-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, jRwuSyovPCtsu2V3L8xG7WwWMTFhLA8MkjgbXTEh1Kb1SfWZQOB8cGM2Iqxv985R YY4S1S6pjmdHfEnX7FbJJQ== 0000079732-94-000059.txt : 19940503 0000079732-94-000059.hdr.sgml : 19940503 ACCESSION NUMBER: 0000079732-94-000059 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19940331 FILED AS OF DATE: 19940502 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: POTOMAC ELECTRIC POWER CO CENTRAL INDEX KEY: 0000079732 STANDARD INDUSTRIAL CLASSIFICATION: 4911 IRS NUMBER: 530127880 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-01072 FILM NUMBER: 94525592 BUSINESS ADDRESS: STREET 1: 1900 PENNSYLVANIA AVE NW STREET 2: C/O M T HOWARD RM 841 CITY: WASHINGTON STATE: DC ZIP: 20068 BUSINESS PHONE: 2028722456 10-Q 1 1ST QUARTER FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended March 31, 1994 -------------- Commission file number 1-1072 ------ Potomac Electric Power Company - ---------------------------------------------------------------- (Exact name of registrant as specified in its charter) District of Columbia and Virginia 53-0127880 - ---------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1900 Pennsylvania Avenue, N.W., Washington, D.C. 20068 - ---------------------------------------------------------------- (Address of principal executive office) (Zip Code) (202) 872-2456 - ---------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes /X/. No / /. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at March 31, 1994 - ------------------------------- ----------------------------- Common Stock, $1 par value 117,944,331 TABLE OF CONTENTS PART I - Financial Information Page Item 1 - Consolidated Financial Statements Consolidated Statements of Earnings and Retained Income.. 2 Consolidated Balance Sheets.............................. 3 Consolidated Statements of Cash Flows.................... 4 Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies......... 5 (2) Income Taxes....................................... 8 (3) Capitalization..................................... 11 (4) Marketable Securities.............................. 15 (5) Commitments and Contingencies...................... 16 Report of Independent Accountants on Review of Interim Financial Information.................................... 19 Item 2 - Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition Utility Results of Operations.................................. 20 Capital Resources and Liquidity........................ 22 New Accounting Standards............................... 23 Nonutility Subsidiary Results of Operations.................................. 23 Capital Resources and Liquidity........................ 25 PART II - Other Information Item 1 - Legal Proceedings................................. 26 Item 4 - Submission of Matters to a Vote of Security Holders......................................... 26 Item 5 - Other Information Other Financing Arrangements............................. 29 Base Rate Proceedings.................................... 29 Peak Load, Sales, Conservation and Energy Use Management and Construction and Capacity Additions................ 31 Selected Nonutility Subsidiary Financial Information..... 34 Statistical Data......................................... 36 Item 6 - Exhibits and Reports on Form 8-K.................. 37 Signatures................................................. 37 Computation of Earnings Per Common Share................... 38 Computation of Ratios - Parent Company Only................ 39 Computation of Ratios - Fully Consolidated................. 40 Independent Accountants Awareness Letter................... 41 1 Part I FINANCIAL INFORMATION - ------ --------------------- Item 1 CONSOLIDATED FINANCIAL STATEMENTS - ------ --------------------------------- POTOMAC ELECTRIC POWER COMPANY Consolidated Statements of Earnings and Retained Income (Unaudited) -------------------------------------------------------
Three Months Ended Twelve Months Ended March 31, March 31, -------------------- ---------------------- 1994 1993 1994 1993 --------- --------- ---------- ---------- (Thousands of Dollars) Revenue Sales of electricity $ 372,595 $ 329,971 $1,739,059 $1,566,143 Other electric revenue 2,315 1,265 7,057 6,141 --------- --------- ---------- ---------- Total Operating Revenue 374,910 331,236 1,746,116 1,572,284 Interchange deliveries 18,134 8,219 32,677 42,783 --------- --------- ---------- ---------- Total Revenue 393,044 339,455 1,778,793 1,615,067 --------- --------- ---------- ---------- Operating Expenses Fuel 113,132 88,026 379,388 352,844 Purchased energy 39,332 36,902 175,886 160,598 Capacity purchase payments 32,559 23,813 105,033 95,158 Other operation 52,279 49,697 210,396 204,434 Maintenance 24,220 20,902 96,986 88,303 --------- --------- ---------- ---------- Total Operation and Maintenance 261,522 219,340 967,689 901,337 Depreciation and amortization 42,697 39,190 167,115 152,500 Income taxes 3,973 (1,244) 115,393 79,331 Other taxes 47,516 45,547 203,220 195,154 --------- --------- ---------- ---------- Total Operating Expenses 355,708 302,833 1,453,417 1,328,322 --------- --------- ---------- ---------- Operating Income 37,336 36,622 325,376 286,745 --------- --------- ---------- ---------- Other Income Nonutility Subsidiary Income 33,009 31,317 141,033 154,113 Expenses, including interest and income taxes (30,804) (29,060) (115,984) (129,095) --------- --------- ---------- ---------- Net earnings from nonutility subsidiary 2,205 2,257 25,049 25,018 Allowance for other funds used during construction 3,220 3,635 12,826 16,146 Other, net 2,828 3,576 9,474 5,683 --------- --------- ---------- ---------- Total Other Income 8,253 9,468 47,349 46,847 --------- --------- ---------- ---------- Income Before Utility Interest Charges 45,589 46,090 372,725 333,592 --------- --------- ---------- ---------- Utility Interest Charges Long-term debt 31,486 34,655 132,324 135,087 Other 2,268 1,102 7,066 5,222 Allowance for borrowed funds used during construction (2,579) (2,711) (9,615) (12,471) --------- --------- ---------- ---------- Net Utility Interest Charges 31,175 33,046 129,775 127,838 --------- --------- ---------- ---------- Net Income 14,414 13,044 242,950 205,754 Dividends on Preferred Stock 4,146 4,113 16,289 15,100 --------- --------- ---------- ---------- Earnings for Common Stock 10,268 8,931 226,661 190,654 Retained Income at Beginning of Period 839,433 802,774 765,043 755,138 Dividends on Common Stock (48,895) (46,885) (191,846) (182,254) Subsidiary Marketable Securities Net Unrealized (Loss) Gain, Net of Tax (3,078) 223 (2,130) 1,505 --------- --------- ---------- ---------- Retained Income at End of Period $ 797,728 $ 765,043 $ 797,728 $ 765,043 ========= ========= ========== ========== Average Common Shares Outstanding (000's) 117,876 114,402 116,496 113,184 Earnings Per Common Share $0.09 $0.08 $1.95 $1.68 Cash Dividends Per Common Share $0.415 $0.410 $1.645 $1.610 Book Value Per Share $16.25 $15.66 Dividend Payout Ratio 84.4% 95.8% Effective Federal Income Tax Rate 18.0% 24.7% In January 1994, the Company increased the quarterly dividend from 41 cents per share to 41.5 cents per share. The first quarter 1994 dividend was paid on March 31, 1994, to stockholders of record on February 25, 1994. The resulting indicated annual dividend rate is $1.66 per share. 2
POTOMAC ELECTRIC POWER COMPANY Consolidated Balance Sheets (Unaudited at March 31, 1994 and 1993) ------------------------------------------
March 31, December 31, March 31, ASSETS 1994 1993 1993 ------ ------------- ------------- ------------- (Thousands of Dollars) Property and Plant - at original cost Electric plant in service $ 5,290,934 $ 5,252,736 $ 5,049,946 Construction work in progress 409,304 373,665 341,993 Electric plant held for future use 31,777 33,644 34,766 Nonoperating property 6,962 5,096 3,722 ------------- ------------- ------------- 5,738,977 5,665,141 5,430,427 Accumulated depreciation (1,559,937) (1,533,999) (1,465,233) ------------- ------------- ------------- Net Property and Plant 4,179,040 4,131,142 3,965,194 ------------- ------------- ------------- Current Assets Cash and cash equivalents 11,774 7,439 7,535 Customer accounts receivable, less allowance for uncollectible accounts of $2,576, $2,748 and $2,510 109,083 100,973 100,085 Other accounts receivable, less allowance for uncollectible accounts of $300 31,588 53,454 28,858 Accrued unbilled revenues 60,854 71,497 56,480 Prepaid taxes 34,306 30,531 38,666 Other prepaid expenses 8,754 6,053 4,491 Material and supplies - at average cost Fuel 63,291 61,973 88,328 Construction and maintenance 69,300 70,262 77,720 ------------- ------------- ------------- Total Current Assets 388,950 402,182 402,163 ------------- ------------- ------------- Deferred Charges Income taxes recoverable through future rates, net 247,264 233,431 190,010 Insurance claim related to litigation settlement - - 38,260 Other 252,945 233,573 160,627 ------------- ------------- ------------- Total Deferred Charges 500,209 467,004 388,897 ------------- ------------- ------------- Nonutility Subsidiary Assets Cash and cash equivalents 1,911 2,625 3,927 Marketable securities 489,059 466,153 419,400 Investment in finance leases 356,538 358,524 446,411 Operating lease equipment, net of accumulated depreciation of $93,192, $85,302 and $63,197 561,205 565,443 558,879 Receivables 88,689 84,726 86,105 Other investments 163,389 163,911 132,540 Other assets 19,297 23,750 35,628 ------------- ------------- ------------- Total Nonutility Subsidiary Assets 1,680,088 1,665,132 1,682,890 ------------- ------------- ------------- Total Assets $ 6,748,287 $ 6,665,460 $ 6,439,144 ============= ============= ============= CAPITALIZATION AND LIABILITIES - ------------------------------ Capitalization Common stock $ 117,944 $ 117,798 $ 114,831 Other common equity 1,799,176 1,837,411 1,683,940 Serial preferred stock 125,441 125,442 125,476 Redeemable serial preferred stock 145,153 147,000 148,500 Long-term debt 1,641,811 1,589,621 1,621,052 ------------- ------------- ------------- Total Capitalization 3,829,525 3,817,272 3,693,799 ------------- ------------- ------------- Current Liabilities Long-term debt and preferred stock redemption due within one year 60,000 17,977 126,610 Short-term debt 282,950 294,615 82,050 Accounts payable and accrued expenses 165,427 174,842 204,059 Other 105,804 103,633 90,157 ------------- ------------- ------------- Total Current Liabilities 614,181 591,067 502,876 ------------- ------------- ------------- Deferred Credits Income taxes 805,270 780,723 718,182 Investment tax credits 70,993 71,906 74,508 Other 24,700 28,916 26,106 ------------- ------------- ------------- Total Deferred Credits 900,963 881,545 818,796 ------------- ------------- ------------- Nonutility Subsidiary Liabilities Long-term debt 1,080,094 1,027,705 937,746 Short-term notes payable 104,850 126,250 253,400 Deferred taxes and other 218,674 221,621 232,527 ------------- ------------- ------------- Total Nonutility Subsidiary Liabilities 1,403,618 1,375,576 1,423,673 ------------- ------------- ------------- Total Capitalization and Liabilities $ 6,748,287 $ 6,665,460 $ 6,439,144 ============= ============= ============= 3
POTOMAC ELECTRIC POWER COMPANY Consolidated Statements of Cash Flows (Unaudited) -------------------------------------
Three Months Ended Twelve Months Ended March 31, March 31, ----------------------- ----------------------- 1994 1993 1994 1993 --------- --------- --------- --------- (Thousands of Dollars) Operating Activities Income from utility operations $ 12,209 $ 10,787 $ 217,901 $ 180,736 Adjustments to reconcile income to net cash from operating activities: Depreciation and amortization 42,697 39,190 167,115 152,500 Deferred income taxes and investment tax credits 13,907 9,672 31,946 32,233 Allowance for funds used during construction (5,799) (6,346) (22,441) (28,617) Changes in materials and supplies (356) 10,696 33,457 5,617 Changes in accounts receivable and accrued unbilled revenues 24,399 5,102 (16,102) (7,913) Changes in accounts payable (1,709) (9,624) 7,475 (22,142) Changes in other current assets and liabilities (16,345) (13,385) 1,355 2,858 Changes in deferred conservation and energy use management costs (16,705) (6,993) (67,427) (27,998) Net other operating activities (11,208) (10,088) (40,167) (12,229) Nonutility subsidiary: Net earnings 2,205 2,257 25,049 25,018 Deferred income taxes 4,005 16,310 (45,119) 9,002 Changes in other assets and net other operating activities 4,572 (12,738) 74,207 (6,470) --------- --------- --------- --------- Net Cash From Operating Activities 51,872 34,840 367,249 302,595 --------- --------- --------- --------- Investing Activities Total investment in property and plant (83,388) (68,224) (338,115) (337,818) Allowance for funds used during construction 5,799 6,346 22,441 28,617 --------- --------- --------- --------- Net investment in property and plant (77,589) (61,878) (315,674) (309,201) Nonutility subsidiary: Purchase of marketable securities (72,056) (51,878) (274,391) (247,835) Proceeds from sale or redemption of marketable securities 44,169 30,813 207,651 184,921 Investment in leased equipment (3,652) (1,094) (34,918) (13,537) Proceeds from sale or disposition of leased equipment - - 120,529 44,092 Purchase of other investments (4,354) (1,487) (47,495) (6,676) Proceeds from sale or distribution of other investments 4,508 - 4,508 40,135 Investment in promissory notes - (402) (1,226) (402) Proceeds from promissory notes 1,111 465 3,659 17,889 --------- --------- --------- --------- Net Cash Used by Investing Activities (107,863) (85,461) (337,357) (290,614) --------- --------- --------- --------- Financing Activities Dividends on common stock (48,895) (46,885) (191,846) (182,254) Dividends on preferred stock (4,146) (4,113) (16,289) (15,100) Issuance of common stock 3,666 13,696 85,971 81,464 Issuance of preferred stock - - - 50,000 Redemption of preferred stock (2,457) - (3,957) (890) Issuance of long-term debt 178,411 152,481 547,194 355,439 Reacquisition and retirement of long-term debt (84,367) (113,448) (599,367) (179,470) Short-term debt, net (11,665) 20,450 200,900 (68,670) Other financing activities (1,925) (6,651) (21,472) (9,943) Nonutility subsidiary: Issuance of long-term debt 115,000 160,630 318,023 352,267 Repayment of long-term debt (62,610) (111,411) (198,276) (364,797) Short-term debt, net (21,400) (10,115) (148,550) (30,300) --------- --------- --------- --------- Net Cash From (Used By) Financing Activities 59,612 54,634 (27,669) (12,254) --------- --------- --------- --------- Net Increase (Decrease) in Cash and Cash Equivalents 3,621 4,013 2,223 (273) Cash and Cash Equivalents at Beginning of Period 10,064 7,449 11,462 11,735 --------- --------- --------- --------- Cash and Cash Equivalents at End of Period $ 13,685 $ 11,462 $ 13,685 $ 11,462 ========= ========= ========= ========= Cash paid for interest (net of capitalized interest) and income taxes: Interest (including nonutility subsidiary interest of $34,764, $33,829, $77,491 and $84,600) $ 66,856 $ 70,546 $ 203,265 $ 207,121 Income taxes $ 4,730 $ 3,017 $ 69,454 $ 50,714 Nonutility subsidiary noncash transactions: Promissory note received in exchange for equipment $ - $ - $ - $ 10,000 Consolidation of majority-owned subsidiaries $ - $ - $ 35,320 $ - 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ The Company's utility operations are regulated by the Maryland and District of Columbia public service commissions and, as to its wholesale business, the Federal Energy Regulatory Commission (FERC). The Company complies with the Uniform System of Accounts prescribed by the FERC and adopted by the Maryland and District of Columbia regulatory commissions. In conformity with generally accepted accounting principles, the accounting policies and practices applied by the regulatory commissions in the determination of rates for utility operations are also employed for financial reporting purposes. Certain 1993 amounts have been reclassified to conform to the current year presentation. A description of significant accounting policies follows: Principles of Consolidation - --------------------------- The consolidated financial statements combine the financial results of the Company and all majority-owned subsidiaries. The Company's principal subsidiary is Potomac Capital Investment Corporation (PCI). All material intercompany balances and transactions have been eliminated. Total Revenue - ------------- Revenue is accrued for service rendered but unbilled as of the end of each month. The Company includes in revenue the amounts received for sales to other utilities relating to pooling and interconnection agreements. Amounts received for such interchange deliveries are a component of the Company's fuel rates. In each jurisdiction, the Company's rate schedules include fuel rates. The fuel rate provisions are designed to provide for separately stated fuel billings which cover applicable net fuel and interchange costs or changes in applicable net fuel and interchange costs from levels incorporated in base rates. Differences between applicable net fuel and interchange costs incurred and fuel rate revenue billed in any given period are accounted for as other current assets or other current liabilities in those cases where specific provision has been made by the appropriate regulatory commission for the resolution of such differences within one year. Where no such provision has 5 been made, the differences are accounted for as other deferred charges or other deferred credits pending regulatory determination. Leasing Transactions - -------------------- Income from PCI investments in direct finance and leveraged lease transactions, in which PCI is an equity participant, is reported using the financing method. In accordance with the financing method, investments in leased property are recorded as a receivable from the lessee to be recovered through the collection of future rentals. For direct finance leases, unearned income is amortized to income over the lease term at a constant rate of return on the net investment. Income, including investment tax credits on leveraged equipment leases, is recognized over the life of the lease at a level rate of return on the positive net investment. PCI investments in equipment under operating leases are stated at cost less accumulated depreciation. Depreciation is recorded on a straight line basis over the equipment's estimated useful life. Property and Plant - ------------------ The cost of additions to, and replacements or betterments of, retirement units of property and plant is capitalized. Such cost includes material, labor, the capitalization of an Allowance for Funds Used During Construction (AFUDC) and applicable indirect costs, including engineering, supervision, payroll taxes and employee benefits. The original cost of depreciable units of plant retired, together with the cost of removal, net of salvage, is charged to accumulated depreciation. Routine repairs and maintenance are charged to operating expenses as incurred. The Company uses separate depreciation rates for each electric plant account. The rates, which vary from jurisdiction to jurisdiction, were equivalent to a system-wide composite depreciation rate of approximately 3.1% for 1994 and 1993, and 3% for 1992. Conservation and Energy Use Management - -------------------------------------- In general, the Company accounts for energy conservation expenditures as a deferred charge, and amortizes the costs over five to ten years. District of Columbia conservation costs receive rate base treatment, with a capital cost recovery factor 6 accrued on the unamortized balance in excess of amounts included in rate base. See Part II, Item 5, Base Rate Proceedings for additional information. In Maryland, conservation costs are currently recovered through a surcharge included in base rates. Allowance for Funds Used During Construction - -------------------------------------------- In general, the Company capitalizes AFUDC with respect to investments in Construction Work in Progress with the exception of expenditures required to comply with federal, state or local environmental regulations (pollution control projects), which are included in rate base without capitalization of AFUDC. The Company accrues a capital cost recovery factor on the retail jurisdictional portion of certain pollution control projects related to compliance with the Clean Air Act (CAA). The base for calculating this return is the amount by which the retail jurisdictional CAA expenditure balance exceeds the CAA balance included in rate base in the Company's most recently completed base rate proceeding. The jurisdictional AFUDC capitalization rates are determined as prescribed by the FERC. The effective capitalization rate was approximately 8.5% compounded semiannually, for the three months ended March 31, 1994, and approximately 8.7% and 9.1% in 1993 and 1992, respectively. Cash and Cash Equivalents - ------------------------- For purposes of the consolidated financial statements, cash and cash equivalents include cash on hand, money market funds and commercial paper with maturities of three months or less. Nonutility Subsidiary Receivables - --------------------------------- The Company's nonutility subsidiary uses the direct write- off method of accounting when a receivable is deemed to be uncollectible in lieu of an allowance for doubtful accounts. The amounts were not material. Income Taxes - ------------ Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109 entitled "Accounting for Income Taxes" which requires the use of an asset and liability approach for financial reporting and accounting for deferred income taxes. Deferred taxes are being recorded for all temporary differences based upon currently enacted tax rates. 7 (2) INCOME TAXES - ---------------- Provision for Income Taxes Charged to Continuing Operations - -----------------------------------------------------------
Three Months Ended March 31, -------------------------- 1994 1993 ----------- ----------- (Thousands of Dollars) Utility current tax expense Federal $ (8,985) $ (11,660) State and local (1,212) (1,542) ----------- ----------- Total utility current tax expense (10,197) (13,202) ----------- ----------- Utility deferred tax expense Federal 12,869 8,700 State and local 1,951 1,839 Investment tax credits (913) (867) ----------- ----------- Total utility deferred tax expense 13,907 9,672 ----------- ----------- Total utility income tax expense 3,710 (3,530) ----------- ----------- Nonutility subsidiary current tax expense Federal (7,063) (8,024) ----------- ----------- Nonutility subsidiary deferred tax expense Federal 4,293 5,864 State and local (288) (250) ----------- ----------- Total nonutility subsidiary deferred tax expense 4,005 5,614 ----------- ----------- Total nonutility subsidiary income tax expense (3,058) (2,410) ----------- ----------- Total consolidated income tax expense 652 (5,940) Income taxes included in other income (3,321) (4,696) ----------- ----------- Income taxes included in utility operating expenses $ 3,973 $ (1,244) =========== =========== 8
Reconciliation of Consolidated Income Tax Expense - -------------------------------------------------
Three Months Ended March 31, -------------------------- 1994 1993 ----------- ----------- (Thousands of Dollars) Income before income taxes $ 15,066 $ 7,104 =========== =========== Utility income tax at federal statutory rate $ 5,572 $ 2,467 Increases (decreases) resulting from Depreciation 1,840 1,233 Removal costs (1,108) (823) Allowance for funds used during construction (946) (1,054) Other (1,256) (4,682) State income taxes, net of federal effect 521 196 Tax Credits (913) (867) ----------- ----------- Total utility income tax expense 3,710 (3,530) ----------- ----------- Nonutility subsidiary income tax at federal statutory rate (299) (52) Increases (decreases) resulting from Dividends received deduction (2,043) (1,977) Other (428) (131) State income taxes, net of federal effect (288) (250) ----------- ----------- Total nonutility subsidiary income tax expense (3,058) (2,410) ----------- ----------- Total consolidated income tax expense 652 (5,940) Income taxes included in other income (3,321) (4,696) ----------- ----------- Income taxes included in utility operating expenses $ 3,973 $ (1,244) =========== =========== 9
Components of Consolidated Deferred Tax Liabilities (Assets) - ------------------------------------------------------------
March 31, -------------------------- 1994 1993 ----------- ----------- (Thousands of Dollars) Utility deferred tax liabilities (assets) Depreciation and other book to tax basis differences $ 693,127 $ 615,987 Rapid amortization of certified pollution control facilities 30,029 39,561 Deferred taxes on amounts to be collected through future rates 93,911 70,456 Property taxes 10,180 10,163 Deferred fuel 7,802 1,237 Prepayment premium on debt retirement 10,965 9,727 Deferred ITC (26,961) (27,627) Contributions in aid of construction (23,888) (22,078) Other 22,506 27,530 ----------- ----------- Total utility deferred tax liabilities (net) 817,671 724,956 Current portion of utility deferred tax liabilities (included in Other current liabilities) 12,401 6,774 ----------- ----------- Total utility deferred tax liabilities (net) - noncurrent $ 805,270 $ 718,182 =========== =========== Nonutility subsidiary deferred tax liabilities (assets) Finance leases $ 126,485 $ 165,241 Operating lease depreciation 119,212 89,492 Reversal of previously accrued taxes related to partnerships (7,480) - Alternative minimum tax (76,904) (69,232) Other (16,605) 5,733 ----------- ----------- Total nonutility subsidiary deferred tax liabilities (net), (included in Deferred taxes and other) $ 144,708 $ 191,234 =========== =========== 10
Pursuant to SFAS No. 109, regulated enterprises recognize regulatory assets and liabilities for income taxes to be recovered from or returned to customers in future rates. Accordingly, as of March 31, 1994, the Company has recorded additional deferred income taxes and a net regulatory asset of $247.3 million. No valuation allowance for deferred tax assets was required or recorded at March 31, 1994. The adoption of SFAS No. 109 increased net income for the three and twelve months ended March 31, 1993 by approximately $2.8 million which is reflected on the Consolidated Statements of Earnings and Retained Income in "Other, net." The Tax Reform Act of 1986 repealed the Investment Tax Credit (ITC) for property placed in service after December 31, 1985, except for certain transition property. ITC previously earned on utility property continues to be normalized over the remaining service lives of the related assets. The Company and its subsidiaries file a consolidated federal income tax return. The Company's federal income tax liabilities for all years through 1991 have been finally determined. The Company is of the opinion that the final settlement of its federal income tax liabilities for subsequent years will not have a material adverse effect on its financial position. (3) CAPITALIZATION -------------- Common Equity - ------------- At March 31, 1994, 117,944,331 shares of the Company's $1 par value Common Stock were outstanding. A total of 200 million shares is authorized. As of March 31, 1994, 2,783,222 shares of Common Stock were reserved for issuance under the Shareholder Dividend Reinvestment Plan (DRP). The DRP permits additional cash investments by plan participants limited to one investment per month of not less than $25 and not more than $5,000. Also, as of March 31, 1994, 99,867 shares of Common Stock were reserved for issuance under the Employee Savings Plans; and shares reserved for conversion of debentures were 2,771,633 and 3,392,500 for the 7% and 5% Convertible Debentures, respectively. 11 Serial Preferred, Redeemable Serial Preferred and Preference - ------------------------------------------------------------ Stock ----- At March 31, 1994, the Company had outstanding 5,411,876 shares of its $50 par value Serial Preferred Stock, including the Redeemable Serial Preferred Stock. A total of 11,211,044 shares is authorized. At March 31, 1994, the aggregate annual dividend requirements on the Serial Preferred Stock and the Redeemable Serial Preferred Stock were approximately $5.8 million and $10.3 million, respectively. Also, the Company has a total of 8,800,000 shares of cumulative, $25 par value, Preference Stock authorized and unissued. The Company's $2.44 Convertible Preferred Stock, 1966 Series (8,825 shares outstanding at March 31, 1994) is convertible into Common Stock of the Company at $8.51 per share. The estimated fair value of this series, based on quoted market prices was $1.1 million and $1.5 million at March 31, 1994 and 1993, respectively. At March 31, 1994, the Company had outstanding one million shares of its Serial Preferred Stock, Auction Series A. The annual dividend rate is 3.01% ($1.505) for the period March 1, 1994 through May 31, 1994. For the period December 1, 1993 through February 28, 1994, the annual dividend rate was 3.02% ($1.51). The average rate at which dividends were paid during the 12 months ended March 31, 1994 was 2.79% ($1.39). The estimated fair value of this series at March 31, 1994 and 1993, was the carrying amount. The estimated fair value at March 31, 1994 and 1993, for the remaining Serial Preferred Stock (excluding the Redeemable Serial Preferred Stock) was $56.3 million and $59.2 million, respectively, based on discounted cash flows using current rates for preferred stock with similar terms. At March 31, 1994, the Company had outstanding 903,051 shares of $50 par value Redeemable Serial Preferred Stock, the $3.37 (6.74%) Series of 1987. The shares are subject to mandatory redemption beginning June 1993, at par, through the operation of a sinking fund, of not less than 30,000 nor more than 60,000 shares annually. Sinking fund requirements through 1998 with respect to the Redeemable Serial Preferred Stock are $1.2 million in 1996 and $1.5 million annually thereafter. At March 31, 1994, the Company had outstanding one million shares of $50 par value Redeemable Serial Preferred Stock, the $3.89 (7.78%) Series of 1991. The shares are subject to mandatory redemption, at par, through the operation of a sinking 12 fund which will redeem not less than 165,000 nor more than 330,000 shares annually, beginning June 1, 2001, and 175,000 shares on June 1, 2006. In addition, the Company has issued and outstanding one million shares of $50 par value Redeemable Serial Preferred Stock, the $3.40 (6.80%) Series of 1992. The shares are subject to mandatory redemption, at par, through the operation of a sinking fund which will redeem 50,000 shares annually, beginning September 1, 2002, with the remaining shares redeemed on September 1, 2007. The estimated fair value of the Company's Redeemable Series Preferred Stock, excluding amounts due within one year, was $151.7 million and $159.2 million based on quoted market prices at March 31, 1994 and 1993, respectively. Long-Term Debt - -------------- The Company's long-term debt at March 31, 1994, is summarized below: (Thousands of Dollars) First Mortgage Bonds $1,326,600 Convertible Debentures 183,467 Notes Payable 225,000 Net Unamortized Discount (33,256) Current Portion (60,000) ---------- Net Utility Long-Term Debt $1,641,811 ========== Nonutility Subsidiary Long-Term Debt $1,080,094 ========== At March 31, 1994, the aggregate annual interest requirement on the Company's long-term debt, including debt due within one year, was approximately $120 million. The aggregate amounts of maturities and sinking fund requirements for the Company's long- term debt outstanding as of March 31, 1994 are $60 million in 1994, $44 million in 1995, $6 million in 1996, $56 million in 1997 and $50 million in 1998. At March 31, 1994, long-term debt due within one year consisted of $43 million of 9-3/4% First Mortgage Bonds, $15 million of 5-1/4% First Mortgage Bonds, and $2 million of 5-5/8% First Mortgage Bonds. 13 On February 24, 1994, the Company issued $42.5 million of 5-3/8% First Mortgage Bonds due 2024, in conjunction with the sale at 99% by Montgomery County, Maryland of a like amount of the County's Pollution Control Revenue Refunding Bonds. Proceeds were applied toward the redemption of the Company's $15 million 6-1/2% First Mortgage Bonds due 2004, $20 million 6-1/2% First Mortgage Bonds due 2007 and $7.5 million 6-5/8% First Mortgage Bonds due 2009, at 101% of their principal amount plus accrued interest, and a like amount of the County's Pollution Control Revenue Bonds. On February 24, 1994, the Company issued $38.3 million of 5-3/8% First Mortgage Bonds due 2024, in conjunction with the sale at 98.896% by Alexandria, Virginia of a like amount of the City's Pollution Control Revenue Refunding Bonds. Proceeds were applied toward the redemption of the Company's $38.3 million 6-1/8% First Mortgage Bonds due 2007, at par plus accrued interest, and a like amount of the City's Pollution Control Revenue Bonds. On March 24, 1994, the Company announced that it will redeem, on May 2, 1994, the remaining $43 million of 9-3/4% First Mortgage Bonds due 2019, at 106.03% of the principal amount plus accrued interest. The estimated fair value of the fixed rate First Mortgage Bonds, excluding amounts due within one year, in the aggregate, was $1.2 billion and $1.3 billion at March 31, 1994 and 1993, respectively. The estimated fair value of the Convertible Debentures, in the aggregate, was $169 million and $175.2 million at March 31, 1994 and 1993, respectively. The estimated fair value at March 31, 1994 and 1993, was based on the current market price or for issues with no market price available, was based on discounted cash flows using current rates for bonds with similar terms and remaining maturities. At March 31, 1994, the estimated fair value of the Adjustable Rate series First Mortgage Bonds, based on the current market price was $53.3 million. The carrying value was considered to be the estimated fair value of this bond series at March 31, 1993. At March 31, 1994 and 1993, the estimated fair value of the Medium-Term Notes, excluding amounts due within one year, in the aggregate, was $222.5 million and $136.8 million, respectively, based on discounted cash flows using current rates for notes with similar terms and remaining maturities. Nonutility Subsidiary Long-Term Debt - ------------------------------------ Long-term debt at March 31, 1994 consisted primarily of unsecured borrowings from institutional lenders maturing at various dates between May 1994 and July 2003. The interest rates 14 of such borrowings range from 3.69% to 10.10%. The weighted average effective interest rate was 7.33% at March 31, 1994 and 7.74% at March 31, 1993. Annual aggregate principal repayments on these borrowings are $105.8 million in 1994, $180.4 million in 1995, $168.5 million in 1996, $103.8 million in 1997, $142.3 million in 1998 and $301 million thereafter through 2003. Also included in long-term debt is $78.3 million of non-recourse debt of which $16.5 million is payable in monthly installments with maturity on April 30, 1994, and the remainder due in monthly installments with final maturities in 2002 and 2011. At March 31, 1994 and 1993, the fair value of long-term debt, including non-recourse debt, was estimated to be $1.1 billion and $982.9 million, respectively. These estimates were based on current rates offered to similar companies for debt with similar remaining maturities. (4) MARKETABLE SECURITIES --------------------- In January 1994, the Company adopted SFAS No. 115 entitled "Accounting for Certain Investments in Debt and Equity Securities." The Company's marketable securities, all of which are classified as available-for-sale as defined in SFAS No. 115, consist primarily of investment grade preferred stocks with mandatory redemption features. Pursuant to SFAS No. 115, net unrealized gains and losses on such securities are reflected, net of tax, in stockholders' equity. The gross unrealized losses are shown below: For the three As of months ended March 31, 1994 March 31, 1994 ----------------------- -------------- Gross Carrying Market Unrealized Value Value Losses ---------- ---------- -------------- (Thousands of Dollars) Mandatory redeemable preferred stock $ 493,513 $ 488,541 $ (4,972) Debt securities 518 518 - Equity securities 3 - (3) ---------- ---------- ------------- Total $ 494,034 $ 489,059 $ (4,975) ========== ========== ============= 15 In determining gross realized gains and losses on sales or maturities of securities, specific identification is used. During the three months ended March 31, 1994 proceeds of $44.2 million were received through the sales of securities which generated gross realized gains of $1.6 million and gross realized losses of $1.6 million. At March 31, 1994, the final contractual maturities (in thousands of dollars) for mandatorily redeemable preferred stock were as follows: Within one year $ 2,890 One to five years 64,898 Five to ten years 115,094 Over ten years 311,152 ---------- 494,034 Less gross unrealized losses (4,975) ---------- $ 489,059 ========== (5) COMMITMENTS AND CONTINGENCIES ----------------------------- On April 4, 1994, the Company filed an application for reconsideration with the District of Columbia Public Service Commission for reconsideration of various determinations in the Commission's March 4, 1994 Order in Formal Case No. 929. An unfavorable ruling on the Company's application would reduce 1994 income. See Part II, Item 5, Base Rate Proceedings for additional information. As discussed in the 1993 Form 10-K, in August 1993, the Company was served with Amended Complaints filed in three jurisdictions (Prince George's County, Baltimore City, and Baltimore County) in separate ongoing, consolidated proceedings each denominated "In re: Personal Injury Asbestos Cases". The Company (and other defendants) were brought into these cases on a theory of premises liability under which plaintiffs argue that the Company was negligent in not providing a safe work environment for employees of its contractors who allegedly were exposed to asbestos while working on the Company's property. Initially, a total of approximately four hundred and forty-eight (448) individual plaintiffs added the Company to their Complaints. While the pleadings are not entirely clear, it 16 appears that each plaintiff seeks $2 million in compensatory damages and $4 million in punitive damages from each defendant. In a related proceeding in the Baltimore City case, the Company was served, September 1993, with a third party complaint by Owens Corning Fiberglass, Inc. (Owens Corning) alleging that Owens Corning was in the process of settling approximately 700 individual asbestos-related cases and seeking a judgment for contribution against the Company on the same theory of alleged negligence set forth above in the plaintiffs' case. Subsequently, Pittsburgh Corning Corp. (Pittsburgh Corning) filed a third party complaint against the Company, seeking contribution for the same plaintiffs involved in the Owens Corning third party complaint. Since the filings, a number of individual suits have been disposed of without any payment by the Company. The claims by Pittsburgh Corning and Owens Corning were disposed of in March 1994 and April 1994, respectively, without any payment by the Company. While the aggregate amount specified in the remaining suits would exceed $1 billion, the Company believes the amounts are greatly exaggerated as were the claims already disposed of. The amount of total liability, if any, and any related insurance recovery cannot be precisely determined at this time; however, based on information and relevant circumstances known at this time, the Company does not believe these suits will have a material adverse effect on its financial position. The Company is involved in other legal and administrative (including environmental) proceedings before various courts and agencies with respect to matters arising in the ordinary course of business. Management is of the opinion that the final disposition of these proceedings will not have a material adverse effect on the Company's financial position or results of operations. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * The information furnished in the accompanying Consolidated Statements of Earnings and Retained Income, Consolidated Balance Sheets and Consolidated Statements of Cash Flows reflects all adjustments (which consist only of normal recurring accruals) which are, in the opinion of management, necessary to a fair presentation of the results of operations for the interim periods. The accompanying consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes included in the Company's 1993 Annual Report to the Securities and Exchange Commission on Form 10-K. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * 17 This Quarterly Report on Form 10-Q, including the report of Price Waterhouse (on page 19) will automatically be incorporated by reference in the Prospectuses constituting part of the Company's Registration Statements on Form S-3 (Registration Nos. 33-48524, 33-58810 and 33-50377 and Form S-8 (Registration No. 33-36798 filed under the Securities Act of 1933. Such report of Price Waterhouse, 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. 18 INDEPENDENT ACCOUNTANTS REPORT To the Board of Directors and Shareholders of Potomac Electric Power Company We have reviewed the accompanying consolidated balance sheets of Potomac Electric Power Company and consolidated subsidiaries (the Company) at March 31, 1994 and 1993 and the related consolidated statements of earnings and retained income for the three and twelve month periods then ended and the consolidated statements of cash flows for the three and twelve month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial information for it to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1993, and the related consolidated statement of earnings and consolidated statement of cash flows for the year then ended (not presented herein); and in our report dated January 21, 1994, we expressed an unqualified opinion, with an explanatory paragraph for a change in accounting principles, on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 1993, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Price Waterhouse Price Waterhouse Washington, D.C. May 2, 1994 19 Part I FINANCIAL INFORMATION - ------ --------------------- Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED - ------ ---------------------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION --------------------------------------------- UTILITY - ------- RESULTS OF OPERATIONS - --------------------- TOTAL REVENUE Total revenue increased for the three and twelve months ended March 31, 1994, as compared to the corresponding periods in 1993. The increases in revenue from sales of electricity for the three and twelve month periods were primarily due to increases in kilowatt-hour sales of 5.2% and 5.7% for the three and twelve months ended March 31, 1994, respectively, over the corresponding periods in 1993, increases in fuel rate revenue and the effects of the 1992 and 1993 base rate increases in Maryland. The increase in kilowatt-hour sales for the three months ended March 31, 1994, was primarily attributable to the impact of severe weather in January 1994 which resulted in record-breaking low temperatures. Heating degree days for the quarter were 7.5% above the corresponding period in 1993 and 13.2% above the 20- year average. The increase in kilowatt-hour sales for the twelve months ended March 31, 1994, was primarily attributable to hotter than average weather during the summer cooling season as well as the colder than average weather during the first quarter of 1994. Cooling degree hours during the twelve months ended March 31, 1994 were 97% above the corresponding period in 1993 and 22% above the 20-year average. Interchange deliveries increased for the three months ended March 31, 1994 and decreased for the twelve months ended March 31, 1994, reflecting the amount of energy delivered to the Pennsylvania-New Jersey-Maryland (PJM) Interconnection. 20 Rate orders received by the Company during 1994 and 1993 provided for changes in annual base rate revenue as shown in the table below: Rate Increase % Effective Regulatory Jurisdiction ($000)* Change Date - ----------------------- ---------- ------- --------------- District of Columbia $25,400 3.8% March/June 1994 Federal - Wholesale 2,600 2.3 January 1994 Maryland 27,000 3.0 November 1993 Maryland 7,254 .9 June 1993 Federal - Wholesale 3,801 3.1 January 1993 * See Part II, Item 5, Base Rate Proceedings for additional information. On April 4, 1994, the Company filed an application for reconsideration with the District of Columbia Public Service Commission for reconsideration of various determinations in the Commission's March 4, 1994 Order in Formal Case No. 929. An unfavorable ruling on the Company's application would reduce 1994 income. See Part II, Item 5, Base Rate Proceedings for additional information. OPERATING EXPENSES Fuel and purchased energy increased for the three and twelve months ended March 31, 1994, as compared to the corresponding periods ended March 31, 1993. Fuel expense increased for the three and twelve months ended March 31, 1994, primarily as the result of a 15.6% and 5.5% increase, respectively, in net generation due to increased customer usage caused by the extreme weather in the first quarter of 1994 and the summer of 1993. The increase in purchased energy for three months ended reflects changes in the levels and prices of energy purchased from PJM and other utilities. The increase for the twelve months ended was due primarily to increased purchases of low-cost energy from PJM. The unit fuel costs for the comparative periods ended March 31, were as follows: Three Twelve Months Ended Months Ended ------------ ------------- 1994 1993 1994 1993 ---- ---- ---- ---- System Average Fuel Cost per MBTU $2.13 $1.87 $1.98 $1.85 21 The increases in the system average unit fuel cost for the three and twelve months ended March 31, 1994 resulted from increased use of major cycling and peaking generation units which burn higher cost fuels. The Company's major cycling and certain peaking units can burn natural gas or oil, adding flexibility in selecting the most cost-effective fuel mix. For the twelve month periods ended March 31, 1994 and 1993, the Company obtained 74% and 84%, respectively, of its system generation from coal based upon percentage of Btus. Capacity purchase payments increased for the three and twelve months ended March 31, 1994, as compared to the corresponding periods in 1993, primarily as the result of a January 1, 1994 increase in the cost of capacity under agreements with Ohio Edison and Allegheny Power System (APS). The cost of capacity increased from $12,380 per megawatt, per month, in effect from 1987 to 1993, to $18,060 per megawatt, per month, plus an allocation of fixed operating and maintenance expenses. Operating expenses other than fuel, purchased energy and capacity purchase payments increased for the three and twelve months ended March 31, 1994 as compared to the corresponding periods ended March 31, 1993. The increases were principally attributable to income taxes, due to a higher federal income tax rate which became effective in 1993, and higher taxable income; depreciation and amortization expense, due to additional investment in property and plant and amortization of increased amounts of conservation program costs; maintenance expense, due to increased expenditures for maintenance of production facilities; and other taxes, due to changes in the levels of operating revenue and plant investment upon which taxes are based. See Part I, Item I, Notes to the Consolidated Financial Statements, (5) Commitments and Contingencies for additional information. CAPITAL RESOURCES AND LIQUIDITY - ------------------------------- The Company's investment in property and plant, at original cost before accumulated depreciation, was $5.7 billion at March 31, 1994, an increase of $73.8 million from the investment at December 31, 1993 and an increase of $308.6 million from the investment at March 31, 1993. Cash invested in property and plant construction, excluding AFUDC, amounted to $77.6 million for the three months ended March 31, 1994 and $315.7 million for the twelve months then ended. 22 See Part I, Item I, Notes to Consolidated Financial Statements, (3) Capitalization for information with respect to financing activity. At March 31, 1994, the Company's capital structure, excluding short-term debt, long-term debt and serial preferred stock redemptions due within one year, and nonutility subsidiary debt, consisted of 42.9% long-term debt, 3.3% serial preferred stock, 3.8% redeemable serial preferred stock and 50% common equity. Cash (used by) from utility operations, after dividends, was $(12) million for the three months ended March 31, 1994 and $105 million for the twelve months then ended as compared with $(22) million and $77.7 million, respectively, for the same periods ended March 31, 1993. Outstanding utility short-term debt totaled $282.9 million at March 31, 1994, a decrease of $11.7 million from the $294.6 million outstanding at December 31, 1993 and an increase of $200.9 million from the $82 million outstanding at March 31, 1993. NEW ACCOUNTING STANDARDS - ------------------------ Effective January 1, 1994, the Company adopted SFAS No. 112 entitled "Employers' Accounting for Postemployment Benefits," which requires the accrual of the expected cost of providing benefits to former or inactive employees after employment but before retirement. The adoption of this pronouncement did not have a material effect on the Company's consolidated financial statements. Also on January 1, 1994, the Company adopted SFAS No. 115 entitled, "Accounting for Certain Investments in Debt and Equity Securities." See the Marketable Securities discussion included in Part I, Item 1, Notes to Consolidated Financial Statements, (4) Marketable Securities. NONUTILITY SUBSIDIARY - --------------------- RESULTS OF OPERATIONS - --------------------- PCI's net earnings totaled $2.2 million and $25 million for each of the three and twelve months ended March 31, 1994 and March 31, 1993, respectively. PCI contributed $.02 and $.22 per share for the three and twelve months ended March 31, 1994, respectively, to PEPCO's consolidated earnings per share, unchanged from the corresponding periods ended March 31, 1993. 23 PCI generates income primarily from its leasing activities and securities investments. Revenue from leasing activities, which includes rental income, gains on asset sales, interest income and fees totaled $24.5 million and $118.4 million for the three and twelve months ended March 31, 1994 compared to $20.4 million and $111.6 million for the same periods ended in 1993. The increase in income from leasing activities in 1994 versus 1993 was primarily due to an increase in asset sales and fee income. All of PCI's aircraft are on lease at this time. At March 31, 1994, a portion ($182 million carrying value) of PCI's leasing portfolio consisted of short term usage based operating leases with monthly rental income dependent upon hours used. Under certain recent short term aircraft leases, PCI is responsible for estimated operating and maintenance expenses exceeding amounts provided therefor by the lessees. Such leases include provisions for early termination. PCI's marketable securities portfolio contributed pre-tax income of $8.4 million and $37.9 million for the three and twelve months ended March 31, 1994 compared to $8.9 million and $39.3 million for the same periods ended March 31, 1993, respectively. Net realized gains included in marketable securities income totaled $6.4 million for the twelve months ended March 31, 1994 and $.5 million and $8.3 million for the three and twelve month periods ended March 31, 1993, respectively. Other income decreased $2 million and $18.4 million for the three and twelve months ended March 31, 1994, respectively, over the same periods in 1993. The decrease for the three month period was due primarily to a pre-tax write-off of approximately $1.5 million as a result of agreements settling lawsuits related to PCI's construction and operation of a municipally owned waste- to-energy facility. The reduction in other income for the twelve month period was the result of a pre-tax writedown of approximately $13.5 million related to the termination of obligations with respect to a real estate limited partnership interest. Expenses, before income taxes, which include interest, depreciation and operating and administration and general expenses totaled $33.9 million and $161.7 million for the three and twelve months ended March 31, 1994, respectively, compared to $31.5 million and $128.6 million for the same periods in 1993. The increase in the three month period was due primarily to increased interest expense as a result of an increase in interest rates. The increase for the twelve month period was due primarily to expenses related to a partnership transaction and increased operating expenses incurred for aircraft under usage based leases or which were not under lease during part of the twelve month period. 24 PCI had income tax credits of $3.1 million and $45.7 million for the three and twelve month periods ended March 31, 1994, respectively, compared with an income tax credit of $2.4 million and income tax expense of $.4 million for the corresponding periods in 1993. Tax credits increased for the three month period ended March 31, 1994 over 1993, primarily due to greater dividends earned over the prior year and taxed at a lower tax rate. The $45.3 million increase in tax credits for the twelve month period ended March 31, 1994 over March 31, 1993 was attributable to a second quarter 1993 partnership transaction, whereby PCI contributed aircraft, subject to direct finance leases, to a majority-owned partnership resulting in future cash savings of $37.4 million. As a result of this transaction, PCI's obligation for previously accrued deferred taxes was reduced, resulting in after tax earnings of $21.3 million, after provision for all costs of the transaction. The excess deferred taxes were recognized as a reduction in income tax expense. The twelve month increase in tax credits for 1994 over 1993 was offset by an August 1993 charge to earnings of $5.1 million to adjust PCI's deferred taxes for the higher rate contained in the Omnibus Budget Reconciliation Act of 1993. CAPITAL RESOURCES AND LIQUIDITY - ------------------------------- Investments in leased equipment of $3.7 million for the three month period ended March 31, 1994 were for refurbishment and modification of existing aircraft and $34.9 million for the twelve month period ended March 31, 1994 reflect the purchase of a new MD-11 aircraft placed on a long-term leveraged lease at the same time that older equipment under lease by the same carrier was sold for proceeds of $108.1 million and a pre-tax gain of $6.2 million. At March 31, 1994, PCI had two aircraft on lease to Hawaiian Airlines (Hawaiian) which had filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code. Hawaiian has made all of its scheduled monthly rent payments. In April 1994, PCI requested and Hawaiian returned the two aircraft which PCI has leased to another carrier commencing in May 1994. PCI's outstanding short-term debt totaled $104.9 million at March 31, 1994, a decrease of $21.3 million from the $126.2 million outstanding at December 31, 1993 and a decrease of $148.5 million from the $253.4 million outstanding at March 31, 1993. During the three and twelve months ended March 31, 1994, PCI issued $115 million and $318 million, respectively, in long-term debt, including non-recourse debt, and debt repayments totaled $62.6 million and $198.3 million, respectively for those same periods. During the twelve month period ended March 31, 1994, 25 PCI assumed $22.6 million in debt as a result of the purchase of minority interests and subsequent consolidation of two entities previously accounted for under the equity method. At March 31, 1994, PCI had $285 million available under its Medium-Term Note Program and $345 million of unused short-term bank credit lines. PCI paid the Company a $15 million dividend in January 1994 resulting in cumulative dividends of $91 million paid since PCI's inception. PCI remains adequately capitalized to support future business plans, which are designed to supplement utility earnings and build long-term value. Part II OTHER INFORMATION - ------- ----------------- Item 1 LEGAL PROCEEDINGS - ------ ----------------- See Part I, Item I, Notes to the Consolidated Financial Statements, (5) Commitments and Contingencies, for information on Personal Injury Asbestos Cases. Part II - ------ Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------ --------------------------------------------------- (a) Annual meeting of shareholders held April 27, 1994. (b) (1) Directors who were elected at the annual meeting: For Term Expiring in 1995: John M. Derrick, Jr. Votes cast for: 99,625,678 Votes withheld: 2,022,082 For Term Expiring in 1997: Richard E. Marriott Votes cast for: 98,690,057 Votes withheld: 2,957,703 David O. Maxwell Votes cast for: 99,089,933 Votes withheld: 2,557,827 Floretta D. McKenzie Votes cast for: 98,260,144 Votes withheld: 3,387,616 Edward F. Mitchell Votes cast for: 99,539,335 Votes withheld: 2,108,425 26 (2) Directors whose terms of office continued after the annual meeting: Roger R. Blunt, Sr. Peter F. O'Malley A. James Clark Louis A. Simpson H. Lowell Davis W. Reid Thompson Ann D. McLaughlin (c) (1) The following two shareholder proposals were introduced: (a) "RESOLVED: That the shareholders of PEPCO recommend that the Board of Directors take the necessary steps to reinstate the election of directors ANNUALLY, instead of the staggered system which was recently adopted." The following statement has been supplied by the shareholder submitting this proposal: "REASONS: Until recently, directors of PEPCO were elected annually by all shareholders." "The great majority of New York Stock Exchange listed corporations elect all their directors each year. "This insures that ALL directors will be more accountable to ALL shareholders each year and to a certain extent prevents the self-perpetuation of the Board." "Last year the owners of 18,159,561 shares, representing 22.6% of shares of voting, voted FOR this proposal." The shareholder proposal was defeated. There were 61,797,260 votes cast against the proposal, 18,615,156 votes cast in support of the proposal, 3,361,179 votes abstaining and 17,874,165 broker nonvotes. (b) "RESOLVED: That the shareholders of PEPCO recommend that the Board of Directors institute a salary and compensation ceiling such that as to future employment contracts, no senior executive or director of the Company receive a combined salary and other compensation which is more than two times the salary provided to the President of the United States, that is, no more than $400,000." The following statement has been supplied by the shareholder submitting this proposal: "REASONS: There is a general consensus that corporate officials are grossly overpaid and that this is promulgated by the hands-off policy of Boards of Directors. 27 The recommended ceiling is sufficient to motivate any person to do his best. There is no corporation which exceeds the size and complexity of the United States government of which the President is the chief executive officer. Even government agencies exceed the size, as measured by personnel and budget, of private corporations. The President of the United States receives a salary of $200,000; even agency heads and members of Congress are paid only somewhat more than $100,000." "The duties of the President of the United States are not comparable to those of senior executive officers or directors (the President has a much more demanding job). While the President has many valuable compensations which may exceed those of company executives, I use the salary of the President only as a reference point for shareholders to consider as they evaluate this resolution. "Officers and directors of public corporations are the employees and not the owners, except as they may be shareholders in common with other stockholders. The Boards of Directors, a closed group which perpetuates itself, determines who is to be selected to the Board and who is an officer of the company, as well as the compensation to be received. They should not give the appearance that they run the corporations for their benefit and only incidentally for the benefit of shareholders. They should not unnecessarily drain away millions of dollars in salary, stock options and other compensation. When the recommended ceiling is exceeded, it may be an expression of greed and abuse of power. "There may be no direct correlation between the profitability of a corporation and the compensation to officers. In many corporations, compensation increases even as profits fall. High compensation need not serve as an incentive for a better run or more profitable corporation. Many qualified people would gladly step in and do as good a job as the incumbent officers of the Corporation and would have no hesitation serving under the aforementioned ceiling on compensation. "Any officer who believes he can better the corporation should be sufficiently motivated to purchase stock on the open market or to receive stock options as part of his salary and compensation package. To remain competitive in world markets we must cut our costs and not overcompensate directors and officers. "Last year a similar proposal received 18.2% of the stockholder's vote." 28 The shareholder proposal was defeated. There were 63,611,227 votes cast against the proposal, 16,041,369 votes cast in support of the proposal, 4,126,079 votes abstaining and 17,869,085 broker nonvotes. Item 5 OTHER INFORMATION - ------ ----------------- OTHER FINANCING ARRANGEMENTS - Credit Agreements - ------------------------------------------------ The Company has, with respect to its utility operations, $90 million in revolving credit agreements with 11 banks and conventional bank line of credit agreements of $200.5 million with 20 banks, all of which were unused during 1994 and 1993. PCI maintains a minimum 100 percent line of credit back-up for its outstanding commercial paper issuances, all of which were unused during 1994 and 1993. BASE RATE PROCEEDINGS - --------------------- Maryland - -------- In October 1993, pursuant to a settlement agreement, the Commission authorized a $27 million, or 3%, increase in base rate revenue effective November 1, 1993. The settlement included a new system composite depreciation rate of approximately 3.1%, up from the 3% rate previously in effect. Prior to the settlement, the Company had filed updated cost of service data which demonstrated a need for a $49.9 million increase in Maryland base rate revenue, based upon the requested return of 9.89% on average rate base including a 12.75% return on common stock equity, 1993 federal tax legislation and the completed separate depreciation case. In connection with the settlement agreement, no determination was made with respect to rate of return. The rate of return on common stock equity most recently determined for the Company in a fully litigated rate case was 12.75% established by the Commission in a June 1991 rate increase order. District of Columbia - -------------------- On March 4, 1994, the Commission authorized a $25.4 million, or 3.8% increase in base rate revenue. Of the total increase, $23.2 million became effective March 16, 1994. The remaining $2.2 million is scheduled to become effective on June 5, 1994, contingent on the June 1, 1994 in-service date of the final segment of a 500-kilovolt transmission line which will provide additional links in the transmission systems of the Company, 29 Baltimore Gas and Electric Company and Virginia Power. The authorized rates are based on a 9.05% rate of return on average rate base, including an 11% return on common stock equity. The Commission approved the Company's proposal for including future changes in purchased capacity costs in fuel adjustment clause billings. Furthermore, the Commission authorized an accounting change for post-retirement benefit costs consistent with SFAS No. 106 entitled "Employer's Accounting for Postretirement Benefits Other Than Pensions." The Commission adopted a three-year phase- in approach for inclusion of increased postretirement benefit costs in the Company's rates. In addition, the Commission reversed its longstanding practice of including Electric Plant Held for Future Use in rate base and ordered the Company to accrue AFUDC on plant held for future use. The order increased test period revenue by $3 million, which reduced the Company's revenue requirement, to reflect 20% of the cumulative effect of a 1992 accounting change related to unbilled revenue applicable to the District of Columbia. The Commission's decision to adopt an unbilled revenue adjustment may require the Company to establish a regulatory liability of up to $5.9 million on an after tax basis. The Commission rejected the Company's proposed Demand Side Management (DSM) surcharge. Consistent with prior decisions, the order included $5.3 million in base rates to recognize DSM program costs without provision for lost revenue between rate cases. In addition, the Commission found that the Company had not adequately supported $5.5 million, or 25% of conservation expenditures during the test year and therefore disallowed recovery of those costs in base rates. Subsequent to the test period in the case, the Company has expended approximately $23 million on conservation in the District of Columbia. The Commission's decision to disallow certain DSM program costs may require the Company to write off more than $5.5 million ($3.2 million after taxes) in 1994. On April 4, 1994, the Company filed a request for reconsideration of the decision. A Commission decision on reconsideration is expected by early May 1994. Federal - Wholesale - ------------------- The Company has a 10-year full service power supply contract with the Southern Maryland Electric Cooperative, Inc. (SMECO), a wholesale customer. The contract period is to be extended for an additional year on January 1 of each year, unless notice is given by either party of termination of the contract at the end of the 10-year period. The full service obligation can be reduced by SMECO by up to 20% of its annual requirements with a five-year advance notice for each such reduction. SMECO rates were increased by $2.6 million and $3.8 million effective January 1, 1994 and 1993, respectively. Rate increases of $2.3 million and $4.2 million are scheduled to become effective on January 1, 1995 and 1996, respectively. 30 Federal - Interchange and Purchased Energy - ------------------------------------------ The Company's generating and transmission facilities are interconnected with the other members of the Pennsylvania-New Jersey-Maryland Interconnection (PJM) and other utilities. The pricing of most PJM internal economy energy transactions is based upon "split savings" so that the price of such energy is halfway between the cost that the purchaser would incur if the energy were supplied by its own sources and the cost of production to the company actually supplying the energy. In addition to PJM interchange activity, the Company has interconnection agreements with Allegheny Power System (APS) and Virginia Power. These agreements provide a mechanism and the flexibility to purchase power from these parties or from others with whom they are interconnected on an as-needed basis in amounts mutually agreed to from time-to-time pursuant to negotiated rates, terms and conditions. Pursuant to the Company's long-term capacity purchase agreements with Ohio Edison and APS, the Company is purchasing 450 megawatts of capacity and associated energy through the year 2005. The monthly capacity commitment under this agreement, excluding an allocation of fixed operating and maintenance cost, was $12,380 per megawatt through 1993, $18,060 per megawatt effective 1994 through 1998 and $25,620 per megawatt from 1999 through 2005. PEAK LOAD, SALES, CONSERVATION AND ENERGY USE MANAGEMENT - -------------------------------------------------------- AND CONSTRUCTION AND CAPACITY ADDITIONS --------------------------------------- Peak Load and Sales Data - ------------------------ Kilowatt-hour sales for the three and twelve month periods ended March 31, 1994, increased 5.2% and 5.7%, respectively, as compared to sales for the corresponding periods ended March 31, 1993. The increases in sales reflect higher customer usage due to the impact of severe weather in January 1994 which resulted in record-breaking low temperatures and warmer than average weather during the summer of 1993 as compared to cooler than average weather in 1992. Heating degree days in January 1994 were 43% above January 1993 and 20% above the 20-year average for this period. Cooling degree hours in 1993 were 97% above the corresponding period in 1992, and were 22% above the 20-year average weather for this period. Assuming future weather conditions approximate historical averages, the Company expects its compound annual growth in kilowatt-hour sales to range between 1% and 2% over the next decade. 31 The 1993 summer peak demand was 5,754 megawatts, 3.8% higher than the 1992 peak demand of 5,546 megawatts and .3% below the all-time summer peak demand of 5,769 megawatts which occurred in July 1991. The Company's present generation capability, including capacity purchase contracts, is 6,576 megawatts. To meet the 1993 summer peak demand, the Company had 201 megawatts available from its dispatchable energy use management program. Based on average weather conditions, the Company estimates that its peak demand will grow at a compound annual rate of approximately 1%, reflecting continuing emphasis on conservation and energy use management programs and anticipated service area growth trends. The new winter peak demand of 5,010 megawatts was established in January 1994, which was 11.1% above the previous all-time winter peak demand of 4,511 megawatts which occurred in December 1989. Conservation and Energy Use Management - -------------------------------------- The Company's conservation and energy use management programs are designed to curb growth in demand in order to defer the need for construction of additional generating capacity and to cost-effectively increase the efficiency of energy use. The Company offers an extensive array of comprehensive conservation programs for its customers in the District of Columbia and Maryland and continues to aggressively identify, design, and test additional energy-efficient conservation measures and technologies. The Company recovers the cost of its conservation programs in its Maryland jurisdiction through a rate surcharge which permits the Company to earn a return on its conservation investment while receiving compensation for lost revenue. The cost recovery mechanism also allows the Company to earn a performance bonus for reaching or exceeding established goals. The surcharge is adjusted periodically to reflect the Company's growing conservation commitment. The District of Columbia Public Service Commission has established a framework for earning a return on approved conservation investments, and incentives for achieving demand side management goals within base rate cases. During the next five years, the Company plans to expend an estimated $525 million to encourage the efficient use of electric energy and to reduce the need to build new generating facilities. It is estimated that peak load reductions of approximately 390 megawatts have been achieved to date from conservation and energy use management programs and that additional peak load reductions of more than 500 megawatts will be achieved in the next five years. 32 Construction and Capacity Additions - ----------------------------------- The Company's construction expenditures, excluding AFUDC, are projected to total $1.3 billion for the five-year period 1994 through 1998 which includes $203 million of estimated Clean Air Act (CAA) expenditures. Making use of the flexibilities in its long-term construction plan, the Company reduced projected expenditures for the five years 1994 through 1998 by a total of $315 million from amounts previously planned. The construction reductions and deferrals were associated with lower rates of projected growth in usage of electricity resulting in large part from implementing economical conservation programs. The Company plans to finance its construction program through funds provided by operations and external financing. Although it is not possible to forecast specific impacts of the National Energy Act legislation enacted during 1992, the Company has substantial flexibility to anticipate and deal with changing conditions and increased competition in the generation and transmission of electricity. Since the early 1980s, the Company has pursued strategies which achieve flexibility through conservation and energy use management, extension of the useful life of generating equipment, cost-effective purchase of capacity and energy and preservation of scheduling flexibility to add new generating capacity in relatively small increments to meet changing requirements. The Company is a low-cost energy producer with customer prices which compare favorably with regional and national averages. The Company has developed cost-effective plans for complying with the CAA which require the reduction of sulfur dioxide and nitrogen oxides emissions in two phases to achieve prescribed standards. The Company anticipates capital expenditures totaling $203 million over the next five years and has received regulatory approval in Maryland and the District of Columbia for its plans for compliance with Phase I requirements of the CAA and for inclusion of the costs of compliance in its ratemaking cost of service. The Company has also received approval for inclusion of sulfur dioxide allowance expenses in its fuel adjustment clause. The Company's construction schedule is flexible in order to accommodate changes in future growth and the addition of nonutility generation. Currently, no additional generating units are scheduled until after the year 2003. The Company's agreement for a project with Panda Energy Corporation for a 230-megawatt gas-fueled combined-cycle cogeneration project in Prince George's County, Maryland, which is scheduled for service in 1996, is currently before the Maryland Public Service Commission for issuance of a certificate 33 of convenience and necessity. In addition, a 40-megawatt resource recovery facility is now under construction in Montgomery County, Maryland, with which the Company has a contract. The Company currently projects that contracted nonutility generation and the Company's commitment to conservation and energy use management will provide adequate reserve margins to meet customers' needs for the next decade. SELECTED NONUTILITY SUBSIDIARIES FINANCIAL INFORMATION - ------------------------------------------------------ Selected (unaudited) financial information of the Company's principal consolidated nonutility subsidiary, Potomac Capital Investment Corporation (PCI) and its subsidiaries, is presented below. The Company's equity investment in PCI, which was reduced by a $15 million dividend in January 1994, and a $14 million dividend in February 1993, was $275 million and $267.1 million at March 31, 1994 and 1993, respectively. 34 Consolidated Statements of Earnings: - -----------------------------------
Three Twelve Months Ended Months Ended March 31, March 31, ------------------- ------------------ 1994 1993 1994 1993 -------- -------- -------- -------- (Thousands of Dollars) Income Leasing activities $ 24,540 $ 20,375 $118,391 $111,618 Marketable securities 8,359 8,859 37,917 39,345 Other 110 2,083 (15,275) 3,150 -------- -------- -------- -------- 33,009 31,317 141,033 154,113 -------- -------- -------- -------- Expenses Interest 20,500 18,721 79,639 82,061 Administrative and general 2,510 2,366 14,783 9,451 Depreciation and operating 10,852 10,383 67,288 37,137 Income tax expense (3,058) (2,410) (45,726) 446 -------- -------- -------- -------- 30,804 29,060 115,984 129,095 -------- -------- -------- -------- Net earnings from nonutility subsidiary $ 2,205 $ 2,257 $ 25,049 $ 25,018 ======== ======== ======== ======== Per share contribution to earnings of the Company $.02 $.02 $.22 $.22 ==== ==== ==== ==== 35
STATISTICAL DATA - ----------------
Three Months Ended Twelve Months Ended March 31, March 31, --------------------------------- ------------------------------------- 1994 1993 % Change 1994 1993 % Change -------- -------- -------- ---------- ---------- -------- Revenue from Sales ------------------ of Electricity -------------- (Thousands of Dollars) Residential $120,798 $104,790 15.3 $ 522,104 $ 440,831 18.4 General Service 152,608 137,604 10.9 762,241 705,881 8.0 Large Power Service 56,711 51,520 10.1 302,419 286,181 5.7 Street Lighting 3,634 3,536 2.8 13,703 12,707 7.8 Rapid Transit 6,326 5,418 16.8 25,015 23,134 8.1 Wholesale 32,518 27,103 20.0 113,577 97,409 16.6 -------- -------- ---------- ---------- System $372,595 $329,971 12.9 $1,739,059 $1,566,143 11.0 ======== ======== ========== ========== Energy Sales ------------ (Millions of KWH) Residential 1,936 1,799 7.6 6,877 6,247 10.1 General Service 2,668 2,562 4.1 10,966 10,501 4.4 Large Power Service 1,196 1,178 1.5 5,250 5,173 1.5 Street Lighting 45 46 (2.2) 163 165 (1.2) Rapid Transit 102 91 12.1 382 362 5.5 Wholesale 692 633 9.3 2,386 2,178 9.6 -------- -------- ---------- ---------- System 6,639 6,309 5.2 26,024 24,626 5.7 ======== ======== ========== ========== Average System Revenue ---------------------- per KWH (cents per KWH) 5.61 5.23 7.3 6.68 6.36 5.0 ----------------------- System Peak Demand ------------------ (Thousands of KW) Summer - - 5,754 5,546 Winter - - 5,010 4,368 Net Generation -------------- (Millions of KWH) 5,614 4,858 19,901 18,864 Fuel Mix (% of Btu) ------------------- Coal (%) 63 83 74 84 Oil (%) 36 16 23 12 Gas (%) 1 1 3 4 Fuel Cost per MBtu ------------------ System Average $2.13 $1.87 $1.98 $1.85 Weather Data ------------ Heating Degree Days 2,510 2,334 4,414 4,344 20 Year Average 2,218 3,988 Cooling Degree Hours - - 13,250 6,732 20 Year Average 12 10,871 Heating Degree Days - The daily difference in degrees by which the mean temperature is below 65 degrees Fahrenheit (dry bulb). Cooling Degree Hours - The daily sum of the differences, by hours, by which the temperature (effective temperature) for each hour exceeds 71 degrees Fahrenheit (effective temperature). 36
Item 6 EXHIBITS AND REPORTS ON FORM 8-K - ------ -------------------------------- (a) Exhibits Exhibit 11 - Computation of Earnings Per Common Share - filed herewith. Exhibit 12 - Computation of ratios - filed herewith. Exhibit 15 - Letter re unaudited interim financial information - filed herewith. (b) Reports on Form 8-K A Current Report on Form 8-K was filed by the Company on January 28, 1994, providing detailed information and audited consolidated financial statements. The item reported on such Form 8-K was Item 7 (Financial Statements, Pro-Forma Financial Information and Exhibits.) SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Potomac Electric Power Company ------------------------------ Registrant By /s/ D. R. Wraase ------------------------------ (D. R. Wraase) Senior Vice President, Finance and Accounting May 2, 1994 - ----------- DATE 37 EX-11 2 STATEMENT RE COMPUTATION OF PER SHARE EARNING Exhibit 11 Computations of Earnings Per Common Share - ---------- ------------------------------------------ The following is the basis for the computation of primary and fully diluted earnings per common share for the twelve months ended March 31, 1994 and the twelve months ended December 31, 1993 and 1992:
March 31, December 31, December 31, 1994 1993 1992 ------------ ------------ ------------ Average shares outstanding for computation of primary earnings per common share 116,496,270 115,639,668 112,389,698 ============ ============ ============ Average shares outstanding for fully diluted computation: Average shares outstanding 116,496,270 115,639,668 112,389,698 Additional shares resulting from: Conversion of Serial Preferred Stock, $2.44 Convertible Series of 1966 (the "Convertible Preferred Stock") 51,891 51,967 57,542 Conversion of 7% Convertible Debentures 2,533,279 2,546,858 2,603,912 Conversion of 5% Convertible Debentures 3,392,500 3,392,500 1,130,833 ------------ ------------ ------------ Average shares outstanding for computation of fully diluted earnings per common share 122,473,940 121,630,993 116,181,985 ============ ============ ============ Earnings applicable to common stock, before cumulative effect of accounting change $226,661,000 $225,324,000 $186,368,000 Cumulative effect of accounting change, net of income taxes - - 16,022,000 ------------ ------------ ------------ Earnings applicable to common stock, as reported 226,661,000 225,324,000 202,390,000 Add: Dividends paid or accrued on Convertible Preferred Stock 21,000 22,000 24,000 Interest paid or accrued on Convertible Debentures, net of related taxes 6,539,000 6,548,000 4,303,000 ------------ ------------ ------------ Earnings applicable to common stock, including cumulative effect of accounting change and assuming conversion of convertible securities $233,221,000 $231,894,000 $206,717,000 ============ ============ ============ Primary earnings per common share Before cumulative effect $1.95 $1.95 $1.66 Cumulative effect - - 0.14 ----- ----- ----- Total $1.95 $1.95 $1.80 ===== ===== ===== Fully diluted earnings per common share Before cumulative effect $1.90 $1.91 $1.64 Cumulative effect - - 0.14 ----- ----- ----- Total $1.90 $1.91 $1.78 ===== ===== ===== This calculation is submitted in accordance with Regulation S-K item 601 (b) (11) although not required by footnote 2 to paragraph 14 of APB No. 15 because it results in dilution of less than 3%. 38
EX-12 3 COMPUTATION OF RATIOS Exhibit 12 Computation of Ratios - ---------- --------------------- The computations of the coverage of fixed charges, excluding the cumulative effect of the 1992 accounting change, before income taxes, and the coverage of combined fixed charges and preferred dividends for the twelve months ended March 31, 1994 and for each of the preceding five years on the basis of parent company operations only, are as follows.
Twelve Months For The Year Ended December 31, Ended ----------------------------------------------------- Mar. 31, 1994 1993 1992 1991 1990 1989 --------- --------- --------- --------- --------- --------- (Thousands of Dollars) Net income before cumulative effect of accounting change $217,901 $216,478 $172,599 $186,813 $165,199 $183,487 Taxes based on income 114,464 107,223 76,965 80,988 70,962 92,593 -------- -------- -------- -------- -------- -------- Income before taxes and cumulative effect of accounting change 332,365 323,701 249,564 267,801 236,161 276,080 -------- -------- -------- -------- -------- -------- Fixed charges: Interest charges 139,390 141,393 138,097 138,512 127,386 113,305 Interest factor in rentals 5,942 5,859 6,140 5,690 4,237 4,338 -------- -------- -------- -------- -------- -------- Total fixed charges 145,332 147,252 144,237 144,202 131,623 117,643 -------- -------- -------- -------- -------- -------- Income before income taxes, cumulative effect of accounting change and fixed charges $477,697 $470,953 $393,801 $412,003 $367,784 $393,723 ======== ======== ======== ======== ======== ======== Coverage of fixed charges 3.29 3.20 2.73 2.86 2.79 3.35 ==== ==== ==== ==== ==== ==== Preferred dividend requirements $16,289 $16,255 $14,392 $12,298 $10,598 $9,235 -------- -------- -------- -------- -------- -------- Ratio of pre-tax income to net income 1.53 1.50 1.45 1.43 1.43 1.50 ---- ---- ---- ---- ---- ---- Preferred dividend factor $24,922 $24,383 $20,868 $17,586 $15,155 $13,853 -------- -------- -------- -------- -------- -------- Total fixed charges and preferred dividends $170,254 $171,635 $165,105 $161,788 $146,778 $131,496 ======== ======== ======== ======== ======== ======== Coverage of combined fixed charges and preferred dividends 2.81 2.74 2.39 2.55 2.51 2.99 ==== ==== ==== ==== ==== ==== 39
Exhibit 12 Computation of Ratios - ---------- --------------------- The computations of the coverage of fixed charges, excluding the cumulative effect of the 1992 accounting change, before income taxes, and the coverage of combined fixed charges and preferred dividends for the twelve months ended March 31, 1994 and for each of the preceding five years on a fully consolidated basis are as follows.
Twelve Months For The Year Ended December 31, Ended ----------------------------------------------------- Mar. 31, 1994 1993 1992 1991 1990 1989 --------- --------- --------- --------- --------- --------- (Thousands of Dollars) Net income before cumulative effect of accounting change $242,950 $241,579 $200,760 $210,164 $170,234 $214,587 Taxes based on income 68,737 62,145 79,481 80,737 63,360 99,766 -------- -------- -------- -------- -------- -------- Income before taxes and cumulative effect of accounting change 311,687 303,724 280,241 290,901 233,594 314,353 -------- -------- -------- -------- -------- -------- Fixed charges: Interest charges 220,933 221,312 226,453 225,323 199,469 165,709 Interest factor in rentals 9,309 9,257 6,599 6,080 4,559 4,705 -------- -------- -------- -------- -------- -------- Total fixed charges 230,242 230,569 233,052 231,403 204,028 170,414 -------- -------- -------- -------- -------- -------- Nonutility subsidiary capitalized interest (1,904) (2,059) (2,200) (6,542) - - -------- -------- -------- -------- -------- -------- Income before income taxes, cumulative effect of accounting change and fixed charges $540,025 $532,234 $511,093 $515,762 $437,622 $484,767 ======== ======== ======== ======== ======== ======== Coverage of fixed charges 2.35 2.31 2.19 2.23 2.14 2.84 ==== ==== ==== ==== ==== ==== Preferred dividend requirements $16,289 $16,255 $14,392 $12,298 $10,598 $9,235 -------- -------- -------- -------- -------- -------- Ratio of pre-tax income to net income 1.28 1.26 1.40 1.38 1.37 1.46 ---- ---- ---- ---- ---- ---- Preferred dividend factor $20,850 $20,481 $20,149 $16,971 $14,519 $13,483 -------- -------- -------- -------- -------- -------- Total fixed charges and preferred dividends $251,092 $251,050 $253,201 $248,374 $218,547 $183,897 ======== ======== ======== ======== ======== ======== Coverage of combined fixed charges and preferred dividends 2.15 2.12 2.02 2.08 2.00 2.64 ==== ==== ==== ==== ==== ==== 40
EX-15 4 LETTER RE UNAUDITED FINANCIAL INFORMATION Exhibit 15 May 2, 1994 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Dear Sirs: We are aware that Potomac Electric Power Company has incorporated by reference our report dated May 2, 1994 (issued pursuant to the provisions of Statement on Auditing Standards No. 71) in the Prospectuses constituting parts of the Registration Statements (Number 33-36798) on Form S-8 filed on September 12, 1990 and (Numbers 33-48524, 33-58810 and 33-50377) on Form S-3 filed on June 10, 1992, February 26, 1993, and September 23, 1993, respectively. We are also aware of our responsibilities under the Securities Act of 1933. Very truly yours, /s/ Price Waterhouse Price Waterhouse Washington, D.C. 41 -----END PRIVACY-ENHANCED MESSAGE-----