10-Q 1 q3.htm QUARTERLY REPORT ON FORM 10-Q QTR. ENDED 9/30/01 SECURITIES AND EXCHANGE COMMISSION





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

  

September 30, 2001

     

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 September 30, 2001

Common Stock, $1 par value

107,422,876





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

5

      (1) Organization and Segment Information

5

      (2) Summary of Significant Accounting Policies

10

      (3) Derivative Instruments and Hedging Activities

10

      (4) Treasury Stock Transactions

12

      (5) Commitments and Contingencies

13

    Report of Independent Accountants on Review of Interim Financial Information

14

  Item 2. - Management's Discussion and Analysis of Consolidated Results of
                Operations and Financial Condition

15

    Safe Harbor Statements

15

    Consolidated Results of Operations

16

    Capital Resources and Liquidity

19

  Item 3. - Quantitative and Qualitative Disclosures About Market Risk

19

PART II - Other Information

  

  Item 1. - Legal Proceedings

19

  Item 5 - Other Information

19

  Item 6. - Exhibits and Reports on Form 8-K

22

  Signatures

23

  Computation of Ratios - Utility Operations Only

24

  Computation of Ratios - Consolidated Basis

25

  Independent Accountants Awareness Letter

26





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
September 30,

  

Nine Months Ended
September 30,

 

2001

2000

2001

2000

(Millions, except per share data)

Operating Revenue

                

   Utility

  

$545.7 

  

$745.0 

  

$1,410.4 

  

$1,757.3 

   Competitive

  

239.2 

  

79.7 

  

557.0 

  

239.6 

   Gain on divestiture of generation assets

  

(18.4) 

  

- 

  

31.8 

  

- 

      Total Operating Revenue

  

766.5 

  

824.7 

  

1,999.2 

  

1,996.9 

Operating Expenses

   Fuel and purchased energy

  

445.3 

  

363.3 

  

1,077.4 

  

887.1 

   Other operation and maintenance

  

91.6 

  

99.2 

  

277.1 

  

298.2 

   Depreciation and amortization

  

45.1 

  

56.9 

  

129.0 

  

191.8 

   Other taxes

 

51.3 

  

55.8 

  

142.1 

  

155.0 

      Total Operating Expenses

  

633.3 

  

575.2 

  

1,625.6 

  

1,532.1 

Operating Income

133.2 

249.5 

373.6 

464.8 

Other Income (Expenses)

                

   Interest and dividend income

 

8.2 

  

6.4 

  

54.6 

  

14.1 

   Interest expense

  

(27.7)

  

(54.5)

  

(115.2)

  

(158.2)

   Loss from Equity Investments, Principally
     a Telecommunication Entity

(6.5)

(3.2)

(17.0)

(11.1)

   Other income

  

0.9 

  

4.6 

  

5.0 

  

6.9 

      Total Other Expenses

  

(25.1)

  

(46.7)

  

(72.6)

  

(148.3)

                 

Distributions on Preferred Securities of Subsidiary Trust

  

2.3 

  

2.3 

  

6.9 

  

6.9 

                 

Income Tax Expense

  

35.8 

  

79.7 

  

109.7 

  

121.1 

                 

Net Income

  

70.0 

  

120.8 

  

184.4 

  

188.5 

                 

Dividends on Preferred Stock

  

1.3 

  

1.3 

  

3.8 

  

4.1 

                 

Earnings Available for Common Stock

68.7 

119.5 

180.6 

184.4 

                 

Retained Income at Beginning of Period

  

965.3 

  

743.3 

  

929.7 

  

779.3 

Dividends on Common Stock

  

(26.9)

  

(46.3)

  

(99.7)

  

(144.6)

Other Comprehensive Income, Net of Tax

  

3.1 

  

1.2 

  

(0.4)

  

(1.4)

Retained Income at End of Period

$1,010.2 

$817.7 

$1,010.2 

$817.7 

                 

Basic Average Common Shares Outstanding

  

107.9 

  

112.0 

  

108.9 

  

116.3 

Basic Earnings Per Share of Common Stock

  

$0.64 

  

$1.07 

  

$1.66 

  

$1.59 

Diluted Average Common Shares Outstanding

  

107.9 

  

115.4 

  

109.3 

  

119.7 

Diluted Earnings Per Share of Common Stock

  

$0.64 

  

$1.04 

  

$1.66 

  

$1.56 

Cash Dividends Per Share of Common Stock

  

$0.25 

  

$0.415 

  

$0.915 

  

$1.245 

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

 

 



POTOMAC ELECTRIC POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited at September 30, 2001)

 

September 30,
2001

  

December 31,
2000

ASSETS

(Millions of Dollars)

CURRENT ASSETS

   Cash and cash equivalents

$692.8 

 

$1,864.6 

   Marketable securities

184.3 

 

231.4 

   Accounts receivable, less allowance for uncollectible
     accounts of $10.8 and $9.1

520.3 

478.4 

   Fuel, materials and supplies - at average cost

36.6 

 

36.4 

   Prepaid expenses and other

4.2 

 

413.6 

         Total Current Assets

1,438.2 

 

3,024.4 

INVESTMENTS AND OTHER ASSETS

   Investment in finance leases

596.2 

 

589.5 

   Operating lease equipment - net of accumulated
     depreciation of $119.3 and $135.4, respectively

28.0 

54.6 

   Other

635.8 

 

637.0 

         Total Investments and Other Assets

1,260.0 

 

1,281.1 

PROPERTY, PLANT AND EQUIPMENT

   Property, plant and equipment

4,359.1 

 

4,284.7 

   Accumulated depreciation

(1,640.2)

  

(1,562.9)

         Net Property, Plant and Equipment

2,718.9 

 

2,721.8 

         TOTAL ASSETS

$5,417.1 

$7,027.3 

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES

      

   Short-term debt

$576.6 

 

$1,150.1 

   Accounts payable and accrued payroll

256.6 

 

273.8 

   Capital lease obligations due within one year

15.2 

 

15.2 

   Interest and taxes accrued

110.4 

 

814.4 

   Other

152.0 

 

151.0 

         Total Current Liabilities

1,110.8 

 

2,404.5 

DEFERRED CREDITS

   Regulatory liabilities, net

40.6 

 

186.1 

   Income taxes

408.9 

 

418.7 

   Investment tax credits

25.2 

 

28.3 

   Other

44.2 

 

52.3 

         Total Deferred Credits

518.9 

 

685.4 

LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

1,707.4 

 

1,859.6 

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 

 

40.8 

   Redeemable serial preferred stock

49.5 

 

49.5 

         Total Preferred Stock

84.8 

 

90.3 

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY

     

   Common stock, $1 par value - authorized 200,000,000 shares,
     issued 118,544,883 and 118,530,802 shares, respectively

118.5 

118.5 

   Premium on stock and other capital contributions

1,028.3 

 

1,027.3 

   Capital stock expense

(12.9)

  

(13.0)

   Accumulated other comprehensive loss

(7.9)

  

(7.5)

   Retained income

1,018.1 

 

937.2 

         Total Shareholders' Equity

2,144.1 

 

2,062.5 

   Less cost of shares of common stock in treasury
      (11,122,007 shares and 7,792,907 shares, respectively)

(273.9)

  

(200.0)

 
 

1,870.2 

 

1,862.5 

         TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$5,417.1 

$7,027.3 

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



POTOMAC ELECTRIC POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 

NIne Months Ended
September 30,

 

2001

2000

 

(Millions of Dollars)

OPERATING ACTIVITIES

Net income

$    184.4 

  

$    188.5 

Adjustments to reconcile net income to net cash
   (used by) from operating activities:

    Depreciation and amortization

129.0 

  

191.8 

    Gain on divestiture of generation assets

(31.8)

  

- 

    Changes in:

      

      Accounts receivable and unbilled revenue

(41.9)

  

(170.3)

      Customer sharing commitment

(182.2)

  

- 

      Prepaid expenses

409.4 

  

33.1 

      Accounts payable and accrued payroll

(20.8)

  

(31.1)

      Interest and taxes accrued

(704.0)

  

57.0 

      Net other operating activities

18.6 

  

6.4 

Net Cash (Used By) From Operating Activities

(239.3)

  

275.4 

INVESTING ACTIVITIES

Net investment in property, plant and equipment

(177.1)

  

(167.1)

Proceeds from/changes in:

      

    Divestiture of generation assets

150.8 

  

- 

    Sales of marketable securities, net of purchases

52.7 

  

7.9 

    Purchases of other investments, net of sales

(59.7)

  

(41.5)

Net Cash Used By Investing Activities

(33.3)

  

(200.7)

FINANCING ACTIVITIES

Dividends paid on preferred and common stock

(103.5)

  

(148.7)

Redemption of preferred stock

(5.5)

  

(6.0)

Reacquisition of the Company's common stock

(73.9)

  

(185.5)

Reacquisition of debt, net of issuances

(725.7)

  

133.6 

Proceeds from sale of aircraft

- 

  

87.1 

Other financing activities

9.4 

  

1.3 

Net Cash Used By Financing Activities

(899.2)

  

(118.2)

       

Net Decrease In Cash and Cash Equivalents

(1,171.8)

  

(43.5)

Cash and Cash Equivalents at Beginning of Year

1,864.6 

  

98.7 

CASH AND CASH EQUIVALENTS AT END OF YEAR

$    692.8 

$      55.2 

Cash paid for interest (net of capitalized interest of $2.6 and $2.8) and income taxes:

    Interest

$    145.8 

  

$    173.1 

    Income taxes

$    799.7 

  

$      (8.2)

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 2000 Form 10-K.

(1)     Organization and Segment Information

Organization

          Potomac Electric Power Company (Pepco or the Company) is engaged in three principal
lines of business. These business lines consist of (1) the provision of regulated electric utility
transmission and distribution services, (2) the supply of telecommunications services including
local and long distance telephone, high speed Internet and cable television, 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
telecommunications services and competitive energy activities are referred to herein as
"Competitive Operations." Competitive Operations are derived from Pepco Holdings, Inc.
(PHI), a wholly owned subsidiary of the Company, and PHI's wholly owned subsidiaries,
Potomac Capital Investment Corporation (PCI) and Pepco Energy Services, Inc. (Pepco Energy
Services). The Company also has a wholly owned Delaware statutory business trust, Potomac
Electric Power Company Trust I (Trust) and a wholly owned Delaware Investment Holding
Company, Edison Capital Reserves Corporation (Edison).

          On February 12, 2001, the Company and Conectiv announced that each company's boards
of directors approved an agreement for a strategic transaction whereby the Company will
effectively acquire Conectiv for a combination of cash and stock valued at approximately $2.2
billion. The combination, which will be accounted for as a purchase, has received approval
from both companies' shareholders, from the Pennsylvania and Virginia commissions, and from
the Federal Energy Regulatory Commission (FERC). Additionally, antitrust clearance has been
received under the Hart-Scott-Rodino Antitrust Improvements Act (HSR) effective August 7,
2001. HSR provides the Federal Trade Commission and the Justice Department the opportunity
to review the proposed transaction prior to its completion to ensure it will not violate antitrust
laws. Pending the receipt of various other regulatory approvals, the transaction is expected to
close in early 2002. Both companies will become subsidiaries of a new holding company to be
named at a later date. At September 30, 2001, the Company has deferred approximately $10.1
million in merger acquisition costs.

Segment Information

          The Company has identified the Utility's operations including the Trust (Utility Segment)
and PHI's operations (Competitive Segment) as its two reportable segments. The following
tables present condensed financial information for the three and nine months ended
September 30, 2001 and 2000, respectively.

 

   

     Competitive Segment     

    

Utility
Segment 

   PCI   

Pepco
Energy
Services

Total
   PHI   

(A)
Elimi-
nations

Total
  Pepco 

Three Months Ended:

(Unaudited, In Millions of Dollars)

September 30, 2001

            

Operating Revenue

$ 527.3(B)

$ 29.7    

$ 212.1 

$241.8  

$(2.6)  

$766.5(B)

Operating Expenses

            

    Fuel and Purchased Energy

274.5     

-     

170.8 

170.8  

-   

445.3    

    Other Operation and
       Maintenance

51.7     

13.7    

28.8 

42.5  

(2.6)  

91.6    

    Depreciation and Amortization

35.8     

7.6    

1.7 

9.3  

-   

45.1    

    Other Taxes

 51.3     

  -     

  -   

  -   

    -   

  51.3    

Total Operating Expenses

413.3     

 21.3    

   201.3 

 222.6  

$(2.6)  

 633.3    

Operating Income

114.0     

  8.4    

    10.8 

  19.2  

    -  

 133.2    

Other Expenses

            

    Interest and Dividend Income

6.5     

2.6(C)

(.9)

1.7  

-   

8.2    

    Interest Expense

(15.8)    

(11.8)   

(.1)

(11.9)

-   

(27.7)   

    Loss from Equity
       Investments, Principally a
       Telecommunication Entity

-     

(4.9)   

(1.6)

(6.5)

-   

(6.5)    

    Other Income (Expenses)

  1.2     

  (.3)   

     -  

   (.3)

    -   

    .9     

Total Other Expenses

(8.1)    

(14.4)   

(2.6)

(17.0)

-   

(25.1)    

Distributions on Preferred
   Securities of Subsidiary Trust

2.3     

-     

-  

-  

-   

2.3     

Income Tax Expense (Benefit)

 42.0     

 (10.2)   

    4.0 

  (6.2)

   -   

  35.8     

Net Income

$ 61.6(D)

$  4.2    

$   4.2 

$  8.4 

   -   

$ 70.0(D)

             

(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.

(B)

Includes pre-tax loss of $18.4 million from an adjustment to the previously reported gain on the sale of the Company's generating plants.

(C)

Includes dividend income from PCI's ongoing preferred stock investment portfolio.

(D)

Includes after-tax loss of $11.0 million from an adjustment to the previously reported gain on the sale of the Company's generating plants.

 

 

         Competitive Segment         


 Utility
Segment



   PCI   

Pepco
Energy
Services


Total
   PHI   


Total
  Pepco 

Three Months Ended:

(Unaudited, In Millions of Dollars)

September 30, 2000

          

Operating Revenue

$745.0 

$ 27.1    

$ 52.6 

$ 79.7 

$824.7 

Operating Expenses

          

    Fuel and Purchased Energy

320.0 

        -    

43.3 

43.3 

363.3 

    Other Operation and
       Maintenance


73.7 


10.5    


15.0 


25.5 


99.2 

    Depreciation and Amortization

51.1 

5.2    

.6 

5.8 

56.9 

    Other Taxes

    55.8 

         -    

          - 

          - 

    55.8 

Total Operating Expenses

  500.6 

  15.7    

   58.9 

   74.6 

  575.2 

Operating Income (Loss)

   244.4 

   11.4    

     (6.3)

      5.1 

   249.5 

Other (Expenses) Income

       

        

    Interest and Dividend Income

         .5 

5.9(A)

          - 

5.9 

6.4 

    Interest Expense (Benefit)

(40.8)

(14.2)   

.5 

(13.7)

(54.5)

    (Loss) Income from Equity
      Investments, Principally a
      Telecommunication Entity



          - 



   (4.8)   



        1.6 



  (3.2)



    (3.2)

    Other Income

     4.3 

     .3    

         -  

    .3 

      4.6 

Total Other (Expenses) Income

(36.0)

(12.8)   

2.1 

(10.7)

(46.7)

Distributions on Preferred
    Securities of Subsidiary Trust


2.3 


-    


- 


- 


2.3 

Income Tax Expense (Benefit)

    83.5 

   (2.3)   

    (1.5)

   (3.8)

   79.7 

Net Income (Loss)

$ 122.6 

$   .9    

$   (2.7)

$ (1.8)

$120.8 

           

(A)    Includes dividend income from PCI's ongoing preferred stock investment portfolio.

 

   

    Competitive Segment    

    

 Utility 
Segment

   PCI   

Pepco
Energy
Services

Total
  PHI  

(A)
Elimi-
nations

Total
 Pepco 

Nine Months Ended:

(Unaudited, In Millions of Dollars)

September 30, 2001

            

Operating Revenue

$1,442.2(B)

$ 79.2   

$ 481.2 

$560.4

$ (3.4)  

$1,999.2(B)

Operating Expenses

            

    Fuel and Purchased Energy

699.1    

-   

378.3 

378.3

-   

1,077.4     

    Other Operation and
       Maintenance

156.1    

42.9   

81.5 

124.4

(3.4) 

277.1     

    Depreciation and Amortization

104.8    

19.3   

4.9 

24.2

-   

129.0     

    Other Taxes

  142.1    

      -   

        - 

      -  

       -   

  142.1     

Total Operating Expenses

1,102.1    

 62.2   

 464.7 

526.9

$ (3.4)  

1,625.6     

Operating Income

  340.1    

 17.0   

   16.5 

  33.5

      -   

  373.6     

Other Expenses (Expenses)

            

    Interest and Dividend Income

43.9    

10.7(C)

- 

10.7

-   

54.6     

    Interest Expense

(80.5)   

(34.4)   

(.3)

(34.7)

-   

(115.2)    

    (Loss) Income from Equity
       Investments, Principally a
      Telecommunication Entity

-    

(16.1)   

(.9)

(17.0)

-   

(17.0)    

    Other Income (Expenses)

    5.1    

    (.1)   

       - 

   (.1)

      -   

   5.0    

Total Other Expenses

(31.5)   

(39.9)   

(1.2)

(41.1)

-   

(72.6)   

Distributions on Preferred
   Securities of Subsidiary Trust

6.9    

-    

- 

-

-   

6.9     

Income Tax Expense
   (Benefit)

  129.5    

(26.9)   

    7.1 

 (19.8)

      -   

   109.7     

Net Income

$172.2(D)

$ 4.0    

$   8.2 

$ 12.2

      -   

$184.4(D)

             

(A)

Represents the elimination of rent paid to PCI by Pepco (starting in June 2001) for its lease of PCI office.

(B)

Includes a pre-tax gain of $31.8 million from the sale of the Conemaugh Generating Station.

(C)

Includes dividend income from PCI's ongoing preferred stock investment portfolio.

(D)

Includes an after-tax gain of $11.4 million from the sale of the Conemaugh Generating Station.

 

 

 

         Competitive Segment         

 Utility 
Segment

   PCI   

Pepco
Energy
Services

Total
   PHI   

Total
  Pepco 

Nine Months Ended:

(Unaudited, In Millions of Dollars)

September 30, 2000

          

Operating Revenue

$1,757.3 

$ 96.9(A)

$142.7 

$239.6 

$1,996.9(A)

Operating Expenses

          

    Fuel and Purchased Energy

770.9 

-   

116.2 

116.2 

887.1    

    Other Operation and
        Maintenance

229.1 

29.6   

39.5 

69.1 

298.2    

    Depreciation and Amortization

174.8 

15.6   

1.4 

17.0 

191.8    

    Other Taxes

   155.0 

        -    

        - 

        - 

   155.0    

Total Operating Expenses

 1,329.8 

   45.2    

  157.1 

  202.3 

1,532.1    

Operating Income (Loss)

    427.5 

   51.7    

   (14.4)

   37.3 

  464.8    

Other (Expenses) Income

          

    Interest and Dividend Income

1.5 

12.6(B)

- 

12.6 

14.1    

    Interest Expense

(115.7)

(41.9)  

(.6)

(42.5)

(158.2)   

    (Loss) Income from Equity
      Investments, Principally a
      Telecommunication Entity

- 

(13.6)  

2.5 

 (11.1)

(11.1)   

    Other Income (Expenses)

      7.0 

      -    

     (.1) 

    (.1)

     6.9    

Total Other (Expenses) Income

    (107.2)

(42.9)  

1.8  

(41.1)

   (148.3)   

Distributions on Preferred     Securities of Subsidiary Trust

6.9 

-   

- 

- 

6.9    

Income Tax Expense (Benefit)

     126.3 

  (.8)  

    (4.4)

 (5.2)

    121.1    

Net Income (Loss)

$   187.1 

$  9.6(C)

$  (8.2)

$ 1.4 

$   188.5(C)

           

(A)   Includes a pre-tax gain of $19.7 million from the sale of Cove Point.
(B)   Includes dividend income from PCI's ongoing preferred stock investment portfolio.
(C)   Includes an after-tax gain of $11.8 million from the sale of Cove Point.

(2)      Summary of Significant Accounting Policies

Basis of Presentation

          The information furnished in the accompanying consolidated financial statements
reflects all adjustments (which consist only of normal recurring accruals) which are, in the
opinion of management, necessary for a fair presentation of the Company's results of
operations for the interim periods presented. The accompanying consolidated financial
statements and notes thereto should be read in conjunction with the Company's 2000 Form
10-K. Certain prior period amounts have been reclassified in order to conform to the
current period presentation.

New Accounting Standards

          In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 141 entitled "Business Combinations," which
applies to all business combinations initiated after June 30, 2001. This statement requires that
the purchase method of accounting be used for all business combinations. Additionally,
identifiable intangible assets must be recognized as assets apart from goodwill if certain criteria
are met. The Company believes that the implementation of SFAS 141 will not have a material
impact on its financial position or results of operations.

           In June 2001, the FASB issued SFAS 142 "Goodwill and Other Intangible Assets," which
is required to be applied starting with fiscal years beginning after December 15, 2001. This
statement establishes the accounting and reporting standards for goodwill and other intangible
assets and requires that goodwill no longer be amortized but rather tested for impairment based
on the criteria prescribed in the statement. The Company believes that the implementation of
SFAS 142 will not have a material impact on its financial position or results of operations.

          In June 2001, the FASB issued SFAS 143 "Accounting for Asset Retirement Obligations,"
which is required to be adopted for financial statements issued for fiscal years beginning after
June 15, 2002. This statement establishes the accounting and reporting standards for obligations
associated with the retirement of tangible long-lived assets and the associated asset retirement
costs. The Company is in the process of assessing the provisions of SFAS 143 in order to
determine its impact on the Company's financial position and results of operations.

          In August 2001, the FASB issued SFAS 144 entitled "Accounting for the Impairment or
Disposal of Long-Lived Assets," which is required to be adopted for financial statements issued
for fiscal years beginning after December 15, 2001. This statement establishes a single
accounting model for long-lived assets to be disposed of by sale and resolves significant
implementation issues related to SFAS 121 entitled "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of". The Company believes that the
implementation of SFAS 144 will not have a material impact on its financial position or results
of operations.

(3)     Derivative Instruments and Hedging Activities

          On January 1, 2001, the Company adopted the provisions of SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities". Although the Utility is not directly impacted by
SFAS 133, the competitive subsidiaries have entered into several agreements that are subject to
its provisions. Specifically, PCI has entered into two interest rate swap agreements for the
purposes of hedging 100% of its variable interest rate debt obligations that were issued under its
Medium Term Note (MTN) program for fixed interest rate debt. In accordance with the terms of
the swap agreements, PCI receives or pays the net difference between variable interest payments
and the fixed rates due from its swap counterparties, thereby fixing its interest expense. In
August 2001, Pepco Energy Services sold electric call options which give the buyer the right to
call on Pepco Energy Services to supply up to 150 megawatts per hour of electricity at a fixed
price for on peak days during the months of July and August 2002. These call options serve to
hedge the potential variability of the operating results of Pepco Energy Services' electric power
generation plants that result from prevailing electric prices. Pepco Energy Services accounts for
these call options as cash flow hedges of forecasted transactions. As a yield adjustment is
realized, the related amounts reflected in Accumulated Other Comprehensive Income (AOCI) are
subsequently reclassified into revenue.

          On the date of adoption, PHI formally designated its interest rate swap agreements as
cash flow hedge instruments which, for accounting purposes, are measured at fair market
value and recorded as liabilities in the Company's consolidated balance sheet. The effective
portion of the change in the fair value of the interest rate swaps and the electric call options are
reported as a component of AOCI. As a yield adjustment is realized, the related amounts
reflected in AOCI are subsequently reclassified into interest expense.

          PHI's management assesses interest rate and electric price risks by continually
identifying and monitoring changes in the marketplace that may adversely impact expected
future cash flows and by evaluating hedging opportunities.

          On January 1, 2001, PCI recorded an after-tax adjustment of $33 thousand to AOCI
for the purpose of recognizing the fair value of interest rate swaps designated as cash flow
hedges. A similar adjustment was not required for the call options, as they did not exist
at that date. AOCI is adjusted monthly for changes in the fair value of the interest rate swaps and
electric call options. During the three and nine months ended September 30, 2001, PCI recorded
$46 thousand and $41 thousand in losses, respectively, as a result of the change in the fair value
of the interest rate swap agreements. As of September 30, 2001, PCI recorded $1.7 million as an
interest rate swap liability classified in other liabilities and Pepco Energy Services recorded no
gain/loss on the call options.

          PCI's interest rate swaps expire on March 24, 2004 and August 22, 2005, which coincides
with the maturity date of these MTNs, to which the swaps relate for hedging purposes. Pepco
Energy Services' electric call options expire in August 2002, which coincides with the planned
electric power generation.

          Through the twelve months ended September 30, 2002, approximately $422 thousand of
losses in AOCI related to the interest rate swaps and the electric call options are expected to be
reclassified into income as a yield or price adjustment of the hedged items.

          The Company's components of comprehensive income are net income, unrealized losses
on marketable securities and unrealized losses on derivative instruments. A detail of
comprehensive income is as follows:


 

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

 

2001

2000

2001

2000

 

(Unaudited, In Millions of Dollars)

Net Income

$ 70.0 

$120.8 

$ 184.4 

$188.5 

         

Other Comprehensive Income:

        

  Unrealized losses on cash flow hedges:

        

      Net unrealized losses on cash flow          hedges

    (1.0)

       - 

    (1.7)

       - 

  Unrealized gains (losses) on marketable
         securities:

        

      Unrealized holding gains (losses) arising
         during period

5.6 

2.1 

1.0 

(2.4)

      Less: reclassification adjustment for (losses)
               gains included in net earnings

      (.2)

     .3 

        - 

     (.2)

      Net unrealized gains (losses) on marketable
         securities

   5.8 

     1.8 

     1.0 

   (2.2)

  Other comprehensive income (loss), before
         tax

   4.8 

     1.8 

     (.7)

   (2.2)

  Income tax expense (benefit)

   1.7 

      .6 

     (.3)

    (.8)

      Other comprehensive income (loss), net of
         tax

    3.1 

     1.2 

    (.4)

   (1.4)

Comprehensive Income

$ 73.1 

$122.0 

$184.0 

$187.1 

(4)     Treasury Stock Transactions

          On February 12, 2001, the Company announced its plan to repurchase up to $450 million
of its common stock in the open market or in privately negotiated transactions over the next
twelve months. The actual amount of stock to be repurchased will be determined by
management depending on market conditions. Through the nine-month period ended
September 30, 2001, the Company has acquired 3,329,100 shares in connection with this
repurchase plan at a total cost of approximately $73.9 million, which is reflected as a reduction
to shareholders' equity on the accompanying consolidated balance sheets. At December 31,
2000, Pepco had 7,792,907 shares held in treasury at a cost of approximately $200 million in
connection with a previous stock repurchase plan.

(5)     Commitments and Contingencies

Investments

          At September 30, 2001, the carrying value of PCI's marketable securities, which consisted
primarily of preferred stocks with mandatory redemption features and investment grade
commercial paper, was $184.3 million. This total includes preferred stock from Southern
California Edison and Pacific Gas & Electric (PG&E) with carrying values at September 30,
2001, of $6.2 million and $12.6 million (including net unrealized losses of $4.4 million and $5.1
million, respectively). On April 6, 2001, PG&E filed for Chapter 11 bankruptcy protection. Due
to the numerous political and economic factors influencing the California utility market, the full
extent of PG&E's filing and subsequent potential impact on PCI's investment, if any, is uncertain.

Regulatory Contingencies

          As of September 30, 2001, the Company credited approximately $188.6 million to
Maryland customers as their portion of divestiture gainsharing. Hearings are expected to be held
on January 10 and 11, 2002 in order to determine whether additional bill credits should be
provided to the Maryland customers.

          On May 8, 2001, the Company filed an application with the District of Columbia Public
Service Commission to approve the Company's plan to credit $50.1 million to D.C. customers as
their portion of divestiture gainsharing. On September 19, 2001, the D.C. Commission approved
the Company's plan. The Company has commenced with its plans to credit D.C. customers bills
and expects to complete the process by the end of November 2001.


* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

          This Quarterly Report on Form 10-Q, including the report of PricewaterhouseCoopers LLP
on review of unaudited interim financial information dated November 9, 2001 will automatically
be incorporated by reference in the Prospectuses constituting parts of the Company's Registration
Statements on Form S-3 (Number 33-58810) and Forms S-8 (Numbers 33-36798, 33-53685, 
33-54197, 333-56683 and 333-57221), and under New RC, Inc.'s Registration Statement on
Form S-4 (Number 333-57042), filed under the Securities Act of 1933. Such report of
PricewaterhouseCoopers LLP, however, is not a "report" or "part of the Registration Statement"
within the meaning of Sections 7 and 11 of the Securities Act of 1933 and the liability provisions
of Section 11(a) of such Act do not apply.



                                               Report of Independent Accountants

To the Board of Directors
and Shareholders of
Potomac Electric Power Company

We have reviewed the accompanying consolidated balance sheets of Potomac Electric Power
Company and its subsidiaries (the Company) as of September 30, 2001 and 2000, and the
related consolidated statements of earnings and retained income for the three and nine
month periods ended September 30, 2001 and 2000 and the consolidated statements of cash
flows for the nine month periods ended September 30, 2001 and 2000. These financial
statements are the responsibility of the Company's management.

We conducted our review in accordance with standards established by the American Institute of
Certified Public Accountants. A review of interim financial information consists principally of
applying analytical procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the
accompanying consolidated interim financial information for it to be in conformity with
accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards generally accepted in the
United States of America, the consolidated balance sheet as of December 31, 2000, and the
related consolidated statements of earnings and retained income and the consolidated statement
of cash flows for the year then ended (not presented herein); and in our report dated January 19,
2001, we expressed an unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying consolidated balance sheet as of
December 31, 2000, is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.



PricewaterhouseCoopers LLP
Washington, D.C.
November 9, 2001


Item 2.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
                     RESULTS OF OPERATIONS AND FINANCIAL CONDITION

          For additional information, other than the information disclosed in the Management's
Discussion and Analysis of Consolidated Results of Operations and Financial Condition section
herein, refer to Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company's 2000 Form 10-K.

Safe Harbor Statements

          In connection with the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995 (Reform Act), the Company is hereby filing cautionary statements identifying
important factors that could cause actual results to differ materially from those projected in
forward-looking statements (as such term is defined in the Reform Act) made in this report on
Form 10-Q. Any statements that express, or involve discussions as to expectations, beliefs,
plans, objectives, assumptions or future events or performance are not statements of historical
facts and may be forward-looking.

          Forward-looking statements involve estimates, assumptions and uncertainties and are
qualified in their entirety by reference to, and are accompanied by, the following important
factors, which are difficult to predict, contain uncertainties, are beyond the control of the
Company and may cause actual results to differ materially from those contained in
forward-looking statements:

-

Prevailing governmental policies and regulatory actions, including those of the Federal Energy Regulatory Commission (FERC) and the Maryland and D.C. Commissions, with respect to allowed rates of return, industry and rate structure, acquisition and disposal of assets and facilities, operation and construction of plant facilities, recovery of purchased power expenses, and present or prospective wholesale and retail competition (including but not limited to retail wheeling and transmission costs);

-

Changes in and compliance with environmental and safety laws and policies;

-

Weather conditions;

-

Population growth rates and demographic patterns;

-

Competition for retail and wholesale customers, including the potential impact of the economic downturn on competition;

-

Growth in demand, sales and capacity to fulfill demand;

-

Changes in tax rates or policies or in rates of inflation;

-

Changes in projects costs;

-

Unanticipated changes in operating expenses and capital expenditures;

-

Capital market conditions;

-

Competition for new energy development opportunities and other opportunities;

-

Legal and administrative proceedings (whether civil or criminal) and settlements that influence the business and profitability of the Company;

-

Pace of entry into new markets;

-

Time and expense required for building out the planned Starpower network;

-

Success in marketing services;

-

Possible development of alternative technologies;

-

The ability to secure electric and gas supply to fulfill sales commitments at favorable prices, and

          Any forward-looking statements speak only as of November 9, 2001, and the Company
undertakes no obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time and it is not possible for
management to predict all of such factors, nor can it assess the impact of any such factor on the
business or the extent to which any factor, or combination of factors, may cause results to differ
materially from those contained in any forward-looking statement.

CONSOLIDATED RESULTS OF OPERATIONS

OPERATING REVENUE

Utility

           The decreases in Utility operating revenue for the three and nine month periods ended
September 30, 2001, compared to the corresponding periods in 2000, are primarily attributable to
the anticipated more level seasonal pattern of revenue being realized under an energy buyback
contract with Mirant Corp., compared with the revenue and earnings pattern related to
production income in the corresponding periods last year when the Company's production-
related revenue varied significantly by quarter due to seasonal rate differentials. While still
seasonal, the favorable contract with Mirant more evenly spreads the earnings impact over all
quarters. These decreases also resulted from base rate reductions effective with the
implementation of customer choice, and from the termination on December 31, 2000 of the
previously existing contract to provide full-requirements energy to SMECO (a new full-
requirements agreement commenced between Pepco Energy Services and SMECO on January 1,
2001). The decreases over the three and nine month periods in 2001 were partially offset by an
increase in delivered kilowatt hour sales of 5.6% and 4.3% for the three and nine months ended
September 30, 2001, respectively. Additionally, the Company estimates that milder than normal
weather in 2001 negatively impacted earnings by 3 cents per share for the nine months ended
September 30, 2001; and higher than expected customer migration negatively affected earnings
by 5 cents per share over the same nine month period.

Competitive Operations

           Competitive operating revenue increased for the three and nine month periods ended
September 30, 2001 primarily due to the continued growth of Pepco Energy Services'
commodity and service businesses and due to the favorable operating results of the two
generating stations that were transferred from the Utility to Pepco Energy Services in December
2000. The increase in Competitive operating revenue for the nine months ended September 30,
2001, was partially offset by the fact that revenue in the corresponding period last year included
a one-time pre-tax gain of $19.7 million from the sale of PCI's 50% interest in the Cove Point
liquefied natural gas storage facility and pipeline.

          On October 18, 2001, PCI sold several properties from its real estate portfolio for
approximately $23 million. The proceeds were comprised of approximately $15 million in cash
and a note received in the amount of $8 million. The note is secured by the properties sold and
is personally guaranteed by the purchaser. This transaction resulted in an after-tax gain of
approximately $3.8 million that will be recorded in October 2001. Additionally, on October 23,
2001, PCI sold its 45.45% interest in a B747-300 aircraft. Total proceeds from the sale
amounted to $13.9 million in cash, of which PCI received approximately $6 million for its
interests. PCI will record the sale and the related $.4 million after-tax gain in October 2001.

Gain on Divestiture of Generation Assets

          This amount represents the pre-tax gain that was recorded in January 2001 on the sale of
the Company's 9.72 percent interest in the Conemaugh Generating Station (Conemaugh), located
near Johnstown, Pennsylvania. The reduction of $18.4 million in the gain during the three
month period ended September 30, 2001 resulted principally from certain adjustments that were
recorded in connection with the previously reported gain in 2000 on the sale of the Company's
generation assets to Mirant Corporation.

OPERATING EXPENSES

           Consolidated operating expenses increased during the three and nine months ended
September 30, 2001, compared to the corresponding periods in 2000, primarily due to increases
in Pepco Energy Services' fuel and purchased energy expenses as a result of the continued
growth in its commodity and service businesses over the periods. These increases were partially
offset by reductions in the Utility's operation and maintenance and depreciation expenses as a
direct result of the divestiture of its generation assets in December 2000.

OTHER INCOME (EXPENSES)

Interest and Dividend Income

          The increases in interest and dividend income during the three and nine month periods
ended September 30, 2001, compared to the corresponding periods last year, primarily resulted
from interest income earned during 2001 on the proceeds received from the divestiture of the
Company's generation assets in December 2000.

Interest Expense

          The decreases in interest expense over the three and nine month periods ended
September 30, 2001, compared to the corresponding prior periods, primarily resulted from a
reduction in the level of the Company's debt outstanding over the periods. A portion of the
proceeds from the divestiture of the generation assets in December 2000 was used to retire debt.

Loss from Equity Investments, Principally a Telecommunication Entity

          These amounts represent the Company's share of the pre-tax income or loss from entities
in which it has a 20% to 50% equity investment. The Company's most significant equity
investment is the joint venture known as Starpower Communications, LLC (Starpower) that was
formed in 1997 between wholly owned subsidiaries of PCI and RCN Corporation. Additionally,
this line item includes income from Pepco Energy Services' 50% share of the operations of
Viron/Pepco Services, Inc., which was created in 1999 to provide energy-savings performance
contracting services to the Military District of Washington.

          Through September 30, 2001, Starpower has built sufficient advanced fiber-optic network
to cumulatively reach approximately 193,000 On-network households as compared to
approximately 175,000 such households at December 31, 2000. The customer subscriber services
base is composed of customers served by Starpower's advanced fiber-optic network (On-
network) and off of other networks ahead of Starpower's build-out (Off-network). The On-
network customer subscriber services include cable television, local and long distance telephone
and high-speed Internet customer services and totaled approximately 64,000 as of September 30,
2001, compared to approximately 35,000 at December 31, 2000. The Off-network customer
subscriber services include dial-up Internet and resale local and long distance telephone and
totaled approximately 195,000 as of September 30, 2001, compared to approximately 240,000 at
December 31, 2000. Total customer subscriber services including cable television, local and long
distance telephone and Internet subscribers were approximately 259,000 as of September 30,
2001, compared to approximately 275,000 as of December 31, 2000. The decline in total
customer subscriber services over the past year is principally due to the loss of dial-up Internet
customers due to competition from free dial-up Internet service providers.

          For the three and nine months ended September 30, 2001, the Loss from Equity
Investments, Principally a Telecommunication Entity, increased compared to the corresponding
periods last year. This was due to increased expenses incurred in 2001 in connection with the
Starpower build-out. PCI anticipates that Starpower will continue to incur losses for at least the
remainder of 2001 as it further develops and expands its network and customer base. At
September 30, 2001, PCI has cumulatively invested $202.5 million in Starpower.

INCOME TAX EXPENSE

           Income tax expense decreased for the three months ended September 30, 2001,
compared to the corresponding period in 2000, primarily as a result of the Utility's decrease in
operating income over the period. The decrease in income tax expense during the nine months
ended September 30, 2001, compared to the corresponding period last year, was primarily the
result of an increase in income tax benefits recorded by PCI in the second quarter of 2001, which
were generated due to the timing of new investments.

CAPITAL RESOURCES AND LIQUIDITY

Dividends on Common Stock

          On October 25, 2001, a quarterly dividend of 25 cents per share was declared payable
December 31, 2001, to shareholders of record of the Company's common stock on
December 10, 2001. This results in a current annual dividend rate on common stock of $1 per
share. The Company's annual dividend rate on its common stock is determined by its Board of
Directors on a quarterly basis and takes into consideration, among other factors, current and
possible future developments which may affect the Company's income and cash flows.

Construction Expenditures

          Construction expenditures totaled $177.1 million for the nine months ended
September 30, 2001 and are projected to total $190.5 million for the year ended December 31,
2001. For the five-year period 2001-2005, construction expenditures are projected to total $761
million. These expenditures will be funded through funds provided from operations.

Reacquisition of First Mortgage Bonds

          On October 31, 2001 the Company reacquired on the open market at 105.38% of principal
amount, plus accrued interest to the reacquisition date, $7.3 million of the 8-1/2% First Mortgage
Bonds due May 15, 2027. The reacquisition totaled approximately $8 million.

Item 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
                     MARKET RISK

          Refer to Item 7A. Quantitative and Qualitative Disclosures About Market Risk of the
Company's 2000 Form 10-K.

PART II   OTHER INFORMATION

Item 1.      LEGAL PROCEEDINGS

          Refer to Item 3. Legal Proceedings of the Company's 2000 Form 10-K.

Item 5.      OTHER INFORMATION

Customer Migration

          As discussed in Item 7. Management's Discussion and Analysis of Consolidated
Results of Operations and Financial Condition of the Company's 2000 Form 10-K, retail
access to a competitive market for generation services was made available to all Maryland
customers on July 1, 2000 and to D.C. customers on January 1, 2001. At September 30, 2001,
51,993 of the Utility's Maryland customers and 5,699 of its D.C. customers have chosen alternate
suppliers. These customers accounted for 610 megawatts of load in Maryland and 912
megawatts of load in D.C

Merger Regulatory Schedules

          In Delaware, the Public Service Commission held three meetings in September 2001 to
hear public comment on the merger. The Delaware Public Service Commission is scheduled to
hold its hearings on the merger on November 28 and 29, 2001. In Maryland, the Public Service
Commission held hearings from October 15 through October 17, 2001. The New Jersey Board
of Public Utilities has scheduled hearings between November 13 and November 20, 2001. In
D.C., hearings will be held on January 4, 2002. The merger has been approved in Pennsylvania
and Virginia and by FERC.


Statistical Data

Three Months Ended
September 30,

Nine Months Ended
September 30,

2001

2000

% Change

2001

2000

% Change

Operating Revenue

(Millions of Dollars)

Electric Revenue

$543.2

$741.5

(26.7)

$1,399.8

$1,747.5

(19.9)

Other

2.5

3.5

(28.6)

10.6

9.8

8.2 

Total Utility Operating Revenue

545.7

745.0

(26.8)

1,410.4

1,757.3

(19.7)

Competitive Operating Revenue

239.2

79.7

100.0+

557.0

239.6

100.0+

Gain on Divestiture of Generating Assets

(18.4)

-

-

31.8

-

- 

Total Operating Revenue

$766.5

$824.7

(7.1)

$1,999.2

$1,996.9

0.1 

Distribution and Transmission by Class of Service

Residential

$76.8

$74.1

3.6

$204.2

$200.3

1.9 

General Service

139.5

135.5

3.0

366.0

352.4

3.9 

Large Power Service *

2.0

2.1

(4.8)

5.0

6.1

(18.0)

Street Lighting

2.4

2.3

4.3

7.1

6.7

6.0 

Metro

  

2.4

 

3.1

 

(22.6)

  

6.8

 

8.3

 

(18.1)

Network Transmission Services

  

26.6

 

29.8

 

(10.7)

  

80.1

 

88.4

 

(9.4)

Wholesale

0.2

4.1

(95.1)

0.4

11.3

(96.5)

Total Revenue

249.9

251.0

(0.4)

669.6

673.5

(0.6)

Network Transmission Expenses

  

(21.1)

  

(28.0)

  

24.6

 

(70.3)

  

(83.5)

  

15.8 

System

$228.8

$223.0

2.6

$599.3

$590.0

1.6 

Generation Services (SOS) by Class of Service

Residential

$105.6

$108.0

(2.2)

$251.7

$248.4

1.3 

General Service

176.1

243.6

(27.7)

450.4

553.6

(18.6)

Large Power Service *

3.9

8.2

(52.4)

9.0

21.1

(57.3)

Street Lighting

1.0

1.3

(23.1)

3.0

3.7

(18.9)

Metro

  

-

 

5.6

 

(100.0)

  

2.6

 

15.4

 

(83.1)

Wholesale

-

32.4

(100.0)

-

89.3

(100.0)

Subtotal

286.6

399.1

(28.2)

716.7

931.5

(23.1)

ALM Capacity/Energy

  

6.7

 

91.4

 

(92.7)

  

13.5

 

142.5

 

(90.5)

System

$293.3

$490.5

(40.2)

$730.2

$1,074.0

(32.0)

Distribution and Transmission Sales
    (Millions of KWH)

Residential

1,971

1,846

6.8

5,758

5,257

9.5 

General Service

4,738

4,503

5.2

12,729

12,394

2.7 

Large Power Service *

188

179

5.0

503

529

(4.9)

Street Lighting

39

39

_

126

122

3.3 

Metro

117

125

(6.4)

317

345

(8.1)

Wholesale

780

727

7.3

2,249

2,138

5.2 

System

7,833

7,419

5.6

21,682

20,785

4.3 

Generation Services (SOS) Sales
   (Millions of KWH)

Residential

1,825

1,846

(1.1)

5,475

5,257

4.1 

General Service

3,380

4,503

(24.9)

10,917

12,394

(11.9)

Large Power Service *

92

179

(48.6)

246

529

(53.5)

Street Lighting

33

39

(15.4)

104

122

(14.8)

Metro

-

125

(100.0)

62

345

(82.0)

Wholesale

2

727

(99.7)

5

2,138

(99.8)

System

5,332

7,419

(28.1)

16,809

20,785

(19.1)

Average System Revenue
   per KWH (Cts./KCW)

Delivered

2.92

Cts.

3.01

Cts.

(3.0)

2.76

Cts.

2.84

Cts.

(2.8)

Generation Services (SOS)

5.38

Cts.

5.38

Cts.

_

4.26

Cts.

4.48

Cts.

(4.9)

Equity Per Common Share:

$17.41 and $15.84 at September 30, 2001 and 2000, respectively.

Weather Data

Heating Degree Days

44

63

2,586

2,344

20 Year Average

26

2,538

Cooling Degree Hours

5,860

4,517

8,414

7,339

20 Year Average

6,932

9,353

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).

* Large Power Service customers are served at high voltage of 66KV or higher.

 



Item 6.      EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits

    
 

Exhibit 10

-

2001 General Memorandum of Understanding, dated August 14, 2001, between the Company and Local 1900 of the International Brotherhood of Electrical Workers -filed herewith.

 

Exhibit 12

-

Computation of ratios - filed herewith.

 

Exhibit 15

-

Letter re: unaudited interim financial information - filed herewith.

(b)

Reports on Form 8-K

    
 

A Current Report on Form 8-K was filed by the Company on July 19, 2001, which included the Company's Press Release dated as of July 18, 2001. The items reported on such Form 8-K were Item 5. (Other Events) and Item 7. (Financial Statements and Exhibits).

 

A Current Report on Form 8-K was filed for the Company on August 27, 2001, which included the Company's 2001 Mid-Year Report. The items reported on such Form 8-K were Item 5. (Other Events) and Item 7. (Financial Statements and Exhibits).






                                                        SIGNATURES

          Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.

                                                  

Potomac Electric Power Company
                     Registrant



By                     A.W. WILLIAMS                   
                A. W. Williams
          Senior Vice President and
             Chief Financial Officer


November 9, 2001
            Date


Exhibit 12 Statements Re. Computation of Ratios

The computations of the coverage of fixed charges before income taxes, and the coverage of combined fixed charges and preferred dividends for the twelve months ended September 30, 2001, and for each of the years 2000 through 1996, on the basis of Utility operations only, are as follows:

Twelve
Months Ended
September 30, 2001

For the Year Ended December 31,

2000

1999

1998

1997

1996

(Dollar Amounts in Millions)

Net income

$333.9 

$348.9 

$228.0 

$211.2 

$164.7 

$220.1 

Taxes based on income

341.9 

352.9 

142.6 

131.0 

97.5 

135.0 

Income before taxes

675.8 

701.8 

370.6 

342.2 

262.2 

355.1 

Fixed charges:

  Interest charges

129.7 

170.1 

156.1 

151.8 

146.7 

146.9 

  Interest factor in rentals

21.8 

23.2 

23.4 

23.8 

23.6 

23.6 

Total fixed charges

151.5 

193.3 

179.5 

175.6 

170.3 

170.5 

Income before income taxes and fixed charges

$827.3 

$895.1 

$550.1 

$517.8 

$432.5 

$525.6 

Coverage of fixed charges

5.46 

4.63 

3.06 

2.95 

2.54 

3.08 

Preferred dividend requirements

$5.1 

$5.5 

$8.9 

$18.0 

$16.5 

$16.6 

Ratio of pre-tax income to net income

2.02 

2.01 

1.63 

1.62 

1.59 

1.61 

Preferred dividend factor

$10.3 

$11.1 

$14.5 

$29.2 

$26.2 

$26.7 

Total fixed charges and preferred dividends

$161.8 

$204.4 

$194.0 

$204.8 

$196.5 

$197.2 

Coverage of combined fixed charges and
  preferred dividends

5.11 

4.38 

2.84 

2.53 

2.20 

2.66 

 

Exhibit 12 Statements Re. Computation of Ratios

The computations of the coverage of fixed charges before income taxes, and the coverage of combined fixed charges and preferred dividends for the twelve months ended September 30, 2001, and for each of the years 2000 through 1996, on a consolidated basis, are as follows.

Twelve
Months Ended
September 30, 2001

For the Year Ended December 31,

2000

1999

1998

1997

1996

(Dollar Amounts in Millions)

Net income

$371.2 

$369.1 

$256.7 

$234.8 

$179.8 

$234.3 

Taxes based on income

315.6 

341.2 

114.5 

122.3 

65.6 

80.4 

Income before taxes

686.8 

710.3 

371.2 

357.1 

245.4 

314.7 

Fixed charges:

  Interest charges

187.0 

230.7 

208.7 

208.6 

216.1 

231.1 

  Interest factor in rentals

22.1 

23.6 

23.8 

24.0 

23.7 

23.9 

Total fixed charges

209.1 

254.3 

232.5 

232.6 

239.8 

255.0 

Competitive subsidiary capitalized interest

(3.8)

(3.9)

(1.8)

(0.6)

(0.5)

(0.7)

Income before income taxes and fixed charges

$892.1 

$960.7 

$601.9 

$589.1 

$484.7 

$569.0 

Coverage of fixed charges

4.27 

3.78 

2.59 

2.53 

2.02 

2.23 

Preferred dividend requirements

$5.1 

$5.5 

$8.9 

$18.0 

$16.5 

$16.6 

Ratio of pre-tax income to net income

1.85 

1.92 

1.45 

1.52 

1.36 

1.34 

Preferred dividend factor

$9.4 

$10.5 

$12.8 

$27.4 

$22.4 

$22.2 

Total fixed charges and preferred dividends

$218.5 

$264.8 

$245.3 

$260.0 

$262.2 

$277.2 

Coverage of combined fixed charges and
  preferred dividends


4.08 


3.63 


2.45 


2.27 


1.85 


2.05 



                                                                                                            Exhibit 15


Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C.   20549

Ladies and Gentlemen:

We are aware that our report dated November 9, 2001 on our review of interim financial
information of Potomac Electric Power Company for the period ended September 30, 2001 and
included in the Company's quarterly report on Form 10-Q for the quarter then ended is
incorporated by reference in the Prospectuses constituting parts of the Registration
Statements on Forms S-8 (Numbers 33-36798, 33-53685, 33-54197, 333-56683 and
333-57221) filed on September 12, 1990, May 18, 1994, June 17, 1994, June 12, 1998 and
June 19, 1998, respectively, on Form S-3 (Number 33-58810) filed on February 26, 1993 of
Potomac Electric Power Company and on Form S-4 (Number 333-57042) of New RC, Inc.
filed on March 14, 2001.

Very truly yours,




PricewaterhouseCoopers LLP
Washington, D.C.
November 9, 2001