<PAGE>
RULE 424(B)(5)
REGISTRATION NO. 33-51305
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED DECEMBER 23, 1993
Part of the Allegheny Power System
(LOGO OF ALLEGHENY POWER
SYSTEM, INC. APPEARS HERE)
$75,000,000
The Potomac Edison Company
First Mortgage Bonds, 8% Series Due 2024
------------
The First Mortgage Bonds, 8% Series Due 2024 (the "Offered New Bonds") mature
on June 1, 2024 and will bear interest from June 1, 1994. Interest on the
Offered New Bonds is payable on June 1 and December 1 of each year, commencing
December 1, 1994. The Offered New Bonds will be redeemable on or after June 1,
2004, in whole or in part, at the option of the Company at the regular
redemption prices set forth herein. The Offered New Bonds may also be redeemed
at 100% of their principal amount through trust money. The Offered New Bonds
will be issued only in registered form in denominations of $1,000 and integral
multiples thereof. See "Description of Offered New Bonds."
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR
THE PROSPECTUS TO WHICH IT RELATES. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------
<TABLE>
<CAPTION>
Initial Public Underwriting Proceeds to
Offering Price (1) Discount (2) Company (1) (3)
------------------ ------------ ---------------
<S> <C> <C> <C>
Per Offered New Bond............ 99.194% .333% 98.861%
Total........................... $74,395,500 $249,750 $74,145,750
</TABLE>
- --------
(1) Plus accrued interest from June 1, 1994.
(2) The Company has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933.
(3) Before deducting estimated expenses of $120,327 payable by the Company.
------------
The Offered New Bonds are offered severally by the Underwriters as specified
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that the Offered New Bonds
will be ready for delivery in New York, New York on or about June 22, 1994.
Goldman, Sachs & Co.
Citicorp Securities, Inc.
PaineWebber Incorporated
A.G. Edwards & Sons, Inc.
Pryor, McClendon, Counts & Co., Inc.
------------
The date of this Prospectus Supplement is June 15, 1994.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
USE OF PROCEEDS
The net proceeds from the sale of the Offered New Bonds will be added to the
Company's general funds and will be used to pay or prepay outstanding short-
term debt and for other corporate purposes. As of March 31, 1994, the Company
had outstanding $12,950,000 of short-term debt at an average interest rate of
3.85% per annum and with a maturity of four days.
RECENT DEVELOPMENTS
The Company, Monongahela Power Company and West Penn Power Company
(collectively, the "Operating Subsidiaries") previously reported that the
Environmental Protection Agency ("EPA") had identified them and approximately
875 others as potentially responsible parties ("PRPs") under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"), with respect to the Jack's Creek/Sitkin Smelting Superfund Site
("Site"). Allegheny Power Service Corporation ("APSC"), a wholly-owned
subsidiary of Allegheny Power System, Inc., has also been identified as a PRP
with respect to the Site. The EPA alleges that the Operating Subsidiaries and
APSC sent materials, including wire and other reclaimable items, to the Site in
the mid-1970's. According to the EPA, treatment of these materials caused
contamination of the soil at the Site. Under CERCLA, PRPs may be held liable
for potential EPA response and remediation action at the Site. To date, the EPA
has spent approximately $5,000,000 on studies and response action at the Site.
A Remedial Investigation/Feasibility Study ("RI/FS") was prepared for the Site
by the EPA. Although the remedial alternatives contained in the RI/FS range as
high as $113,000,000, the EPA has not yet selected which remedial alternative
it will use. The Operating Subsidiaries and APSC believe they have defenses to
allegations of liability and intend to vigorously defend this matter. At this
time it is not possible to determine what costs, if any, they may incur.
The Company previously reported that the Consumer Advocate Division of the
West Virginia Public Service Commission, Maryland People's Counsel and
Pennsylvania Office of Consumer Advocate had filed a joint complaint against
Allegheny Generating Company ("AGC") with the Federal Energy Regulatory
Commission ("FERC") challenging AGC's existing return on equity ("ROE"). On
June 2, 1994, the FERC denied AGC's motion to dismiss the complaint, set an
effective date of April 1, 1994 for any refund, and ordered that a public
hearing be held on the complaint.
SELECTED FINANCIAL INFORMATION
The following summary income statement information as to the year ended
December 31, 1993 should be read in conjunction with the audited Financial
Statements contained in the Annual Report for the Company on Form 10-K for the
year ended December 31, 1993. The unaudited summary income statement
information for the twelve months ended March 31, 1994 reflects all adjustments
(which consist only of normal recurring adjustments) which in the Company's
opinion are necessary for a fair presentation of that period.
<TABLE>
<CAPTION>
Year Ended 12 Months Ended
December 31, 1993 March 31, 1994
----------------- ---------------
(Thousands of Dollars)
<S> <C> <C>
Income Statement Data:
Total Operating Revenues.................... $712,585 $743,304
Operating Income............................ 101,716 106,782
Income Before Interest Charges.............. 114,464 119,487
Interest Charges............................ 40,997 40,514
Net Income.................................. 73,467 78,973
Ratio of Earnings to Fixed Charges............ 3.34 3.58
</TABLE>
S-2
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at December
31, 1993 and March 31, 1994, and as adjusted to give effect to the sale of the
Offered New Bonds.
<TABLE>
<CAPTION>
December 31, 1993 March 31, 1994
---------------------- ----------------------
Actual As Adjusted Actual As Adjusted
---------- ----------- ---------- -----------
(Thousands of Dollars) (Thousands of Dollars)
<S> <C> <C> <C> <C>
Common Stock, Other Paid-in
Capital
and Retained Earnings........... $626,467 $626,467 $ 640,201 $ 640,201
Preferred Stock:
Not Subject to Mandatory
Redemption...................... 36,378 36,378 36,378 36,378
Subject to Mandatory Redemption. 26,400 26,400 26,400 26,400
Long-Term Debt................... 517,910 592,056 519,245 593,391
---------- ---------- ---------- ----------
Total Capitalization............ $1,207,155 $1,281,301 $1,222,224 $1,296,370
========== ========== ========== ==========
</TABLE>
CONSTRUCTION AND FINANCING
Construction expenditures by the Company in 1993 amounted to $179 million and
for 1994 and 1995 are expected to aggregate $136 million and $106 million,
respectively. In 1993, these expenditures included $76 million for compliance
with the Clean Air Act Amendments of 1990 ("CAAA"). The 1994 and 1995 estimated
expenditures include $40 million and $10 million, respectively, to cover the
costs of compliance with the CAAA. Allowance for funds used during construction
(shown below) has been reduced for carrying charges on CAAA expenditures that
will be collected in a currently approved surcharge or in base rates.
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(Millions of Dollars)
<S> <C> <C> <C>
Generation............................................. $ 107.5 $ 56.9 $ 29.8
Transmission and Distribution.......................... 66.0 73.4 73.0
Other.................................................. 5.9 5.7 3.6
------- ------- -------
Total................................................ $179.4 $136.0 $106.4
======= ======= =======
Allowance For Funds Used During Construction Included $ 7.1 $ 5.7 $ 2.7
Above..................................................
</TABLE>
DESCRIPTION OF OFFERED NEW BONDS
The following description of the particular terms of the Offered New Bonds
supplements, and to the extent inconsistent therewith replaces, the description
of the general terms and provisions of the Offered New Bonds set forth in the
Prospectus, to which description reference is hereby made.
General
The Offered New Bonds will be limited to $75,000,000 aggregate principal
amount and will mature on June 1, 2024. The Offered New Bonds will bear
interest at the rate per annum shown on the front cover of this Prospectus
Supplement from June 1, 1994 or from the most recent interest payment date to
which interest has been paid or provided for, payable semiannually on June 1
and December 1 of each year, commencing December 1, 1994, to the persons in
whose name the Offered New Bonds (or any predecessor Offered New Bonds) are
registered at the close of business on the last business day which is more than
fourteen days prior to such interest payment date. Principal of and interest on
the Offered New Bonds are payable, and transfers of the Offered New Bonds are
registrable, at the office of the Trustee, Chemical Bank, at 450 West 33rd
Street, New York, New York.
S-3
<PAGE>
Neither the Indenture nor the Supplemental Indenture relating to the Offered
New Bonds contains any covenants or other provisions that are specifically
intended to afford holders of the Offered New Bonds special protection in the
event of a highly leveraged transaction.
Redemption
On or after June 1, 2004, the Offered New Bonds will be redeemable at the
option of the Company, in whole or in part, at any time during the 12-month
period beginning on June 1 in each year, on at least 30 but not more than 60
days' notice, at the percentages of their principal amount set forth below
opposite such year, plus accrued interest.
<TABLE>
<CAPTION>
If redeemed If redeemed
during during
the 12-month the 12-month
period Regular If redeemed during Regular period Regular
beginning Redemption the 12-month period Redemption beginning Redemption
June 1, Price beginning June 1, Price June 1, Price
- ------------ ---------- ------------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
2004......... 103.597% 2008......... 102.158% 2012......... 100.719%
2005......... 103.237 2009......... 101.799 2013......... 100.360
2006......... 102.878 2010......... 101.439 2014 and
2007......... 102.518 2011......... 101.079 thereafter.. 100.00
</TABLE>
The Special Redemption Price is 100% plus accrued interest and applies to
redemptions of the Offered New Bonds with cash deposited in the trust estate
from proceeds of released property, property taken by eminent domain or
insurance. Redemptions of the Offered New Bonds during any 12-month period
beginning April 30 at the Special Redemption Price with cash included in the
trust estate may not exceed the greater of (a) 1% of the principal amount of
such series of the Offered New Bonds originally issued ($750,000) or (b) the
lowest percentage so redeemed of Bonds of any other series then redeemable
during such period relative to the respective aggregate principal amount of
Bonds of such series originally issued.
UNDERWRITING
Subject to the terms and conditions set forth in the Purchase Agreement
relating to the Offered New Bonds, the Company has agreed to sell to each of
the Underwriters named below, and each of the Underwriters has severally agreed
to purchase the principal amount of the Offered New Bonds set forth opposite
its name below:
<TABLE>
<CAPTION>
Principal
Amount of
Offered New
Underwriters Bonds
- ------------ -----------
<S> <C>
Goldman, Sachs & Co................................................. $20,700,000
Citicorp Securities, Inc............................................ 20,650,000
PaineWebber Incorporated............................................ 20,650,000
A.G. Edwards & Sons, Inc............................................ 10,000,000
Pryor, McClendon, Counts & Co., Inc................................. 3,000,000
-----------
Total.............................................................. $75,000,000
===========
</TABLE>
Under the terms and conditions of the Purchase Agreement, the Underwriters
are committed to take and pay for all of the Offered New Bonds, if any are
taken.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the Offered New Bonds in part directly to retail purchasers at
the initial public offering price set forth on the cover page of this
Prospectus Supplement, and in part to certain securities dealers at such price
less a concession not in excess of .25% of the principal amount of the Offered
New Bonds. The Underwriters may allow and such dealers may reallow to certain
brokers and dealers a concession not in excess of .125% of the principal amount
of the Offered New Bonds. After the Offered New Bonds are released for sale to
the public, the offering price and other selling terms may from time to time be
varied by the Underwriters.
S-4
<PAGE>
There is presently no established trading market for the Offered New Bonds,
and the Company does not intend to apply for listing of the Offered New Bonds
on a national securities exchange. The Company has been advised by the
Underwriters that they intend to make a market in the Offered New Bonds, but
are not obligated to do so and may discontinue market-making at any time
without notice. No assurance can be given as to the liquidity of the trading
market for the Offered New Bonds.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
S-5
<PAGE>
First Mortgage Bonds
Preferred Stock
(par value $100)
THE POTOMAC EDISON COMPANY
------------------
The Potomac Edison Company (the "Company") may offer and sell from time to
time in one or more series, or all at one time in one or more series, up to
$270,000,000 aggregate principal amount of its First Mortgage Bonds ("New
Bonds") and up to 150,000 shares of its Preferred Stock (par value $100) ("New
Preferred Stock" and together with the New Bonds, the "Securities") at prices
and on terms to be determined at the time of sale. This Prospectus will be
supplemented by one or more prospectus supplements ("Prospectus Supplement")
which will set forth, in the case of an offering of New Bonds, the aggregate
principal amount, maturity, interest rate (or method of calculating the
interest rate), any redemption provisions, offering price, proceeds to the
Company, and any other specific terms of the particular series of New Bonds
and, in the case of an offering of New Preferred Stock, the specific
designation, number of shares, rate and time of payment of dividends, or manner
of determining such rate and time, offering price, any redemption provisions,
proceeds to the Company, and any other specific terms of the particular series
of the New Preferred Stock. The sale of one series of New Bonds or of one
series of New Preferred Stock will not be contingent upon the sale of any other
series of New Bonds or New Preferred Stock, as the case may be.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-----------
The date of this Prospectus is December 23, 1993.
<PAGE>
AVAILABLE INFORMATION
The Potomac Edison Company (the "Company"), 10435 Downsville Pike,
Hagerstown, Maryland 21740-1766 (tel. 301-790-3400), is subject to the
informational requirements of the Securities Exchange Act of 1934 and in
accordance therewith files reports and other information with the Securities
and Exchange Commission (the "Commission"). Such reports and other information
filed by the Company can be inspected at the public reference facilities of the
Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549; Suite 1400, Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661; and Room 1400, 7 World Trade Center, 13th Floor, New
York, New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission at prescribed rates. Requests should be
directed to the Commission's Public Reference Section, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Certain securities of
the Company are listed on the Philadelphia Stock Exchange, and reports and
other information concerning the Company can be inspected at the offices of
such Exchange.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Commission pursuant to the Securities Exchange Act of 1934, are hereby
incorporated by reference in this Prospectus:
(i) The Annual Report of the Company on Form 10-K for the year ended
December 31, 1992 as amended by the Company's Form 8 filed on March 1,
1993 (the "Annual Report");
(ii) The Quarterly Reports of the Company on Form 10-Q for the quarters
ended March 31, 1993, June 30, 1993 and September 30, 1993; and
(iii) The Current Reports of the Company on Form 8-K filed on February 17,
1993 and March 30, 1993.
All documents filed by the Company pursuant to Section 13, 14 or 15(d) of the
Securities Exchange Act of 1934 after the date of this Prospectus and prior to
the termination of the offering of the Securities offered hereby shall be
deemed to be incorporated in this Prospectus by reference and to be a part
hereof from the date of filing of such documents. Any statement contained in a
document, incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any subsequently filed document
which also is or is deemed to be incorporated by reference herein or in
accompanying Prospectus Supplements modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as modified or
superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, on the written or oral
request of any such person, a copy of any or all of the documents referred to
above which have been or may be incorporated by reference in this Prospectus,
other than exhibits to such documents. Requests for such copies should be
directed to: The Potomac Edison Company, 10435 Downsville Pike, Hagerstown,
Maryland 21740-1766, Attention: Mr. Dale F. Zimmerman, Secretary and Treasurer
(tel. 301-790-6240).
2
<PAGE>
THE COMPANY
The Company, incorporated in Maryland in 1923 and in Virginia in 1974, is an
electric utility operating in portions of Maryland, Virginia and West Virginia.
It also owns generating capacity in Pennsylvania. The Company is a wholly-owned
subsidiary of Allegheny Power System, Inc. and, together with Monongahela Power
Company ("Monongahela"), West Penn Power Company ("West Penn") and Allegheny
Generating Company ("AGC") (the "affiliates"), makes up the Allegheny Power
integrated electric utility system (the "System"). The Company owns 28% of the
common stock of AGC, and Monongahela and West Penn own the remainder of AGC's
common stock. AGC owns an undivided 40% interest (840 MW) in a pumped-storage
hydroelectric station in Bath County, Virginia, which is operated by an
unaffiliated company.
SELECTED INFORMATION
The following selected information is qualified in its entirety by the
detailed information appearing elsewhere in this Prospectus and by the
information and financial statements (including the notes thereto) appearing in
the documents incorporated in this Prospectus by reference.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
Twelve Months
Ended
September 30, 1993 1992 1991 1990 1989 1988
------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Generating capability at
end of period (KW in
Thousands):
Company-owned:
Coal-fired............ 1,831 1,831 1,831 1,831 1,814 1,814
Pumped-storage (a).... 235 235 235 235 235 235
Hydro................. 10 10 11 10 10 10
Maximum hour peak demand
(KW in Thousands)...... 2,233 1,987 1,915 1,930 2,124 1,864
Sales (KWh in Millions):
Retail Customers....... 11,331 10,755 10,549 10,309 10,108 9,799
Nonaffiliated utilities
(b)................... 4,261 5,394 5,649 6,818 7,312 6,778
Other, including
affiliates (b)....... 654 617 615 594 599 590
Customers (at end of
period)............... 351,894 346,740 338,870 332,006 322,105 311,488
</TABLE>
- ------
(a) Capacity entitlement through percentage ownership of AGC.
(b) Amounts for periods prior to 1991 have been reclassified for comparative
purposes to reflect a change in a Federal Energy Regulatory Commission
classification.
CAPITALIZATION
<TABLE>
<CAPTION>
September 30, 1993
------------------------
Amount Percent
------ -------
(Thousands of Dollars)
<S> <C> <C>
Common Stock, Other Paid-in Capital, and Retained
Earnings $ 581,208 50.3%
Preferred Stock:
Not Subject to Mandatory Redemption................ 36,378 3.1
Subject to Mandatory Redemption.................... 26,400 2.3
Long-Term Debt....................................... 512,365 44.3
------------- --------
Total Capitalization............................. $1,156,351 100.0%
============= ========
</TABLE>
3
<PAGE>
INCOME STATEMENT SUMMARY
The following summary income information as to the years ended December 31,
1988 through 1992 should be read in conjunction with the audited Financial
Statements contained in the Annual Report. The unaudited income information for
the twelve months ended September 30, 1993 reflects all adjustments (which
consist only of normal recurring adjustments) which in the Company's opinion
are necessary for a fair presentation of that period.
<TABLE>
<CAPTION>
Twelve Months Years Ended December 31,
Ended --------------------------------------------
September 30, 1993 1992 1991 1990 1989 1988
------------------ ---- ---- ---- ---- ----
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Total Operating
Revenues*............. $710,421 $687,887 $674,077 $697,544 $690,418 $650,157
Operating Income....... 102,035 92,148 82,113 80,757 85,300 83,465
Income Before Interest
Charges............... 115,516 104,704 93,587 93,286 97,398 95,618
Interest Charges....... 40,063 37,228 35,346 31,706 27,720 27,106
Net Income............. 75,453 67,476 58,241 61,580 69,678 68,512
Ratio of Earnings to
Fixed Charges.......... 3.45 3.40 3.20 3.56 4.26 4.33
Ratio of Earnings to
Fixed Charges and
Preferred Stock
Dividend Requirements.. 3.01 2.80 2.57 2.81 3.27 3.30
</TABLE>
- ------
* Amounts for periods prior to 1991 have been reclassified for comparative
purposes to reflect a change in a Federal Energy Regulatory Commission
classification.
USE OF PROCEEDS
The net proceeds from the sale of the Securities will be added to the
Company's general funds and, together with other funds available to the
Company, will be used to pay or prepay, to the extent desirable, debt, to
redeem outstanding bonds and preferred stock, and for other corporate purposes,
including the financing of the Company's construction program.
CONSTRUCTION AND FINANCING
Construction expenditures by the Company in 1992 amounted to $153 million and
for 1993 and 1994 are expected to aggregate $181 million and $129 million,
respectively. In 1992, these expenditures included $68 million for
environmental protection, of which $57 million was for compliance with the
Clean Air Act Amendment of 1990 (the "CAAA"). The 1993 and 1994 estimated
expenditures include $97 million and $43 million, respectively, for
environmental protection, of which $85 million and $28 million, respectively,
are to cover costs of compliance with the CAAA. Allowance for funds used during
construction (shown below) has been reduced for carrying charges on CAAA
expenditures which are currently included in rates.
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
(Millions of Dollars)
<S> <C> <C> <C>
Generation.......................................... $85.2 $111.7 $49.0
Transmission and Distribution....................... 61.9 62.7 77.0
Other............................................... 6.4 6.5 3.4
------- ------- -------
Total............................................. $153.5 $180.9 $129.4
======= ======= =======
Allowance for Funds used During Construction
included above.................................... $5.4 $6.4 $5.3
</TABLE>
4
<PAGE>
In connection with its construction program, the Company must make estimates
of the availability and cost of capital as well as the future demands of its
customers that are necessarily subject to regional, national, and international
developments, changing business conditions, and other factors. The construction
of facilities and their cost are affected by laws and regulations, lead times
in manufacturing, availability of labor, materials and supplies, inflation,
interest rates, and licensing, rate environmental and other proceedings before
regulatory authorities. As a result, the Company's future construction plans,
as well as its projected ownership of future generating stations are subject to
continuing review and substantial change.
The Company has financed its construction program through internally
generated funds, first mortgage bond and preferred stock issues, pollution
control and solid waste disposal bonds, instalment loans, long-term lease
arrangements, equity investments by its parent, and, where necessary, interim
short-term debt. The future ability of the Company to finance its construction
program by these means depends on many factors, including rate levels
sufficient to provide internally generated funds and adequate revenues to
produce a satisfactory return on the common equity portion of the Company's
capital structure and to support the issuance of senior securities.
DESCRIPTION OF THE NEW BONDS
General
The New Bonds are to be issued under an Indenture, dated as of October 1,
1944, between the Company and Chemical Bank and Thomas J. Foley, as Trustees,
as supplemented and as to be supplemented as is necessary to create any series
of New Bonds (collectively, the "Indenture"). Chemical Bank is a depositary of
funds of, dividend paying agent, transfer agent and registrar for, and a lender
to, the Company and its affiliates.
The statements under this caption relating to the New Bonds and the Indenture
are summaries and do not purport to be complete. They make use of terms defined
in the Indenture and are qualified in their entirety by express reference to
the Indenture, the form of which is filed as an exhibit to the Registration
Statement.
Reference is made to the Prospectus Supplement relating to the particular New
Bonds offered thereby (the "Offered New Bonds") for the terms of the Offered
New Bonds, including dates of maturity, the rates of interest, and the prices
at which, the periods within which, and the terms and conditions upon which the
Offered New Bonds may, pursuant to any optional or mandatory redemption
provisions, be redeemed by the Company.
Unless otherwise indicated in the Prospectus Supplement relating thereto, the
Offered New Bonds are to be issued as registered securities without coupons in
denominations of $1,000 or any integral multiple of $1,000. They will be
transferable and exchangeable without charge except for governmental charges,
if any.
The Indenture does not contain any covenants or other provisions that are
specifically intended to afford holders of the New Bonds special protection in
the event of a highly leveraged transaction.
Renewal and Replacement Fund
So long as Bonds of any series issued under the Indenture prior to December
16, 1992 ("Prior Bonds") are outstanding, the Company will, on or before April
30 in each year, pay to the Trustee in cash or Bonds an amount equal to 2 1/4%
of the average amount of Depreciable Property of the Company during the
preceding year less certain property additions and Bonds retired or to be
retired. Cash deposited may be used to acquire Prior Bonds or be withdrawn
against Prior Bonds or gross property additions. Excess credits may be used in
any subsequent year. The Company has reserved the right to change the 2 1/4%
with the approval of the Commission.
Security
The New Bonds will be equally and ratably secured, together with all other
Bonds now or hereafter issued, by a direct first lien on all the fixed
properties and franchises now or hereafter owned by the Company.
5
<PAGE>
The lien is subject to statutory liens and equitable priorities for taxes and
other permitted liens and encumbrances and, as to certain after-acquired
property, to pre-existing liens and encumbrances, and to rights of others which
may attach prior to recordation of a supplemental indenture specifically
mortgaging the property. There are excepted from the lien all bills, notes,
accounts receivable, cash, agreements, unpledged securities, materials and
supplies and certain other assets.
ISSUANCE OF ADDITIONAL BONDS
Additional Bonds of any series may be issued in an amount equal to (1) 60% of
the net bondable value (such value being estimated to be in excess of $644
million as of September 30, 1993) of property additions not subject to an
unfunded prior lien, (2) certain Bonds retired or to be retired and (3) cash
deposited with the Trustee; but (except as to additional Bonds which are issued
to refund Bonds within two years of their maturity) only if net earnings of the
Company available for interest (in 12 out of the 15 preceding months), after a
provision for depreciation (at the higher of (i) 2 1/4% of Depreciable Property
or (ii) book depreciation) but before income taxes, are at least twice the
annual interest charges on all Bonds and prior lien bonds then outstanding or
applied for. Cash deposited for an issue of Bonds may be withdrawn in an amount
equal to either 60% of net bondable value of property additions not subject to
a prior lien or the aggregate principal amount of certain Bonds retired or to
be retired and such property additions or Bonds may not thereafter be used as a
basis to issue additional Bonds.
Additional prior lien bonds secured by an unfunded prior lien may be issued
under the prior lien, within the same limits as those applicable to the issue
of additional Bonds, on the basis of additions subject to such lien acquired
after the first acquisition of property subject thereto, the retirement of
prior lien bonds or the deposit of cash.
The Company expects that the New Bonds will be issued on the basis of
property additions, cash or Bonds retired or to be retired.
MODIFICATION
With the consent of the Company and the holders of 75% in amount of the Bonds
outstanding and (if less than all series are affected) 75% in amount of each
affected series, the Indenture and the rights of the Bondholders may be changed
in any way except to affect the terms of payment of principal or interest or to
reduce said percentage.
DEFAULTS
Failure to pay principal, or, for specified periods, to pay interest or meet
other Indenture requirements constitutes an event of default. A majority of the
Bondholders may direct the time, method and place of exercising any power
conferred upon the Trustees, but the Trustees, subject during default to the
required standard of care, are first entitled to security or indemnity
satisfactory to them. Periodic evidence as to general compliance with the
Indenture is not required to be furnished unless prescribed by the Commission
under the Trust Indenture Act of 1939, but certificates as to compliance with
certain provisions are required to be furnished annually and in connection with
action to be taken by the Trustees at the Company's request.
DESCRIPTION OF THE NEW PREFERRED STOCK
The authorized preferred stock of the Company consists of 5,400,046 shares of
cumulative preferred stock, par value $100 (the "Preferred Stock"), of which
639,784 shares were issued and outstanding as of September 30, 1993 as shares
of various series heretofore established. The statements herein concerning the
New Preferred Stock are brief summaries of the relative rights and preferences
of the Preferred Stock. They make use of terms defined in the Company's
charter, as amended, do not purport to be complete, and are qualified in their
entirety by reference to such charter, which has been filed as an exhibit to
the Registration Statement of which this Prospectus is a part.
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As set forth below, particular series of the New Preferred Stock may differ
with respect to designation, liquidation preference per share, sinking fund
provisions, if any, amount and method of determining the rate of dividends and
redemption terms, among other things.
Reference is made to the Prospectus Supplement relating to the particular
series of New Preferred Stock offered thereby (the "Offered New Preferred
Stock") for the specific terms of the Offered New Preferred Stock, including
the dividend rate (or, if the rate is not fixed, the method of determining the
dividend rate), the liquidation preference per share, any provisions for
redemption (including by way of sinking fund) and other terms of the Offered
New Preferred Stock.
General
The Company's charter provides that the Company's Preferred Stock may be
divided into and issued in series. The New Preferred Stock will constitute one
or more new series of the Company's Preferred Stock. All shares of Preferred
Stock are of equal rank. The charter provides that all of the shares of
Preferred Stock shall be identical in all respects, except as to the
designation thereof and except that each series may vary, as fixed and
determined by the Board of Directors of the Company at the time of its
creation and expressed in a resolution, as to (a) the annual dividend rate and
the date from which dividends in such series shall be cumulative, (b) the
price at which, and the terms and conditions on which, such shares may be
redeemed, (c) the amounts payable upon shares in the event of voluntary or
involuntary liquidation, (d) the terms and conditions, if any, on which shares
may be converted and (e) any other preferences, rights, voting powers,
restrictions or qualifications of shares of such series.
Dividends
The holders of each series of the New Preferred Stock shall be entitled to
receive, in preference to any class of stock ranking junior to the Preferred
Stock, as and when declared by the Board of Directors of the Company out of
funds legally available therefor, cumulative cash dividends at the rate for
such series determined in accordance with the charter at the time of creation
of such series. The New Preferred Stock will rank on parity, as to dividends,
with all series of Preferred Stock. No dividend shall be paid upon, or
declared or set apart for, any share of Preferred Stock for any quarterly
dividend period unless at the same time a like proportionate dividend for the
same quarterly dividend period, ratably in proportion to the respective annual
dividend rates fixed therefor, shall be paid upon, or declared and set apart
for, all shares of Preferred Stock of all series then issued and outstanding
and entitled to receive such dividend.
If any dividends are in arrears on the Preferred Stock, the Company may not
acquire (for a sinking fund or otherwise) any shares thereof (except by
redemption of all) without prior approval of the Commission under the Public
Utility Holding Company Act of 1935.
The Company's charter provides that so long as any shares of Preferred Stock
are outstanding, the Company shall not declare any dividends or make any
distributions in respect of outstanding shares of any stock of the Company
ranking junior to the Preferred Stock as to dividends or assets (the "junior
stock"), other than dividends in shares of junior stock, or purchase or
otherwise acquire for value any outstanding shares of junior stock (each such
dividend, distribution, purchase or acquisition being called a "dividend") in
contravention of the following:
(a) If and so long as the junior stock equity, as defined, at the end of
the calendar month immediately preceding the date on which a dividend
on the junior stock is declared is, or as a result of the dividend
would become, less than 20% of total consolidated capitalization, as
defined, the Company shall not declare such dividends in an amount
which, together with all other dividends on the junior stock paid
within the year ending with and including the date on which such
dividend is payable, exceeds 50% of the consolidated net income of the
Company and its subsidiaries available for dividends on the junior
stock for the 12 full calendar months immediately preceding the
calendar month in which such dividends are declared, except in an
amount not exceeding the aggregate of dividends which under the
restriction set forth above could have been, and have not been,
declared; and
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<PAGE>
(b) If and so long as the junior stock equity, as defined, at the end of
the calendar month immediately preceding the date on which a dividend
on the junior stock is declared is, or as a result of the dividend
would become, less than 25% but not less than 20% of total consolidated
capitalization, as defined, the Company shall not declare dividends on
the junior stock in an amount which, together with all other dividends
on the junior stock paid within the year ending with and including the
date on which such dividend is payable, exceeds 75% of the consolidated
net income of the Company and its subsidiaries available for dividends
on the junior stock for 12 full calendar months immediately preceding
the calendar month in which such dividends are declared, except in an
amount not exceeding the aggregate of dividends on junior stock which
under the restriction above under (a) and in this paragraph could have
been, and have not been, declared.
Liquidation Rights
In the event of any voluntary or involuntary dissolution, liquidation or
winding up of the Company, each series of Preferred Stock, pari passu with each
other, shall have preference over any class of stock ranking junior to the
Preferred Stock until an amount equal to the amount per share determined in
accordance with the charter provisions, plus accrued dividends, shall have been
paid. Neither the consolidation or merger of the Company nor the sale or
transfer of all or part of its assets shall be deemed a liquidation,
dissolution or winding up of the affairs of the Company.
Voting Rights
The Preferred Stock has no voting rights except as indicated below or as
required by law.
If dividends on any of the Preferred Stock are in default in an amount
equivalent to four or more full quarterly dividends, and until all such
dividends in arrears have been paid, the Preferred Stock, voting as a class,
shall be entitled to elect a majority of the Board of Directors. In such case,
each share is entitled to one vote for each director to be elected by the
Preferred Stock, which votes may be cast cumulatively.
A consent of two-thirds of the holders of outstanding shares of the Preferred
Stock, voting as a class, is required to:
(1) change the charter to adversely affect the powers, preferences or rights
of the Preferred Stock (the vote being by the series adversely affected, voting
as a class, if less than all series are adversely affected), but a change in
the authorized amount of the Preferred Stock or the creation, or change in the
amount, of any new class of stock ranking on a parity as to dividends or assets
(hereinafter referred to as "equal rank") or any class of stock ranking junior
to the Preferred Stock or any security convertible into such stock or into
Preferred Stock shall not be deemed to be adverse; or
(2) authorize or create, or increase the authorized amount of, or issue more
than 12 months after such authorization or creation, any prior ranking stock.
A consent of the holders of a majority of the outstanding shares of Preferred
Stock, voting as a class, is required to:
(1) issue or assume any securities representing unsecured debt (except to
refund unsecured debt or retire all outstanding shares of Preferred Stock) if
all unsecured debt to be outstanding would exceed 20%, or all such debt with
maturities of less than 10 years to be outstanding would exceed 10%, of secured
indebtedness, capital and surplus;
(2) issue any additional or reacquired shares of Preferred Stock or stock of
equal rank (except to refinance an equal par amount of Preferred Stock or stock
of equal or prior rank) unless annual interest charges on
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<PAGE>
indebtedness of the Company and its subsidiaries to be outstanding after the
issuance and annual dividend requirements of all Preferred Stock and stock of
equal or prior rank to be outstanding after the issuance are covered 1 1/2
times by consolidated gross income (after all taxes) for 12 consecutive
calendar months within the 15 preceding calendar months and unless aggregate
capital applicable to junior stock equity, as defined, is not less than the
aggregate amount payable on involuntary liquidation on all Preferred Stock and
stock of equal or prior rank to be outstanding; or
(3) dispose of substantially all of the Company's assets or merge or
consolidate (i) except with the approval of the Commission under the Public
Utility Holding Company Act of 1935, or (ii) with or to a subsidiary of the
Company, if the Preferred Stock is not adversely affected thereby and if other
conditions are met.
Other Rights
There are no preemptive, subscription or conversion rights for the New
Preferred Stock.
Transfer Agent and Registrar
The transfer agent and the registrar for the Preferred Stock is Chemical
Bank, New York, N.Y.
PLAN OF DISTRIBUTION
The Company will sell the Securities from time to time through underwriters
or dealers in either negotiated or competitively bid transactions. Any
Securities acquired by any underwriters will be acquired by such underwriters
for their own account and may be resold from time to time in one or more
transactions, including negotiated transactions, at a fixed public offering
price or at varying prices determined at the time of sale. The underwriter or
underwriters with respect to a particular underwritten offering of New Bonds or
New Preferred Stock will be named in the Prospectus Supplement relating to such
offering and, if an underwriting syndicate is used, the managing underwriter or
underwriters will be set forth on the cover page of such Prospectus Supplement.
The applicable Prospectus Supplement will also set forth the purchase price of
the New Bonds or New Preferred Stock offered and the proceeds to the Company
from such sale, any underwriting discounts and other items constituting
underwriters' compensation, any initial public offering price and any discounts
or concessions allowed or reallowed or paid to dealers and other specific terms
of the particular Securities.
Unless otherwise set forth in the Prospectus Supplement, the obligations of
the underwriters to purchase any Securities will be subject to certain
conditions precedent, and the underwriters will be obligated to purchase all of
the particular Securities offered thereby if any are purchased. Underwriters
and dealers may be entitled, under agreements to be entered into with the
Company, to indemnification against certain civil liabilities, including
liabilities under the Securities Act of 1933.
EXPERTS
The consolidated financial statements incorporated in this Prospectus by
reference to the Annual Report have been so incorporated in reliance on the
reports of Price Waterhouse, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
VALIDITY OF THE SECURITIES
The validity of the Securities offered hereby will be passed upon for the
Company by Sullivan & Cromwell, New York, New York. Certain legal matters in
connection with the Securities will be passed upon for the Underwriters by
Cahill Gordon & Reindel, a partnership including a professional corporation,
New York, New York. On matters of local law, those firms will rely on Robert B.
Murdock, Esq., Vice President, Legal Services of the Company.
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No person has been authorized to give any information or to make any represen-
tations other than those contained in this Prospectus Supplement or the Pro-
spectus and, if given or made, such information or representation must not be
relied upon as having been authorized. This Prospectus Supplement and the Pro-
spectus do not constitute an offer to sell or a solicitation of an offer to
buy any securities other than the securities offered by this Prospectus Sup-
plement and the Prospectus or an offer to sell or a solicitation of an offer
to buy such securities in any jurisdiction to any person to whom it is unlaw-
ful to make such offer or solicitation in such jurisdiction. Neither the de-
livery of this Prospectus Supplement and the Prospectus nor any sale made
thereunder shall, under any circumstances, create any implication that there
has been no change in the affairs of The Potomac Edison Company since the date
of this Prospectus Supplement or the Prospectus, or that the information
herein or therein is correct as of any time since such date.
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TABLE OF CONTENTS
Prospectus Supplement
Page
Use of Proceeds.............................................................S-2
Recent Developments.........................................................S-2
Selected Financial Information..............................................S-2
Capitalization..............................................................S-3
Construction and Financing..................................................S-3
Description of Offered New Bonds............................................S-3
Underwriting ...............................................................S-4
Prospectus
Available Information........................................................ 2
Incorporation of Certain Documents by Reference.............................. 2
The Company.................................................................. 3
Selected Information......................................................... 3
Capitalization............................................................... 3
Income Statement Summary..................................................... 4
Use of Proceeds.............................................................. 4
Construction and Financing................................................... 4
Description of the New Bonds................................................. 5
Description of the New Preferred Stock....................................... 6
Plan of Distribution......................................................... 9
Experts...................................................................... 9
Validity of the Securities................................................... 9
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$75,000,000
The Potomac
Edison Company
First Mortgage Bonds,
8% Series Due 2024
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PROSPECTUS SUPPLEMENT
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Goldman, Sachs & Co.
Citicorp Securities, Inc.
PaineWebber Incorporated
A.G. Edwards & Sons, Inc.
Pryor, McClendon, Counts & Co., Inc.
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