonus. The
Company was awarded a bonus of $1.3 million in 1998, based on
1997 performance, which followed a bonus of $1.6 million in 1997,
based on 1996 performance. The surcharge tariff is revised each
year. Beginning with the 1998 surcharge update, the program cost
amortization period will be successively reduced to reflect the
following: 1998 program costs will be amortized over four years;
1999 program costs will be amortized over three years; 2000
program costs will be amortized over two years; and 2001 and
subsequent program costs will be amortized over one year. In
addition, the performance bonus provision of the surcharge
relative to future energy saving goals will no longer apply.
Investment in District of Columbia DSM programs totaled
approximately $3.2 million, $4.5 million and $5.9 million for the
three, nine and twelve months ended September 30, 1998,
respectively, and $1.6 million, $3.7 million and $6.8 million for
the corresponding periods in 1997. These DSM costs are amortized
over ten years with an accrued return on unamortized costs. In
June 1997, the Company filed an Application for Authority with
the District of Columbia Commission to update the ECRR surcharge
tariff to recover actual DSM expenditures incurred during the
period January 1995 through December 1996. The ECRR surcharge
includes both a conservation expenditure component and a
component for recovering certain costs associated with complying
with the CAA amendments of 1990. The conservation component is
scheduled to be updated annually on June 1 of each year, while
the CAA component is updated quarterly. In a June 1998 filing,
the Company requested that recovery of year 1997 DSM expenditures
also be reflected within the ECRR. On September 3, 1998, the
Commission approved the Company's June 1997 request for recovery
of the January 1995 through December 1996 DSM expenditures,
increasing annual revenue by approximately $9 million. On
October 30, 1998, the Company updated its June 1998 request for
1997 DSM expenditures to incorporate provisions of the
39
Commission's September 3, 1998, decision, which would increase
annual revenue by approximately $3 million. A proposal by the
Company to eliminate DSM programs operated within the District of
Columbia was filed with the Commission in March 1998, and as of
November 11, 1998, a decision 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 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.
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 January
1998, the Company filed a complaint at the FERC challenging the
rate for transmission service being charged by AEI to deliver the
Ohio Edison energy. The complaint argued that the rate being
charged exceeds the rate that AEI now charges under its Order 888
OATT. In an order issued October 30, 1998, the FERC declined to
lower AEI's rate for transmission service. The Company also has
a 25-year agreement with Panda for a 230-megawatt gas-fueled
combined-cycle cogeneration project in Prince George's County,
Maryland. In addition, the Company continues to purchase
capacity and associated energy from a 32-megawatt municipally
financed resource recovery facility in Montgomery County,
Maryland. The capacity expense under these agreements, including
an allocation of a portion of Ohio Edison's fixed operating and
maintenance costs, was $36.2 million, $112 million and $153.3
million for the three, nine and twelve months ended September 30,
1998, respectively, compared to $34 million, $103.9 million and
$132.7 million for the three, nine and twelve months ended
September 30, 1997, respectively. Purchased capacity expenses
are 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.
40
The Company projects that existing contracts for nonutility
generation and the emerging wholesale market for generation
resources are expected to provide adequate reserve margins to
meet present customers' needs well beyond the year 2000.
SELECTED NONUTILITY SUBSIDIARY FINANCIAL INFORMATION
- ----------------------------------------------------
The Company's wholly owned subsidiary, 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
$240.7 million securities portfolio, consisting primarily of
fixed rate electric utility preferred stocks, provides PCI with
significant liquidity and flexibility to participate in
additional investment opportunities. The Company's investment in
PCI was $244.6 million, $227 million and $225.6 million, at
September 30, 1998, December 31, 1997, and September 30, 1997,
respectively.
41
<TABLE>
Potomac Capital Investment Corporation
Consolidated Statements of Earnings:
- --------------------------------------
<CAPTION>
Three Nine Twelve
Months Ended Months Ended Months Ended
September 30, September 30, September 30,
--------------------- --------------------- ---------------------
1998 1997 1998 1997 1998 1997
-------- -------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Income
Leasing activities $ 15,512 $ 21,305 $ 59,348 $ 57,066 $ 77,866 $ 78,416
Marketable securities 3,899 5,751 14,925 23,625 19,941 31,800
Other 10,478 5,842 28,939 20,679 29,175 20,618
-------- -------- -------- -------- -------- --------
29,889 32,898 103,212 101,370 126,982 130,834
-------- -------- -------- -------- -------- --------
Expenses
Interest 13,718 16,482 42,938 53,031 58,866 72,892
Administrative and general 3,533 3,536 11,685 12,246 12,928 14,340
Depreciation and
operating 11,356 15,379 34,741 44,603 47,599 56,447
Income tax credit (2,495) (3,374) (2,391) (24,291) (9,950) (29,119)
-------- -------- -------- -------- -------- --------
26,112 32,023 86,973 85,589 109,443 114,560
-------- -------- -------- -------- -------- --------
Net earnings from
nonutility subsidiary $ 3,777 $ 875 $ 16,239 $ 15,781 $ 17,539 $ 16,274
======== ======== ======== ======== ======== ========
Per share contribution to
earnings of the Company $ .03 $ .01 $ .14 $ .13 $ .15 $ .14
===== ===== ===== ===== ===== =====
42
</TABLE>
<TABLE>
STATISTICAL DATA
- ----------------
<CAPTION>
Three Months Ended Twelve Months Ended
September 30, September 30,
--------------------------------- -------------------------------------
1998 1997 % Change 1998 1997 % Change
-------- -------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue from Sales
------------------
of Electricity
--------------
(Thousands of Dollars)
Residential $208,073 $185,274 12.3 $ 564,882 $ 527,885 7.0
General Service 394,286 370,409 6.4 1,115,688 1,065,271 4.7
Large Power Service <F1> 11,701 11,822 (1.0) 35,287 35,452 (0.5)
Street Lighting 3,143 3,055 2.9 13,286 12,700 4.6
Rapid Transit 8,668 8,444 2.7 29,773 28,529 4.4
Wholesale 39,370 36,617 7.5 126,112 122,284 3.1
-------- -------- ---------- ----------
System $665,241 $615,621 8.1 $1,885,028 $1,792,121 5.2
======== ======== ========== ==========
Energy Sales
------------
(Millions of KWH)
Residential 2,020 1,872 7.9 6,792 6,583 3.2
General Service 4,618 4,322 6.8 15,673 15,184 3.2
Large Power Service <F1> 182 198 (8.1) 685 697 (1.7)
Street Lighting 36 37 (2.7) 164 165 (0.6)
Rapid Transit 117 113 3.5 422 408 3.4
Wholesale 757 674 12.3 2,697 2,539 6.2
-------- -------- ---------- ----------
System 7,730 7,216 7.1 26,433 25,576 3.4
======== ======== ========== ==========
Average System Revenue
----------------------
per KWH (cents per KWH) 8.61 8.53 0.9 7.13 7.01 1.7
-----------------------
System Peak Demand <F2>
------------------
(Thousands of KW)
Summer - - 5,807 5,689
Winter - - 4,076 4,632
Net Generation
--------------
(Millions of KWH) 6,792 5,469 21,012 17,614
Fuel Mix (% of Btu)
-------------------
Coal (%) 74 88 84 90
Oil (%) 21 5 13 5
Gas (%) 5 7 3 5
Fuel Cost per MBtu
------------------
System Average $1.72 $1.81 $1.77 $1.82
Weather Data
------------
Heating Degree Days 4 14 3,671 3,876
20 Year Average 22 4,007
Cooling Degree Hours 7,573 6,526 10,442 8,542
20 Year Average 8,201 10,966
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 September 30, 1998, the net generation capability, excluding short-term capacity transactions,
was 6,806 MW.
</FN>
43
</TABLE>
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
(a) Exhibits
Exhibit 3 - By-Laws.
Exhibit 11 - Computations 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 July 1, 1998, summarizing the Company's
filing of stranded costs and unbundled rates for
retail competition, submitted in compliance with
orders previously issued by the Maryland Public
Service Commission. The item reported on such Form
8-K was Item 5 (Other Events).
44
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
November 12, 1998
- -----------------
DATE
45
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.
46
<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 September 30, 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 ---------------------------------------------------------
September 30,
1998 1997 1996 1995 1994 1993
------------ --------- --------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Net income $181,801 $164,749 $220,066 $218,788 $208,074 $216,478
Taxes based on income 111,745 97,487 135,011 129,439 116,648 107,223
------------ --------- --------- --------- --------- ---------
Income before taxes 293,546 262,236 355,077 348,227 324,722 323,701
------------ --------- --------- --------- --------- ---------
Fixed charges:
Interest charges 150,194 146,703 146,939 146,558 139,210 141,393
Interest factor in rentals 23,619 23,616 23,560 23,431 6,300 5,859
------------ --------- --------- --------- --------- ---------
Total fixed charges 173,813 170,319 170,499 169,989 145,510 147,252
------------ --------- --------- --------- --------- ---------
Income before income taxes and fixed charges $467,359 $432,555 $525,576 $518,216 $470,232 $470,953
============ ========= ========= ========= ========= =========
Coverage of fixed charges 2.69 2.54 3.08 3.05 3.23 3.20
==== ==== ==== ==== ==== ====
Preferred dividend requirements $20,262 $16,579 $16,604 $16,851 $16,437 $16,255
------------ --------- --------- --------- --------- ---------
Ratio of pre-tax income to net income 1.61 1.59 1.61 1.59 1.56 1.50
------------ --------- --------- --------- --------- ---------
Preferred dividend factor $32,622 $26,361 $26,732 $26,793 $25,642 $24,383
------------ --------- --------- --------- --------- ---------
Total fixed charges and preferred dividends $206,435 $196,680 $197,231 $196,782 $171,152 $171,635
============ ========= ========= ========= ========= =========
Coverage of combined fixed charges
and preferred dividends 2.26 2.20 2.66 2.63 2.75 2.74
==== ==== ==== ==== ==== ====
47
</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 September 30, 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 ---------------------------------------------------------
September 30,
1998 1997 1996 1995 1994 1993
------------ --------- --------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Net income $199,340 $181,830 $236,960 $94,391 $227,162 $241,579
Taxes based on income 101,795 65,669 80,386 43,731 93,953 62,145
------------ --------- --------- --------- --------- ---------
Income before taxes 301,135 247,499 317,346 138,122 321,115 303,724
------------ --------- --------- --------- --------- ---------
Fixed charges:
Interest charges 209,681 216,156 231,029 238,724 224,514 221,312
Interest factor in rentals 23,795 23,687 23,943 26,685 9,938 9,257
------------ --------- --------- --------- --------- ---------
Total fixed charges 233,476 239,843 254,972 265,409 234,452 230,569
------------ --------- --------- --------- --------- ---------
Nonutility subsidiary capitalized interest (620) (493) (649) (529) (521) (2,059)
------------ --------- --------- --------- --------- ---------
Income before income taxes and fixed charges $533,991 $486,849 $571,669 $403,002 $555,046 $532,234
============ ========= ========= ========= ========= =========
Coverage of fixed charges 2.29 2.03 2.24 1.52 2.37 2.31
==== ==== ==== ==== ==== ====
Preferred dividend requirements $20,262 $16,579 $16,604 $16,851 $16,437 $16,255
------------ --------- --------- --------- --------- ---------
Ratio of pre-tax income to net income 1.51 1.36 1.34 1.46 1.41 1.26
------------ --------- --------- --------- --------- ---------
Preferred dividend factor $30,596 $22,547 $22,249 $24,602 $23,176 $20,481
------------ --------- --------- --------- --------- ---------
Total fixed charges and preferred dividends $264,072 $262,390 $277,221 $290,011 $257,628 $251,050
============ ========= ========= ========= ========= =========
Coverage of combined fixed charges
and preferred dividends 2.02 1.86 2.06 1.39 2.15 2.12
==== ==== ==== ==== ==== ====
48
</TABLE>
Exhibit 15
November 12, 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 November 12, 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, 33-54197,
333-56683 and 333-57221) filed on September 12, 1990, May 18,
1994, June 17, 1994, June 12, 1998 and June 19, 1998,
respectively, and on Forms S-3 (Numbers 33-58810, 33-61379,
333-33495 and 333-66127) filed on February 26, 1993, July 28,
1995, August 13, 1997 and October 26, 1998, respectively. We are
also aware of our responsibilities under the Securities Act of
1933.
Very truly yours,
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Washington, D.C.
49
Exhibit 3
By-Laws
of
POTOMAC ELECTRIC POWER COMPANY
WASHINGTON, D. C.
As amended through
October 22, 1998
=================================================================
<PAGE>
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 60 days nor more than 85 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.
<PAGE>
2
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
<PAGE>
3
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.
<PAGE>
4
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 or by a nominating committee
or person appointed by 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 60 days nor more than 85 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
<PAGE>
5
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
<PAGE>
6
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.
<PAGE>
7
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
<PAGE>
8
(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,
except for a director who has served as Chief Executive Officer,
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.
<PAGE>
9
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, may elect a Chairman of the Board as
an officer of the Company, 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.
<PAGE>
10
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
<PAGE>
11
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.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0001062043
<NAME> POTOMAC ELECTRIC POWER COMPANY TRUST I
<SUBSIDIARY>
<NUMBER> 2
<NAME> POTOMAC CAPITAL INVESTMENT CORPORATION
POTOMAC ELECTRIC POWER COMPANY TRUST I
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,465,331
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 506,160
<TOTAL-DEFERRED-CHARGES> 645,980
<OTHER-ASSETS> 1,124,972
<TOTAL-ASSETS> 6,742,443
<COMMON> 118,527
<CAPITAL-SURPLUS-PAID-IN> 1,011,604
<RETAINED-EARNINGS> 798,713
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,928,844
50,000
100,000
<LONG-TERM-DEBT-NET> 1,858,590
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 119,125<F1>
<LONG-TERM-DEBT-CURRENT-PORT> 45,000
0
<CAPITAL-LEASE-OBLIGATIONS> 158,336
<LEASES-CURRENT> 20,772
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,461,776<F2>
<TOT-CAPITALIZATION-AND-LIAB> 6,742,443
<GROSS-OPERATING-REVENUE> 1,659,684
<INCOME-TAX-EXPENSE> 129,150
<OTHER-OPERATING-EXPENSES> 1,212,921
<TOTAL-OPERATING-EXPENSES> 1,342,071
<OPERATING-INCOME-LOSS> 317,613
<OTHER-INCOME-NET> 19,879
<INCOME-BEFORE-INTEREST-EXPEN> 337,492
<TOTAL-INTEREST-EXPENSE> 110,891
<NET-INCOME> 226,601
16,122<F3>
<EARNINGS-AVAILABLE-FOR-COMM> 210,479
<COMMON-STOCK-DIVIDENDS> 147,484
<TOTAL-INTEREST-ON-BONDS> 139,600<F4>
<CASH-FLOW-OPERATIONS> 345,495
<EPS-PRIMARY> $1.78<F5>
<EPS-DILUTED> $1.73
<FN>
<F1>Included on the Balance Sheet in the caption "short-term debt".
<F2>Includes redeemable preferred securities of subsidiary trust.
<F3>Includes preferred stock redemption premium of $6,632.
<F4>Total annualized interest cost for all utility long-term debt and
manditorily redeemable preferred securities of subsidiary trust outstanding
at September 30, 1998.
<F5>Basic earnings per share for the nine months ended September 30, 1998 were
$1.78. Diluted earnings per share for the nine months ended September 30, 1998
were $1.73.
</FN>
</TABLE>
