UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1995
-------------
Commission file number 1-1072
------
Potomac Electric Power Company
- ----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
District of Columbia and Virginia 53-0127880
- ----------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 Pennsylvania Avenue, N.W., Washington, D.C. 20068
- ----------------------------------------------------------------
(Address of principal executive office) (Zip Code)
(202) 872-2456
- ----------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for the past
90 days. Yes /X/. No / /.
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Class Outstanding at June 30, 1995
- ------------------------------- ----------------------------
Common Stock, $1 par value 118,485,727
TABLE OF CONTENTS
PART I - Financial Information Page
Item 1 - Consolidated Financial Statements
Consolidated Statements of Earnings and Retained Income.. 2
Consolidated Balance Sheets.............................. 3
Consolidated Statements of Cash Flows.................... 4
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies......... 5
(2) Income Taxes....................................... 9
(3) Capitalization..................................... 12
(4) Fair Value of Financial Instruments................ 15
(5) Marketable Securities.............................. 17
(6) Commitments and Contingencies...................... 19
Report of Independent Accountants on Review of Interim
Financial Information.................................... 23
Item 2 - Management's Discussion and Analysis of Consolidated
Results of Operations and Financial Condition
Utility
Results of Operations.................................. 24
Capital Resources and Liquidity........................ 27
The Cove Point Joint Venture........................... 28
Joint Venture for Wireless Data Communication
Network and New Energy Services Subsidiary Formed.... 28
Nonutility Subsidiary
Results of Operations.................................. 28
Capital Resources and Liquidity........................ 34
PART II - Other Information
Item 1 - Legal Proceedings................................. 35
Item 5 - Other Information
Other Financing Arrangements............................. 35
Base Rate Proceedings.................................... 35
Peak Load, Sales, Conservation and Construction and
Generating Capacity.................................... 38
Selected Nonutility Subsidiary Financial Information..... 41
Statistical Data......................................... 43
Item 6 - Exhibits and Reports on Form 8-K.................. 44
Signatures................................................. 45
Computation of Earnings Per Common Share................... 46
Computation of Ratios - Parent Company Only................ 47
Computation of Ratios - Fully Consolidated................. 48
Independent Accountants Awareness Letter................... 49
1
<TABLE>
Part I FINANCIAL INFORMATION
- ------ ---------------------
Item 1 CONSOLIDATED FINANCIAL STATEMENTS
- ------ ---------------------------------
POTOMAC ELECTRIC POWER COMPANY
Consolidated Statements of Earnings and Retained Income
(Unaudited)
-------------------------------------------------------
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
-------------------- -------------------- ----------------------
1995 1994 1995 1994 1995 1994
--------- --------- --------- --------- ---------- -----------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Revenue
Sales of electricity $ 438,842 $ 456,933 $ 800,013 $ 829,528 $1,753,550 $1,781,177
Other electric revenue 1,613 1,498 3,875 3,813 7,597 7,218
--------- --------- --------- --------- ---------- ----------
Total Operating Revenue 440,455 458,431 803,888 833,341 1,761,147 1,788,395
Interchange deliveries 4,904 9,020 6,380 27,154 11,700 38,157
--------- --------- --------- --------- ---------- ----------
Total Revenue 445,359 467,451 810,268 860,495 1,772,847 1,826,552
--------- --------- --------- --------- ---------- ----------
Operating Expenses
Fuel 69,630 103,859 153,171 216,991 328,910 400,673
Purchased energy 45,390 32,567 88,029 71,899 189,514 171,448
Capacity purchase payments 32,085 31,839 64,546 64,398 127,970 112,491
Other operation 53,198 46,765 111,434 99,044 218,495 208,660
Maintenance 21,046 21,318 43,873 45,538 90,949 95,881
--------- --------- --------- --------- ---------- ----------
Total Operation and Maintenance 221,349 236,348 461,053 497,870 955,838 989,153
Depreciation and amortization 48,433 42,793 96,093 85,490 190,590 169,710
Income taxes 34,815 40,224 34,394 44,197 110,056 126,937
Other taxes 49,523 51,074 96,671 98,590 204,162 205,260
--------- --------- --------- --------- ---------- ----------
Total Operating Expenses 354,120 370,439 688,211 726,147 1,460,646 1,491,060
--------- --------- --------- --------- ---------- ----------
Operating Income 91,239 97,012 122,057 134,348 312,201 335,492
--------- --------- --------- --------- ---------- ----------
Other Income
Nonutility Subsidiary
Income 32,666 34,042 66,551 67,051 146,506 148,230
Loss on assets held for disposal (170,078) - (170,078) - (170,078) -
Expenses, including interest
and income taxes 21,913 (33,905) (16,346) (64,709) (79,554) (142,267)
--------- --------- --------- --------- ---------- ----------
Net (loss) earnings from nonutility
subsidiary (115,499) 137 (119,873) 2,342 (103,126) 5,963
Allowance for other funds
used during construction 362 2,786 717 6,006 3,834 11,938
Other, net 2,545 (4,346) 5,435 (1,518) 10,998 4,827
--------- --------- --------- --------- ---------- ----------
Total Other (Loss) Income (112,592) (1,423) (113,721) 6,830 (88,294) 22,728
--------- --------- --------- --------- ---------- ----------
(Loss) Income Before Utility Interest Charges (21,353) 95,589 8,336 141,178 223,907 358,220
--------- --------- --------- --------- ---------- ----------
Utility Interest Charges
Long-term debt 32,353 31,352 64,659 62,838 129,222 129,503
Other 5,146 3,395 8,445 5,663 14,591 8,912
Allowance for borrowed funds
used during construction (2,014) (3,451) (3,958) (6,030) (7,552) (10,414)
--------- --------- --------- --------- ---------- ----------
Net Utility Interest Charges 35,485 31,296 69,146 62,471 136,261 128,001
--------- --------- --------- --------- ---------- ----------
Net (Loss) Income (56,838) 64,293 (60,810) 78,707 87,646 230,219
Dividends on Preferred Stock 4,234 4,069 8,475 8,215 16,697 16,307
--------- --------- --------- --------- ---------- ----------
(Loss) Earnings for Common Stock (61,072) 60,224 (69,285) 70,492 70,949 213,912
Retained Income at Beginning of Period 785,792 797,728 830,524 839,433 800,385 791,862
Dividends on Common Stock (49,118) (48,907) (98,164) (97,802) (196,116) (193,649)
Subsidiary Marketable Securities Net
Unrealized Gain (Loss), Net of Tax 13,873 (8,660) 26,400 (11,738) 14,257 (11,740)
--------- --------- --------- --------- ---------- ----------
Retained Income at End of Period $ 689,475 $ 800,385 $ 689,475 $ 800,385 $ 689,475 $ 800,385
========= ========= ========= ========= ========== ==========
Average Common Shares
Outstanding (000's) 118,415 117,946 118,333 117,911 118,215 117,249
(Loss) Earnings Per Common Share ($0.52) $0.51 ($0.59) $0.60 $0.60 $1.82
Cash Dividends Per Common Share $0.415 $0.415 $0.83 $0.83 $1.66 $1.65
Book Value Per Share $15.35 $16.28
Dividend Payout Ratio 276.7% 90.7%
Effective Federal Income Tax Rate 16.6% 27.7%
2
</TABLE>
<TABLE>
POTOMAC ELECTRIC POWER COMPANY
Consolidated Balance Sheets
(Unaudited at June 30, 1995 and 1994)
------------------------------------------
<CAPTION>
June 30, December 31, June 30,
ASSETS 1995 1994 1994
------ ------------- ------------- -------------
(Thousands of Dollars)
<S> <C> <C> <C>
Property and Plant - at original cost
Electric plant in service $ 5,885,859 $ 5,765,210 $ 5,498,340
Construction work in progress 118,233 147,224 293,888
Electric plant held for future use 4,041 18,041 20,468
Nonoperating property 22,629 7,556 7,542
------------- ------------- -------------
6,030,762 5,938,031 5,820,238
Accumulated depreciation (1,687,219) (1,639,771) (1,589,965)
------------- ------------- -------------
Net Property and Plant 4,343,543 4,298,260 4,230,273
------------- ------------- -------------
Current Assets
Cash and cash equivalents 20,182 7,198 11,066
Customer accounts receivable, less allowance
for uncollectible accounts of $1,950, $2,432
and $2,740 138,591 107,351 150,168
Other accounts receivable, less allowance for
uncollectible accounts of $300 29,705 57,128 28,024
Accrued unbilled revenue 112,459 67,543 125,413
Prepaid taxes 2,833 34,352 1,388
Other prepaid expenses 9,783 5,448 12,415
Material and supplies - at average cost
Fuel 67,207 73,671 63,381
Construction and maintenance 73,904 72,447 71,073
------------- ------------- -------------
Total Current Assets 454,664 425,138 462,928
------------- ------------- -------------
Deferred Charges
Income taxes recoverable through future rates, net 241,376 251,357 248,918
Conservation costs, net 211,246 161,204 116,343
Unamortized debt reacquisition costs 55,430 56,725 58,056
Other 120,109 98,783 95,603
------------- ------------- -------------
Total Deferred Charges 628,161 568,069 518,920
------------- ------------- -------------
Nonutility Subsidiary Assets
Cash and cash equivalents 14,107 - 1,417
Marketable securities 514,159 473,608 499,360
Investment in finance leases 394,948 410,327 355,027
Operating lease equipment, net of accumulated
depreciation of $60,643, $116,832 and $101,187 241,481 544,064 551,534
Assets held for disposal 104,370 - -
Receivables, less allowance for uncollectible
accounts of $5,000, $5,000 and $0 75,698 76,426 71,991
Other investments 131,723 147,313 159,716
Other assets 17,354 22,551 19,115
------------- ------------- -------------
Total Nonutility Subsidiary Assets 1,493,840 1,674,289 1,658,160
------------- ------------- -------------
Total Assets $ 6,920,208 $ 6,965,756 $ 6,870,281
============= ============= =============
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization
Common stock $ 118,486 $ 118,248 $ 118,046
Other common equity 1,700,068 1,837,050 1,803,605
Serial preferred stock 125,401 125,409 125,427
Redeemable serial preferred stock 143,485 143,563 145,153
Long-term debt 1,703,370 1,723,399 1,767,754
------------- ------------- -------------
Total Capitalization 3,790,810 3,947,669 3,959,985
------------- ------------- -------------
Other Non-Current Liabilities
Capital lease obligation 135,854 136,723 -
------------- ------------- -------------
Total Other Non-Current Liabilities 135,854 136,723 -
------------- ------------- -------------
Current Liabilities
Long-term debt due within one year 65,000 45,445 17,000
Short-term debt 354,000 189,600 292,825
Accounts payable and accrued expenses 162,229 175,258 179,383
Capital lease obligation due within one year 15,233 15,233 -
Other 108,935 107,405 114,546
------------- ------------- -------------
Total Current Liabilities 705,397 532,941 603,754
------------- ------------- -------------
Deferred Credits
Income taxes 863,302 848,456 816,154
Investment tax credits 66,432 68,256 70,081
Other 31,430 31,766 33,029
------------- ------------- -------------
Total Deferred Credits 961,164 948,478 919,264
------------- ------------- -------------
Nonutility Subsidiary Liabilities
Long-term debt 1,038,053 1,140,505 1,152,600
Short-term notes payable 136,000 48,400 27,850
Deferred taxes and other 152,930 211,040 206,828
------------- ------------- -------------
Total Nonutility Subsidiary Liabilities 1,326,983 1,399,945 1,387,278
------------- ------------- -------------
Total Capitalization and Liabilities $ 6,920,208 $ 6,965,756 $ 6,870,281
============= ============= =============
3
</TABLE>
<TABLE>
POTOMAC ELECTRIC POWER COMPANY
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------
<CAPTION>
Six Months Ended Twelve Months Ended
June 30, June 30,
----------------------- -----------------------
1995 1994 1995 1994
--------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating Activities
Income from utility operations $ 59,063 $ 76,365 $ 190,772 $ 224,256
Adjustments to reconcile income to net
cash from operating activities:
Depreciation and amortization 96,093 85,490 190,590 169,710
Deferred income taxes and investment tax credits 19,758 20,704 43,695 38,085
Allowance for funds used during construction (4,675) (12,036) (11,386) (22,352)
Changes in materials and supplies 5,007 (2,219) (6,657) 24,554
Changes in accounts receivable and accrued unbilled revenue (48,733) (77,681) 22,850 (33,205)
Changes in accounts payable (18,919) (4,924) (5,738) (2,074)
Changes in other current assets and liabilities 37,265 40,106 (9,601) 2,281
Changes in deferred conservation costs (62,095) (35,952) (118,647) (76,066)
Net other operating activities (16,710) (3,357) (12,995) 5,921
Nonutility subsidiary:
Net (loss) earnings (119,873) 2,342 (103,126) 5,963
Deferred income taxes (70,702) (15,547) (48,769) (291)
Loss on assets held for disposal 170,078 - 170,078 -
Changes in other assets and net other operating activities 50,824 47,300 51,517 59,601
--------- --------- --------- ---------
Net Cash From Operating Activities 96,381 120,591 352,583 396,383
--------- --------- --------- ---------
Investing Activities
Total investment in property and plant (119,887) (170,294) (266,483) (340,002)
Allowance for funds used during construction 4,675 12,036 11,386 22,352
--------- --------- --------- ---------
Net investment in property and plant (115,212) (158,258) (255,097) (317,650)
Nonutility subsidiary:
Purchase of marketable securities (11,321) (112,829) (25,827) (267,413)
Proceeds from sale or redemption of marketable securities 15,450 61,103 36,791 191,281
Investment in leased equipment (7,360) (3,037) (76,457) (31,091)
Proceeds from sale or disposition of leased equipment - 1,150 - 121,679
Purchase of other investments (2,563) (5,593) (4,161) (43,889)
Proceeds from sale or distribution of other investments 14,899 4,508 28,475 4,508
Investment in promissory notes - - (542) (458)
Proceeds from promissory notes 3,541 2,177 6,266 3,699
--------- --------- --------- ---------
Net Cash Used by Investing Activities (102,566) (210,779) (290,552) (339,334)
--------- --------- --------- ---------
Financing Activities
Dividends on common stock (98,164) (97,802) (196,116) (193,649)
Dividends on preferred stock (8,475) (8,215) (16,697) (16,307)
Issuance of common stock 4,580 5,535 8,330 74,432
Redemption of preferred stock (78) (2,457) (1,668) (2,457)
Issuance of long-term debt 15,840 302,999 15,840 671,782
Reacquisition and retirement of long-term debt (17,548) (127,367) (34,603) (642,367)
Proceeds from sale and leaseback of control center system - - 152,000 -
Short-term debt, net 164,400 (1,790) 61,175 107,525
Other financing activities (12,427) (4,791) (22,089) (23,563)
Nonutility subsidiary:
Issuance of long-term debt 75,000 210,000 151,750 244,000
Repayment of long-term debt (177,452) (85,105) (266,297) (189,332)
Short-term debt, net 87,600 (98,400) 108,150 (86,730)
--------- --------- --------- ---------
Net Cash From (Used By) Financing Activities 33,276 92,607 (40,225) (56,666)
--------- --------- --------- ---------
Net Increase in Cash and Cash Equivalents 27,091 2,419 21,806 383
Cash and Cash Equivalents at Beginning of Period 7,198 10,064 12,483 12,100
--------- --------- --------- ---------
Cash and Cash Equivalents at End of Period $ 34,289 $ 12,483 $ 34,289 $ 12,483
========= ========= ========= =========
Cash paid for interest (net of capitalized interest) and income taxes:
Interest (including nonutility subsidiary
interest of $46,672, $40,372, $90,024 and $78,856) $ 109,303 $ 97,761 $ 215,059 $ 203,544
Income taxes $ 2,665 $ 4,744 $ 49,289 $ 69,420
Nonutility subsidiary noncash transactions:
Consolidation of majority-owned subsidiaries $ - $ - $ - $ 35,320
4
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
The Company's utility operations are regulated by the
Maryland and District of Columbia public service commissions and,
as to its wholesale business, the Federal Energy Regulatory
Commission (FERC). The Company complies with the Uniform System
of Accounts prescribed by the FERC and adopted by the Maryland
and District of Columbia regulatory commissions. In conformity
with generally accepted accounting principles, the accounting
policies and practices applied by the regulatory commissions in
the determination of rates for utility operations are also
employed for financial reporting purposes.
Certain 1994 amounts have been reclassified to conform to
the current year presentation.
A description of significant accounting policies follows:
Principles of Consolidation
- ---------------------------
The consolidated financial statements combine the financial
results of the Company and all majority-owned subsidiaries. The
Company's principal subsidiary is Potomac Capital Investment
Corporation (PCI). All material intercompany balances and
transactions have been eliminated.
Total Revenue
- -------------
Revenue is accrued for service rendered but unbilled as of
the end of each month. The Company includes in revenue the
amounts received for sales to other utilities related to pooling
and interconnection agreements. Amounts received for such
interchange deliveries are a component of the Company's fuel
rates.
In each jurisdiction, the Company's rate schedules include
fuel rates. The fuel rate provisions are designed to provide for
separately stated fuel billings which cover applicable net fuel
and interchange costs, purchased capacity in the District of
Columbia, and emission allowance costs in the Company's retail
jurisdictions, or changes in the applicable costs from levels
incorporated in base rates. Differences between applicable net
costs incurred and fuel rate revenue billed in any given period
are accounted for as other current assets or other current
liabilities in those cases where specific provision has been made
by the appropriate regulatory commission for the resolution of
such differences within one year. Where no such provision has
5
been made, the differences are accounted for as other deferred
charges or other deferred credits pending regulatory
determination.
In the District of Columbia, pre-July 1993 conservation
costs receive rate base treatment. Conservation expenditures for
the period July 1993 to December 1994 are recovered through a
surcharge mechanism which initially became effective July 11,
1995, and which will be updated annually on June 1 to recover
1995 and subsequent conservation expenditures, including a
capital cost recovery factor. A procedure has been established
to consider lost revenue without the need for base rate
proceedings. In Maryland, conservation costs are recovered
through a surcharge rate which reflects amortization of program
costs including costs in the year during which the surcharge
commences, a capital cost recovery factor, incentives, applicable
taxes and estimated lost revenue. The surcharge is established
annually in a collaborative process with the recovery of lost
revenue subject to an earnings test performed on a quarterly
basis.
Leasing Transactions
- --------------------
Income from PCI investments in direct finance and leveraged
lease transactions, in which PCI is an equity participant, is
reported using the financing method. In accordance with the
financing method, investments in leased property are recorded as
a receivable from the lessee to be recovered through the
collection of future rentals. For direct finance leases,
unearned income is amortized to income over the lease term at a
constant rate of return on the net investment. Income, including
investment tax credits on leveraged equipment leases, is
recognized over the life of the lease at a level rate of return
on the positive net investment.
PCI investments in equipment under operating leases are
stated at cost less accumulated depreciation, except that
equipment held for disposal is carried at estimated fair value
less estimated costs to sell. Depreciation is recorded on a
straight line basis over the equipment's estimated useful life.
There will be no future depreciation on equipment held for
disposal.
Property and Plant
- ------------------
The cost of additions to, and replacements or betterments
of, retirement units of property and plant is capitalized. Such
cost includes material, labor, the capitalization of an Allowance
for Funds Used During Construction (AFUDC) and applicable
6
indirect costs, including engineering, supervision, payroll taxes
and employee benefits. The original cost of depreciable units of
plant retired, together with the cost of removal, net of salvage,
is charged to accumulated depreciation. Routine repairs and
maintenance are charged to operating expenses as incurred.
The Company uses separate depreciation rates for each
electric plant account. The rates, which vary from jurisdiction
to jurisdiction, were equivalent to a system-wide composite
depreciation rate of approximately 3.1% for 1995, 1994 and 1993.
Conservation
- ------------
In general, the Company accounts for conservation
expenditures in connection with its demand side management (DSM)
program as a deferred charge, and amortizes the costs over five
years in Maryland and ten years in the District of Columbia.
Allowance for Funds Used During Construction
- --------------------------------------------
In general, the Company capitalizes AFUDC with respect to
investments in Construction Work in Progress with the exception
of expenditures required to comply with federal, state or local
environmental regulations (pollution control projects), which are
included in rate base without capitalization of AFUDC. The
Company accrues a capital cost recovery factor on the retail
jurisdictional portion of certain pollution control projects
related to compliance with the Clean Air Act (CAA). The base for
calculating this return is the amount by which the retail
jurisdictional CAA expenditure balance exceeds the CAA balance
included in rate base in the Company's most recently completed
base rate proceeding.
The jurisdictional AFUDC capitalization rates are determined
as prescribed by the FERC. The effective capitalization rates
were approximately 8% compounded semiannually, for the six months
ended June 30, 1995, and approximately 7.6% in 1994 and 8.7% in
1993, compounded semiannually.
Cash and Cash Equivalents
- -------------------------
For purposes of the consolidated financial statements, cash
and cash equivalents include cash on hand, money market funds and
commercial paper with maturities of three months or less.
7
Nonutility Subsidiary Receivables
- ---------------------------------
PCI, the Company's nonutility subsidiary, continuously
monitors its receivables and establishes an allowance for
doubtful accounts against its notes receivable, when deemed
appropriate, on a specific identification basis. The direct
write-off method is used when trade receivables are deemed
uncollectible.
Income Taxes
- ------------
The Company's accounting for income taxes is in accordance
with Statement of Financial Accounting Standards (SFAS) No. 109
entitled "Accounting for Income Taxes" which requires the use of
an asset and liability approach for financial reporting and
accounting for deferred income taxes. Deferred taxes are being
recorded for all temporary differences based upon currently
enacted tax rates.
8
<TABLE>
(2) INCOME TAXES
- ----------------
Provision for Income Taxes Charged to Continuing Operations
- -----------------------------------------------------------
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
-------------------- ---------------------- ---------------------
1995 1994 1995 1994 1995 1994
-------- -------- ---------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Utility current tax expense
Federal $ 24,347 $ 26,563 $ 12,950 $ 17,578 $ 58,767 $ 70,100
State and local 2,881 3,546 1,429 2,334 7,707 10,386
-------- -------- --------- -------- -------- --------
Total utility current tax expense 27,228 30,109 14,379 19,912 66,474 80,486
-------- -------- --------- -------- -------- --------
Utility deferred tax expense
Federal 6,966 6,460 18,435 19,329 41,176 36,820
State and local 1,564 1,249 3,147 3,200 6,168 5,527
Investment tax credits (912) (912) (1,824) (1,825) (3,649) (3,559)
-------- -------- --------- -------- -------- --------
Total utility deferred tax expense 7,618 6,797 19,758 20,704 43,695 38,788
-------- -------- --------- -------- -------- --------
Total utility income tax expense 34,846 36,906 34,137 40,616 110,169 119,274
-------- -------- --------- -------- -------- --------
Nonutility subsidiary current tax expense
Federal (4,705) 3,376 (7,940) (3,686) (33,569) (15,815)
-------- -------- --------- -------- -------- --------
Nonutility subsidiary deferred tax expense
Federal (63,607) (18,971) (66,661) (14,679) (45,224) 506
State and local - (581) - (869) 731 308
-------- -------- --------- -------- -------- --------
Total nonutility subsidiary deferred tax expense (63,607) (19,552) (66,661) (15,548) (44,493) 814
-------- -------- --------- -------- -------- --------
Total nonutility subsidiary income tax expense (68,312) (16,176) (74,601) (19,234) (78,062) (15,001)
-------- -------- --------- -------- -------- --------
Total consolidated income tax expense (33,466) 20,730 (40,464) 21,382 32,107 104,273
Income taxes included in other income (68,281) (19,494) (74,858) (22,815) (77,949) (22,664)
-------- -------- --------- -------- -------- --------
Income taxes included in utility operating expenses $ 34,815 $ 40,224 $ 34,394 $ 44,197 $110,056 $126,937
======== ======== ========= ======== ======== ========
9
</TABLE>
<TABLE>
Reconciliation of Consolidated Income Tax Expense
- -------------------------------------------------
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
-------------------- ---------------------- ---------------------
1995 1994 1995 1994 1995 1994
-------- -------- --------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
(Loss) income before income taxes $(90,304) $ 85,023 $(101,274) $100,089 $119,753 $334,492
======== ======== ========= ======== ======== ========
Utility income tax at federal
statutory rate $ 32,727 35,372 $ 32,620 $ 40,943 $105,329 $121,207
Increases (decreases) resulting from
Depreciation 2,249 1,909 4,497 3,749 8,770 6,143
Removal costs (1,668) (1,222) (2,899) (2,330) (4,655) (4,940)
Allowance for funds used during
construction 162 (792) 327 (1,738) (346) (3,469)
Other (602) (567) (1,640) (1,822) (3,991) (3,777)
State income taxes, net of federal effect 2,890 3,118 3,056 3,639 9,100 10,341
Tax credits (912) (912) (1,824) (1,825) (4,038) (3,964)
Cumulative effect of tax rate change - - - - - (2,267)
-------- -------- --------- -------- -------- --------
Total utility income tax expense 34,846 36,906 34,137 40,616 110,169 119,274
-------- -------- --------- -------- -------- --------
Nonutility subsidiary income tax at federal
statutory rate (64,334) (5,614) (68,066) (5,912) (63,416) (3,441)
Increases (decreases) resulting from
Dividends received deduction (2,112) (2,106) (4,313) (4,149) (8,651) (7,881)
Reversal of previously accrued deferred taxes - (6,547) - (6,547) (1,659) (7,593)
Other (1,866) (1,328) (2,222) (1,757) (5,067) (1,990)
State income taxes, net of federal effect - (581) - (869) 731 (690)
Cumulative effect of tax rate change - - - - - 6,594
-------- -------- --------- -------- -------- --------
Total nonutility subsidiary income tax expense (68,312) (16,176) (74,601) (19,234) (78,062) (15,001)
-------- -------- --------- -------- -------- --------
Total consolidated income tax expense (33,466) 20,730 (40,464) 21,382 32,107 104,273
Income taxes included in other income (68,281) (19,494) (74,858) (22,815) (77,949) (22,664)
-------- -------- --------- -------- -------- --------
Income taxes included in utility operating expenses $ 34,815 $ 40,224 $ 34,394 $ 44,197 $110,056 $126,937
======== ======== ========= ======== ======== ========
10
</TABLE>
<TABLE>
Components of Consolidated Deferred Tax Liabilities (Assets)
- ------------------------------------------------------------
<CAPTION>
June 30, Dec. 31, June 30,
1995 1994 1994
--------- -------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
Utility deferred tax liabilities (assets)
Depreciation and other book to tax
basis differences $745,417 $723,248 $ 705,541
Rapid amortization of certified pollution
control facilities 28,252 29,018 29,600
Deferred taxes on amounts to be collected
through future rates 91,409 95,465 94,539
Property taxes 11,407 11,212 10,229
Deferred fuel (4,338) 177 4,346
Prepayment premium on debt retirement 20,970 21,537 11,276
Deferred investment tax credit (25,155) (25,922) (26,615)
Contributions in aid of construction (25,272) (24,954) (23,866)
Other 24,146 25,454 21,984
-------- -------- ---------
Total utility deferred tax liabilities (net) 866,836 855,235 827,034
Current portion of utility deferred tax liabilities
(included in Other Current Liabilities) 3,534 6,779 10,880
-------- -------- ---------
Total utility deferred tax liabilities (net) - noncurrent $863,302 $848,456 $ 816,154
======== ======== =========
Nonutility subsidiary deferred tax liabilities (assets)
Finance leases $133,326 134,925 $ 129,176
Operating leases 22,256 117,782 123,638
Reversal of previously accrued taxes related
to partnerships (16,152) (16,385) (16,962)
Alternative minimum tax (81,730) (77,167) (85,783)
Other 21,940 (24,477) (30,088)
-------- -------- ---------
Total nonutility subsidiary deferred tax liabilities
(net), (included in Deferred taxes and other) $ 79,640 $134,678 $ 119,981
======== ======== =========
11
</TABLE>
Certain provisions of SFAS No. 109, allow regulated
enterprises to recognize regulatory assets and liabilities for
income taxes to be recovered from or returned to customers in
future rates. No valuation allowance for deferred tax assets was
required or recorded at June 30, 1995.
The Tax Reform Act of 1986 repealed the Investment Tax
Credit (ITC) for property placed in service after December 31,
1985, except for certain transition property. ITC previously
earned on utility property continues to be normalized over the
remaining service lives of the related assets.
The Company and its subsidiaries file a consolidated federal
income tax return. The Company's federal income tax liabilities
for all years through 1991 have been finally determined. The
Company is of the opinion that the final settlement of its
federal income tax liabilities for subsequent years will not have
a material adverse effect on its financial position.
(3) CAPITALIZATION
--------------
Common Equity
- -------------
At June 30, 1995, 118,485,727 shares of the Company's $1 par
value Common Stock were outstanding. A total of 200 million
shares is authorized. As of June 30, 1995, 2,324,721 shares were
reserved for issuance under the Shareholder Dividend Reinvestment
Plan; 1,221,624 shares of Common Stock were reserved for issuance
under the Employee Savings Plans; and shares reserved for
conversion of debentures were 2,771,633 and 3,392,500 for the 7%
and 5% Convertible Debentures, respectively.
Serial Preferred, Redeemable Serial Preferred and Preference
- ------------------------------------------------------------
Stock and Long-Term Debt
------------------------
At June 30, 1995, the Company had outstanding 5,377,727
shares of its $50 par value Serial Preferred Stock, including the
Redeemable Serial Preferred Stock. A total of 11,159,434 shares
is authorized. At June 30, 1995, the aggregate annual dividend
requirements on the Serial Preferred Stock and the Redeemable
Serial Preferred Stock were approximately $6.6 million and $10.2
million, respectively. Also, the Company has a total of
8,800,000 shares of cumulative, $25 par value, Preference Stock
authorized and unissued.
The Company's $2.44 Convertible Preferred Stock, 1966 Series
(8,031 shares outstanding at June 30, 1995) is convertible into
Common Stock at $8.51 per share.
12
At June 30, 1995, the Company had outstanding one million
shares of its Serial Preferred Stock, Auction Series A. The
annual dividend rate is 4.625% ($2.3125) for the period June 1,
1995 through August 31, 1995. For the period March 1, 1995
through May 31, 1995, the annual dividend rate was 4.9% ($2.45).
The average rate at which dividends were paid during the 12
months ended June 30, 1995 was 4.4% ($2.20).
At June 30, 1995, the Company had outstanding three series
of $50 par value Redeemable Serial Preferred Stock. There are
one million shares of the $3.89 (7.78%) Series of 1991 on which
the sinking fund requirement commences June 1, 2001. There are
one million shares of the $3.40 (6.80%) Series of 1992 on which
the sinking fund requirement commences September 1, 2002. There
are 869,696 shares of the $3.37 (6.74%) Series of 1987 on which
the sinking fund requires redemption beginning June 1993, at par,
of not less than 30,000 nor more than 60,000 shares annually.
Sinking fund requirements through 1999 with respect to the three
series of Redeemable Serial Preferred Stock are $1 million in
1997 and $1.5 million annually thereafter.
The Company's long-term debt at June 30, 1995, is summarized
below:
(Thousands of Dollars)
First Mortgage Bonds $1,266,600
Convertible Debentures 181,864
Notes Payable 350,000
Net Unamortized Discount (30,094)
Current Portion (65,000)
----------
Net Utility Long-Term Debt $1,703,370
==========
Nonutility Subsidiary Long-Term Debt $1,038,053
==========
At June 30, 1995, the aggregate annual interest requirement
on the Company's long-term debt, including debt due within one
year, was $123.6 million; and the aggregate amounts of long-term
debt maturities are $40 million in 1995, $25 million in 1996,
$150 million in 1997, $50 million in 1998 and $45 million in
1999. At June 30, 1995, long-term debt due within one year
consisted of $40 million of 5% First Mortgage Bonds and $25
million of 6 1/4% Medium-Term Notes.
13
Nonutility Subsidiary Long-Term Debt
- ------------------------------------
Long-term debt at June 30, 1995 consisted primarily of
unsecured borrowings from institutional lenders maturing at
various dates between 1995 and 2003. The interest rates of such
borrowings ranged from 5% to 10.1%. The weighted average
effective interest rate was 7.71% at June 30, 1995, 7.47% at
December 31, 1994 and 7.21% at June 30, 1994. Annual aggregate
principal repayments on these borrowings are $94.3 million in
1995, $180.5 million in 1996, $135.5 million in 1997, $242.3
million in 1998, $126.5 million in 1999 and $189.5 million
thereafter. Also included in long-term debt is $69.5 million of
non-recourse debt which is due in monthly installments with final
maturities in 2001, 2002 and 2011.
Long-Term Debt Ratings
- ----------------------
On July 10, 1995, Moody's confirmed its A1 rating on the
outstanding senior secured debt of the Company, as well as its
other ratings of senior securities and commercial paper of both
the utility and PCI, removing those securities from the Negative
Watch List. During the second quarter, Standard and Poor's and
Duff and Phelps affirmed their ratings on the Company's senior
secured debt of A and AA-, respectively.
14
<TABLE>
(4) Fair Value of Financial Instruments
- ---------------------------------------
The estimated fair values of the Company's financial instruments at
June 30, 1995, December 31, 1994 and June 30, 1994 are shown below.
<CAPTION>
June 30, December 31, June 30,
1995 1994 1994
-------------------------- ------------------------- -------------------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
----------- ---------- ---------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Utility
Capitalization and Liabilities
Serial preferred stock $ 125,401 111,297 125,409 102,102 125,427 104,273
========== ========= ========= ========= ========= =========
Redeemable serial
preferred stock $ 143,485 139,796 143,563 134,008 145,153 145,227
========== ========= ========= ========= ========= =========
Long-term debt
First Mortgage Bonds $1,212,289 1,203,599 1,208,076 1,093,208 1,251,722 1,169,468
Medium-Term Notes $ 322,860 326,886 347,712 324,223 347,565 336,399
Convertible Debentures $ 168,221 164,667 167,611 146,098 168,467 161,472
---------- --------- --------- --------- --------- ---------
Total long-term debt $1,703,370 1,695,152 1,723,399 1,563,529 1,767,754 1,667,339
========== ========= ========= ========= ========= =========
Nonutility Subsidiary
Assets
Marketable securities $ 514,159 514,159 473,608 473,608 499,360 499,360
========== ========= ========= ========= ========= =========
Notes receivable $ 61,188 59,380 61,278 58,616 58,461 62,000
========== ========= ========= ========= ========= =========
Liabilities
Long-term debt $1,038,053 1,041,401 1,140,505 1,122,638 1,152,600 1,160,000
========== ========= ========= ========= ========= =========
15
</TABLE>
The methods and assumptions below were used to estimate, at
June 30, 1995, December 31, 1994 and June 30, 1994, the fair
value of each class of financial instruments shown above for
which it is practicable to estimate that value.
The fair value of the Company's long-term debt, which
includes First Mortgage Bonds, Medium-Term Notes and Convertible
Debentures, excluding amounts due within one year, was based on
the current market price, or for issues with no market price
available, was based on discounted cash flows using current rates
for similar issues with similar terms and remaining maturities.
The fair value of the Company's Serial Preferred Stock,
including Redeemable Serial Preferred Stock, was based on quoted
market prices or discounted cash flows using current rates of
preferred stock with similar terms.
The fair value of PCI's Marketable Securities was based on
quoted market prices.
The fair value of PCI's Notes Receivable was based on
discounted future cash flows using current rates and similar
terms.
The fair value of PCI's long-term debt, including non-
recourse debt, was based on current rates offered to similar
companies for debt with similar remaining maturities.
16
(5) MARKETABLE SECURITIES
---------------------
SFAS No. 115 entitled, "Accounting for Certain Investments
in Debt and Equity Securities," was adopted by PCI in January
1994. PCI's marketable securities, all of which are classified
as available-for-sale as defined in SFAS No. 115, consist
primarily of investment grade preferred stocks with mandatory
redemption features. Pursuant to SFAS No. 115, net unrealized
gains and losses on such securities are reflected, net of tax, in
stockholders equity. The net unrealized gains (losses) are shown
below:
As of June 30, 1995
---------------------------------------
Net
Market Unrealized
Cost Value Gains/(Losses)
---------- ---------- --------------
(Thousands of Dollars)
Mandatory redeemable
preferred stock $ 510,280 $ 514,159 $ 3,879
Equity securities 3 - (3)
---------- ---------- ------------
Total $ 510,283 $ 514,159 $ 3,876
========== ========== ============
As of December 31, 1994
---------------------------------------
Net
Market Unrealized
Cost Value Losses
---------- ---------- --------------
(Thousands of Dollars)
Mandatory redeemable
preferred stock $ 511,791 $ 473,608 $ (38,183)
Equity securities 3 - (3)
---------- ---------- ------------
Total $ 511,794 $ 473,608 $ (38,186)
========== ========== ============
17
As of June 30, 1994
---------------------------------------
Net
Market Unrealized
Cost Value Losses
---------- ---------- --------------
(Thousands of Dollars)
Mandatory redeemable
preferred stock $ 518,166 $ 499,360 $ (18,806)
Equity securities 3 - (3)
---------- ---------- ------------
Total $ 518,169 $ 499,360 $ (18,809)
========== ========== ============
Included in net unrealized gains and losses are gross
unrealized losses of $9 million and gross unrealized gains of
$12.9 million at June 30, 1995; gross unrealized losses of $40
million and gross unrealized gains of $1.8 million at December
31, 1994; and gross unrealized losses of $24.1 million and gross
unrealized gains of $5.3 million at June 30, 1994.
At June 30, 1995, the final contractual maturities (in
thousands of dollars) for mandatory redeemable preferred stock
were as follows:
Within one year $ 10,232
One to five years 75,645
Five to ten years 168,525
Over ten years 255,878
--------
510,280
Plus net unrealized
gains 3,879
--------
$514,159
========
In determining gross realized gains and losses on sales or
maturities of securities, specific identification is used. A
summary of realized gains and losses is shown below.
Three Months Six Months
Ended Ended
June 30, 1995 June 30, 1995
------------- -------------
(Thousands of Dollars)
Gross realized gains $ 213 $ 361
Gross realized losses (196) (207)
--------- --------
Net gain $ 17 $ 154
========= ========
18
(6) COMMITMENTS AND CONTINGENCIES
-----------------------------
Environmental Contingencies
- ---------------------------
As discussed in the 1994 Form 10-K, the Company was served
in August 1993, with Amended Complaints filed in three
jurisdictions (Prince George's County, Baltimore City, and
Baltimore County) in separate ongoing, consolidated proceedings
each denominated "In re: Personal Injury Asbestos Cases". The
Company (and other defendants) were brought into these cases on a
theory of premises liability under which plaintiffs argue that
the Company was negligent in not providing a safe work
environment for employees of its contractors who allegedly were
exposed to asbestos while working on the Company's property.
Initially, a total of approximately four hundred and forty-eight
(448) individual plaintiffs added the Company to their
Complaints. While the pleadings are not entirely clear, it
appears that each plaintiff seeks $2 million in compensatory
damages and $4 million in punitive damages from each defendant.
In a related proceeding in the Baltimore City case, the Company
was served, in September 1993, with a third party complaint by
Owens Corning Fiberglass, Inc. (Owens Corning) alleging that
Owens Corning was in the process of settling approximately 700
individual asbestos-related cases and seeking a judgment for
contribution against the Company on the same theory of alleged
negligence set forth above in the plaintiffs' case.
Subsequently, Pittsburgh Corning Corp. (Pittsburgh Corning) filed
a third party complaint against the Company, seeking contribution
for the same plaintiffs involved in the Owens Corning third party
complaint. Since the filings, a number of individual suits have
been disposed of without any payment by the Company. The third
party complaints involving Pittsburgh Corning and Owens Corning
were dismissed by the Baltimore City Court during 1994 without
any payment by the Company. While the aggregate amount specified
in the remaining suits would exceed $1 billion, the Company
believes the amounts are greatly exaggerated as were the claims
already disposed of. The amount of total liability, if any, and
any related insurance recovery cannot be precisely determined at
this time; however, based on information and relevant
circumstances known at this time, the Company does not believe
these suits will have a material adverse effect on its financial
position. However an unfavorable decision rendered against the
Company could have a material adverse effect on results of
operations in the fiscal year in which a decision is rendered.
As also discussed in the 1994 Form 10-K, a Remedial
Investigation/Feasibility Study (RI/FS) report was submitted to
the EPA in October 1994, with respect to a site in Philadelphia,
Pennsylvania. Pursuant to an agreement among the participating
potentially responsible parties, the Company is responsible for
19
12% of the costs of the RI/FS. Total costs of the RI/FS and
associated activities prior to the issuance of a Record of
Decision (ROD) by EPA, including legal fees, are currently
estimated to be $6.5 million. The Company has paid $.8 million
as of June 30, 1995. The report included a number of possible
remedies, the estimated costs of which range from $2 million to
$90 million. On July 20, 1995, EPA announced its proposed
remedial action plan for the site and indicated it will accept
comments on the plan from any interested parties. EPA's estimate
of the costs associated with implementation of the plan is
approximately $17 million. The Company lacks sufficient
information to comment on the accuracy of EPA's cost estimate and
cannot predict whether EPA will include the plan in its ROD as
proposed or make changes as a result of comments received. In
addition, the Company cannot estimate the total extent of the
EPA's administrative and oversight costs. To date, the Company
has accrued $1.7 million for its share of this contingency.
On July 3, 1995, the United States Attorney for the District
of Maryland filed a Complaint and Consent Decree resolving
violations of the Clean Water Act by the Company which occurred
at its Faulkner Fly Ash Storage Facility located in Charles
County, Maryland. Pursuant to the terms of the Consent Decree
the Company agreed to pay a civil penalty of $975,000, which has
been accrued at June 30, 1995. If approved by the court, the
settlement will bring to an end an environmental investigation,
begun at the Company's request in 1993, of unlawful activities by
a former Company employee and contractors. The environmental
violations were discovered by Company environmental investigators
in 1993 and involved wastewater discharges from treatment ponds
that occurred over several years at the Company's Faulkner Fly
Ash Storage Facility in Charles County, Maryland. Upon
discovering the violations, the Company immediately reported them
to federal and state authorities and fully cooperated with these
officials in a thorough investigation that resulted in the
criminal conviction and sentencing of a former employee. The
Company also terminated the employee, his supervisor and several
contractors.
Litigation
- ----------
The Company filed a Petition for Review with the District of
Columbia Court of Appeals related to the Commission's decisions
in Formal Case No. 929 in July 1994. On June 19, 1995, the Court
issued its opinion and order by which it (1) affirmed the
Commission's decision not to allow the recovery of 100% of test
year conservation costs; (2) remanded to the Commission for a
fuller and clearer explanation with supporting reasons justifying
the disallowance of 25%, as opposed to any other percentage, of
test period conservation costs; and (3) affirmed the Commission's
disallowance of 100% of projected increases in employee benefit
costs.
20
In remanding to the Commission for further explanation the
Commission's decision to disallow 25%, as opposed to any other
percentage, of test period conservation costs, the Court noted
that there was nothing in the record to support the 25% figure,
and that the Commission had failed to explain in any way how it
chose the 25% figure. The Court added that on remand, the
Commission should explain how application of the prudent
management criteria to the facts of this case leads to the
conclusion that 25% (or whatever greater or lesser figure the
Commission determines is appropriate) cannot lawfully be
recovered from the Company's ratepayers. All disallowances and
adjustments required by the decisions in D.C. Formal Case No. 929
were reflected in the results for June 1994. See Part II, Item
5, Base Rate Proceedings for additional information.
The Company is involved in other legal and administrative
(including environmental) proceedings before various courts and
agencies with respect to matters arising in the ordinary course
of business. Management is of the opinion that the final
disposition of these proceedings will not have a material adverse
effect on the Company's financial position or results of
operations.
Other
- -----
Subsidiaries of the Company and Columbia Gas System, Inc.
have formed a joint venture partnership (the Partnership) to own
and operate natural gas storage and terminaling facilities at
Cove Point, Maryland, and an 87-mile natural gas pipeline that
extends from Cove Point to Loudoun County, Virginia. A Company
subsidiary has committed to loan the Partnership $15 million to
recommission certain existing facilities and for new
construction. As of June 30, 1995, the remaining $3.5 million of
the loan commitment is yet to be drawn upon by the Partnership.
In May 1995, the Company announced that its subsidiary,
PepData, Inc., entered into a joint venture agreement with
Metricom, Inc. to own and operate a wireless data network in the
Washington, D.C. metropolitan area. The Company will invest $7
million and own 20 percent of the joint venture. See Part I,
Item 2, Management's Discussion and Analysis of Consolidated
Results of Operations and Financial Condition for additional
information.
Nonutility Subsidiary
- ---------------------
See discussion of PCI in Part I, Item 2, Management's
Discussion and Analysis of Consolidated Results of Operations and
Financial Condition.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
21
The information furnished in the accompanying Consolidated
Statements of Earnings and Retained Income, Consolidated Balance
Sheets and Consolidated Statements of Cash Flows reflects all
adjustments (which consist only of normal recurring accruals)
which are, in the opinion of management, necessary to a fair
presentation of the results of operations for the interim
periods. The accompanying consolidated financial statements and
notes thereto should be read in conjunction with the consolidated
financial statements and notes included in the Company's 1994
Annual Report to the Securities and Exchange Commission on Form
10-K.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
This Quarterly Report on Form 10-Q, including the report of
Price Waterhouse LLP (on page 23) will automatically be
incorporated by reference in the Prospectuses constituting part
of the Company's Registration Statements on Form S-3
(Registration Nos. 33-58810 and 33-50377) and Form S-8
(Registration Nos. 33-36798, 33-53685 and 33-54197) filed under
the Securities Act of 1933. Such report of Price Waterhouse 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.
22
INDEPENDENT ACCOUNTANTS REPORT
To the Board of Directors
and Shareholders of
Potomac Electric Power Company
We have reviewed the accompanying consolidated balance sheets of
Potomac Electric Power Company and consolidated subsidiaries (the
Company) at June 30, 1995 and 1994 and the related consolidated
statements of earnings and retained income for the three, six and
twelve month periods then ended and the consolidated statements
of cash flows for the six and twelve month periods then ended.
These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying financial
information for it to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of December
31, 1994, and the related consolidated statement of earnings and
consolidated statement of cash flows for the year then ended (not
presented herein); and in our report dated January 26, 1995, we
expressed an unqualified opinion, with an explanatory paragraph
for a change in accounting principles, on those consolidated
financial statements. In our opinion, the information set forth
in the accompanying consolidated balance sheet information as of
December 31, 1994, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been
derived.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Washington, D.C.
July 28, 1995
23
Part I FINANCIAL INFORMATION
- ------ ---------------------
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
- ------ ----------------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
UTILITY
- -------
RESULTS OF OPERATIONS
- ---------------------
TOTAL REVENUE
Total revenue decreased for the three, six and twelve months
ended June 30, 1995, as compared to the corresponding periods in
1994. The decrease in revenue from sales of electricity for each
period were primarily due to decreases in kilowatt-hour sales of
2.7% for the three months ended and 4.3% for the six and twelve
months ended June 30, 1995, over the corresponding periods in
1994. The decrease in kilowatt-hour sales for the three months
ended June 30, 1995, was primarily attributable to cooler than
average spring weather with cooling degree hours 32% below the
20-year average and 53% below the three months ended June 30,
1994. The Company recognized $8.7 million in revenue in June
1995 compared to $5.0 million in June 1994 associated with the
conservation incentive provision of the Company's Maryland Demand
Side Management (DSM) surcharge tariff. The decrease in
kilowatt-hour sales for the six months ended June 30, 1995 was
the result of milder weather in 1995, as compared to 1994 when
record-breaking frigid temperatures in January and warmer than
average June weather resulted in extraordinarily high sales. The
decline in kilowatt-hour sales was partially offset by a March
1994 base rate increase in the District of Columbia. The
decrease in revenue for the twelve months ended June 30, 1995 as
compared to the same period ending June 30, 1994 was primarily
attributable to a decrease in interchange deliveries to the
Pennsylvania-New Jersey-Maryland Interconnection Association
(PJM) and a 4.3% decrease in kilowatt-hour sales as a result of
milder weather in the period ending June 30, 1995. The decrease
in revenue as a result of lower kilowatt-hour sales was partially
offset by the effects of the 1993 base rate increase in Maryland,
the 1994 base rate increase in the District of Columbia, and an
increase in revenue of approximately $23.7 million for the twelve
months ended June 30, 1995 as compared to the same period in 1994
associated with the Company's DSM surcharge tariff in its
Maryland jurisdiction.
24
Recent rate orders received by the Company provided for
changes in annual base rate revenue as shown in the table below:
Rate
Increase % Effective
Regulatory Jurisdiction ($000) Change Date
- ----------------------- ---------- ------- ---------------
District of Columbia $27,900 3.8% July 1995
Federal - Wholesale 2,300 1.8 January 1995
District of Columbia 26,700 3.9 March/June 1994
Federal - Wholesale 2,600 2.3 January 1994
Maryland 27,000 3.0 November 1993
On June 30, 1995, the District of Columbia Public Service
Commission authorized a $27.9 million, or 3.8% increase in base
rate revenues, effective July 11, 1995. Also in June 1995, the
District of Columbia Court of Appeals issued its Opinion and
Order in response to the Company's 1994 Petition Order in
connection with the Commission's decisions in Formal Case No.
929. The Company was granted a mechanism in Formal Case No. 917
which allows the Company to recover post June 1993 conservation
expenditures through a billing surcharge. The initial rate,
which became effective July 11, 1995, will result in $15 million
of additional revenue annually. See Part I, Item 1, Notes to the
Consolidated Financial Statements, (6) Commitments and
Contingencies, and Part II, Item 5, Base Rate Proceedings, for
additional information.
OPERATING EXPENSES
Fuel and purchased energy decreased for the three, six and
twelve months ended June 30, 1995, as compared to the
corresponding periods ended June 30, 1994. Fuel expense
decreased for the three, six and twelve months ended June 30,
1995, primarily as the result of decreases in net generation of
22.2%, 21.9% and 16.9%, respectively, due to decreased customer
usage. The decreases in customer usage were caused by milder
weather in the various periods as discussed above. The increases
in purchased energy for the three, six and twelve months ended
June 30, 1995, reflect changes in the levels and prices of energy
purchased from PJM and other utilities.
25
The unit fuel costs for the comparative periods ended June
30, were as follows:
Three Six Twelve
Months Ended Months Ended Months Ended
------------ ------------- ------------
1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
System Average
Fuel Cost
per MBTU $1.66 $1.91 $1.74 $2.03 $1.80 $2.00
The decreases in the system average unit fuel cost for the
three, six and twelve months ended June 30, 1995 were primarily
attributable to decreased net generation due to decreased
customer usage of electricity. Decreased use of cycling and
peaking units which burn oil and natural gas resulted in an
increase in the percent of coal contribution to the fuel mix.
The Company's major cycling and certain peaking units can burn
natural gas or oil, adding flexibility in selecting the most
cost-effective fuel mix.
For the twelve month periods ended June 30, 1995 and 1994,
the Company obtained 85% and 72%, respectively, of its system
generation from coal based upon percentage of Btus.
Capacity purchase payments increased slightly for the three
and six months ended and increased for the twelve months ended
June 30, 1995, as compared to the corresponding periods in 1994.
The increase for the twelve months ended June 30, 1995 reflects a
January 1, 1994 increase in the cost of capacity under agreements
with Ohio Edison and Allegheny Power System (APS) and the 147
megawatts of capacity being purchased from Pennsylvania Power &
Light Company for a one year period June 1, 1994 through May 31,
1995. The cost of capacity, under the Ohio Edison and APS
agreements, increased from $12,380 per megawatt, per month, in
effect from 1987 to 1993, to $18,060 per megawatt, per month,
plus an allocation of fixed operating and maintenance expenses.
Operating expenses other than fuel, purchased energy and
capacity purchase payments increased for the three, six and
twelve months ended June 30, 1995 as compared to the
corresponding periods ended June 30, 1994. The increases were
principally due to increased depreciation and amortization
expense due to additional investment in property and plant and
the amortization of increased amounts of conservation program
costs and a nonrecurring charge of $7.4 million taken in January
1995 for operating costs associated with the Company's Voluntary
Severance Program.
See "Legal Proceedings," under Part II, Item 1, Other
Information, for additional information.
26
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
The Company's investment in property and plant, at original
cost before accumulated depreciation, was $6 billion at June 30,
1995, an increase of $92.7 million from the investment at
December 31, 1994 and an increase of $210.5 million from the
investment at June 30, 1994. Cash invested in property and plant
construction, excluding AFUDC, amounted to $115.2 million for the
six months ended June 30, 1995, and $255.1 million for the twelve
months then ended.
See Part I, Item 1, Notes to Consolidated Financial
Statements, (3) Capitalization for information with respect to
financing activity.
At June 30, 1995, the Company's capital structure, excluding
short-term debt, long-term debt due within one year, and
nonutility subsidiary debt, consisted of 44.9% long-term debt,
3.3% serial preferred stock, 3.8% redeemable serial preferred
stock and 48.0% common equity. On July 10, 1995, Moody's
affirmed its A1 rating on the outstanding senior secured debt of
the Company, as well as its other ratings of senior securities
and commercial paper, and removed those securities from the
Negative Watch List. During the second quarter, Standard and
Poor's and Duff and Phelps had affirmed their ratings on the
Company's senior secured debt of A and AA-, respectively.
The Company filed for a 5.3% increase in the Maryland fuel
rate, in September 1994, which became effective, subject to
refund, on November 1, 1994. The initial filing also included an
adjustment for a deferred fuel amortization charge to recover
over a twelve month period approximately $28.5 million of
previously unrecovered fuel costs incurred through July 31, 1994.
During the case, which is still pending, the Company updated the
proposed deferred fuel amortization, pursuant to a recommendation
of the Staff of the Maryland Public Service Commission, to
reflect a reduction in the unrecovered amount at October 31, 1994
to $21.1 million. Based on results for the period ended November
30, 1994, the Company, in January 1995, filed for a fuel rate
reduction in Maryland of 5.3%. Based on results for the period
ended February 28, 1995, the Company filed for an additional fuel
rate reduction in Maryland of 5.7% during April 1995, which
became effective subject to refund on May 1, 1995. At June 30,
1995, essentially all unrecovered fuel costs have been recovered.
The final orders in these filings are expected in the third
quarter.
Cash (used by) from utility operations, after dividends, was
$(40.6) million for the six months ended June 30, 1995, and $70.1
million for the twelve months then ended as compared with $(19.5)
million and $121.2 million, respectively, for the same periods
ended June 30, 1994.
27
Outstanding utility short-term debt totaled $354.0 million
at June 30, 1995, an increase of $164.4 million from the $189.6
million outstanding at December 31, 1994 and an increase of $61.2
million from the $292.8 million outstanding at June 30, 1994.
THE COVE POINT JOINT VENTURE
- ----------------------------
Subsidiaries of the Company and Columbia Gas System, Inc.,
have formed a joint venture partnership (the Partnership) to own
and operate natural gas storage and terminaling facilities at
Cove Point, Maryland, and an 87-mile natural gas pipeline that
extends from Cove Point to Loudoun County, Virginia.
Construction and recommissioning activities are on schedule and
the Partnership anticipates commercial operation in the fall of
1995. At June 30, 1995, the Company's subsidiaries have invested
$21.5 million, in the form of equity and debt, in the
Partnership.
JOINT VENTURE FOR WIRELESS DATA COMMUNICATION NETWORK AND
- ---------------------------------------------------------
NEW ENERGY SERVICES SUBSIDIARY FORMED
-------------------------------------
In May 1995, the Company announced that its subsidiary,
PepData, Inc., entered into a joint venture agreement with
Metricom, Inc. to own and operate a wireless data network
providing economical data communication services to four million
people in the Washington, D.C. metropolitan area. The agreement
calls for the joint venture company, Metricom D.C. LLC., to
install radio devices on public and private facilities to create
a wireless data communication network. The Company will invest
$7 million and own 20 percent of the joint venture.
Also in May, a subsidiary Pepco Services, Inc., was formed
to offer a range of energy-related technical, engineering,
management and financing services to businesses and government
organizations in the region.
NONUTILITY SUBSIDIARY
- ---------------------
RESULTS OF OPERATIONS
- ---------------------
PCI incurred net losses of $115.5 million, $119.9 million
and $103.1 million for the three, six and twelve months ended
June 30, 1995 compared to earnings of $.1 million, $2.3 million
and $6 million for the same periods ended June 30, 1994,
respectively. Net losses incurred in 1995 are the result of the
adoption of a plan by PCI to exit the aircraft equipment leasing
business, resulting in a second quarter 1995 $110 million non-
cash, after-tax charge to earnings.
28
PCI contributed $(.98), $(1.01) and $(.87) to the Company's
earnings per share for the three, six and twelve months ended
June 30, 1995 as compared to no contribution to earnings, $.02
and $.05 for the same periods ended June 30, 1994. Included in
the loss per share for 1995 was $(.93) per share, for each of the
periods, for a charge upon the adoption of a plan to exit the
aircraft equipment leasing business and $(.05), $(.06) and $(.06)
per share, respectively, for the periods for a valuation
adjustment of aircraft equipment under master lease.
On May 18, 1995, PCI adopted a plan to exit the aircraft
equipment leasing business. The plan, which was developed
following a comprehensive review of the business, is designed to
permit a withdrawal from the aircraft leasing business on an
orderly basis designed to preserve value. The decision to exit
the aircraft leasing business was based on an accumulation of
factors which led PCI to conclude that the business was no longer
consistent with PCI's goal of providing a stable supplement to
consolidated earnings. These factors included the recent
inability to secure satisfactory leases for certain aircraft
returned by prior lessees, the continuing difficulties and credit
risks associated with certain lessees, including Trans World
Airlines (TWA) and Continental Airlines (Continental), and PCI's
evaluation of the prospects for its aircraft lease portfolio and
the airline industry in general.
Under the plan, PCI will make no new investments to increase
the size of the aircraft leasing portfolio. In addition,
thirteen aircraft, (seven L-1011 aircraft, two F-28-4000
aircraft, one A-300 aircraft, two B-747-200 aircraft and one
B747-200F aircraft) have been designated for sale. These
aircraft are subject to short-term, usage-based leases, leases
that will expire in the near term, or are not currently under
lease. PCI will seek to accomplish these sales over 18 to 24
months. The book value of these aircraft (which, prior to
adoption of the plan, was $295 million) was reduced to an
estimated net realizable value of approximately $105 million.
After taking into account the elimination of a previously
established reserve of approximately $22 million for future
repair and maintenance expenditures and other minor adjustments,
the result was an immediate non-cash charge to after-tax earnings
of approximately $110 million for the second quarter of 1995.
There will be no future depreciation of, or accrual for, repair
and maintenance expenditures with respect to these aircraft.
In accordance with the plan, PCI will continue to hold and
closely monitor the remainder of its aircraft leasing portfolio,
with the objective of identifying future opportunities for
disposition of these investments on favorable terms. Included in
this portion of the portfolio are six wholly owned aircraft
(three DC-10-30 aircraft and three B-747-200 aircraft) and two
29
DC-10-30 aircraft held by partnerships in which PCI has a 50%
interest, all of which are under long-term operating leases to
Continental or United Airlines. Depreciation on each of these
aircraft has been increased in order to achieve book values at
lease expiration that will correspond to their respective
anticipated residual values. The net effect of this revised
depreciation, coupled with the elimination of further
depreciation on the aircraft designated for sale, will result in
higher depreciation charges through 1997, and lower depreciation
charges thereafter, as compared to the depreciation charges PCI
would have incurred absent the plan. No adjustments were made to
the remainder of PCI's aircraft leasing portfolio, which consists
of twelve full or partial interests in aircraft under leveraged
leases or direct finance leases (one DC-10-30 aircraft, three MD-
82 aircraft, four B737-300 aircraft, two B747-300 aircraft, one
B757-200 aircraft and one MD-11F aircraft).
PCI has two aircraft under a master lease agreement which
are not carried on its balance sheet. Separate from the plan, as
a result of differences between the guaranteed residual value and
the expected market value of these aircraft at the end of the
initial term of the master lease agreement, PCI, following
generally accepted accounting principles, is recording a monthly
after-tax charge against earnings of approximately $1.7 million
during the period March through September 1995.
In January 1995, Continental announced its intention to seek
the early termination of all of its A-300 aircraft leases and
rental reductions under certain leases of other widebody
aircraft. Following negotiations, in April 1995, PCI signed an
agreement with Continental regarding this matter. As
compensation for the return of the A-300 aircraft in 1995, prior
to the end of its lease, PCI is to be paid $10.3 million, as
adjusted for rents received from Continental for the period
February 1995 until the aircraft is returned, in Continental
securities. The A-300 aircraft is one of the aircraft designated
for sale by PCI under its previously-discussed plan to exit the
aircraft leasing business. There will also be deferral of
approximately 40% of aggregate monthly rentals from the four
wholly owned and two jointly owned DC-10-30 aircraft for a period
of sixteen months, commencing February 1995. In addition, PCI
obtained cross-default provisions in its Continental leases and
improvements in aircraft return conditions. The deferred amounts
are to be repaid over a three and one-half year period with 8%
interest, commencing June 1, 1996, at which time the aggregate
deferred amount would be approximately $20 million.
30
PCI's aircraft portfolio at June 30, 1995 is summarized
below.
Aircraft
Designated for
Sale in Near Term Qty(1) Year(2) Lessee Lease Type
- ------------------ --------------------------------------------
A-300 aircraft 1 1979 Continental(5) Operating
B747-200 aircraft 1 1977 Air Atlanta Operating
Icelandic
B747-200 aircraft 1 1976 Air Club Operating
B747-200F aircraft
& spare engine 1 1976 Atlas Air Operating
F-28-4000 aircraft
& spare engine 2 1979/80 USAir Operating
L1011-50 aircraft 2 1974 ING Operating
L1011-50 aircraft 1 1975 TWA Operating
L1011-100 aircraft 4 1974/75 (4) N/A
Aircraft
With Increased
Depreciation
- -------------------
B747-200 aircraft
& spare engines 1 1972 Continental Operating
B747-200 aircraft 1 1978 United Operating
B747-200 aircraft 1 1978 United Operating
DC-10-30 aircraft 4 1973 Continental(3) Operating
DC-10-30 aircraft 1 1974 Continental Operating
- -----------------------------------------------------------------
(1) Includes all equipment in which PCI has a greater than 10%
ownership interest. Not included in PCI's balance sheet at
June 30, 1995 are two DC-10-30 aircraft on operating
lease to PCI which were sub-leased to Canadian Airlines in
March 1995.
(2) Year of manufacture.
(3) PCI owns a partial interest in certain of this equipment.
(4) Currently not on lease.
(5) Scheduled to be returned to PCI in 1995.
31
All Other Aircraft
Equipment Qty(1) Year(2) Lessee Lease Type
- ------------------ --------------------------------------------
B737-300 aircraft 4 1988 United(3) Direct
Finance
B747-300 Combi
aircraft 1 1984 KLM(3) Leveraged
B747-300 aircraft 1 1985 Singapore Leveraged
B757-200 aircraft 1 1986 Northwest Leveraged
DC-10-30 aircraft 1 1979 Continental Direct
Finance
MD-11F aircraft 1 1993 Fed. Express Leveraged
MD-82 aircraft 1 1982 Continental Direct
Finance
MD-82 aircraft
& spare engine 2 1987 Continental(3) Direct
Finance
Assorted Aircraft
Engines 12 Various Various Operating
- -----------------------------------------------------------------
(1) Includes all equipment in which PCI has a greater than 10%
ownership interest. Not included in PCI's balance sheet at
June 30, 1995 are two DC-10-30 aircraft on operating
lease to PCI which were sub-leased to Canadian Airlines in
March 1995.
(2) Year of manufacture.
(3) PCI owns a partial interest in certain of this equipment.
During 1994, PCI purchased from and leased to a Dutch
electric utility company an approximate one-third undivided
interest in a recently-constructed 650 megawatt (gross) base
load, coal and gas-fired power plant located in The Netherlands.
PCI's original equity investment totaled $60 million and is
accounted for as a leveraged lease.
In prior years the Company has invested in five 30-megawatt
Solar Electric Generating Systems (SEGS) projects in the Mojave
Desert in California. The Company owns 22%, 10%, 19%, 31%, and
25% of SEGS projects III through VII, respectively, representing
a net investment of $58 million included in PCI's investment in
finance leases at June 30, 1995.
The five SEGS power generating projects in which PCI has
invested sell electricity to Southern California Edison Company
(Edison) under thirty year Interim Standard Offer No. 4 power
purchase agreements which fix the energy rate paid by Edison for
the first ten years of the agreements. For the remaining term of
the agreements, energy rates are variable, based on Edison's
32
avoided cost of generation. The SEGS projects are scheduled to
convert to supplying electricity at avoided cost rates at various
times beginning in early 1997 through the end of 1998. As a
result of declines in Edison's avoided costs subsequent to the
inception of these agreements, revenues at these projects would
be substantially lower than revenues presently being realized
under the fixed energy price terms of the agreements. If current
avoided cost levels were to continue into 1997 and beyond, PCI
could experience reduced earnings or incur losses associated with
these projects. PCI is investigating and pursuing alternatives
for these projects, including but not limited to, renegotiating
the power purchase agreements and restructuring the associated
debt.
PCI generates income primarily from its leasing activities
and securities investments. Revenue from leasing activities,
which includes rental income, gains on asset sales, interest
income and fees totaled $22.1 million, $45.9 million and $108.8
million for the three, six and twelve months ended June 30, 1995,
respectively, compared to $23.9 million, $48.4 million and $119
million for the corresponding periods ended in 1994. The
decrease in revenue for the three, six and twelve months ended
June 30, 1995 over 1994 was primarily due to decreases in rental
income from operating leases and decreased fee income.
PCI's marketable securities portfolio contributed pre-tax
income of $9.4 million, $18.6 million and $36.5 million for the
three, six and twelve months ended June 30, 1995 respectively,
compared to $8.9 million, $17.3 million and $37.0 million for the
same periods ended June 30, 1994. Net realized gains included in
marketable securities income totaled approximately $.02 million,
$.2 million and $.6 million for the three, six and twelve months
ended June 30, 1995, respectively, and $.3 million, $.3 million
and $5.2 million for the corresponding periods in 1994.
Other income decreased during the second quarter 1995 over
the corresponding period in 1994 and increased for the six and
twelve month periods ended June 30, 1995 over 1994. The decrease
in the second quarter was due to a decrease in real estate
income. The increase during the six and twelve months ended June
30, 1995 over 1994 was primarily due to a first quarter 1994
writeoff resulting from agreements settling lawsuits related to
PCI's construction and operation of a municipally-owned waste-to-
energy facility. For the twelve month period the increase was
primarily caused by a September 1993 termination of approximately
$13.5 million related to the termination of obligations with
respect to a real estate limited partnership interest.
The $170.1 million pretax charge during the three, six and
twelve months ended June 30, 1995 is the result of PCI's plan,
adopted during the second quarter of 1995, to exit the aircraft
equipment leasing business.
33
Expenses before income taxes, which include interest,
depreciation and operating, and administrative and general
expenses totaled $46.4 million, $90.9 million and $157.6 million
for the three, six and twelve months ended June 30, 1995,
respectively, compared to $50.1 million, $83.9 million and $157.3
million for the same periods ended June 30, 1994. Expenses
decreased for the three month period ended June 30, 1995 over the
same period in 1994 primarily due to the elimination of future
accrued repairs and maintenance expenses for assets held for
disposal. Expenses increased for the six month period ended June
30, 1995 over the same period in 1994 primarily as a result of a
$2.7 million pretax monthly accrual which commenced in March 1995
for the recognition of the difference between the guaranteed
residual value and the expected market value of aircraft at the
end of the initial term of a master lease agreement in September
1995. Due to increased interest rates, interest expense also
increased for each of the three periods in 1995 over the
corresponding periods in 1994.
PCI had income tax credits of $68.3 million, $74.6 million
and $78.1 million for the three, six and twelve months ended June
30, 1995, respectively, compared to income tax credits of $16.2
million, $19.2 million and $15.0 million for the corresponding
periods in 1994. The significant increase in income tax credits
for each of the three periods ended June 30, 1995 compared to
June 30, 1994 was the result of the previously mentioned charge
relating to aircraft equipment.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
Investments in leased equipment of $7.4 million for the six
month period ended June 30, 1995 were for the purchase of
aircraft engines placed under operating leases. The investments
of $76.5 million in leased equipment for the twelve month period
ended June 30, 1995 also included $60 million for a one-third
undivided interest in a recently-constructed 650 megawatt (gross)
baseload, coal and gas fired power plant located in The
Netherlands which was purchased and leased back under a long-term
leveraged lease to a Dutch electric utility.
PCI's outstanding short-term debt totaled $136 million at
June 30, 1995, an increase of $87.6 million from the $48.4
million outstanding at December 31, 1994 and an increase of
$108.2 million over the $27.8 million outstanding at June 30,
1994. During the six and twelve months ended June 30, 1995, PCI
issued $75 million and $151.8 million, respectively, in long-term
debt, including non-recourse debt. No long-term debt was issued
in the three months ended June 30, 1995. Debt repayments totaled
$115.7 million, $177.5 million and $266.3 million, respectively,
for the three, six and twelve months ended June 30, 1995. At
34
June 30, 1995, PCI had $13.3 million available under its Medium-
Term Note Program and $270 million of unused short-term bank
credit lines.
PCI has paid a total of $100 million in dividends to the
Company, including a $9 million dividend paid in January 1995.
Dividend payments are considered based upon factors such as
future business plans, debt-to-equity ratios, and anticipated
capital requirements. PCI paid a dividend of $50 million to the
Company in December 1990, and subsequent dividend payments,
through January 1995, have been approximately 50% of annual net
earnings.
The $514.2 million portfolio of investment grade preferred
stocks provides PCI with significant liquidity and flexibility to
participate in additional investment opportunities.
Part II OTHER INFORMATION
- ------- -----------------
Item 1 LEGAL PROCEEDINGS
- ------ -----------------
See Part I, Item 1, Notes to Consolidated Financial
Statements, (6) Commitments and Contingencies, for information on
various legal proceedings. Also see Part II, Item 5, Base Rate
Proceedings, for information about a Petition for Review filed by
the Company with the District of Columbia Court of Appeals, in
July 1994, related to the District of Columbia Public Service
Commission's rate orders.
Item 5 OTHER INFORMATION
- ------ -----------------
OTHER FINANCING ARRANGEMENTS - Credit Agreements
- ------------------------------------------------
The Company and PCI satisfy their short-term financing
requirements through the sale of commercial promissory notes.
The Company and PCI maintain minimum 100 percent lines of credit
back-up for their outstanding commercial promissory notes. These
lines of credit were unused during 1995 and 1994.
BASE RATE PROCEEDINGS
- ---------------------
Maryland
- --------
Effective November 1, 1993, pursuant to a settlement
agreement, base rate revenue was increased by $27 million, or 3%.
In connection with the settlement agreement, no determination was
made with respect to rate of return. The rate of return on
35
common stock equity most recently determined for the Company in a
fully litigated rate case was 12.75% established by the
Commission in a June 1991 rate increase order.
Effective July 1, 1995, the DSM surcharge rate per KWH was
increased from $.00338 to $.00556, which will provide
approximately $29 million in increased revenue. The surcharge
includes a provision for the recovery of lost revenue,
amortization of pre-1995 actual program expenditures plus the
initial amortization of 1995 projected program costs, a capital
cost recovery factor of 9.46% on the unamortized balance, and an
incentive of $8.7 million awarded for exceeding 1994 energy
saving goals. The $8.7 million conservation incentive is
reflected in utility results in June 1995. An incentive of $5
million for exceeding 1993 goals was recorded in June 1994.
District of Columbia
- --------------------
On June 30, 1995, the Commission authorized, in Formal Case
No. 939, a $27.9 million, or 3.8%, increase in base rate revenue
effective July 11, 1995. The authorized rates are based on a
9.09% rate of return on average rate base, including an 11.1%
return on common stock equity and a capital structure which
excludes short-term debt. The Company's updated cost of service
data filing in February 1995, had requested a $56.6 million, or
7.6%, revenue increase based upon a 1994 calendar year test
period and a return of 9.89% on average rate base, including a
12.75% return on common stock equity. The primary difference
between the Company's $56.6 million request and the $27.9 million
increase granted was due to the difference in the rate of return.
In addition, the Commission approved the Company's Least-
Cost Plan filed in June 1994. DSM spending caps for the period
1995-1998 were approved, and the time period for filing Least-
Cost Planning cases was increased from two to three years. The
Commission also approved the Company's proposal to narrow the
scope of DSM activities by discontinuing operation of certain DSM
programs and by reducing expenditures on the remaining programs.
The narrowing of the scope of the DSM activities and the adoption
of the spending caps enable the Company to implement cost-
effective conservation programs while limiting the impact on the
price of electricity. An Environmental Cost Recovery Rider
(ECRR) was approved to provide for full cost recovery of actual
conservation program expenditures, through a billing surcharge.
Costs will be amortized over 10 years with a return on
unamortized amounts by means of a capital cost recovery factor
computed at the authorized rate of return. The initial rate,
which reflects all actual costs expended from July 1993 through
December 1994, will result in $15 million of additional revenue
annually. Subsequent rate updates will be filed annually on June
1 to reflect the prior year's actual costs within the spending
caps. Although the Commission denied the Company's request to
36
recover "lost revenue", due to DSM programs, through the
surcharge, a process has been established whereby the Company can
seek recovery of lost revenue in a separate annual proceeding
without the need to file frequent base rate increase requests.
In June 1995, the District of Columbia Court of Appeals
issued its Opinion and Order in response to the Company's July
1994 Petition for Review in connection with the Commission's
decisions in Formal Case No. 929. The Court affirmed the
decisions but remanded to the Commission for a fuller and clearer
explanation justifying the decisions.
Federal - Wholesale
- -------------------
The Company has a 10-year full service power supply contract
with the Southern Maryland Electric Cooperative, Inc. (SMECO), a
wholesale customer. The contract period is to be extended for an
additional year on January 1 of each year, unless notice is given
by either party of termination of the contract at the end of the
10-year period. The full service obligation can be reduced by
SMECO by up to 20% of its annual requirements with a five-year
advance notice for each such reduction. SMECO rates were
increased by $2.3 million effective January 1, 1995 and $2.6
million effective January 1, 1994. Although a rate increase of
$4.2 million is scheduled to become effective on January 1, 1996,
such increase is subject to revision to reflect significant
reductions in the Company's purchased capacity costs which have
occurred subsequent to the rate agreement.
Federal - Interchange and Purchased Energy
- ------------------------------------------
The Company's generating and transmission facilities are
interconnected with the other members of the Pennsylvania-New
Jersey-Maryland Interconnection Association (PJM) and other
utilities. The pricing of most PJM internal economy energy
transactions is based upon "split savings" so that the price of
such energy is halfway between the cost that the purchaser would
incur if the energy were supplied by its own sources and the cost
of production to the company actually supplying the energy.
In addition to PJM interchange activity, the Company has
interconnection agreements with Allegheny Power System (APS) and
Virginia Power. These agreements provide a mechanism and the
flexibility to purchase power from these parties or from others
with whom they are interconnected on an as-needed basis in
amounts mutually agreed to from time-to-time pursuant to
negotiated rates, terms and conditions.
Pursuant to long-term capacity purchase agreements with Ohio
Edison and APS, the Company is purchasing 450 megawatts of
capacity and associated energy through the year 2005. The
37
monthly capacity commitment under these agreements, excluding an
allocation of fixed operating and maintenance cost, increased
from $12,380 per megawatt through 1993 to $18,060 per megawatt,
effective January 1, 1994, with provision for escalation in 1999.
In addition, from June 1994 through May 1995, the Company
purchased 147 megawatts of capacity from Pennsylvania Power and
Light Company at a total cost of $3 million.
Duquesne Light Company Transmission Case
- ----------------------------------------
On March 29, 1995, FERC issued a Notice of Proposed
Rulemaking (NOPR) covering open access to transmission lines and
the recovery of stranded costs. These rules, if adopted, provide
for open access to the interstate electric transmission network.
Subsequent to this NOPR, Duquesne Light Company requested
that it be provided with 300 megawatts of transmission service,
firm and non-firm with flexible destinations, for 20 years on the
PJM and APS systems. During May 1995, FERC issued an order
directing the PJM and APS companies to provide Duquesne with the
transmission service it requested and to negotiate jointly, over
the next 45 days, the appropriate rates, terms and conditions.
On June 30, 1995 a "final offer" was submitted as directed by the
transmitting companies. This final offer contained the
allocation of the 300 megawatts among the member utilities and
each company's firm transmission rates. Final briefs were filed
with FERC on July 25, 1995.
PEAK LOAD, SALES, CONSERVATION, AND CONSTRUCTION
- ------------------------------------------------
AND GENERATING CAPACITY
-----------------------
Peak Load and Sales Data
- ------------------------
Kilowatt-hour sales decreased 2.7% for the three months
ended and 4.3% for the six and twelve months ended June 30, 1995,
as compared to sales for the corresponding periods ended June 30,
1994. The decreases in sales for the three and six months ended
June 30, 1995, reflect decreased customer usage due to below
average weather in June 1995, as compared to the above average
weather in June 1994 and milder winter weather in 1995, as
compared to 1994 when record-breaking frigid temperatures in
January resulted in extraordinarily high sales. Cooling degree
hours for the quarter were 53% below the corresponding period in
1994, and were 32% below the 20-year average weather for this
period. The decline in sales for the twelve months ended June
30, 1995 also reflects the mild summer weather during the 1994
cooling season. Assuming future weather conditions approximate
38
historical averages, the Company expects its compound annual
growth in kilowatt-hour sales to range between 1% and 2% over the
next decade.
Through July 26, 1995, the 1995 summer peak demand was 5,595
megawatts. The 1994 summer peak demand was 5,660 megawatts and
the all-time summer peak demand of 5,769 megawatts occurred in
July 1991. The Company's present generation capability,
including capacity purchase contracts, is 6,576 megawatts. To
meet the 1995 summer peak demand, the Company had 271 megawatts
available from its dispatchable energy use management programs.
Based on average weather conditions, the Company estimates that
its peak demand will grow at a compound annual rate of
approximately 1%, reflecting continuing emphasis on conservation
and energy use management programs and anticipated service area
growth trends. The 1994-1995 winter season peak demand of 4,685
megawatts was 6.5% below the all-time winter peak demand of 5,010
megawatts which was established in January 1994.
Conservation
- ------------
The Company's conservation and energy use management (EUM)
programs are designed to curb growth in demand in order to defer
the need for construction of additional generating capacity and
to cost-effectively increase the efficiency of energy use. To
reduce the near-term upward pressure on prices and total customer
bills, the Company is limiting the DSM programs being offered to
those with the strongest cost benefit results and has reduced
previously planned five-year conservation expenditures by
approximately $120 million. By narrowing its conservation
offerings, the Company expects to be able to continue to
encourage its customers to use energy efficiently without
significantly increasing electricity prices.
During 1994, the Company invested approximately $90 million
in energy conservation programs, all of which is currently being
recovered in rates. During the next five years, the Company
plans to expend an estimated $370 million ($86 million in 1995)
to encourage the efficient use of electric energy and to reduce
the need to build new generating facilities. The Company also
estimates that in 1994 energy savings of more than 810 million
kilowatt-hours were realized through operation of its
conservation and energy use management programs. It is further
estimated that peak load reductions of approximately 510
megawatts have been achieved to date from conservation and energy
use management programs and that additional peak load reductions
of approximately 395 megawatts will be achieved in the next five
years. See the discussions included in Part I, Item 1, Summary
of Significant Accounting Policies, Total Revenue, and Part II,
Item 5, Base Rate Proceedings, for additional information.
39
Construction and Generating Capacity
- ------------------------------------
The Company's construction expenditures, excluding AFUDC,
are projected to total $1.1 billion for the five-year period 1995
through 1999, which includes $165 million of estimated Clean Air
Act (CAA) expenditures. Making use of the flexibilities in its
long-term construction plan, the Company in 1994 reduced
projected expenditures for the five years 1995 through 1999 by
$190 million from amounts previously planned. This reduction
followed a $365 million reduction in 1993. The construction
reductions and deferrals are associated with lower rates of
projected growth in usage of electricity resulting in large part
from implementing economical conservation programs. The Company
plans to finance its construction program primarily through funds
provided by operations.
The electric utility industry is subject to increasing
competitive pressures, stemming from a combination of increasing
independent power production, greater reliance upon long-distance
transmission, and regulatory and legislative initiatives intended
to increase bulk power competition, including the Energy Policy
Act of 1992. Since the early 1980s, the Company has pursued
strategies which achieve financial flexibility through
conservation and energy use management programs, extension of the
useful life of generating equipment, cost-effective purchases
of capacity and energy and preservation of scheduling flexibility
to add new generating capacity in relatively small increments.
The Company serves a unique and stable service territory and is a
low-cost energy producer with customer prices which compare
favorably with regional and national averages.
The Company has developed cost-effective plans for complying
with the CAA which requires the reduction of sulfur dioxide and
nitrogen oxides emissions in two phases to achieve prescribed
standards. Both the District of Columbia and Maryland
commissions have approved the Company's plans for meeting Phase I
requirements including cost recovery of investment and inclusion
of emission allowance expenses in the Company's fuel adjustment
clause. The Company anticipates capital expenditures totaling
$165 million over the next five years pursuant to Phase II plans.
A 32-megawatt municipally owned resource recovery facility
is nearing completion in Montgomery County, Maryland. Under the
contract covering this project, the Company will initially
purchase energy without capacity payment obligations. In
addition, the Company has an agreement with Panda Energy
Corporation for a 230-megawatt gas-fueled combined-cycle
cogeneration project in Prince George's County, Maryland
scheduled for operation in 1996 with capacity payments commencing
in 1997. The Company currently projects that existing contracts
for nonutility generation and the Company's commitment to
conservation will provide adequate reserve margins to meet
40
customers' needs well beyond the year 2000. Completion of the
first combined-cycle unit at its Station H facility in Dickerson,
Maryland, is currently scheduled for 2004. This will add a steam
cycle to the two existing combustion turbine units.
SELECTED NONUTILITY SUBSIDIARIES FINANCIAL INFORMATION
- ------------------------------------------------------
The Company's wholly owned nonutility subsidiary, Potomac
Capital Investment Corporation (PCI), was organized in late 1983
with the objective of supplementing utility earnings and building
long-term value. The principal assets of PCI are portfolios of
securities and equipment leases, and to a lesser extent real estate
and other investments. The $514.2 million portfolio of investment
grade preferred stocks provides PCI with significant liquidity and
flexibility to participate in additional investment opportunities.
The Company's equity investment in PCI was $168.6 million at June
30, 1995 and $266.5 million at June 30, 1994, following an April
1995 reduction of $110 million ($.93 per share) relating to a one-
time, non-cash, after-tax charge to earnings as the result of the
adoption of a plan to exit the aircraft equipment leasing business
and dividend payments of $9 million and $15 million in January 1995
and 1994, respectively.
41
<TABLE>
Consolidated Statements of Earnings:
- -----------------------------------
<CAPTION>
Three Six Twelve
Months Ended Months Ended Months Ended
June 30, June 30, June 30,
-------------------- ------------------- -------------------
1995 1994 1995 1994 1995 1994
--------- -------- --------- -------- --------- --------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Income
Leasing activities $ 22,105 $ 23,886 $ 45,931 $ 48,426 $ 108,767 $118,993
Marketable securities 9,423 8,902 18,568 17,261 36,455 36,978
Other 1,138 1,254 2,052 1,364 1,284 (7,741)
--------- -------- --------- -------- --------- --------
32,666 34,042 66,551 67,051 146,506 148,230
--------- -------- --------- -------- --------- --------
Loss on assets held for disposal (170,078) - (170,078) - (170,078) -
--------- -------- --------- -------- --------- --------
Expenses
Interest 22,806 20,313 45,119 40,813 89,089 80,404
Administrative and general 2,797 2,494 5,428 5,004 10,682 12,546
Depreciation and
operating 20,796 27,274 40,400 38,126 57,845 64,318
Income tax credit (68,312) (16,176) (74,601) (19,234) (78,062) (15,001)
--------- -------- --------- -------- --------- --------
(21,913) 33,905 16,346 64,709 79,554 142,267
--------- -------- --------- -------- --------- --------
Net (loss) earnings from
nonutility subsidiary $(115,499) $ 137 $(119,873) $ 2,342 $(103,126) $ 5,963
========= ======== ========= ======== ========= ========
Per share contribution to
(loss) earnings of the Company $(.98) $ - $(1.01) $.02 $(.87) $.05
===== ==== ====== ==== ===== ====
Per share contribution includes:
Charge Upon Adoption of Plan
to End Investment in Aircraft
Equipment Leasing Business $(.93) $ - $(.93) $ - $(.93) $ -
Valuation Adjustment of
Aircraft Equipment Under
Master Lease $(.05) $ - $(.06) $ - $(.06) $ -
42
</TABLE>
<TABLE>
STATISTICAL DATA
- ----------------
<CAPTION>
Three Months Ended Twelve Months Ended
June 30, June 30,
--------------------------------- -------------------------------------
1995 1994 % Change 1995 1994 % Change
-------- -------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue from Sales
------------------
of Electricity
--------------
(Thousands of Dollars)
Residential $122,990 $125,490 (2.0) $ 514,891 $ 538,452 (4.4)
General Service 271,684 285,457 (4.8) 1,052,432 1,051,240 0.1
Large Power Service <F1> 9,048 9,538 (5.1) 35,516 35,153 1.0
Street Lighting 2,908 3,272 (11.1) 13,127 13,914 (5.7)
Rapid Transit 6,788 6,930 (2.0) 27,808 26,035 6.8
Wholesale 25,424 26,246 (3.1) 109,776 116,383 (5.7)
-------- -------- ---------- ----------
System $438,842 $456,933 (4.0) $1,753,550 $1,781,177 (1.6)
======== ======== ========== ==========
Energy Sales
------------
(Millions of KWH)
Residential 1,394 1,421 (1.9) 6,337 6,935 (8.6)
General Service 3,708 3,833 (3.3) 15,110 15,522 (2.7)
Large Power Service <F1> 164 171 (4.1) 678 702 (3.4)
Street Lighting 34 34 - 161 163 (1.2)
Rapid Transit 99 97 2.1 403 388 3.9
Wholesale 517 523 (1.1) 2,311 2,414 (4.3)
-------- -------- ---------- ----------
System 5,916 6,079 (2.7) 25,000 26,124 (4.3)
======== ======== ========== ==========
Average System Revenue
----------------------
per KWH (cents per KWH) 7.42 7.52 (1.3) 7.01 6.82 2.8
-----------------------
System Peak Demand
------------------
(Thousands of KW)
Summer - - 5,660 5,754
Winter - - 4,685 5,010
Net Generation
--------------
(Millions of KWH) 3,877 4,983 16,996 20,453
Fuel Mix (% of Btu)
-------------------
Coal (%) 93 80 85 72
Oil (%) 1 17 7 25
Gas (%) 6 3 8 3
Fuel Cost per MBtu
------------------
System Average $1.66 $1.91 $1.80 $2.00
Weather Data
------------
Heating Degree Days 333 267 3,635 4,339
20 Year Average 323 3,985
Cooling Degree Hours 1,833 3,924 9,363 14,674
20 Year Average 2,684 10,998
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).
<FN>
<F1> Large Power Service customers are served at high voltage of 66KV or higher.
</FN>
43
</TABLE>
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
(a) Exhibits
Exhibit 10.1 - Employment Agreement - filed
herewith.
Exhibit 10.2 - Potomac Electric Power Company
Supplemental Executive Retirement
Plan - filed herewith.
Exhibit 10.3 - Potomac Electric Power Company
Executive Split Dollar Insurance
Plan - filed herewith.
Exhibit 10.4 - Potomac Electric Power Company
Revised and Restated Executive and
Director Deferred Compensation Plan
- filed herewith.
Exhibit 10.5 - Potomac Electric Power Company
Executive Performance Supplemental
Retirement Plan - filed herewith.
Exhibit 10.6 - Potomac Electric Power Company
Supplemental Benefit Plan - filed
herewith.
Exhibit 11 - Computation of Earnings Per Common
Share - filed herewith.
Exhibit 12 - Computation of ratios - filed
herewith.
Exhibit 15 - Letter re unaudited interim
financial information - filed
herewith.
Exhibit 27 - Financial data schedule - filed
herewith.
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed by the
Company on May 19, 1995, providing information
regarding Potomac Capital Investment Corporation's
plan to exit the aircraft leasing business.
44
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Potomac Electric Power Company
------------------------------
Registrant
By /s/ D. R. Wraase
------------------------------
(D. R. Wraase)
Senior Vice President,
Finance and Accounting
July 28, 1995
- -------------
DATE
45
<TABLE>
Exhibit 11 Computations of Earnings Per Common Share
- ---------- -----------------------------------------
The following is the basis for the computation of primary and fully
diluted earnings per common share for the twelve months ended June 30, 1995
and the twelve months ended December 31, 1994 and 1993:
<CAPTION>
June 30, December 31, December 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Average shares outstanding for
computation of primary earnings
per common share 118,214,907 118,005,847 115,639,668
============ ============ ============
Average shares outstanding for
fully diluted computation:
Average shares outstanding 118,214,907 118,005,847 115,639,668
Additional shares resulting from:
Conversion of Serial Preferred
Stock, $2.44 Convertible Series
of 1966 (the "Convertible
Preferred Stock") 47,222 48,110 51,967
Conversion of 7% Convertible
Debentures 2,473,968 2,531,244 2,546,858
Conversion of 5% Convertible
Debentures 3,392,500 3,392,500 3,392,500
------------ ------------ ------------
Average shares outstanding for
computation of fully diluted
earnings per common share 124,128,597 123,977,701 121,630,993
============ ============ ============
Earnings applicable to common stock $70,949,000 $210,725,000 $225,324,000
Add: Dividends paid or accrued on
Convertible Preferred Stock 20,000 20,000 22,000
Interest paid or accrued on
Convertible Debentures,
net of related taxes 6,480,000 6,537,000 6,548,000
------------ ------------ ------------
Earnings applicable to common stock,
including cumulative effect of
accounting change and assuming
conversion of convertible securities $77,449,000 $217,282,000 $231,894,000
============ ============ ============
Primary earnings per common share $0.60 $1.79 $1.95
Fully diluted earnings per common share $0.62 $1.75 $1.91
</TABLE>
This calculation is submitted in accordance with Regulation S-K item 601
(b)(11) al- though it is contrary to paragraph 40 of APB Opinion No. 15
because it produces an anti- dilutive result for the twelve months ended
June 30, 1995. In addition, the valuation is not required by footnote 2
to paragraph 14 for 1994 and 1993 because it results in dilution of less
than 3%.
46
<TABLE>
Exhibit 12 Computation of Ratios
- ---------- ---------------------
The computations of the coverage of fixed charges, excluding the
cumulative effect of the 1992 accounting change, before income taxes, and the
coverage of combined fixed charges and preferred dividends for the twelve
months ended June 30, 1995 and for each of the preceding five years on the
basis of parent company operations only, are as follows.
<CAPTION>
Twelve
Months For The Year Ended December 31,
Ended -----------------------------------------------------
June 30,
1995 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Net income before cumulative effect
of accounting change $190,772 $208,074 $216,478 $172,599 $186,813 $165,199
Taxes based on income 110,169 116,648 107,223 76,965 80,988 70,962
-------- -------- -------- -------- -------- --------
Income before taxes and cumulative effect
of accounting change 300,941 324,722 323,701 249,564 267,801 236,161
-------- -------- -------- -------- -------- --------
Fixed charges:
Interest charges 143,813 139,210 141,393 138,097 138,512 127,386
Interest factor in rentals 16,933 6,300 5,859 6,140 5,690 4,237
-------- -------- -------- -------- -------- --------
Total fixed charges 160,746 145,510 147,252 144,237 144,202 131,623
-------- -------- -------- -------- -------- --------
Income before income taxes, cumulative
effect of accounting change and
fixed charges $461,687 $470,232 $470,953 $393,801 $412,003 $367,784
======== ======== ======== ======== ======== ========
Coverage of fixed charges 2.87 3.23 3.20 2.73 2.86 2.79
==== ==== ==== ==== ==== ====
Preferred dividend requirements $16,697 $16,437 $16,255 $14,392 $12,298 $10,598
-------- -------- -------- -------- -------- --------
Ratio of pre-tax income to net income 1.58 1.56 1.50 1.45 1.43 1.43
---- ---- ---- ---- ---- ----
Preferred dividend factor $26,381 $25,642 $24,383 $20,868 $17,586 $15,155
-------- -------- -------- -------- -------- --------
Total fixed charges and preferred dividends $187,127 $171,152 $171,635 $165,105 $161,788 $146,778
======== ======== ======== ======== ======== ========
Coverage of combined fixed charges
and preferred dividends 2.47 2.75 2.74 2.39 2.55 2.51
==== ==== ==== ==== ==== ====
47
</TABLE>
<TABLE>
Exhibit 12 Computation of Ratios
- ---------- ---------------------
The computations of the coverage of fixed charges, excluding the
cumulative effect of the 1992 accounting change, before income taxes, and the
coverage of combined fixed charges and preferred dividends for the twelve
months ened June 30, 1995 and for each of the preceding five years on a fully
consolidated basis are as follows.
<CAPTION>
Twelve
Months For The Year Ended December 31,
Ended -----------------------------------------------------
June 30,
1995 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(Thousands of Dollars)
Net income before cumulative effect
of accounting change $87,646 $227,162 $241,579 $200,760 $210,164 $170,234
Taxes based on income 32,107 93,953 62,145 79,481 80,737 63,360
-------- -------- -------- -------- -------- --------
Income before taxes and cumulative effect
of accounting change 119,753 321,115 303,724 280,241 290,901 233,594
-------- -------- -------- -------- -------- --------
Fixed charges:
Interest charges 233,032 224,514 221,312 226,453 225,323 199,469
Interest factor in rentals 20,503 9,938 9,257 6,599 6,080 4,559
-------- -------- -------- -------- -------- --------
Total fixed charges 253,535 234,452 230,569 233,052 231,403 204,028
-------- -------- -------- -------- -------- --------
Nonutility subsidiary capitalized interest (130) (521) (2,059) (2,200) (6,542) -
-------- -------- -------- -------- -------- --------
Income before income taxes, cumulative
effect of accounting change and
fixed charges $373,158 $555,046 $532,234 $511,093 $515,762 $437,622
======== ======== ======== ======== ======== ========
Coverage of fixed charges 1.47 2.37 2.31 2.19 2.23 2.14
==== ==== ==== ==== ==== ====
Preferred dividend requirements $16,697 $16,437 $16,255 $14,392 $12,298 $10,598
-------- -------- -------- -------- -------- --------
Ratio of pre-tax income to net income 1.37 1.41 1.26 1.40 1.38 1.37
---- ---- ---- ---- ---- ----
Preferred dividend factor $22,875 $23,176 $20,481 $20,149 $16,971 $14,519
-------- -------- -------- -------- -------- --------
Total fixed charges and preferred dividends $276,410 $257,628 $251,050 $253,201 $248,374 $218,547
======== ======== ======== ======== ======== ========
Coverage of combined fixed charges
and preferred dividends 1.35 2.15 2.12 2.02 2.08 2.00
==== ==== ==== ==== ==== ====
48
</TABLE>
Exhibit 15
July 28, 1995
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We are aware that Potomac Electric Power Company has incorporated
by reference our report dated July 28, 1995 (issued pursuant to
the provisions of Statement on Auditing Standards No. 71) in the
Prospectuses constituting parts of the Registration Statements
(Numbers 33-36798, 33-53685 and 33-54197) on Form S-8 filed on
September 12, 1990, May 18, 1994 and June 17, 1994, respectively,
and (Numbers 33-58810 and 33-50377) on Form S-3 filed on February
26, 1993 and September 23, 1993, respectively. We are also aware
of our responsibilities under the Securities Act of 1933.
Very truly yours,
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Washington, D.C.
49
This Agreement, made this 26th day of April, 1995 between
Potomac Electric Power Company, hereinafter referred to as the
"Company" and Edward F. Mitchell, hereinafter referred to as
"Mitchell",
WITNESSETH:
WHEREAS, Mitchell has served as Chief Executive Officer of
the Company since September 1, 1989; and
WHEREAS, the Company wishes to make provision for the
continuance of Mitchell's employment as Chief Executive Officer
for the period specified herein; and
WHEREAS, Mitchell is willing to continue as Chief Executive
Officer upon the terms and conditions hereinafter set forth;
NOW THEREFORE, the parties agree as follows:
1. For the period beginning on the date of execution of
this Agreement and ending on January 1, 1997 (or such subsequent
date as may be mutually agreed to in writing between the Company
and Mitchell) Mitchell will serve as Chief Executive Officer of
the Company, unless his services are sooner terminated in
accordance with the provisions of clause numbered 3 hereafter.
During the continuance of his employment, Mitchell will devote
his full time and energies and best efforts to the business of
the Company.
1
2. Mitchell's salary during the period of this Agreement
shall be payable monthly at an annual rate to be established by
the Company's Board of Directors from time to time.
3. Mitchell's services as Chief Executive Officer may be
terminated at a time prior to January 1, 1997 (or such subsequent
date as may be mutually agreed to in writing between the Company
and Mitchell) in the following circumstances:
(a) The Board of Directors of the Company may
terminate Mitchell's services and effectuate his retirement upon
a showing by clear and convincing evidence of just cause and with
six (6) months' notice to Mitchell.
(b) Mitchell's services shall be terminated upon a
determination by the Company that he has become totally and
permanently disabled to work for the Company due to physical or
mental disability.
4. Upon termination of Mitchell's services with the
Company, whether on or before January 1, 1997 (or such subsequent
date as may be mutually agreed to in writing between the Company
and Mitchell) and for whatever reason, the Company will pay or
cause to be paid to Mitchell, in addition to any amounts payable
under the Company's General Retirement Plan, a monthly amount,
commencing on the first day of the month following such
termination and continuing through the first day of the month in
2
which occurs Mitchell's death, equal to the excess of (a) below
over (b) below:
(a) one-twelfth (1/12th) of sixty-five percent (65%)
of Mitchell's "final average annual pay", as defined below;
(b) the monthly amount of pension benefit which
Mitchell receives under the General Retirement Plan, calculated
in the form of the Automatic Joint and Survivor Annuity, as
defined in the General Retirement Plan, if Mitchell is married at
the time of termination (to a spouse as to whom Automatic Joint
and Survivor Annuity payments are available for election and
elected under the General Retirement Plan), and on the Normal
Form of Annuity, as defined in the General Retirement Plan, if
Mitchell is not married at the time of termination. Mitchell
hereby agrees that he shall not elect an optional form of annuity
under the General Retirement Plan inconsistent with the
foregoing.
For purposes of this Agreement, Mitchell's final average
annual pay shall be: (i) the amount paid or payable to Mitchell
in respect of the last twelve (12) full months of his employment,
without reduction for any deferrals under any deferred
compensation plan or arrangement made available to Mitchell by
the Company, plus (ii) the target annual award designated as
applicable to Mitchell's position under the Company's Executive
3
Incentive Compensation Plan guidelines for the year in which his
termination of employment occurs.
5. (i) In the event of Mitchell's death after termination
of employment but before 120 monthly payments have been made to
Mitchell under clause 4 above, if Mitchell is survived by a
spouse who is entitled to Automatic Joint and Surviving Spouse
Annuity payments under the General Retirement Plan, the Company
will pay or cause to be paid to such surviving spouse, in
addition to any amounts payable under the Company's General
Retirement Plan, a monthly amount, commencing on the first day of
the month following the month in which Mitchell dies and
continuing through the date upon which a total of 120 payments
have been made to Mitchell and his surviving spouse, equal to the
excess of (a) below over (b) below:
(a) the amount described in paragraph (a) under clause
4 above;
(b) the monthly amount which said spouse receives
under the General Retirement Plan by operation of the automatic
Joint and Surviving Spouse Annuity in effect thereunder.
If Mitchell's spouse survives Mitchell but dies prior
to the date upon which a total of 120 payments have been made to
Mitchell and his surviving spouse, the estate of Mitchell's
surviving spouse shall be entitled to receive monthly payments in
an amount equal to the amount described in paragraph (a) under
4
clause 4, above, until the date upon which a total of 120
payments have been made to Mitchell, his surviving spouse and the
estate of such surviving spouse.
(ii) If Mitchell's surviving spouse is still living
after a total of 120 payments have been made under clause 4 and
paragraph (i) of this clause 5, the Company will pay or cause to
be paid to said surviving spouse, in addition to any amounts
payable under the General Retirement Plan, a monthly amount,
commencing on the first day of the month following the 120th
payment and continuing through the first day of the month in
which occurs the death of said surviving spouse, equal to the
amount described in paragraph (iii) below.
(iii) In the event of Mitchell's death after
termination of employment and after 120 monthly payments have
been made to Mitchell under clause 4 above, if Mitchell is
survived by a spouse who is entitled to Automatic Joint and
Survivor Annuity payments under the General Retirement Plan, the
Company will pay or cause to be paid, in addition to any amounts
payable under the General Retirement Plan, a monthly amount,
commencing on the first day of the month following the month in
which Mitchell dies and continuing through the first day of the
month in which occurs the death of said surviving spouse, equal
to the excess of (a) below over (b) below:
5
(a) seventy-five percent (75%) of the amount
described in paragraph (a) under clause 4 above;
(b) the monthly amount which said spouse receives
under the General Retirement Plan by operation of the Automatic
Joint and Surviving Spouse Annuity in effect thereunder.
(iv) In the event of Mitchell's death after
termination of employment but prior to receipt by Mitchell of 120
monthly payments of the benefit described in clause 4, above, if
Mitchell is not survived by a spouse who is entitled to Automatic
Joint and Surviving Spouse Annuity payments under the General
Retirement Plan, the Company shall pay or cause to be paid to
Mitchell's designated beneficiary, commencing on the first day of
the month following Mitchell's death, an amount equal to the
amount described in paragraph (a) under clause 4, above, until
the sum of the number of monthly payments received by Mitchell
under clause 4, above, and the number of monthly payments
received by Mitchell's beneficiary under this paragraph (iv) of
this clause 5 equals 120. For purposes of this paragraph (iv) of
this clause 5, Mitchell's designated beneficiary shall be deemed
to constitute the individual or individuals designated by
Mitchell in his most recent writing on file with the Company. In
the event that Mitchell fails to designate a beneficiary or in
the event that Mitchell's designated beneficiary fails to survive
6
Mitchell, Mitchell shall be deemed to have designated his estate
as beneficiary hereunder.
6. In the event of Mitchell's death before termination of
employment, if Mitchell is survived by a spouse to whom he was
married for one year or more on the date of his death, the
Company will pay or cause to be paid to such surviving spouse, in
addition to any amounts payable under the Company's General
Retirement Plan, a monthly amount, commencing on the first day of
the month following the month in which Mitchell dies and
continuing through the first day of the month in which occurs the
death of said surviving spouse, equal to the excess of (a) below
over (b) below:
(a) seventy-five percent (75%) of the amount described
in paragraph (a) under clause 4 above;
(b) the monthly amount of Surviving Spouse Benefits
which Mitchell's spouse receives under Article VI of the General
Retirement Plan.
7. If pensions under the Company's General Retirement Plan
should be increased for retired employees at any time or from
time to time after Mitchell's termination of employment to take
into account cost-of-living increases, the amount of the payments
described in clauses 4 through 6 of this Agreement shall be
increased at the same time or times according to the same formula
7
that is applied to pension amounts under the General Retirement
Plan.
It is agreed that all benefits payable to Mitchell or to his
beneficiary under Clauses 4 through 6 of this Agreement will be
treated as compensation income to Mitchell or as income in
respect of a decedent to Mitchell's beneficiary and that Mitchell
(or his beneficiary) shall be personally responsible for any
Federal income tax liability attributable thereto. However, in
the event any additional excise tax or other extraordinary tax
liability arises from such benefits and results in a Federal tax
liability in excess of that generally attributable to
compensation income, the Company shall increase the amount of
benefits payable under clauses 4 through 6 so as to provide
Mitchell or his beneficiary with additional funds to pay the
amount of such additional excise tax or other extraordinary tax
liability, plus any additional tax liability arising from such
additional benefit payments.
8. The Company agrees to continue after Mitchell's
termination of employment, and for the remainder of his life, on
a basis which produces no net additional income tax liability or
other cost to Mitchell or his beneficiary, life insurance
coverage or the equivalent on Mitchell's life through an
arrangement under which Mitchell shall have the power to name the
beneficiary and to assign the incidents of ownership in the
8
policy. The face amount of such coverage shall be an amount
equal to the excess of (a) over (b) below:
(a) Three times Mitchell's final average salary
determined in the manner described in provision (i) of the last
paragraph of Clause 4 above.
(b) The amount otherwise provided under the Company's
group life insurance program generally applicable to retired
executives of Mitchell's age during each year including, without
limitation, any death benefits attributable to the Company's
split dollar insurance program.
9. The Company agrees that upon Mitchell's death, if
Mitchell is survived by a spouse who is entitled to Automatic
Joint and Surviving Spouse Annuity payments under the General
Retirement Plan, the Company will continue for the remainder of
said spouse's life to provide or cause to be provided to said
spouse, on a basis which produces no net additional income tax or
other cost to said spouse, medical coverage and benefits
equivalent to those provided to the Company's active employees.
10. The Company will also continue to provide tax
preparation and financial advisory services to Mitchell for years
up to and including the year in which he attains age 72, or, if
Mitchell dies before reaching age 72, to his surviving spouse up
to and including the year in which he would have reached age 72.
9
11. This Agreement shall inure to the benefit of and be
binding upon the Company, its successors and assigns (including
without limitation any corporation which might acquire all or
substantially all of the Company's assets and business or with
which the Company may be consolidated or merged).
12. This Agreement is effective on the date of execution
hereof.
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed by its duly authorized officers, under its corporate
seal, by the order of its Board of Directors, and Mitchell has
hereunto set his hand and seal both as of the day and year first
above written.
POTOMAC ELECTRIC POWER COMPANY
/s/ John M. Derrick
By___________________________
President
Attest:
/s/ William Torgerson
____________________________
Secretary
/s/ Edward F. Mitchell
____________________________(Seal)
Edward F. Mitchell
POTOMAC ELECTRIC POWER COMPANY
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Potomac Electric Power Company Supplemental Executive Retirement
Plan was established, effective July 1, 1986, by the Board of Directors of
Potomac Electric Power Company (the "Company") to provide supplemental
retirement benefits to key executives of the Company. The Plan was amended by
the Board of Directors on December 19, 1988, April 26, 1989, April 24, 1991,
and January 27, 1994 and is restated herein.
I. Definitions
1.1 Applicable Form of Benefit - The type of life annuity which will
be provided to a Participant receiving benefits under this Plan. The Plan
benefit to be paid to a Participant under this Plan shall be paid in the
annuity form elected by the Participant with respect to the Participant's
benefits under the General Retirement Plan, except that the variable annuity
option under the General Retirement Plan is not an annuity form available for
payments of benefits under this Plan. If a Participant does elect the
variable annuity option under the General Retirement Plan, benefits under this
Plan will be paid in the form applicable to the component of the Participant's
accrued benefit under the General Retirement Plan which is not payable in the
variable annuity form.
1.2 Committee - The Human Resources Committee of the Board of
Directors of the Company.
1.3 Eligible Member - A Member of the General Retirement Plan who is
described in Section 2.1 of this Plan.
1.4 General Retirement Plan - The General Retirement Plan for
Employees of Potomac Electric Power Company.
1.5 Surviving Spouse Welfare Plan - The Exempt Employees Surviving
Spouse Welfare Plan of Potomac Electric Power Company.
1.6 Participant - An Eligible Member who has satisfied the conditions
described in Section 2.1 and to whom the provisions of Section 2.2 are not
applicable.
1.7 Participation Agreement - The separate agreement with a designated
Participant which sets forth the constructive years of Benefit Service which
will be credited to the Participant for purposes of determining benefits under
the Plan.
1.8 Plan - The Supplemental Executive Retirement Plan of the Potomac
Electric Power Company.
1.9 Supplemental Benefit Plan - Supplemental Benefit Plan of Potomac
Electric Power Company.
Any term which is not defined in this section or any other section of
the Plan will have the same meaning as that term has under the General
Retirement Plan.
II. Eligibility and Participation
2.1 Any executive officer or key executive of the Company shall be
eligible to participate in this Plan upon being designated by the Board of
Directors of the Company as a Participant hereunder and upon providing to the
Company satisfactory evidence concerning all other pension benefits, if any,
which such individual has received or to which such individual may become
entitled from plans or arrangements maintained by such individual's prior
employers. The Board of Directors shall designate the amount of service to be
credited to the Participant for purposes of determining benefits under the
Plan.
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2.2 An employee shall cease to be a Participant in this Plan and shall
not be entitled to any benefits hereunder if the employment of such employee
is terminated for any reason, other than death, before the later of (i) the
date the employee attains age 59, or (ii) the date the employee first attains
either his Early Retirement Date or his Normal Retirement Date under the
General Retirement Plan.
III. Retirement Benefits
3.1 This Section 3.1 defines the amount of retirement income which
will be paid to a Participant (who terminated employment on or after attaining
age 59 for any reason other than death) to supplement other pension benefits.
The amount of retirement benefits payable from this Plan in the Applicable
Form of Benefit shall be the difference, if any, between (i) the amount of the
benefits to which such Participant would be entitled under the provisions of
the General Retirement Plan and the Supplemental Benefit Plan (expressed in
the Applicable Form of Benefit) (1) had the amount of the benefits under such
plans not been otherwise reduced due to the limitations imposed by Section 415
of the Internal Revenue Code, (2) had any dollar limitation under the Internal
Revenue Code on the amount of compensation that may be considered in
determining benefits under such plans not been imposed, (3) had the deferred
compensation earned by such Participant which was excluded from the
Participant's compensation base used in determining retirement benefits under
such plans been included in such compensation base, and (4) had the number of
such Participant's years of Benefit Service under such General Retirement Plan
been increased by the additional years of service set forth in such
Participant's Participation Agreement, and (ii) the amount of benefits, if
any, to which such Participant is otherwise entitled under the General
Retirement Plan and the Supplemental Benefit Plan. Notwithstanding the above,
in no event will a Participant be granted constructive years of Benefit
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Service hereunder which would cause the combination of his actual years of
Benefit Service (as earned under the General Retirement Plan) and his
constructive years of Benefit Service granted hereunder to exceed the lesser
of (i) forty (40), or (ii) the number by which the Participant's then current
age exceeds twenty-five (25). To the extent that a cost of living adjustment
is made to the benefits payable under the General Retirement Plan, a
comparable and proportionate adjustment will be made to the benefits payable
hereunder.
3.2 The monthly benefit provided to a Participant under Section 3.1
shall commence as of the first day of the month on which such Participant
begins receipt of retirement benefits under the General Retirement Plan and
shall continue for so long as benefits are payable to such Participant (or his
surviving spouse) under such General Retirement Plan.
3.3 Death Benefits - This Section 3.3 defines the amount of death
benefits, if any, which will be paid to the surviving spouse of a Participant
who dies while employed by the Company. In order to receive death benefits
hereunder, a surviving spouse must have been legally married to the
Participant for at least one (1) year prior to the Participant's death and the
sum of the Participant's actual years of Benefit Service and constructive
years of Benefit Service granted herein must equal at least ten (10) years.
The amount of death benefits payable from this Plan shall be the difference,
if any, between (i) (a) the amount of the death benefits to which such
surviving spouse would have been entitled under the provisions of the General
Retirement Plan and/or Surviving Spouse Welfare Plan and the Supplemental
Benefit Plan (expressed as a single life annuity) and (b) the amount of the
benefits under such plans (1) had the amount not been otherwise reduced due to
the limitations imposed by Section 415 of the Internal Revenue Code, (2) had
any dollar limitation under the Internal Revenue Code on the amount of
compensation that may be considered in determining benefits under such plans
not been imposed, (3) had the deferred compensation earned by such Participant
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which was excluded from the Participant's compensation base used in
determining retirement benefits under such plans been included in such
compensation base, and (4) had the number of such Participant's years of
Benefit Service under such General Retirement Plan been increased by the
additional constructive years of Benefit Service set forth in such
Participant's Participation Agreement, and (ii) the amount of the benefits, if
any, to which the surviving spouse would otherwise be entitled under those
plans.
3.4 The monthly death benefit provided to a surviving spouse under
Section 3.3 shall commence as of the first day of the month on which such
surviving spouse begins receipt of death benefits under the General Retirement
Plan or Surviving Spouse Welfare Plan and shall continue for so long as
benefits are payable to such surviving spouse under either such plan.
3.5 Loss of Benefits
(a) Notwithstanding any other section of this Plan, if a
Participant is discharged by the Company because of misfeasance, malfeasance,
dishonesty, fraud, misappropriation of funds, or commission of a felony, or if
the Committee determines that the Participant has made a material
misrepresentation regarding the amount or nature of any pension, retirement or
deferred compensation benefits resulting from Participant's prior employment,
such Participant's rights to any benefit under this Plan shall be forfeited.
(b) If during his employment with the Company or after the
Participant has ceased to be employed by the Company, and after providing him
an opportunity to be heard, following 30 days written notice, sent by
registered mail, return receipt requested, the Committee finds that such
Participant has used or is using trade secrets or other confidential, secret
or proprietary information gained while in the employ of the Company in a
manner which is, or is likely to be detrimental to the best interests of the
Company, the Committee shall notify such Participant of such findings and stop
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all current and future distributions of his interest hereunder. If within one
year of the date or such notice, it is determined by the Committee upon proof
submitted by such Participant that he has ceased to so use such information
and the Company's loss from such Participant's past and future improper use of
such information is likely to be insubstantial in proportion to the future
loss of his benefit hereunder, the Committee may reinstate him; and, if
payment of his retirement income has stopped, it shall be resumed. If he is
not reinstated within one year of such notice, the Committee shall cancel his
interest hereunder.
3.6 Facility of Payment - If the Committee shall find that any person
to whom a benefit is payable is unable to care for his affairs because of
illness or accident, any payment due hereunder (unless a prior claim therefor
shall have been made by a duly appointed guardian, committee, or other legal
representative) may be paid to the spouse, a child, children, a parent, or a
brother or sister, or to any person deemed by the Company to have incurred
expense for such person otherwise entitled to payment. Any such payment shall
be a complete discharge of all liability under the Plan therefor.
3.7 Payment of Benefits Upon Change in Control
(a) Notwithstanding any other provisions of the Plan except
Section 3.5, if a Participant terminates employment before the later of (i)
the date the employee attains age 59, or (ii) the date the employee first
attains either his Early Retirement Date or his Normal Retirement Date under
the General Retirement Plan for any reason other than death following the
occurrence of an event described in subsection (b) of this Section 3.7, the
entitlements of such Participant under the Plan shall be paid to him in a lump
sum within thirty (30) days of the date of his termination of employment. The
amount of such lump sum payment shall be computed in two steps. Under the
first step, a calculation will be made of the monthly annuity payments to
which such Participant would otherwise have been entitled under the provisions
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of Sections 3.1 and 3.2 of the Plan based upon (a) the service performed by
the Participant through the date of such termination of employment, plus (b)
the additional years of service set forth in such Participant's Participation
Agreement (hereinafter collectively referred to as "Aggregate Service") under
the assumptions that (i) the Participant was scheduled to commence receipt of
benefits under this Plan as of the earliest date on which the Participant
could receive benefits under the General Retirement Plan that were not subject
to the early retirement reduction factor described in Section 3.02(a) of the
General Retirement Plan determined as if such Participant's years of Vesting
Service under the General Retirement Plan equalled his Aggregate Service and
(ii) this Plan did not contain any minimum age requirement as to eligibility
for receipt of benefits. Under the second step, such monthly annuity payments
will be discounted to their present value as of the date of the Participant's
termination of employment using the Pension Benefit Guaranty Corporation's
immediate payment interest rate in effect on the date of the Participant's
termination of employment plus one-half of one percent (1/2%).
(b) The provisions of subsection (a) of this Section 3.7 shall
apply in the event that (i) any "person" (as such term is used in Section
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), other than a trustee or other fiduciary holding securities
under an employee benefit plan of the Company or a corporation owned, directly
or indirectly, by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing 30% or more of the
combined voting power of the Company's then outstanding securities; or (ii)
during any period of twenty-four (24) consecutive months (not including any
period prior to the adoption of this Plan), individuals who at the beginning
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of such period constitute the Board of Directors of the Company and any new
director (other than a director designated by a person who has entered into an
agreement with the Company to effect a transaction described in clause (i) or
(iii) of this subsection (b)) whose election by the Board of Directors of the
Company or nomination for election by the Company's stockholders was approved
by a vote of at least two-thirds (2/3) of the directors then still in office
who either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute a majority thereof; or (iii) the stockholders of the Company
approve a merger or consolidation of the Company with any other corporation
other than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least 70% of the combined voting power
of the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, the stockholders of the
Company approve a plan of complete liquidation of the Company, or the
stockholders of the Company approve an agreement for the sale or disposition
by the Company of all or substantially all the Company's assets.
IV. Administration of the Plan
4.1 Administration - The Human Resources Committee of the Board of
Directors shall administer the Plan.
(a) The Committee shall have the sole, exclusive authority to
interpret and construe the provisions of this Plan, to decide any disputes
which may arise with regard to the rights of employees under the terms of this
Plan, to give instructions and directions necessary hereunder and, in general,
to direct the administration of the Plan. All fees, salaries, and other costs
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incurred in connection therewith shall be paid by the Company.
(b) The Committee shall keep or cause to be kept, records
containing all relevant data pertaining to Participants and their rights under
this Plan, and is charged with the primary duty of seeing that each
Participant receives the benefits to which he may be entitled under this Plan.
4.2 Accounts and Reports - The Company and its officers, employees and
directors or designees and the Committee shall be entitled to rely upon all
tables, valuations, certificates, and reports furnished by any actuary
selected by the Committee; upon all certificates and reports made by any
accountant selected by the Committee; and upon all opinions given by any legal
counsel selected by the Committee; and the Company and its officers and
directors or designees and the Committee shall be fully protected in respect
of any action taken or suffered by them in good faith in reliance upon any
tables, valuations, certificates, reports, opinions, or other advice furnished
by any such actuary, accountant, or counsel; and all action so taken or
suffered shall be conclusive upon each of them and upon all Participants of
the Plan.
4.3 Expenses of Administration - All expenses shall be paid by the
Company.
4.4 Liability - The Company, the Board of Directors, the Committee,
officers, and employees shall incur no liability for any action taken in good
faith in connection with the administration of this Plan. The Company may
provide all appropriate and necessary insurance to render the aforesaid
harmless from any and all liability incurred in the discharge of their duties.
V. Funding
5.1 Company Contributions - No assets of the Company shall be set
aside, earmarked or placed in trust or escrow for the benefit of any
Participant to fund the Company's obligations which may exist under the Plan;
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provided, however, that the Company may establish a grantor trust to hold
assets to secure the Company's obligations to the Participants under this Plan
if the establishment of such a trust does not result in the Plan being
`funded' for purposes of the Internal Revenue Code of 1986, as amended.
Except to the extent provided through a grantor trust established under the
provisions of the preceding sentence, all payments under this Plan shall be
made out of the Company's general revenue and a Participant's right to
payments shall be solely that of an unsecured general creditor of the Company.
5.2 Employee Contributions - No Participant shall be required or
permitted to make any contribution to the Plan.
VI. Miscellaneous
6.1 Limitation of Responsibility - Neither the establishment of the
Plan, any modifications thereof, nor the payment of any benefits shall be
construed as giving to any Participant or other person any legal or equitable
right against the Company (the Board of Directors, the Committee, or any
officer or employee) except as herein provided; and in no event shall the
other terms of employment of any employee be modified or in any way affected
thereby.
6.2 Restrictions on Alienation and Assignment - Except as any of the
following provisions may be contrary to the law of any state having
jurisdiction in the premises, no Participant, or beneficiary shall have the
right to assign transfer, hypothecate, encumber, commute or anticipate his
interest in any payments under this Plan, and such payments shall not in any
way be subject to any legal process to levy upon or attach the same for
payment of any claim against any Participant, or beneficiary.
6.3 Failure to Claim Amounts Payable under the Plan - In the event
that any amount shall become payable hereunder to any person or, upon his
death, to his surviving spouse and if after written notice from the Committee
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mailed to such person's last known address as shown in the Company's records,
such person or his personal representative shall not have presented himself to
the Committee within six months after mailing of such notice, the Committee
may, but it is not required to, determine that such person's interest in the
Plan has terminated, which determination shall be conclusive upon all persons
provided, however, in lieu of the foregoing, the Committee may in its sole
discretion apply to a court of competent jurisdiction for direction as to the
distribution of such amount.
6.4 Right of the Company to Dismiss or Demote Employees - Neither the
action of the Company in establishing this Plan nor any action taken by it
under any provisions of this Plan shall be construed as giving to any employee
of the Company the right to be retained in any specific position or in its
employ in general or any right to any retirement income or benefit or to any
payment whatsoever, except to the extent of the benefits which may be provided
for by the express provisions of this Plan. The Company expressly reserves
the right at any time, to dismiss, demote or reduce the compensation of any
employee without incurring any liability for any claim against itself for any
payment whatsoever.
6.5 Amendment and Termination - Nothing in this Plan shall be deemed
to limit the Company's right, by resolution of the Board of Directors of the
Company, to amend, modify or terminate the Plan at any time and for any reason
except that no such amendment, modification or termination shall serve to
decrease the benefits set forth in a Participant's Participation Agreement,
other than by operation of Section 3.5 or by operation of an involuntary
termination of employment under the rights reserved to the Company in Section
6.4.
6.6 Laws to Govern - The provisions of this Plan shall be construed,
administered, and enforced according to the laws of the District of Columbia.
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IN WITNESS WHEREOF, the Company has caused this restated version of the
Plan to be signed on this 2nd day of June, 1995, which restated version
reflects all modifications made to the Plan through the date of execution, and
supersedes the Plan document signed April 1, 1993.
ATTEST POTOMAC ELECTRIC POWER COMPANY
/s/ Ellen Sheriff Rogers /s/ E. F. Mitchell
By:________________________ By:__________________________________
Asst. Secretary Chairman of the Board
POTOMAC ELECTRIC POWER COMPANY
EXECUTIVE SPLIT DOLLAR INSURANCE PLAN
Potomac Electric Power Company (the "Company"), pursuant to authority
granted by its Board of Directors, established the Executive Split Dollar
Insurance Plan (the "Plan") on July 28, 1988. The Plan was amended on April
26, 1989, October 22, 1992, December 21, 1992, and April 25, 1995 and is
restated herein.
1. Purpose of the Plan. The purpose of the Potomac Electric Power
Company Executive Split Dollar Insurance Plan is to provide those key
employees who are mainly responsible for the continued growth and financial
success of the Company and its Subsidiaries with life insurance protection in
the event of their demise during active employment with the Company or
subsequent to their retirement from active service with the Company.
2. Definitions. The following definitions are applicable herein:
(a) "Beneficiary -- the person or persons designated by the
Eligible Employee as beneficiary or beneficiaries under the Policy owned by
the Eligible Employee.
(b) "Board" -- the Board of Directors of the Company.
(c) "Company" -- Potomac Electric Power Company or its
successors.
(d) "Compensation" -- the annual base salary rate established
for an Eligible Employee as of the date he or she becomes eligible to
participate in the Plan.
(e) "Eligible Employee" -- any person employed by the Company or
a Subsidiary on a regularly scheduled basis who is selected by the Board to
participate in the Plan.
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(f) "Insurer" -- the insurance company which has issued a
particular Policy.
(g) "Policy" -- a life insurance policy on the life of an
Eligible Employee which is owned by the Eligible Employee and is subject to
the Company premium contribution feature and collateral assignment
requirements of the Plan.
(h) "Rollout Policy" -- the new life insurance policy issued by
the Insurer to the Company on the Rollout Qualification Date of a Policy or
upon such earlier date as a rollout of a Policy may take place under the
provisions of Sections 7, 8 or 9 of the Plan. The Rollout Policy will be
initially funded with some or all of the cash surrender value attributable to
the Policy from which it was originated.
(i) "Rollout Qualification Date" -- the later of the date of
retirement (following attainment of age sixty-five (65)) or the fifth (5th)
anniversary of an Eligible Employee's acquisition of a Policy.
(j) "Subsidiary" -- any corporation of which 50% or more of its
outstanding voting stock or voting power is beneficially owned, directly or
indirectly by the Company.
3. Eligibility. Key employees of the Company and its Subsidiaries
who, in the opinion of the Board are mainly responsible for the continued
growth and financial success of the business of the Company or one or more of
its Subsidiaries shall be eligible to acquire life insurance protection under
the terms and conditions of this Plan. Subject to the provisions of the Plan,
the Board may from time to time select such Eligible Employees to participate
hereunder. No employee of the Company or its Subsidiaries shall have any
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right to be selected under this Plan.
4. Administration. The Plan shall be administered in accordance with
the terms of the Plan document by the Human Resources Committee of the Board
which shall implement the decisions of the Board. All questions of
interpretation and application of the Plan, or the terms and conditions of any
documents effectuating the Plan shall be subject to the determination of the
Board or the Human Resources Committee of the Board, to the extent delegated
by the Board. Such determination shall be final and binding upon all parties
affected thereby.
5. Acquisition of Policies. Each Eligible Employee shall be granted
the opportunity to acquire a Policy in the face amount and with such other
policy characteristics as may be approved by the Human Resources Committee of
the Board. During the period of the Eligible Employee's employment with the
Company, the Company will pay all premium amounts in respect of the Policy.
The Employee will execute a collateral assignment on a form satisfactory to
the Human Resources Committee assigning to the Company certain economic rights
to the Policy as described in the Plan.
6. Death of Employee Prior to Rollout Qualification Date. In the
event of the death of an Eligible Employee prior to termination of employment
with the Company or any Subsidiary, death benefit proceeds under the Policy in
an amount equal to three (3) times the Eligible Employee's Compensation,
increased by seven percent (7%) each January 1 through the date of death, or
such other amount as the Human Resources Committee may designate at the time
the Policy is established, will be paid to the Eligible Employee's
Beneficiary. In the event an Eligible Employee terminates employment on or
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after attaining age sixty-five (65) and dies prior to his or her Rollout
Qualification Date, death benefit proceeds under the Policy in an amount equal
to three (3) times the Eligible Employee's Compensation, increased by seven
percent (7%) each January 1 through the date of death, or such other amount as
the Human Resources Committee may designate at the time the Policy is
established, will be paid to the Eligible Employee's Beneficiary. All
remaining death benefit proceeds under the Policy will be paid to the Company.
7. Termination of Employment Prior to Age 55. In the event an
Eligible Employee terminates employment for any reason other than death prior
to attainment of age fifty-five (55), the Insurer will issue a Rollout Policy
to the Company having a cash surrender value equal to the total premiums paid
to date by the Company on the Policy. The Eligible Employee will be entitled
to retain the Policy with any remaining cash surrender value subject to the
requirement to pay any premiums necessary to continue the Policy in effect.
8. Termination of Employee Between Age 55 and Age 65. In the event
an Eligible Employee terminates employment for any reason other than death
subsequent to attaining age fifty-five (55) but prior to attaining age sixty-
five (65), the Insurer will issue a Rollout Policy to the Company having a
cash surrender value equal to the total premiums paid to date by the Company
on the Policy. The Eligible Employee will be entitled to retain the Policy
with the remaining cash surrender value. A determination will be made by the
Human Resources Committee of the amount of additional life insurance coverage
which can be provided to the Eligible Employee by the cash surrender value
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retained within the Policy. To the extent that such additional life insurance
coverage is projected to be less during any future year than the amount of
life insurance coverage to which the Eligible Employee would have been
entitled under the terms and provisions of the group term insurance program in
effect on June 30, 1988, the Company will take appropriate steps to acquire
and maintain a term life insurance policy to provide the Eligible Employee's
designated Beneficiary with the projected differential in life insurance
coverage.
9. Termination of Employment On or After Attainment of Age 65.
(a) In the event of the termination of employment of an Eligible
Employee for any reason other than death on or after attainment of age sixty-
five (65) but before the Rollout Qualification Date, the Company shall
continue to pay the premium costs attributable to the Policy until the Rollout
Qualification Date. Upon the Rollout Qualification Date, the Eligible
Employee will be entitled to receive the treatment described in Section 9(b).
(b) In the event of the termination of employment of an Eligible
Employee for any reason other than death on or after attainment of his or her
Rollout Qualification Date, the Policy will be divided between the Policy
retained by the Eligible Employee and the Rollout Policy to be issued to the
Company. The Policy retained by the Eligible Employee will have a death
benefit equal to that which would have been payable to the Eligible Employee's
Beneficiary under Section 6 above if the Eligible Employee had died
immediately prior to the Rollout Qualification Date. The amount of the cash
surrender value which will be retained in the Eligible Employee's Policy will
be determined by applying the ratio which (i) the death benefit which would be
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payable to the Eligible Employee's Beneficiary under Section 6, above, if the
Eligible Employee had died immediately prior to the Rollout Qualification
Date, bears to (ii) the total amount of death benefits provided under the
Policy as of the Rollout Qualification Date to the total cash surrender value
in the Policy as of the Rollout Qualification Date. The Company will receive
a Rollout Policy reflecting the remaining amount of such cash surrender value.
10. Amendment of Plan. The Board may at any time and from time to
time alter, amend, suspend or terminate the Plan in whole or in part provided,
however, that such termination shall not adversely affect the rights
thereunder of any Eligible Employee in connection with any outstanding Policy,
unless deemed necessary by the Board due to a projected material net after-tax
cost of the Plan resulting from modifications made to the Internal Revenue
Code of 1986, as amended.
11. Miscellaneous Provisions.
(a) No Employment Right. Neither this Plan nor any action taken
hereunder shall be construed as giving any right to be retained as an officer
or employee of the Company or any of its Subsidiaries.
(b) Indemnification. Each member of the Board or Human
Resources Committee (and any person to whom any of them has delegated any
authority or power under this Plan) shall be indemnified and held harmless by
the Company against and from (i) any loss, cost, liability or expense that may
be imposed upon or incurred by such person in connection with or resulting
from any claim, action, suit or proceeding to which such person may be a party
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or in which such person may be involved by reason of any action or failure to
act under the Plan; and (ii) any and all amounts paid by such person in
satisfaction of judgment in such action, suit or proceeding relating to the
Plan. Each person covered by this indemnification shall give the Company an
opportunity, at its own expense, to handle and defend the same before such
person undertakes to handle and defend it on such person's own behalf. The
foregoing right of indemnification shall not be exclusive of any other rights
of indemnification to which such persons may be entitled under the Charter or
By-Laws of the Company or any of its Subsidiaries, as a matter of law, or
otherwise, or of any other power that the Company may have to indemnify such
person or hold such person harmless.
(c) Governing Law. All matters relating to the Plan shall be
governed by the laws of the District of Columbia without regard to the
principles of conflict of laws.
(d) Expenses. The expenses of administering the Plan shall be
borne by the Company and its Subsidiaries.
(e) Titles and Headings. The titles and headings of the
sections in the Plan are for convenience of reference only and in the event of
any conflict, the text of the Plan, rather than such titles and headings,
shall control.
(f) The right of any Eligible Employee, Beneficiary, or other
person to receive payments under this Plan shall not be subject to attachment
or other legal process of whatever nature.
12. (a) Notwithstanding any other provisions of the Plan, if
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following the occurrence of an event described in Section 12(b), an Eligible
Employee terminates employment before attaining his or her Rollout
Qualification Date for any reason other than death, the Company shall continue
to pay all premium amounts in respect of the Eligible Employee's Policy for
the lesser of ten (10) years from the effective date of the event described in
Section 12(b), or the time period remaining until the Eligible Employee's
attainment of his Rollout Qualification Date, which ever first occurs.
(b) The provisions of Section 12(a) shall apply in the event
that (i) any "person" (as such term is used in section 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than
a trustee or other fiduciary holding securities under an employee benefit plan
of the Company or a corporation owned, directly or indirectly by the
stockholders of the Company in substantially the same proportion as their
ownership of stock of the Company, is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 30% or more of the combined voting
power of the Company's then outstanding securities; or (ii) during any period
of twenty-four (24) consecutive months (not including any period prior to the
adoption of this Plan), individuals who at the beginning of such period
constitute the Board of Directors of the Company and any new director (other
than a director designated by a person who has entered into an agreement with
the Company to effect a transaction described in clause (i) or (iii) of this
subsection (b)) whose election by the Board of Directors of the Company or
nomination for election by the Company's stockholders was approved by a vote
of at least two-thirds (2/3) of the directors then still in office who either
were directors at the beginning of the period or whose election or nomination
for election was previously so approved, cease for any reason to constitute a
8
majority thereof or (iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least 70% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately
after such merger or consolidation, the stockholders of the Company approve a
plan of complete liquidation of the Company, or the stockholders of the
Company approve an agreement for the sale or disposition by the Company of all
or substantially all of the Company's assets.
13. The Company shall establish a grantor trust to hold assets to
secure the Company's obligations to pay Policy premiums hereunder in such a
manner that the establishment of such a trust does not result in the Plan
being "funded" for purposes of the Internal Revenue Code of 1986, as amended.
Such trust shall initially receive a transfer of ten thousand dollars
($10,000). However such trust shall provide that the full present value of
the Policy premiums payable hereunder shall subsequently be contributed to the
trust in the event the Company fails to pay any Policy premiums due hereunder
in a timely manner. Except to the extent provided through a grantor trust
established under the provisions of this Section, all payments of Policy
premiums under this Plan shall be made out of the Company's general revenue, a
Participant's right to payment of Policy premiums shall be solely that of an
unsecured general creditor of the Company, and no assets of the Company shall
9
be set aside, earmarked or placed in trust or escrow for the benefit of any
Participant to fund the Company's obligations which may exist under the Plan.
IN WITNESS WHEREOF, the Company has caused this restated version of the
Plan to be signed on this 2nd day of June, 1995, which restated version
reflects all modifications made to the Plan through such date of execution,
and supersedes the Plan document signed April 1, 1993.
ATTEST POTOMAC ELECTRIC POWER COMPANY
/s/ Ellen Sheriff Rogers /s/ E. F. Mitchell
By:_______________________ By: __________________________________
Asst. Secretary Chairman of the Board
10
POTOMAC ELECTRIC POWER COMPANY
REVISED AND RESTATED
EXECUTIVE AND DIRECTOR DEFERRED COMPENSATION PLAN
I. INTRODUCTION
Potomac Electric Power Company (the "Company") established
the Potomac Electric Power Company Executive Deferred
Compensation Plan, effective November 18, 1982, to enable certain
executives to supplement their retirement income by deferring the
receipt of compensation for services performed while this Plan is
in effect. The Potomac Electric Power Company Executive Deferred
Compensation Plan was amended by action of the Board of Directors
on February 17, 1983, June 21, 1984, December 16, 1985, July 27,
1989, October 25, 1990, December 16, 1991, October 22, 1992, and
January 27, 1994, and is restated herein and is now known as the
Potomac Electric Power Company Revised and Restated Executive and
Director Deferred Compensation Plan (the "Plan").
II. DEFINITIONS
2.01 "Account" means the bookkeeping account maintained by
the Company (i) for each participating Executive and (ii) for
each participating Director, which is credited with the
Executive's or the Director's Deferred Compensation, as the case
may be, and with additional amounts in the nature of interest and
which is debited to reflect benefit distributions.
2.02 "Agreement" means the Participation Agreement executed
by the Company and an Executive or a Director, as the case may
be, which designates the amount of the Executive's or the
Director's Deferred Compensation, the time and manner of benefit
distributions, and the Executive's or the Director's Beneficiary.
2.03 "Beneficiary" means any person designated by a
participating Executive or a participating Director to receive
benefits under the Plan in the event of the Executive's or the
Director's death prior to the completion of all benefit payments
under the Plan. An Executive's or a Director's Agreement, as the
case may be, may designate more than one Beneficiary or may
designate primary and contingent Beneficiaries.
2.04 "Board of Directors" means the Board of Directors of
Potomac Electric Power Company.
2.05 "Deferred Compensation" means any remuneration which
would otherwise be currently payable to the Executive or the
Director, but which the Executive or the Director irrevocably
agrees to receive on a deferred basis in accordance with the
terms of the Plan.
2.06 "Director" means a member of the Board of Directors.
2.07 "Executive" means any individual who, as of the first
day of any Plan Year, holds the position with the Company of
Chairman of the Board, President, Vice Chairman and Chief
Financial Officer, Executive Vice President, Senior Vice
President or Vice President, any employee whose Normal
Compensation is fixed by the Board of Directors on an individual
basis, or any other individual designated as such for purposes of
this Plan by the Chairman of the Board of Directors of the
Company.
2.08 "Human Resources Committee" shall mean that Committee,
comprised of members of the Board of Directors, which governs the
development of personnel policies for the Company.
2.09 "Normal Compensation" with respect to an Executive
means the amount of salary that would be payable to an Executive
for the twelve (12) month period commencing on the first day of
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any Plan Year if the Executive were not participating hereunder.
"Normal Compensation" with respect to a Director means the amount
of retainer/fees that would be payable to a Director for the
twelve (12) month period commencing on the first day of any Plan
Year if the Director were not participating hereunder.
2.10 "Plan Year" means the twelve-month period commencing
on July 1 of each calendar year and ending on June 30 of the
following calendar year.
2.11 "Retirement" with respect to an Executive means the
date following an Executive's Separation from Service on which
the payment of benefits to the Executive commences under the
Company's General Retirement Plan by reason of the Executive
having attained normal or early retirement age under that plan.
In the event that an Executive is not entitled to receive
benefits under the Company's General Retirement Plan following
Separation from Service, "Retirement" means Separation from
Service and attainment of age sixty-five (65). "Retirement" with
respect to a Director means Separation from Service and
attainment of age sixty-five (65).
2.12 "Separation from Service" means an Executive's
termination of employment with the Company or a Director's
cessation of participation on the Board of Directors. An
Executive who terminates regular employment with the Company or a
Director who discontinues participation on the Board of Directors
and who thereafter performs consulting services for the Company
on a part-time basis will nonetheless be deemed to have had a
Separation from Service at the date of termination of regular
employment or the date of discontinuance of participation on the
Board of Directors, as the case may be.
-3-
III. PARTICIPATION
3.01 An Executive or a Director may execute an Agreement
and become a participant in the Plan prior to the first day of
any Plan Year. Except as set forth in Section 5.02, an
Executive's or a Director's Agreement for a Plan Year may not be
amended or revoked once that Plan Year has commenced, provided
that a participating Executive or a participating Director may at
any time change his Beneficiary designation by providing written
notice of such change to the Company.
3.02 An Executive's or a Director's Agreement shall relate
to (i) compensation for services performed during the Plan Year
to which it relates, (ii) benefit entitlements otherwise payable
in connection with prior deferrals pursuant to Section 5.01 of
the Potomac Electric Power Company Director and Executive
Deferred Compensation Plan, (iii) other remuneration approved by
the Board of Directors as eligible to be deferred under the Plan,
provided that such Agreement shall be entered into prior to
payment of such compensation to the Executive or the Director, as
the case may be, or (iv)other remuneration approved by the Board
of Directors as eligible to be credited under the Plan by way of
a transfer of a deferred compensation entitlement to this Plan
from any other nonqualified deferred compensation program
maintained by the Company.
IV. DEFERRAL OF COMPENSATION - EXECUTIVE AND DIRECTOR RULES
4.01 The deferral of compensation for an Executive shall be
made in accordance with the following provisions.
A. Each Plan Year, the Executive may elect any or all
of the following four options for deferring compensation:
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Option 1 - the Executive may elect to defer an amount
of Normal Compensation. The Agreement may specify that
the Executive's salary will be reduced by the amount of
the Deferred Compensation on a ratable basis throughout
the Plan Year or that the Executive's salary will be
reduced by a specified amount or amounts in a specified
month or months of the Plan Year.
Option 2 - the Executive may elect to defer the
difference between (i) six percent (6%) of his
compensation, as defined in Article I of the Savings
Plan for Exempt Employees of Potomac Electric Power
Company, and (ii) the amount of pre-tax contributions
he is permitted to make under the Savings Plan for
Exempt Employees of Potomac Electric Power Company.
Under this Option 2, the Executive's salary will be
reduced by the amount of Deferred Compensation at the
same time and in the same amounts as if such reduction
was governed by the election then in effect for the
Executive under the Savings Plan for Exempt Employees
of Potomac Electric Power Company.
Option 3 - the Executive may elect to further defer
benefits which would otherwise be paid to the Executive
during the calendar year that begins during the Plan
Year in accordance with Section 5.01 of the Potomac
Electric Power Company Director and Executive Deferred
Compensation Plan.
Option 4 - the Executive may elect to defer such other
compensation which would otherwise be paid to the
Executive during the Plan Year provided such
compensation has been approved by the Board of
Directors in its sole discretion as eligible to be
deferred under the Plan.
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Option 5 - subject to the prior approval of the Board
of Directors, which approval may be granted or withheld
in the sole discretion of the Board of the Directors,
the Executive may elect to have the Executive's Account
under this Plan credited with a deferred compensation
entitlement attributable to any other nonqualified
deferred compensation program maintained by the
Company, provided that such transfer will be
accompanied by a corresponding elimination of the
Company's obligation under such other deferred
compensation arrangement and provided further that no
such transfer will be permitted with respect to any
deferred compensation entitlement which would otherwise
become payable to the Executive under the terms of such
other nonqualified deferred compensation program within
the same calendar year as the year of the proposed
transfer.
Each Executive who elects Deferred Compensation with
respect to a Plan Year shall specify in his Agreement for such
Plan Year the Option or Options which shall apply for such Plan
Year.
B. The Company will credit the Deferred Compensation
to the Account of each participating Executive as of the day such
amount would have been paid to the Executive if the Executive's
Agreement had not been in effect. Prior to July 1, 1994, the
Company will credit the Executive's Account on a monthly basis
with an amount in the nature of interest at a rate equal to the
prime interest rate quoted by the Chase Manhattan Bank, N.A. (the
"Prime Rate"), as of the last day of that month. Such interest
shall be credited to the Executive's Account as of the last day
of each calendar month based on the daily balances in the Account
-6-
during such month, and the crediting of such interest on a
monthly basis shall continue until the balance in the Executive's
Account has been reduced to zero by reason of benefit payments
under the Plan. Effective July 1, 1994, the Executive may elect
to have the Company credit, on a monthly basis, all Deferred
Compensation accrued on and after July 1, 1994 into the
Executive's Account with an amount in the nature of interest at
either (i) the Prime Rate, (ii) a rate equal to the rate of
return with respect to any one or a combination of the investment
funds selected by the Human Resources Committee (an "Investment
Fund Rate"), or (iii) a combination of the Prime Rate and an
Investment Fund Rate. In addition, Executives who previously
accrued pre-July 1, 1994 amounts of Deferred Compensation ("Pre-
July 1, 1994 Accruals") may elect to have the Company credit the
portion of their Account consisting of the Pre-July 1, 1994
Accruals with an amount in the nature of interest at either (i)
the Prime Rate, (ii) an Investment Fund Rate, or (iii) a
combination of the two rates. The portion of the Account
consisting of Pre-July 1, 1994 Accruals may also be designated to
be credited with interest computed by reference to one or more
Investment Fund Rates. However, such process of designation must
be effectuated by a written election filed by the Executive with
the Human Resources Committee prior to July 1, 1994. The
appropriate rate or rates of interest shall be credited to the
Executive's Account as of the last day of each calendar month
based on the daily balances in the Account attributable to each
designated investment fund and, if applicable, the daily balance
in the Account to be credited with the Prime Rate. The crediting
of such interest on a monthly basis shall continue until such
balance in the Executive's Account has been reduced to zero by
reason of benefit payments under the Plan.
-7-
C. If the Executive elects Option 2, the Company shall
credit the Executive's Account with a Matching Company Credit
equal in value to the percentage of Deferred Compensation elected
by the Executive under Option 2 which would have been matched by
the Company if the Executive had contributed such Deferred
Compensation to the Savings Plan for Exempt Employees of Potomac
Electric Power Company. The Matching Company Credit shall be
made to the Executive's Account at the same time as the
corresponding Deferred Compensation is credited to the
Executive's Account pursuant to Option 2.
D. The Company shall furnish each participating
Executive with an annual report showing the balance in the
Executive's Account as of June 30 of each year.
4.02 The deferral of Normal Compensation for a Director
shall be made in accordance with the following provisions.
A. Each Plan Year or until the Director provides
written notification of cancellation of a previous election, each
Director may elect to defer an amount of retainer/fees
constituting such Director's Normal Compensation. The Agreement
may specify that the Director's retainer/fees will be reduced by
the elected amount of the Deferred Compensation on a ratable
basis throughout the Plan Year or that the Director's
retainer/fees will be reduced by a specified amount or amounts in
a specified month or months of the Plan Year. In addition,
subject to the prior approval of the Board of Directors, which
approval may be granted or withheld in the sole discretion of the
Board of Directors, a Director may elect to have the Director's
Account under this Plan credited with a deferred compensation
entitlement attributable to any other nonqualified deferred
compensation program maintained by the Company, provided that
such transfer will be accompanied by a corresponding elimination
-8-
of the Company's obligation under such other deferred
compensation arrangement and provided further that no such
transfer will be permitted with respect to any deferred
compensation entitlement which would otherwise become payable to
the Director under the terms of such other nonqualified deferred
compensation program within the same calendar year as the year of
the proposed transfer.
B. The Company will credit the Deferred Compensation
to the Account of each participating Director as of the day such
amount would have been paid to the Director if the Director's
Agreement had not been in effect. The Company will, in addition,
credit the Director's Account on a monthly basis with an amount
in the nature of interest at a rate equal to the rate of return
with respect to any one or a combination of the investment funds
(including the Prime Rate option) selected by the Human Resources
Committee (an "Investment Fund Rate"). The appropriate rate or
rates of interest shall be credited to the Director's Account as
of the last day of each calendar month based on the daily
balances in the Account attributable to each designated
investment fund, and the crediting of such interest on a monthly
basis shall continue until such balance in the Director's Account
has been reduced to zero by reason of benefit payments under the
Plan.
C. The Company shall furnish each participating
Director with an annual report showing the balance in the
Director's Account as of June 30 of each year.
V. PAYMENT OF BENEFITS
5.01 Except as otherwise provided in this Article V, the
payment of benefits to a participating Executive shall commence
as of the date specified by the Executive in the Executive's
Agreement under one of the following options: (i) on the date of
commencement of benefits under the Company's General Retirement
-9-
Plan; (ii) on January 31 of the calendar year following the year
of the Executive's Retirement; (iii) on the first day of the
month following the Executive's Separation from Service; (iv) on
January 31 of the calendar year following the later of the year
of the Executive's Separation from Service or attainment of an
age specified in the Agreement; or (vi) on January 31 of the
calendar year specified in the Agreement, which may not be
earlier than the second calendar year following the calendar year
which includes the first day of the Plan Year for which the
Agreement is made. Except as otherwise provided in this Article
V, the payment of benefits to a participating Director shall
commence as of the date specified by the Director in the
Director's Agreement under one of the following options: (i) on
the first day of the month following the Director's Separation
from Service; (ii) on January 31 of the calendar year following
the year of the Director's Separation from Service; (iii) on
January 31 of the calendar year following the latter of the year
of the Director's Separation from Service or attainment of an age
specified in the Agreement; or (iv) on January 31 of the calendar
year specified in the Agreement, which may not be earlier than
the second calendar year following the calendar year which
includes the first day of the Plan Year for which the Agreement
is made.
5.02 As specified in the Executive's or the Director's
Agreement, as the case may be, benefits shall be paid (i) in a
lump sum amount equal to the Executive's or the Director's
Account balance as of the benefit commencement date, or (ii) in a
series of approximately equal monthly or annual installments, as
computed by the Company, over a period of between two (2) and
fifteen (15) years with the final payment equalling the then
remaining balance in the Executive's or the Director's Account.
If annual installments are elected by the Executive or the
-10-
Director, such annual installments shall be payable on the
benefit commencement date and each succeeding January 31 during
the payment period. Notwithstanding a specification of
installment payments in an Executive's or Director's Agreement,
as the case may be, if the balance in the Executive's or the
Director's Account as of the benefit commencement date is less
than one thousand dollars ($1,000.00), the Company shall instead
make a lump sum payment of that amount on that date. The time
for payment of benefits to an Executive or a Director may be
modified by the Executive or Director by the filing of a written
election prior to the beginning of the calendar year in which
benefits would otherwise become payable under the existing
Agreement. Any election to accelerate benefits may not provide
for a commencement date earlier than the calendar year following
the date of such election.
5.03 In the event that a participating Executive or a
participating Director dies before the benefit commencement date,
the Company shall make benefit payments to the Executive's or the
Director's Beneficiary or Beneficiaries in an aggregate amount
equal to twice the balance credited to the Account of the
participating Executive or participating Director, as the case
may be, immediately prior to such individual's death. An amount
equal to Account balance will be paid on the first of the month
following the Executive's or the Director's death and the
remaining amount of the death benefit will commence as of January
31 of the calendar year following the Executive's or the
Director's death in accordance with the method of payment under
Section 5.02 specified in the Executive's or the Director's
Agreement. In the event that a participating Executive or a
participating Director dies after the benefit commencement date,
any remaining benefit payments shall be paid to the Executive's
or the Director's Beneficiary or Beneficiaries. In the event
that no Beneficiary survives the Executive or the Director, an
-11-
amount equal to the remaining balance in the Executive's or
Director's Account (or two times the Account balance if death
occurs prior to the benefit commencement date) shall be paid to
the estate of the Executive or the Director, as the case may be,
in a lump sum within thirty (30) days following the date on which
the Company is notified of the Beneficiary's death.
5.04 Notwithstanding the foregoing, the Company may at
any time make a lump sum payment to an Executive or Director (or
surviving Beneficiary) equal to part or all of the balance in the
Executive's or Director's Account, as the case may be, upon a
showing of a financial emergency caused by circumstances beyond
the control of the Executive or Director (or surviving
Beneficiary) which would result in serious financial hardship if
such payment were not made. The determination whether such
emergency exists shall be made in the sole discretion of the
Board of Directors of the Company, the amount of the payment
shall be limited to the amount necessary to meet the financial
emergency, and any remaining balance in the Executive's or
Director's Account shall be paid at the time and in the manner
otherwise set forth in the Executive's or Director's Agreement,
as the case may be.
5.05 In the event that a participating Executive or
Director ceases to be an employee or Director of the Company and
becomes a proprietor, officer, partner, employee, or otherwise
becomes affiliated with any business or entity that is in
competition with the Company, or becomes employed by any
governmental agency having jurisdiction over the affairs of the
Company, the Company reserves the right in the sole discretion of
its Board of Directors to make an immediate lump sum payment to
the Executive or the Director in an amount equal to the balance
in the Executive's or the Director's Account at that time.
-12-
5.06 If an Executive or a Director has entered into two (2)
or more Agreements with respect to different Plan Years which
specify different benefit commencement dates under Section 5.01
or different methods of payment under Section 5.02, the Company
will separately account for the Deferred Compensation
attributable to each such Agreement and distribute the amounts
covered by each Agreement in accordance with the terms thereof.
VI. RIGHTS OF PARTICIPATING OFFICERS AND BENEFICIARIES
6.01 Nothing contained in this Plan or any Agreement and no
action taken hereunder shall create or be construed to create a
trust of any kind, or a fiduciary relationship between the
Company and any Executive, any Director, any Beneficiary or any
other person. Any compensation deferred under the Plan shall
continue for all purposes to be a part of the general funds of
the Company. To the extent that any person acquires a right to
receive payments from the Company under this Plan, such right
shall be no greater than the right of any unsecured general
creditor of the Company.
6.02 The right of any Executive, Director, Beneficiary, or
other person to receive benefits under the Plan may not be
assigned, transferred, pledged or encumbered except by will or
the laws of descent and distribution, nor shall it be subject to
attachment or other legal process of whatever nature.
6.03 If the Company finds that any person to whom any
payment is payable under the Plan is unable to care for his or
her affairs because of illness or accident, or is a minor, any
payment due (unless a prior claim therefor shall have been made
by a duly appointed guardian, committee or other legal
representative) may be paid to the spouse, a parent, or a brother
-13-
or sister, or to any person deemed by the Company to have
incurred expense for the person who is otherwise entitled to
payment.
VII. MISCELLANEOUS
7.01 This Plan may be amended, suspended or terminated at
any time by the Company provided, however, that no amendment,
suspension or termination shall have the effect of impairing the
rights of (i) participating Executives or their Beneficiaries or
(ii) participating Directors or their Beneficiaries with respect
to amounts credited to their Accounts before the date of the
amendments, suspension or termination.
7.02 To the extent required by law, the Company shall
withhold federal or state income or payroll taxes from benefit
payments hereunder and shall furnish the recipient and the
applicable governmental agency or agencies with such reports,
statements, or information as may be legally required in
connection with such benefit payments.
7.03 This Plan and all Agreements hereunder shall be
construed in accordance with and governed by the laws of the
District of Columbia.
IN WITNESS WHEREOF, the Company has caused this restated
version of the Plan to be signed on this 2nd day of June, 1995,
which restated version reflects all modifications made to the
Plan through such date of execution, and supersedes the Plan
document signed April 1, 1993.
ATTEST POTOMAC ELECTRIC POWER COMPANY
/s/ Ellen Sheriff Rogers /s/ E. F. Mitchell
By:______________________ By: ___________________________
Asst. Secretary Chairman of the Board
-14-
POTOMAC ELECTRIC POWER COMPANY
EXECUTIVE PERFORMANCE SUPPLEMENTAL RETIREMENT PLAN
The Potomac Electric Power Company Executive Performance Supplemental
Retirement Plan (the "Plan") was established, effective January 27, 1994, by
the Board of Directors of Potomac Electric Power Company (the "Company") to
provide supplemental retirement benefits to key executives of the Company,
based on awards received by such executives under the Executive Incentive
Compensation Plan. The Plan was amended on April 25, 1995 and is as set forth
herein.
I. Definitions
1.1 Applicable Form of Benefit - The type of life annuity which will
be provided to a Participant receiving benefits under this Plan. The Plan
benefit to be paid to a participant under this Plan shall be in the annuity
form elected by the Participant under the General Retirement Plan. No other
benefit options are provided under this Plan. If a Participant does elect the
variable annuity plan option under the General Retirement Plan, benefits under
this Plan will be paid in the form applicable to the component of the
Participant's accrued benefit under the General Retirement Plan which is not
payable in the variable annuity form.
1.2 Committee - The Human Resources Committee of the Board of
Directors of the Company.
1.3 Eligible Member - A Member of the General Retirement Plan who is
described in Section 2.1 of this Plan.
1.4 Executive Incentive Compensation Plan - The Executive Incentive
Compensation Plan of the Potomac Electric Power Company established by the
Board of Directors on February 17, 1983, as amended from time to time.
1.5 General Retirement Plan - The General Retirement Plan for
Employees of Potomac Electric Power Company.
1.6 Participant - An Eligible Member who has satisfied the conditions
described in Section 2.1 and to whom the provisions of Section 2.2 are not
applicable.
1.7 Plan - The Executive Performance Supplemental Retirement Plan of
the Potomac Electric Power Company.
1.8 SERP - The Supplemental Executive Retirement Plan of the Potomac
Electric Power Company established by the Board of Directors, effective
July 1, 1986, as amended from time to time.
1.9 Surviving Spouse Welfare Plan - The Exempt Employees Surviving
Spouse Welfare Plan of Potomac Electric Power Company.
1.10 Supplemental Benefit Plan - The Supplemental Benefit Plan of
Potomac Electric Power Company.
Any term which is not defined in this Section or any other section of
the Plan will have the same meaning as that term has under the General
Retirement Plan or the Executive Incentive Compensation Plan, if applicable.
II. Eligibility and Participation
2.1 Any individual who holds the position of Chairman of the Board,
President, Vice Chairman and Chief Financial Officer, Executive Vice
President, Senior Vice President or Vice President and any other individual
designated by the Board of Directors shall be eligible to participate in the
Plan.
2.2 An employee shall cease to be a Participant in this Plan and shall
2
not be entitled to any benefits hereunder if the employment of such employee
is terminated for any reason, other than death, before the later of (i) the
date the employee attains age 59, or (ii) the date the employee first attains
either his Early Retirement Date or his Normal Retirement Date under the
General Retirement Plan.
2.3 In order to receive benefits under the Plan, a Participant (i) must
not have incurred a forfeiture of benefits under Section 2.2 and (ii) must
have held one or more of the offices designated in Section 2.1 within the
twelve (12) months immediately preceding his actual retirement under the
General Retirement Plan, and either (a) have held such position for at least a
five year period, or (b) have attained age 65.
III. Retirement Benefits
3.1 This Section 3.1 defines the amount of retirement income which
will be paid to a Participant under this Plan to supplement other pension
benefits. The amount of retirement benefits payable from this Plan in the
Applicable Form of Benefit shall be the difference, if any, between (i) the
aggregate amount of the benefits to which such Participant would be entitled
under the provisions of the General Retirement Plan, the provisions of the
SERP and the provisions of the Supplemental Benefit Plan (expressed in the
Applicable Form of Benefit) (a) had the amount of the Participant's Final
Average Earnings under such plans (expressed on an annual basis) been
increased by the average of the three highest Awards made to such Participant
(or such number of Awards actually made to such Participant if less than
three) under the Executive Incentive Compensation Plan (without regard to any
deferral of receipt of an Award elected by such Participant) within the five
consecutive years immediately preceding the Participant's retirement under the
General Retirement Plan and (b)(1) had the amount of the benefits under such
plans not been otherwise reduced due to the limitations imposed by Section 415
3
of the Internal Revenue Code, (2) had any dollar limitation under the Internal
Revenue Code on the amount of compensation that may be considered in
determining benefits under such plans not been imposed, and (3) had the
deferred compensation earned by such Participant which was excluded from the
Participant's compensation base used in determining retirement benefits under
such plans been included in such compensation base, and (ii) the amount of
benefits, if any, to which such Participant is otherwise entitled under the
General Retirement Plan, the SERP and the Supplemental Benefit Plan. To the
extent that a cost of living adjustment is made to benefits payable under the
General Retirement Plan, a comparable and proportional adjustment will be made
to the benefits payable herein.
3.2 The monthly benefit provided to a Participant under Section 3.1
shall commence as of the first day of the month on which such Participant
begins receipt of retirement benefits under the General Retirement Plan and
shall continue for so long as benefits are payable to such Participant (or his
surviving spouse) under such General Retirement Plan.
3.3 Death Benefits - This Section 3.3 defines the amount of death
benefits, if any, which will be paid to the surviving spouse of a Participant
who dies while employed by the Company. In order to receive death benefits
hereunder, a surviving spouse must have been legally married to the
Participant for at least one (1) year prior to the Participant's death and the
sum of the Participant's actual years of Benefit Service and constructive
years of Benefit Service granted under the Supplemental Executive Retirement
Plan must equal at least ten (10) years. The amount of death benefits payable
from this Plan shall be the difference, if any, between (i) the amount of the
death benefits to which such surviving spouse would have been entitled under
the provisions of the General Retirement Plan, the SERP, the Supplemental
Benefit Plan and/or Surviving Spouse Welfare Plan (expressed as a single life
annuity) (a) had the amount of the Participant's Final Average Earnings under
4
such plans been increased by the average of the three highest Awards made to
such Participant (or such number of Awards actually made to such Participant
if less than three) under the Executive Incentive Compensation Plan (without
regard to any deferral of receipt of an Award elected by such Participant)
within the five consecutive years immediately preceding the Participant's
retirement under the General Retirement Plan or death, as the case may be, and
(b)(1) had the amount of the benefits under such plans not been otherwise
reduced due to the limitations imposed by Section 415 of the Internal Revenue
Code, (2) had any dollar limitation under the Internal Revenue Code on the
amount of compensation that may be considered in determining benefits under
such plans not been imposed, and (3) had the deferred compensation earned by
the Participant which was excluded from the Participant's compensation base
used in determining retirement benefits under such plans been included in such
compensation base, and (ii) the amount of the benefits, if any, to which the
surviving spouse would otherwise be entitled under the General Retirement
Plan, the SERP, the Supplemental Benefit Plan and/or the Surviving Spouse
Welfare Plan.
3.4 The monthly death benefit provided to a surviving spouse under
Section 3.3 shall commence as of the first day of the month on which such
surviving spouse begins receipt of death benefits under the General Retirement
Plan or Surviving Spouse Welfare Plan and shall continue for so long as
benefits are payable to such surviving spouse under either such Plan.
3.5 Loss of Benefits
(a) Notwithstanding any other section of this Plan, if a
Participant is discharged by the Company because of misfeasance, malfeasance,
dishonesty, fraud, misappropriation of funds, or commission of a felony, such
Participant's rights to any benefit under this Plan shall be forfeited.
5
(b) If during his employment with the Company or after the
Participant has ceased to be employed by the Company, and after providing him
an opportunity to be heard, following 30 days written notice, sent by
registered mail, return receipt requested, the Committee finds that such
Participant has used or is using trade secrets or other confidential, secret
or proprietary information gained while in the employ of the Company in a
manner which is, or is likely to be detrimental to the best interests of the
Company, the Committee shall notify such Participant of such findings and stop
all current and future distributions of his interest hereunder. If, within
one year of the date or such notice, it is determined by the Committee upon
proof submitted by such Participant that he has ceased to so use such
information and the Company's loss from such Participant's past and future
improper use of such information is likely to be insubstantial in proportion
to the future loss of his benefit hereunder, the Committee may reinstate him;
and, if payment of his retirement income has stopped, it shall be resumed. If
he is not reinstated within one year of such notice, the Committee shall
cancel his interest hereunder.
3.6 Facility of Payment - If the Committee shall find that any person
to whom a benefit is payable is unable to care for his affairs because of
illness or accident, any payment due hereunder (unless a prior claim therefor
shall have been made by a duly appointed guardian, committee, or other legal
representative) may be paid to the spouse, a child, children, a parent, or a
brother or sister, or to any person deemed by the Company to have incurred
expense for such person otherwise entitled to payment. Any such payment shall
be a complete discharge of all liability under the Plan therefor.
3.7 Payment of Benefits Upon Change in Control
(a) Notwithstanding any other provisions of the Plan except
Section 3.5, if a Participant terminates employment before the later of (i)
the date the employee attains age 59, or (ii) the date the employee first
6
attains either his Early Retirement Date or his Normal Retirement Date under
the General Retirement Plan for any reason other than death following the
occurrence of an event described in subsection (b) of this Section 3.7, the
entitlements of such Participant under the Plan shall be paid to him in a lump
sum within thirty (30) days of the date of his termination of employment. The
amount of such lump sum payment shall be computed in two steps. Under the
first step, a calculation will be made of the monthly annuity payments to
which such Participant would otherwise have been entitled under the provisions
of Sections 3.1 and 3.2 of the Plan based upon the service performed by the
Participant through the date of such termination of employment, plus any
constructive years of Benefit Service granted under the Supplemental Executive
Retirement Plan (hereinafter collectively referred to as "Aggregate Service")
under the assumptions that (i) the Participant was scheduled to commence
receipt of benefits under this Plan as of the earliest date on which the
Participant could receive benefits under the General Retirement Plan that were
not subject to the early retirement reduction factor described in Section
3.02(a) of the General Retirement Plan determined as if such Participant's
years of Vesting Service under the General Retirement Plan equalled his
Aggregate Service and (ii) this Plan did not contain any minimum age
requirement as to eligibility for receipt of benefits. Under the second step,
such monthly annuity payments will be discounted to their present value as of
the date of the Participant's termination of employment using the Pension
Benefit Guaranty Corporation's immediate payment interest rate in effect on
the date of the Participant's termination of employment plus one-half of one
percent (1/2%).
(b) The provisions of subsection (a) of this Section 3.7 shall
apply in the event that (i) any "person" (as such term is used in Section
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), other than a trustee or other fiduciary holding securities
7
under an employee benefit plan of the Company or a corporation owned, directly
or indirectly, by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing 30% or more of the
combined voting power of the Company's then outstanding securities; or (ii)
during any period of twenty-four (24) consecutive months (not including any
period prior to the adoption of this Plan), individuals who at the beginning
of such period constitute the Board of Directors of the Company and any new
director (other than a director designated by a person who has entered into an
agreement with the Company to effect a transaction described in clause (i) or
(iii) of this subsection (b)) whose election by the Board of Directors of the
Company or nomination for election by the Company's stockholders was approved
by a vote of at least two-thirds (2/3) of the directors then still in office
who either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute a majority thereof; or (iii) the stockholders of the Company
approve a merger or consolidation of the Company with any other corporation
other than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least 70% of the combined voting power
of the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, the stockholders of the
Company approve a plan of complete liquidation of the Company, or the
stockholders of the Company approve an agreement for the sale or disposition
by the Company of all or substantially all the Company's assets.
8
IV. Administration of the Plan
4.1 Administration - The Human Resources Committee of the Board of
Directors shall administer the Plan.
(a) The Committee shall have the sole, exclusive authority to
interpret and construe the provisions of this Plan, to decide any disputes
which may arise with regard to the rights of employees under the terms of this
Plan, to give instructions and directions necessary hereunder and, in general,
to direct the administration of the Plan. All fees, salaries, and other costs
incurred in connection therewith shall be paid by the Company.
(b) The Committee shall keep or cause to be kept, records
containing all relevant data pertaining to Participants and their rights under
this Plan, and is charged with the primary duty of seeing that each
Participant receives the benefits to which he may be entitled under this Plan.
4.2 Accounts and Reports - The Company and its officers, employees and
directors or designees and the Committee shall be entitled to rely upon all
tables, valuations, certificates, and reports furnished by any actuary
selected by the Committee; upon all certificates and reports made by any
accountant selected by the Committee; and upon all opinions given by any legal
counsel selected by the Committee; and the Company and its officers and
directors or designees and the Committee shall be fully protected in respect
of any action taken or suffered by them in good faith in reliance upon any
tables, valuations, certificates, reports, opinions, or other advice furnished
by any such actuary, accountant, or counsel; and all action so taken or
suffered shall be conclusive upon each of them and upon all Participants of
the Plan.
4.3 Expenses of Administration - All expenses shall be paid by the
Company.
9
4.4 Liability - The Company, the Board of Directors, the Committee,
officers, and employees shall incur no liability for any action taken in good
faith in connection with the administration of this Plan. The Company may
provide all appropriate and necessary insurance to render the aforesaid
harmless from any and all liability incurred in the discharge of their duties.
V. Funding
5.1 Company Contributions - The Company shall establish a grantor
trust to hold assets to secure the Company's obligations to the Participant
under this Plan in such a manner that the establishment of such a trust does
not result in the Plan being "funded" for purposes of the Internal Revenue
Code of 1986, as amended. Such trust shall initially receive a transfer of
ten thousand dollars ($10,000). However such trust shall provide that the
full present value of the benefits of the benefits payable hereunder shall
subsequently be contributed to the trust in the event the Company fails to pay
such benefits due hereunder in a timely manner. Except to the extent provided
through a grantor trust established under the provisions of this Section, all
payments under this Plan shall be made out of the Company's general revenue, a
Participant's right to payment shall be solely that of an unsecured general
creditor of the Company, and no assets of the Company shall be set aside,
earmarked or placed in trust or escrow for the benefit of any Participant to
fund the Company's obligations which may exist under the Plan.
5.2 Employee Contributions - No Participant shall be required or
permitted to make any contribution to the Plan.
VI. Miscellaneous
6.1 Limitation of Responsibility - Neither the establishment of the
Plan, any modifications thereof, nor the payment of any benefits shall be
construed as giving to any Participant or other person any legal or equitable
10
right against the Company (the Board of Directors, the Committee, or any officer
or employee) except as herein provided; and in no event shall the other terms of
employment of any employee be modified or in any way affected thereby.
6.2 Restrictions on Alienation and Assignment - Except as any of the
following provisions may be contrary to the law of any state having
jurisdiction in the premises, no Participant, or beneficiary shall have the
right to assign transfer, hypothecate, encumber, commute or anticipate his
interest in any payments under this Plan, and such payments shall not in any
way be subject to any legal process to levy upon or attach the same for
payment of any claim against any Participant, or beneficiary.
6.3 Failure to Claim Amounts Payable under the Plan - In the event
that any amount shall become payable hereunder to any person or, upon his
death, to his surviving spouse and if after written notice from the Committee
mailed to such person's last known address as shown in the Company's records,
such person or his personal representative shall not have presented himself to
the Committee within six months after mailing of such notice, the Committee
may, but it is not required to, determine that such person's interest in the
Plan has terminated, which determination shall be conclusive upon all persons
provided, however, in lieu of the foregoing, the Committee may in its sole
discretion apply to a court of competent jurisdiction for direction as to the
distribution of such amount.
6.4 Right of the Company to Dismiss or Demote Employees - Neither the
action of the Company in establishing this Plan nor any action taken by it
under any provisions of this Plan shall be construed as giving to any employee
of the Company the right to be retained in any specific position or in its
employ in general or any right to any retirement income or benefit or to any
payment whatsoever, except to the extent of the benefits which may be provided
11
for by the express provisions of this Plan. The Company expressly reserves
the right at any time, to dismiss, demote or reduce the compensation of any
employee without incurring any liability for any claim against itself for any
payment whatsoever.
6.5 Amendment and Termination - Nothing in this Plan shall be deemed
to limit the Company's right, by resolution of the Board of Directors of the
Company, to amend, modify or terminate the Plan at any time and for any reason
except that no such amendment, modification or termination shall serve to
decrease the Participants' benefits accrued under this Plan, other than by
operation of Section 3.5 or by operation of an involuntary termination of
employment under the rights reserved to the Company in Section 6.4.
6.6 Laws to Govern - The provisions of this Plan shall be construed,
administered, and enforced according to the laws of the District of Columbia.
IN WITNESS WHEREOF, the Company has caused this Plan to be signed and to
become effective on this 2nd day of June, 1995.
ATTEST POTOMAC ELECTRIC POWER COMPANY
/s/ Ellen Sheriff Rogers /s/ E. F. Mitchell
By:_______________________ By: ____________________________
Asst. Secretary Chairman of the Board
12
POTOMAC ELECTRIC POWER COMPANY
SUPPLEMENTAL BENEFIT PLAN
Introduction
On February 17, 1983, the Potomac Electric Power Company (the "Company")
established the Supplemental Benefit Plan (the "Plan") to provide for the
payment of a retirement supplement to executives eligible to participate in
the Company's Executive Deferred Compensation Plan or their beneficiaries in
amounts equal to any reduction of total retirement benefits that otherwise
would be payable under the General Retirement Plan to the extent such
reduction is attributable to A) the benefit limitation provisions of the
Internal Revenue Code of 1954, as amended (the "Code"); or B) the exclusion of
deferred compensation from the compensation base used in determining
retirement benefits under the General Retirement Plan, as required under the
Code. The Plan was amended on December 19, 1988, April 26, 1989 and January
27, 1994 and April 25, 1995 and is as set forth herein.
I. Definitions:
1.1 Applicable Form of Benefit - The type of life annuity which will
be provided to a Participant receiving benefits under this Plan. The Plan
benefit to be paid to a Participant under this Plan shall be paid in the
annuity form elected by the Participant with respect to the Participant's
benefits under the General Retirement Plan, except that the variable annuity
option under the General Retirement Plan is not an annuity form available for
payment of benefits under this Plan. If a Participant does elect the variable
annuity option under the General Retirement Plan, benefits under this Plan
will be paid in the form applicable to the component of the Participant's
accrued benefit under the General Retirement Plan which is not payable in the
variable annuity form.
1.2 Committee - The Human Resources Committee of the Board of
Directors of the Company.
1.3 General Retirement Plan - The General Retirement Plan for
Employees of Potomac Electric Power Company.
1.4 Surviving Spouse Welfare Plan - The Exempt Employees Surviving
Spouse Welfare Plan of Potomac Electric Power Company.
1.5 Participant - An employee who has been so designated as described
in Section II.
1.6 Plan - The Supplemental Benefit Plan of the Potomac Electric Power
Company.
Any term which is not defined in this section or any other section of
the Plan shall have the same meaning as that term has under the General
Retirement Plan.
II. Eligibility and Participation
Any officer of the Company and any other employee of the Company
designated by the President of the Company as a Participant hereunder shall be
eligible to participate in this Plan.
III. Supplemental Benefit
3.1 This Section defines the amount of retirement income (the
"Supplemental Benefit") which will be paid to a Participant under this Plan.
The amount of retirement benefits payable from this Plan in the Applicable
Form of Benefit shall be the difference, if any, between (i) the amount of the
-2-
benefits to which such Participant would be entitled under the provisions of
the General Retirement Plan (expressed in the Applicable Form of Benefit) (1)
had the amount of the benefits under such plan not been otherwise reduced due
to the limitations imposed by Section 415 of the Internal Revenue Code, (2)
had any dollar limitation under the Internal Revenue Code on the amount of
compensation that may be considered in determining benefits under such plan
not been imposed, and (3) had the deferred compensation earned by such
Participant which was excluded from the Participant's compensation base used
in determining retirement benefits under such plan been included in such
compensation base, and (ii) the amount of benefits, if any, to which such
Participant is otherwise entitled under the General Retirement Plan. To the
extent that a cost of living adjustment is made to the benefits payable under
the General Retirement Plan, a comparable and proportionate adjustment will be
made to the benefits payable hereunder.
3.2 Vesting
a) The Supplemental Benefit shall vest when the Participant
otherwise would be vested under the terms and conditions of
the Company's General Retirement Plan.
b) A Participant whose employment with the Company is
terminated prior to the attainment of a vested retirement
benefit under the General Retirement Plan shall not be
entitled to receive a benefit from the Supplemental Benefit
Plan.
-3-
3.3 Supplemental Benefit Account
a) For bookkeeping purposes only, the Company will establish
and maintain a Supplemental Benefit Account for each
Participant which reflects the Participant's currently
accrued Supplemental Benefit, expressed in the form of
straight life annuity.
b) The Company shall furnish each Participant with an annual
statement, as of December 31 of each year, showing the
Supplemental Benefit which the Executive is eligible to
receive.
3.4 Time and Form of Payment of Supplemental Retirement Benefit
a) The Supplemental Benefit shall be payable to the Participant
in the Applicable Form of Benefit elected by the Participant
under the terms and conditions of the General Retirement
Plan.
b) The Supplemental Benefit shall be payable to the Participant
beginning on the first of the month in which such
Participant begins receipt of retirement benefits under the
General Retirement Plan and shall continue for as long as
benefits are payable to such Participant (or his surviving
spouse) under the General Retirement Plan.
c) In the event that a Participant ceases to be an employee of
the Company and becomes a proprietor, officer, partner,
employee or otherwise becomes employed by a governmental
agency having jurisdiction over the affairs of the Company,
the Company reserves the right in its sole discretion to
make an immediate lump sum payment of the Actuarial
-4-
Equivalent value of the Participant's Supplemental Benefit.
d) Notwithstanding anything in the foregoing to the contrary,
in the event benefits under the General Retirement Plan are
paid to a Participant prior to his Normal Retirement Date,
the Supplemental Benefit payable hereunder shall be adjusted
by use of the same methodology as is then in effect to
adjust the benefit payable under the General Retirement Plan
to reflect commencement of benefits prior to a Participant's
Normal Retirement Date.
3.5 Death Benefits
Except as provided in Section 1.1, above, the terms of the
General Retirement Plan and the Surviving Spouse's Welfare Plan shall govern
the timing and form of payment of the Participant's Supplemental Benefit to
the surviving spouse upon the Participant's death. Payment of the
Supplemental Benefit, if any, to a Participant's surviving spouse (as that
term is used under the General Retirement Plan and the Surviving Spouse
Welfare Plan) shall begin when benefits commence to such surviving spouse
under either such plan and shall continue for so long as benefits are payable
to such surviving spouse under either such plan.
IV. General Provisions
4.1 Rights of Participants, Joint Annuitants and Beneficiaries
a) The Company shall establish a grantor trust to hold assets
to secure the Company's obligations to the Participant under
-5-
this Plan in such a manner that the establishment of such a
trust does not result in the Plan being "funded" for
purposes of the Internal Revenue Code of 1986, as amended.
Such trust shall initially receive a transfer of Ten
Thousand Dollars ($10,000). However such trust shall
provide that the full present value of the benefits payable
hereunder shall subsequently be contributed to the trust in
the event the Company fails to pay any benefits due
hereunder in a timely manner. Except to the extent provided
under the provisions of this Section, all payments under
this Plan shall be made out of the Company's general
revenue, a Participant's right to payment shall be solely
that of an unsecured general creditor of the Company, and no
assets of the Company shall be set aside, earmarked or
placed in trust or escrow for the benefit of any Participant
to fund the Company's obligations which exist under the
Plan.
b) Except as any of the following provisions may be contrary to
the law of any state having jurisdiction in the premises, no
Participant, or beneficiary shall have the right to assign,
transfer, hypothecate, encumber, commute or anticipate his
interest in any payments under this Plan, and such payments
shall not in any way be subject to any legal process to levy
upon or attach the same for payment of any claim against any
Participant, or beneficiary.
-6-
c) If the Company finds that any person to whom any payment is
payable under this Plan is unable to care for his or her
affairs because of illness or accident, or is a minor, any
payment due (unless a prior claim therefor shall have been
made by a duly appointed guardian, committee or other legal
representative) may be paid to the spouse, a parent, or a
brother or sister, or to any person deemed by the Company to
have incurred expenses for the person who is otherwise
entitled to payment, in such manner and proportions as the
Company may determine. Any such payment will serve to
discharge the liability of the Company under this Plan to
make payment to the person who is otherwise entitled to
payment.
d) To the extent it deems required by law, the Company shall
withhold applicable taxes from benefit payments hereunder
and shall furnish the recipient and the applicable
governmental agency or agencies with such reports,
statements, or information as may be legally required in
connection with such benefit payments.
e) Neither the action of the Company in establishing this Plan
nor any action taken by it under any provisions of this Plan
shall be construed as giving to any employee of the Company
the right to be retained in any specific position or in its
employ in general or any right to any retirement income or
benefit or to any payment whatsoever, except to the extent
of the benefits which may be provided for by the express
-7-
provisions of this Plan. The Company expressly reserves the
right at any time, to dismiss, demote or reduce the
compensation of any employee without incurring any liability
for any claim against itself for any payment whatsoever.
f) In the event that any amount shall become payable hereunder
to any person or, upon his death, to his surviving spouse
and if after written notice from the Committee mailed to
such person's last known address as shown in the Company's
records, such person or his personal representative shall
not have presented himself to the Committee within six
months after mailing of such notice, the Committee may, but
it is not required to, determine that such person's interest
in the Plan has terminated, which determination shall be
conclusive upon all persons provided, however, in lieu of
the foregoing, the Committee may in its sole discretion
apply to a court of competent jurisdiction for direction as
to the distribution of such amount.
4.2 Amendment and Termination
The Plan may be amended, suspended or terminated at any time
by the Company; provided, however, that no amendment, suspension or
termination shall have the effect of impairing the rights of Participants or
Beneficiaries with respect to the amount reflected in their Supplemental
Benefit Account on or before the date of the amendment, suspension or
termination.
4.3 Interpretation
-8-
This Plan shall be construed in accordance with and governed
by the laws of the District of Columbia.
4.4 Limitation of Responsibility
Neither the establishment of the Plan, any modifications
thereof, nor the payment of any benefits shall be construed as giving to any
Participant or other person any legal or equitable right against the Company
(the Board of Directors, the Committee, or any officer or employee) except as
herein provided; and in no event shall the other terms of employment of
any employee be modified or in any way affected thereby.
IN WITNESS WHEREOF, the Company has caused this Plan to be signed on
this 2nd day of June, 1995.
ATTEST POTOMAC ELECTRIC POWER COMPANY
/s/ Ellen Sheriff Rogers /s/ E. F. Mitchell
By:__________________________ By:___________________________________
Asst. Secretary Chairman of the Board
-9-
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<NAME> POTOMAC CAPITAL INVESTMENT CORPORATION
<MULTIPLIER> 1,000
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143,485
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0
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<OTHER-OPERATING-EXPENSES> 653,817
<TOTAL-OPERATING-EXPENSES> 688,211
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<OTHER-INCOME-NET> (113,721)
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<NET-INCOME> (60,810)
8,475
<EARNINGS-AVAILABLE-FOR-COMM> (69,285)
<COMMON-STOCK-DIVIDENDS> (98,164)
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<FN>
<F1>Included on the Balance Sheet in the caption "Short-term debt."
<F2>Total annualized interest costs for all utility long-term debt outstanding
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<F3>If all the convertible preferred stock and debentures were converted into
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