POTOMAC ELECTRIC POWER CO - 10-Q Quarterly Report

Back to GetFilings.com

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, 2002

Commission File Number							1-1072



Potomac Electric Power Company (Exact name of registrant as specified in its charter)


District of Columbia and Virginia (State or other jurisdiction of incorporation or organization)								53-0127880 (I.R.S. Employer Identification No.)


701 Ninth Street, N.W., Washington, D.C. (Address of principal executive office)								20068 (Zip Code)


202-872-2000 (Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
	Yes		[ X ]		No	[ ]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class				Outstanding at June 30, 2002
Common Stock, $1 par value				107,125,976

TABLE OF CONTENTS

Page

PART I - Financial Information
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	5
(1) Organization and Segment Information	5
(2) Summary of Significant Accounting Policies	8
(3) Derivative Instruments and Hedging Activities	9
(4) Treasury Stock Transactions	10
(5) Commitments and Contingencies	11
(6) Subsequent Event	11
Report of Independent Accountants on Review of Interim Financial Information	12
Item 2. - Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition	13
Safe Harbor Statements	13
Critical Accounting Policies	14
Consolidated Results of Operations	15
Capital Resources and Liquidity	17
Item 3. - Quantitative and Qualitative Disclosures About Market Risk	18
PART II - Other Information
Item 1. - Legal Proceedings	18
Item 5. - Other Information	18
Item 6. - Exhibits and Reports on Form 8-K	21
Signatures	22
Computation of Ratios - Utility Operations Only	23
Computation of Ratios - Consolidated Basis	24
Independent Accountants Awareness Letter	25

Part I FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
POTOMAC ELECTRIC POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED INCOME (Unaudited)
	Three Months Ended June 30,		Six Months Ended June 30,
	Three Months Ended June 30,		Six Months Ended June 30,
	2002	2001	2002	2001
(Millions, except per share data)
Operating Revenue
Utility	$390.8	$468.0	$ 706.9	$ 864.7
Competitive	203.0	154.5	385.7	318.6
Gain on divestiture of generation assets	-	-	-	50.2
Total Operating Revenue	593.8	622.5	$1,092.6	1,233.5
Operating Expenses
Fuel and purchased energy	320.8	340.4	586.4	632.2
Other operation and maintenance	84.5	94.9	171.9	186.2
Depreciation and amortization	38.0	42.0	75.9	83.9
Other taxes	48.7	45.7	94.2	90.8
Impairment loss	2.4	-	2.4	-
Total Operating Expenses	494.4	523.0	930.8	993.1
Operating Income	99.4	99.5	161.8	240.4
Other Income (Expenses)
Interest and dividend income	8.9	15.7	15.6	46.4
Interest expense	(32.0)	(41.4)	(63.4)	(87.5)
Loss from Equity Investments, principally a Telecommunication Entity	(.9)	(4.2)	(1.2)	(10.5)
Other income	(1.0)	1.5	(.5)	4.1
Total Other Expenses	(25.0)	(28.4)	(49.5)	(47.5)

Distributions on Preferred Securities of Subsidiary Trust	2.3	2.3	4.6	4.6

Income Tax Expense	25.1	19.3	36.2	73.9

Net Income	47.0	49.5	71.5	114.4

Dividends on Preferred Stock	1.3	1.3	2.5	2.5

Earnings Available for Common Stock	$45.7	$48.2	$69.0	$111.9

Retained Income at Beginning of Period	$969.5	$946.4	$967.4	$929.7
Dividends on Common Stock	(26.7)	(26.9)	(53.6)	(72.7)
Other Comprehensive Loss, Net of Tax	(6.7)	(2.4)	(1.0)	(3.6)
Retained Income, net of other comprehensive loss, net of tax, at End of Period	$981.8	$965.3	$981.8	$965.3

Basic Average Common Shares Outstanding	107.1	108.3	107.1	109.4
Basic Earnings Per Share of Common Stock	$ .43	$ .45	$ .64	$1.02
Diluted Average Common Shares Outstanding	107.1	108.3	107.1	110.0
Diluted Earnings Per Share of Common Stock	$ .43	$ .45	$ .64	$1.02
Cash Dividends Per Share of Common Stock	$ .25	$ .25	$ .50	$.665
The accompanying Notes are an integral part of these Consolidated Financial Statements.

POTOMAC ELECTRIC POWER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited at June 30, 2002)
	June 30, 2002	December 31, 2001
	June 30, 2002	December 31, 2001
ASSETS	(Millions of Dollars)
CURRENT ASSETS
Cash and cash equivalents	$ 488.8	$ 515.5
Marketable securities	163.7	161.2
Accounts receivable, less allowance for uncollectible accounts of $4.9 and $9.5	455.0	401.2
Fuel, materials and supplies - at average cost	38.5	37.8
Prepaid expenses and other	31.3	24.2
Total Current Assets	1,177.3	1,139.9
INVESTMENTS AND OTHER ASSETS
Investment in finance leases	870.9	736.0
Operating lease equipment - net of accumulated depreciation of $.8 and $123.6, respectively	1.7	4.6
Regulatory assets, net	-	14.3
Other	658.6	637.7
Total Investments and Other Assets	1,531.2	1,392.6
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment	4,465.3	4,361.9
Accumulated depreciation	(1,679.6)	(1,608.5)
Net Property, Plant and Equipment	2,785.7	2,753.4
TOTAL ASSETS	$5,494.2	$5,285.9
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt	$ 518.6	$ 458.2
Accounts payable and accrued payroll	242.1	224.1
Capital lease obligations due within one year	15.6	15.2
Interest and taxes accrued	92.2	92.6
Other	177.8	175.3
Total Current Liabilities	1,046.3	965.4
DEFERRED CREDITS
Regulatory liabilities, net	10.3	-
Income taxes	665.8	501.6
Investment tax credits	23.7	24.7
Other	36.4	38.8
Total Deferred Credits	736.2	565.1

LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS	1,666.5	1,722.4

COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST WHICH HOLDS SOLELY PARENT JUNIOR SUBORDINATED DEBENTURES	125.0	125.0

PREFERRED STOCK
Serial preferred stock	35.3	35.3
Redeemable serial preferred stock	49.5	49.5
Total Preferred Stock	84.8	84.8
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $1 par value - authorized 200,000,000 shares, issued 118,544,883 shares	118.5	118.5
Premium on stock and other capital contributions	1,028.4	1,028.3
Capital stock expense	(13.0)	(12.9)
Accumulated other comprehensive loss	(7.7)	(6.7)
Retained income	989.5	974.1
	2,115.7	2,101.3

Less cost of shares of common stock in treasury (11,418,907 shares and 11,323,707 shares, respectively)	(280.3)	(278.1)
	(280.3)	(278.1)
Total Shareholders' Equity	1,835.4	1,823.2

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$5,494.2	$5,285.9
The accompanying Notes are an integral part of these Consolidated Financial Statements.

POTOMAC ELECTRIC POWER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
	Six Months Ended June 30,
	Six Months Ended June 30,
	2002	2001
	(Millions of Dollars)
OPERATING ACTIVITIES
Net income	$ 71.5	$ 114.4
Adjustments to reconcile net income to net cash from (used by) operating activities:
Depreciation and amortization	75.9	83.9
Gain on divestiture of generation assets	-	(50.2)
Impairment loss	2.4	-
Changes in:
Accounts receivable and unbilled revenue	(53.8)	36.7
Regulatory assets, net	35.4	(101.8)
Prepaid expenses	(7.1)	404.5
Accounts payable and accrued payroll	18.0	(38.4)
Interest and taxes accrued, including Federal income tax refund of $135.4 million in 2002	135.8	(702.9)
Net other operating activities, including divestiture related items in 2001	(26.3)	(24.9)
Net Cash From (Used By) Operating Activities	251.8	(278.7)
INVESTING ACTIVITIES
Net investment in property, plant and equipment	(103.4)	(108.0)
Proceeds from/changes in:
Divestiture of generation assets	-	156.2
Purchase of leveraged leases	(111.6)	-
Sales of marketable securities, net of purchases	1.4	21.9
Purchases of other investments, net of sales	(15.1)	(32.7)
Net other investing activities	5.0	(7.1)
Net Cash (Used By) From Investing Activities	(223.7)	30.3
FINANCING ACTIVITIES
Dividends paid on preferred and common stock	(56.1)	(75.2)
Redemption of preferred stock	-	(5.5)
Reacquisition of the Company's common stock	(2.2)	(61.7)
Issuances of debt, net of reacquisitions	4.5	(675.5)
Net other financing activities	(1.0)	5.8
Net Cash Used By Financing Activities	(54.8)	(812.1)

Net Decrease In Cash and Cash Equivalents	(26.7)	(1,060.5)
Cash and Cash Equivalents at Beginning of Period	515.5	1,864.6
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$ 488.8	$ 804.1

Cash paid for interest (net of capitalized interest of $- and $3.8) and income taxes:
Interest	$65.3	$ 89.0
Income taxes	$75.0	$ 799.7

The accompanying Notes are an integral part of these Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For additional information, other than the information discussed in the
Notes to Consolidated Financial Statements section herein, refer to Item 8.
Financial Statements and Supplementary Data of the Company's 2001 Form 10-K.

(1) Organization and Segment Information

Organization

On February 12, 2001, Potomac Electric Power Company (Pepco or the
Company) and Conectiv announced that each company's board of directors
approved an agreement for a strategic transaction whereby Pepco would acquire
Conectiv for a combination of cash and stock valued at approximately $2.2
billion. After the closing of the acquisition on August 1, 2002, Pepco and
Conectiv became subsidiaries of a new holding company, Pepco Holdings, Inc.
(Pepco Holdings, formerly New RC, Inc.)

Until August 1, 2002, Pepco was engaged in three principal lines of
business. These business lines consisted of (1) the provision of regulated
electric utility transmission and distribution services in the Washington,
D.C. (D.C.) metropolitan area, (2) the management of a diversified financial
investments portfolio and (3) the supply of energy products and services in
competitive retail markets. The Company's regulated electric utility
activities are referred to herein as the "Utility" or "Utility Operations,"
and its financial investments and competitive energy activities are referred
to herein as its "Competitive Operations." The Company's wholly owned
unregulated subsidiary, POM Holdings, Inc. (POM) was the parent company of
two wholly owned subsidiaries, Potomac Capital Investment Corporation (PCI)
and Pepco Energy Services, Inc. (Pepco Energy Services). The Company's
financial investment portfolio was managed by PCI and its competitive energy
products and services were provided by Pepco Energy Services. After the
merger, the stock of PCI and Pepco Energy Services was distributed as a
dividend to Pepco's new parent company, Pepco Holdings, which resulted in
Pepco Holdings becoming the new parent company of PCI and Pepco Energy
Services as well. Additionally, the Company has a wholly owned Delaware
statutory business trust, Potomac Electric Power Company Trust I, and a
wholly owned Delaware Investment Holding Company, Edison Capital Reserves
Corporation.

Segment Information

The Company has identified the Utility's operations (Utility Segment)
and POM's operations (Competitive Segment) as its two reportable segments.
The following tables present condensed financial information for the three
and six months ended June 30, 2002 and 2001, respectively.

		Competitive Segment
	Utility	PCI	Pepco Energy Services	Total	(A) Elimi- nations	Total Pepco
Three Months Ended:	(Unaudited, In Millions of Dollars)
June 30, 2002
Operating Revenue	$390.8	$ 22.1	$ 183.5	$205.6	$(2.6)	$593.8
Operating Expenses
Fuel and Purchased Energy	170.3	-	150.5	150.5	-	320.8
Other Operation and Maintenance	51.5	8.3	27.3	35.6	(2.6)	84.5
Depreciation and Amortization	36.0	.7	1.3	2.0	-	38.0
Other Taxes	48.7	-	-	-	-	48.7
Impairment loss	-	2.4	-	2.4	-	2.4
Total Operating Expenses	306.5	11.4	179.1	190.5	$(2.6)	494.4
Operating Income	84.3	10.7	4.4	15.1	-	99.4
Other (Expenses) Income
Interest and Dividend Income	4.0	4.7	.2	4.9	-	8.9
Interest Expense	(21.2)	(10.7)	(.1)	(10.8)	-	(32.0)
Loss from Equity Investments, Principally a Telecommunication Entity	-	(1.2)	.3	(.9)	-	(.9)
Other Income	(.8)	(.2)	-	(.2)	-	(1.0)
Total Other (Expenses) Income	(18.0)	(7.4)	.4	(7.0)	-	(25.0)
Distributions on Preferred Securities of Subsidiary Trust	2.3	-	-	-	-	2.3
Income Tax Expense (Benefit)	24.5	(1.1)	1.7	.6	-	25.1
Net Income	$ 39.5	$ 4.4	$ 3.1	$ 7.5	-	$ 47.0

			Competitive Segment
			Utility Segment		PCI		Pepco Energy Services		Total		(A) Elimi- nations		Total Pepco
Three Months Ended:			(Unaudited, In Millions of Dollars)
June 30, 2001
Operating Revenue			$468.0		$20.7		$133.8		$154.5		-		$622.5
Operating Expenses
Fuel and Purchased Energy			235.8		-		104.6		104.6		-		340.4
Other Operation and Maintenance			53.6		14.7		26.6		41.3		-		94.9
Depreciation and Amortization			34.7		5.6		1.7		7.3		-		42.0
Other Taxes			45.7		-		-		-		-		45.7
Total Operating Expenses			369.8		20.3		132.9		153.2		-		523.0
Operating Income			98.2		.4		.9		1.3		-		99.5
Other (Expenses) Income
Interest and Dividend Income			11.3		3.4		1.0		4.4		-		15.7
Interest Expense			(30.0)		(11.4)		-		(11.4)		-		(41.4)
(Loss) Income from Equity Investments, Principally a Telecommunication Entity			-		(4.6)		.4		(4.2)		-		(4.2)
Other Income			1.5		-		-		-		-		1.5
Total Other (Expenses) Income			(17.2)		(12.6)		1.4		(11.2)		-		(28.4)
Distributions on Preferred Securities of Subsidiary Trust			2.3		-		-		-		-		2.3
Income Tax Expense (Benefit)			31.9		(13.5)		.9		(12.6)		-		19.3
Net Income			$ 46.8		$ 1.3		$ 1.4		$ 2.7		-		$ 49.5

(A)	Represents the elimination of rent paid to PCI for Pepco's lease of office space in PCI's 10-story commercial office building. The lease commenced in June 2001.
				Competitive Segment
		Utility		PCI		Pepco Energy Services		Total		(A) Elimi- nations		Total Pepco
Six Months Ended:		(Unaudited, In Millions of Dollars)
June 30, 2002
Operating Revenue		$706.9		$ 50.6		$ 340.3		$390.9		$(5.2)		$1,092.6
Operating Expenses
Fuel and Purchased Energy		302.5		-		283.9		283.9		-		586.4
Other Operation and Maintenance		104.6		19.4		53.1		72.5		(5.2)		171.9
Depreciation and Amortization		71.8		1.4		2.7		4.1		-		75.9
Other Taxes		94.2		-		-		-		-		94.2
Impairment loss		-		2.4		-		2.4		-		2.4
Total Operating Expenses		573.1		23.2		339.7		362.9		$(5.2)		930.8
Operating Income		133.8		27.4		.6		28.0		-		161.8
Other (Expenses) Income
Interest and Dividend Income		7.8		7.3		.5		7.8