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WASHINGTON, D.C. 20549 |
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FORM 10-Q |
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Quarterly Report Under Section 13 or 15(d) |
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For Quarter Ended |
June 30, 2000 |
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Commission File Number |
1-1072 |
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Potomac Electric Power Company |
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District of Columbia and Virginia |
53-0127880 |
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1900 Pennsylvania Avenue, N.W., Washington, D.C. |
20068 |
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202-872-2000 |
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Indicate by check mark whether the
registrant (1) has filed all reports required to be |
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Yes |
[ X ] |
No |
[ ] |
||||||
Indicate the number of shares
outstanding of each of the issuer's classes of common |
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Class |
Outstanding at June 30, 2000 |
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Common Stock, $1 par value |
113,420,502 |
TABLE OF CONTENTS
Page |
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PART I - Financial Information |
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Item 1. - Consolidated Financial Statements |
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2 |
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3 |
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4 |
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5 |
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5 |
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9 |
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10 |
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11 |
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Report of Independent Accountants on Review of Interim Financial Information |
14 |
Item 2. - Management's Discussion and Analysis of
Consolidated Results of |
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15 |
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16 |
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22 |
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Item 3. - Quantitative and Qualitative Disclosures About Market Risk |
23 |
PART II - Other Information |
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23 |
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23 |
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25 |
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26 |
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27 |
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28 |
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29 |
Part I FINANCIAL INFORMATION
POTOMAC ELECTRIC POWER COMPANY AND SUBSIDIARIES | ||||||
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED INCOME | ||||||
(Unaudited) | ||||||
Three Months Ended | Six Months Ended | Twelve Months Ended | ||||
June 30, | June 30, | June 30, | ||||
2000 | 1999 | 2000 | 1999 | 2000 | 1999 | |
(Millions, except per share data) | ||||||
Operating Revenue | ||||||
Utility | $ 574.9 | $ 546.0 | $ 1,016.0 | $ 999.1 | $ 2,236.2 | $ 2,156.4 |
Nonregulated | 78.2 | 54.0 | 166.3 | 113.0 | 310.0 | 190.8 |
Total Operating Revenue | 653.1 | 600.0 | 1,182.3 | 1,112.1 | 2,546.2 | 2,347.2 |
Operating Expenses | ||||||
Fuel and purchased energy | 275.1 | 248.3 | 523.8 | 463.2 | 1,086.3 | 914.7 |
Other operation and maintenance | 103.7 | 95.0 | 199.1 | 188.0 | 411.8 | 384.3 |
Depreciation and amortization | 67.7 | 66.6 | 134.9 | 133.8 | 273.9 | 267.4 |
Other taxes | 53.4 | 50.6 | 99.1 | 94.7 | 205.5 | 201.8 |
Interest | 52.1 | 48.1 | 103.7 | 96.5 | 202.5 | 193.4 |
Total Operating Expenses | 552.0 | 508.6 | 1,060.6 | 976.2 | 2,180.0 | 1,961.6 |
Loss from Equity Investments,
principally Telecommunication Entities |
(4.0) | (1.7) | (8.0) | (4.8) | (12.8) | (12.4) |
Pre-tax Income | 97.1 | 89.7 | 113.7 | 131.1 | 353.4 | 373.2 |
Distributions on Preferred Securities of Subsidiary Trust | 2.3 | 2.3 | 4.6 | 4.6 | 9.2 | 9.2 |
Income Tax Expense | 36.8 | 12.1 | 41.4 | 25.2 | 130.7 | 109.8 |
Net Income | 58.0 | 75.3 | 67.7 | 101.3 | 213.5 | 254.2 |
Dividends on Preferred Stock | 1.4 | 2.0 | 2.8 | 4.0 | 6.7 | 7.9 |
Redemption Premium/Expenses on Preferred Stock | - | - | - | - | 1.0 | 0.1 |
Earnings Available for Common Stock | 56.6 | 73.3 | 64.9 | 97.3 | 205.8 | 246.2 |
Retained Income at Beginning of Period | 733.7 | 721.9 | 779.3 | 747.3 | 744.4 | 696.6 |
Dividends on Common Stock | (49.1) | (49.2) | (98.3) | (98.3) | (196.6) | (196.7) |
Nonregulated Subsidiary Marketable
Securities, Net Unrealized Gain (Loss), Net of Tax |
2.1 | (1.6) | (2.6) | (1.9) | (10.3) | (1.7) |
Retained Income at End of Period | $ 743.3 | $ 744.4 | $ 743.3 | $ 744.4 | $ 743.3 | $ 744.4 |
Basic Average Common Shares Outstanding | 118.4 | 118.5 | 118.5 | 118.5 | 118.5 | 118.5 |
Basic Earnings Per Share of Common Stock | $0.48 | $0.62 | $0.55 | $0.82 | $1.74 | $2.08 |
Diluted Average Common Shares Outstanding | 121.8 | 122.4 | 121.8 | 123.3 | 121.9 | 123.8 |
Diluted Earnings Per Share of Common Stock | $0.47 | $0.61 | $0.55 | $0.81 | $1.72 | $2.04 |
Cash Dividends Per Share of Common Stock | $0.415 | $0.415 | $0.83 | $0.83 | $1.66 | $1.66 |
Effective Federal Income Tax Rate | 33.9% | 26.6% | ||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these Consolidated Financial Statements. |
POTOMAC ELECTRIC POWER COMPANY AND SUBSIDIARIES | |||
CONSOLIDATED BALANCE SHEETS | |||
(Unaudited at June 30, 2000 and 1999) | |||
June 30, | December 31, | June 30, | |
2000 | 1999 | 1999 | |
ASSETS | (Millions of Dollars) | ||
CURRENT ASSETS | |||
Cash and cash equivalents | $ 34.8 | $ 98.7 | $ 127.1 |
Marketable securities | 193.6 | 203.2 | 227.1 |
Accounts
receivable, less allowance for uncollectible accounts of $8.5, $8.0, and $7.4 |
547.2 | 295.0 | 378.5 |
Fuel, materials and supplies - at average cost | 177.0 | 192.0 | 139.6 |
Prepaid expenses | 6.4 | 35.9 | 24.1 |
Total Current Assets | 959.0 | 824.8 | 896.4 |
INVESTMENTS AND OTHER ASSETS | |||
Investment in finance leases | 623.3 | 664.3 | 423.2 |
Operating
lease equipment - net of accumulated depreciation of $124.2, $113.9, and $131.4 |
67.5 | 77.9 | 114.7 |
Regulatory assets | 428.7 | 411.7 | 436.3 |
Other | 425.0 | 407.5 | 384.3 |
Total Investments and Other Assets | 1,544.5 | 1,561.4 | 1,358.5 |
PROPERTY, PLANT AND EQUIPMENT | |||
Property, plant and equipment | 6,889.5 | 6,784.3 | 6,716.4 |
Accumulated depreciation | (2,331.1) | (2,259.9) | (2,203.0) |
Net Property, Plant and Equipment | 4,558.4 | 4,524.4 | 4,513.4 |
TOTAL ASSETS | $ 7,061.9 | $ 6,910.6 | $ 6,768.3 |
LIABILITIES AND SHAREHOLDERS' EQUITY | |||
CURRENT LIABILITIES | |||
Short-term debt | $ 609.3 | $ 347.0 | $ 390.3 |
Accounts payable and accrued payroll | 262.9 | 239.0 | 166.5 |
Capital lease obligations due within one year | 20.8 | 20.8 | 20.8 |
Interest and taxes accrued | 95.2 | 85.1 | 106.3 |
Other | 147.9 | 91.6 | 136.6 |
Total Current Liabilities | 1,136.1 | 783.5 | 820.5 |
DEFERRED CREDITS | |||
Income taxes | 1,067.3 | 1,052.8 | 996.4 |
Investment tax credits | 48.2 | 50.0 | 51.8 |
Other | 21.6 | 22.0 | 24.1 |
Total Deferred Credits | 1,137.1 | 1,124.8 | 1,072.3 |
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS | 2,824.0 | 2,867.0 | 2,726.0 |
COMPANY OBLIGATED
MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST WHICH HOLDS SOLELY PARENT JUNIOR SUBORDINATED DEBENTURES |
125.0 | 125.0 | 125.0 |
PREFERRED STOCK | |||
Serial preferred stock | 44.5 | 50.0 | 100.0 |
Redeemable serial preferred stock | 49.5 | 50.0 | 50.0 |
Total Preferred Stock | 94.0 | 100.0 | 150.0 |
COMMITMENTS AND CONTINGENCIES | |||
SHAREHOLDERS' EQUITY | |||
Common
stock, $1 par value - authorized 200,000,000 shares, outstanding 113,420,502, 118,530,802, and 118,530,802 shares, respectively |
118.5 | 118.5 | 118.5 |
Premium on stock and other capital contributions | 1,026.5 | 1,025.4 | 1,025.4 |
Capital stock expense | (12.9) | (12.9) | (13.8) |
Accumulated other comprehensive (loss) income | (4.4) | (1.8) | 5.9 |
Retained income | 747.7 | 781.1 | 738.5 |
1,875.4 | 1,910.3 | 1,874.5 | |
Less cost of
shares of common stock in treasury (5,110,300 and zero shares) |
(129.7) | - | - |
  ; Total Shareholders' Equity | 1,745.7 | 1,910.3 | 1,874.5 |
  ; TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ 7,061.9 | $ 6,910.6 | $ 6,768.3 |
The accompanying Notes to Consolidated Financial Statements are an integral part of these Consolidated Financial Statements. |
POTOMAC ELECTRIC POWER COMPANY AND SUBSIDIARIES | ||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||
(Unaudited) | ||||
Six Months Ended | Twelve Months Ended | |||
June 30, | June 30, | |||
2000 | 1999 | 2000 | 1999 | |
(Millions of Dollars) | ||||
OPERATING ACTIVITIES | ||||
Net income | $ 67.7 | $ 101.3 | $ 213.5 | $ 254.2 |
Adjustments to reconcile net
income to net cash from operating activities: |
||||
Depreciation and amortization | 134.9 | 133.8 | 273.9 | 267.4 |
Changes in: | ||||
Accounts receivable | (252.7) | (97.6) | (169.8) | (34.2) |
Fuel, materials and supplies | 15.0 | (17.6) | (37.4) | (23.9) |
Regulatory assets | (40.8) | (3.9) | (42.9) | (5.9) |
Contract termination fee | (0.7) | (23.8) | (1.5) | (23.8) |
Accounts payable | 23.9 | 31.7 | 96.4 | 44.6 |
Net other operating activities | 86.1 | 31.0 | 32.1 | (26.7) |
Net Cash From Operating Activities | 33.4 | 154.9 | 364.3 | 451.7 |
INVESTING ACTIVITIES | ||||
Net investment in property, plant and equipment | (115.5) | (94.6) | (221.3) | (198.7) |
Proceeds from: | ||||
Purchase of marketable securities, net of sales or redemptions | 5.2 | 1.5 | 15.4 | 11.6 |
Sale of leased equipment, net of additions | - | - | 19.4 | 44.6 |
Purchases of other investments, net of sales or distribution | (10.7) | (36.4) | (239.8) | (13.9) |
Gain from liquidation of partnership, net of proceeds | - | (1.1) | - | (1.1) |
Net Cash Used by Investing Activities | (121.0) | (130.6) | (426.3) | (157.5) |
FINANCING ACTIVITIES | ||||
Dividends on preferred and common stock | (101.1) | (102.3) | (203.3) | (204.6) |
Purchase of treasury stock | (129.7) | - | (129.7) | - |
Redemption of preferred stock | (6.0) | - | (57.0) | (0.1) |
Reacquisition of long-term debt, net of issuances | (43.0) | (5.1) | 98.0 | 137.7 |
Issuance of short-term debt, net of repayments | 262.3 | 126.5 | 219.0 | (114.0) |
Proceeds from the sale of aircraft | 40.1 | - | 40.1 | - |
Other financing activities | 1.1 | (2.3) | 2.6 | (2.5) |
Net Cash From (Used by) Financing Activities | 23.7 | 16.8 | (30.3) | (183.5) |
Net (Decrease) Increase In Cash and Cash Equivalents | (63.9) | 41.1 | (92.3) | 110.7 |
Cash and Cash Equivalents at Beginning of Year | 98.7 | 86.0 | 127.1 | 16.4 |
CASH AND CASH EQUIVALENTS AT END OF YEAR | $ 34.8 | $ 127.1 | $ 34.8 | $ 127.1 |
Cash paid for interest
(net of capitalized interest of $1.8, $.4, $3.2 and $.7) and income taxes: |
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Interest | $ 100.0 | $ 98.9 | $ 195.0 | $ 196.0 |
Income taxes paid (received) | $ 10.2 | $ 13.6 | $ (24.2) | $ 71.3 |
The accompanying Notes to Consolidated Financial Statements are an integral part of these Consolidated Financial Statements. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For additional
information, other than the information discussed in the Notes to
Consolidated Financial Statements section herein, refer to Item 8.
Financial Statements
and Supplementary Data of the Company's 1999 Form 10-K.
(1) Organization and
Segment Information
Organization
Potomac Electric Power Company (Pepco, or the Company) is engaged in
regulated utility operations (the Utility) and in diversified, competitive energy and
telecommunications businesses through its wholly owned nonregulated subsidiary, Pepco
Holdings, Inc. (PHI). PHI was created in 1999 as the parent company of its two wholly
owned subsidiaries, Potomac Capital Investment Corporation (PCI) and Pepco Energy
Services, Inc. (Pepco Energy Services). Additionally, Potomac Electric Power Company
Trust I (the Trust), a Delaware statutory business trust, is a wholly owned subsidiary of
the Company.
The Utility is currently engaged
in the generation, transmission, distribution, and
sale of electric energy in the Washington, D.C. metropolitan area. The Utility's retail
service territory includes all of the District of Columbia and major portions of
Montgomery and Prince George's counties in suburban Maryland. In addition, the Utility
currently supplies electricity, at wholesale, under a full-requirements agreement with
Southern Maryland Electric Cooperative, Inc. (SMECO) that expires in December 2000.
Thereafter, Pepco Energy Services will continue to supply full-requirements electricity to
SMECO pursuant to a competitively awarded four-year contract commencing in January
2001. The Utility also delivers economy energy to the Pennsylvania-New Jersey-
Maryland Interconnection LLC (PJM) of which it is a member.
As discussed in Note (4)
Commitments and Contingencies of the Notes to
Consolidated Financial Statements, on June 7, 2000, the Company entered into an
agreement (the Agreement) with Southern Energy Inc. (Southern), a wholly owned
subsidiary of Southern Company, to sell substantially all of its plants, facilities and
equipment used in the generation of electricity, its purchased capacity contracts, and its
other rate-based assets that are not required for the provision of electric transmission and
distribution services (the Generation Assets) for $2.65 billion. The Agreement was
reached after Southern was selected by the Company as the winning bidder in its open
auction process that was held to select the buyer of its Generation Assets. Additionally,
on May 19, 2000, the Company reached an agreement with PPL Global, Inc. and
Allegheny Energy Supply Company, LLC, to sell its 9.72 percent interest in the
Conemaugh Generating Station for approximately $152.5 million. Accordingly, the total
the Company will receive for the divestiture of its Generation Assets is $2.8 billion. The
Company anticipates that both divestitures will close in the fourth quarter of 2000.
Subsequent to the closing of
the divestitures, the Utility's operations would then
consist of its regulated transmission and distribution services. The Company will
compete for market share throughout the mid-Atlantic region in the deregulated
electricity, natural gas, and telecommunications markets through its nonregulated
subsidiaries.
Maryland customers began
to have their choice of electricity suppliers on July 1,
2000. In D.C., legislation providing similar customer choice beginning on January 1,
2002, was enacted by the Council in December 1999 and approved by the Mayor and
Control Board earlier this year. The legislation is not scheduled to become effective until
corresponding tax legislation has been enacted. The tax legislation, which replaces the
gross receipts tax with a per kilowatt-hour delivery tax, became effective on August 4,
2000. The D.C. Public Service Commission (D.C. Commission) approved a customer
choice plan providing that customers will have their choice of electricity suppliers
beginning January 1, 2001. The D.C. Commission's plan was contemplated by and takes
precedence over the legislation.
Segment Information
The Company has
identified the Utility's operations including the Trust (Utility
Segment) and PHI's operations (Nonregulated Segment) as its two reportable segments.
The following tables present condensed financial information for the three, six and
twelve months ended June 30, 2000 and 1999, respectively.
Nonregulated Segment |
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Pepco |
|||||
Energy |
Total |
Total |
|||
Utility |
PCI |
Services |
PHI |
Pepco |
|
Three Months Ended: |
(Unaudited, In Millions of Dollars) |
||||
June 30, 2000 |
|||||
Operating Revenue |
$574.9 |
$ 31.8 |
$46.4 |
$ 78.2 |
$653.1 |
Operating Expenses |
470.5 |
29.6 |
51.9 |
81.5 |
552.0 |
(Loss) Income from Equity |
|
|
|
|
|
Pre-Tax Income (Loss) |
104.4 |
(2.6) |
(4.7) |
(7.3) |
97.1 |
Distributions on Preferred |
2.3 |
- |
- |
- |
2.3 |
Income Tax Expense (Benefit) |
40.9 |
(2.5) |
(1.6) |
(4.1) |
36.8 |
Net Income (Loss) |
$ 61.2 |
$ (.1) |
$(3.1) |
$ (3.2) |
$ 58.0 |
June 30, 1999 |
|||||
Operating Revenue |
$546.0 |
$ 26.2 |
$27.8 |
$ 54.0 |
$600.0 |
Operating Expenses |
453.4 |
25.0 |
30.2 |
55.2 |
508.6 |
Loss from Equity Investments, |
|
|
|
|
|
Pre-Tax Income (Loss) |
92.6 |
(.5) |
(2.4) |
(2.9) |
89.7 |
Distributions on Preferred |
|
- |
- |
- |
2.3 |
Income Tax Expense (Benefit) |
34.0 |
(21.1) |
(.8) |
(21.9) |
12.1 |
Net Income (Loss) |
$ 56.3 |
$ 20.6 |
$(1.6) |
$19.0 |
$ 75.3 |
Nonregulated Segment |
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Pepco |
||||||
Energy |
Total |
Total |
||||
Utility |
PCI |
Services |
PHI |
Pepco |
||
Six Months Ended: |
(Unaudited, In Millions of Dollars) |
|||||
June 30, 2000 |
||||||
Operating Revenue |
$1,016.0 |
$76.2 |
$90.1 |
$166.3 |
$1,182.3 |
|
Operating Expenses |
904.1 |
57.1 |
99.4 |
156.5 |
1,060.6 |
|
(Loss) Income from Equity |
|
|
|
|
|
|
Pre-Tax Income (Loss) |
111.9 |
10.2 |
(8.4) |
1.8 |
113.7 |
|
Distributions on Preferred |
4.6 |
- |
- |
- |
4.6 |
|
Income Tax Expense (Benefit) |
42.8 |
1.5 |
(2.9) |
(1.4) |
41.4 |
|
Net Income (Loss) |
$ 64.5 |
$ 8.7 |
$(5.5) |
$ 3.2 |
$ 67.7 |
|
June 30, 1999 |
||||||
Operating Revenue |
$ 999.1 |
$62.8 |
$50.2 |
$113.0 |
$1,112.1 |
|
Operating Expenses |
868.7 |
53.0 |
54.5 |
107.5 |
976.2 |
|
Loss from Equity Investments, |
|
|
|
|
|
|
Pre-Tax Income (Loss) |
130.4 |
5.0 |
(4.3) |
.7 |
131.1 |
|
Distributions on Preferred |
4.6 |
- |
- |
- |
4.6 |
|
Income Tax Expense (Benefit) |
48.0 |
(21.3) |
(1.5) |
(22.8) |
25.2 |
|
Net Income (Loss) |
$ 77.8 |
$26.3 |
$(2.8) |
$ 23.5 |
$ 101.3 |
|
Nonregulated Segment |
|||||
Pepco |
|||||
Energy |
Total |
Total |
|||
Utility |
PCI |
Services |
PHI |
Pepco |
|
Twelve Months Ended: |
(Unaudited, In Millions of Dollars) |
||||
June 30, 2000 |
|||||
Operating Revenue |
$2,236.2 |
$136.8 |
$173.2 |
$310.0 |
$2,546.2 |
Operating Expenses |
1,874.8 |
114.6 |
190.6 |
305.2 |
2,180.0 |
(Loss) Income from Equity |
|
|
|
|
|
Pre-Tax Income (Loss) |
361.4 |
7.8 |
(15.8) |
(8.0) |
353.4 |
Distributions on Preferred |
9.2 |
- |
- |
- |
9.2 |
Income Tax Expense (Benefit) |
137.4 |
(1.2) |
(5.5) |
(6.7) |
130.7 |
Net Income (Loss) |
$ 214.8 |
$ 9.0 |
$(10.3) |
$ (1.3) |
$ 213.5 |
June 30, 1999 |
|||||
Operating Revenue |
$2,156.4 |
$119.2 |
$71.6 |
$190.8 |
$2,347.2 |
Operating Expenses |
1,777.8 |
106.4 |
77.4 |
183.8 |
1,961.6 |
Loss from Equity Investments, |
|
|
|
|
|
Pre-Tax Income (Loss) |
378.6 |
.4 |
(5.8) |
(5.4) |
373.2 |
Distributions on Preferred |
9.2 |
- |
- |
- |
9.2 |
Income Tax Expense (Benefit) |
141.4 |
(29.6) |
(2.0) |
(31.6) |
109.8 |
Net Income (Loss) |
$ 228.0 |
$ 30.0 |
$(3.8) |
$ 26.2 |
$ 254.2 |
(2) Summary
of Significant Accounting Policies
Basis of Presentation
The
information furnished in the accompanying consolidated financial statements
reflects all adjustments (which consist only of normal recurring accruals) which are, in
the opinion of management, necessary for a fair presentation of the Company's results of
operations for the interim periods presented. The accompanying consolidated financial
statements and notes thereto should be read in conjunction with the Company's 1999
Form 10-K.
Prior
period amounts have been reclassified in order to conform to the current
period presentation and to present financial data for PCI and Pepco Energy Services on a
comparable basis given the formation of PHI in 1999.
Environmental Remediation Costs
The Company
accrues environmental remediation costs at the time that
management determines that it is probable that an asset has been impaired or that a
liability has been incurred and the amount of the loss can be reasonably estimated.
Environmental remediation costs are charged as an operating expense unless the costs
extend the life of an asset or prevent environmental contamination that has yet to occur,
in which case the costs are capitalized. Amounts that the Company has determined are
probable of recovery from third parties, such as insurance carriers, are netted against the
operating expense line item. Amounts accrued for probable environmental remediation
costs that may be incurred in the future are not measured on a discounted basis.
Treasury Stock
The Company
uses the cost method of accounting for treasury stock. Under the
cost method the Company records the total cost of the treasury stock as a reduction to its
shareholders' equity on the face of its consolidated balance sheets. Additionally, stock
held in treasury is not considered outstanding for the purposes of computing the
Company's earnings per share.
Comprehensive Income
The Company's components
of comprehensive income are net income, and
unrealized gains and losses on marketable securities. Comprehensive income was $60.1
million, $65.1 million, and $203.2 million for the three, six and twelve months ended
June 30, 2000, compared to $73.7 million, $99.4 million and $252.5 million for the
corresponding periods ended June 30, 1999.
(3) Treasury Stock Transactions
In April 2000, following
the indicative bid stage of the auction process used to
divest its Generation Assets, Pepco announced its Board approved plan to repurchase up
to $200 million of its common stock as a preliminary use of the proceeds that will be
received from the divestiture. In May 2000, the Company retained Banc of America
Securities LLC (B of A), to acquire Pepco shares in the open market and to hold them
for purchase by Pepco. This transaction, which is commonly referred to as a "forward
share repurchase,"allows Pepco to purchase these shares from B of A at a future date for
a price per share that is based upon the purchase price per share plus a financing charge
equal to accumulated interest less dividends. On June 28, 2000, Pepco acquired
4,958,800 common shares from B of A for approximately $125.8 million as an initial
phase of the reacquisition plan. This amount was funded by a short-term loan from
B of A's parent company. Previously, on June 7, 2000, Pepco reacquired 151,500 shares
of its common stock in the open market for approximately $3.9 million.
The total cost of the
Company's treasury shares of approximately $129.7 million at
June 30, 2000, is reflected as a reduction to shareholders' equity on the accompanying
consolidated balance sheets. These shares (5,110,300 in total) are no longer
"outstanding" and therefore are not included in the Company's calculation of average
common shares outstanding for purposes of computing earnings per share for the period
the shares are held in treasury. Accordingly, the Company's average common shares
outstanding for the three, six and twelve month periods ended June 30, 2000, decreased
in comparison to the corresponding periods in 1999. This decrease, however, resulted in
an insignificant impact on the Company's earnings per share for each period presented.
On July 28, 2000 Pepco
acquired an additional 2,069,700 shares from B of A for
approximately $55.7 million. This amount was also funded by a short-term loan from
B of A's parent company.
(4) Commitments and Contingencies
Divestiture of Generation Assets
On June 7, 2000, the
Company entered into the Agreement with Southern to sell
the Generation Assets for $2.65 billion. The Agreement was reached after Southern was
selected by the Company as the winning bidder in its open auction process that was held
to select the buyer of its Generation Assets. Additionally, on May 19, 2000, the
Company reached an agreement with PPL Global, Inc. and Allegheny Energy Supply
Company, LLC, to sell its 9.72 percent interest in the Conemaugh Generating Station for
approximately $152.5 million. Accordingly, the total the Company will receive for the
divestiture of its Generation Assets is $2.8 billion. The Company expects both
divestitures to close in the fourth quarter of 2000. After all customer sharing, if any, as
provided in the Maryland and D.C. Commissions' divestiture orders, and payment of any
income tax obligations, the Company intends to use the balance of funds remaining from
the divestitures to further its business strategies and/or to reduce its
capital structure. The
amounts applied by the Company to each of these purposes will depend on an economic
evaluation of the reinvestment opportunities available. Additionally, the Company is
preparing to seek regulatory approval to transfer its Benning Road and Buzzard Point
generating plants, with a total installed capacity of 806 megawatts, to Pepco Energy
Services. These power plants, which are not a part of the Generation Assets being sold to
Southern, will function as exempt wholesale generators. They will be operated and
maintained by Southern pursuant to an initial three-year contract with Pepco Energy
Services.
Oil Spill at the Chalk Point Generating Station
On April 7, 2000,
approximately 139,000 gallons of oil leaked from the Company's
pipeline at its Chalk Point Generating Station in Aquasco, Maryland. The pipeline is
operated by Support Terminals Services Operating Partnership LP, an unaffiliated
pipeline management company. The oil spread from Swanson Creek to the Patuxent
River and several of its tributaries. The area affected covers portions of seventeen miles
of shoreline along the Patuxent River and approximately 45 acres of marshland adjacent
to the Company's property. Cleanup operations have been underway under the direction
of the Environmental Protection Agency since the leak was discovered. The Company
has been joined in the cleanup effort by officials from other federal, state, county and
local government agencies. The 51-mile pipeline, which transports oil to the Company's
Chalk Point and Morgantown plants, has been shut down by the Office of Pipeline
Safety, a unit of the federal government's Department of Transportation, until a plan of
corrective measures to prevent a reoccurrence of the spill is approved. However, the
plants remain fully operational and are being operated using coal and natural gas. As of
June 30, 2000, approximately $59 million in clean up costs had been incurred in
connection with the oil spill; and it is currently anticipated that total costs (excluding
liability claims against the Company and fines or other monetary penalties, if any) may
be in the range of $70 million to $75 million. These costs, which may continue to be
incurred beyond the end of the year, consist principally of the costs to clean up the oil
spill such as labor, supplies, repair work on damaged properties, and the rental of
equipment.
In addition, as a
result of the oil spill, nine class action lawsuits and one lawsuit on
behalf of two individuals have been filed against the Company. At this early stage, no
determination has been made as to the merits of the claims. The Company has indicated
its willingness to settle appropriate claims arising from the oil spill. Otherwise, the
Company intends to vigorously contest the lawsuits. Fines or penalties, if any, assessed
by government authorities are not expected to be recoverable from the Company's
insurance carrier. The Company does not believe that fines or penalties assessed, if any,
will have a material adverse effect on its financial position; however, such fines or
penalties, if any, could have a material adverse effect on the Company's results of
operations in the fiscal quarter in which they are assessed.
For the quarter
ended June 30, 2000, the Company recorded the net amount of $1
million in operating expense as a result of the oil spill. This amount, which is included in
the "Fuel and Purchased Energy" line item on the Company's consolidated statements of
earnings, represents an accrual of $75 million in total oil spill related clean up costs, net
of $5 million in insurance proceeds received to date and an additional $69 million in
probable recoveries from its insurance carriers. However, no assurances can be given
that this amount will actually be received. The aggregate insurance coverage available
under the Company's general liability insurance policy with respect to this event is $100
million. The Company will continue to assess the status of the oil spill clean up efforts,
as necessary, for any significant changes in the estimated costs of completing the
remediation.
NPDES Permits
The Company's
generating stations operate under National Pollutant Discharge
Eliminating System (NPDES) permits. NPDES permits were issued for the Morgantown
station in February 1995, the Dickerson station in August 1996, the Chalk Point station in
September 1996, and the Potomac River station in May 2000. NPDES renewal
applications were submitted in July 1993 for the Benning station, in August 1998 for the
Potomac River station, and in August 1999 for the Morgantown station. At June 30,
2000, resolution of these applications is pending.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
* * * * * * * * * * * * *
This Quarterly Report on Form
10-Q, including the report of
PricewaterhouseCoopers LLP on review of unaudited interim financial information dated
August 9, 2000, will automatically be incorporated by reference in the Prospectuses
constituting parts of the Company's Registration Statements on Form S-3 (Number 33-
58810) 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.
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 its consolidated subsidiaries (the Company) as of June 30, 2000 and
1999, and the related consolidated statements of earnings and retained income for the
three, six and twelve month periods then ended and the consolidated statements of cash
flows for the six and twelve month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial information
consists principally of applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting matters. It is substantially
less in scope than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made
to the accompanying consolidated interim 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, 1999, and the related consolidated
statements of earnings and consolidated statement of cash flows for the year then ended
(not presented herein); and in our report dated January 21, 2000, 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, 1999, is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
Washington, D.C.
August 9, 2000
Item 2. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF CONSOLIDATED
RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
For additional
information, other than the information disclosed in the
Management's Discussion and Analysis of Consolidated Results of Operations and
Financial Condition section herein, refer to Item 7. and Item 2., Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Company's 1999 Form 10-K and March 31, 2000 Form 10-Q, respectively.
Safe Harbor Statements
In connection with
the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 (Reform Act), the Company is hereby filing cautionary statements
identifying important factors that could cause actual results to differ materially from
those projected in forward-looking statements (as such term is defined in the Reform Act)
made in this report on Form 10-Q. Any statements that express, or involve discussions as
to expectations, beliefs, plans, objectives, assumptions or future events or performance
are not statements of historical facts and may be forward-looking.
Forward-looking
statements involve estimates, assumptions and uncertainties and
are qualified in their entirety by reference to, and are accompanied by, the following
important factors, which are difficult to predict, contain uncertainties, are beyond the
control of the Company, and may cause actual results to differ materially from those
contained in forward-looking statements:
- |
prevailing governmental policies and regulatory actions, including those of the |
- |
changes in and compliance with environmental and safety laws and policies; |
- |
weather conditions; |
- |
population growth rates and demographic patterns; |
- |
competition for retail and wholesale customers; |
- |
growth in demand, sales and capacity to fulfill demand; |
- |
changes in tax rates or policies or in rates of inflation; |
- |
changes in project costs; |
- |
unanticipated changes in operating expenses and capital expenditures; |
- |
capital market conditions; |
- |
competition for new energy development opportunities and other opportunities; |
- |
legal and administrative proceedings (whether civil or criminal) and settlements |
- |
pace of entry into new markets; |
- |
time and expense required for building out the planned Starpower network; |
- |
success in marketing services; |
- |
possible development of alternative technologies; |
- |
the ability to secure electric and gas supply to fulfil sales commitments at favorable |
- |
the cost of fuel. |
Any forward-looking
statements speak only as of August 9, 2000, and the
Company undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made or to reflect the
occurrence of unanticipated events. New factors emerge from time to time and it is not
possible for management to predict all of such factors, nor can it assess the impact of any
such factor on the business or the extent to which any factor, or combination of factors,
may cause results to differ materially from those contained in any forward-looking
statement.
CONSOLIDATED RESULTS OF OPERATIONS
Operating Revenue
Utility
Utility
operating revenue was $574.9 million for the three months ended June 30,
2000 compared to $546 million for the corresponding period in 1999 (an increase of
approximately $29 million or 5%). The increase primarily results from an increase in
kilowatt-hour sales of 5.8% during the second quarter, which resulted from a stronger
local economy and an increase in total customers, partially offset by reductions of 2%
and 3.5% in District of Columbia residential and non-residential base rates, respectively.
The base rate reductions implemented on January 1, 2000, reflect the termination of the
conservation portion of the Environmental Cost Recovery Rider. Remaining
unamortized D.C. conservation expenditures will be deducted from the proceeds of the
divestiture of the generation assets, before the sharing of amounts received from the
divestiture between utility customers and shareholders. Additionally, weather during the
second quarter, as measured in cooling degree hours, was 33% hotter than the
corresponding quarter in 1999.
Utility operating
revenue was $1,016 million for the six months ended June 30,
2000 compared to $999.1 million for the corresponding period in 1999 (an increase of
approximately $17 million or 2%). The increase primarily result from an increase in
kilowatt-hour sales of 4% during the period, which resulted from a stronger local
economy and an increase in total customers, partially offset by reductions in District of
Columbia base rates, discussed above. Additionally, weather that was 33% hotter during
the second quarter of 2000 was partially offset by milder weather during the first quarter
of the year.
Utility
operating revenue was $2,236.2 million for the twelve months ended June
30, 2000 compared to $2,156.4 million for the corresponding period in 1999 (an increase
of approximately $80 million or 4%). The increase primarily results from an increase in
kilowatt-hour sales of 3.2% during the period, which resulted from a stronger local
economy and an increase in total customers, partially offset by reductions in District of
Columbia base rates, discussed above. Additionally, summer weather during the twelve
months ended June 30, 2000, as measured in cooling degree hours, was 18% hotter than
1999 and 22% hotter than the 20-year average.
Nonregulated
Nonregulated operating
revenue is derived from the operations of PCI and Pepco
Energy Services. PCI classifies its revenue as "financial investments" and "utility
industry services" and Pepco Energy Services classifies its revenue as "energy services."
Nonregulated
operating revenue was $78.2 million for the three months ended June
30, 2000 compared to $54 million for the corresponding period in 1999 (an increase of
approximately $24 million or 45%). The increase primarily results from the fact that
energy services revenue increased by approximately $18 million over the prior period as
a result of increased energy services contracting revenue and revenue generated from the
continued growth of Pepco Energy Services' businesses. Additionally, utility industry
services revenue increased by approximately $4 million over the prior period due to
additional contracts that were entered into by PCI during 2000.
During the first
quarter of 2000, PCI executed legal and binding contracts with a
third party to sell four aircraft for a total of $73 million. As a result of
these contracts, the
aircraft were written down to their respective sale prices at March 31, 2000, resulting in
the recognition of a $5.5 million after-tax loss. In connection with the transfer of these
aircraft, PCI received cash for 10% of the aggregate sales price and investment-grade
recourse notes for the remaining balances, which were payable on May 14, 2000 and July
15, 2000, depending on each aircraft's contract. PCI recorded the transfers of the aircraft
as financing arrangements, as it had not yet transferred to the third party significantly all
of the risks and rewards of ownership of the aircraft. Two aircraft were removed from
PCI's consolidated balance sheets in May 2000, once the May 14, 2000 notes were
collected and the sales finalized. The remaining two aircraft are on PCI's consolidated
balance sheet at June 30, 2000, but will be removed during the third quarter of 2000 as
the notes were paid in full on July 17, 2000.
Nonregulated
operating revenue was $166.3 million for the six months ended June
30, 2000 compared to $113 million for the corresponding period in 1999 (an increase of
approximately $53 million or 47%). The increase primarily results from the fact that
energy services revenue increased by approximately $40 million over the prior period due
to increased energy services contracting revenue and the growth of the business. In
addition, utility industry services revenue increased by approximately $24 million over
the prior period due to the sale of PCI's 50% interest in the Cove Point liquefied natural
gas storage facility and pipeline that resulted in a $19.6 million pre-tax gain recorded in
the first quarter of 2000 and additional contract revenue that PCI recorded during 2000.
These increases were partially offset by a decrease of approximately $11 million in
financial investments revenue over the prior year primarily associated with losses
recorded on aircraft sales and reduced leasing income from reductions in the aircraft
portfolio.
Nonregulated operating
revenue was $310 million for the twelve months ended
June 30, 2000 compared to $190.8 million for the corresponding period in 1999 (an
increase of approximately $119 million or 62%). This increase results from a $27 million
increase in utility industry services revenue and a $102 million increase in energy
services revenue over the prior period, due to the reasons discussed above for the six
month period. These increases were partially offset by a decrease of approximately $9
million in financial investments revenue, for the reasons discussed above for the six
month period.
Operating Expenses
Total operating
expenses were $552 million for the three months ended June 30,
2000, compared to $508.6 million for the corresponding period in 1999 (an increase of
approximately $43 million or 9%). Approximately $27 million of this increase is
attributable to an increase in consolidated fuel and purchased energy ($10 million by the
Utility and $17 million by Pepco Energy Services). The increase in the Utility's fuel and
purchased energy over the prior period results from increases in the levels of energy
purchased from PJM and through bilateral energy transactions. The increase in Pepco
Energy Services' fuel and purchased energy over the prior period results from the
increased operating activities of Pepco Gas Services, a division of Pepco Energy
Services, as it continues to grow its operations. An additional $5 million of the increase
in total operating expenses relates to the fact that Pepco Energy Services' other operation
and maintenance expense increased as it continues to build up its infrastructure for
deregulation.
Total operating
expenses were $1,060.6 million for the six months ended June 30,
2000, compared to $976.2 million for the corresponding period in 1999 (an increase of
approximately $84 million or 9%). Approximately $61 million of this increase is
attributable to an increase in consolidated fuel and purchased energy ($25 million by the
Utility and $36 million by Pepco Energy Services). The increase in the Utility's fuel and
purchased energy over the prior period results from increases in the levels of energy
purchased from PJM and through bilateral energy transactions. The increase in Pepco
Energy Services' fuel and purchased energy over the prior period results from the
increased operating activities of Pepco Gas Services as it continues to grow its
operations. An additional $8 million of the increase in total operating expenses relates to
the fact that Pepco Energy Services' other operation and maintenance expense increased
as it continues to build up its infrastructure for deregulation.
Total operating expenses
were $2,180 million for the twelve months ended June
30, 2000, compared to $1,961.6 million for the corresponding period in 1999 (an increase
of approximately $218 million or 11%). Approximately $172 million of this increase is
attributable to an increase in consolidated fuel and purchased energy ($82 million by the
Utility and $90 million by Pepco Energy Services). The increase in the Utility's fuel and
purchased energy expense over the prior period results from the reasons discussed in the
three and six month periods above. The increase in Pepco Energy Services' fuel and
purchased energy over the prior twelve month period is also consistent with the
explanation for the increase in the three and six month periods provided above.
Additionally, $21 million of the increase in total operating expenses primarily results
from the fact that Pepco Energy Services' other operation and maintenance expense
increased as it continues to build up its infrastructure for deregulation.
(Loss) Income from Equity Investments, principally Telecommunication Entities
These amounts represent
the Company's share of the pre-tax income or losses from
entities in which it has a 20% to 50% equity investment. The Company's most significant
equity investment is the joint venture known as Starpower Communications, LLC
(Starpower) that was formed in 1997 between wholly owned subsidiaries of PCI and
RCN Corporation. Additionally, this line item includes income from Pepco Energy
Services' 50% share of the operations from Viron/Pepco Services, Inc., a joint venture,
which was created in 1999 to provide energy-savings performance contract services to
the Military District of Washington.
Starpower, which is discussed
in detail in Item 8. Financial Statements and
Supplementary Data in the Company's 1999 Form 10-K, is the only regional company
providing cable television, local and long distance telephone and dial-up and high-speed
Internet services in a competitively priced bundled package for residential customers,
over an advanced fiber-optic network. Total customer subscriber
services including cable
television, telephone and Internet customers were in excess of 275,000 as of June 30,
2000, compared to in excess of 260,000 customers as of June 30, 1999. The customer
subscriber services base is composed of customers served on Starpower's advanced fiber-
optic network (On-network customers) and off of other networks ahead of Starpower's
build-out (Off-network). The On-network customer subscriber services include cable
television and local and long distance telephone and high-speed Internet and totaled in
excess of 27,000 as of June 30, 2000, compared to 7,000 at June 30, 1999. The Off-
network customer subscriber services include dial-up Internet and resale local and long
distance telephone and totaled approximately 248,000 as of June 30, 2000, compared to
in excess of 253,000 at June 30, 1999.
Authorized cable households
for Starpower in the Washington metropolitan area at
June 30, 2000, exceeded 550,000, up from approximately 250,000 authorized cable
households at June 30, 1999. Starpower continues to solicit approvals from the
remaining jurisdictions within the Washington metropolitan area and is currently seeking
further agreements that will add over 900,000 additional households. Through June 30,
2000, Starpower has built sufficient advanced fiber-optic network to cumulatively reach
approximately 100,000 On-network households as compared to approximately 8,900 On-
network households at June 30, 1999. The average customer household acquiring On-
network services, subscribes to more than two Starpower services. As of June 30, 2000,
PCI has invested $110.2 million of its initial $150 million commitment in Starpower.
PCI expects to invest the balance of its initial capital commitment during 2000.
The Loss from Equity
Investments, principally Telecommunication Entities,
increased for the three, six and twelve months ended June 30, 2000, compared to the
corresponding periods in 1999, primarily due to the costs of expanding the Starpower
fiber-optic network. The largest component of these losses is derived from Starpower
losses. PCI expects that Starpower will continue to incur losses in 2000 as it develops
and expands its network and customer base. During 2000, Starpower may decide to
accelerate the scope and pace of system construction in 2001 and beyond based upon the
favorable receipt of additional cable franchises ahead of plan. If Starpower decides to
ccelerate its build, its pre-tax losses may increase over the near-term.
Income Tax Expense/Effective Federal Income Tax Rate
The increases in
consolidated income tax expense for the three, six and twelve
months ended June 30, 2000, compared to the corresponding periods in 1999, result from
PCI's recognition of $18.7 million in tax benefits in June 1999 associated with the
completion of a restructuring transaction related to a partnership. This restructuring has
allowed PCI to consolidate the majority of its aircraft under one umbrella company, and
by doing so, facilitate the management and disposition of its aircraft portfolio. The
Company's effective federal income tax rate was 33.9% for the twelve months ended
June 30, 2000, compared to 26.6% for the corresponding period in 1999.
Oil Spill at the Chalk Point Generating Station
On April 7, 2000,
approximately 139,000 gallons of oil leaked from the Company's
pipeline at its Chalk Point Generating Station in Aquasco, Maryland. The pipeline is
operated by Support Terminals Services Operating Partnership LP, an unaffiliated
pipeline management company. The oil spread from Swanson Creek to the Patuxent
River and several of its tributaries. The area affected covers portions of seventeen miles
of shoreline along the Patuxent River and approximately 45 acres of marshland adjacent
to the Company's property. Cleanup operations have been underway under the direction
of the Environmental Protection Agency since the leak was discovered. The Company
has been joined in the cleanup effort by officials from other federal, state, county and
local government agencies. The 51-mile pipeline, which transports oil to the Company's
Chalk Point and Morgantown plants, has been shut down by the Office of Pipeline
Safety, a unit of the federal government's Department of Transportation, until a plan of
corrective measures to prevent a reoccurrence of the spill is approved. However, the
plants remain fully operational and are being operated using coal and natural gas. As of
June 30, 2000 approximately $59 million in clean up costs had been incurred in
connection with the oil spill; and it is currently anticipated that total costs (excluding
liability claims against the Company and fines or other monetary penalties, if any) may
be in the range of $70 million to $75 million. These costs, which may continue to be
incurred beyond the end of the year, consist principally of the costs to clean up the oil
spill such as labor, supplies, repair work on damaged properties, and the rental of
equipment.
In addition, as a
result of the oil spill, nine class action lawsuits and one lawsuit on
behalf of two individuals have been filed against the Company. At this early stage, no
determination has been made as to the merits of the claims. The Company has indicated
its willingness to settle appropriate claims arising from the oil spill. Otherwise, the
Company intends to vigorously contest the lawsuits. Fines or penalties, if any, assessed
by government authorities are not expected to be recoverable from the Company's
insurance carrier. The Company does not believe that fines or penalties assessed, if any,
will have a material adverse effect on its financial position; however, such fines or
penalties, if any, could have a material adverse effect on the Company's results of
operations in the fiscal quarter in which they are assessed.
For the quarter ended
June 30, 2000, the Company recorded the net amount of $1
million in operating expense as a result of the oil spill. This amount, which is included in
the "Fuel and Purchased Energy" line item on the Company's Consolidated Statements of
Earnings, represents an accrual of $75 million in total oil spill related clean up costs, net
of $5 million in insurance proceeds received to date and an additional $69 million in
probable recoveries from its insurance carriers. However, no assurances can be given
that this amount will actually be received. The aggregate insurance coverage available
under the Company's general liability insurance policy with respect to this event is $100
million. The Company will continue to assess the status of the oil spill clean up efforts,
as necessary, for any significant changes in the estimated costs of completing the
remediation.
CAPITAL RESOURCES AND LIQUIDITY
Short Term Borrowings
As discussed in Note (3)
of the Notes to Consolidated Financial Statements,
Treasury Stock Transactions, on June 28, 2000, the Company purchased 4,958,800 of its
common shares that had been acquired by B of A for a total cost, including commissions
and accrued interest, of approximately $125.8 million. This amount was funded by the
Company through a short-term adjustable rate loan from B of A's parent company, which
initially bears interest at 7.285%. The loan, which the Company intends to repay with a
portion of the proceeds from the divestiture, was issued on June 28, 2000.
Additionally, on
July 28, 2000, the Company purchased an additional 2,069,700
shares from B of A for a total cost of approximately $55.7 million. This amount was also
funded by a short term loan from B of A's parent company.
Long Term Borrowings
On July 7, 2000,
PCI completed a new series Medium-Term Note facility
providing up to $900 million of future debt issuances. The notes will bear interest at
fixed or floating rates and will have varying maturity dates from nine months and one day
from the date of issue through November 30, 2009.
Dividends on Common Stock
On July 27, 2000, a
dividend of 41.5 cents per share was declared payable
September 29, 2000, to holders of record of the Company's common stock on September
11, 2000. This results in a current annual dividend rate on common stock of $1.66 per
share. The Company's annual dividend rate on its common stock is determined by the
Company's Board of Directors on a quarterly basis. In view of the impending divestiture
of the Company's generation assets and the competitive environment in which the
Company's future operations will take place following the divestiture, the Board of
Directors believes that the high payout ratio represented by the current annual dividend
rate of $1.66 per share will not be consistent with the Company's future utility and
telecommunications operations. Accordingly, the Board anticipates changing its
dividend rate in the second half of 2000.
Construction and Generating Capacity
Construction
expenditures, excluding the Allowance for Funds Used During
Construction and Capital Cost Recovery Factor, totaled $115.5 million for the six months
ended June 30, 2000, ($45 million related to generation) and are projected to total $203
million ($75 million related to generation, including $25 million of Clean Air Act
expenditures) for the year 2000. The Company anticipates completing the divestiture of
its Generation Assets by the end of 2000 and accordingly, does not expect to incur
generation-related construction or Clean Air Act expenditures beyond the date of closing.
For the five-year period 2000-2004, construction expenditures are projected to total $646
($75 million related to generation).
Preferred Stock Repurchase
On May 8, 2000, the
Company repurchased 10,000 shares of Redeemable Preferred
Stock, $3.40 Series of 1992, at $49.50 per share. The repurchase totaled approximately
$.5 million.
Item 3. QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT
MARKET RISK
Refer to Item 7A.
Quantitative and Qualitative Disclosures About Market Risk of
the Company's 1999 Form 10-K.
PART II OTHER INFORMATION
Item 1. LEGAL
PROCEEDINGS
Refer to
Item 3. Legal Proceedings of the Company's 1999 Form 10-K.
Item 5. OTHER INFORMATION
Statistical Data | |||||||||||||||
Three Months Ended | Twelve Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2000 | 1999 | % Change | 2000 | 1999 | % Change | ||||||||||
Utility Operating Revenue | |||||||||||||||
(Millions of Dollars) | |||||||||||||||
Electric Revenue | $ 506.7 | $ 481.1 | 5.3 | $ 1,942.0 | $1,900.5 | 2.2 | |||||||||
Other | 68.2 | 64.9 | 5.1 | 294.2 | 255.9 | 15.0 | |||||||||
Total | $ 574.9 | $ 546.0 | 5.3 | $ 2,236.2 | $2,156.4 | 3.7 | |||||||||
Electric Revenue by Class of Service | |||||||||||||||
Residential | $ 144.6 | $ 136.2 | 6.2 | $ 593.0 | $ 577.5 | 2.7 | |||||||||
General Service | 310.1 | 295.8 | 4.8 | 1,136.8 | 1,117.0 | 1.8 | |||||||||
Large Power Service * | 9.8 | 9.0 | 8.9 | 37.0 | 34.9 | 6.0 | |||||||||
Street Lighting | 3.2 | 3.2 | - | 13.8 | 13.4 | 3.0 | |||||||||
Rapid Transit | 7.9 | 7.7 | 2.6 | 30.9 | 30.1 | 2.7 | |||||||||
Wholesale | 31.1 | 29.2 | 6.5 | 130.5 | 127.6 | 2.3 | |||||||||
System | $ 506.7 | $ 481.1 | 5.3 | $ 1,942.0 | $1,900.5 | 2.2 | |||||||||
Energy Sales | |||||||||||||||
(Millions of KWH) | |||||||||||||||
Residential | 1,589 | 1,494 | 6.4 | 7,107 | 6,877 | 3.3 | |||||||||
General Service | 4,090 | 3,890 | 5.1 | 16,208 | 15,750 | 2.9 | |||||||||
Large Power Service * | 179 | 163 | 9.8 | 722 | 675 | 7.0 | |||||||||
Street Lighting | 36 | 35 | 2.9 | 169 | 165 | 2.4 | |||||||||
Rapid Transit | 112 | 104 | 7.7 | 451 | 425 | 6.1 | |||||||||
Wholesale | 655 | 607 | 7.9 | 2,826 | 2,729 | 3.6 | |||||||||
System | 6,661 | 6,293 | 5.8 | 27,483 | 26,621 | 3.2 | |||||||||
Average System Revenue | |||||||||||||||
perKWH (Cents/KWH) | 7.61 | 7.65 | (0.5) | 7.07 | 7.14 | (1.0) | |||||||||
System Peak Demand ** | |||||||||||||||
(Thousands of KW) | |||||||||||||||
Summer | - | - | 5,927 | 5,735 | |||||||||||
Winter | - | - | 4,735 | 4,631 | |||||||||||
Net Generation | |||||||||||||||
(Millions of KWH) | 4,307 | 4,946 | 21,719 | 22,271 | |||||||||||
Fuel Mix (% of Btu) | |||||||||||||||
Coal (%) | 80 | 74 | 82 | 81 | |||||||||||
Oil (%) | 3 | 20 | 10 | 15 | |||||||||||
Gas (%) | 17 | 6 | 8 | 4 | |||||||||||
Fuel Cost per MBtu | |||||||||||||||
System Average | $2.02 | $1.75 | $1.74 | $1.69 | |||||||||||
Weather Data | |||||||||||||||
Heating Degree Days | 328 | 288 | 3,598 | 3,637 | |||||||||||
20 Year Average | 337 | 3,963 | |||||||||||||
Cooling Degree Hours | 2,863 | 2,149 | 11,533 | 9,735 | |||||||||||
20 Year Average | 2,345 | 9,543 | |||||||||||||
Item 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a) |
Exhibits |
||
Exhibit 12 |
- |
Computation of ratios - filed |
|
Exhibit 15 |
- |
Letter re unaudited interim financial |
|
Exhibit 27 |
- |
Financial data schedule - filed |
|
(b) |
Reports on Form 8-K |
||
A Current Report on Form 8-K was filed by the Company on June 8, 2000, |
|||
A Current Report on Form 8-K was filed by the Company on June 13, 2000, |
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 |
Twelve | ||||||
Months Ended | For the Year Ended December 31, | |||||
June 30, 2000 | 1999 | 1998 | 1997 | 1996 | 1995 | |
(Dollar Amounts in Millions) | ||||||
Net income | $214.8 | $228.0 | $211.2 | $164.7 | $220.1 | $218.8 |
Taxes based on income | 137.4 | 142.6 | 131.0 | 97.5 | 135.0 | 129.4 |
Income before taxes | 352.2 | 370.6 | 342.2 | 262.2 | 355.1 | 348.2 |
Fixed charges: | ||||||
Interest charges | 159.7 | 156.1 | 151.8 | 146.7 | 146.9 | 146.6 |
Interest factor in rentals | 23.3 | 23.4 | 23.8 | 23.6 | 23.6 | 23.4 |
Total fixed charges | 183.0 | 179.5 | 175.6 | 170.3 | 170.5 | 170.0 |
Income before income taxes and fixed charges | $535.2 | $550.1 | $517.8 | $432.5 | $525.6 | $518.2 |
Coverage of fixed charges | 2.92 | 3.06 | 2.95 | 2.54 | 3.08 | 3.05 |
Preferred dividend requirements | $7.7 | $8.9 | $18.0 | $16.5 | $16.6 | $16.9 |
Ratio of pre-tax income to net income | 1.64 | 1.63 | 1.62 | 1.59 | 1.61 | 1.59 |
Preferred dividend factor | $12.6 | $14.5 | $29.2 | $26.2 | $26.7 | $26.9 |
Total fixed charges and preferred dividends | $195.6 | $194.0 | $204.8 | $196.5 | $197.2 | $196.9 |
Coverage of combined fixed charges and preferred dividends |
2.74 | 2.84 | 2.53 | 2.20 | 2.66 | 2.63 |
Twelve | ||||||
Months Ended | For the Year Ended December 31, | |||||
June 30, 2000 | 1999 | 1998 | 1997 | 1996 | 1995 | |
(Dollar Amounts in Millions) | ||||||
Net income | $213.5 | $247.1 | $226.3 | $181.8 | $237.0 | $94.4 |
Taxes based on income | 130.7 | 114.5 | 122.3 | 65.6 | 80.4 | 43.7 |
Income before taxes | 344.2 | 361.6 | 348.6 | 247.4 | 317.4 | 138.1 |
Fixed charges: | ||||||
Interest charges | 216.9 | 208.7 | 208.6 | 216.1 | 231.1 | 238.7 |
Interest factor in rentals | 23.7 | 23.8 | 24.0 | 23.7 | 23.9 | 26.7 |
Total fixed charges | 240.6 | 232.5 | 232.6 | 239.8 | 255.0 | 265.4 |
Nonregulated subsidiary capitalized interest | (3.2) | (1.8) | (0.6) | (0.5) | (0.7) | (0.5) |
Income before income taxes and fixed charges | $581.6 | $592.3 | $580.6 | $486.7 | $571.7 | $403.0 |
Coverage of fixed charges | 2.42 | 2.55 | 2.50 | 2.03 | 2.24 | 1.52 |
Preferred dividend requirements | $7.7 | $8.9 | $18.0 | $16.5 | $16.6 | $16.9 |
Ratio of pre-tax income to net income | 1.61 | 1.46 | 1.54 | 1.36 | 1.34 | 1.46 |
Preferred dividend factor | $12.3 | $12.9 | $27.7 | $22.4 | $22.2 | $24.7 |
Total fixed charges and preferred dividends | $252.9 | $245.4 | $260.3 | $262.2 | $277.2 | $290.1 |
Coverage of combined fixed charges and preferred dividends |
2.30 | 2.41 | 2.23 | 1.86 | 2.06 | 1.39 |
Exhibit 15
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We are aware that our report dated August 9, 2000 on our review of interim financial
information of Potomac Electric Power Company for the period ended June 30, 2000 and
included in the Company's quarterly report on Form 10-Q for the quarter then ended is
incorporated by reference 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 Form S-3 (Number 33-58810) filed on February 26,
1993.
Very truly yours,
/s/ PricewaterhouseCoopers LLP
Washington, D.C.
August 9, 2000
|