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Previous: POLYMER RESEARCH CORP OF AMERICA, 10QSB, EX-27, 2000-10-26 |
Next: POTOMAC ELECTRIC POWER CO, 10-Q, EX-27, 2000-10-26 |
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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 |
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September 30, 2000 |
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Commission File Number |
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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 |
[ ] |
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Indicate the number of shares outstanding of each of the issuer's classes of common |
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Class |
Outstanding at September 30, 2000 |
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Common Stock, $1 par value |
111,364,736 |
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TABLE OF CONTENTS
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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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9 |
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9 |
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Report of Independent Accountants on Review of Interim Financial Information |
12 |
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Item 2. - Management's Discussion and Analysis of Consolidated Results of |
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13 |
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14 |
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20 |
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Item 3. - Quantitative and Qualitative Disclosures About Market Risk |
21 |
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PART II - Other Information |
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21 |
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21 |
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23 |
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24 |
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25 |
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26 |
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27 |
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Part I FINANCIAL INFORMATION |
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POTOMAC ELECTRIC POWER COMPANY AND SUBSIDIARIES |
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Three Months Ended |
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Nine Months Ended |
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2000 |
1999 |
2000 |
1999 |
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(Millions, except per share data) |
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Operating Revenue |
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Utility |
$749.8 |
$799.3 |
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$1,765.8 |
$1,798.5 |
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Nonregulated |
85.9 |
62.4 |
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252.2 |
175.4 |
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Total Operating Revenue |
835.7 |
861.7 |
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2,018.0 |
1,973.9 |
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Operating Expenses |
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Fuel and purchased energy |
363.3 |
331.0 |
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887.1 |
794.3 |
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Other operation and maintenance |
99.2 |
100.1 |
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298.2 |
287.8 |
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Depreciation and amortization |
56.9 |
70.3 |
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191.8 |
204.2 |
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Other taxes |
55.8 |
60.5 |
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155.0 |
155.3 |
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Interest |
54.5 |
48.9 |
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158.3 |
145.5 |
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Total Operating Expenses |
629.7 |
610.8 |
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1,690.4 |
1,587.1 |
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Loss from Equity Investments, principally Telecommunication Entities |
(3.2) |
(2.6) |
(11.1) |
(7.4) |
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Pre-tax Income |
202.8 |
248.3 |
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316.5 |
379.4 |
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Distributions on Preferred Securities of Subsidiary Trust |
2.3 |
2.3 |
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6.9 |
6.9 |
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Income Tax Expense |
79.7 |
92.0 |
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121.1 |
117.2 |
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Net Income |
120.8 |
154.0 |
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188.5 |
255.3 |
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Dividends on Preferred Stock |
1.3 |
2.1 |
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4.1 |
6.0 |
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Earnings Available for Common Stock |
119.5 |
151.9 |
184.4 |
249.3 |
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Retained Income at Beginning of Period |
743.3 |
744.4 |
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779.3 |
747.3 |
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Dividends on Common Stock |
(46.3) |
(49.1) |
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(144.6) |
(147.5) |
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Nonregulated Subsidiary Marketable Securities, Net Unrealized Gain (Loss), Net of Tax |
1.2 |
(4.9) |
(1.4) |
(6.8) |
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Retained Income at End of Period |
$817.7 |
$842.3 |
$817.7 |
$842.3 |
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Basic Average Common Shares Outstanding |
112.0 |
118.5 |
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116.3 |
118.5 |
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Basic Earnings Per Share of Common Stock |
$1.07 |
$1.28 |
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$1.59 |
$2.10 |
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Diluted Average Common Shares Outstanding |
115.4 |
121.9 |
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119.7 |
122.9 |
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Diluted Earnings Per Share of Common Stock |
$1.04 |
$1.25 |
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$1.56 |
$2.06 |
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Cash Dividends Per Share of Common Stock |
$0.415 |
$0.415 |
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$1.245 |
$1.245 |
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The accompanying Notes to Consolidated Financial Statements are an integral part of these Consolidated Financial Statements. |
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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 and the Notes to
Consolidated Financial Statements of the Company's March 31, 2000 Form 10-Q and
June 30, 2000 Form 10-Q.
(1) Organization and Segment Information
Organization
Potomac Electric Power Company (Pepco, or the Company) is engaged in 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). In September 2000, PepMarket.com, LLC ("PepMarket") was
organized as a third direct, wholly owned subsidiary of PHI. PepMarket will seek to earn
fee income by supplying efficient, low-cost, internet-based procurement services to
businesses and institutional customers, initially focusing on the seven million person
Washington, D.C., Baltimore and Northern Virginia metropolitan region. It is anticipated
that PepMarket will begin doing business by December 2000. As of September 30, 2000,
Pepco has invested $5 million of its $16 million commitment to PepMarket.
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 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 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. 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
divestitures is $2.8 billion. The Company anticipates that both divestitures will close by
December 31, 2000.
Subsequent to the closing of the divestitures, the Utility's operations will 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, and in D.C., customers will have their choice of electricity suppliers beginning
January 1, 2001.
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 and nine
months ended September 30, 2000 and 1999, respectively.
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Nonregulated Segment |
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Pepco |
Total |
Total |
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Three Months Ended: |
(Unaudited, in Millions of Dollars) |
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September 30, 2000 |
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Operating Revenue |
$ 749.8 |
$ 33.3 |
$ 52.6 |
$ 85.9 |
$835.7 |
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Operating Expenses |
541.4 |
29.9 |
58.4 |
88.3 |
629.7 |
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(Loss) Income from Equity |
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Pre-Tax Income (Loss) |
208.4 |
(1.4) |
(4.2) |
(5.6) |
202.8 |
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Distributions on Preferred |
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Income Tax Expense (Benefit) |
83.5 |
(2.3) |
(1.5) |
(3.8) |
79.7 |
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Net Income (Loss) |
$ 122.6 |
$ .9 |
$ (2.7) |
$ (1.8) |
$120.8 |
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September 30, 1999 |
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Operating Revenue |
$ 799.3 |
$ 27.2 |
$ 35.2 |
$ 62.4 |
$861.7 |
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Operating Expenses |
547.9 |
25.1 |
37.8 |
62.9 |
610.8 |
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Loss from Equity Investments, |
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Pre-Tax Income (Loss) |
251.4 |
(.5) |
(2.6) |
(3.1) |
248.3 |
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Distributions on Preferred |
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Income Tax Expense (Benefit) |
95.4 |
(2.5) |
(.9) |
(3.4) |
92.0 |
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Net Income (Loss) |
$ 153.7 |
$ 2.0 |
$ (1.7) |
$ .3 |
$154.0 |
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Nonregulated Segment |
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Pepco |
Total |
Total |
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Nine Months Ended: |
(Unaudited, in Millions of Dollars) |
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September 30, 2000 |
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Operating Revenue |
$1,765.8 |
$109.5 |
$ 142.7 |
$ 252.2 |
$2,018.0 |
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Operating Expenses |
1,445.5 |
87.1 |
157.8 |
244.9 |
1,690.4 |
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(Loss) Income from Equity |
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Pre-Tax Income (Loss) |
320.3 |
8.8 |
(12.6) |
(3.8) |
316.5 |
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Distributions on Preferred |
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Income Tax Expense (Benefit) |
126.3 |
(.8) |
(4.4) |
(5.2) |
121.1 |
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Net Income (Loss) |
$ 187.1 |
$ 9.6 |
$ (8.2) |
$ 1.4 |
$ 188.5 |
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September 30, 1999 |
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Operating Revenue |
$1,798.5 |
$ 90.0 |
$ 85.4 |
$ 175.4 |
$1,973.9 |
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Operating Expenses |
1,416.7 |
78.1 |
92.3 |
170.4 |
1,587.1 |
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Loss from Equity Investments, |
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Pre-Tax Income (Loss) |
381.8 |
4.5 |
(6.9) |
(2.4) |
379.4 |
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Distributions on Preferred |
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Income Tax Expense (Benefit) |
143.4 |
(23.8) |
(2.4) |
(26.2) |
117.2 |
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Net Income (Loss) |
$ 231.5 |
$ 28.3 |
$ (4.5) |
$ 23.8 |
$ 255.3 |
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(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 and March 31, 2000 Form 10-Q and June 30, 2000 Form 10-Q.
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 on a
comparable basis given the formation of PHI in May 1999.
Comprehensive Income
The Company's components of comprehensive income are net income and
unrealized gains and losses on marketable securities. Comprehensive income was $122
million and $187.1 million for the three and nine months ended September 30, 2000,
compared to $149.1 million and $248.5 million for the corresponding periods ended
September 30, 1999.
(3) Treasury Stock Transactions
As discussed in detail in Note (3) Treasury Stock Transactions in the Company's
June 30, 2000 Form 10-Q, in April 2000, following the indicative bid stage of the auction
process used to divest its Generation Assets, the Company 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. As of September 30, 2000, the
Company acquired 7,180,000 treasury shares for a total cost of $185.5 million, which is
reflected as a reduction to shareholders' equity on the accompanying consolidated balance
sheets.
During the period October 9, 2000 through
October 26, 2000,
the Company
completed the remaining $14.5 million of approved repurchases by acquiring
approximately
611,000 additional shares.
(4) Commitments and Contingencies
Divestiture of Generation Assets
On June 7, 2000, the Company entered into an agreement with Southern (the
Agreement) 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 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 (Conemaugh) for approximately $152.5 million. The Company anticipates that
both divestitures will close by December 31, 2000. Accordingly, the total the Company
will receive for the divestitures of its Generation Assets and its interest in Conemaugh is
$2.8 billion. 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 seeking regulatory
approval to transfer its Benning Road and Buzzard Point generating plants, with a total
installed capacity of 806 megawatts, to a subsidiary of Pepco Energy. 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.
Oil Spill at the Chalk Point Generating Station
As discussed in detail in Note (4) Commitments and Contingencies in the
Company's June 30, 2000 Form 10-Q, 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.
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.
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 April 2000. NPDES renewal
applications were submitted in July 1993 for the Benning station and in August 1999 for
the Morgantown station. At September 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
October 26, 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 September 30,
2000, and the related consolidated statements of earnings and retained income for each of
the three month and nine month periods ended September 30, 2000 and the consolidated
statements of cash flows for the nine month period ended September 30, 2000. 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 accepted in the United States of America.
We previously audited in accordance with auditing standards generally accepted in the
United States of America, 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.
October 26, 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 its March 31, 2000 Form 10-Q and June 30, 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:
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prevailing governmental policies and regulatory actions, including those of the |
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changes in and compliance with environmental and safety laws and policies; |
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weather conditions; |
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population growth rates and demographic patterns; |
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competition for retail and wholesale customers; |
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growth in demand, sales and capacity to fulfill demand; |
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changes in tax rates or policies or in rates of inflation; |
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changes in project costs; |
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unanticipated changes in operating expenses and capital expenditures; |
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capital market conditions; |
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competition for new energy development opportunities and other opportunities; |
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legal and administrative proceedings (whether civil or criminal) and settlements |
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pace of entry into new markets; |
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time and expense required for building out the planned Starpower network; |
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success in marketing services; |
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possible development of alternative technologies; |
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the ability to secure electric and gas supply to fulfil sales commitments at favorable prices; and |
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the cost of fuel. |
Any forward-looking statements speak only as of October 26, 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 $749.8 million for the three months ended September
30, 2000 compared to $799.3 million for the corresponding period in 1999 (a decrease of
approximately $49 million or 6%). The decrease resulted primarily from cooler weather
over the period and base rate reductions in Maryland and D.C. Temperatures during the
summer of 2000 were 48% milder (70% in the month of July 2000), as measured in
cooling degree hours, and were 37% milder than the corresponding 20-year average. In
regards to base rate reductions, effective July 1, 2000, base rates were reduced 1.5
percent for both District of Columbia residential and non-residential customers, and 3
percent and $3 million for Maryland residential and non-residential customers,
respectively.
Utility operating revenue was $1,765.8 million for the nine months ended
September 30, 2000 compared to $1,798.5 million for the corresponding period in 1999
(a decrease of approximately $33 million or 2%). The decrease resulted primarily from
the base rate reductions described above.
Nonregulated
Nonregulated operating revenue is derived from the operations of PCI and Pepco
Energy. PCI classifies its revenue as "financial investments" and "utility industry
services" and Pepco Energy classifies its revenue as "energy and energy services."
Nonregulated operating revenue was $85.9 million for the three months ended
September 30, 2000 compared to $62.4 million for the corresponding period in 1999 (an
increase of approximately $23 million or 37%). The increase resulted primarily from the
fact that energy and energy services revenue increased by approximately $17 million over
the corresponding period in 1999 due to the continued growth of Pepco Energy's
businesses. Additionally, utility industry services revenue increased by approximately $4
million over the corresponding period in 1999 due to additional contracts that were
entered into by PCI during 2000. Financial investments revenue increased approximately
$2 million during the period due to the timing and disposition of investments.
Nonregulated operating revenue was $252.2 million for the nine months ended
September 30, 2000 compared to $175.4 million for the corresponding period in 1999 (an
increase of approximately $77 million or 44%). The increase primarily resulted from the
fact that energy and energy services revenue increased by approximately $57 million over
the corresponding period in 1999 due to the continued growth of Pepco Energy's
businesses. In addition, utility industry services revenue increased by approximately $28
million over the corresponding period in 1999 due to both 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 $8 million in financial investments revenue primarily
associated with losses recorded on aircraft sales and reduced leasing income from
reductions in the aircraft portfolio.
Through September 30, 2000, PCI has completed the sale of five commercial
aircraft (two MD-82's on lease to Continental Airlines, two B-737s on lease to United
Airlines and one DC-10-30 on lease to Continental Airlines). The sale of these aircraft,
which is consistent with PCI's objective of exiting the aircraft leasing business has
resulted in year-to-date after-tax losses of approximately $5.4 million.
Operating Expenses
Total operating expenses were $629.7 million for the three months ended
September 30, 2000, compared to $610.8 million for the corresponding period in 1999
(an increase of approximately $19 million or 3%). This increase resulted from an
increase of approximately $32 million attributable to consolidated fuel and purchased
energy ($19 million by the Utility and $13 million by Pepco Energy) partially offset by a
$13 million decrease in Utility depreciation and amortization expense. The increase in
the Utility's fuel and purchased energy over the prior period resulted from increases in
the levels of energy purchased from PJM and through bilateral energy transactions. The
increase in Pepco Energy fuel and purchased energy over the prior period resulted from
the increased operating activities of Pepco Gas Services, a division of Pepco Energy, as it
continues to grow its operations. The decrease in Utility depreciation and amortization
expense over the period resulted from a reduction in the amortization of conservation
expenditures as all of Maryland and most of D.C. conservation expenditures are no
longer being amortized. Additionally, a decrease of approximately $5 million in Utility
other taxes, which resulted primarily from the elimination of the gross receipts tax on
generation revenues in Maryland and a reduction in property taxes on generation assets in
Maryland, was completely offset by an approximately $5 million increase in Utility
interest expense primarily related to the increase in short term debt used to finance the
acquisition of a significant portion of the Company's treasury stock acquisitions.
Total operating expenses were $1,690.4 million for the nine months ended
September 30, 2000, compared to $1,587.1 million for the corresponding period in 1999
(an increase of approximately $103 million or 7%). Approximately $93 million of this
increase was attributable to an increase in consolidated fuel and purchased energy ($43
million by the Utility and $50 million by Pepco Energy). Additionally, other operation
and maintenance expense increased by approximately $10 million (Pepco Energy
increased approximately $22 million offset by a decrease of approximately $12 million
by the Utility.) The increase in the Utility's fuel and purchased energy over the prior
period resulted from increases in the levels of energy purchased from PJM and through
bilateral energy transactions. The increase in Pepco Energy's fuel and purchased energy
over the prior period resulted from the increased operating activities of Pepco Gas
Services as it continues to grow its operations. The increase in Pepco Energy's other
operation and maintenance expense resulted from the fact that Pepco Energy continued to
build up its infrastructure for deregulation while the decrease in the Utility's other
operation and maintenance expense resulted primarily from reduced labor and benefits
costs over the period. Additionally, a decrease in depreciation and amortization expense
at the Utility of approximately $12 million was completely offset by an increase of
approximately $12 million in interest expense ($8 million at the Utility and $4 million at
PCI.) The decrease in the Utility's depreciation and amortization expense and the
increase in its interest expense resulted from the reasons discussed in the three month
period above. The increase in PCI's interest expense is due to additional long term debt
that was obtained to acquire new lease investments in late 1999 and to fund a portion of
PCI's capital commitments to Starpower Communications LLC (Starpower).
Accounting For Fuel Costs
Effective July 1, 2000 in Maryland (the date of the commencement of customer
choice) the recovery of fuel costs were no longer subject to the Company's fuel clause
and therefore, fuel costs began to be expensed as incurred and fuel rate revenue billed in
any given period is no longer deferred for recovery from or repayment to customers. In
D.C., the recovery of fuel costs will continue to be subject to the fuel clause until the
completion of the divestiture of the Generation Assets to Southern. For the three months
ended September 30, 2000, the discontinuance of the fuel clause in Maryland had an
unfavorable impact on the Company's earnings as Maryland fuel costs exceeded
Maryland fuel revenues by approximately $6.4 million (pre tax).
After closing on the Generation Asset divestiture, the Company will no longer
incur fuel costs in the provision of standard offer service. Rather, the Company will
procure necessary energy from Southern through a transition power agreement (TPA)
and/or through other sources. The TPA provides the Company with the ability to procure
all of the energy necessary for its standard offer service obligation from Southern at
prices that are below the fixed production rates that will be charged to standard offer
service customers. Pursuant to provisions of the approved settlement agreements in both
D.C. and Maryland, the difference, or gain, between the revenues billed to standard offer
service customers for generation services and the cost of procuring those services will be
shared with customers through a Generation Procurement Credit (GPC). The GPC will
be determined annually based on twelve months of experience. In Maryland, the GPC
will be based on the twelve-month period ended June 30 of each year, beginning in 2001.
In D.C., the GPC will be based on the twelve month period thereafter, through the end of
the transition period. As a result of the GPC in Maryland, any fuel cost losses incurred in
providing standard offer services during the period beginning July 1, 2000 and continuing
through the date of closing on the sale of the Generation Assets will be included in the
GPC calculation for the twelve month period ended June 20, 2001. Therefore, the
Company will not be obligated to share energy procurement gains until such losses have
been fully offset, which the Company expects to occur during the first few months of
2001.
(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 that was formed in
1997 between wholly owned subsidiaries of PCI and RCN Corporation. Additionally,
this line item includes income from Pepco Energy's 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, currently is the only regional
company providing cable television, local and long distance telephone, dial-up and high-
speed Internet services in a competitively priced bundled package for residential
consumers, over an advanced fiber-optic network. Each Starpower partner committed to
initially contribute $150 million of equity to the joint venture over a three-year period
(1998-2000). As of September 30, 2000, PCI has invested $134 million of its initial $150
million commitment. PCI and its partner are expected to invest the balance of their initial
capital commitments during the fourth quarter of 2000. The partners are currently
reviewing future capital commitments to fund further expansion.
In August 2000, Starpower received approval from the Arlington County Board of
Supervisors to provide competitive cable television services to the more than 90,000
households of Arlington County, Virginia. In addition, Starpower has received
preliminary approval from the Baltimore County Council to provide competitive cable
television services to the more than 280,000 households of Baltimore County, Maryland.
The grant of a competitive cable franchise in Baltimore County is conditioned upon final
approval by the Baltimore County Council of a franchise agreement that outlines specific
performance obligations. Starpower is currently engaged in the process of completing the
franchise agreement with the county. Upon execution of the final agreement, Starpower
will be authorized to build its network to approximately 900,000 households in the
Washington-Baltimore metropolitan area, including the District of Columbia;
Montgomery County, Maryland; Gaithersburg, Maryland; Arlington County, Virginia
and Falls Church, Virginia. Starpower is also seeking additional franchise agreements
covering more than 550,000 households in Fairfax County, Virginia and Prince Georges'
County, Maryland. The timing for a decision on Starpower's applications by these
jurisdictions is determined by the regulatory bodies involved, certain of which are
expected to take action during 2000. As of September 30, 2000, the number of authorized
cable households was approximately 640,000, up from approximately 500,000 authorized
cable households at September 30, 1999.
Through September 30, 2000, Starpower has built sufficient advanced fiber-optic
network to cumulatively reach approximately 140,000 On-network households as
compared to approximately 25,000 On-network households at September 30, 1999. The
typical customer household acquiring On-network services, subscribes to more than two
Starpower services. The customer subscriber services base is composed of customers
served by 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, local and long distance telephone and high-
speed Internet and totaled approximately 30,000 as of September 30, 2000 as compared
to approximately 11,000 at September 30, 1999. The Off-network customer subscriber
services include dial-up Internet and resale local and long distance telephone and totaled
approximately 245,000 as of September 30, 2000, as compared to approximately 269,000
at September 30, 1999. Total customer subscriber services including cable television,
local and long distance telephone and Internet customers were approximately 275,000 as
of September 30, 2000, compared to approximately 280,000 customers as of September
30, 1999. The decline in total customer subscriber services is principally due to the loss
of dial-up Internet customers due to competition from free dial-up Internet service
providers. In 1998, Starpower acquired the Washington, D.C. metropolitan area customer
base of Internet service provider Erols Internet (Erols) from RCN. The acquisition of
Erols brought Starpower 197,000 dial-up Internet customers.
Loss from Equity Investments, principally Telecommunication Entities, includes
losses from investments held by PHI, which are accounted for using the equity method.
For the three and nine months ended September 30, 2000, PHI recorded pre-tax losses of
$3.2 million ($2.1 million after-tax) and $11.1 million ($7.2 million after-tax),
respectively, compared to $2.6 million ($1.7 million after-tax) and $7.4 million ($4.8
million after-tax) for the corresponding periods in 1999. The increase in losses for the
three and nine months ended September 30, 2000 is primarily due to the costs of
expanding the Starpower fiber-optic network. The largest component of these losses is
derived from PCI's 50% share of Starpower's pre-tax losses. With the decision to
accelerate the scope and pace of system construction, PCI expects that Starpower's pre-
tax losses will increase over the short-term.
Income Tax Expense/Effective Federal Income Tax Rate
The increase in consolidated income tax expense for the nine months ended
September 30, 2000, compared to the corresponding period 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.
Oil Spill at the Chalk Point Generating Station
As discussed in detail in Note (4) Commitments and Contingencies in the
Company's June 30, 2000 Form 10-Q, 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.
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.
CAPITAL RESOURCES AND LIQUIDITY
Dividends on Common Stock
On October 26, 2000, a dividend of 41.5 cents per share was declared payable
December 29, 2000, to holders of record of the Company's common stock on December
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 after the completion of the closing of the divestiture.
Construction and Generating Capacity
Construction expenditures, excluding the Allowance for Funds Used During
Construction and Capital Cost Recovery Factor, totaled $167.1 million for the nine
months ended September 30, 2000, ($54.3 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. As discussed herein, the Company
anticipates completing the divestiture of its Generation Assets by December 31, 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 million ($75 million related to
generation).
Capital Commitment
As of September 30, 2000, Pepco has invested $5 million of its $16 million
commitment to PepMarket.
Preferred Stock Repurchase
On September 28, 2000, the Company executed a forward trade agreement to
repurchase 39,322 shares of Serial Preferred Stock, $2.28 series of 1965, at $37.875 per
share and 35,000 shares of $2.46 series of 1958, at $38.90 per share. These repurchases,
which total approximately $1.5 million and $1.4 million, respectively, have a delayed
settlement date of December 11, 2000 and therefore will be recorded during the fourth
quarter of 2000.
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.
On September 21, 2000, Moody's Investor Services announced that it upgraded
PCI's senior unsecured debt rating from Baa1 to A3. This senior unsecured debt is
currently rated BBB by Standard & Poors and Fitch Rating Agency.
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
Rate of Return and Coverage Ratios
|
|
Twelve Months Ended |
|
|
|
2000 |
1999 |
|
Rate of Return |
|
|
|
Return on End-of-Period Capitalization |
|
|
|
Utility |
9.44% |
9.68% |
|
Consolidated |
8.68% |
9.62% |
|
|
|
|
|
Return on Average Equity |
|
|
|
Utility |
11.25% |
13.80% |
|
Consolidated |
9.42% |
13.16% |
|
|
|
|
|
Coverage |
|
|
|
Times Interest Earned Before Taxes (SEC Method) |
2.63 |
3.12 |
|
Utility |
2.19 |
2.59 |
|
Consolidated |
|
|
|
Statistical Data |
|||||||||||
|
Three Months |
Nine Months |
||||||||||
|
2000 |
1999 |
% Change |
2000 |
1999 |
% Change |
||||||
|
Utility Operating Revenue |
|||||||||||
|
Electric Revenue |
$620.3 |
$671.8 |
(7.7) |
$1,516.6 |
$1,542.8 |
(1.7) |
|||||
|
Other |
129.5 |
127.5 |
1.6 |
249.2 |
255.7 |
(2.5) |
|||||
|
Total |
$749.8 |
$799.3 |
(6.2) |
$1,765.8 |
$1,798.5 |
(1.8) |
|||||
|
Electric Revenue by Class of Service |
|||||||||||
|
Residential |
$182.2 |
$220.4 |
(17.3) |
$448.7 |
$480.3 |
(6.6) |
|||||
|
General Service |
379.0 |
388.0 |
(2.3) |
906.0 |
899.4 |
0.7 |
|||||
|
Large Power Service * |
10.3 |
12.8 |
(19.5) |
27.2 |
28.9 |
(5.9) |
|||||
|
Street Lighting |
3.6 |
3.2 |
12.5 |
10.5 |
9.9 |
6.1 |
|||||
|
Rapid Transit |
8.8 |
8.9 |
(1.1) |
23.7 |
23.5 |
0.9 |
|||||
|
Wholesale |
36.4 |
38.5 |
(5.5) |
100.5 |
100.8 |
(0.3) |
|||||
|
System |
$620.3 |
$671.8 |
(7.7) |
$1,516.6 |
$1,542.8 |
(1.7) |
|||||
|
Energy Sales |
|||||||||||
|
Residential |
1,846 |
2,166 |
(14.8) |
5,258 |
5,484 |
(4.1) |
|||||
|
General Service |
4,503 |
4,641 |
(3.0) |
12,393 |
12,214 |
1.5 |
|||||
|
Large Power Service * |
179 |
204 |
(12.3) |
529 |
533 |
(0.8) |
|||||
|
Street Lighting |
39 |
37 |
5.4 |
122 |
117 |
4.3 |
|||||
|
Rapid Transit |
125 |
125 |
- |
345 |
333 |
3.6 |
|||||
|
Wholesale |
727 |
771 |
(5.7) |
2,138 |
2,115 |
1.1 |
|||||
|
System |
7,419 |
7,944 |
(6.6) |
20,785 |
20,796 |
(0.1) |
|||||
|
Average System Revenue |
8.36 |
8.46 |
(1.2) |
7.30 |
7.42 |
(1.6) |
|||||
|
System Peak Demand ** |
|||||||||||
|
Summer |
- |
- |
5,721 |
5,927 |
|||||||
|
Winter |
- |
- |
4,735 |
4,631 |
|||||||
|
Net Generation (Millions of KWH) |
5,268 |
7,448 |
14,480 |
17,747 |
|||||||
|
Fuel Mix (% of Btu) |
|||||||||||
|
Coal (%) |
86 |
75 |
84 |
78 |
|||||||
|
Oil (%) |
1 |
16 |
5 |
16 |
|||||||
|
Gas (%) |
13 |
9 |
11 |
6 |
|||||||
|
Fuel Cost per MBtu |
|||||||||||
|
System Average |
$1.87 |
$1.76 |
$1.86 |
$1.72 |
|||||||
|
Weather Data |
|||||||||||
|
Heating Degree Days |
63 |
22 |
2,344 |
2,431 |
|||||||
|
20 Year Average |
23 |
23 |
|||||||||
|
Cooling Degree Hours |
4,538 |
8,656 |
7,413 |
10,805 |
|||||||
|
20 Year Average |
7,151 |
9,507 |
|||||||||
|
Heating Degree Days - The daily difference in degrees by which the mean temperature is below 65 degrees |
|||||||||||
|
Cooling Degree Hours - The daily sum of the differences, by hours, by which the temperature |
|||||||||||
|
* Large Power Service customers are served at high voltage of 66KV or higher. |
|||||||||||
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
|
(a) |
Exhibits |
|
|
|
|
Exhibit 12 |
- |
Computation of ratios - filed |
|
|
Exhibit 15 |
- |
Letter re: unaudited interim |
|
|
Exhibit 27 |
- |
Financial data schedule - filed |
|
(b) |
Reports on Form 8-K |
|
|
|
|
None. |
|
|
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 |
October 26, 2000
Date
|
The computations of the coverage of fixed charges before income taxes, and the coverage of combined fixed charges and preferred |
||||||
|
Twelve |
|
|||||
|
Sep. 30, 2000 |
1999 |
1998 |
1997 |
1996 |
1995 |
|
|
(Dollar Amounts in Millions) |
||||||
|
Net income |
$183.7 |
$228.0 |
$211.2 |
$164.7 |
$220.1 |
$218.8 |
|
Taxes based on income |
125.5 |
142.6 |
131.0 |
97.5 |
135.0 |
129.4 |
|
Income before taxes |
309.2 |
370.6 |
342.2 |
262.2 |
355.1 |
348.2 |
|
Fixed charges: |
||||||
|
Interest charges |
166.1 |
156.1 |
151.8 |
146.7 |
146.9 |
146.6 |
|
Interest factor in rentals |
23.4 |
23.4 |
23.8 |
23.6 |
23.6 |
23.4 |
|
Total fixed charges |
189.5 |
179.5 |
175.6 |
170.3 |
170.5 |
170.0 |
|
Income before income taxes and fixed charges |
$498.7 |
$550.1 |
$517.8 |
$432.5 |
$525.6 |
$518.2 |
|
Coverage of fixed charges |
2.63 |
3.06 |
2.95 |
2.54 |
3.08 |
3.05 |
|
Preferred dividend requirements, including |
$7.0 |
$8.9 |
$18.0 |
$16.5 |
$16.6 |
$16.9 |
|
Ratio of pre-tax income to net income |
1.68 |
1.63 |
1.62 |
1.59 |
1.61 |
1.59 |
|
Preferred dividend factor |
$11.8 |
$14.5 |
$29.2 |
$26.2 |
$26.7 |
$26.9 |
|
Total fixed charges and preferred dividends |
$201.3 |
$194.0 |
$204.8 |
$196.5 |
$197.2 |
$196.9 |
|
Coverage of combined fixed charges and |
2.48 |
2.84 |
2.53 |
2.20 |
2.66 |
2.63 |
|
The computations of the coverage of fixed charges before income taxes, and the coverage of combined fixed charges and preferred |
||||||
|
Twelve |
|
|||||
|
Sep. 30, 2000 |
1999 |
1998 |
1997 |
1996 |
1995 |
|
|
(Dollar Amounts in Millions) |
||||||
|
Net income |
$180.3 |
$247.1 |
$226.3 |
$181.8 |
$237.0 |
$94.4 |
|
Taxes based on income |
118.4 |
114.5 |
122.3 |
65.6 |
80.4 |
43.7 |
|
Income before taxes |
298.7 |
361.6 |
348.6 |
247.4 |
317.4 |
138.1 |
|
Fixed charges: |
||||||
|
Interest charges |
224.3 |
208.7 |
208.6 |
216.1 |
231.1 |
238.7 |
|
Interest factor in rentals |
23.8 |
23.8 |
24.0 |
23.7 |
23.9 |
26.7 |
|
Total fixed charges |
248.1 |
232.5 |
232.6 |
239.8 |
255.0 |
265.4 |
|
Nonregulated subsidiary capitalized interest |
(3.5) |
(1.8) |
(0.6) |
(0.5) |
(0.7) |
(0.5) |
|
Income before income taxes and fixed charges |
$543.3 |
$592.3 |
$580.6 |
$486.7 |
$571.7 |
$403.0 |
|
Coverage of fixed charges |
2.19 |
2.55 |
2.50 |
2.03 |
2.24 |
1.52 |
|
Preferred dividend requirements, including |
$7.0 |
$8.9 |
$18.0 |
$16.5 |
$16.6 |
$16.9 |
|
Ratio of pre-tax income to net income |
1.66 |
1.46 |
1.54 |
1.36 |
1.34 |
1.46 |
|
Preferred dividend factor |
$11.7 |
$12.9 |
$27.7 |
$22.4 |
$22.2 |
$24.7 |
|
Total fixed charges and preferred dividends |
$259.8 |
$245.4 |
$260.3 |
$262.2 |
$277.2 |
$290.1 |
|
Coverage of combined fixed charges and |
2.09 |
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 October 26, 2000 on our review of interim financial
information of Potomac Electric Power Company for the period ended September 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.
October 26, 2000
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