-----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, sOQzEXZhomARa775FmEXb/4FuouQgg1Op1xI76C00G6Y8uH3BhrYA8idmv64YaxG /j8TiBL6Y85ZQSZLMSe8hw== 0000079732-94-000106.txt : 19940801 0000079732-94-000106.hdr.sgml : 19940801 ACCESSION NUMBER: 0000079732-94-000106 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940729 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: 94540701 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 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 June 30, 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 June 30, 1994 - ------------------------------- ---------------------------- Common Stock, $1 par value 118,045,899 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........................ 23 Nonutility Subsidiary Results of Operations.................................. 24 Capital Resources and Liquidity........................ 26 PART II - Other Information Item 1 - Legal Proceedings................................. 26 Item 5 - Other Information Other Financing Arrangements............................. 27 Base Rate Proceedings.................................... 27 Peak Load, Sales, Least-Cost Resource Plan, and Construction and Generating Capacity............... 30 Environmental Matters.................................... 33 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 Six Months Ended Twelve Months Ended June 30, June 30, June 30, -------------------- -------------------- ---------------------- 1994 1993 1994 1993 1994 1993 --------- --------- --------- --------- ---------- ----------- (Thousands of Dollars) Revenue Sales of electricity $ 456,933 $ 414,815 $ 829,528 $ 744,786 $1,781,177 $1,600,928 Other electric revenue 1,498 1,337 3,813 2,602 7,218 6,215 --------- --------- --------- --------- ---------- ---------- Total Operating Revenue 458,431 416,152 833,341 747,388 1,788,395 1,607,143 Interchange deliveries 9,020 3,541 27,154 11,760 38,157 37,081 --------- --------- --------- --------- ---------- ---------- Total Revenue 467,451 419,693 860,495 759,148 1,826,552 1,644,224 --------- --------- --------- --------- ---------- ---------- Operating Expenses Fuel 103,859 82,574 216,991 170,600 400,673 351,527 Purchased energy 32,567 37,005 71,899 73,907 171,448 159,919 Capacity purchase payments 31,839 24,382 64,398 48,195 112,491 94,670 Other operation 46,765 48,502 99,044 98,199 208,660 203,122 Maintenance 21,318 22,422 45,538 43,324 95,881 87,312 --------- --------- --------- --------- ---------- ---------- Total Operation and Maintenance 236,348 214,885 497,870 434,225 989,153 896,550 Depreciation and amortization 42,793 40,196 85,490 79,386 169,710 155,957 Income taxes 40,224 28,681 44,197 27,437 126,937 90,500 Other taxes 51,074 49,034 98,590 94,581 205,260 197,238 --------- --------- --------- --------- ---------- ---------- Total Operating Expenses 370,439 332,796 726,147 635,629 1,491,060 1,340,245 --------- --------- --------- --------- ---------- ---------- Operating Income 97,012 86,897 134,348 123,519 335,492 303,979 --------- --------- --------- --------- ---------- ---------- Other Income Nonutility Subsidiary Income 34,042 26,845 67,051 58,162 148,230 142,406 Expenses, including interest and income taxes (33,905) (7,623) (64,709) (36,683) (142,267) (103,888) --------- --------- --------- --------- ---------- ---------- Net earnings from nonutility subsidiary 137 19,222 2,342 21,479 5,963 38,518 Allowance for other funds used during construction 2,786 3,674 6,006 7,309 11,938 15,872 Other, net (4,346) 301 (1,518) 3,877 4,827 6,054 --------- --------- --------- --------- ---------- ---------- Total Other Income (1,423) 23,197 6,830 32,665 22,728 60,444 --------- --------- --------- --------- ---------- ---------- Income Before Utility Interest Charges 95,589 110,094 141,178 156,184 358,220 364,423 --------- --------- --------- --------- ---------- ---------- Utility Interest Charges Long-term debt 31,352 34,172 62,838 68,827 129,503 137,077 Other 3,395 1,550 5,663 2,652 8,912 4,562 Allowance for borrowed funds used during construction (3,451) (2,650) (6,030) (5,361) (10,414) (10,834) --------- --------- --------- --------- ---------- ---------- Net Utility Interest Charges 31,296 33,072 62,471 66,118 128,001 130,805 --------- --------- --------- --------- ---------- ---------- Net Income 64,293 77,022 78,707 90,066 230,219 233,618 Dividends on Preferred Stock 4,069 4,048 8,215 8,161 16,307 15,830 --------- --------- --------- --------- ---------- ---------- Earnings for Common Stock 60,224 72,974 70,492 81,905 213,912 217,788 Retained Income at Beginning of Period 797,728 765,043 839,433 802,774 791,862 757,216 Dividends on Common Stock (48,907) (47,104) (97,802) (93,989) (193,649) (184,683) Subsidiary Marketable Securities Net Unrealized (Loss) Gain, Net of Tax (8,660) 949 (11,738) 1,172 (11,740) 1,541 --------- --------- --------- --------- ---------- ---------- Retained Income at End of Period $ 800,385 $ 791,862 $ 800,385 $ 791,862 $ 800,385 $ 791,862 ========= ========= ========= ========= ========== ========== Average Common Shares Outstanding (000's) 117,946 114,926 117,911 114,665 117,249 113,979 Earnings Per Common Share $0.51 $0.63 $0.60 $0.71 $1.82 $1.91 Cash Dividends Per Common Share $0.415 $0.410 $0.83 $0.82 $1.65 $1.62 Book Value Per Share $16.28 $15.94 Dividend Payout Ratio 90.7% 84.8% Effective Federal Income Tax Rate 27.7% 12.5% 2
POTOMAC ELECTRIC POWER COMPANY Consolidated Balance Sheets (Unaudited at June 30, 1994 and 1993) -------------------------------------
June 30, December 31, June 30, ASSETS 1994 1993 1993 ------ ------------- ------------- ------------- (Thousands of Dollars) Property and Plant - at original cost Electric plant in service $ 5,498,340 $ 5,252,736 $ 5,183,480 Construction work in progress 293,888 373,665 287,999 Electric plant held for future use 20,468 33,644 34,805 Nonoperating property 7,542 5,096 3,722 ------------- ------------- ------------- 5,820,238 5,665,141 5,510,006 Accumulated depreciation (1,589,965) (1,533,999) (1,495,376) ------------- ------------- ------------- Net Property and Plant 4,230,273 4,131,142 4,014,630 ------------- ------------- ------------- Current Assets Cash and cash equivalents 11,066 7,439 11,025 Customer accounts receivable, less allowance for uncollectible accounts of $2,740, $2,748 and $2,961 150,168 100,973 129,335 Other accounts receivable, less allowance for uncollectible accounts of $300 28,024 53,454 128,159 Accrued unbilled revenue 125,413 71,497 111,117 Prepaid taxes 1,388 30,531 1,573 Other prepaid expenses 16,754 6,053 12,446 Material and supplies - at average cost Fuel 63,381 61,973 81,032 Construction and maintenance 71,073 70,262 77,976 ------------- ------------- ------------- Total Current Assets 467,267 402,182 552,663 ------------- ------------- ------------- Deferred Charges Income taxes recoverable through future rates, net 248,918 233,431 194,332 Conservation costs, net 116,343 87,328 52,181 Other 149,320 146,245 154,389 ------------- ------------- ------------- Total Deferred Charges 514,581 467,004 400,902 ------------- ------------- ------------- Nonutility Subsidiary Assets Cash and cash equivalents 1,417 2,625 1,075 Marketable securities 499,360 466,153 436,868 Investment in finance leases 355,027 358,524 450,772 Operating lease equipment, net of accumulated depreciation of $101,187, $85,302 and $70,476 551,534 565,443 554,816 Receivables 71,991 84,726 84,138 Other investments 159,716 163,911 138,660 Other assets 19,115 23,750 54,555 ------------- ------------- ------------- Total Nonutility Subsidiary Assets 1,658,160 1,665,132 1,720,884 ------------- ------------- ------------- Total Assets $ 6,870,281 $ 6,665,460 $ 6,689,079 ============= ============= ============= CAPITALIZATION AND LIABILITIES - ------------------------------ Capitalization Common stock $ 118,046 $ 117,798 $ 115,331 Other common equity 1,803,605 1,837,411 1,723,568 Serial preferred stock 125,427 125,442 125,463 Redeemable serial preferred stock 145,153 147,000 147,000 Long-term debt 1,767,754 1,589,621 1,644,777 ------------- ------------- ------------- Total Capitalization 3,959,985 3,817,272 3,756,139 ------------- ------------- ------------- Current Liabilities Long-term debt and preferred stock redemption due within one year 17,000 17,977 201,610 Short-term debt 292,825 294,615 185,300 Accounts payable and accrued expenses 179,383 174,842 187,617 Other 114,546 103,633 97,285 ------------- ------------- ------------- Total Current Liabilities 603,754 591,067 671,812 ------------- ------------- ------------- Deferred Credits Income taxes 816,154 780,723 725,477 Investment tax credits 70,081 71,906 73,640 Other 33,029 28,916 28,970 ------------- ------------- ------------- Total Deferred Credits 919,264 881,545 828,087 ------------- ------------- ------------- Nonutility Subsidiary Liabilities Long-term debt 1,152,600 1,027,705 1,109,951 Short-term notes payable 27,850 126,250 114,580 Deferred taxes and other 206,828 221,621 208,510 ------------- ------------- ------------- Total Nonutility Subsidiary Liabilities 1,387,278 1,375,576 1,433,041 ------------- ------------- ------------- Total Capitalization and Liabilities $ 6,870,281 $ 6,665,460 $ 6,689,079 ============= ============= ============= 3
POTOMAC ELECTRIC POWER COMPANY Consolidated Statements of Cash Flows (Unaudited) -------------------------------------
Six Months Ended Twelve Months Ended June 30, June 30, ----------------------- ----------------------- 1994 1993 1994 1993 --------- --------- --------- --------- (Thousands of Dollars) Operating Activities Income from utility operations $ 76,365 $ 68,587 $ 224,256 $ 195,100 Adjustments to reconcile income to net cash from operating activities: Depreciation and amortization 85,490 79,386 169,710 155,957 Deferred income taxes and investment tax credits 20,704 10,331 38,085 29,840 Allowance for funds used during construction (12,036) (12,670) (22,352) (26,706) Changes in materials and supplies (2,219) 17,736 24,554 15,209 Changes in accounts receivable and accrued unbilled revenue (77,681) (79,875) (33,205) (26,887) Changes in accounts payable (4,924) (3,291) (2,074) (5,372) Changes in other current assets and liabilities 35,767 42,140 463 44,587 Changes in deferred conservation costs (35,952) (19,525) (76,066) (37,689) Net other operating activities 982 (46,401) 7,739 (47,076) Nonutility subsidiary: Net earnings 2,342 21,479 5,963 38,518 Deferred income taxes (15,547) (48,070) (291) (63,826) Changes in other assets and net other operating activities 47,300 44,596 59,601 20,996 --------- --------- --------- --------- Net Cash From Operating Activities 120,591 74,423 396,383 292,651 --------- --------- --------- --------- Investing Activities Total investment in property and plant (170,294) (153,243) (340,002) (331,669) Allowance for funds used during construction 12,036 12,670 22,352 26,706 --------- --------- --------- --------- Net investment in property and plant (158,258) (140,573) (317,650) (304,963) Nonutility subsidiary: Purchase of marketable securities (112,829) (99,629) (267,413) (241,882) Proceeds from sale or redemption of marketable securities 61,103 64,117 191,281 186,254 Investment in leased equipment (3,037) (4,306) (31,091) (11,963) Proceeds from sale or disposition of leased equipment 1,150 - 121,679 44,092 Purchase of other investments (5,593) (6,332) (43,889) (10,013) Proceeds from sale or distribution of other investments 4,508 - 4,508 37,433 Investment in promissory notes - (1,170) (458) (1,170) Proceeds from promissory notes 2,177 1,491 3,699 16,617 --------- --------- --------- --------- Net Cash Used by Investing Activities (210,779) (186,402) (339,334) (285,595) --------- --------- --------- --------- Financing Activities Dividends on common stock (97,802) (93,989) (193,649) (184,683) Dividends on preferred stock (8,215) (8,161) (16,307) (15,830) Issuance of common stock 5,535 27,105 74,432 81,863 Issuance of preferred stock - - - 50,000 Redemption of preferred stock (2,457) (1,500) (2,457) (2,125) Issuance of long-term debt 302,999 152,481 671,782 282,303 Reacquisition and retirement of long-term debt (127,367) (113,448) (642,367) (179,460) Short-term debt, net (1,790) 123,700 107,525 5,870 Other financing activities (4,791) (7,426) (23,563) (10,190) Nonutility subsidiary: Issuance of long-term debt 210,000 329,653 244,000 478,180 Repayment of long-term debt (85,105) (142,850) (189,332) (350,641) Short-term debt, net (98,400) (148,935) (86,730) (154,845) --------- --------- --------- --------- Net Cash From (Used By) Financing Activities 92,607 116,630 (56,666) 442 --------- --------- --------- --------- Net Increase in Cash and Cash Equivalents 2,419 4,651 383 7,498 Cash and Cash Equivalents at Beginning of Period 10,064 7,449 12,100 4,602 --------- --------- --------- --------- Cash and Cash Equivalents at End of Period $ 12,483 $ 12,100 $ 12,483 $ 12,100 ========= ========= ========= ========= Cash paid for interest (net of capitalized interest) and income taxes: Interest (including nonutility subsidiary interest of $40,372, $38,072, $78,856 and $85,036) $ 97,761 $ 101,176 $ 203,544 $ 208,908 Income taxes $ 4,744 $ 3,065 $ 69,420 $ 50,696 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 - ------------ In general, the Company accounts for conservation expenditures in connection with its demand side management (DSM) program 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 accrued 6 on the unamortized balance in excess of amounts included in rate base. In Maryland, conservation costs are recovered through a surcharge included in base rates which reflects current year expenditures and lost revenue. 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 7.8% compounded semiannually for the six months ended June 30, 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 Six Months Ended June 30, June 30, -------------------------- -------------------------- 1994 1993 1994 1993 ----------- ----------- ----------- ----------- (Thousands of Dollars) Utility current tax expense Federal $ 26,563 $ 28,146 $ 17,578 $ 16,486 State and local 3,546 3,291 2,334 1,749 ----------- ----------- ----------- ----------- Total utility current tax expense 30,109 31,437 19,912 18,235 ----------- ----------- ----------- ----------- Utility deferred tax expense Federal 6,460 594 19,329 9,293 State and local 1,249 933 3,200 2,773 Investment tax credits (912) (868) (1,825) (1,735) ----------- ----------- ----------- ----------- Total utility deferred tax expense 6,797 659 20,704 10,331 ----------- ----------- ----------- ----------- Total utility income tax expense 36,906 32,096 40,616 28,566 ----------- ----------- ----------- ----------- Nonutility subsidiary current tax expense Federal 3,376 7,130 (3,686) (893) ----------- ----------- ----------- ----------- Nonutility subsidiary deferred tax expense Federal (18,971) (52,408) (14,679) (46,545) State and local (581) (1,623) (869) (1,873) ----------- ----------- ----------- ----------- Total nonutility subsidiary deferred tax expense (19,552) (54,031) (15,548) (48,418) ----------- ----------- ----------- ----------- Total nonutility subsidiary income tax expense (16,176) (46,901) (19,234) (49,311) ----------- ----------- ----------- ----------- Total consolidated income tax expense 20,730 (14,805) 21,382 (20,745) Income taxes included in other income (19,494) (43,486) (22,815) (48,182) ----------- ----------- ----------- ----------- Income taxes included in utility operating expenses $ 40,224 $ 28,681 $ 44,197 $ 27,437 =========== =========== =========== =========== 8
Reconciliation of Consolidated Income Tax Expense - -------------------------------------------------
Three Months Ended Six Months Ended June 30, June 30, -------------------------- -------------------------- 1994 1993 1994 1993 ----------- ----------- ----------- ----------- (Thousands of Dollars) Income before income taxes $ 85,023 $ 62,217 $ 100,089 $ 69,321 =========== =========== =========== =========== Utility income tax at federal statutory rate $ 35,372 $ 30,565 $ 40,943 $ 33,032 Increases (decreases) resulting from Depreciation 1,909 1,469 3,749 2,702 Removal costs (1,222) (952) (2,330) (1,775) Allowance for funds used during construction (792) (1,067) (1,738) (2,121) Other (567) 161 (1,822) (4,521) State income taxes, net of federal effect 3,118 2,788 3,639 2,984 Tax Credits (912) (868) (1,825) (1,735) ----------- ----------- ----------- ----------- Total utility income tax expense 36,906 32,096 40,616 28,566 ----------- ----------- ----------- ----------- Nonutility subsidiary income tax at federal statutory rate (5,614) (9,411) (5,912) (9,463) Increases (decreases) resulting from Dividends received deduction (2,106) (1,963) (4,149) (3,940) Reversal of previously accrued deferred taxes (6,547) (34,858) (6,547) (34,858) Other (1,328) (45) (1,757) (175) State income taxes, net of federal effect (581) (624) (869) (875) ----------- ----------- ----------- ----------- Total nonutility subsidiary income tax expense (16,176) (46,901) (19,234) (49,311) ----------- ----------- ----------- ----------- Total consolidated income tax expense 20,730 (14,805) 21,382 (20,745) Income taxes included in other income (19,494) (43,486) (22,815) (48,182) ----------- ----------- ----------- ----------- Income taxes included in utility operating expenses $ 40,224 $ 28,681 $ 44,197 $ 27,437 =========== =========== =========== =========== 9
Components of Consolidated Deferred Tax Liabilities (Assets) - ------------------------------------------------------------
June 30, -------------------------- 1994 1993 ----------- ----------- (Thousands of Dollars) Utility deferred tax liabilities (assets) Depreciation and other book to tax basis differences $ 705,541 $ 627,593 Rapid amortization of certified pollution control facilities 29,600 39,170 Deferred taxes on amounts to be collected through future rates 94,539 72,058 Property taxes 10,229 10,501 Deferred fuel 4,346 27 Prepayment premium on debt retirement 11,276 9,574 Deferred ITC (26,615) (27,306) Contributions in aid of construction (23,866) (23,617) Other 21,984 22,805 ----------- ----------- Total utility deferred tax liabilities (net) 827,034 730,805 Current portion of utility deferred tax liabilities (included in Other current liabilities) 10,880 5,328 ----------- ----------- Total utility deferred tax liabilities (net) - noncurrent $ 816,154 $ 725,477 =========== =========== Nonutility subsidiary deferred tax liabilities (assets) Finance leases $ 129,176 $ 136,152 Operating lease depreciation 123,638 93,942 Reversal of previously accrued taxes related to partnerships (16,962) - Alternative minimum tax (85,783) (75,595) Other (30,088) (27,156) ----------- ----------- Total nonutility subsidiary deferred tax liabilities (net), (included in Deferred taxes and other) $ 119,981 $ 127,343 =========== =========== 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 June 30, 1994, the Company has recorded additional deferred income taxes and a net regulatory asset of $248.9 million. No valuation allowance for deferred tax assets was required or recorded at June 30, 1994. The adoption of SFAS No. 109 increased net income for the six and twelve months ended June 30, 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 June 30, 1994, 118,045,899 shares of the Company's $1 par value Common Stock were outstanding. A total of 200 million shares is authorized. As of June 30, 1994, 2,683,222 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 June 30, 1994, 1,299,867 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 June 30, 1994, the Company had outstanding 5,411,609 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 June 30, 1994, the aggregate annual dividend requirements on the Serial Preferred Stock and the Redeemable Serial Preferred Stock were approximately $6.2 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 (8,558 shares outstanding at June 30, 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 million and $1.5 million at June 30, 1994 and 1993, respectively. At June 30, 1994, the Company had outstanding one million shares of its Serial Preferred Stock, Auction Series A. The annual dividend rate is 3.75% ($1.873) for the period June 1, 1994 through August 31, 1994. For the period March 1, 1994 through May 31, 1994, the annual dividend rate was 3.01% ($1.505). The average rate at which dividends were paid during the 12 months ended June 30, 1994 was 2.94% ($1.47). The estimated fair value of this series at June 30, 1994 and 1993, was the carrying value. The estimated fair value at June 30, 1994 and 1993, for the remaining Serial Preferred Stock (excluding the Redeemable Serial Preferred Stock) was $53.3 million and $60.9 million, respectively, based on discounted cash flows using current rates of preferred stock with similar terms. At June 30, 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 June 30, 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 $145.2 million and $155.3 million based on quoted market prices at June 30, 1994 and 1993, respectively. Long-Term Debt - -------------- The Company's long-term debt at June 30, 1994, is summarized below: (Thousands of Dollars) First Mortgage Bonds $1,283,600 Convertible Debentures 183,467 Notes Payable 350,000 Net Unamortized Discount (32,313) Current Portion (17,000) ---------- Net Utility Long-Term Debt $1,767,754 ========== Nonutility Subsidiary Long-Term Debt $1,152,600 ========== At June 30, 1994, the aggregate annual interest requirement on the Company's long-term debt, including debt due within one year, was approximately $123.6 million. The aggregate amounts of maturities and sinking fund requirements for the Company's long- term debt outstanding as of June 30, 1994 are $17 million in 1994, $44 million in 1995, $31 million in 1996, $156 million in 1997 and $50 million in 1998. At June 30, 1994, long-term debt due within one year consisted of $15 million of 5-1/4% First Mortgage Bonds and $2 million of 5-5/8% First Mortgage Bonds. 13 During May 1994, the Company redeemed the remaining $43 million of 9-3/4% First Mortgage Bonds due in 2019, at 106.03% of the principal amount plus accrued interest. Also during May 1994, the Company issued, at par, $100 million of 6.66-6.73% Medium-Term Notes due in 1997 and $25 million of 6.25% Medium-Term Notes due in 1996. The notes were sold pursuant to a "shelf" registration statement filed with the Securities and Exchange Commission during September 1993, of which $100 million remains available. The estimated fair value of the fixed rate First Mortgage Bonds, excluding amounts due within one year, in the aggregate, was $1.1 billion and $1.4 billion at June 30, 1994 and 1993, respectively. The estimated fair value of the Convertible Debentures, in the aggregate, was $161.5 million and $177.8 million at June 30, 1994 and 1993, respectively. The estimated fair value at June 30, 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 June 30, 1994 and 1993, the estimated fair value of the Adjustable Rate series First Mortgage Bonds, based on the current market price was $53 million and $52.7 million, respectively. At June 30, 1994 and 1993, the estimated fair value of the Medium-Term Notes, excluding amounts due within one year, in the aggregate, was $336.4 million and $138.8 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 June 30, 1994 consisted primarily of unsecured borrowings from institutional lenders maturing at various dates between July 1994 and July 2003. The interest rates of such borrowings range from 3.69% to 10.10%. The weighted average effective interest rate was 7.21% at June 30, 1994 and 7.45% at June 30, 1993. Annual aggregate principal repayments on these borrowings are $85.7 million in 1994, $260.4 million in 1995, $168.5 million in 1996, $103.8 million in 1997, $157.3 million in 1998 and $301 million thereafter through 2003. Also included in long-term debt is $75.9 million of non-recourse debt which is due in monthly installments with final maturities in 2001, 2002 and 2011. At June 30, 1994 and 1993, the fair value of long-term debt, including non-recourse debt, was approximately $1.2 billion. These estimates were based on current rates offered to similar companies for debt with similar remaining maturities. 14 (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: As of June 30, 1994 --------------------------------------- Gross Market Unrealized Cost Value Losses ---------- ---------- ------------- (Thousands of Dollars) Mandatory redeemable preferred stock $ 518,166 $ 499,360 $ (18,806) Debt securities - - - Equity securities 3 - (3) ---------- ---------- ------------- Total $ 518,169 $ 499,360 $ (18,809) ========== ========== ============= As of June 30, 1993 ------------------------- Carrying Market Value Value ---------- ---------- (Thousands of Dollars) Mandatory redeemable preferred stock $ 414,930 $ 436,838 Debt securities 2,257 542 Equity securities 19,681 19,068 ---------- ---------- Total $ 436,868 $ 456,448 ========== ========== 15 In determining gross realized gains and losses on sales or maturities of securities, specific identification is used. Gross realized gains and losses are shown below. Three Months Six Months Ended Ended June 30, 1994 June 30, 1994 ------------- ------------- (Thousands of Dollars) Gross realized gains $ 715 $ 2,346 Gross realized losses (418) (1,458) Recognized losses - (598) ------------- ------------- Net gain $ 297 $ 290 ============= ============= Net recognized gains of $1.6 million and $2.1 million were included in income from marketable securities for the three and six months ended June 30, 1993, respectively. At June 30, 1994, the final contractual maturities (in thousands of dollars) for mandatorily redeemable preferred stock were as follows: Within one year $ 12,057 One to five years 99,348 Five to ten years 167,326 Over ten years 239,435 ---------- 518,166 Less gross unrealized losses (18,806) ---------- $ 499,360 ========== (5) COMMITMENTS AND CONTINGENCIES ----------------------------- On July 5, 1994, the Company filed a Petition for Review with the District of Columbia Court of Appeals related to District of Columbia Public Service Commission orders in Formal Case No. 929. See Part II, Item 5, Base Rate Proceedings for additional information. As discussed in the 1993 Form 10-K and the March 31, 1994 Form 10-Q, 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, 16 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 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, in 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 plaintiff's 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. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * 17 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. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * 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. 33-58810 and 33-50377) and Form S-8 (Registration Nos. 33-36798, 33-53685 and 33-54197) 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 June 30, 1994 and 1993 and the related consolidated statements of earnings and retained income for the three, six and twelve month periods then ended and the consolidated statements of cash flows for the six and twelve month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying 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. July 29, 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, six and twelve months ended June 30, 1994, as compared to the corresponding periods in 1993. The increases in revenue from sales of electricity for each period were primarily due to increases in kilowatt-hour sales of 1.7%, 3.5% and 4.7% for the three, six and twelve months ended June 30, 1994, respectively, over the corresponding periods in 1993, increases in fuel rate revenue for each period and the effects of 1993 base rate increases in Maryland and the 1994 base rate increase in the District of Columbia. Also, during June 1994, the Company recognized additional revenue of $5 million associated with the conservation incentive provision of the Company's Demand Side Management (DSM) surcharge tariff. See Part II, Item 5, Base Rate Proceedings for additional information. The increase in kilowatt-hour sales for the three months ended June 30, 1994, was primarily attributable to increased customer usage due to hotter than average weather during June 1994, in which kilowatt-hour sales increased 6.7% over June 1993. For the month of June 1994, cooling degree hours were 62.2% above June 1993 and 78.3% above the 20-year average. For the quarter ended June 30, 1994, cooling degree hours were 57% above the corresponding period in 1993 and 53% above the 20- year average. The increase in kilowatt-hour sales for the six months ended June 30, 1994, was primarily attributable to increased customer usage due to hotter than average weather in June 1994 and the severe weather in January 1994 which resulted in record-breaking low temperatures. The increase in kilowatt- hour sales for the twelve months ended June 30, 1994, was primarily attributable to increased customer usage due to hotter than average weather during the 1993 summer cooling season as well as the hotter than average June 1994 weather and the colder than average weather during the first quarter 1994. Cooling degree hours during the twelve months ended June 30, 1994 were 79.3% above the corresponding period in 1993 and 35% above the 20-year average. Interchange deliveries increased for the three, six and twelve months ended June 30, 1994, as compared to the corresponding periods in 1993, reflecting the amount of energy delivered to the Pennsylvania-New Jersey-Maryland (PJM) Interconnection Association. 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 $26,692 3.9% 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 May 4, 1994, the District of Columbia Public Service Commission ruled on the Company's application for reconsideration of its March 4, 1994 order in Formal Case No. 929. The order on reconsideration authorized an additional base rate increase of $1.3 million. Also, the Commission upheld its initial decisions to disallow 25% of test period DSM program expenditures, to adopt an unbilled revenue adjustment applicable to the District of Columbia portion of the 1992 accounting change related to unbilled revenue and to adopt a three-year phase-in period to reflect increased post retirement benefit costs. The Company recorded the effects of the Commission's decision for these items in June 1994, which reduced after tax income by approximately $4.1 million. The after tax impact of the DSM write-off and unbilled revenue adjustment was $4.7 million, which is reflected in other income in "Other, net." On July 5, 1994, the Company filed a Petition for Review with the District of Columbia Court of Appeals related to the Commission's orders in Formal Case No. 929. See Part II, Item 5, Base Rate Proceedings for additional information. OPERATING EXPENSES Fuel and purchased energy increased for the three, six and twelve months ended June 30, 1994, as compared to the corresponding periods ended June 30, 1993. Fuel expense increased for the three, six and twelve months ended June 30, 1994, primarily as the result of increases in net generation of 12.5%, 14.1% and 7.6% respectively, due to increased customer usage caused by the hotter than average weather in June 1994, the record-breaking low temperatures of January 1994 and the hotter than average weather during the summer of 1993. The decreases in purchased energy for the three and six months ended and the increase for the twelve months ended reflect changes in the levels and prices of energy purchased from PJM and other utilities. 21 The unit fuel costs for the comparative periods ended June 30, were as follows: Three Six Twelve Months Ended Months Ended Months Ended ------------ ------------ ------------ 1994 1993 1994 1993 1994 1993 ---- ---- ---- ---- ---- ---- System Average Fuel Cost per MBTU $1.91 $1.81 $2.03 $1.84 $2.00 $1.85 The increases in the system average unit fuel cost for the three, six and twelve months ended June 30, 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 June 30, 1994 and 1993, the Company obtained 72% and 85%, respectively, of its system generation from coal based upon percentage of Btus. Capacity purchase payments increased for the three, six and twelve months ended June 30, 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. In addition, effective June 1, 1994 through May 31, 1995, the Company is purchasing 147 megawatts of capacity from Pennsylvania Power & Light Company at a total cost of $3 million. Operating expenses other than fuel, purchased energy and capacity purchase payments increased for the three, six and twelve months ended June 30, 1994 as compared to the corresponding periods ended June 30, 1993. The increase for the three months ended June 30, 1994 was principally attributable to income taxes, due to a higher federal income tax rate which became effective in 1993, and higher taxable income. The increases for the six and twelve months ended June 30, 1994 were principally attributable to income taxes; depreciation and amortization expense, due to additional investment in property and plant and amortization of increased amounts of conservation program costs; and other taxes, primarily due to changes in the levels of operating revenue. The increase in maintenance expense for the twelve months ended was primarily due to increased expenditures for maintenance of production facilities. 22 See "Legal Proceedings," under Part II, Item 1, Other Information, for additional information. CAPITAL RESOURCES AND LIQUIDITY - ------------------------------- The Company's investment in property and plant, at original cost before accumulated depreciation, was $5.8 billion at June 30, 1994, an increase of $155.1 million from the investment at December 31, 1993 and an increase of $310.2 million from the investment at June 30, 1993. Cash invested in property and plant construction, excluding AFUDC, amounted to $170.3 million for the six months ended June 30, 1994 and $340 million for the twelve months then ended. See Part I, Item I, Notes to Consolidated Financial Statements, (3) Capitalization for information with respect to financing activity. At June 30, 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 44.7% long-term debt, 3.2% serial preferred stock, 3.6% redeemable serial preferred stock and 48.5% common equity. Cash (used by) from utility operations, after dividends, was $(19.5) million for the six months ended June 30, 1994 and $121.2 million for the twelve months then ended as compared with $(45.7) million and $96.5 million, respectively, for the same periods ended June 30, 1993. The Company's 1994 energy plan, which is an integrated least-cost resource plan, was filed with regulators on June 30, 1994. As part of the 1994 planning process, the Company has reassessed each of its existing conservation programs. To reduce the near-term upward pressure on prices and total customer bills, the Company proposes to narrow its current offering of DSM programs to those with the strongest cost benefit results. The effect of this plan on the 1994 to 1998 period is a further reduction of the construction budget by approximately $145 million, bringing the total reduction of projected construction expenditures to $460 million from amounts previously planned. This was also accompanied by a reduction of approximately $121 million in the conservation expenditure budget over the 5 year period. Outstanding utility short-term debt totaled $292.8 million at June 30, 1994, a decrease of $1.8 million from the $294.6 million outstanding at December 31, 1993 and an increase of $107.5 million from the $185.3 million outstanding at June 30, 1993. 23 NONUTILITY SUBSIDIARY - --------------------- RESULTS OF OPERATIONS - --------------------- PCI's net earnings totaled $.1 million, $2.3 million and $6 million for the three, six and twelve months ended June 30, 1994, respectively, compared with $19.2 million, $21.5 million and $38.5 million for the same periods ended June 30, 1993. PCI contributed $.02 and $.05 for the six and twelve months ended June 30, 1994, respectively, to the Company's consolidated earnings per share; and $.17, $.19 and $.34 per share, respectively, during the three, six and twelve month periods ended June 30, 1993. Net earnings decreased for the three, six and twelve months ended June 30, 1994 primarily due to the completion of a transaction, during the second quarter 1993, whereby PCI contributed aircraft to a majority owned partnership resulting in future cash savings of $37.4 million. The terms of the partnership agreement had the effect of reducing PCI's obligation for previously accrued deferred taxes 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 in the second quarter of 1993. 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 $23.9 million, $48.4 million and $119 million for the three, six and twelve months ended June 30, 1994 compared to $23.3 million, $43.7 million and $104.3 million for the corresponding periods in 1993. Increases in income from leasing activities during 1994 over 1993 were primarily due to increases in fee income, asset sales and revenue earned from operating lease aircraft. All of PCI's aircraft are on lease at this time. At June 30, 1994, a portion ($134 million carrying value) of PCI's leasing portfolio consisted of short-term usage based operating leases with monthly rental income dependent upon hours used. PCI's marketable securities portfolio contributed pre-tax income of $8.9 million, $17.3 million and $37 million for the three, six and twelve months ended June 30, 1994, respectively, compared to $9.8 million, $18.7 million and $41.6 million for the same periods ended June 30, 1993. The decrease in 1994 from 1993 was primarily due to a decrease in net realized gains from the sales of securities which totaled $.3 million, $.3 million and $5.2 million for the three, six and twelve months ended June 30, 1994, respectively, compared to $1.6 million, $2.1 million and $9.8 million for the corresponding periods in 1993. 24 Other income increased for the three and six month periods ended June 30, 1994 over 1993 and decreased for the twelve month period. The increase for the three and six month periods was a result of a second quarter 1993 writedown related to the termination of obligations with respect to a real estate limited partnership interest. The decrease in the twelve month period related to an additional writedown of the limited partnership interest in the third quarter of 1993. Expenses, before income taxes, which include interest, depreciation and operating and administrative and general expenses totaled $50.1 million, $83.9 million and $157.3 million for the three, six and twelve months ended June 30, 1994, respectively, compared to $54.5 million, $86 million and $150.5 million for the same periods in 1993. Expenses for the three and six month periods ended June 30, 1994 decreased from the corresponding periods in 1993 primarily due to expenses related to the second quarter 1993 aircraft partnership transaction. Expenses for the twelve month period ended June 30, 1994 increased over the same period in 1993 due to increased operating expenses for PCI's aircraft subject to usage based leases. Under certain recent short-term aircraft leases, PCI is responsible for estimated operating and maintenance expenses exceeding amounts provided therefor by lessees. Although most of the usage based and short-term leases include provisions for early termination, the foregoing factors have had an unfavorable impact on net earnings for the second quarter 1994 and are expected to have a continuing unfavorable impact on earnings and cash flow. PCI is aggressively seeking to replace such usage based and short-term leases with arrangements providing more favorable terms. The ability to do so, however, depends on developments in the aircraft market which are unpredictable. During the three, six and twelve months ended June 30, 1994, PCI recognized income tax benefits of $16.2 million, $19.2 million and $15 million, respectively, compared with $46.9 million, $49.3 million, and $46.7 million for the same periods in 1993. Income tax benefits decreased for the three, six and twelve month periods ended June 30, 1994 over 1993 as a result of the second quarter 1993 aircraft partnership transaction. 25 CAPITAL RESOURCES AND LIQUIDITY - ------------------------------- Investments in leased equipment of $3 million for the six months ended June 30, 1994 were for refurbishment and modification of existing aircraft. Investments of $31.1 million for the twelve month period ended June 30, 1994 also reflect the purchase during the third quarter of 1993 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. PCI's outstanding short-term debt totaled $27.8 million at June 30, 1994, a decrease of $98.4 million from the $126.2 million outstanding at December 31, 1993 and a decrease of $86.8 million from the $114.6 million outstanding at June 30, 1993. During the three, six and twelve months ended June 30, 1994, PCI issued $95 million, $210 million and $244 million, respectively, in long-term debt. Debt repayments for the three, six and twelve months ended June 30, 1994 were $22.5 million, $85.1 million and $189.3 million, respectively. During the twelve month period ended June 30, 1994, 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 June 30, 1994, PCI had $190 million available under its Medium-Term Note Program and $295 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. Also see Part II, Item 5, Base Rate Proceedings, for information about a Petition for Review filed by the Company with the District of Columbia Court of Appeals, on July 5, 1994, related to the District of Columbia Public Service Commission's rate orders. In addition, see "Environmental Matters," under Part II, Item 5, Other Information, for updated information on pending environmental proceedings. 26 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 $305.5 million with 18 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. 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. The Company's operating revenue for periods ended June 30, 1994, includes approximately $5 million associated with the conservation incentive provision of the Company's DSM surcharge tariff. This incentive compensates the Company for achieving specified 1993 energy savings goals. District of Columbia - -------------------- On May 4, 1994, the Commission ruled on the applications for reconsideration of its March 4, 1994 rate order. The Commission's original order authorized the Company to increase its base rates by a total of $25.4 million in two steps: an increase of $23.2 million effective March 16, 1994 and an increase of $2.2 million effective June 5, 1994. The order on reconsideration authorized an additional "step 2" base rate increase of $1.3 million resulting in a total base rate increase of $26.7 million. Of the "step 2" increase, $3 million was contingent on the June 1, 1994 in-service date of the final segment of a 500 kilovolt transmission line which provides links 27 in the transmission systems of the Company, Baltimore Gas and Electric Company and Virginia Power. This transmission line segment was placed in service prior to June 1, 1994. 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's initial order approved the Company's proposal for including future changes in purchased capacity costs in fuel adjustment billings. 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. Furthermore, the Commission authorized an accounting change for postretirement benefit costs consistent with SFAS No. 106 entitled "Employer's Accounting for Postretirement Benefits Other Than Pensions" and adopted a three-year phase-in approach for inclusion of these increased costs in the Company's rates. In June 1994, the Company established a regulatory asset for the increase in post retirement benefit costs of $.6 million on an after tax basis which will be amortized over a three year period. The initial order 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 initial decision to adopt an unbilled revenue adjustment, supplemented by its subsequent decisions in response to the Company's application for reconsideration and motion for clarification, has required the Company to establish in June 1994 a regulatory liability of $2.5 million on an after tax basis which will be amortized in 1995 and 1996. The Commission's initial decision rejected the Company's proposed DSM surcharge and, consistent with prior decisions, included $5.3 million in base rates to recognize DSM program costs without provision for lost revenue between rate cases. In addition, the initial decision and subsequent decisions in response to the Company's application for reconsideration and motion for clarification, disallowed the recovery of 25% of test period DSM program expenditures which required the Company to write off $2.2 million on an after tax basis in June 1994. In its order on reconsideration, the Commission stated that in the future the appropriate forum for consideration of DSM cost recovery would be during the Company's least-cost resource planning cases, which the Company files on a two-year cycle. Under this new process, DSM program approval and cost recovery will be linked together in one proceeding. Subsequent to the test period in the case, the Company has expended approximately $31 million on conservation in the District of Columbia. On July 5, 1994, the Company filed a Petition for Review with the District of Columbia Court of Appeals related to the Commission's orders in Formal Case No. 929. 28 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. 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 Association (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. In addition, effective June 1, 1994 through May 31, 1995, the Company is purchasing, at a total cost of $3 million, 147 megawatts of capacity from Pennsylvania Power & Light Company. 29 PEAK LOAD, SALES, LEAST-COST RESOURCE PLAN, AND - ----------------------------------------------- CONSTRUCTION AND GENERATING CAPACITY ------------------------------------ Peak Load and Sales Data - ------------------------ Kilowatt-hour sales for the three, six and twelve month periods ended June 30, 1994, increased 1.7%, 3.5% and 4.7%, respectively, as compared to sales for the corresponding periods ended June 30, 1993. The increases in sales reflect higher customer usage due to the impact of weather extremes: record- breaking low temperatures in January 1994; and warmer weather in July and August 1993 and in June 1994 as compared to weather for the corresponding prior periods. Cooling degree hours for the quarter were 57% above the corresponding period in 1993, and were 53% above the 20-year average weather for this period. Customer usage in the month of June 1994 increased 154,000 megawatt-hours or 6.7% as compared to June 1993. 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. Through July 22, 1994, the 1994 summer peak demand was 5,660 megawatts. The 1993 summer peak demand was 5,754 megawatts and the all-time summer peak demand of 5,769 megawatts occurred in July 1991. The Company's present generation capability, including capacity purchase contracts, is 6,723 megawatts. To meet the 1994 summer peak demand, the Company also had 256 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 all-time winter peak demand of 5,010 megawatts was established in January 1994 compared with the previous winter peak demand of 4,511 megawatts which occurred in December 1989. 1994 Least-Cost Resource Plan - ----------------------------- The Company's 1994 energy plan, which was filed with regulators on June 30, 1994, is an integrated least-cost resource plan. As part of the 1994 planning process, the Company has reassessed each of its existing conservation programs. To reduce the near-term upward pressure on prices and total customer bills, the Company proposes to narrow its current offering of DSM programs to those with the strongest cost benefit results. 30 The effect of this plan on the 1994 to 1998 period is a further reduction of the construction budget by approximately $145 million accompanied by a reduction in the conservation expenditure budget of approximately $121 million. Conservation ------------ The Company's conservation and energy use management (EUM) 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. 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 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. During the next five years, the Company plans to expend an estimated $250 million on conservation programs to encourage the efficient use of electric energy and to reduce the need to build new generating facilities. This represents a reduction of approximately $121 million from amounts previously planned. Other expenditures in connection with EUM programs are recovered through the fuel adjustment clause, inclusion of plant investment in rate base, and as operating expenses. It is estimated that peak load reductions of approximately 390 megawatts have been achieved to date from conservation and EUM programs and that additional peak load reductions of more than 435 megawatts will be achieved in the next five years. Construction and Generating Capacity ------------------------------------ The Company's construction expenditures, excluding AFUDC, are projected to total $1.1 billion for the five-year period 1994 through 1998 which includes $174 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 an additional $145 million, bringing the total reduction to $460 31 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 $174 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 agreement for a project with Panda Energy Corporation for a 230-megawatt gas-fueled combined-cycle cogeneration project in Prince George's County, Maryland, is currently before the Maryland Public Service Commission for issuance of a certificate of convenience and necessity. In addition, a 40-megawatt resource recovery facility with which the Company has a contract is now under construction in Montgomery County, Maryland. These nonutility generation projects are expected to begin operating in 1996. In 2004, the Company plans to complete the first combined-cycle unit at its Station H facility in Dickerson, Maryland, by adding a steam cycle to the two combustion turbine units installed in 1992 and 1993. The Company currently projects that existing contracts for nonutility generation and the Company's commitment to conservation will provide adequate reserve margins to meet customers' needs beyond the year 2000. 32 ENVIRONMENTAL MATTERS - --------------------- The following is an update to the Environmental Matters discussion in the Company's 1993 Form 10-K. Water Quality - ------------- The Maryland Department of the Environment (MDE) promulgated regulations effective April 16, 1990 that, among other things, set numeric criteria for toxic substances in surface waters. These regulations are applicable to the Company's Chalk Point, Morgantown and Dickerson generating stations. None of the numeric criteria have been incorporated into the National Pollutant Discharge Elimination System permits for these stations at this time. While it is not known whether the criteria will be included in the Company's permits in the future, or, if included, what the economic impact will be, it was preliminarily estimated that if the regulations were interpreted in the manner most detrimental, the Company could incur capital costs of as much as $810 million and annual operating and maintenance expenses of $224 million in order to comply with these regulations. The Company, in conjunction with other utilities, industrial companies, and the Maryland Chamber of Commerce, filed a suit in May 1990 in the Circuit Court for Baltimore City that challenges the validity of the regulations. The parties reached settlement of the suit contingent upon the outcome of subsequent rulemaking proceedings. Revised regulations were adopted on May 6, 1993 in accordance with the settlement agreement. U.S. Environmental Protection Agency (EPA) has approved the revised regulations and the Company has executed and MDE has filed a joint motion to dismiss this suit. Toxic Substances - --------------- The Company was notified by the EPA on December 18, 1987, that it, along with five other utilities and eight non-utilities, is a potentially responsible party (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA or Superfund), in connection with the polychlorinated biphenyl compounds (PCBs) contamination of soil, ground water and surface water occurring at a Philadelphia, Pennsylvania site owned by an unaffiliated company. Additional PRPs have since been identified and the number is continuously subject to change. In the early 1970s, the Company sold scrap transformers, some of which may have contained some level of PCBs, to a metal reclaimer operating at the site. The Company and nine other PRPs executed an Administrative Order by Consent (ACO) with the EPA and the performance of a Remedial 33 Investigation/Feasibility Study (RI/FS) is in progress. Pursuant to an agreement among the participating PRPs, the Company is responsible for 12% of the costs of the RI/FS. It is currently estimated that the PRPs' cost of compliance with the ACO, including the RI/FS and legal fees, will be approximately $6.5 million. The Company has paid $601,000 as of June 30, 1994. On June 1, 1994 a draft RI/FS was submitted to the EPA for its review. The draft includes a number of possible remedies, the estimated costs of which range from $2 million to $70 million. While a remedy near the lower end of the range is possible, the Company cannot predict what remedy may be acceptable to the EPA. The final RI/FS is due September 30, 1994. The Company cannot estimate the extent of the EPA's administrative and oversight costs. 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 $266.5 million and $287.3 million at June 30, 1994 and 1993, respectively. 34 Consolidated Statements of Earnings: - -----------------------------------
Three Six Twelve Months Ended Months Ended Months Ended June 30, June 30, June 30, ------------------- ------------------ ------------------ 1994 1993 1994 1993 1994 1993 -------- -------- -------- -------- -------- -------- (Thousands of Dollars) Income Leasing activities $ 23,886 $ 23,284 $ 48,426 $ 43,659 $118,993 $104,263 Marketable securities 8,902 9,841 17,261 18,700 36,978 41,642 Other 1,254 (6,280) 1,364 (4,197) (7,741) (3,499) -------- -------- -------- -------- -------- -------- 34,042 26,845 67,051 58,162 148,230 142,406 -------- -------- -------- -------- -------- -------- Expenses Interest 20,313 19,549 40,813 38,270 80,404 79,920 Administrative and general 2,494 4,733 5,004 7,099 12,546 11,007 Depreciation and operating 27,274 30,242 38,126 40,625 64,318 59,621 Income tax credit (16,176) (46,901) (19,234) (49,311) (15,001) (46,660) -------- -------- -------- -------- -------- -------- 33,905 7,623 64,709 36,683 142,267 103,888 -------- -------- -------- -------- -------- -------- Net earnings from nonutility subsidiary $ 137 $ 19,222 $ 2,342 $ 21,479 $ 5,963 $ 38,518 ======== ======== ======== ======== ======== ======== Per share contribution to earnings of the Company $ - $.17 $.02 $.19 $.05 $.34 ==== ==== ==== ==== ==== ==== 35
STATISTICAL DATA - ----------------
Three Months Ended Twelve Months Ended June 30, June 30, --------------------------------- ------------------------------------- 1994 1993 % Change 1994 1993 % Change -------- -------- -------- ---------- ---------- -------- Revenue from Sales ------------------ of Electricity -------------- (Thousands of Dollars) Residential $125,490 $109,142 15.0 $ 538,452 $ 451,567 19.2 General Service 208,926 194,614 7.4 776,553 721,721 7.6 Large Power Service 86,069 78,648 9.4 309,840 291,310 6.4 Street Lighting 3,272 3,061 6.9 13,914 13,031 6.8 Rapid Transit 6,930 5,910 17.3 26,035 23,411 11.2 Wholesale 26,246 23,440 12.0 116,383 99,888 16.5 -------- -------- ---------- ---------- System $456,933 $414,815 10.2 $1,781,177 $1,600,928 11.3 ======== ======== ========== ========== Energy Sales ------------ (Millions of KWH) Residential 1,421 1,363 4.3 6,935 6,321 9.7 General Service 2,669 2,661 0.3 10,974 10,648 3.1 Large Power Service 1,335 1,335 - 5,250 5,229 0.4 Street Lighting 34 34 - 163 164 (0.6) Rapid Transit 97 91 6.6 388 366 6.0 Wholesale 523 495 5.7 2,414 2,217 8.9 -------- -------- ---------- ---------- System 6,079 5,979 1.7 26,124 24,945 4.7 ======== ======== ========== ========== Average System Revenue ---------------------- per KWH (cents per KWH) 7.52 6.94 6.82 6.42 ----------------------- System Peak Demand ------------------ (Thousands of KW) Summer - - 5,754 5,546 Winter - - 5,010 4,368 Net Generation -------------- (Millions of KWH) 4,983 4,431 20,453 19,007 Fuel Mix (% of Btu) ------------------- Coal (%) 80 90 72 85 Oil (%) 17 9 25 12 Gas (%) 3 1 3 3 Fuel Cost per MBtu ------------------ System Average $1.91 $1.81 $2.00 $1.85 Weather Data ------------ Heating Degree Days 267 342 4,339 4,259 20 Year Average 326 3,939 Cooling Degree Hours 3,924 2,500 14,674 8,185 20 Year Average 2,557 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 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 ------------------------------ Registrant By /s/ D. R. Wraase ------------------------------ (D. R. Wraase) Senior Vice President, Finance and Accounting July 29, 1994 - ------------- DATE 37 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 June 30, 1994 and the twelve months ended December 31, 1993 and 1992:
June 30, December 31, December 31, 1994 1993 1992 ------------ ------------ ------------ Average shares outstanding for computation of primary earnings per common share 117,249,164 115,639,668 112,389,698 ============ ============ ============ Average shares outstanding for fully diluted computation: Average shares outstanding 117,249,164 115,639,668 112,389,698 Additional shares resulting from: Conversion of Serial Preferred Stock, $2.44 Convertible Series of 1966 (the "Convertible Preferred Stock") 50,321 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 123,225,264 121,630,993 116,181,985 ============ ============ ============ Earnings applicable to common stock, before cumulative effect of accounting change $213,912,000 $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 213,912,000 225,324,000 202,390,000 Add: Dividends paid or accrued on Convertible Preferred Stock 20,000 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 $220,471,000 $231,894,000 $206,717,000 ============ ============ ============ Primary earnings per common share Before cumulative effect $1.82 $1.95 $1.66 Cumulative effect - - 0.14 ----- ----- ----- Total $1.82 $1.95 $1.80 ===== ===== ===== Fully diluted earnings per common share Before cumulative effect $1.79 $1.91 $1.64 Cumulative effect - - 0.14 ----- ----- ----- Total $1.79 $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
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 June 30, 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 ----------------------------------------------------- June 30, 1994 1993 1992 1991 1990 1989 --------- --------- --------- --------- --------- --------- (Thousands of Dollars) Net income before cumulative effect of accounting change $224,256 $216,478 $172,599 $186,813 $165,199 $183,487 Taxes based on income 119,274 107,223 76,965 80,988 70,962 92,593 -------- -------- -------- -------- -------- -------- Income before taxes and cumulative effect of accounting change 343,530 323,701 249,564 267,801 236,161 276,080 -------- -------- -------- -------- -------- -------- Fixed charges: Interest charges 138,415 141,393 138,097 138,512 127,386 113,305 Interest factor in rentals 6,033 5,859 6,140 5,690 4,237 4,338 -------- -------- -------- -------- -------- -------- Total fixed charges 144,448 147,252 144,237 144,202 131,623 117,643 -------- -------- -------- -------- -------- -------- Income before income taxes, cumulative effect of accounting change and fixed charges $487,978 $470,953 $393,801 $412,003 $367,784 $393,723 ======== ======== ======== ======== ======== ======== Coverage of fixed charges 3.38 3.20 2.73 2.86 2.79 3.35 ==== ==== ==== ==== ==== ==== Preferred dividend requirements $16,307 $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 $24,950 $24,383 $20,868 $17,586 $15,155 $13,853 -------- -------- -------- -------- -------- -------- Total fixed charges and preferred dividends $169,398 $171,635 $165,105 $161,788 $146,778 $131,496 ======== ======== ======== ======== ======== ======== Coverage of combined fixed charges and preferred dividends 2.88 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 June 30, 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 ----------------------------------------------------- June 30, 1994 1993 1992 1991 1990 1989 --------- --------- --------- --------- --------- --------- (Thousands of Dollars) Net income before cumulative effect of accounting change $230,219 $241,579 $200,760 $210,164 $170,234 $214,587 Taxes based on income 104,271 62,145 79,481 80,737 63,360 99,766 -------- -------- -------- -------- -------- -------- Income before taxes and cumulative effect of accounting change 334,490 303,724 280,241 290,901 233,594 314,353 -------- -------- -------- -------- -------- -------- Fixed charges: Interest charges 220,536 221,312 226,453 225,323 199,469 165,709 Interest factor in rentals 9,446 9,257 6,599 6,080 4,559 4,705 -------- -------- -------- -------- -------- -------- Total fixed charges 229,982 230,569 233,052 231,403 204,028 170,414 -------- -------- -------- -------- -------- -------- Nonutility subsidiary capitalized interest (1,717) (2,059) (2,200) (6,542) - - -------- -------- -------- -------- -------- -------- Income before income taxes, cumulative effect of accounting change and fixed charges $562,755 $532,234 $511,093 $515,762 $437,622 $484,767 ======== ======== ======== ======== ======== ======== Coverage of fixed charges 2.45 2.31 2.19 2.23 2.14 2.84 ==== ==== ==== ==== ==== ==== Preferred dividend requirements $16,307 $16,255 $14,392 $12,298 $10,598 $9,235 -------- -------- -------- -------- -------- -------- Ratio of pre-tax income to net income 1.45 1.26 1.40 1.38 1.37 1.46 ---- ---- ---- ---- ---- ---- Preferred dividend factor $23,645 $20,481 $20,149 $16,971 $14,519 $13,483 -------- -------- -------- -------- -------- -------- Total fixed charges and preferred dividends $253,627 $251,050 $253,201 $248,374 $218,547 $183,897 ======== ======== ======== ======== ======== ======== Coverage of combined fixed charges and preferred dividends 2.22 2.12 2.02 2.08 2.00 2.64 ==== ==== ==== ==== ==== ==== 40
Exhibit 15 July 29, 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 July 29, 1994 (issued pursuant to the provisions of Statement on Auditing Standards No. 71) in the Prospectuses constituting parts of the Registration Statements (Numbers 33-36798, 33-53685 and 33-54197) on Form S-8 filed on September 12, 1990, May 18, 1994 and June 17, 1994, respectively, and (Numbers 33-58810 and 33-50377) on Form S-3 filed on 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-----