UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1994 Commission file number 1-1072
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Potomac Electric Power Company
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(Exact name of registrant as specified in its charter)
District of Columbia and Virginia 53-0127880
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 Pennsylvania Avenue, N.W.
Washington, D. C. 20068
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (202) 872-2456
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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7% Convertible Debentures due 2018 - ) New York Stock Exchange, Inc.
due January 15, 2018 )
5% Convertible Debentures due 2002 - )
due September 1, 2002 )
Continued
Name of each exchange on
Title of each class which registered
------------------- -----------------------------
Serial Preferred Stock, ) New York Stock Exchange, Inc.
$50 par value (entitled to )
cumulative dividends) )
$3.37 Series of 1987 )
$3.89 Series of 1991 )
$2.44 Convertible )
Series of 1966 )
Common Stock, $1 par value )
Securities registered pursuant to Section 12(g) of the Act:
None.
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 .
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Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. X .
---
As of March 7, 1995, Potomac Electric Power Company had 118,248,594
shares of its $1 par value Common Stock outstanding, and the aggregate market
value of these common shares (based upon the closing price of these shares on
the New York Stock Exchange on that date) held by nonaffiliates was
approximately $2.2 billion.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's 1994 Annual Report to shareholders are
incorporated by reference into Parts II and IV of this Form 10-K.
Portions of the Notice of Annual Meeting of Shareholders and Proxy
Statement, dated March 17, 1995, are incorporated by reference into Part III
of this Form 10-K.
2
POTOMAC ELECTRIC POWER COMPANY
Form 10-K - 1994
TABLE OF CONTENTS
PART I Page
Item 1 - Business ----
General ............................................................ 5
Sales .............................................................. 6
Capacity Planning .................................................. 7
Construction Program ............................................... 9
Fuel ............................................................... 10
Regulation ......................................................... 14
Rates .............................................................. 14
Competition ........................................................ 18
Environmental Matters .............................................. 20
Labor .............................................................. 24
Nonutility Subsidiary .............................................. 24
Item 2 - Properties .................................................. 26
Item 3 - Legal Proceedings ........................................... 27
Item 4 - Submission of Matters to a Vote of Security Holders ......... 28
PART II
Item 5 - Market for the Registrant's Common Equity and Related
Stockholder Matters ....................................... 28
Item 6 - Selected Financial Data ..................................... 28
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................. 29
Item 8 - Financial Statements and Supplementary Data ................. 29
Item 9 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure .................................. 29
PART III
Item 10 - Directors and Executive Officers of the Registrant ......... 30
Item 11 - Executive Compensation ..................................... 32
Item 12 - Security Ownership of Certain Beneficial Owners and
Management................................................ 32
Item 13 - Certain Relationships and Related Transactions ............. 32
PART IV
Item 14 - Exhibits, Financial Statement Schedule and Reports on
Form 8-K ................................................. 33
Schedule VIII - Valuation and Qualifying Accounts .................. 40
Signatures ........................................................... 41
Exhibit 11 - Computation of Earnings Per Common Share ........... 43
Exhibit 12 - Computation of Ratios .............................. 44
Exhibit 21 - Subsidiaries of the Registrant ..................... 46
Exhibit 23 - Consent of Independent Accountants ................. 47
Report of Independent Accountants on Consolidated Financial
Statement Schedule ............................................... 48
3
PAGE LEFT BLANK
INTENTIONALLY
4
Part I
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Item 1 BUSINESS
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GENERAL
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Potomac Electric Power Company (Company), which was incorporated in the
District of Columbia in 1896 and in the Commonwealth of Virginia in 1949, is
engaged in the generation, transmission, distribution and sale of electric
energy in the Washington, D.C. metropolitan area. The Company's retail
service territory includes the District of Columbia and major portions of
Montgomery and Prince George's counties in suburban Maryland. The area served
at retail covers approximately 640 square miles and had a population of
approximately 1.9 million at the end of 1994 and 1993. The Company also sells
electricity, at wholesale, to Southern Maryland Electric Cooperative, Inc.
(SMECO), which distributes electricity in Calvert, Charles, Prince George's
and St. Mary's counties in southern Maryland. During 1994, approximately 59%
of the Company's revenue were derived from Maryland sales (including
wholesale) and 41% from sales in the District of Columbia. About 30% of the
Company's revenue were derived from residential customers, 64% from sales to
commercial and government customers and 6% from sales at wholesale.
Approximately 14% and 3% of 1994 revenue were derived from sales to the U.S.
and D.C. governments, respectively.
The Company holds valid franchises, permits and other rights adequate
for its business in the territory it serves, and such franchises, permits and
other rights contain no unduly burdensome restrictions.
The Company is a member of the Pennsylvania-New Jersey-Maryland
Interconnection Association (PJM) pursuant to an agreement under which its
generating and transmission facilities are operated on an integrated basis
with those of the other PJM member utilities in Pennsylvania, New Jersey,
Maryland, Delaware and a small portion of Virginia. The purpose of PJM is to
improve the operating economy and reliability of the systems in the group and
to provide capital economies by permitting lower reserve requirements than
would be required on a system basis. The Company also has direct high voltage
connections with the Potomac Edison Company and Virginia Power, neither of
which is a member of PJM.
5
SALES
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The following data presents the Company's sales and revenue by class of
service and by customer type, including data as to sales to the United States
and District of Columbia governments.
1994 1993 1992
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Electric Energy Sales (Thousands of Kilowatt-hours)
---------------------
Kilowatt-hours Sold - Total 25,546,210 25,693,999 24,484,444
========== ========== ==========
By Class of Service -
Residential service 6,586,970 6,739,987 6,155,793
General service 15,345,484 15,388,525 14,969,669
Large power service (a) 683,762 704,292 705,113
Street lighting 162,439 163,827 163,739
Rapid transit 404,634 370,428 360,432
Wholesale 2,362,921 2,326,940 2,129,698
By Type of Customer -
Residential 6,574,199 6,726,520 6,142,414
Commercial 11,685,351 11,750,542 11,391,337
U.S. Government 4,009,810 3,986,149 3,947,611
D.C. Government 913,929 903,848 873,384
Wholesale 2,362,921 2,326,940 2,129,698
Electric Revenue (Thousands of Dollars)
----------------
Sales of Electricity - Total (b) $1,783,064 $1,696,435 $1,556,098
========== ========== ==========
By Class of Service -
Residential service $ 525,660 $ 506,096 $ 433,648
General service 1,066,710 1,010,552 958,369
Large power service (a) 35,701 33,913 33,454
Street lighting 13,783 13,605 12,363
Rapid transit 27,892 24,107 22,914
Wholesale 113,318 108,162 95,350
By Type of Customer -
Residential $ 524,738 $ 505,173 $ 432,797
Commercial 834,323 791,357 748,550
U.S. Government 254,030 238,192 229,586
D.C. Government 56,655 53,551 49,815
Wholesale 113,318 108,162 95,350
(a) Large power service customers are served at high voltage of 66KV or
higher.
(b) Exclusive of Other Electric Revenue (000s omitted) of $7,536 in 1994,
$6,007 in 1993 and $6,069 in 1992.
6
The Company's sales of electric energy are seasonal, and, accordingly,
rates have been designed to closely reflect the daily and seasonal variations
in the cost of producing electricity, in part by raising summer rates and
lowering winter rates. Mild weather during the summer billing months of June
through October, when base rates are high to encourage customer conservation
and peak load shifting, has an adverse effect on revenue and, conversely, hot
weather during these months has a favorable effect.
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.
CAPACITY PLANNING
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General
-------
During the period 1995 through 2004 the Company estimates that its peak
demand will grow at a compound annual rate of approximately 1%. Based upon
average weather conditions, the Company expects its compound annual growth in
kilowatt-hour sales to range between 1% and 2% over the next decade. The
Company's ongoing strategies to meet the increasing energy needs of its
customers include conservation and energy use management programs which are
designed to curb growth in peak demand. The need for new capacity has been
further reduced by programs to maintain older generating units to ensure their
continued efficiency over an extended life and the cost-effective purchase of
capacity and energy.
Conservation
------------
Cost-effective conservation programs have been a major component of the
Company's success in limiting the need for new construction during the past
decade.
The Company's conservation and energy use management 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. During 1994, the Company reevaluated its
conservation programs, including additional review and consideration of the
current and prospective effect of these programs on customer rates and bills.
As a result of this reevaluation, the Company phased out several conservation
programs and reduced rebate levels for others. In addition, in November 1994
the Company temporarily suspended approval of additional applications for its
Custom Rebate Program. 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. The Company
expects approximately 80% of the previously estimated benefits from
conservation for approximately 45% of estimated cost.
7
For residential customers the Company continues to offer rebates for
high efficiency heating and air conditioning equipment. These rebates are
paid directly to customers when customers buy equipment which significantly
exceeds the efficiency of average available equipment.
In 1995, the Company expects to resume operation of its highly
successful Custom Rebate Program for commercial customers. This program pays
rebates to customers who install energy efficient lighting, motors, heating
and cooling systems and other measures. The Company also continues to operate
the New Building Design Program, which offers cash incentives as well as
technical assistance to developers and designers who incorporate energy
efficient designs and equipment in new commercial construction.
During 1994, the Company invested approximately $90 million in energy
conservation programs. The Company recovers the costs of its conservation
programs in its Maryland jurisdiction through a rate surcharge which amortizes
costs over a five year period and permits the Company to earn a return on its
conservation investment while receiving compensation for lost revenue. In
addition, when the Company's performance exceeds its annual goals, the Company
earns a performance bonus. The Company was awarded a bonus of approximately
$5 million in 1994 based on its 1993 performance. At the end of 1994 the
conservation surcharge in Maryland was $.00338 per kilowatt-hour. In the
District of Columbia, conservation costs are amortized over 10 years with an
accrued return on unamortized costs. To date, costs have been considered in
base rate cases.
In 1994, approximately 151,000 customers participated in continuing
energy use management programs which cycle air conditioners and water heaters
during peak periods. In addition, the Company operates a commercial load
program which provides incentives to customers for reducing energy use during
peak periods. Time-of-use rates have been in effect since the early 1980s and
currently approximately 60% of the Company's revenue is based on time-of-use
rates.
It is estimated that peak load reductions of approximately 525 megawatts
have been achieved to date from conservation and energy use management
programs and that additional peak load reductions of approximately 380
megawatts will be achieved in the next five years. The Company also estimates
that in 1994 energy savings of more than 760 million kilowatt-hours have been
realized through operation of its conservation and energy use management
programs. 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.
Although the Company is continuing its conservation and energy use
management efforts, new sources of supply will be needed to assure the future
reliability of electric service to the Washington area. These new sources of
supply will be provided through the Company's plans for purchases of capacity
and energy and through its ongoing construction program.
8
Purchase of Capacity and Energy
-------------------------------
Pursuant to the Company's 1987 long-term capacity purchase agreements
with Ohio Edison and Allegheny Power System, the Company is purchasing 450
megawatts of capacity and associated energy through the year 2005. In
addition, effective June 1, 1994 through May 31, 1995, the Company is
purchasing 147 megawatts of capacity from Pennsylvania Power and Light
Company. The Company also has a purchase agreement with SMECO, through 2015,
for 84 megawatts of capacity supplied by a combustion turbine installed and
owned by SMECO at the Company's Chalk Point Generating Station. The Company
is responsible for all costs associated with operating and maintaining the
facility.
The Company has been exploring other cost-effective sources of energy
and has entered into contracts for two nonutility generation projects which
total 270 megawatts of capacity. A 40-megawatt resource recovery facility
with which the Company has a contract is now under construction in Montgomery
County, Maryland. 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. This project has received a certificate
of convenience and necessity from the Maryland Public Service Commission.
These nonutility generation projects are expected to begin operating in 1995
and 1996, respectively.
CONSTRUCTION PROGRAM
--------------------
The Company carries on a continuous construction program, the nature and
extent of which is determined by the Company's strategic planning process
which integrates supply-side and demand-side resource options.
From January 1, 1992 to December 31, 1994, the Company made property
additions, net of an Allowance for Funds Used During Construction (AFUDC), of
$926 million (of which $298 million were made in 1994) and had property
retirements of $122 million (of which $44 million were made in 1994).
The Company's current construction program calls for estimated
expenditures, excluding AFUDC, of $215 million in 1995, $170 million in 1996,
$210 million in 1997, $240 million in 1998 and $250 million in 1999, an
aggregate of $1.1 billion for the five-year period. AFUDC is estimated to be
$7 million in 1995, $7 million in 1996, $7 million in 1997, $9 million in 1998
and $10 million in 1999. The 1995-1999 construction program includes
approximately $544 million for generating facilities (including $165 million
for Clean Air Act compliance), $35 million for transmission facilities, $497
million for distribution, service and other facilities, and $9 million
associated with the Company's energy use management programs. 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
9
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 construction program includes amounts for the construction of
facilities that will not be completed until after 1999. Although the program
includes provision for escalation of construction costs, generally at an
annual rate of 4%, the aggregate budget for long lead time projects will
increase or decrease depending upon the actual rates of inflation in
construction costs. The program is reviewed continuously and revised as
appropriate to reflect changes in projections of demand, consumption patterns
and economic trends.
The Clean Air Act Amendments of 1990 (CAA) requires utilities to reduce
emissions of sulfur dioxide and nitrogen oxides in two phases, January 1995
(Phase I) and January 2000 (Phase II). The Company has developed plans for
complying with the CAA to achieve prescribed standards in Phases I and II.
The Company anticipates capital expenditures totaling $165 million over the
next five years pursuant to these plans. The plans call for replacement of
boiler burner equipment for nitrogen oxides emissions control, the use of
lower-sulfur fuel and cofiring with natural gas at selected baseload plants.
The CAA allows companies to achieve required emission levels by using a
market-based emission allowance trading system. If economical, emission
allowances may be purchased in lieu of burning lower-sulfur fuel.
Installation of scrubbers is not contemplated for the Company's wholly
owned plants. 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 owns a 9.72% undivided interest in the Conemaugh Generating
Station located in western Pennsylvania. As a result of installing flue gas
scrubbing equipment to meet Phase I requirements of the CAA, this station will
receive additional allowances. The Company's share of these "bonus"
allowances may be used to reduce the need for lower-sulfur fuel at its other
plants. The Company's share of the construction costs is approximately $38
million.
In addition, the final segment of a 500,000 volt transmission line which
provides links in the transmission systems of the Company, Baltimore Gas and
Electric Company and Virginia Power was placed in service prior to June 1,
1994.
FUEL
----
For customer billing purposes, all of the Company's kilowatt-hour sales
are covered by separately stated fuel rates (see Item 8 - Note 2 of "Notes to
Consolidated Financial Statements").
10
The Company's generating units burn only fossil fuels. The principal
fuel is coal. The Company owns no nuclear generation facilities and none are
planned. The following table sets forth the quantities of each type of fuel
used by the Company in the years 1994, 1993 and 1992 and the contribution, on
the basis of Btus, of each fuel to energy generated.
1994 1993 1992
-------------- -------------- --------------
% of % of % of
Quantity Btu Quantity Btu Quantity Btu
-------- ----- -------- ----- -------- -----
Coal
(000s net tons) 5,788 76.1 6,010 79.4 5,926 82.9
Residual oil
(000s barrels) 4,868 15.7 4,835 15.9 3,294 11.4
Natural gas
(000s dekatherms) 10,780 5.5 6,090 3.2 8,200 4.5
No. 2 fuel oil
(000s barrels) 919 2.7 480 1.5 376 1.2
The following table sets forth the average cost of each type of fuel
burned, for the years shown.
1994 1993 1992
------ ------ ------
Coal: per ton $44.39 $43.69 $43.66
per million Btu 1.73 1.72 1.72
Residual oil: per barrel 15.31 15.09 14.35
per million Btu 2.44 2.39 2.28
Natural gas: per dekatherm 2.49 2.88 2.32
per million Btu 2.49 2.88 2.32
No. 2 fuel oil: per barrel 24.34 24.98 26.70
per million Btu 4.17 4.30 4.60
The average cost of fuel burned per million Btu was $1.95 in 1994,
compared with $1.90 in 1993 and $1.85 in 1992. The increase of approximately
3% in each of the past two years in the system average unit fuel cost resulted
from increased use of major cycling and peaking generation units which burn
higher cost fuels. The Company's major cycling and certain peaking units can
burn natural gas or oil, adding flexibility in selecting the most cost-
effective fuel mix. The increase in the actual percent of gas contribution in
1994 to the fuel mix reflects the decreased price of gas and the increased
price of oil. The decrease in the actual percent of coal contribution to the
fuel mix in 1994 primarily reflects major outages for construction related to
Clean Air Act additions on baseload coal-fired generation units.
11
Ten of the Company's sixteen steam-electric generating units can burn
only coal; two can burn only residual oil; two can burn either coal or
residual oil or a combination of both and two units can burn either residual
oil or natural gas. Those units capable of burning either coal or residual
oil normally burn coal as their primary fuel. The Company also has combustion
turbines, some of which can burn only No. 2 fuel oil, and others which can
burn natural gas or No. 2 fuel oil. The following table provides details of
the Company's generating capability from the standpoint of plant configuration
as well as actual energy generation (see Item 2 - Properties for additional
information on type of fuel used in generating facilities).
Net Generating Net
Capability and Energy
Purchased Capacity Generated
------------------ ------------------
1994 1993 1992 1994 1993 1992
---- ---- ---- ---- ---- ----
Steam Generation
Dual fuel units, capable
of burning coal, residual
oil or a combination of
coal and residual oil.... 17% 18% 18% 28% 29% 27%
Units capable of burning
coal only................ 28% 28% 29% 43% 45% 50%
Units capable of burning
residual oil only........ 8% 8% 9% 1% 1% -
Units capable of burning
residual oil or natural
gas...................... 18% 19% 19% 12% 10% 9%
Combustion Turbines
Units capable of burning
No. 2 fuel oil only...... 9% 9% 9% )
Units capable of burning ) 3% 2% 1%
No. 2 fuel oil or natural )
gas...................... 11% 11% 9% )
Purchased capacity........... 9% 7% 7% 13%(a) 13%(a) 13%(a)
(a) Includes purchases under cogeneration agreements.
12
The Company's fuel mix objective is to obtain a minimum unit cost of
energy through the use of its generating facilities. The actual use of coal,
oil and natural gas is influenced by the availability of the generating units,
the relative cost of the fuels, energy and demand requirements of other
utilities with which the Company has interconnection arrangements, regulatory
requirements (for future units), weather conditions and fuel supply
constraints, if any.
The Company has numerous coal contracts with various expiration dates
through 2003 for aggregate annual deliveries of approximately 3.5 million
tons. Deliveries under these contracts are expected to provide approximately
58% of the estimated system coal requirements in 1995. Approximately 42% of
the estimated system coal requirements in 1995 will be purchased under shorter
term agreements and on a spot basis from a variety of suppliers. Prices under
the Company's coal contracts are generally determined by reference to base
amounts adjusted to reflect provisions for changes in suppliers' costs, which
in turn are determined by reference to published indices and are limited by
current market spot prices.
Most of the coal currently used by the Company is surface mined in
Pennsylvania, West Virginia and Maryland. The Company believes that it will
be able to continue to obtain the quantities of coal needed to operate at its
current fuel mix objective. The costs of coal to the Company may be affected
by increases in the costs of production, including the costs of complying with
federal legislation (such as amendments to the CAA, discussed above, the costs
of surface mining reclamation and black lung benefits), the imposition of (or
changes in) state severance taxes and by modification of contracts with
Conrail, CSX Transportation and Norfolk Southern which cover all of the coal
movements to the Company's generating stations.
The Company purchases both domestically refined and imported residual
oil. Residual oil is being obtained under one two-year and two one-year
contracts. Prices under the contracts are determined by reference to base
contract prices, as adjusted to reflect current market prices. Prior to
expiration of the contracts, the Company expects to solicit bids for new
contracts to supply its residual oil requirements. The Company also purchases
No. 2 fuel oil under two one-year contracts.
Certain units at the Company's Chalk Point Generating Station and the
new Dickerson combustion turbine units are capable of burning natural gas as
well as oil. The Company has a contract with Washington Gas Light Company for
Chalk Point extending through December 1998. The Company has a one-year
contract with Consolidated Natural Gas for the Dickerson combustion turbine
units through March 31, 1995. Both contracts are for an interruptible supply
of natural gas with provisions for price review and adjustment each month.
The actual use of natural gas for these units will be dependent upon
operational requirements, the relative costs of natural gas and oil, and the
availability of natural gas.
13
REGULATION
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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). In addition, in
certain limited respects relating to its participation in the Conemaugh
Generating Station and related transmission lines, the Company is subject to
regulation by the Pennsylvania Public Utility Commission.
The Company's operations are subject to certain portions of the National
Energy Act designed to promote the conservation of energy and the development
and use of more plentiful domestic fuels through various regulatory and tax
provisions. The legislation, among other things, requires states to develop
residential energy conservation plans and requires utilities to enter into
cogeneration purchases with operators of qualified facilities. To date, this
legislation has fostered nonutility generation (cogeneration and solid waste
fired generation) supplying the Company with approximately 8 megawatts. As
noted above under "Purchase of Capacity and Energy," the Company is planning
additional cost-effective nonutility generation projects.
RATES
-----
General
-------
The Company's retail rates for electric service in Maryland and the
District of Columbia are based on allowed rates of return to the Company's
jurisdictional original cost rate base investments as determined in base rate
proceedings before the regulatory commissions by reference to the test periods
used in setting rates. Rate base in each of these jurisdictions generally has
included (1) the Company's full investments in Electric Plant in Service (net
of depreciation, certain pre-1981 investment tax credits and plant related
deferred income taxes) and the pollution control portion of Construction Work
in Progress (CWIP), (2) inventories of fuels and other materials and supplies
and (3) an allowance for cash working capital. The Company has employed,
since 1978, Allowance for Funds Used During Construction (AFUDC) accounting.
In general, the Company capitalizes AFUDC with respect to investments in CWIP
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. In 1992, pursuant to
orders from both the Maryland and District of Columbia commissions, the
Company commenced the accrual of a capital cost recovery factor on the retail
jurisdictional portion of certain pollution control projects related to
compliance with the 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
on a gross basis pursuant to formulas prescribed by the FERC. The effective
capitalization rates were approximately 7.6% in 1994, 8.7% in 1993 and 9.1% in
1992, compounded semiannually.
14
Rate orders received by the Company during the past three years provided
for increases in annual base rate revenue as shown in the table below.
Rate
Increase
(Decrease) % Effective
Regulatory Jurisdiction ($000) Change Date
-------------------------- ---------- ---------- ---------------
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
Federal-Wholesale 3,801 3.1 January 1993
Maryland 25,300 3.0 1992/1993 (a)
District of Columbia 30,380 4.6 July 1992
Federal-Wholesale 2,814 2.6 January 1992
(a) See Maryland discussion below.
Fuel Rates
----------
The Company has separately stated fuel rates in each jurisdiction. Such
rates include the delivered cost of fuel and the applicable costs and/or
credits from the interchange of energy with other electric utilities, to the
extent not provided for in base rates.
In January 1995, the Company filed for a 5.3% decrease in the Maryland
fuel rate which became effective, subject to refund, on February 1, 1995.
Previously, the Company filed for a 5.3% increase in the fuel rate which
became effective, subject to refund, on November 1, 1994. Both cases are
currently pending and a final order in each case is expected during the second
quarter of 1995 (see Item 8 - Note 2 of "Notes to Consolidated Financial
Statements").
Maryland
--------
In October 1993, pursuant to a settlement agreement, the Commission
authorized a $27 million, or 3%, increase in base rate revenue effective
November 1, 1993. The settlement included a new system composite depreciation
rate of approximately 3.1%, up from the 3% rate previously in effect. In
connection with the settlement agreement, no determination was made with
respect to rate of return. The rate of return on common stock equity most
recently determined for the Company in a fully litigated rate case was 12.75%
established by the Commission in a June 1991 rate increase order.
In October 1992, pursuant to a settlement agreement, the Commission
authorized an increase in base rate revenue of approximately 3% with $18
million effective December 1, 1992, and $7.3 million effective June 1, 1993.
No determination with respect to rate of return was specified.
15
District of Columbia
--------------------
In its pending base rate proceeding, the Company further updated its
cost of service data filing, on February 21, 1995, to reduce the base rate
revenue increase request to $56.6 million, or 7.6%, 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 update was filed principally to
reflect the effect of the Company's Voluntary Severance Program. This case
was originally filed on September 30, 1994, requesting a $67 million, or 9%,
increase in base rate revenue. The Company had previously updated its initial
cost of service data filing to reduce the request to $60.6 million to reflect
subsequent events which included the sale and leaseback of the Control Center
Replacement project, a reduction in the 1995 District of Columbia income tax
rate, an approved traffic signal maintenance deregulation agreement with the
District of Columbia and an increase in the FICA tax wage base. In accordance
with Commission directives, the Company has included conservation program
expenditures subsequent to June 1993 in the proposed Environmental Cost
Recovery Rider in its pending Least-Cost Planning proceeding filed in June
1994. It is expected that both proceedings will be concluded by mid-1995. On
January 17, 1995, the Commission Staff filed testimony recommending a $37.1
million rate increase.
In May 1994, the Commission ruled on the application for reconsideration
of its March 1994 rate order. The Commission's original order authorized the
Company to increase its base rates by a total of $25.4 million in two steps:
an increase of $23.2 million effective March 16, 1994 and an increase of $2.2
million effective June 5, 1994. The order on reconsideration authorized an
additional "step 2" base rate increase of $1.3 million resulting in a total
base rate increase of $26.7 million. Of the "step 2" increase, $3 million was
contingent on the June 1, 1994 in-service date of the final segment of a 500
kilovolt transmission line which provides links in the transmission systems of
the Company, Baltimore Gas and Electric Company and Virginia Power. This
transmission line segment was placed in service prior to June 1, 1994. The
authorized rates are based on a 9.05% rate of return on average rate base,
including an 11% return on common stock equity. Prior to the order, the
Company had filed updated cost of service data which demonstrated a need for
$55.4 million increase in District of Columbia base rate revenue, based upon
the requested return of 9.46% on average rate base including an 11.8% return
on common stock equity.
The Commission's rate increase order approved the Company's proposal for
including future changes in purchased capacity costs in fuel adjustment
billings. In addition, the Commission reversed in longstanding practice of
including Electric Plant Held for Future Use in rate base. The Commission
also authorized an accounting change for postretirement benefit costs
consistent with SFAS No. 106 entitled "Employers' Accounting for
Postretirement Benefits Other Than Pensions" and adopted a three-year phase-in
approach for inclusion of these increased costs in the Company's rates. In
June 1994, the Company established a regulatory asset for the increase in
postretirement benefit costs of $.6 million on an after tax basis which will
be amortized over a three year period.
16
The initial order also reduced the Company's revenue requirement to
reflect 20% of the cumulative effect of a 1992 accounting change related to
unbilled revenue applicable to the District of Columbia. The Commission's
initial decision to adopt an unbilled revenue adjustment, supplemented by its
subsequent decisions in response to the Company's application for
reconsideration and motion for clarification, has required the Company to
establish in June 1994 a regulatory liability of $2.5 million on an after tax
basis which will be amortized in 1995 and 1996.
The Commission's initial decision rejected the Company's proposal to
provide rate recognition of DSM costs through a billing surcharge and
consistent with prior decisions, included $5.3 million in base rates to
recognize DSM program costs without provision for lost revenue between rate
cases. In addition, the initial decision and subsequent decisions in response
to the Company's application for reconsideration and motion for clarification,
disallowed the recovery of 25% of test period DSM program expenditures which
required the Company to write off $2.2 million on an after tax basis in June
1994. In its order on reconsideration, the Commission stated that in the
future the appropriate forum for consideration for DSM cost recovery would be
the Company's least-cost resource planning cases, which the Company files on
a two-year cycle. Under this new process, DSM approval and cost recovery will
be linked together in the same proceeding. Subsequent to June 1993, the
Company has expended through December 31, 1994, approximately $56 million on
conservation in the District of Columbia. The Company requested a surcharge
mechanism for billing unamortized DSM costs in its June 1994 Least-Cost
Planning Case filing.
In July 1994, the Company filed a Petition for Review with the District
of Columbia Court of Appeals related to the Commission's decisions to disallow
the recovery of 25% of test period DSM program expenditures and to reject an
adjustment to reflect increases in employee benefit costs. The Company
expects to receive an order on appeal in the second quarter of 1995.
Wholesale
---------
The Company has a 10-year full service power supply contract with 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.
The rates were increased by $2.6 million and $3.8 million effective January 1,
1994 and 1993, respectively. A rate increase of $4.2 million is scheduled to
become effective January 1, 1996.
17
Interchange of Power
--------------------
The Company's generating and transmission facilities are interconnected
with the other members of 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.
The Company has interconnection agreements with Allegheny Power System
(APS) and Virginia Power. These agreements provide a mechanism and the
flexibility to purchase power from these parties or from others with whom they
are interconnected on an as-needed basis in amounts mutually agreed to from
time-to-time pursuant to negotiated rates, terms and conditions.
Pursuant to the Company's long-term capacity purchase agreements with
Ohio Edison and APS, the Company is purchasing 450 megawatts of capacity and
associated energy through the year 2005. The monthly capacity commitment
under 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, effective June 1, 1994 through May 31, 1995, the Company is
purchasing 147 megawatts of capacity from Pennsylvania Power and Light Company
at a total cost of $3 million.
The Company has a purchase agreement with SMECO, through 2015, for 84
megawatts of capacity supplied by a combustion turbine installed and owned by
SMECO at the Company's Chalk Point Generating Station. The Company is
responsible for all costs associated with operating and maintaining the
facility. The capacity payment to SMECO is $462,000 per month.
COMPETITION
-----------
The traditional concept of a vertically integrated electric utility
industry, with exclusive franchises serving defined areas, is changing.
Market forces, federal regulatory policies and customer demands are creating a
more competitive landscape. Although much of the future outlook for the
utility industry remains undefined, it is clear that the power generation
sector is rapidly moving toward a competitive, commodity-based business, with
broader access to utility-owned transmission facilities. The Company believes
that it has prepared for these changes.
The Company has achieved a highly competitive position by developing and
emphasizing the strong fundamentals of its core business. A premium has been
placed on financial, operating and construction flexibility, which has
prepared the Company to operate in the new and changing business environment.
In 1994, the Company's average price was 6.98 cents per kilowatt-hour,
compared with 6.60 cents in 1993 and 6.65 cents in 1985 - a modest 5% increase
over the past 10 years. Electricity price comparisons in 1993 of East Coast
18
cities range from a high of 13.3 cents per kilowatt-hour in New York to a low
of 6.5 cents in Richmond and 6.3 cents in Raleigh. Based on this comparison,
the the Company's rates compare favorably with those of electric utilities
serving other East Coast cities.
The Company's cost of generation is among the lowest on the Eastern
Seaboard. The Company's plants are maintained at a high level of availability
and their operating efficiency continues to be among the best in the nation.
Based on 1993 data, the Company's net investment in generating capacity was
only $232 per kilowatt, compared with $380 industrywide. Due to this low
generating investment and because of the Company's extensive investment in the
underground distribution and transmission network serving the nation's
capital, generating assets account for only 38% of total plant investment.
This low ratio compares favorably with an industry median of about 50%. In
addition, the Company's contracts for purchased power are competitive and no
additional generating capacity is foreseen until well into the next decade.
The Company's investment in transmission plant amounts to approximately
10% of total assets, about the median for the industry. In 1994, the last
sections of a 243-mile, 500-kilovolt transmission ring surrounding Washington,
D.C. was completed. This loop provides greater reliability for the Company's
system and increases access to other utilities and power pools.
Substantial concern has been expressed over the potential burdens and
risks of "stranded investment" as the utility industry makes the transition to
a less regulated business. Much of this concern focuses on certain high-cost
nuclear and other generating investments that may not be competitive with
alternative sources of power. The Company is in a favorable position with its
low plant investment per kilowatt. Significantly, approximately 50% of the
Company's net plant investment is in distribution system assets, which are not
likely to be "stranded" by market developments and which provide a stable
revenue base in an evolving business environment.
In addition, the Company's costs deferred under traditional rate-making
conventions - known as "regulatory assets" - are relatively limited. They
consist mostly of deferred taxes and other routine deferrals such as those
associated with conservation programs and changes in fuel costs.
Consequently, the Company does not expect significant "regulatory asset"
burdens.
With a significant federal presence, a well-educated and affluent
population, and a total absence of heavy industry, the Washington metropolitan
area is unique among America's major markets. The Company's nonresidential
load consists principally of commercial office buildings. The Company does
not have large customers with energy-intensive operations, which would be
vulnerable in a more open marketplace.
Additional information concerning competition is presented in
Management's Discussion and Analysis incorporated by reference in Item 7.
19
ENVIRONMENTAL MATTERS
---------------------
General
-------
The Company is subject to federal, state and local legislation and
regulation with respect to environmental matters, including air and water
quality and the handling of solid and hazardous waste. Air quality
requirements relate to both ambient air quality and emissions from facilities,
including particulate matter, sulfur dioxide, nitrogen oxides, carbon
monoxide, volatile organic compounds and visible emissions. Water quality
requirements relate to intake and discharge of water from facilities,
including water used for cooling purposes in electric generating facilities.
Waste requirements relate to the generation, treatment, storage,
transportation and disposal of specified wastes. Compliance with such
requirements may limit or prevent certain operations or substantially increase
the cost of construction and operation of the Company's existing and future
generating installations. The Company has expended approximately $546 million
through December 31, 1994, for the construction of pollution control
facilities. The $544 million 1995-1999 construction program for generating
facilities includes estimated provision for pollution control facilities,
including expenditures for CAA compliance, of $47 million for 1995, $17
million for 1996, $43 million for 1997, $58 million for 1998 and $59 million
for 1999. The Company is unable to predict the future course of environmental
regulations generally, the manner in which compliance with such regulations
will be required, the availability of technology to meet such regulations and
any budget amendments which may be required to recognize the costs which may
ultimately be associated with such compliance.
Air Quality
-----------
Under authority of the Clean Air Act of 1970, as amended, the U.S.
Environmental Protection Agency (EPA) has issued national primary and
secondary standards for the following air pollutants: sulfur dioxide,
nitrogen dioxide, particulate matter, carbon monoxide, ozone and lead. The
EPA has also enacted regulations designed to prevent significant deterioration
of air quality in areas where air quality levels are better than the secondary
ambient air quality standards. The appropriate agencies in Maryland, the
District of Columbia and Virginia have issued regulations designed to
implement EPA's standards and regulations.
In 1990, Congress enacted amendments to the CAA that require the
reduction of sulfur dioxide and nitrogen oxides emissions from electric
generating units. The Company cannot fully predict the financial and
operating effects of this new legislation until all of the related
implementing regulations are adopted by EPA and by appropriate agencies in
each of the jurisdictions where the Company's generating facilities are
located. However, the Company has developed cost-effective plans for
complying with the CAA to achieve prescribed standards in two phases. The
Company anticipates CAA related capital expenditures totaling $165 million
20
over the next five years. The plans call for replacement of boiler burner
equipment for nitrogen oxides emissions control, the use of lower-sulfur fuel
and cofiring with natural gas at selected baseload plants. The CAA allows
companies to achieve required emission levels by using a market-based emission
allowance trading system. If economical, emission allowances may be purchased
in lieu of burning lower-sulfur fuel.
Maryland, the District of Columbia and Northern Virginia are members of
the Ozone Transport Commission, established by the CAA for the purpose of
developing a regional solution to attainment of the ambient ozone standard in
the northeastern United States. Those states are currently preparing rules
under Title I of the CAA which will require the retrofit of existing
generating units with Reasonably Available Control Technology (RACT) for
nitrogen oxides control by mid-1995. The Company has developed a plan whereby
the nitrogen oxides reductions already planned to be achieved by PEPCO under
Title IV of the CAA will also satisfy the states' requirements for RACT. This
plan will be undergoing regulatory review and implementation during 1995.
The Company is unaware in any respect in which its generating stations
are not presently in compliance with federal and state air quality
regulations, with the exception of visible emissions from the Dickerson
Station and Chalk Point Units 3 and 4. Recognizing that the specified units
cannot continuously satisfy their applicable standards, the Company is working
with Maryland regulators to establish revised visible emissions standards for
the Dickerson units and a plan of compliance for the Chalk Point units.
Water Quality
-------------
The Company's generating stations operate under National Pollutant
Discharge Elimination System (NPDES) permits. NPDES renewal applications
submitted in December 1991 for the Dickerson station, March 1992 for the Chalk
Point station, April 1993 for the Buzzard Point station and July 1993 for the
Benning station are pending. NPDES permits were issued for the Potomac River
station in February 1994 and for the Morgantown station in February 1995.
The Maryland Department of the Environment promulgated regulations
effective April 16, 1990 that, among other things, set numeric criteria for
toxic substances in surface waters. These criteria, if incorporated into the
NPDES permits for the Company's Chalk Point, Morgantown and Dickerson
generating stations, had the potential to cause the Company to incur
significant costs to achieve compliance. The Company, in conjunction with
other utilities, industrial companies, and the Maryland Chamber of Commerce,
filed a suit in May 1990 that challenged the validity of the regulations. The
parties entered into a settlement agreement and revised regulations were
adopted on May 6, 1993 in accordance with the settlement agreement. These
revised regulations received EPA approval and the suit filed in the Circuit
Court for Baltimore City was subsequently dismissed on July 25, 1994. It is
currently not anticipated that these regulations will result in any
significant adverse economic impact on the Company.
21
On March 18, 1993, the Company brought to the attention of state and
federal authorities information discovered in an internal Company
investigation to the effect that one of the Company's NPDES permits may have
been violated by the pumping of water from a settlement pond at a Company-
owned flyash storage facility. Further investigation both internally and by
the governmental authorities has continued, including issuance of, and
response by the Company to, a federal grand jury subpoena for documents
germane to the investigation and testimony of two Company employees before the
grand jury.
Toxic Substances
----------------
The Company was notified by the EPA on December 18, 1987, that it, along
with five other utilities and eight non-utilities, is a potentially
responsible party (PRP) under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended (CERCLA or Superfund), in
connection with the polychlorinated biphenyl compounds (PCBs) contamination of
soil, ground water and surface water occurring at a Philadelphia, Pennsylvania
site owned by an unaffiliated company. Additional PRPs have since been
identified and the number is continuously subject to change. In the early
1970s, the Company sold scrap transformers, some of which may have contained
some level of PCBs, to a metal reclaimer operating at the site. In October
1994, a Remedial Investigation/Feasibility Study (RI/FS) was submitted to the
EPA. Pursuant to an agreement among the participating PRPs, the Company is
responsible for 12% of the costs of the RI/FS. Total costs of the RI/FS,
including legal fees, are currently estimated to be $5.6 million. The Company
has paid $836,000 to date. The report includes a number of possible remedies,
the estimated costs of which range from $2 million to $90 million. In
addition, the Company cannot estimate the total extent of the EPA's
administrative and oversight costs. While a remedy near the lower end of the
range is possible, the Company cannot predict what remedy may be acceptable to
the EPA. To date, the Company has accrued approximately $1.7 million for its
share of this contingency.
On September 19, 1989, an unaffiliated company, the Richmond,
Fredericksburg and Potomac Railroad (RF&P), requested the Company to
participate in the investigation and remediation of a 3-acre site in
Arlington, Virginia owned by RF&P at which it is alleged that soil and
groundwater have been contaminated by PCB compounds. Subsequently, the
Virginia Department of Waste Management requested information from the Company
related to transformers which may have been sold or sent to the site operator.
On December 7, 1990, a Summons and Complaint filed by RF&P in the United
States District Court for the Eastern District of Virginia against the Company
and seven other defendants was received. The Complaint alleges that the
defendant site operator released PCBs and other hazardous substances at the
site during the course of its operation, and that the sole source of PCBs and
other hazardous substances is from the defendant operator's operations and
from transformers and capacitors supplied by other defendants. Subsequently,
additional defendants were added to the Complaint. The Complaint seeks
contribution and other equitable remedies for remediation of the site. In
22
October 1993, the parties reached, and the Court approved, a settlement
subject to confirmation by additional site testing that remediation can be
accomplished at or below, and that no regulatory authority will require a
remediation which exceeds, approximately $4 million.
During 1993, the Company and two other PRPs completed a removal action
at a site in Harmony, West Virginia pursuant to an Administrative Order (AO)
issued by the EPA. Approximately $3 million (of which the Company has paid
one-third, subject to possible reallocation) was expended on the removal
action, which the EPA has stated is in compliance with the AO. The Company
and two other PRPs have entered into settlements with third parties to recover
approximately $2.4 million of this cost. EPA oversight costs, which are not
expected to be material, have not yet been assessed. While compliance with
the AO has been completed, the Company cannot determine whether it will be
subject to any future liability with respect to the site.
During 1993, the Company was served 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 the 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.
23
Solid and Hazardous Waste
-------------------------
The Resource Conservation and Recovery Act of 1976 (RCRA) provides
federal mandates and authority for dealing with the generation, treatment,
storage, transportation and disposal of solid or hazardous waste. The
principal utility wastes of fly ash, bottom ash and scrubber sludge are exempt
from EPA regulation as hazardous waste. The Company sends its wastes
designated as hazardous to appropriately licensed facilities for hazardous
waste treatment, storage and disposal. The current impact of regulations
under RCRA is not substantial. The only permit which will be required at this
time is for the Morgantown Generating Station, where the Company burns certain
amounts of PCB-contaminated mineral oil. Maryland regulations provide for a
special "limited facility permit" for this activity and the Company's
application for such permit is pending.
LABOR
-----
The Company has a labor contract expiring May 31, 1996, with Local 1900
of the International Brotherhood of Electrical Workers which represents 2,912
of the Company's 4,863 employees.
In September 1994, the Company announced a Voluntary Severance Program
(VSP), which offered incentive payments to full-time employees based upon
years of service, to voluntarily sever employment no later than the first
quarter of 1995. Approximately 340 employees will participate in the VSP.
During January 1995, $7.4 million in severance costs was expensed. The VSP
will result in annual savings of more than $15 million. Including this
reduction, the Company's workforce has declined by more than 700 employees, or
14%, since 1989.
NONUTILITY SUBSIDIARY
---------------------
Potomac Capital Investment Corporation (PCI), the Company's principal
wholly owned subsidiary, was formed in late 1983 to provide a vehicle for
ongoing nonutility investment business. PCI's objective is to provide an
annual supplement to utility earnings and to build long-term shareholder
value.
At December 31, 1994, PCI's assets totaled $1.7 billion, including
$954.4 million in finance and operating equipment leases and $473.6 million in
marketable securities, principally investment grade sinking fund preferred
stock. The Company's equity investment in PCI was $271.1 million, including
$149.3 million of subsidiary retained earnings. Additional financial
information concerning assets, income, expenses and net earnings is presented
in the consolidated financial statements incorporated by reference in Item 8.
PCI's equipment-leasing portfolio consists primarily of wide-body
commercial aircraft. Income from leasing activities includes rental and
interest income, gains on asset sales and service fees. At December 31, 1994,
24
a portion ($263 million carrying value) of PCI's aircraft leasing portfolio
consisted of equipment not on lease (four L-1011 aircraft returned by TWA when
leases expired in November 1994) and equipment on short-term, and in some
cases, usage-based operating leases with monthly rentals and maintenance
payments dependent upon hours used. Under these leases, PCI is responsible
for future operating and maintenance expenses exceeding amounts provided
therefor by lessees. Most of the usage-based and short-term leases include
provisions for early termination by PCI if more favorable transactions become
available. In January 1995, because of the lessee's inability to make timely
rental payments and to satisfy other lease obligations, Fortunair Canada
returned one B747 aircraft previously under short-term lease. PCI is
continuing to seek new leases with more favorable terms or to sell the
equipment on satisfactory terms. In January 1995, Continental Airlines
(Continental) announced its intention to seek the early termination of its A-
300 aircraft leases and the reduction of rental payments due under certain
leases of other widebody aircraft. Pending discussions with lessors,
Continental has indicated that it will not be making full payments to such
lessors as required by the terms of its contracts. Beginning in February
1995, Continental unilaterally reduced, by approximately 50%, the amounts of
rent paid to PCI for the lease of one A-300 aircraft and six DC-10-30 aircraft
(two of which are owned jointly with another investor). Continental also has
informed PCI that, during 1995, it intends to take out of service and further
reduce the rent payments for the lease of the A-300 aircraft. Continental is
seeking temporary rent deferrals for the contractual rents due on the DC-10-30
aircraft. PCI has declared Continental to be in default of its obligations
under the A-300 and DC-10-30 leases and has reserved the right to exercise the
default remedies available under the leases, including repossession of the
aircraft and acceleration and recovery of the present value of the full rents
due during the remainder of the lease terms. PCI has informed Continental
that it expects all lease obligations to be satisfied in full, and currently
is discussing with Continental the payment terms and schedule for the unpaid
balance of rents due from Continental under the leases of the DC-10-30
aircraft and compensation to be paid for the return of the A-300 aircraft
prior to the scheduled end of its lease term. Additional information
concerning leasing activities is presented in Management's Discussion and
Analysis incorporated by reference in Item 7.
PCI's aircraft leasing business has been affected adversely by a lengthy
economic downturn in the airline industry. There can be no assurance that a
recovery will occur or as to the nature, extent or timing of any such
recovery. Accordingly, management is evaluating business strategies to
improve the overall performance of PCI's aircraft equipment operating lease
portfolio, including actions which could have a non-recurring material
adverse impact on the Company's earnings for 1995.
PCI's real estate activity consists of real estate projects and holdings
in the Washington metropolitan area. PCI also owns leasehold interests in oil
and natural gas producing properties in Texas.
25
<TABLE>
Part I
------
Item 2 PROPERTIES
------ ----------
<CAPTION>
Megawatts of Net Capability
Steam --------------------------- Net Megawatt-
Generation Steam Combustion Hours Generated
Generating Station Location Primary Fuel Generation Turbine<F1> in 1994
------------------ --------------------------------------- -------------- ------------ ------------ ---------------
(Thousands)
<S> <C> <C> <C> <C> <C>
Benning Benning Road and Anacostia River, N.E. No. 4 Oil 550 - 255
Washington, D.C.
Buzzard Point 1st and V Streets, S.W. - - 256 19
Washington, D.C.
Potomac River Bashford Lane and Potomac River Coal 482 - 2,109
Alexandria, Virginia
Dickerson Potomac River, South of Little Monocacy Coal 546 291 3,311
River, Dickerson, Maryland
Chalk Point Patuxent River at Swanson Creek Coal/ 1,907 516 <F2> 6,235
Aquasco, Maryland Residual Oil/
Natural Gas
Morgantown Potomac River, South of Route 301 Coal/ 1,164 248 6,327
Newburg, Maryland Residual Oil
----------- ----------- -----------
Total - Wholly owned Units 4,649 1,311 18,256
Conemaugh Indiana County, Pennsylvania Coal 165 1 1,064
----------- ----------- -----------
Total - All Stations Operated 4,814 1,312 19,320
===========
Purchased Capacity
Ohio Edision <F3> 450 - 2,957
===========
Other <F4> 147 -
----------- -----------
Total System 5,411 1,312
=========== ===========
<FN>
All of the above properties are held in fee, but as to Conemaugh, the
Company holds a 9.72% undivided interest as a tenant in common.
<F1>Combustion turbines burn No. 2 fuel oil and certain units can also
burn natural gas.
<F2>Includes 84 megawatts supplied by a combustion turbine owned by SMECO
and operated by the Company.
<F3>Generating capacity under long-term agreements with Ohio Edison and
Allegheny Power System.
<F4>A one-year agreement with Pennsylvania Power and Light Company which
became effective June 1, 1994.
</FN> 26
</TABLE>
The five steam-electric generating stations, together with combustion
turbines, had an aggregate net capability at December 31, 1994, of 5,960
megawatts (including the 84 megawatt combustion turbine owned by SMECO at the
Company's Chalk Point Generating Station), assuming all units are available
for service at the time and for the usual duration of the system peak (which
occurs in the summer). The Company also has 166 megawatts of net capability
available from its 9.72% undivided interest in a mine-mouth, steam-electric
generating station known as the Conemaugh Generating Station, located in
Indiana County, Pennsylvania, which it owns with eight other utilities as
tenants in common. The Company also receives generating capacity and
associated energy from Ohio Edison under its 1987 long-term agreements with
Ohio Edison and APS. The agreements, which provide for 450 megawatts of
capacity and associated energy, are expected to continue at that level through
the year 2005. The net 60-minute peak load in 1994 was 5,660 megawatts, which
occurred on July 6, 1994, and was 1.9% below the all-time summer peak demand
of 5,769 megawatts. To meet the 1994 summer peak demand, the Company also had
256 megawatts available from its dispatchable energy use management programs.
For additional information regarding the Company's net generating capability,
see "Construction Program" and "Fuel" under Item 1 - Business.
The Company owns the transmission and distribution facilities serving
its customers. As stated above, the Company's interest in the Conemaugh
Generating Station and its associated transmission lines is that of a tenant
in common with eight other owners. Substantially all of such Conemaugh
transmission lines, substantially all of the Company's transmission and
distribution lines of less than 230,000 volts, small portions of its 230,000
volt transmission lines and certain of its substations are located on land
owned by others or in public streets and highways. Substantially all of the
Company's property and plant is subject to the mortgage which secures its
bonded indebtedness.
Item 3 LEGAL PROCEEDINGS
------ -----------------
For information regarding pending environmental legal proceedings, see
"Environmental Matters" under Item 1 - Business.
The Company was a defendant in employment discrimination litigation
which was pending in the United States District Court for the District of
Columbia. In February 1993, the parties to the case reached tentative
settlement of the claims and, in April 1993, the Company paid $38.26 million
into a trust fund pursuant to the terms of the Agreement. The funds will be
disbursed from the trust fund to certain covered classes of current and former
employees and applicants for employment and to cover the plaintiffs' legal and
expert fees and costs. The Court approved the settlement agreement, effective
in July 1993. The Company received insurance payments of $13.5 million in
October 1993 and $24 million in January 1994, bringing the total recovered
from insurance companies to $37.5 million. At December 31, 1993,
approximately $.8 million was charged to non-operating expense. Subsequently,
in November 1994, the Company received an additional insurance recovery of $.8
million which was treated as a credit to amounts previously charged to non-
operating expense.
27
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------ ---------------------------------------------------
None.
Part II
-------
Item 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
------ -----------------------------------------------------------------
MATTERS
-------
The following table presents the dividends per share of Common Stock and
the high and low of the daily Common Stock transaction prices as reported in
The Wall Street Journal during each period. The New York Stock Exchange is
the principal market on which the Company's Common Stock is traded.
Dividends Price Range
Period Per Share High Low
--------------------- --------------- -------- ---------
1994:
First Quarter...... $.415 $26-5/8 $21-3/4
Second Quarter..... .415 23-1/2 18-1/2
Third Quarter...... .415 21-1/2 18-3/8
Fourth Quarter..... .415 $1.66 19-3/4 18-1/4
1993:
First Quarter...... $.41 $26-1/2 $23-7/8
Second Quarter..... .41 27-3/8 25-5/8
Third Quarter...... .41 28-7/8 27-1/8
Fourth Quarter..... .41 $1.64 28-3/4 24-5/8
The number of holders of Common Stock was 104,047 at March 7, 1995 and
96,638 at December 31, 1994.
There were 118,248,594 and 118,248,103 shares of the Company's $1 par
value Common Stock outstanding at March 7, 1995, and December 31, 1994,
respectively. A total of 200 million shares is authorized.
At its January 1995 meeting, the Company's Board of Directors declared a
quarterly dividend on Common Stock of 41-1/2 cents per share continuing the
$1.66 annual dividend rate set in January 1994. The dividend is payable March
31, 1995, to shareholders of record on February 27, 1995.
Item 6 SELECTED FINANCIAL DATA
------ -----------------------
The information required by Item 6 is incorporated herein by reference
to "Selected Consolidated Financial Data" in the Financial Information of the
Company's 1994 Annual Report to shareholders.
28
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------ ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The information required by Item 7 is incorporated herein by reference
to the "Management's Discussion and Analysis of Consolidated Results of
Operations and Financial Condition" in the Financial Information section of
the Company's 1994 Annual Report to shareholders.
See "Nonutility Subsidiary" under Item 1 - Business for an update to the
discussion of the Company's nonutility subsidiary, including developments
relating to the subsidiary's aircraft leasing portfolio.
See "Rates" under Item 1 - Business for an update to the discussion of
the Company's base rate proceeding in the District of Columbia.
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
------ -------------------------------------------
The consolidated financial statements, together with the report thereon
of Price Waterhouse LLP dated January 26, 1995, and supplementary data from
the Company's 1994 Annual Report to shareholders are incorporated herein by
reference. With the exception of the aforementioned information and the
information incorporated in Items 5, 6, 7, 8 and 9, the 1994 Annual Report to
shareholders is not deemed filed as part of this Form 10-K Annual Report.
Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------ ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
29
Part III
--------
Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------- --------------------------------------------------
The information required by Item 10 with regard to Directors of the
registrant is incorporated herein by reference to the Company's Notice of
Annual Meeting of Shareholders and Proxy Statement dated March 17, 1995.
Information with regard to the executive officers of the registrant as
of March 7, 1995, is as follows:
Served in
such position
Name Position Age since
-------------------- -------------------------------- --- -------------
Edward F. Mitchell Chairman of the Board and Chief
Executive Officer 63 1992 (1)
John M. Derrick Jr. President and Chief Operating
Officer and Director 54 1992 (2)
H. Lowell Davis Vice Chairman and Chief Financial
Officer and Director 62 1983
Paul Dragoumis Executive Vice President 60 1989
William T. Torgerson Senior Vice President, General
Counsel and Secretary 50 1994 (3)
Dennis R. Wraase Senior Vice President -
Finance and Accounting 50 1992 (4)
Iraline G. Barnes Vice President - Corporate 47 1990 (5)
Relations
Earl K. Chism Vice President and Comptroller 59 1994 (6)
Kirk J. Emge Vice President - Regulatory
Law 45 1994 (7)
Susann D. Felton Vice President - Materials 46 1992 (8)
William R. Gee Jr. Vice President - System
Engineering 54 1991 (9)
Robert C. Grantley Vice President - Customers
and Community Relations 46 1989
Anthony J. Kamerick Vice President and Treasurer 47 1994 (10)
30
Served in
such position
Name Position Age since
-------------------- -------------------------------- --- -------------
Anthony S. Macerollo Vice President - Corporate
Administration and Services 53 1989
Eddie R. Mayberry Vice President - Market
Planning and Policy 47 1993 (11)
John D. McCallum Vice President - Corporate Tax 45 1992 (12)
James S. Potts Vice President - Environment 49 1993 (13)
William J. Sim Vice President - Power Supply
and Delivery 50 1991 (14)
Andrew W. Williams Vice President - Energy and
Market Policy and Development 45 1989
None of the above persons has a "family relationship" with any other officer
listed or with any director or nominee for director.
The term of office for each of the above persons is from April 27, 1994
to April 26, 1995.
(1) Mr. Mitchell was elected to the position of Chairman of the Board on
December 21, 1992. He was elected Chief Executive Officer effective
September 1, 1989.
(2) Mr. Derrick was elected to the position of President on December 21,
1992. He was elected Executive Vice President and Chief Operating
Officer on July 27, 1989.
(3) Mr. Torgerson was elected Senior Vice Present and General Counsel on
April 27, 1994. He was elected Secretary effective August 22, 1994.
Prior to 1994 he held the position of Vice President and General
Counsel.
(4) Mr. Wraase was elected to his present position on April 22, 1992. He
was elected Senior Vice President and Comptroller on July 27, 1989.
(5) Mrs. Barnes was elected to her present position effective April 1, 1990.
Prior to that time she served as Associate Judge of the Superior Court
of the District of Columbia for ten years.
(6) Mr. Chism was elected to his present position on April 27, 1994.
Prior to that time he held the position of Vice President and Treasurer
since July 1989.
31
(7) Mr. Emge was elected to his present position on April 27, 1994. Prior
to that time he held the position of Deputy General Counsel.
(8) Ms. Felton was elected to her present position on April 22, 1992. Prior
to that time she held the position of Manager, Materials.
(9) Mr. Gee was elected to his present position on April 24, 1991. Prior to
that time he held the position of Vice President - Generating
Engineering and Construction, since 1989.
(10) Mr. Kamerick was elected to his present position on April 27, 1994.
Prior to that time he held the position of Comptroller from 1992 to
1994. Prior to 1992 he held the position of Assistant Comptroller.
(11) Dr. Mayberry was elected to his present position on April 28, 1993.
Prior to that time he held the position of Manager, Market Planning and
Policy, since 1989.
(12) Mr. McCallum was elected to his present position on April 22, 1992.
Prior to that time he held the position of Assistant Comptroller.
(13) Mr. Potts was elected to his present position on April 28, 1993. Prior
to that time he held the position of Manager, Generating Strategic
Support since 1991. Prior to 1991 he held the position of Manager,
Production Performance.
(14) Mr. Sim was elected to his present position on April 24, 1991. Prior to
that time he was President of the American Energy division of the
Company's nonutility subsidiary, Potomac Capital Investment Corporation,
since 1988.
Item 11 EXECUTIVE COMPENSATION
------- ----------------------
The information required by Item 11 is incorporated herein by reference
to the Company's Notice of Annual Meeting of Shareholders and Proxy Statement
dated March 17, 1995.
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------- --------------------------------------------------------------
The information required by Item 12 is incorporated herein by reference
to the Company's Notice of Annual Meeting of Shareholders and Proxy Statement
dated March 17, 1995.
Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
------- ----------------------------------------------
None.
32
Part IV
-------
Item 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
------- --------------------------------------------------------------
(a) Documents List
--------------
1. Financial Statements
The following documents are filed as part of this report as incorporated
herein by reference from the indicated pages of the Company's 1994 Annual
Report.
Reference (Page)
----------------
Form 10-K
Annual Report Annual Report
to Shareholders Exhibit 13
--------------- -------------
Consolidated Statements of
Earnings - for the years
ended December 31, 1994,
1993 and 1992 15 28
Consolidated Balance Sheets -
December 31, 1994 and 1993 16-17 29-30
Consolidated Statements of
Cash Flows - for the years
ended December 31, 1994,
1993 and 1992 18 31
Notes to Consolidated Financial
Statements 19-30 32-69
Report of Independent Accountants 31 27
2. Financial Statement Schedule
Unaudited supplementary data entitled "Quarterly Financial Summary
(Unaudited)" is incorporated herein by reference in Item 8 (included in "Notes
to Consolidated Financial Statements" as Note 16).
Schedule VIII (Valuation and Qualifying Accounts) and the Report of
Independent Accountants on Consolidated Financial Statement Schedule is
submitted pursuant to Item 14(d).
33
All other schedules are omitted because they are not applicable, or the
required information is presented in the financial statements.
3. Exhibits required by Securities and Exchange Commission Regulation
S-K (summarized below).
Exhibit
No. Description of Exhibit Reference*
------- ---------------------- ----------
3-A Charter of the Company.............. Filed herewith.
3-B By-Laws of the Company.............. Filed herewith.
4 Mortgage and Deed of Trust dated
July 1, 1936, of the Company to The
Riggs National Bank of Washington,
D.C., as Trustee, securing First
Mortgage Bonds of the Company, and
Supplemental Indenture dated
July 1, 1936........................ Exh. B-4 to First Amendment,
6/19/36, to Registration
Statement No. 2-2232.
Supplemental Indentures, to the
aforesaid Mortgage and Deed of
Trust, dated -
December 1, 1939 and December
10, 1939.......................... Exhs. A & B to Form 8-K,
1/3/40.
August 1, 1940...................... Exh. A to Form 8-K, 9/25/40.
July 15, 1942 and August 10,
1942................................ Exh. B-1 to Amendment No. 2,
8/24/42, and B-3 to Post-
Effective Amendment,
8/31/42, to Registration
Statement No. 2-5032.
August 1, 1942...................... Exh. B-4 to Form 8-A,
10/8/42.
October 15, 1942.................... Exh. A to Form 8-K, 12/7/42.
October 15, 1947.................... Exh. A to Form 8-K, 12/8/47.
January 1, 1948..................... Exh.7-B to Post-Effective
Amendment No. 2, 1/28/48,
to Registration Statement
No. 2-7349.
December 31, 1948................... Exh. A-2 to Form 10-K,
4/13/49.
34
Exhibit
No. Description of Exhibit Reference*
------- ---------------------- ----------
4 May 1, 1949......................... Exh. 7-B to Post-Effective
(cont.) Amendment No. 1,
5/10/49, to Registration
Statement No. 2-7948.
December 31, 1949................... Exh. (a)-1 to Form 8-K,
2/8/50.
May 1, 1950......................... Exh. 7-B to Amendment No. 2,
5/8/50, to Registration
Statement No. 2-8430.
February 15, 1951................... Exh. (a) to Form 8-K, 3/9/51.
March 1, 1952....................... Exh. 4-C to Post-Effective
Amendment No. 1, 3/12/52,
to Registration Statement
No. 2-9435.
February 16, 1953................... Exh. (a)-1 to Form 8-K,
3/5/53.
May 15, 1953........................ Exh. 4-C to Post-Effective
Amendment No. 1, 5/26/53,
to Registration Statement
No. 2-10246.
March 15, 1954 and March 15,
1955................................ Exh. 4-B to Registration
Statement No. 2-11627,
5/2/55.
May 16, 1955........................ Exh. A to Form 8-K, 7/6/55.
March 15, 1956...................... Exh. C to Form 10-K, 4/4/56.
June 1, 1956........................ Exh. A to Form 8-K, 7/2/56.
April 1, 1957....................... Exh. 4-B to Registration
Statement No. 2-13884,
2/5/58.
May 1, 1958......................... Exh. 2-B to Registration
Statement No. 2-14518,
11/10/58.
December 1, 1958.................... Exh. A to Form 8-K, 1/2/59.
May 1, 1959......................... Exh. 4-B to Amendment No. 1,
5/13/59, to Registration
Statement No. 2-15027.
November 16, 1959................... Exh. A to Form 8-K, 1/4/60.
May 2, 1960......................... Exh. 2-B to Registration
Statement No. 2-17286,
11/9/60.
December 1, 1960 and April 3,
1961................................ Exh. A-1 to Form 10-K,
4/24/61.
35
Exhibit
No. Description of Exhibit Reference*
------- ---------------------- ----------
4 May 1, 1962......................... Exh. 2-B to Registration
(cont.) Statement No. 2-21037,
1/25/63.
February 15, 1963................... Exh. A to Form 8-K, 3/4/63.
May 1, 1963......................... Exh. 4-B to Registration
Statement No. 2-21961,
12/19/63.
April 23, 1964...................... Exh. 2-B to Registration
Statement No. 2-22344,
4/24/64.
May 15, 1964........................ Exh. A to Form 8-K, 6/2/64.
May 3, 1965......................... Exh. 2-B to Registration
Statement No. 2-24655,
3/16/66.
April 1, 1966....................... Exh. A to Form 10-K, 4/21/66.
June 1, 1966........................ Exh. 1 to Form 10-K, 4/11/67.
April 28, 1967...................... Exh. 2-B to Post-Effective
Amendment No. 1 to
Registration Statement No.
2-26356, 5/3/67.
May 1, 1967......................... Exh. A to Form 8-K, 6/1/67.
July 3, 1967........................ Exh. 2-B to Registration
Statement No. 2-28080,
1/25/68.
February 15, 1968................... Exh. II-I to Form 8-K, 3/7/68.
May 1, 1968......................... Exh. 2-B to Registration
Statement No. 2-31896,
2/28/69.
March 15, 1969...................... Exh. A-2 to Form 8-K, 4/8/69.
June 16, 1969....................... Exh. 2-B to Registration
Statement No. 2-36094,
1/27/70.
February 15, 1970................... Exh. A-2 to Form 8-K, 3/9/70.
May 15, 1970........................ Exh. 2-B to Registration
Statement No. 2-38038,
7/27/70.
August 15, 1970..................... Exh. 2-D to Registration
Statement No. 2-38038,
7/27/70.
September 1, 1971................... Exh. 2-C to Registration
Statement No. 2-45591, 9/1/72.
September 15, 1972.................. Exh. 2-E to Registration
Statement No. 2-45591, 9/1/72.
April 1, 1973....................... Exh. A to Form 8-K, 5/9/73.
January 2, 1974..................... Exh. 2-D to Registration
Statement No. 2-49803,
12/5/73.
36
Exhibit
No. Description of Exhibit Reference*
------- ---------------------- ----------
4 August 15, 1974..................... Exhs. 2-G and 2-H to
(cont.) Amendment No. 1 to
Registration Statement
No. 2-51698, 8/14/74.
June 15, 1977....................... Exh. 4-A to Form 10-K,
3/19/81.
July 1, 1979........................ Exh. 4-B to Form 10-K,
3/19/81.
June 16, 1981....................... Exh. 4-A to Form 10-K,
3/19/82.
June 17, 1981....................... Exh. 2 to Amendment No. 1,
6/18/81, to Form 8-A.
December 1, 1981.................... Exh. 4-C to Form 10-K,
3/19/82.
August 1, 1982...................... Exh. 4-C to Amendment No. 1
to Registration Statement
No. 2-78731, 8/17/82.
October 1, 1982..................... Exh. 4 to Form 8-K, 11/8/82.
April 15, 1983...................... Exh. 4 to Form 10-K, 3/23/84.
November 1, 1985.................... Exh. 2-B to Form 8-A, 11/1/85.
March 1, 1986....................... Exh. 4 to Form 10-K, 3/28/86.
November 1, 1986.................... Exh. 2-B to Form 8-A, 11/5/86.
March 1, 1987....................... Exh. 2-B to Form 8-A, 3/2/87.
September 16, 1987.................. Exh. 4-B to Registration
Statement No. 33-18229,
10/30/87.
May 1, 1989......................... Exh. 4-C to Registration
Statement No. 33-29382,
6/16/89.
August 1, 1989...................... Exh. 4 to Form 10-K, 3/23/90.
April 5, 1990....................... Exh. 4 to Form 10-K, 3/29/91.
May 21, 1991........................ Exh. 4 to Form 10-K, 3/27/92.
May 7, 1992......................... Exh. 4 to Form 10-K, 3/26/93.
September 1, 1992................... Exh. 4 to Form 10-K, 3/26/93.
November 1, 1992.................... Exh. 4 to Form 10-K, 3/26/93.
March 1, 1993....................... Exh. 4 to Form 10-K, 3/26/93.
March 2, 1993....................... Exh. 4 to Form 10-K, 3/26/93.
July 1, 1993........................ Exh. 4.4 to Registration
Statement No. 33-49973,
8/11/93.
37
Exhibit
No. Description of Exhibit Reference*
------- ---------------------- ----------
4 August 20, 1993..................... Exh. 4.4 to Registration
(cont.) Statement No. 33-50377,
9/23/93.
September 29, 1993.................. Exh. 4 to Form 10-K, 3/25/94.
September 30, 1993.................. Exh. 4 to Form 10-K, 3/25/94.
October 1, 1993..................... Exh. 4 to Form 10-K, 3/25/94.
February 10, 1994................... Exh. 4 to Form 10-K, 3/25/94.
February 11, 1994................... Exh. 4 to Form 10-K, 3/25/94.
4-A Indenture, dated as of January 15,
1988, between the Company and
Centerre Trust Company of St. Louis
(now known as Boatmen's Trust
Company), Trustee for the Company's
$75,000,000 issue of 7% Convertible
Debentures due 2018 ................ Exh. 4-A to Form 10-K,
3/25/88.
4-B Indenture, dated as of July 28,
1989, between the Company and
The Bank of New York, Trustee,
with respect to the Company's
Medium-Term Note Program............ Exh. 4 to Form 8-K, 6/21/90.
4C Indenture, dated as of August 15,
1992, between the Company and the
Bank of New York, Trustee, for the
Company's $115,000,000 issue of 5%
Convertible Debentures due 2002..... Exh. 4-C to Form 10-K,
3/26/93.
10 Agreement, effective July 23, 1993,
between the Company and the
International Brotherhood of
Electrical Workers (Local Union
#1900).............................. Exh. 10 to Form 10-Q, 7/30/93.
38
Exhibit
No. Description of Exhibit Reference*
------- ---------------------- ----------
**11 Computation of Earnings Per
Common Share...................... Filed herewith.
**12 Computation of Ratios............... Filed herewith.
13 Financial Information Section of
Annual Report .................... Filed herewith.
**21 Subsidiaries of the Registrant...... Filed herewith.
**23 Consent of Independent Accountants.. Filed herewith.
*The exhibits referred to in this column by specific designations and
date have heretofore been filed with the Securities and Exchange
Commission under such designations and are hereby incorporated herein
by reference. The Forms 8-A, 8-K and 10-K referred to were filed by
the Company under the Commission's File No. 1-1072 and the
Registration Statements referred to are registration statements of
the Company.
**These exhibits are submitted pursuant to Item 14(c).
(b) Reports on Form 8-K
-------------------
None.
39
<TABLE>
POTOMAC ELECTRIC POWER COMPANY
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
------ ------ ------ ------ ------
Additions
Balance ------------------------- Balance
at Charged to Charged to at
Beginning Costs and Other End
Description of Period Expenses Accounts<F1> Deductions<F2> of Period
------------------------------------------- --------- ---------- ----------- ------------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1994
Allowance for uncollectible accounts -
customer and other accounts receivable
Utility operations $ 3,048 $ 6,967 $ 893 $ (8,176) $ 2,732
Nonutility subsidiary $ - $ 5,000 $ - $ - $ 5,000
Year Ended December 31, 1993
Allowance for uncollectible accounts -
customer and other accounts receivable
Utility operations $ 2,709 $ 6,451 $ 658 $ (6,770) $ 3,048
Nonutility subsidiary $ - $ - $ - $ - $ -
Year Ended December 31, 1992
Allowance for uncollectible accounts -
customer and other accounts receivable
Utility operations $ 3,115 $ 5,753 $ 836 $ (6,995) $ 2,709
Nonutility subsidiary $ - $ - $ - $ - $ -
<FN>
<F1>Collection of accounts previously written off.
<F2>Uncollectible accounts written off.
</FN>
40
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Washington, District of Columbia, on the 24th day of March, 1995.
POTOMAC ELECTRIC POWER COMPANY
(Registrant)
By /s/ E. F. Mitchell
--------------------------
(Edward F. Mitchell,
Chairman of the Board and
Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
(i) Principal Executive Officers
/s/ E. F. Mitchell
--------------------------- Chairman of the Board and
(Edward F. Mitchell) Chief Executive Officer
/s/ John M. Derrick Jr.
--------------------------- President and Director
(John M. Derrick Jr.)
(ii) Principal Financial Officer
/s/ H. L. Davis
--------------------------- Vice Chairman and Chief
(H. Lowell Davis) Financial Officer and Director
(iii) Principal Accounting Officer
/s/ D. R. Wraase
--------------------------- Senior Vice President
(Dennis R. Wraase) Finance and Accounting
March 24, 1995
41
Signature Title Date
--------- ----- ----
(iv) Directors:
/s/ Roger R. Blunt
------------------------- Director
(Roger R. Blunt Sr.)
/s/ A. J. Clark
------------------------- Director
(A. James Clark)
/s/ Richard E. Marriott
------------------------- Director
(Richard E. Marriott)
/s/ David O. Maxwell
------------------------ Director
(David O. Maxwell)
/s/ Floretta D. McKenzie
------------------------- Director
(Floretta D. McKenzie)
/s/ Ann D. McLaughlin
------------------------- Director
(Ann D. McLaughlin)
/s/ Peter F. O'Malley
------------------------- Director
(Peter F. O'Malley)
/s/ Louis A. Simpson
------------------------- Director
(Louis A. Simpson)
/s/ W. Reid Thompson
------------------------- Director
(W. Reid Thompson)
March 24, 1995
42
<TABLE>
Exhibit 11 Computations of Earnings Per Common Share <F1>
---------- ------------------------------------------
The following is the basis for the computation of primary and fully
diluted earnings per common share for each of the years 1994, 1993 and 1992:
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Average shares outstanding for
computation of primary earnings
per common share 118,005,847 115,639,668 112,389,698
============ ============ ============
Average shares outstanding for
fully diluted computation:
Average shares outstanding 118,005,847 115,639,668 112,389,698
Additional shares resulting from:
Conversion of Serial Preferred
Stock, $2.44 Convertible Series
of 1966 (the "Convertible
Preferred Stock") 48,110 51,967 57,542
Conversion of 7% Convertible
Debentures 2,531,244 2,546,858 2,603,912
Conversion of 5% Convertible
Debentures 3,392,500 3,392,500 1,130,833
------------ ------------ ------------
Average shares outstanding for
computation of fully diluted
earnings per common share 123,977,701 121,630,993 116,181,985
============ ============ ============
Earnings applicable to common
stock, before cumulative effect
of accounting change $210,725,000 $225,324,000 $186,368,000
Cumulative effect of accounting
change, net of income taxes - - 16,022,000
------------ ------------ ------------
Earnings applicable to common stock,
as reported 210,725,000 225,324,000 202,390,000
Add: Dividends paid or accrued on
Convertible Preferred Stock 20,000 22,000 24,000
Interest paid or accrued on
Convertible Debentures,
net of related taxes 6,537,000 6,548,000 4,303,000
------------ ------------ ------------
Earnings applicable to common stock,
including cumulative effect of
accounting change and assuming
conversion of convertible securities $217,282,000 $231,894,000 $206,717,000
============ ============ ============
Primary earnings per common share
Before cumulative effect $1.79 $1.95 $1.66
Cumulative effect - - 0.14
----- ----- -----
Total $1.79 $1.95 $1.80
===== ===== =====
Fully diluted earnings per common share
Before cumulative effect $1.75 $1.91 $1.64
Cumulative effect - - 0.14
----- ----- -----
Total $1.75 $1.91 $1.78
===== ===== =====
<FN>
<F1>This calculation is submitted in accordance with Regulation S-K
item 601 (b) (11) although not required by footnote 2 to paragraph 14
of APB No. 15 because it results in dilution of less than 3%.
</FN>
43
</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 each of the
years 1994 through 1990 on the basis of parent company operations only, are
as follows.
<CAPTION>
For The Year Ended December 31,
-----------------------------------------------------
1994 1993 1992 1991 1990
--------- --------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Net income before cumulative effect
of accounting change $208,074 $216,478 $172,599 $186,813 $165,199
Taxes based on income 116,648 107,223 76,965 80,988 70,962
-------- -------- -------- -------- --------
Income before taxes and cumulative effect
of accounting change 324,722 323,701 249,564 267,801 236,161
-------- -------- -------- -------- --------
Fixed charges:
Interest charges 139,210 141,393 138,097 138,512 127,386
Interest factor in rentals 6,300 5,859 6,140 5,690 4,237
-------- -------- -------- -------- --------
Total fixed charges 145,510 147,252 144,237 144,202 131,623
-------- -------- -------- -------- --------
Income before income taxes, cumulative
effect of accounting change and
fixed charges $470,232 $470,953 $393,801 $412,003 $367,784
======== ======== ======== ======== ========
Coverage of fixed charges 3.23 3.20 2.73 2.86 2.79
==== ==== ==== ==== ====
Preferred dividend requirements $16,437 $16,255 $14,392 $12,298 $10,598
-------- -------- -------- -------- --------
Ratio of pre-tax income to net income 1.56 1.50 1.45 1.43 1.43
---- ---- ---- ---- ----
Preferred dividend factor $25,642 $24,383 $20,868 $17,586 $15,155
-------- -------- -------- -------- --------
Total fixed charges and preferred dividends $171,152 $171,635 $165,105 $161,788 $146,778
======== ======== ======== ======== ========
Coverage of combined fixed charges
and preferred dividends 2.75 2.74 2.39 2.55 2.51
==== ==== ==== ==== ====
44
</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 each of the
years 1994 through 1990 on a fully consolidated basis are as follows.
<CAPTION>
For The Year Ended December 31,
-----------------------------------------------------
1994 1993 1992 1991 1990
--------- --------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Net income before cumulative effect
of accounting change $227,162 $241,579 $200,760 $210,164 $170,234
Taxes based on income 93,953 62,145 79,481 80,737 63,360
-------- -------- -------- -------- --------
Income before taxes and cumulative effect
of accounting change 321,115 303,724 280,241 290,901 233,594
-------- -------- -------- -------- --------
Fixed charges:
Interest charges 224,514 221,312 226,453 225,323 199,469
Interest factor in rentals 9,938 9,257 6,599 6,080 4,559
-------- -------- -------- -------- --------
Total fixed charges 234,452 230,569 233,052 231,403 204,028
-------- -------- -------- -------- --------
Nonutility subsidiary capitalized interest (521) (2,059) (2,200) (6,542) -
-------- -------- -------- -------- --------
Income before income taxes, cumulative
effect of accounting change and
fixed charges $555,046 $532,234 $511,093 $515,762 $437,622
======== ======== ======== ======== ========
Coverage of fixed charges 2.37 2.31 2.19 2.23 2.14
==== ==== ==== ==== ====
Preferred dividend requirements $16,437 $16,255 $14,392 $12,298 $10,598
-------- -------- -------- -------- --------
Ratio of pre-tax income to net income 1.41 1.26 1.40 1.38 1.37
---- ---- ---- ---- ----
Preferred dividend factor $23,176 $20,481 $20,149 $16,971 $14,519
-------- -------- -------- -------- --------
Total fixed charges and preferred dividends $257,628 $251,050 $253,201 $248,374 $218,547
======== ======== ======== ======== ========
Coverage of combined fixed charges
and preferred dividends 2.15 2.12 2.02 2.08 2.00
==== ==== ==== ==== ====
45
</TABLE>
Exhibit 21 Subsidiaries of the Registrant
---------- ------------------------------
The Company has two wholly owned nonutility investment subsidiary
companies, Potomac Capital Investment Corporation and PEPCO Enterprises, Inc.,
(PEI) both of which were incorporated in Delaware in 1983. Subsidiaries of
PEI and Columbia Gas System, Inc. have formed the Cove Point joint venture
partnership discussed in Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
46
Exhibit 23 Consent of Independent Accountants
---------- ----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Numbers 33-36798, 33-53685 and 33-54197) and to the
incorporation by reference in the Prospectuses constituting part of the
Registration Statements on Forms S-3 (Numbers 33-58810 and 33-50377) of
Potomac Electric Power Company of our report dated January 26, 1995 appearing
in the Annual Report to shareholders which is also incorporated by reference
in this Annual Report on Form 10-K. We also consent to the incorporation by
reference of our report on the Consolidated Financial Statement Schedule,
which appears under Item 14(a) of this Form 10-K.
/s/ Price Waterhouse LLP
Washington, D.C.
March 24, 1995
47
Report of Independent Accountants on Consolidated
-------------------------------------------------
Financial Statement Schedule
----------------------------
January 26, 1995
To the Board of Directors of
Potomac Electric Power Company
Our audits of the consolidated financial statements referred to in our report
dated January 26, 1995 appearing in the 1994 Annual Report to shareholders of
Potomac Electric Power Company (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the consolidated financial statement schedule
listed in Item 14(a) of this Form 10-K. In our opinion, this consolidated
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ Price Waterhouse LLP
Washington, D.C.
48
RESTATED ARTICLES OF INCORPORATION
AND ARTICLES OF RESTATEMENT
OF
POTOMAC ELECTRIC POWER COMPANY
These Restated Articles of Incorporation and Articles of
Restatement were duly adopted on December 21, 1992 by the Board
of Directors of Potomac Electric Power Company (hereinafter
sometimes called the "Company"), a District of Columbia
corporation and a domestic corporation of the Commonwealth of
Virginia, in accordance with the provisions of Section 58a of the
District of Columbia Business Corporation Act, D.C. Code Section
29-358.1, and Chapter 522 of the Virginia State Corporation Act,
Va. Code Section 13.1-711 (1989 Replacement Volume). The
Company's Articles of Incorporation were originally filed in the
District of Columbia on April 28, 1896, and Articles of
Reincorporation of an Existing Domestic Corporation were filed in
the District of Columbia on January 20, 1957.
The Restated Articles of Incorporation and Articles of
Restatement only restate and integrate and do not further amend
the provisions of the Company's articles of incorporation as
previously amended or supplemented, and there is no discrepancy
between those provisions and the provisions of these restated
articles.
The Restated Articles of Incorporation and Articles of
Restatement of the Company are as follows:
I. The name of the Company is
POTOMAC ELECTRIC POWER COMPANY.
II. The duration of the Company shall be perpetual.
III. The purposes for which the Company is organized are:
(A) To manufacture, produce, generate, buy, sell,
lease, deal in, transmit and distribute (i) power, light, energy
and heat in the form of electricity or otherwise, (ii)
by-products thereof and (iii) appliances, facilities and
equipment for use in connection therewith;
(B) To acquire (by construction, purchase,
condemnation, lease or otherwise), use, maintain, operate, deal
in and dispose of, power plants, dams, substations, office
buildings, service buildings, transmission lines, distribution
lines, and all other buildings, machinery, property (real,
personal or mixed) and facilities (including water power and
other sites), and all fixtures, equipments and appliances,
necessary, appropriate, incidental or convenient for its
corporate purposes; and
(C) To conduct business as a public service company,
which business is briefly described as the purchase, manufacture,
generation, transmission, distribution and sale, both at
wholesale and at retail, of electricity or other power or energy
for light, heat and power purposes in the District of Columbia,
the Commonwealth of Virginia, the State of Maryland and
elsewhere.
IV. The aggregate number of shares which the Company shall have
authority to issue is 215,042,227 divided into three classes:
the first consisting of 6,242,227 shares of the par value of $50
each; the second consisting of 8,800,000 shares of the par value
of $25 each; and the third consisting of 200,000,000 shares of
the par value of $1 each.
V. Said 6,242,227 shares of the par value of $50 each are
designated as Serial Preferred Stock; said 8,800,000 shares of
the par value of $25 each are designated as Preference Stock; and
said 200,000,000 shares of the par value of $1 each are
designated as Common Stock. Such of said authorized shares of
Serial Preferred Stock, Preference Stock and Common Stock as are
unissued at any time may be issued, in whole or in part, at any
time or from time to time by action of the Board of Directors of
the Company, subject to the laws in force in the District of
Columbia and the Commonwealth of Virginia and the terms and
conditions set forth in the Articles of Incorporation, as
amended, of the Company.
The preferences, qualifications, limitations, and
restrictions, the special or relative rights, and the voting
power in respect of the shares of each said class are as follows:
(A) SERIAL PREFERRED STOCK
(a) Subject to the provisions hereafter in this subdivision
(A) set forth, the Serial Preferred Stock may be divided into and
issued, from time to time, in one or more series as the Board of
Directors may determine, and the Board of Directors is hereby
expressly authorized to adopt from time to time resolutions, in
respect of any unissued shares of Serial Preferred Stock, to fix
and determine:
(1) The division of such shares into series and the
designation and authorized number of the shares of the particular
series;
(2) The rate of dividend for the particular series;
(3) The price or prices at and the terms and
conditions on which shares of the particular series may be
redeemed;
(4) The amount payable upon shares of the particular
series in the event of voluntary liquidation;
(5) Sinking fund provisions (if any) for the
redemption or purchase of shares of the particular series; and
(6) The terms and conditions (if any) on which the
shares of the particular series may be converted into other
classes of stock of the Company;
All shares of Serial Preferred Stock shall be of equal rank with
each other, regardless of series, and all shares thereof shall be
identical except as to the above listed relative rights and
preferences, in respect of any or all of which there may be
variations between different series as fixed and determined by
the Board of Directors in said resolutions. All shares of the
Serial Preferred Stock of any one series shall be identical with
each other in all respects.
(b) The following terms, as used in this subdivision (A),
shall have the following meanings:
(1) The term senior stock shall mean any class of
stock ranking in its claim to assets or dividends prior to the
1,600,000 shares of Serial Preferred Stock created hereby;
(2) The term parity stock shall mean any class of
stock ranking in its claim to assets or dividends on a parity
with the Serial Preferred Stock, but shall not include any of the
1,600,000 shares of Serial Preferred Stock created hereby, nor
shall it include any increase in the authorized amount of the
Serial Preferred Stock; and
(3) The term junior stock shall mean the Common Stock
and any other class of stock ranking in its claim to assets or
dividends junior to the Serial Preferred Stock.
(c) The holders of the Serial Preferred Stock shall be
entitled to receive, but only when and as declared by the Board
of Directors, cumulative cash dividends in the case of each
series at the annual rate for such series theretofore fixed by
the Board of Directors as hereinbefore provided, payable
quarter-yearly on the first days of March, June, September and
December in each year to stockholders of record on the respective
dates fixed for the purpose by the Board of Directors as
dividends are declared.
No dividend shall be declared on any shares of the
Serial Preferred Stock unless there shall likewise be declared on
all shares of the Serial Preferred Stock at the time outstanding
like dividends, ratably in proportion to the respective annual
dividend rates fixed therefor.
The dividends on shares of the Serial Preferred Stock
shall be cumulative from the quarter-yearly dividend payment date
next preceding the date of issue of such shares, unless such
shares shall have been issued after the record date and before
the payment date for a particular dividend, in which case the
dividends shall be cumulative from the quarter-yearly dividend
payment date next ensuing after the date of issue of such shares.
Unless dividends on all outstanding shares of the Serial
Preferred Stock, at the annual dividend rate or rates fixed
therefor, shall have been paid for all past quarter-yearly
dividend periods to which they are entitled, and the full
dividend thereon at said rate or rates for the quarter-yearly
dividend period current at the time shall have been paid or
declared and set apart for payment, but without interest on
accumulated dividends, and unless all sinking fund payments, if
any, theretofore required to have been made shall have been made
or provided for, no dividends shall be declared and no other
distribution shall be made on any junior stock, and no junior
stock shall be purchased, retired or otherwise acquired for value
by the Company. No dividend shall be declared on any junior
stock payable more than 120 days after the date of declaration.
The holders of the Serial Preferred Stock shall not be
entitled to receive any dividends thereon other than the
dividends referred to in this subdivision (c).
(d) The Company, at the option of the Board of Directors or
by the operation of the sinking fund, if any, provided for the
Serial Preferred Stock of any series, may, from time to time,
subject to such terms and conditions, if any, as may be fixed by
the Board of Directors with respect to any series as hereinbefore
provided, redeem the whole or any part of such series at any time
outstanding, by paying in cash the applicable redemption price
therefor theretofore fixed by the Board of Directors as
hereinbefore provided.
Notice of every such redemption shall be given by
publication at least once in each of two calendar weeks in each
of two daily newspapers printed in the English language, one
published and of general circulation in the City of Washington,
District of Columbia, and the other in the Borough of Manhattan,
The City of New York, the first publication to be at least thirty
days and not more than sixty days prior to the date fixed for
such redemption. At least thirty days' and not more than sixty
days' previous notice of every such redemption shall also be
mailed to the holders of record of the shares so to be redeemed,
at their respective addresses as the same shall appear on the
books of the Company; but failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the
validity of the proceedings for the redemption of any shares so
to be redeemed.
In case of the redemption of a part only of any series
of the Serial Preferred Stock at the time outstanding, the
Company or its duly authorized agent shall select by lot the
shares so to be redeemed. The Board of Directors shall have full
power and authority, subject to the limitations and provisions
herein contained, to prescribe the manner in which the drawings
by lot shall be conducted and the terms and conditions upon which
the Serial Preferred Stock shall be redeemed from time to time.
If such notice of redemption shall have been duly given
by publication, and if on or before the redemption date specified
therein the funds necessary for such redemption shall have been
set aside by the Company, separate and apart from its other
funds, in trust for the account of the holders of the shares so
called for redemption, so as to be and continue to be available
therefor, then, notwithstanding that any certificate for shares
so called for redemption shall not have been surrendered for
cancellation, the shares represented thereby shall no longer be
deemed to be outstanding on and after such redemption date, and
all rights with respect to such shares shall forthwith on such
redemption date cease and terminate, except only the right of the
holders thereof to receive the amount payable upon redemption
thereof, without interest.
Provided, however, in the alternative, that, after
giving notice by publication of any such redemption as
hereinbefore provided or after giving to the bank or trust
company referred to below irrevocable authorization to give or
complete such notice by publication, and prior to the redemption
date specified in such notice, the Company may deposit in trust,
for the account of the holders of the shares of Serial Preferred
Stock so to be redeemed, the funds necessary for such redemption
with a bank or trust company in good standing, organized and
doing business under the laws of the United States or of any
state or territory or of the District of Columbia and having its
principal office in the City of Washington, District of Columbia,
or in the Borough of Manhattan, The City of New York, having
capital, surplus and undivided profits aggregating at least Ten
Million Dollars, designated in such notice of redemption, and
thereupon all shares of the Serial Preferred Stock with respect
to which such deposit shall have been made shall no longer be
deemed to be outstanding, and all rights with respect to such
shares of Serial Preferred Stock shall forthwith upon such
deposit in trust cease and terminate, except only the right of
the holders thereof to receive from such bank or trust company at
any time after the time of such deposit the funds so deposited,
without interest and the right to exercise, on or before such
redemption date privileges of conversion or exchange, if any, not
theretofore expiring.
Shares of Serial Preferred Stock purchased or redeemed
pursuant to any obligation of the Company to purchase or redeem
shares for a sinking fund, shares redeemed pursuant to the
provisions hereof or purchased and for which credit shall have
been taken against any sinking fund obligation, and shares
surrendered pursuant to any conversion right, shall not be
reissued or otherwise disposed of and shall be canceled. Any
other shares of Serial Preferred Stock redeemed or otherwise
acquired by the Company shall continue to be part of the
authorized capital stock of the Company and may thereafter, in
the discretion of the Board of Directors and to the extent
permitted by law, be sold or reissued from time to time, as part
of the same or another series, subject to the terms and
conditions herein set forth.
If and so long as the Company shall be in default in
the payment of any quarter-yearly dividend on shares of any
series of the Serial Preferred Stock, or shall be in default in
the payment of funds into or the setting aside of funds for any
sinking fund created for any series of the Serial Preferred
Stock, the Company may not (other than by the use of unapplied
funds, if any, paid into or set aside for a sinking fund or funds
prior to such default) (i) redeem any shares of the Serial
Preferred Stock unless all shares thereof are redeemed, or (ii)
purchase or otherwise acquire for a consideration any shares of
the Serial Preferred Stock, except pursuant to offers of sale
made by holders of the Serial Preferred Stock in response to an
invitation for tenders given simultaneously by the Company by
mail to the holders of record of all shares of the Serial
Preferred Stock then outstanding.
(e) In the event of any voluntary liquidation, dissolution
or winding up of the Company, then, before any distribution or
payment shall be made to the holders of any junior stock, the
holder of each share of the Serial Preferred Stock shall be
entitled to be paid in full in cash the amount fixed with respect
to such share by the Board of Directors as hereinbefore provided,
together with an amount computed at the annual dividend rate
therefor from the date upon which dividends thereon became
cumulative to the date fixed for the payment thereof, less the
aggregate of the dividends theretofore paid thereon. If such
payments shall have been made in full to the holders of the
Serial Preferred Stock, the remaining assets and funds of the
Company shall be distributed among the holders of the Common
Stock and any other junior stock according to their respective
rights, preferences, restrictions, qualifications and shares.
In the event of any involuntary liquidation,
dissolution or winding up of the Company, then, before any
distribution or payment shall be made to the holders of any
junior stock, the holder of each share of the Serial Preferred
Stock shall be entitled to be paid in full the par value thereof
in cash, together with an amount computed at the annual dividend
rate therefor from the date upon which dividends thereon became
cumulative to the date fixed for the payment thereof, less the
aggregate of the dividends theretofore paid thereon. If such
payments shall have been made in full to the holders of the
Serial Preferred Stock, the remaining assets and funds of the
Company shall be distributed among the holders of the Common
Stock and any other junior stock according to their respective
rights, preferences, restrictions, qualifications and shares.
With respect to the payments to be made in the event of
voluntary or involuntary liquidation, dissolution or winding up
of the Company, all series of the Serial Preferred Stock shall
rank ratably according to their respective interests without
preference of any series thereof over any other series.
(f) Subject to the limitations hereinafter specified,
whenever the full dividends on the Serial Preferred Stock at the
time outstanding for all past quarter-yearly dividend periods
shall have been paid and the full dividend thereon for the
quarter-yearly dividend period then current shall have been paid
or declared and a sum sufficient for the payment thereof set
apart, then such dividends (payable in cash, stock or otherwise)
as may be determined by the Board of Directors may be declared on
the Common Stock and any other junior stock, and the Serial
Preferred Stock shall not be entitled to participate in any such
dividends.
(g) So long as any shares of the Serial Preferred Stock are
outstanding, no amendment to the Articles of Incorporation of the
Company which would (i) create, change any junior stock into, or
increase the rights and preferences of, any senior or parity
stock, (ii) increase the authorized amount of the Serial
Preferred Stock in excess of the 1,600,000 shares created hereby
or the authorized amount of any senior or parity stock, or (iii)
change the express terms of the outstanding shares of Serial
Preferred Stock in any manner substantially prejudicial to the
holders thereof, shall be made without the affirmative consent
(given in writing without a meeting or by a vote at a meeting
duly called for the purpose) of the holders of more than two
thirds of the aggregate number of shares of the Serial Preferred
Stock then outstanding; but any such amendment may be made with
such affirmative consent, together with such additional vote or
consent of stockholders as from time to time may be required by
law; provided, however, that if any such amendment would change
the express terms of the outstanding shares of Serial Preferred
Stock of any particular series in any manner substantially
prejudicial to the holders thereof without correspondingly
affecting the holders of the outstanding shares of Serial
Preferred Stock of all series, then, in lieu of such consent of
the holders of Serial Preferred Stock (or, if such consent of the
holders of the outstanding shares of Serial Preferred Stock is
required by law, in addition thereto), a like affirmative consent
of the holders of more than two thirds of the Serial Preferred
Stock of the affected series at the time outstanding shall be
necessary for making such amendment.
(h) So long as any shares of the Serial Preferred Stock are
outstanding, the Company shall not, without the affirmative
consent (given in writing without a meeting or by a vote at a
meeting duly called for the purpose) of the holders of at least a
majority of the aggregate number of shares of the Serial
Preferred Stock then outstanding:
(1) issue any shares of the Serial Preferred Stock, in
excess of 300,000 shares thereof at any one time outstanding, or
issue any shares of senior or parity stock (either directly or by
reclassification), unless for a period of twelve consecutive
calendar months within the fifteen calendar months next preceding
the date on which such shares are to be issued net earnings
(after depreciation and taxes but before deducting interest) have
been at least one and one-half times the annual interest charges
and dividend requirements on all indebtedness of the Company and
on all shares of Serial Preferred Stock and senior and parity
stock which shall then be outstanding; for the purpose of such
computation, the shares and any indebtedness proposed to be
issued in connection with such issue shall be included, but any
indebtedness or shares proposed to be retired in connection with
such issue shall be excluded, and in determining such net
earnings, the Board of Directors of the Company shall make such
adjustments, by way of increase or decrease in such net earnings,
as shall in their opinion be necessary to give effect, for the
entire twelve months for which such net earnings are determined,
to any acquisition or disposition of property the earnings of
which can be separately ascertained, and to any issue, sale,
assumption or retirement of securities, which shall have occurred
after the commencement of such twelve months' period and prior to
or in connection with the issue of the shares of the Serial
Preferred Stock or senior or parity stock; or
(2) issue any shares of the Serial Preferred Stock, in
excess of 300,000 shares thereof at any one time outstanding, or
issue any shares of senior or parity stock (either directly or by
reclassification), unless immediately after such proposed issue
the aggregate of (i) the capital of the Company applicable to its
stock ranking junior as to assets and dividends and (ii) the
surplus of the Company shall be not less than the aggregate
amount payable upon involuntary liquidation to the holders of the
Serial Preferred Stock and of senior and parity stock then to be
outstanding, excluding from such computation all stock to be
retired through such proposed issue; or
(3) issue any unsecured notes, debentures or other
securities representing unsecured indebtedness, or assume or
guarantee any such unsecured securities, other than for the
extension, renewal or refunding of outstanding debt securities
theretofore issued or assumed, or for the redemption or
retirement of shares of the Serial Preferred Stock or of any
senior or parity stock, if immediately after such issue or
assumption the total principal amount of such unsecured
securities then outstanding would exceed twenty-five per cent of
the aggregate of (i) the total principal amount of all bonds or
other securities representing secured indebtedness issued,
assumed or guaranteed by the Company and then to be outstanding
and (ii) the capital and surplus of the Company as then stated on
its books less any known excess of book value of the Company's
physical property which is devoted to public use over (I) the
actual cost thereof to the Company and (II) as to such property
as was not acquired as the result of arm's length negotiations,
the actual cost thereof to the one first devoting the same to
public use; or
(4) merge or consolidate with or into any other
corporation or corporations or sell or lease all or substantially
all of its assets, unless such merger, consolidation, sale or
lease, or the issue and assumption of all securities to be issued
or assumed in connection with any such merger, consolidation,
sale or lease shall have been ordered, approved or permitted by
the regulatory authority or authorities having jurisdiction in
the premises; provided that the provisions of this clause (4)
shall not apply to a purchase, lease or other acquisition by the
Company of the franchises or assets of another corporation, or
otherwise apply in any manner which does not involve a merger or
consolidation or sale or lease by the Company of all or
substantially all of its assets.
(i) So long as any shares of the Serial Preferred Stock are
outstanding, the Company shall not pay any dividends on its
Common Stock (other than dividends payable in Common Stock) or
make any distribution on, or purchase or otherwise acquire for
value, any of its Common Stock (each such payment, distribution,
purchase and/or acquisition being herein referred to as a "Common
Stock dividend"), except to the extent permitted by the following
provisions:
(1) No Common Stock dividend shall be declared or paid
in an amount which, together with all other Common Stock
dividends declared in the year ending on (and including) the date
of the declaration of such Common Stock dividend, would in the
aggregate exceed 50% of the net earnings of the Company for the
period consisting of the twelve consecutive calendar months
ending on the last day of the calendar month next preceding the
declaration of such Common Stock dividend, after deducting from
such net earnings dividends accruing on any stock other than
Common Stock of the Company during such period, if at the end of
such period, the ratio (herein referred to as the "capitalization
ratio") of the sum of (i) the capital represented by the Common
Stock (including premiums on Common Stock) and (ii) the surplus
accounts of the Company, to the sum of (I) the total capital and
(II) the surplus accounts of the Company (after adjustment in
each case of the surplus accounts to reflect payment of such
Common Stock dividend) would be less than 20%.
(2) If such capitalization ratio, determined as
aforesaid, shall be 20% or more, but less than 25%, no Common
Stock dividend shall be declared or paid in an amount which,
together with all other Common Stock dividends declared in the
year ending on (and including) the date of the declaration of
such Common Stock dividend, would in the aggregate exceed 75% of
the net earnings of the Company for the period consisting of the
twelve consecutive calendar months ending on the last day of the
calendar month next preceding the declaration of such Common
Stock dividend after deducting from such net earnings dividends
accruing on any stock other than the Common Stock of the Company
during such period; and
(3) If such capitalization ratio, determined as
aforesaid, shall be in excess of 25%, no Common Stock dividend
shall be declared or paid which would reduce such capitalization
ratio to less than 25% except to the extent permitted by the next
preceding subparagraphs (1) and (2).
For the purposes of this subdivision (i) the total capital
of the Company shall be deemed to consist of the aggregate of (x)
the principal amount of all outstanding indebtedness of the
Company represented by bonds, notes or other evidences of
indebtedness maturing by their terms one year or more after the
date of the issue thereof and (y) the par or stated value of all
outstanding capital stock (including premiums on capital stock)
of all classes of the Company. All indebtedness and shares of
stock of the Company acquired by the Company and held in its
treasury shall be excluded in determining total capital.
Purchases or other acquisitions of Common Stock shall be
deemed, for the purposes of the foregoing provisions of this
subdivision (i), to have been declared as dividends as of the
date on which such purchases or acquisitions are consummated.
(j) No holder of Serial Preferred Stock shall be entitled
as such as a matter of right to subscribe for or purchase any
part of any new or additional issue of stock, or securities
convertible into, or carrying or evidencing any right to
purchase, stock, of any class whatever, whether now or hereafter
authorized, and whether issued for cash, property, services or
otherwise.
(k) Except as otherwise in subdivisions (g) and (h) of this
subdivision (A) or by statute specifically provided, the Serial
Preferred Stock shall have no voting power unless and until
dividends payable thereon are in default in an amount equivalent
to four full quarter-yearly dividends on the Serial Preferred
Stock at the time outstanding. In such event and until such
default shall have been remedied as hereinafter provided, the
holders of Serial Preferred Stock, voting separately, shall
become entitled to elect twenty-five percent of the Board of
Directors, or the smallest number of directors that exceeds
twenty-five percent of the Board, but in no event less than two
directors, and the other stockholders then entitled to vote for
the election of directors, voting separately by classes if so
required by the provisions applicable to such classes, shall be
entitled to elect the remaining directors of the Company. Upon
the accrual of such special right to the holders of Serial
Preferred Stock a meeting of the stockholders then entitled to
vote for the election of directors shall be held upon notice
promptly given, as provided in the By-Laws for a special meeting,
by the President or the Chairman of the Board of the Company. If
within fifteen days after the accrual of such special right to
the holders of Serial Preferred Stock, the President and the
Chairman of the Board of the Company shall fail to call such
meeting, then such meeting shall be held upon notice, as provided
in the By-Laws for a special meeting, given by the holders of not
less than five hundred shares of Serial Preferred Stock after
filing with the Company notice of their intention so to do. The
terms of office of all persons who may be directors of the
Company at the time shall terminate upon the election of
directors by the holders of Serial Preferred Stock, whether or
not at the time of such termination the remaining directors of
the Company shall have been elected; and thereafter and during
the continuance of such special right of the holders of Serial
Preferred Stock, the Board of Directors shall be divided into two
or more classes, one class consisting of the directors to be
elected by the holders of Serial Preferred Stock and the other
class or classes consisting of the directors to be elected by the
other stockholders entitled to vote for the election of
directors, and the directors of each such class elected at such
meeting, or at any adjournment thereof, and the directors of each
such class elected at any subsequent annual meeting for the
election of directors, held during the continuance of such
special right, shall hold office until the next succeeding annual
election and until their respective successors by classes are
elected and qualified.
However, if and when all dividends then in default on the
Serial Preferred Stock shall be paid (and such dividends shall be
declared and paid as soon as reasonably practicable out of
surplus or net profits, but without diminishing the amount of
capital of the Company), the holders of Serial Preferred Stock
shall be divested of such special right, but subject always to
the same provisions for the revesting of such special right in
the holders of Serial Preferred Stock in the case of any similar
future default or defaults. Whenever the holders of Serial
Preferred Stock shall be so divested of such special right, the
method of election of the Board of Directors by the vote of the
other stockholders entitled to vote for the election of directors
exclusively shall be restored, and the election of directors
shall take place at the next succeeding annual meeting for the
election of directors, or at any adjournment thereof.
(l) Except as hereinafter provided, during the continuance
of the special right of the holders of Serial Preferred Stock to
elect directors as provided in subdivision (k) of this
subdivision (A), at all meetings for the election of directors
the presence in person or by proxy of the holders of record of a
majority of the outstanding shares of Serial Preferred Stock
shall be necessary to constitute a quorum for the election of
directors whom the holders of Serial Preferred Stock are entitled
to elect, and the presence in person or by proxy of the holders
of record of a majority of the outstanding shares of each other
class of stock then entitled to vote for the election of
directors shall be necessary to constitute a quorum for the
election of the directors whom the holders of such class of stock
are entitled to elect. In the absence of such a quorum of the
holders of stock of any particular class then entitled to vote
for the election of directors, the holders of a majority of the
shares of the stock of such class so present in person or
represented by proxy may adjourn from time to time the meeting
for the election of directors to be elected by such stock,
without notice other than announcement at the meeting, until the
requisite quorum of holders of such stock shall be obtained.
However, at the first meeting for the election of directors after
any accrual of the special right of the holders of Serial
Preferred Stock, and at any subsequent annual meeting for the
election of directors held during the continuance of such special
right, if there shall not be such a quorum of the holders of
Serial Preferred Stock the meeting shall be adjourned from time
to time as above provided until such quorum shall have been
obtained; provided that, if such quorum shall not have been
obtained within ninety days from the date of such meeting as
originally called (or, in the case of any annual meeting held
during the continuance of such special right, from the date fixed
for such annual meeting), the presence in person or by proxy of
the holders of record of one third of the outstanding shares of
Serial Preferred Stock shall then be sufficient to constitute a
quorum for the election of the directors whom the holders of
Serial Preferred Stock are then entitled to elect. The absence
of a quorum of the holders of any class of stock then entitled to
vote for the election of directors shall not, except as
hereinafter provided, prevent or invalidate the election by the
other class or classes of stockholders of the directors which
they are entitled to elect, if the necessary quorum of
stockholders of such other class or classes is present in person
or represented by proxy at any such meeting or any adjournment
thereof. However, at the first meeting for the election of
directors after any accrual of the special right of the holders
of Serial Preferred Stock to elect directors as provided in
subdivision (k) of this subdivision (A), the absence of a quorum
of the holders of Serial Preferred Stock shall prevent the
election of directors by the holders of Common Stock until the
election of directors by the holders of Serial Preferred Stock
after a quorum of the holders of Serial Preferred Stock shall
have been obtained.
(B) PREFERENCE STOCK
(a) Subject to the provisions hereafter in this subdivision
(B) set forth, the Preference Stock may be divided into and
issued, from time to time, in one or more series as the Board of
Directors may determine, and the Board of Directors is hereby
expressly authorized to adopt from time to time resolutions, in
respect of any unissued shares of Preference Stock, to fix and
determine:
(1) The division of such shares into series and the
designation and authorized number of shares of the particular
series;
(2) The rate of dividend and the time of payment for
the particular series and the dates from which dividends on all
shares of such series issued prior to the record date for the
first dividend on shares of such series shall be cumulative;
(3) The price or prices at and the terms and
conditions on which shares of the particular series may be
redeemed;
(4) The amount payable upon shares of the particular
series in the event of voluntary liquidation;
(5) Sinking fund provisions (if any) for the
redemption or purchase of shares of the particular series; and
(6) The terms and conditions (if any) on which the
shares of the particular series may be converted into other
classes of stock of the Company.
All shares of Preference Stock shall be of equal rank with each
other, regardless of series, and all shares thereof shall be
identical except as to the above listed relative rights and
preferences, in respect of any or all of which there may be
variations between different series as fixed and determined by
the Board of Directors in said resolutions. All shares of the
Preference Stock of any one series shall be identical with each
other in all respects. All shares of the Preference Stock shall
be subject to the prior rights and preferences of the Serial
Preferred Stock as defined in subdivision (A) above and any other
senior stock as defined in subdivision (b) (1) below hereafter
authorized.
(b) The following terms, as used in this subdivision (B),
shall have the following meanings:
(1) The term senior stock as used in this subdivision
(B) shall mean the Serial Preferred Stock and any other class of
stock ranking in its claim to assets or dividends prior to the
5,000,000 shares of Preference Stock created hereby;
(2) The term parity stock as used in this subdivision
(B) shall mean any class of stock ranking in its claim to assets
or dividends on a parity with the Preference Stock, but shall not
include any of the 8,800,000 shares of Preference Stock provided
for hereby, nor shall it include any increase in the authorized
amount of the Preference Stock; and
(3) The term junior stock as used in this subdivision
(B) shall mean the Common Stock and any other class of stock
ranking in its claim to assets or dividends junior to the
Preference Stock.
(c) The holders of the Preference Stock shall be entitled,
subject to the prior rights and preferences of senior stock, to
receive, but only when and as declared by the Board of Directors,
cumulative cash dividends in the case of each series at the
annual rate for such series theretofore fixed by the Board of
Directors as hereinbefore provided, payable quarter-yearly on the
first days of March, June, September and December (or such other
quarter-yearly dates for a particular series as the Board of
Directors may determine prior to the issue thereof as
hereinbefore provided) in each year to stockholders of record on
the respective dates fixed for the purpose by the Board of
Directors as dividends are declared.
No dividend shall be declared on any shares of
Preference Stock of any series for any particular dividend period
unless dividends in full have been paid or declared and set apart
for payment or are contemporaneously declared and set apart for
payment on the Preference Stock of all series then outstanding
for all dividend periods terminating at or before the end of the
particular dividend period. When dividends at the respective
annual dividend rates are not paid in full on any shares of
Preference Stock, the shares of all series of Preference Stock
shall share ratably in the payment of dividends including
accumulations, if any, in accordance with the sums which would be
payable on such shares if all dividends were declared and paid in
full.
The dividends on shares of Preference Stock shall be
cumulative in the case of all shares of each particular series
(a) if issued prior to the record date for the first dividend on
shares of such series, then from the date theretofore fixed for
the purpose by the Board of Directors as hereinbefore provided,
or, if no such date is so fixed, then from the date on which the
shares of such series shall have been originally issued, (b) if
issued after the record date for a dividend on shares of such
series and before the payment date for such dividend then from
such dividend payment date; and (c) otherwise from the quarterly
dividend payment date next preceding the date of issue of such
shares. Unless dividends on all outstanding shares of the
Preference Stock, at the annual dividend rate or rates fixed
therefor, shall have been paid for all past quarter-yearly
dividend periods to which they are entitled, and the full
dividend thereon at said rate or rates for the quarter-yearly
dividend periods current at the time shall have been paid or
declared and set apart for payment, but without interest on
accumulated dividends, and unless all sinking fund payments, if
any, theretofore required to have been made shall have been made
or provided for, no dividends shall be declared and no other
distribution shall be made on any junior stock, and no junior
stock shall be purchased, retired or otherwise acquired for value
by the Company. No dividend shall be declared on any junior
stock payable more than 120 days after the date of declaration.
The holders of the Preference Stock shall not be
entitled to receive any dividends thereon other than the
dividends referred to in this subdivision (c).
(d) The Company, at the option of the Board of Directors or
by the operation of the sinking fund, if any, provided for the
Preference Stock of any series, may, from time to time, subject
to such terms and conditions, if any, as may be fixed by the
Board of Directors with respect to any series as hereinbefore
provided, and subject to the prior rights and preferences of
senior stock, redeem the whole or any part of such series at any
time outstanding, by paying in cash the applicable redemption
price theretofore fixed by the Board of Directors as hereinbefore
provided.
Notice of every such redemption shall be given by
publication at least once in each of two calendar weeks in each
of two daily newspapers printed in the English language, one
published and of general circulation in the City of Washington,
District of Columbia, and the other in the Borough of Manhattan,
The City of New York, the first publication to be at least thirty
days and not more than sixty days prior to the date fixed for
such redemption. At least thirty days' and not more than sixty
days' previous notice of every such redemption shall also be
mailed to the holders of record of the shares so to be redeemed,
at their respective addresses as the same shall appear on the
books of the Company; but failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the
validity of the proceedings for the redemption of any shares so
to be redeemed.
In case of the redemption of a part only of any series
of the Preference Stock at the time outstanding, the Company or
its duly authorized agent shall select by lot the shares so to be
redeemed. The Board of Directors shall have full power and
authority, subject to the limitations and provisions herein
contained, to prescribe the manner in which the drawings by lot
shall be conducted and the terms and conditions upon which the
Preference Stock shall be redeemed from time to time.
If such notice of redemption shall have been duly given
by publication, and if on or before the redemption date specified
therein the funds necessary for such redemption shall have been
set aside by the Company, separate and apart from its other
funds, in trust for the account of the holders of the shares so
called for redemption so as to be and continue to be available
therefor, then, notwithstanding that any certificate for shares
so called for redemption shall not have been surrendered for
cancellation, the shares represented thereby shall no longer be
deemed to be outstanding on and after such redemption date, and
all rights with respect to such shares shall forthwith on such
redemption date cease and terminate, except only the right of the
holders thereof to receive the amount payable upon redemption
thereof, without interest.
Provided, however, in the alternative, that after
giving notice by publication of any such redemption as
hereinbefore provided or after giving to the bank or trust
company referred to below irrevocable authorization to give or
complete such notice by publication, and prior to the redemption
date specified in such notice, the Company may deposit in trust,
for the account of the holders of the shares of Preference Stock
so to be redeemed, the funds necessary for such redemption with a
bank or trust company in good standing, organized and doing
business under the laws of the United States or of any state or
territory or of the District of Columbia and having its principal
office in the City of Washington, District of Columbia, or in the
Borough of Manhattan, The City of New York, having capital,
surplus and undivided profits aggregating at least Ten Million
Dollars, designated in such notice of redemption, and thereupon
all shares of the Preference Stock with respect to which such
deposit shall have been made shall no longer be deemed to be
outstanding, and all rights with respect to such shares of
Preference Stock shall forthwith upon such deposit in trust cease
and terminate, except only the right of the holders thereof to
receive from such bank or trust company at any time after the
time of such deposit the funds so deposited, without interest and
the right to exercise, on or before such redemption date
privileges of conversion or exchange, if any, not theretofore
expiring.
Shares of Preference Stock purchased or redeemed
pursuant to any obligation of the Company to purchase or redeem
shares for a sinking fund, shares redeemed pursuant to the
provisions hereof or purchased and for which credit shall have
been taken against any sinking fund obligation, and shares
surrendered pursuant to any conversion right, shall not be
reissued or otherwise disposed of and shall be cancelled. Any
other shares of Preference Stock redeemed or otherwise acquired
by the Company shall continue to be part of the authorized
capital stock of the Company and may thereafter, in the
discretion of the Board of Directors and to the extent permitted
by law, be sold or reissued from time to time, as part of the
same or another series, subject to the terms and conditions
herein set forth.
If and so long as the Company shall be in default in
the payment of any quarter-yearly dividend on shares of any
series of the Preference Stock, or shall be in default in the
payment of funds into or the setting aside of funds for any
sinking fund created for any series of the Preference Stock, the
Company may not (other than by the use of unapplied funds, if
any, paid into or set aside for a sinking fund or funds prior to
such default) (i) redeem any shares of the Preference Stock
unless all shares thereof are redeemed, or (ii) purchase or
otherwise acquire for a consideration any shares of the
Preference Stock, except pursuant to offers of sale made by
holders of the Preference Stock in response to an invitation for
tenders given simultaneously by the Company by mail to the
holders of record of all shares of the Preference Stock then
outstanding.
(e) In the event of any voluntary liquidation, dissolution
or winding up of the Company, then, before any distribution or
payment shall be made to the holders of any junior stock, the
holder of each share of the Preference Stock shall be entitled,
subject to the prior rights and preferences of senior stock, to
be paid in full in cash the amount fixed with respect to such
share by the Board of Directors as hereinbefore provided,
together with an amount computed at the annual dividend rate
therefor from the date upon which dividends thereon became
cumulative to the date fixed for the payment thereof, less the
aggregate of the dividends theretofore paid thereon. If such
payments shall have been made in full to the holders of the
Preference Stock, the remaining assets and funds of the Company
shall be distributed among the holders of the Common Stock and
any other junior stock according to their respective rights,
preferences, restrictions, qualifications and shares.
In the event of any involuntary liquidation,
dissolution or winding up of the Company, then, before any
distribution or payment shall be made to the holders of any
junior stock, the holder of each share of the Preference Stock
shall be entitled, subject to the prior rights and preferences of
senior stock, to be paid in full the par value thereof in cash,
together with an amount computed at the annual dividend rate
therefor from the date upon which dividends thereon became
cumulative to the date fixed for the payment thereof, less the
aggregate of the dividends theretofore paid thereon. If such
payments shall have been made in full to the holders of the
Preference Stock, the remaining assets and funds of the Company
shall be distributed among the holders of the Common Stock and
any other junior stock according to their respective rights,
preferences, restrictions, qualifications and shares.
With respect to the payments to be made in the event of
voluntary or involuntary liquidation, dissolution or winding up
of the Company, all series of the Preference Stock shall rank
ratably according to their respective interests without
preference of any series thereof over any other series.
(f) Whenever the full dividends on the Preference Stock at
the time outstanding for all past quarter-yearly dividend periods
shall have been paid and the full dividend thereon for the
quarter-yearly dividend period then current shall have been paid
or declared and a sum sufficient for the payment thereof set
apart, then such dividends (payable in cash, stock or otherwise)
as may be determined by the Board of Directors may be declared on
the Common Stock and any other junior stock, and the Preference
Stock shall not be entitled to participate in any such dividends.
(g) So long as any shares of the Preference Stock are
outstanding, no amendment to the Articles of Incorporation of the
Company which would (i) create, change any junior stock into, or
increase the rights and preferences of, any senior or parity
stock, (ii) increase the authorized amount of the Preference
Stock in excess of the 5,000,000 shares created hereby or the
authorized amount of any senior or parity stock, or (iii) change
the express terms of the outstanding shares of Preference Stock
in any manner substantially prejudicial to the holders thereof,
shall be made without the affirmative consent (given in writing
without a meeting or by a vote at a meeting duly called for the
purpose) of the holders of more than two thirds of the aggregate
number of shares of the Preference Stock then outstanding; but
any such amendment may be made with such affirmative consent,
together with such additional vote or consent of stockholders as
from time to time may be required by law; provided, however, that
if any such amendment would change the express terms of the
outstanding shares of Preference Stock of any particular series
in any manner substantially prejudicial to the holders thereof
without correspondingly affecting the holders of the outstanding
shares of Preference Stock of all series, then, in lieu of such
consent of the holders of Preference Stock (or, if such consent
of the holders of the outstanding shares of Preference Stock is
required by law, in addition thereto), a like affirmative consent
of the holders of more than two thirds of the Preference Stock of
the affected series at the time outstanding shall be necessary
for making such amendment.
(h) So long as any shares of the Preference Stock are
outstanding, the Company shall not, without the affirmative
consent (given in writing without a meeting or by a vote at a
meeting duly called for the purpose) of the holders of at least a
majority of the aggregate number of shares of the Preference
Stock then outstanding, merge or consolidate with or into any
other corporation or corporations or sell or lease all or
substantially all of its assets, unless such merger,
consolidation, sale or lease, or the issue and assumption of all
securities to be issued or assumed in connection with any such
merger, consolidation, sale or lease shall have been ordered,
approved or permitted by the regulatory authority or authorities
having jurisdiction in the premises; provided that the provisions
of this subdivision (h) shall not apply to a purchase, lease or
other acquisition by the Company of the franchises or assets of
another corporation, or otherwise apply in any manner which does
not involve a merger or consolidation or sale or lease by the
Company of all or substantially all of its assets.
(i) No holder of Preference Stock shall be entitled as such
as a matter of right to subscribe for or purchase any part of any
new or additional issue of stock, or securities convertible into,
or carrying or evidencing any right to purchase, stock, of any
class whatever, whether now or hereafter authorized, and whether
issued for cash, property, services or otherwise.
(j) Except as otherwise in subdivisions (g) and (h) of this
subdivision (B) or by statute specifically provided, the
Preference Stock shall have no voting power unless and until
dividends payable thereon are in default in an amount equivalent
to six full quarter-yearly dividends on the Preference Stock at
the time outstanding. In such event and until such default shall
have been remedied as hereinafter provided, the holders of
Preference Stock, voting separately, shall become entitled to
elect two directors of the Company at the next meeting of
stockholders for the election of directors (unless all dividends
then in default on the Preference Stock shall have been paid),
and the other stockholders then entitled to vote for the election
of directors, voting separately by classes if so required by the
provisions applicable to such classes, shall be entitled to elect
the remaining directors of the Company. During the continuance
of such special right of the holders of Preference Stock, the
Board of Directors shall be divided into two or more classes, one
consisting of the directors to be elected by the holders of
Preference Stock and the other class or classes consisting of the
directors to be elected by the other stockholders entitled to
vote for the election of directors, and the directors of each
such class elected at any meeting for the election of directors,
held during the continuance of such special right, shall hold
office, subject to the rights of any senior stock, until the next
succeeding annual election and until their respective successors
by classes are elected and qualified.
However, if and when all dividends then in default on
the Preference Stock shall be paid (and such dividends shall be
declared and paid as soon as reasonably practicable out of
surplus or net profits, but without diminishing the amount of
capital of the Company), the holders of Preference Stock shall be
divested of such special right, but subject always to the same
provisions for the revesting of such special right in the holders
of Preference Stock in the case of any similar future default or
defaults. Whenever the holders of Preference Stock shall be so
divested of such special right, the method of election of the
Board of Directors by the vote of the other stockholders entitled
to vote for the election of directors exclusively shall be
restored and the election of directors shall take place at the
next succeeding annual meeting for the election of directors, or
at any adjournment thereof.
(k) Except as hereinafter provided, during the continuance
of the special right of the holders of Preference Stock to elect
directors as provided in subdivision (j) of this subdivision (B),
at all meetings for the election of directors the presence in
person or by proxy of the holders of record of a majority of the
outstanding shares of Preference Stock shall be necessary to
constitute a quorum for the election of directors whom the
holders of Preference Stock are entitled to elect, and the
presence in person or by proxy of the holders of record of a
majority of the outstanding shares of each other class of stock
then entitled to vote for the election of directors shall, except
as otherwise provided in subdivision (1) of subdivision (A), be
necessary to constitute a quorum for the election of the
directors whom the holders of such class of stock are entitled to
elect. In the absence of such a quorum of the holders of stock
of any particular class then entitled to vote for the election of
directors, the holders of a majority of the shares of the stock
of such class so present in person or represented by proxy may
adjourn from time to time the meeting for the election of
directors to be elected by such stock, without notice other than
announcement at the meeting, until the requisite quorum of
holders of such stock shall be obtained. The absence of a quorum
of the holders of any class of stock then entitled to vote for
the election of directors shall not, except as hereinbefore
provided, prevent or invalidate the election by the other class
or classes of stockholders of the directors which they are
entitled to elect, if the necessary quorum of stockholders of
such other class or classes is present in person or represented
by proxy at any such meeting or any adjournment thereof.
(C) COMMON STOCK
(a) No holder of Common Stock shall be entitled as such as
a matter of right to subscribe for or purchase any part of any
new or additional issue of stock, or securities convertible into,
or carrying or evidencing any right to purchase, stock, of any
class whatever, whether now or hereafter authorized, and whether
issued for cash, property, services or otherwise.
(b) Except as otherwise provided by statute or by this
Article V, voting rights for all purposes shall be vested
exclusively in the holders of the Common Stock, who shall have
one vote for each share held by them.
VI. The following provisions are set forth herein for the
regulation of the internal affairs of the Company:
At the date hereof, the Company has issued and
outstanding $120,000,000 aggregate principal amount of First
Mortgage Bonds issued under and secured by the lien of the
Company's Mortgage and Deed of Trust dated July 1, 1936, as
amended and supplemented, heretofore made by the Company to The
Riggs National Bank of Washington, D.C., as Trustee, which
Mortgage and Deed of Trust, as amended and supplemented,
constitutes a lien on substantially all the properties and
franchises of the Company, other than cash, accounts receivable
and other liquid assets, securities, leases by the Company as
lessor, equipment and materials not installed as part of the
fixed property, and electric energy and other materials,
merchandise or supplies produced or purchased by the Company for
sale, distribution or use. The Board of Directors of the Company
may from time to time cause to be issued additional First
Mortgage Bonds to be secured by said Mortgage and Deed of Trust,
as heretofore or hereafter amended and supplemented, without
limitation as to principal amount and without action by or
approval of the Company's shareholders, and in connection
therewith may cause to be executed and delivered by the Company
such supplemental indentures, containing such additional
covenants, as the Board may approve.
Without the assent of the shareholders of any class the
stated capital of the Company may, from time to time, be reduced
in respect of shares of its Serial Preferred Stock reacquired in
conversion and cancelled.
VII. The address of the Company's registered office in the
District of Columbia is 1900 Pennsylvania Avenue, N. W.; and the
name of its registered agent at such address is Jack E.
Strausman.
The address of the Company's registered office in Virginia
is 8280 Greensboro Drive, #900, P.O. Box 9346, Tyson's Corner,
McLean, Virginia 22102; and the name of its registered agent at
such address is John S. Stump, who is a resident of Virginia and
a member of the Virginia State Bar.
VIII. Unless otherwise provided in the By-Laws, the number of
directors of the Company shall be twelve (12).
IX. The business and affairs of the Company shall be managed by
or under the direction of the Board of Directors. The number of
directors shall be determined in accordance with the provisions
of Article VIII. The directors shall be divided into three
classes, designated Class I, Class II and Class III. Each class
shall consist, as nearly as may be possible, of one-third of the
total number of directors constituting the entire Board of
Directors. At the 1987 annual meeting of shareholders, Class I
directors shall be elected for a one-year term, Class II
directors for a two-year term, and Class III directors for a
three-year term. At each succeeding annual meeting of
shareholders beginning in 1988, successors to the class of
directors whose term expires at that annual meeting shall be
elected for a three-year term. If the number of directors is
changed in accordance with the provisions of Article VIII, any
increase or decrease shall be apportioned among the classes so as
to maintain the number of directors in each class as nearly equal
as possible, and any additional director of any class elected to
fill a vacancy resulting from an increase in such class shall
hold office for a term that shall coincide with the remaining
term of that class, but in no case will a decrease in the number
of directors shorten the term of any incumbent director. A
director shall hold office until the annual meeting for the year
in which his term expires and until his successor shall be
elected and shall qualify, subject, however, to prior death,
resignation, retirement, age and service limitations as may be
set forth in the By-Laws, disqualification or removal from
office. Any vacancy on the Board of Directors that results from
other than an increase in the number of directors may be filled
by a majority of the Board of Directors then in office even if
less than a quorum, or by a sole remaining director. The term of
any director elected by the Board of Directors to fill a vacancy
not resulting from an increase in the number of directors shall
expire at the next shareholders' meeting at which directors are
elected, and the remainder of such term, if any, shall be filled
by a director elected at such meeting.
Notwithstanding the foregoing, whenever the holders of any
class of stock issued by the Company shall have the right, voting
separately by class or series, to elect directors at an annual or
special meeting of shareholders, the election, term of office,
filling of vacancies and other features of such directorships
shall be governed by the terms of the Articles of Incorporation
applicable thereto, and such directors so elected shall not be
divided into classes pursuant to this Article IX unless expressly
provided by such terms.
Subject to the provisions of the preceding paragraphs,
directors elected pursuant to this Article IX may be removed only
for cause.
X. In addition to any other vote that may be required by law or
these Articles of Incorporation or the By-Laws of the Company,
the affirmative vote of the holders of four-fifths of all the
capital stock entitled to vote shall be required to amend, alter,
or repeal Articles IX and X of these Articles of Incorporation,
and Article I, Section 1, the second through the fourth
paragraphs, Article I, Section 2, and Article II, Section 1 of
the By-Laws of the Company; provided, however, that the power of
the Board of Directors to amend, alter, or repeal the By-Laws
shall not be affected by this Article X.
XI. (A) In addition to any affirmative vote required by law or
these Articles of Incorporation or the By-Laws of the Company,
and except as otherwise expressly provided in Paragraph (B) of
this Article XI, a Business Combination (as hereinafter defined)
shall require the affirmative vote of not less than sixty-six and
two-thirds percent (66-2/3%) of the votes entitled to be cast by
the holders of all the then outstanding shares of Voting Stock
(as hereinafter defined), voting together as a single class,
excluding Voting Stock beneficially owned by any Interested
Shareholder (as hereinafter defined). Such affirmative vote
shall be required notwithstanding the fact that no vote may be
required, or that a lesser percentage or separate class vote may
be specified, by law or in any agreement with any national
securities exchange or otherwise.
(B) The provisions of the preceding Paragraph (A) shall not
be applicable to any particular Business Combination, and such
Business Combination shall require only such affirmative vote, if
any, as is required by law or by any other provision of these
Articles of Incorporation or the By-Laws of the Company, or any
agreement with any national securities exchange, if all of the
conditions specified in either of the following Paragraphs (1) or
(2) are met or, in the case of a Business Combination not
involving the payment of consideration to the holders of the
Company's outstanding Capital Stock (as hereinafter defined), if
the condition specified in the following Paragraph (1) is met:
(1) The Business Combination shall have been approved
by a majority (whether such approval is made prior to or
subsequent to the acquisition of beneficial ownership of the
Voting Stock that caused the Interested Shareholder to become an
Interested Shareholder) of the Continuing Directors (as
hereinafter defined).
(2) All of the following conditions shall have been
met with respect to every class or series of outstanding Capital
Stock, whether or not the Interested Shareholder has previously
acquired beneficial ownership of any shares of a particular class
or series of Capital Stock:
(a) The aggregate amount of cash and the Fair
Market Value (as hereinafter defined), as of the date of the
consummation of the Business Combination, of consideration other
than cash to be received per share by holders of Common Stock in
such Business Combination shall be at least equal to the highest
amount determined under clauses (i), (ii), (iii), and (iv) below:
(i) (if applicable) the highest per share
price (including any brokerage commissions, transfer taxes and
soliciting dealers' fees) paid by or on behalf of the Interested
Shareholder for any share of Common Stock in connection with the
acquisition by the Interested Shareholder of beneficial ownership
of shares of Common Stock (x) within the two-year period
immediately prior to the first public announcement of the
proposed Business Combination (the "Announcement Date") or (y) in
the transaction in which it became an Interested Shareholder,
whichever is higher, in either case as adjusted for any
subsequent stock split, stock dividend, subdivision or
reclassification with respect to Common Stock;
(ii) the Fair Market Value per share of
Common Stock on the Announcement Date or on the date on which the
Interested Shareholder became an Interested Shareholder (the
"Determination Date"), whichever is higher, as adjusted for any
subsequent stock split, stock dividend, subdivision or
reclassification with respect to Common Stock;
(iii) (if applicable) the price per share
equal to the Fair Market Value per share of Common Stock
determined pursuant to the immediately preceding clause (ii),
multiplied by the ratio of (x) the highest per share price
(including any brokerage commissions, transfer taxes and
soliciting dealers' fees) paid by or on behalf of the Interested
Shareholder for any share of Common Stock in connection with the
acquisition by the Interested Shareholder of beneficial ownership
of shares of Common Stock within the two-year period immediately
prior to the Announcement Date, as adjusted for any subsequent
stock split, stock dividend, subdivision or reclassification with
respect to Common Stock to (y) the Fair Market Value per share of
Common Stock on the first day in such two-year period on which
the Interested Shareholder acquired beneficial ownership of any
share of Common Stock, as adjusted for any subsequent stock
split, stock dividend, subdivision or reclassification with
respect to Common Stock; and
(iv) the Company's net income per share of
Common Stock for the four full consecutive fiscal quarters
immediately preceding the Announcement Date, multiplied by the
higher of the then price/earnings multiple (if any) of such
Interested Shareholder or the highest price/earnings multiple of
the Company within the two-year period immediately preceding the
Announcement Date (such price/earnings multiples being determined
by dividing the highest price per share during a day as reported
in the Wall Street Journal from the Composite Tape for the New
York Stock Exchange by the immediately preceding publicly
reported twelve-months earnings per share).
(b) The aggregate amount of cash and the Fair Market
Value, as of the date of the consummation of the Business
Combination, of consideration other than cash to be received per
share by holders of shares of any class or series of outstanding
Capital Stock, other than Common Stock, shall be at least equal
to the highest amount determined under clauses (i), (ii), (iii),
and (iv) below:
(i) (if applicable) the highest per share
price (including any brokerage commissions, transfer taxes and
soliciting dealers' fees) paid by or on behalf of the Interested
Shareholder for any share of such class or series of Capital
Stock in connection with the acquisition by the Interested
Shareholder of beneficial ownership of shares of such class or
series of Capital Stock (x) within the two-year period
immediately prior to the Announcement Date or (y) in the
transaction in which it became an Interested Shareholder,
whichever is higher, in either case as adjusted for any
subsequent stock split, stock dividend, subdivision or
reclassification with respect to such class or series of Capital
Stock;
(ii) the Fair Market Value per share of such
class or series of Capital Stock on the Announcement Date or on
the Determination Date, whichever is higher, as adjusted for any
subsequent stock split, stock dividend, subdivision or
reclassification with respect to such class or series of Capital
Stock;
(iii) (if applicable) the price per share
equal to the Fair Market Value per share of such class or series
of Capital Stock determined pursuant to the immediately preceding
clause (ii), multiplied by the ratio of (x) the highest per share
price (including any brokerage commissions, transfer taxes and
soliciting dealers' fees) paid by or on behalf of the Interested
Shareholder for any share of such class or series of Capital
Stock in connection with the acquisition by the Interested
Shareholder of beneficial ownership of shares of such class or
series of Capital Stock within the two-year period immediately
prior to the Announcement Date, as adjusted for any subsequent
stock split, stock dividend, subdivision or reclassification with
respect to such class or series of Capital Stock to (y) the Fair
Market Value per share of such class or series of Capital Stock
on the first day in such two-year period on which the Interested
Shareholder acquired beneficial ownership of any share of such
class or series of Capital Stock, as adjusted for any subsequent
stock split, stock dividend, subdivision or reclassification with
respect to such class or series of Capital Stock; and
(iv) (if applicable) the highest preferential
amount per share to which the holders of shares of such class or
series of Capital Stock would be entitled in the event of any
voluntary or involuntary liquidation, dissolution or winding up
of the affairs of the Company regardless of whether the Business
Combination to be consummated constitutes such an event.
(c) The consideration to be received by holders
of a particular class or series of outstanding Capital Stock
shall be in cash or in the same form as previously has been paid
by or on behalf of the Interested Shareholder in connection with
its direct or indirect acquisition of beneficial ownership of
shares of such class or series of Capital Stock. If the
consideration previously paid by the Interested Shareholder to
acquire shares of any class or series of Capital Stock varied
among the recipients thereof as to form, the form of
consideration to be paid for such class or series of Capital
Stock in connection with the Business Combination shall be either
cash or the form used to acquire beneficial ownership of the
largest number of shares of such class or series of Capital Stock
previously acquired by the Interested Shareholder.
(d) After the Determination Date and prior to the
consummation of such Business Combination: (i) except as
approved by a majority of the Continuing Directors, there shall
have been no failure to declare and pay at the regular date
therefor any full quarterly dividends (whether or not cumulative)
payable in accordance with the terms of any outstanding Capital
Stock; (ii) there shall have been no reduction in the annual rate
of dividends paid on the Common Stock (except as necessary to
reflect any stock split, stock dividend or subdivision of the
Common Stock), except as approved by a majority of the Continuing
Directors; (iii) there shall have been an increase in the annual
rate of dividends paid on the Common Stock as necessary to
reflect any reclassification (including any reverse stock split),
recapitalization, reorganization or any similar transaction that
has the effect of reducing the number of outstanding shares of
Common Stock, unless the failure so to increase such annual rate
is approved by a majority of the Continuing Directors; and (iv)
such Interested Shareholder shall not have become the beneficial
owner of any additional shares of Capital Stock except as part of
the transaction that results in such Interested Shareholder
becoming an Interested Shareholder and except in a transaction
that, after giving effect thereto, would not result in any
increase in the Interested Shareholder's percentage of beneficial
ownership of any class or series of Capital Stock.
(e) After the Determination Date, such Interested
Shareholder shall not have received the benefit, directly or
indirectly (except proportionately as a shareholder of the
Company), of any loans, advances, guarantees, pledges or other
financial assistance or any tax credits or other tax advantages
provided by the Company, whether in anticipation of or in
connection with such Business Combination or otherwise.
(f) A proxy or information statement describing
the proposed Business Combination and complying with the
requirements of the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder (the "Act") (or any
subsequent provisions replacing such Act, rules or regulations)
shall be mailed to all shareholders of the Company at least 30
days prior to the consummation of such Business Combination
(whether or not such proxy or information statement is required
to be mailed pursuant to such Act or subsequent provisions). The
proxy or information statement shall contain on the first page
thereof, in a prominent place, any statement as to the
advisability (or inadvisability) of the Business Combination that
the Continuing Directors, or any of them, may choose to make and,
if deemed advisable by a majority of the Continuing Directors,
the opinion of an investment banking firm selected by a majority
of the Continuing Directors as to the fairness (or not) of the
terms of the Business Combination from a financial point of view
to the holders of the outstanding shares of Capital Stock other
than the Interested Shareholder and its Affiliates or Associates
(as hereinafter defined), such investment banking firm to be paid
a reasonable fee for its services by the Company.
(g) Such Interested Shareholder shall not have
made any major change in the Company's business or equity capital
structure without the approval of a majority of the Continuing
Directors.
(C) The following definitions shall apply with respect to
this Article XI:
(1) The term "Business Combination" shall mean:
(a) any merger or consolidation of the Company or
any Subsidiary (as hereinafter defined) with (i) any Interested
Shareholder or (ii) any other company (whether or not itself an
Interested Shareholder) which is or after such merger or
consolidation would be an Affiliate or Associate of an Interested
Shareholder; or
(b) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition or security arrangement,
investment, loan, advance, guarantee, agreement to purchase,
agreement to pay, extension of credit, joint venture
participation or other arrangement (in one transaction or a
series of transactions) with or for the benefit of any Interested
Shareholder or any Affiliate or Associate of any Interested
Shareholder involving any assets, securities or commitments of
the Company or any Subsidiary having an aggregate Fair Market
Value and/or involving aggregate commitments of $10,000,000 or
more or constituting more than 5 percent of the book value of the
total assets (in the case of transactions involving assets or
commitments other than Capital Stock) or 5 percent of the
shareholders' equity (in the case of transactions in Capital
Stock) of the entity in question (the "Substantial Part"), as
reflected in the most recent fiscal year-end consolidated balance
sheet of such entity existing at the time the shareholders of the
Company would be required, pursuant to Paragraph A of this
Article XI, to approve or authorize the Business Combination
involving the assets, securities and/or commitments constituting
any Substantial Part; or
(c) the adoption of any plan or proposal for the
liquidation or dissolution of the Company which is voted for or
consented to by any Interested Shareholder or any Affiliate or
Associate thereof; or
(d) any reclassification of securities (including
any reverse stock split), or recapitalization of the Company, or
any merger or consolidation of the Company with any of its
Subsidiaries or any other transaction (whether or not with or
otherwise involving an Interested Shareholder) that has the
effect, directly or indirectly, of increasing the proportionate
share of any class or series of Capital Stock, or any securities
convertible into Capital Stock or into equity securities of any
Subsidiary, that is beneficially owned by any Interested
Shareholder or any Affiliate or Associate of any Interested
Shareholder; or
(e) any agreement, contract or other arrangement
providing for any one or more of the actions specified in the
foregoing clauses (a) to (d).
(2) The term "Capital Stock" shall mean all capital
stock of the Company authorized to be issued from time to time
under Article IV of these Articles of Incorporation, and the term
"Voting Stock" shall mean all Capital Stock that by its terms may
be voted on all matters submitted to shareholders of the Company
generally.
(3) The term "person" shall mean any individual, firm,
company or other entity and shall include any group comprised of
any person and any other person with whom such person or any
Affiliate or Associate of such person has any agreement,
arrangement or understanding, directly or indirectly, for the
purpose of acquiring, holding, voting or disposing of Capital
Stock.
(4) The term "Interested Shareholder" shall mean any
person (other than the Company or any Subsidiary and other than
any profit-sharing, employee stock ownership or other employee
benefit plan of the Company or any Subsidiary or any trustee of
or fiduciary with respect to any such plan when acting in such
capacity) who (a) is the beneficial owner of Voting Stock
representing ten percent (10%) or more of the votes entitled to
be cast by the holders of all then outstanding shares of Voting
Stock; or (b) is an Affiliate or Associate of the Company and at
any time within the two-year period immediately prior to the
Announcement Date was the beneficial owner of Voting Stock
representing ten percent (10%) or more of the votes entitled to
be cast by the holders of all then outstanding shares of Voting
Stock.
(5) A person shall be a "beneficial owner" of any
Capital Stock (a) which such person or any of its Affiliates or
Associates beneficially owns, directly or indirectly; (b) which
such person or any of its Affiliates or Associates has, directly
or indirectly, (i) the right to acquire (whether such right is
exercisable immediately or subject only to the passage of time),
pursuant to any agreement, arrangement or understanding or upon
the exercise of conversion rights, exchange rights, warrants or
options, or otherwise, or (ii) the right to vote pursuant to any
agreement, arrangement or understanding; or (c) which is
beneficially owned, directly or indirectly, by any other person
with which such person or any of its Affiliates or Associates has
any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of any shares of Capital
Stock. For purposes of determining whether a person is an
Interested Shareholder pursuant to Paragraph (4) of this Section
(C), the number of shares of Capital Stock deemed to be
outstanding shall include shares deemed beneficially owned by
such person through application of this Paragraph (5) of Section
(C), but shall not include any other shares of Capital Stock that
may be issuable pursuant to any agreement, arrangement or
understanding, or upon exercise of conversion rights, warrants or
options, or otherwise.
(6) The terms "Affiliate" and "Associate" shall have
the respective meanings ascribed to such terms in Rule 12b-2
under the Act as in effect on the date that Article XI is
approved by the Board (the term "registrant" in said Rule 12b-2
meaning in this case the Company).
(7) The term "Subsidiary" means any company of which a
majority of any class of equity security is beneficially owned by
the Company; provided, however, that for the purposes of the
definition of Interested Shareholder set forth in Paragraph (4)
of this Section (C), the term "Subsidiary" shall mean only a
company of which a majority of each class of equity security is
beneficially owned by the Company.
(8) The term "Continuing Director" means any member of
the Board of Directors of the Company (the "Board of Directors"),
while such person is a member of the Board of Directors, who is
not an Affiliate or Associate or representative of the Interested
Shareholder and was a member of the Board of Directors prior to
the time that the Interested Shareholder became an Interested
Shareholder, and any successor of a Continuing Director while
such successor is a member of the Board of Directors, who is not
an Affiliate or Associate or representative of the Interested
Shareholder and is recommended or elected to succeed the
Continuing Director by a majority of Continuing Directors.
(9) The term "Fair Market Value" means (a) in the case
of cash, the amount of such cash; (b) in the case of stock, the
highest closing sale price during the 30-day period immediately
preceding the date in question of a share of such stock on the
Composite Tape for New York Stock Exchange-Listed Stocks, or, if
such stock is not quoted on the Composite Tape, on the New York
Stock Exchange, or, if such stock is not listed on such Exchange,
on the principal United States securities exchange registered
under the Act on which such stock is listed, or, if such stock is
not listed on any such exchange, the highest closing bid
quotation with respect to a share of such stock during the 30-day
period preceding the date in question on the National Association
of Securities Dealers, Inc. Automated Quotations System or any
similar system then in use, or if no such quotations are
available, the fair market value on the date in question of a
share of such stock as determined by a majority of the Continuing
Directors in good faith; and (c) in the case of property other
than cash or stock, the fair market value of such property on the
date in question as determined in good faith by a majority of the
Continuing Directors.
(10) In the event of any Business Combination in which
the Company survives, the phrase "consideration other than cash
to be received" as used in Paragraphs (2)(a) and (2)(b) of
Section (B) of this Article XI shall include the shares of Common
Stock and/or the shares of any other class or series of Capital
Stock retained by the holders of such shares.
(D) A majority of the Continuing Directors shall have the
power and duty to determine for the purposes of this Article XI,
on the basis of information known to them after reasonable
inquiry, (a) whether a person is an Interested Shareholder, (b)
the number of shares of Capital Stock or other securities
beneficially owned by any person, (c) whether a person is an
Affiliate or Associate of another, (d) whether the assets that
are the subject of any Business Combination have, or the
consideration to be received for the issuance or transfer of
securities by the Company or any Subsidiary in any Business
Combination has, an aggregate Fair Market Value of $10,000,000 or
more, and (e) whether the assets or securities that are the
subject of any Business Combination constitute a Substantial
Part. Any such determination made in good faith shall be binding
and conclusive on all parties.
(E) Nothing contained in this Article XI shall be construed
to relieve any Interested Shareholder from any fiduciary
obligation imposed by law.
(F) The fact that any Business Combination complies with
the provisions of Section (B) of this Article XI shall not be
construed to impose any fiduciary duty, obligation or
responsibility on the Board of Directors, or any member thereof,
to approve such Business Combination or recommend its adoption or
approval to the shareholders of the Company, nor shall such
compliance limit, prohibit or otherwise restrict in any manner
the Board of Directors, or any member thereof, with respect to
evaluations of or actions and responses taken with respect to
such Business Combination.
(G) Notwithstanding any other provisions of these Articles
of Incorporation or the By-Laws of the Company (and
notwithstanding the fact that a lesser percentage or separate
class vote may be specified by law, these Articles of
Incorporation or the By-Laws of the Company), the affirmative
vote of the holders of not less than four-fifths of the votes
entitled to be cast by the holders of all the then outstanding
shares of Voting Stock, voting together as a single class, shall
be required to amend or repeal, or adopt any provisions
inconsistent with, this Article XI; provided, however, that this
Section (G) shall not apply to, and such four-fifths vote shall
not be required for, any amendment, repeal or adoption
unanimously recommended by the Board of Directors if all of such
directors are persons who would be eligible to serve as
Continuing Directors within the meaning of Section (C), Paragraph
(8) of this Article XI.
IN WITNESS WHEREOF, Potomac Electric Power Company has duly
caused these Restated Articles of Incorporation to be duly
executed (in duplicate) in its name by Dennis R. Wraase, one of
its Senior Vice Presidents, and by Betty K. Cauley, its
Secretary, and its corporate seal to be hereunto affixed and duly
attested by Betty K. Cauley, its Secretary, all as of the 22nd
day of December, 1992.
POTOMAC ELECTRIC POWER COMPANY
[Corporate Seal]
Attest: By /s/ D. R. WRAASE
Dennis R. Wraase
Senior Vice President
/s/ BETTY K. CAULEY By /s/ BETTY K. CAULEY
Betty K. Cauley Betty K. Cauley
Secretary Secretary
DISTRICT OF COLUMBIA, ss.:
I, Indiana C. Shepp, a notary public, do hereby certify that
on this 22nd day of December, 1992, personally appeared before me
Dennis R. Wraase, who, being by me first duly sworn, declared
that he is a Senior Vice President of Potomac Electric Power
Company, that he signed the foregoing document as Senior Vice
President of the corporation, and that the statements therein
contained are true.
/s/ INDIANA C. SHEPP
[NOTARIAL SEAL] Notary Public, D. C.
My commission expires: June 14, 1992.
CERTIFICATE OF
POTOMAC ELECTRIC POWER COMPANY
Pursuant to Virginia Code Section 13.1-711 D., Potomac
Electric Power Company, through Betty K. Cauley, it Secretary and
Associate General Counsel, hereby certifies that the accompanying
Restated Articles of Incorporation and Articles of Restatement do
not contain an amendment to the Articles of Incorporation
requiring shareholder approval and were duly adopted by the Board
of Directors of the Company on December 21, 1992.
WHEREFORE, this Certificate has been duly executed this 22nd
day of December, 1992.
POTOMAC ELECTRIC POWER COMPANY
By: /s/ BETTY K. CAULEY
Betty K. Cauley
Secretary and Associate General Counsel
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
POTOMAC ELECTRIC POWER COMPANY
Pursuant to the provisions of Section 29-356 of Title 29 of
the District of Columbia Code (Section 56 of the District of
Columbia Business Corporation Act, as amended) and Section
13.1-710 of the Code of Virginia (chapter 522 of the Virginia
Stock Corporation Act), the undersigned corporation adopts these
Articles of Amendment to its Articles of Incorporation.
FIRST:
The name of the Company is Potomac Electric Power Company.
SECOND:
The following amendment to the Articles of Incorporation was
adopted by the shareholders of the corporation in the manner
prescribed by the District of Columbia Business Corporation Act
and the Virginia State Corporation Act:
Article IV of the Articles of Incorporation is hereby
amended to read as follows:
IV. The aggregate number of shares which the Company
shall have authority to issue is 220,042,227 divided into three
classes: the first consisting of 11,242,227 shares of the par
value of $50 each; the second consisting of 8,800,000 shares of
the par value of $25 each; and the third consisting of
200,000,000 shares of the par value of $1 each.
The first paragraph of Article V of the Articles of
Incorporation is hereby amended to read as follows:
V. Said 11,242,227 shares of the par value of $50 each
are designated as Serial Preferred Stock; said 8,800,000 shares
of the par value of $25 each are designated as Preference Stock;
and said 200,000,000 shares of the par value of $1 each are
designated as Common Stock. Such of said authorized shares of
Serial Preferred Stock, Preference Stock and Common Stock as are
unissued at any time may be issued, in whole or in part, at such
time, or from time to time, by action of the Board of Directors
of the Company, subject to the laws in force in the District of
Columbia and the Commonwealth of Virginia and the terms and
conditions set forth in the Articles of Incorporation, as amended
of the Company.
The number of shares of Serial Preferred Stock appearing in
Article V, Section (A), subparagraphs (b)(1) and (2) and (g) is
hereby amended to read 11,242,227.
THIRD:
The amendment to increase by 5,000,000 shares the authorized
number of shares of Serial Preferred Stock was proposed and
recommended by the Board of Directors of the corporation and
submitted to and approved by its shareholders in accordance with
the corporation's Articles of Incorporation and applicable law.
FOURTH:
The amendment was adopted by the shareholders on May 20,
1993. The number of shares of the corporation outstanding at the
time of such adoption was 120,430,936. The number of shares
entitled to vote at such time on the amendment was 119,962,841,
the designation and number of which shares of each class were as
follows:
Class Number of Shares
Common Stock 114,471,011
Serial Preferred Stock 5,491,830
The number of shares of each class entitled to vote on the
amendment that were voted for and against the amendment were:
Number of Shares Voted
Class For Against
Common Stock 78,854,276 7,415,274
Serial Preferred Stock 4,263,996 234,178
FIFTH:
The amendment does not provide for an exchange,
reclassification, or cancellation of issued shares.
SIXTH:
The amendment does not effect a change in the amount of
stated capital, or paid-in surplus, or both, of the corporation.
IN WITNESS WHEREOF, the Potomac Electric Power Company has
caused these Articles of Amendment to be duly executed (in
duplicate) in its name by William T. Torgerson, one of its Vice
Presidents, and by Mary T. Howard, one of its Assistant
Secretaries, and its corporate seal to be hereunto affixed and
duly attested by Mary T. Howard, one of its Assistant
Secretaries, all as of the 20th day of May, 1993.
POTOMAC ELECTRIC POWER COMPANY
(Corporate Seal)
By: /s/ WILLIAM T. TORGERSON
Vice President
ATTEST:
/s/ M. T. HOWARD By: /s/ M. T. HOWARD
Assistant Secretary Assistant Secretary
DISTRICT OF COLUMBIA, ss.:
I, Indiana C. Shepp, a notary public, do hereby certify that
on this 20th day of May, 1993, personally appeared before me
William T. Torgerson, who, being by me first duly sworn, declared
that he is a Vice President of Potomac Electric Power Company,
that he signed the foregoing document as Vice President of the
corporation, and that the statements therein are true.
/s/ INDIANA C. SHEPP
Notary Public, D. C.
[NOTARIAL SEAL]
My commission expires: June 14, 1995
DISTRICT OF COLUMBIA
STATEMENT OF
CANCELLATION OF REDEEMABLE SHARES
OF
POTOMAC ELECTRIC POWER COMPANY
Under the provisions of Section 29-359 of Chapter 3 of Title
29 of the District of Columbia Code, 1981 Edition (Section 59 of
the District of Columbia Business Corporation Act, as amended),
the undersigned corporation submits this statement of
cancellation, pursuant to the provisions of its articles of
incorporation, of redeemable shares of the corporation reacquired
by it subsequent to the close of business on December 17, 1992,
and prior to the close of business on December 16, 1993, through
their conversion, in accordance with their terms, into shares of
its common stock, and through redemption subsequent to the close
of business on December 17, 1992, and prior to the close of
business on December 16, 1993 of 30,000 shares of Serial
Preferred Stock, $3.37 Series of 1987:
FIRST: The name of the corporation is Potomac Electric Power
Company.
SECOND: The aggregate number of shares which the corporation
had authority to issue is 220,042,227, itemized as follows:
CLASS SERIES NUMBER OF SHARES
Common Stock - 200,000,000
Preference Stock Undesignated as to series 8,800,000
Serial Preferred
Stock $2.44 Series of 1957 300,000
$2.46 Series of 1958 300,000
$2.28 Series of 1965 400,000
$2.44 Convertible
Series of 1966 10,027
$3.82 Series of 1969 500,000
$3.37 Series of 1987 982,200
Auction Series A 1,000,000
$3.89 Series of 1991 1,000,000
$3.40 Series of 1992 1,000,000
Undesignated as to series
5,750,000
THIRD: The number of shares of the corporation so cancelled is
31,183 itemized as follows:
CLASS SERIES NUMBER OF SHARES
Serial Preferred
Stock $2.44 Convertible Series of 1966 1,183
$3.37 Series of 1987 30,000
FOURTH: The number of shares which the corporation has
authority to issue after giving effect to such cancellation is
220,011,044, itemized as follows:
CLASS SERIES NUMBER OF
SHARES
Common Stock -
200,000,000
Preference Stock Undesignated as to series 8,800,000
Serial Preferred
Stock $2.44 Series of 1957 300,000
$2.46 Series of 1958 300,000
$2.28 Series of 1965 400,000
$2.44 Convertible
Series of 1966
8,844
$3.82 Series of 1969
500,000
$3.37 Series of 1987
952,200
Auction Series A
1,000,000
$3.89 Series of 1991
1,000,000
$3.40 Series of 1992
1,000,000
Undesignated as to series
5,750,000
FIFTH: The aggregate number of issued shares of the
corporation after giving effect to such cancellation is
122,926,152 itemized as follows:
CLASS SERIES NUMBER OF SHARES
Common Stock - 117,465,108
Preference Stock -
NONE
Serial Preferred
Stock $2.44 Series of 1957 300,000
$2.46 Series of 1958
300,000
$2.28 Series of 1965
400,000
$2.44 Convertible Series of 1966
8,844 $3.82 Series of 1969
500,000
$3.37 Series of 1987
952,200
Auction Series A
1,000,000
$3.89 Series of 1991
1,000,000
$3.40 Series of 1992
1,000,000
SIXTH: After giving effect to such cancellation, the amounts
of the stated capital and paid-in surplus of the corporation,
computed in accordance with the provisions of the District of
Columbia Business Corporation Act, as amended, are $390,517,308
and $989,419,430.89, respectively.
DATED: December 21, 1993
POTOMAC ELECTRIC POWER
COMPANY
By /s/ H. L. DAVIS
H. Lowell Davis
Vice Chairman and
Chief Financial Officer
[Corporate Seal]
Attest:
/s/ M. T. HOWARD
M. T. Howard
Assistant Secretary
DISTRICT OF COLUMBIA, ss.:
I, Lisa A. Poole, a Notary Public, do hereby certify that on
this 21st day of December, 1993, personally appeared before me H.
Lowell Davis, who, being by me first duly sworn, declared that he
is Vice Chairman and Chief Financial Officer of Potomac Electric
Power Company, that he signed the foregoing document as Vice
Chairman and Chief Financial Officer of the corporation, and that
the statements therein contained are true.
/s/ LISA A. POOLE
Notary Public, D. C.
[Notarial Seal]
ARTICLES OF AMENDMENT
OF
POTOMAC ELECTRIC POWER COMPANY
Under the provisions of Section 13.1-652 of the Code of
Virginia, as amended, the undersigned corporation submits these
Articles of Amendment.
FIRST: The name of the corporation is Potomac Electric Power
Company.
SECOND: The reduction in the number of authorized shares of the
corporation is 31,183, itemized as follows:
CLASS SERIES NUMBER OF
SHARES
Serial Preferred
Stock $2.44 Convertible Series of 1966 1,183
$3.37 Series of 1987 30,000
THIRD: The total number of authorized shares of the
corporation remaining after giving effect to such reduction is
220,011,044, itemized as follows:
CLASS SERIES NUMBER OF
SHARES
Common Stock - 200,000,000
Preference Stock Undesignated as to series 8,800,000
Serial Preferred
Stock $2.44 Series of 1957 300,000
$2.46 Series of 1958 300,000
$2.28 Series of 1965 400,000
$2.44 Convertible Series of 1966 8,844
$3.82 Series of 1969 500,000
$3.37 Series of 1987 952,200
Auction Series A 1,000,000
$3.89 Series of 1991 1,000,000
$3.40 Series of 1992 1,000,000
Undesignated as to series 5,750,000
The Articles of Incorporation prohibit the reissuance of
acquired shares.
FOURTH: The reduction in the number of authorized shares was
duly authorized by the Board of Directors on December 20, 1993.
DATED: December 21, 1993
POTOMAC ELECTRIC POWER
COMPANY
By /s/ H. L. DAVIS
H. Lowell Davis
Vice Chairman and
Chief Financial Officer
[Corporate Seal]
Attest:
/s/ M. T. HOWARD
M. T. Howard
Assistant Secretary
DISTRICT OF COLUMBIA
STATEMENT OF
CANCELLATION OF REDEEMABLE SHARES
OF
POTOMAC ELECTRIC POWER COMPANY
Under the provisions of Section 29-359 of Chapter 3 of Title
29 of the District of Columbia Code, 1981 Edition (Section 59 of
the District of Columbia Business Corporation Act, as amended),
the undersigned corporation submits this statement of
cancellation, pursuant to the provisions of its articles of
incorporation, of redeemable shares of the corporation reacquired
by it subsequent to the close of business on December 16, 1993,
and prior to the close of business on December 12, 1994, through
their conversion, in accordance with their terms, into shares of
its common stock, and through redemption subsequent to the close
of business on December 16, 1993, and prior to the close of
business on December 12, 1994 of 50,949 shares of Serial
Preferred Stock, $3.37 Series of 1987:
FIRST: The name of the corporation is Potomac Electric Power
Company.
SECOND: The aggregate number of shares which the corporation
had authority to issue is 220,011,044, itemized as follows:
CLASS SERIES NUMBER OF
SHARES
Common Stock -
200,000,000
Preference Stock Undesignated as to series 8,800,000
Serial Preferred
Stock $2.44 Series of 1957 300,000
$2.46 Series of 1958 300,000
$2.28 Series of 1965 400,000
$2.44 Convertible Series of 1966 8,844
$3.82 Series of 1969 500,000
$3.37 Series of 1987 952,200
Auction Series A
1,000,000
$3.89 Series of 1991 1,000,000
$3.40 Series of 1992 1,000,000
Undesignated as to series 5,750,000
THIRD: The number of shares of the corporation so cancelled is
51,610 itemized as follows:
CLASS SERIES NUMBER OF
SHARES
Serial Preferred
Stock $2.44 Convertible Series of 1966 661
$3.37 Series of 1987 50,949
FOURTH: The number of shares which the corporation has
authority to issue after giving effect to such cancellation is
219,959,434, itemized as follows:
CLASS SERIES NUMBER OF
SHARES
Common Stock -
200,000,000
Preference Stock Undesignated as to series 8,800,000
Serial Preferred
Stock $2.44 Series of 1957
300,000
$2.46 Series of 1958
300,000
$2.28 Series of 1965
400,000
$2.44 Convertible Series of 1966 8,183
$3.82 Series of 1969
500,000
$3.37 Series of 1987
901,251
Auction Series A
1,000,000
$3.89 Series of 1991
1,000,000
$3.40 Series of 1992
1,000,000
Undesignated as to series
5,750,000
FIFTH: The aggregate number of issued shares of the
corporation after giving effect to such cancellation is
123,557,532 itemized as follows:
CLASS SERIES NUMBER OF
SHARES
Common Stock -
118,148,098
Preference Stock -
NONE
Serial Preferred
Stock $2.44 Series of 1957
300,000
$2.46 Series of 1958
300,000
$2.28 Series of 1965
400,000
$2.44 Convertible Series of 1966 8,183
$3.82 Series of 1969 500,000
$3.37 Series of 1987
901,251
Auction Series A
1,000,000
$3.89 Series of 1991
1,000,000
$3.40 Series of 1992
1,000,000
SIXTH: After giving effect to such cancellation, the amounts
of the stated capital and paid-in surplus of the corporation,
computed in accordance with the provisions of the District of
Columbia Business Corporation Act, as amended, are $388,619,798
and $1,004,683,941.72, respectively.
DATED: December 16, 1994
POTOMAC ELECTRIC POWER COMPANY
By /s/ H. L. DAVIS
H. Lowell Davis
Vice Chairman and
Chief Financial Officer
[Corporate Seal]
Attest:
/s/ M. T. HOWARD
M. T. Howard
Assistant Secretary
DISTRICT OF COLUMBIA, ss.:
I, Indiana C. Shepp, a Notary Public, do hereby certify that
on this 16th day of December, 1994, personally appeared before me
H. Lowell Davis, who, being by me first duly sworn, declared that
he is Vice Chairman and Chief Financial Officer of Potomac
Electric Power Company, that he signed the foregoing document as
Vice Chairman and Chief Financial Officer of the corporation, and
that the statements therein contained are true.
/s/ INDIANA C. SHEPP
Notary Public, D. C.
[Notarial Seal] My commission expires: June 14, 1995
ARTICLES OF AMENDMENT
OF
POTOMAC ELECTRIC POWER COMPANY
Under the provisions of Section 13.1-652 of the Code of
Virginia, as amended, the undersigned corporation submits these
Articles of Amendment.
FIRST: The name of the corporation is Potomac Electric Power
Company.
SECOND: The reduction in the number of authorized shares of the
corporation is 51,610, itemized as follows:
CLASS SERIES NUMBER OF
SHARES
Serial Preferred
Stock $2.44 Convertible Series of 1966 661
$3.37 Series of 1987 50,949
THIRD: The total number of authorized shares of the
corporation remaining after giving effect to such reduction is
219,959,434, itemized as follows:
CLASS SERIES NUMBER OF
SHARES
Common Stock -
200,000,000
Preference Stock Undesignated as to series 8,800,000
Serial Preferred
Stock $2.44 Series of 1957 300,000
$2.46 Series of 1958 300,000
$2.28 Series of 1965 400,000
$2.44 Convertible Series of 1966 8,183
$3.82 Series of 1969 500,000
$3.37 Series of 1987 901,251
Auction Series A
1,000,000
$3.89 Series of 1991 1,000,000
$3.40 Series of 1992 1,000,000
Undesignated as to series 5,750,000
The Articles of Incorporation prohibit the reissuance of
acquired shares.
FOURTH: The reduction in the number of authorized shares was
duly authorized by the Board of Directors on December 15, 1994.
DATED: December 16, 1994
POTOMAC ELECTRIC POWER
COMPANY
By /s/ H. L. DAVIS
H. Lowell Davis
Vice Chairman and
Chief Financial Officer
[Corporate Seal]
Attest:
/s/ M. T. HOWARD
M. T. Howard
Assistant Secretary
================================================================
BY-LAWS
of
POTOMAC ELECTRIC POWER COMPANY
WASHINGTON, D. C.
As amended through
October 27, 1994
================================================================
POTOMAC ELECTRIC POWER COMPANY
BY-LAWS
______
ARTICLE I
SECTION 1. The annual meeting of the stockholders of the
Company shall be held on the fourth Wednesday in April in each
year, at such time and place within or without the District of
Columbia as the Board of Directors shall by resolution designate,
for the purpose of electing directors and of transacting such
other business as may properly be brought before the meeting.
At an annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual meeting,
business must be specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board,
otherwise properly brought before the meeting by or at the
direction of the Board, or otherwise properly brought before the
meeting by a stockholder. In addition to any other applicable
requirements, for business to be properly brought before an
annual meeting by a stockholder, the stockholder must have given
timely notice thereof in writing to the Secretary of Potomac
Electric Power Company. To be timely, a stockholder's notice
must be received at the principal executive offices of the
Company not less than 50 days nor more than 75 days prior to the
meeting; provided, however, that in the event that less than 65
days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the
stockholder to be timely must be so received not later than the
close of business on the fifteenth day following the day on which
such notice of the date of the annual meeting was mailed or such
public disclosure was made, whichever first occurs. A
stockholder's notice to the Secretary shall set forth (i) a brief
description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at
the annual meeting, (ii) the name and record address of the
stockholder proposing such business, (iii) the class and number
of shares of the Company that are beneficially owned by the
stockholder, and (iv) any material interest of the stockholder in
such business.
Notwithstanding anything in the By-Laws to the contrary, no
business shall be conducted at the annual meeting except in
accordance with the procedures set forth in this Article I,
Section 1; provided, however, that nothing in this Article I,
Section 1 shall be deemed to preclude discussion by any
stockholder of any business properly brought before the annual
meeting in accordance with such procedures.
The Chairman of an annual meeting shall, if the facts
warrant, determine that business was not properly brought before
the meeting in accordance with the provisions of this Article I,
Section 1, and if he should so determine, he shall so declare to
the meeting and any such business not properly brought before the
meeting shall not be transacted.
SECTION 2. Special meetings of the stockholders, when
called, shall be held at the office of the Company in the
District of Columbia and may be called by the Board of Directors,
or the Executive Committee, or the holders of record of not less
than one-fifth of all the outstanding shares entitled to vote at
the meeting, or, if the meeting is for the purpose of enabling
the holders of the Serial Preferred Stock of the Company to elect
directors upon the conditions set forth in the Articles of
Incorporation of the Company, such meeting shall be called as
therein provided.
SECTION 3. Written notice stating the place, day and hour
of each meeting of the stockholders and the purpose or purposes
for which the meeting is called shall be given not less than ten
days (or such longer period as may be prescribed by law) and not
more than fifty days before the date of the meeting to each
stockholder of record entitled to vote at the meeting, by
depositing such notice in the United States mail addressed to the
respective stockholders at their addresses as they appear on the
records of the Company, with postage thereon prepaid.
In connection with the first election of a portion of the
members of the Board of Directors by the holders of the Serial
Preferred Stock upon accrual of such right, as provided in the
Articles of Incorporation of the Company, the Company shall
prepare and mail to the holders of the Serial Preferred Stock
entitled to vote thereon such proxy forms, communications and
documents as may be deemed appropriate for the purpose of
soliciting proxies for the election of directors by the holders
of the Serial Preferred Stock.
The Secretary or an Assistant Secretary of the Company shall
cause to be made, at least ten days before each meeting of
stockholders, a complete list of the stockholders entitled to
vote at such meeting or any adjournment thereof, with the address
of and the number of shares held by each. Such list, for a
period of ten days prior to such meeting, shall be kept on file
at the principal place of business of the Company and shall be
subject to inspection for any proper purpose by any stockholder
at any time during usual business hours. Such list shall also be
produced and kept open at the time and place of the meeting and
shall be subject to the inspection for any proper purpose of any
stockholder during the whole time of the meeting.
SECTION 4. At each meeting of stockholders the holders of
record of a majority of the outstanding shares entitled to vote
at such meeting, represented in person or by proxy, shall
constitute a quorum, except as otherwise provided by law or by
the Articles of Incorporation of the Company. The affirmative
vote of the holders of a majority of the shares represented at a
duly organized meeting at which a quorum was present at the time
of organization, and entitled to vote on the subject matter,
shall be the act of the stockholders, unless the vote of the
holders of a greater number, or voting by classes, is required by
law or by the Articles of Incorporation of the Company and except
that in elections of directors those receiving the greatest
numbers of votes shall be deemed elected even though not
receiving a majority. If a meeting cannot be organized because a
quorum has not attended, the holders of a majority of the shares
represented at the meeting may adjourn the meeting from time to
time, without notice other than announcement at the meeting,
until a quorum shall have been obtained, when any business may be
transacted which might have been transacted at the meeting as
first convened had there been a quorum.
SECTION 5. Meetings of the stockholders shall be presided
over by the Chairman of the Board or, if he is not present, by
the President or, if neither is present, by a Vice Chairman or,
if no such officer is present, by a chairman to be chosen at the
meeting. The Secretary of the Company or, if he is not present,
an Assistant Secretary of the Company or, if neither is present,
a secretary to be chosen at the meeting, shall act as Secretary
of the meeting.
SECTION 6. Each stockholder entitled to vote at any meeting
may so vote either in person or by proxy executed in writing by
the stockholder or by his duly authorized attorney-in-fact and
shall be entitled to one vote on each matter submitted to a vote
for each share of stock of the Company having voting power
thereon registered in his name at the date fixed for the
determination of the stockholders entitled to vote at the
meeting.
SECTION 7. At all elections of directors the voting shall
be by ballot. At all such elections, the Chairman of the meeting
shall appoint two inspectors of election, unless such appointment
shall be unanimously waived by the stockholders present in person
or represented by proxy at the meeting and entitled to vote for
the election of directors. No director or candidate for the
office of director shall be appointed as such inspector. The
inspectors, before entering upon the discharge of their duties,
shall take and subscribe an oath or affirmation faithfully to
execute the duties of inspector at such meeting with strict
impartiality and according to the best of their ability, and
shall take charge of the polls and after the balloting shall make
a certificate of the result of the vote taken.
SECTION 8. In order to determine who are stockholders of
the Company for any proper purpose, the Board of Directors either
may close the stock transfer books or, in lieu thereof, may fix
in advance a date as the record date for such determination, such
date in any case to be not more than fifty days (and, in the case
of a meeting of stockholders, not less than ten days or such
longer period as may be required by law) prior to the date on
which the particular action, requiring such determination, is to
be taken. When such a record date has been so fixed for the
determination of stockholders entitled to vote at a meeting, such
determination shall apply to any adjournment thereof.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. The Board of Directors of the Company shall
consist of twelve persons, each of whom shall be a stockholder of
the Company. The directors shall be divided into three classes,
designated Class I, Class II, and Class III. Each of the classes
shall have four directors. At the 1987 annual meeting of
stockholders, Class I directors shall be elected for a one-year
term, Class II directors for a two-year term, and Class III
directors for a three-year term. At each succeeding annual
meeting of stockholders beginning in 1988, successors to the
class of directors whose term expires at that annual meeting
shall be elected for a three-year term. Except as otherwise
provided in the Articles of Incorporation of the Company and in
these By-Laws, the directors shall hold office until the annual
meeting of the stockholders for the year in which their
respective terms expire and until their respective successors
shall have been elected and qualified. No person shall be
eligible for election as a director after he shall have attained
his seventieth birthday, and no person shall be eligible to serve
as a director beyond the next annual meeting after he shall have
attained his seventieth birthday. Except for a director who is
serving or has served as Chief Executive Officer, no director who
is a full time employee of the Company shall be eligible to serve
as a director beyond the next annual meeting after termination of
his employment with the Company. Seven members of the Board
shall constitute a quorum for the transaction of business, but if
any meeting of the Board cannot be organized because a quorum has
not attended, a majority of those present may adjourn the meeting
from time to time, without notice other than announcement at the
meeting, until a quorum shall have been obtained, when any
business may be transacted which might have been transacted at
the meeting as first convened had there been a quorum. The acts
of a majority of the directors present at a meeting at which a
quorum is present shall, except as otherwise provided by law, by
the Articles of Incorporation of the Company, or by these By-
Laws, be the acts of the Board of Directors.
Only persons who are nominated in accordance with the
following procedures shall be eligible for election as Directors.
Nominations of persons for election to the Board of the Company
may be made at the annual meeting of stockholders by or at the
direction of the Board of Directors, by any nominating committee
or person appointed by the Board, or by any stockholder of the
Company entitled to vote for the election of Directors at the
meeting who complies with the notice procedures set forth in this
Article II, Section 1. Such nominations, other than those made
by or at the direction of the Board, shall be made pursuant to
timely notice in writing to the Secretary of Potomac Electric
Power Company. To be timely, a stockholder's notice shall be
received at the principal executive offices of the Company not
less than 50 days nor more than 75 days prior to the meeting;
provided, however, that in the event that less than 65 days'
notice or prior public disclosure of the date of the meeting is
given or made to stockholders, notice by the stockholder to be
timely must be so received not later than the close of business
on the fifteenth day following the day on which such notice of
the date of the meeting was mailed or such public disclosure was
made, whichever first occurs. Such stockholder's notice to the
Secretary shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or reelection as a
Director, (i) the name, age, business address and residence
address of the person, (ii) the principal occupation or
employment of the person, (iii) the class and number of shares of
capital stock of the Company that are beneficially owned by the
person and (iv) any other information relating to the person that
is required to be disclosed in solicitations for proxies for
election of Directors pursuant to Section 14(a) of the Securities
Exchange Act of 1934, as amended; and (b) as to the stockholder
giving the notice (i) the name and record address of the
stockholder and (ii) the class and number of shares of capital
stock of the Company that are beneficially owned by the
stockholder. The Company may require any proposed nominee to
furnish such other information as may reasonably be required by
the Company to determine the eligibility of such proposed nominee
to serve as Director of the Company. No person shall be eligible
for election as a Director of the Company unless nominated in
accordance with the procedures set forth herein.
The Chairman of the meeting shall, if the facts warrant,
determine that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so
declare to the meeting and the defective nomination shall be
disregarded.
The Board of Directors, as soon as is reasonably practicable
after the initial election of Directors by the stockholders in
each year, shall elect one of its number Chairman of the Board,
who may be, but is not required to be, an officer and employee of
the Company.
SECTION 2. Any vacancy, from any cause other than an
increase in the number of Directors, occurring among the
directors shall be filled without undue delay by a majority of
the remaining directors who were elected, or whose predecessors
in office were elected, by the same class of stockholders as that
which elected the last incumbent of the vacant directorship. The
term of any director elected by the remaining directors to fill a
vacancy (other than one caused by an increase in the number of
directors) shall expire at the next stockholders' meeting at
which directors are elected.
SECTION 3. Regular meetings of the Board of Directors shall
be held at the office of the Company in the District of Columbia
(unless otherwise fixed by resolution of the Board) at such time
as may from time to time be fixed by resolution of the Board.
Special meetings of the Board may be held upon call of the
Executive Committee, or the Chairman of the Board, or the
President, or a Vice Chairman, by oral, telegraphic or written
notice, setting forth the time and place (either within or
without the District of Columbia) of the meeting, duly served on
or sent or mailed to each director not less than two days before
the meeting. A meeting of the Board may be held without notice,
immediately after, and at the same place as, the annual meeting
of the stockholders. A waiver in writing of any notice, signed
by a director, whether before or after the time stated therein,
shall be deemed equivalent to the giving of such notice to such
director. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the Board need be
specified in any notice, or waiver of notice, of such meeting.
SECTION 4. Meetings of the Board of Directors shall be
presided over by the Chairman of the Board or, if he is not
present, by the President or, if neither is present, by a Vice
Chairman or, if no such officer is present, by a chairman to be
chosen at the meeting. The Secretary of the Company or, if he is
not present, an Assistant Secretary of the Company or, if neither
is present, a secretary to be chosen at the meeting, shall act as
secretary of the meeting.
SECTION 5. The Board of Directors may, by resolution or
resolutions adopted by not less than the number of directors
necessary to constitute a quorum of the Board, designate an
Executive Committee consisting of not less than three nor more
than seven directors. Except as otherwise provided by law, the
Executive Committee shall have and may exercise, when the Board
is not in session, all of the powers of the Board in the
management of the property, business and affairs of the Company;
but the Executive Committee shall not have power to fill
vacancies in the Board, or to change the membership of, or to
fill vacancies in, the Executive Committee, or to adopt, alter,
amend, or repeal by-laws of the Company. The Board shall have
the power at any time to fill vacancies in, to change the
membership of, or to dissolve, the Executive Committee. The
Executive Committee may make rules for the conduct of its
business and fix the time and place of its meetings, and may
appoint such committees and assistants as it shall from time to
time deem necessary. A majority of the members of the Executive
Committee shall constitute a quorum, and the acts of a majority
of the members of the Committee present at a meeting at which a
quorum is present shall be the acts of said Committee. All
action taken by the Executive Committee shall be reported to the
Board at its regular meeting next succeeding the taking of such
action.
SECTION 6. The Board of Directors may also, by resolution
or resolutions adopted by not less than the number of directors
necessary to constitute a quorum of the Board, designate one or
more other committees, each such committee to consist of such
number of directors as the Board may from time to time determine,
which, to the extent provided in said resolution or resolutions,
shall have and may exercise such limited authority as the Board
may authorize. Such committee or committees shall have such name
or names as the Board may from time to time determine. The Board
shall have the power at any time to fill vacancies in, to change
the membership of, or to dissolve, any such committee. A
majority, or such other number as the Board may designate, of the
members of any such committee shall constitute a quorum. Each
such committee may make rules for the conduct of its business and
fix the time and place of its meetings unless the Board shall
otherwise provide. All action taken by any such committee shall
be reported to the Board at its regular meeting next succeeding
the taking of such action, unless otherwise directed.
SECTION 7. The Board of Directors shall fix the
compensation to be paid to each director who is not a salaried
employee of the Company for serving as a director and for
attendance at meetings of the Board and committees thereof, and
may authorize the payment to directors of expenses incurred in
attending any such meeting or otherwise incurred in connection
with the business of the Company. This By-Law shall not be
construed to preclude any Director from serving the Company in
any other capacity and receiving compensation therefor.
SECTION 8. At a special meeting called expressly for such
purpose (i) any director elected by the holders of the Serial
Preferred Stock, or elected by directors to fill a vacancy among
the directors elected by the holders of such stock, may be
removed, only for cause, by a vote of the holders of a majority
of the shares of Serial Preferred Stock, and the resulting
vacancy may be filled, for the unexpired term of the director so
removed, by a vote of the holders of such Stock; and (ii) any
director elected by the holders of the Common Stock, or elected
by directors to fill a vacancy among the directors elected by the
holders of such stock, may be removed, only for cause, by a vote
of the holders of a majority of the shares of Common Stock, and
the resulting vacancy may be filled, for the unexpired term of
the director so removed, by a vote of the holders of such Stock.
SECTION 9. With respect to a Company officer, director, or
employee, the Company shall indemnify, and with respect to any
other individual the Company may indemnify, any person who was or
is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding (an "Action"),
whether civil, criminal, administrative, arbitrative or
investigative (including an Action by or in the right of the
Company) by reason of the fact that he is or was a director,
officer, employee or agent of the Company, or is or was serving
at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust
or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by him in connection with such Action;
except in relation to matters as to which he shall be finally
adjudged in such Action to have knowingly violated the criminal
law or be liable for willful misconduct in the performance of his
duty to the Company. The termination of any Action by judgment,
order, settlement, conviction, or upon a plea of nolo contendere
or its equivalent, shall not of itself create a presumption that
the person was guilty of willful misconduct.
Any indemnification (unless ordered by a court) shall be
made by the Company only as authorized in the specific case upon
a determination that indemnification of the director, officer,
employee or agent is proper in the circumstances because he has
met the applicable standard of conduct set forth above. In the
case of any director, such determination shall be made: (1) by
the Board of Directors by a majority vote of a quorum consisting
of directors who were not parties to such Action; or (2) if such
a quorum is not obtainable, by majority vote of a committee duly
designated by the Board of Directors (in which designation
directors who are parties may participate) consisting solely of
two or more directors not at the time parties to the proceeding;
or (3) by special legal counsel selected by the Board of
Directors or its committee in the manner prescribed by clause (1)
or (2) of this paragraph, or if such a quorum is not obtainable
and such a committee cannot be designated, by majority vote of
the Board of Directors, in which selection directors who are
parties may participate; or (4) by vote of the shareholders, in
which vote shares owned by or voted under the control of
directors, officers and employees who are at the time parties to
the Action may not be voted. In the case of any officer,
employee, or agent other than a director, such determination may
be made (i) by the Board of Directors or a committee thereof;
(ii) by the Chairman of the Board of the Company or, if the
Chairman is a party to such Action, the President of the Company,
or (iii) such other officer of the Company, not a party to such
Action, as such person specified in clause (i) or (ii) of this
paragraph may designate. Authorization of indemnification and
evaluation as to reasonableness of expenses shall be made in the
same manner as the determination that indemnification is
permissible, except that if the determination is made by special
legal counsel, authorization of indemnification and evaluation as
to reasonableness of expenses shall be made by those entitled
hereunder to select such legal counsel.
Expenses incurred in defending an Action for which
indemnification may be available hereunder shall be paid by the
Company in advance of the final disposition of such Action as
authorized in the manner provided in the preceding paragraph,
subject to execution by the person being indemnified of a written
undertaking to repay such amount if and to the extent that it
shall ultimately be determined by a court that such
indemnification by the Company is not permitted under applicable
law.
It is the intention of the Company that the indemnification
set forth in this Section 9 of Article II, shall be applied to no
less extent than the maximum indemnification permitted by law.
In the event that any right to indemnification or other right
hereunder may be deemed to be unenforceable or invalid, in whole
or in part, such unenforceability or invalidity shall not affect
any other right hereunder, or any right to the extent that it is
not deemed to be unenforceable. The indemnification provided
herein shall be in addition to, and not exclusive of, any other
rights to which those indemnified may be entitled under any by-
law, agreement, vote of stockholders, or otherwise, and shall
continue as to a person who has ceased to be a director, officer,
employee, or agent and inure to the benefit of such person's
heirs, executors, and administrators.
SECTION 10. The Board of Directors may, in its discretion,
at any time elect one or more persons to the position of Advisory
Director, to serve as such during the pleasure of the Board, but
no person shall be eligible to serve as an Advisory Director
beyond the next annual meeting after he shall have attained his
seventy-second birthday. Advisory Directors so elected by the
Board shall be entitled to attend, and take part in discussions
at, meetings of the Board of Directors, but shall not be
considered members of the Board for quorum or voting purposes.
Advisory Directors shall receive the same compensation as members
of the Board.
SECTION 11. In any proceeding brought by a stockholder in
the right of the Company or brought by or on behalf of the
stockholders of the Company, no monetary damages shall be
assessed against an officer or director. The liability of an
officer or director shall not be limited as provided in this
section if the officer or director engaged in willful misconduct
or a knowing violation of the criminal law.
ARTICLE III
OFFICERS
SECTION 1. The Board of Directors, as soon as reasonably
practicable after the initial election of directors by
stockholders in each year, shall elect a President, may elect one
or more Vice Chairmen and shall elect one or more Vice Presidents
(who may be given such other descriptive titles as the Board may
specify), a Secretary, a Treasurer and a Comptroller, and from
time to time may elect such Assistant Secretaries, Assistant
Treasurers, Assistant Comptrollers and other officers, and
appoint such other agents, as it may deem desirable. Any two or
more offices may be held by the same person, except the offices
of President and Secretary. The Board of Directors shall elect
the Chairman of the Board or one of the above officers Chief
Executive Officer of the Company.
SECTION 2. The term of office of all officers shall be
until the next succeeding annual election of officers and until
their respective successors shall have been elected and
qualified; but any officer or agent elected or appointed by the
Board of Directors may be removed, with or without cause, by the
affirmative vote of a majority of the members of the Board
whenever in their judgment the best interests of the Company will
be served thereby. Such removal shall be without prejudice to
contract rights, if any, of the person so removed. Election or
appointment of an officer or agent shall not of itself create
contract rights. Unless specifically authorized by resolution of
the Board of Directors, no agreement for the employment of any
officer for a period longer than one year shall be made.
SECTION 3. Subject to such limitations as the Board of
Directors or the Executive Committee may from time to time
prescribe, the officers of the Company shall each have such
authority and perform such duties in the management of the
property, business and affairs of the Company as by custom
generally pertain to their respective offices, as well as such
authority and duties as from time to time may be conferred by the
Board of Directors, the Executive Committee or the Chief
Executive Officer.
SECTION 4. The salaries of all officers, employees and
agents of the Company shall be determined and fixed by the Board
of Directors, or pursuant to such authority as the Board may from
time to time prescribe.
ARTICLE IV
CERTIFICATES OF STOCK
SECTION 1. The shares of the capital stock of the Company
shall be represented by certificates, provided that the Board of
Directors of the Company may provide by resolution that some or
all of the shares of any or all of its classes or series of
capital stock may be uncertificated shares. Except as otherwise
expressly provided by law, the rights and obligations of the
holders of uncertificated shares and the rights and obligations
of the holders of certificates representing shares of the same
class and series shall be identical. Shares of the capital stock
of the Company that are evidenced by certificates shall be in
such form as the Board of Directors may from time to time
prescribe. Such certificates shall be signed by the President or
a Vice President and by the Secretary or an Assistant Secretary,
shall be sealed with the seal of the Company, or a facsimile
thereof, shall be countersigned and registered in such manner, if
any, as the Board may by resolution prescribe. Where such a
certificate is countersigned by a transfer agent (other than the
Company or an employee of the Company), or by a transfer clerk
and registered by a registrar, the signatures thereon of the
President or Vice President and the Secretary or Assistant
Secretary may be facsimiles. In case any officer who has signed
or whose facsimile signature has been placed upon any such
certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the Company with the
same effect as if such officer had not ceased to hold such office
at the date of its issue.
SECTION 2. The shares of the capital stock of the Company
shall be transferable on the books of the Company by the holders
thereof in person or by duly authorized attorney, and, if
represented by certificates, upon surrender and cancellation of
the certificates evidencing such shares, with duly executed
assignment and power of transfer endorsed thereon or attached
thereto, and with such proof of the authenticity of the
signatures as the Company or its agents may reasonably require
and, if uncertificated, upon receipt of appropriate instructions.
SECTION 3. No certificate evidencing shares of the capital
stock of the Company shall be issued in place of any certificate
alleged to have been lost, stolen, or destroyed, except upon
production of such evidence of the loss, theft or destruction,
and upon such indemnification of the Company and its agents by
such person or persons and in such manner, as the Board of
Directors may from time to time prescribe.
ARTICLE V
CHECKS, NOTES, CONTRACTS, ETC.
All checks and drafts on the Company's bank accounts, bills
of exchange, promissory notes, acceptances, obligations, other
instruments for the payment of money, and endorsements other than
for deposit in a bank account of the Company shall be signed by
the Treasurer or an Assistant Treasurer and shall be
countersigned by the Chief Executive Officer, the President, a
Vice Chairman or a Vice President, unless otherwise authorized by
the Board of Directors; provided that checks drawn on the
Company's dividend and/or special accounts may bear the manual
signature, or the facsimile signature, affixed thereto by a
mechanical device, of such officer or agent as the Board of
Directors shall authorize.
All contracts, bonds and other agreements and undertakings
of the Company shall be executed by the Chief Executive Officer,
the President, a Vice Chairman or a Vice President and by such
other officer or officers, if any, as may be designated, from
time to time, by the Board of Directors and, in the case of any
such document required to be under seal, the corporate seal shall
be affixed thereto and attested by the Secretary or an Assistant
Secretary.
Whenever any instrument is required by this Article to be
signed by more than one officer of the Company, no person shall
so sign in more than one capacity.
ARTICLE VI
FISCAL YEAR
The fiscal year of the Company shall begin on the first day
of January in each year and shall end on the thirty-first day of
December following.
ARTICLE VII
OFFICES
The principal office of the Company shall be situated in the
District of Columbia. The registered office of the Company in
Virginia shall be situated in the County of Fairfax. The Company
may have such other offices at such places, within the District
of Columbia, the Commonwealth of Virginia, or elsewhere, as shall
be determined from time to time by the Board of Directors or by
the Chief Executive Officer.
ARTICLE VIII
AMENDMENTS
Except as otherwise provided by law, the Board of Directors
may alter, amend, or repeal the By-Laws of the Company, or adopt
new By-Laws, at any meeting of the Board, by the affirmative vote
of not less than the number of directors necessary to constitute
a quorum of the Board.
Exhibit 13
Financial Information
---------------------
Potomac Electric Power Company and Subsidiaries
Contents
--------
Management's Discussion and Analysis of
Consolidated Results of Operations and
Financial Condition...................................... 2
Management's Report on the Consolidated Financial
Statements............................................... 26
Report of Independent Accountants.......................... 27
Consolidated Statements of Earnings........................ 28
Consolidated Balance Sheets................................ 29
Consolidated Statements of Cash Flows...................... 31
Notes to Consolidated Financial Statements................. 32
Selected Consolidated Financial Data....................... 70
Explanation of Graphic Material.................... Appendix A
1
Management's Discussion and Analysis of Consolidated
Results of Operations and Financial Condition
----------------------------------------------------
GENERAL
-------
As an investor-owned electric utility, Potomac Electric Power
Company (the Company, PEPCO) is capital intensive, with a gross
investment in property and plant of approximately $3 for each $1
of annual total revenue. The costs associated with property and
plant investment amounted to 48% of the Company's total revenue
in 1994. Fuel and purchased energy, capacity purchase payments
and other operating expenses were 52% of total revenue. The
Company's principal wholly owned subsidiary, Potomac Capital
Investment Corporation (PCI), conducts nonutility investment
programs with the objective of supplementing current utility
earnings and building long-term shareholder value.
The information set forth below discusses the results of
operations, capital resources and liquidity during the period
1992 through 1994 for the Company and PCI.
The Company's earnings for common stock during 1994 totaled
$210.7 million, as compared to $225.3 million in 1993. As set
forth below, earnings per share for common stock decreased from
$1.95 in 1993 to $1.79 for 1994. The 1992 earnings per share
amount from utility operations shown below includes $.14 as the
cumulative effect of an accounting change for unbilled revenue.
-----------------------------------------------------------------
1994 1993 1992
-----------------------------------------------------------------
Utility Operations $1.63 $1.73 $1.55
Nonutility Subsidiary .16 .22 .25
----- ----- -----
Consolidated $1.79 $1.95 $1.80
===== ===== =====
----------------------------------------------------------------
The average number of common shares outstanding at December 31,
1994 increased by 2.4 million shares as compared to December 31,
1993.
Utility earnings for 1994 reflect the effect on electricity
sales and revenue of mild weather during the 1994 summer cooling
season as compared to the unseasonably hot weather during the
1993 summer cooling season, partially offset by the continued
effect of the 1993 base rate increases in Maryland. Although
1994 revenue increased as a result of the base rate increase
authorized by the District of Columbia during the year, the
2
earnings impact was limited since this revenue increase was
substantially offset by write-offs resulting from the rate order,
as explained in the discussion of "Other Income" below.
UTILITY
-------
Results of Operations
---------------------
Total Revenue
-------------
The changes in total revenue are shown in the following table.
-----------------------------------------------------------------
Increase (Decrease)
from Prior Year
1994 1993 1992
-----------------------------------------------------------------
(Millions of Dollars)
Change in kilowatt-hour sales $(18.7) $ 87.0 $(39.1)
Change in base rate revenue 32.2 45.4 71.8
Change in fuel adjustment clause
billings to cover cost of
fuel and interchange and
capacity purchase payments 73.2 8.0 (19.2)
Change in other revenue 1.5 (.1) (3.4)
------ ----- -----
Change in Operating Revenue 88.2 140.3 10.1
------ ------ ------
Change in interchange deliveries 9.7 (16.7) (27.9)
------ ------ ------
Change in Total Revenue $ 97.9 $123.6 $(17.8)
====== ====== ======
-----------------------------------------------------------------
The $32.2 million change in 1994 base rate revenue compared
to 1993 reflects the effect of a District of Columbia rate
increase of $26.7 million (effective primarily in March 1994) and
the continued effect of 1993 rate increases in Maryland. Also,
1994 revenue reflects cooler weather during the summer billing
months of June through October as compared to the warmer than
average weather during the corresponding period in 1993. Summer
period base rates are high to encourage customer conservation and
peak load shifting. In addition, 1994 base rate revenue reflects
approximately $5 million for achieving specified 1993 Maryland
energy goals associated with the conservation incentive provision
of the Company's Demand Side Management (DSM) surcharge tariff.
3
The increase in base rate revenue in 1993 as compared to
1992 reflects the effects of Maryland rate increases of $7.3
million (effective June 1993) and $27 million (effective November
1993) and the continued effect of 1992 rate increases in both of
the Company's retail jurisdictions. Also, 1993 revenue reflects
warmer than average weather during the summer billing months of
June through October.
Base rate revenue for 1992 compared to 1991 was increased by
approximately $9 million from a gross receipts tax rate increase
implemented in the District of Columbia in July 1991, and in
effect throughout 1992, and approximately $14 million from higher
fuel and energy taxes in Montgomery County, Maryland; also by a
$30.4 million District of Columbia rate increase (effective July
1992) and a $25.3 million Maryland rate increase, of which $18
million became effective in December 1992. Mild weather during
the peak period summer billing months June through October had an
adverse effect on 1992 revenue.
An increase in 1994 and decreases in 1993 and 1992 in
revenue from interchange deliveries reflect changes in levels and
pricing in energy delivered to the Pennsylvania-New Jersey-
Maryland Interconnection Association (PJM). Interchange
deliveries continue to be a component of the Company's fuel
rates.
4
Kilowatt-hour Sales
-------------------
-----------------------------------------------------------------
1994 1993
vs. vs.
1994 1993 1992 1993 1992
-----------------------------------------------------------------
(Millions of Kilowatt-hours)
By Customer Type
Residential 6,574 6,727 6,142 (2.3)% 9.5%
Commercial 11,685 11,751 11,391 (.6) 3.2
U.S. Government 4,010 3,986 3,948 .6 1.0
D.C. Government 914 903 873 1.2 3.4
Wholesale 2,363 2,327 2,130 1.5 9.2
------ ------ ------
Total energy sales 25,546 25,694 24,484 (.6) 4.9
====== ====== ======
Interchange
Energy deliveries 800 483 771 65.6 (37.4)
====== ====== ======
By Geographic Area
Maryland, including
wholesale 15,251 15,319 14,441 (.4) 6.1
District of Columbia 10,295 10,375 10,043 (.8) 3.3
------ ------ ------
Total energy sales 25,546 25,694 24,484 (.6) 4.9
====== ====== ======
-----------------------------------------------------------------
The slight decrease in kilowatt-hour sales in 1994,
following a 4.9% increase in 1993, reflects primarily decreased
customer usage of electricity during the summer cooling season
(June through October) due to mild weather during these months as
compared to the unseasonably hot weather during the same period
in 1993, partially offset by an increase of .9% in the number of
customers. Cooling degree hours during 1994 were 14% below those
in 1993 and 5% above the 20-year average. The increase in
kilowatt-hour sales in 1993 compared to 1992 reflects increased
customer usage during the summer cooling season due to warmer
than average weather. Cooling degree hours during 1993 were 97%
above those in 1992 and 22% above the 20-year average. Assuming
future weather conditions approximate historical averages, the
Company expects its compound annual growth in kilowatt-hour sales
to range between 1% and 2% over the next decade.
The Company's 1994 summer peak demand was 5,660 megawatts,
1.6% below the 1993 summer peak demand of 5,754 megawatts and
1.9% below the all-time summer peak demand of 5,769 megawatts
which occurred in July 1991. The Company's present generation
capability, including capacity purchase contracts, is 6,723
megawatts. To meet the 1994 summer peak demand, the Company had
5
256 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 all-time winter peak
demand of 5,010 megawatts was established in January 1994, which
was 11.1% above the previous winter peak demand of 4,511
megawatts which occurred in December 1989.
Operating Expenses
------------------
Fuel, Purchased Energy and Capacity Purchase Payments
-----------------------------------------------------
1994 1993 1992
-----------------------------------------------------------------
(Millions of Dollars)
Fuel expense $392.7 $354.3 $345.5
------ ------ ------
Purchased energy
PJM receipts 108.8 108.9 94.6
Other purchases 64.6 64.5 72.0
------ ------ ------
Total purchased energy 173.4 173.4 166.6
------ ------ ------
Fuel and purchased energy $566.1 $527.7 $512.1
====== ====== ======
Capacity purchase payments $127.8 $ 96.3 $ 95.5
====== ====== ======
-----------------------------------------------------------------
Net System Generation and Purchased Energy were as follows.
-----------------------------------------------------------------
1994 1993 1992
-----------------------------------------------------------------
(Millions of Kilowatt-hours)
Net system generation 19,320 19,145 18,274
====== ====== ======
Purchased energy 8,356 8,448 8,251
====== ====== ======
-----------------------------------------------------------------
The 1994 increase in fuel expense reflects an increase of
.9% in net generation and increased use of major cycling and
peaking generation units which burn higher costs fuels. During
January 1994, severe cold weather sent demand for electricity to
a new winter peak, which required significantly increased net
generation. Major cycling and peaking generation units were used
to meet the increased demand. The 1993 increase in fuel expense
primarily reflects a 4.8% increase in net generation resulting
6
from the increase in kilowatt-hour sales, partially offset by the
Company's ability to purchase low-cost economy energy from PJM
which helped keep the fuel expense increase to a minimum. Fuel
expense in 1992 primarily reflects a decrease in net generation
and increased purchases of low-cost economy energy from PJM.
The Company's unit costs of fuel burned and the percentages
of system fuel requirements obtained from coal, oil and natural
gas were as shown in the following table.
-----------------------------------------------------------------
Percent of Unit Cost
Fuel Burned of Fuel Burned
------------------- --------------------------------
System
Coal Oil Gas Coal Oil Gas Average
-----------------------------------------------------------------
(Per Million Btu)
1994 76.1 18.4 5.5 $1.73 $2.70 $2.49 $1.95
1993 79.4 17.4 3.2 1.72 2.55 2.88 1.90
1992 82.9 12.6 4.5 1.72 2.50 2.32 1.85
-----------------------------------------------------------------
The increase of approximately 3% in each of the past two
years in the system average unit fuel cost resulted from
increased use of major cycling and peaking generation units which
burn higher cost fuels. The Company's major cycling and certain
peaking units can burn natural gas or oil, adding flexibility in
selecting the most cost-effective fuel mix. The increase in the
actual percent of gas contribution in 1994 to the fuel mix
reflects the decreased price of gas and the increased price of
oil. The decrease in the actual percent of coal contribution to
the fuel mix in 1994 primarily reflects major outages for
construction related to Clean Air Act additions on baseload coal-
fired generation units.
The Company's generating and transmission facilities are
interconnected with the other members of 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. "Other Purchases" above
includes the cost of this energy together with purchases of
energy from Ohio Edison under the Company's 1987 long-term
capacity purchase agreements with Ohio Edison and APS.
7
The capacity purchase payments referred to in the table
above include capacity costs incurred under agreements with Ohio
Edison and Southern Maryland Electric Cooperative, Inc. (SMECO),
which compare favorably with other long-term capacity and energy
alternatives. Pursuant to the Company's long-term capacity
purchase agreements with Ohio Edison and APS, the Company is
purchasing 450 megawatts of capacity and associated energy
through the year 2005. The monthly capacity commitment under
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 1994, with
provision for escalation in 1999. In addition, effective June 1,
1994 through May 31, 1995, the Company is purchasing 147
megawatts of capacity from Pennsylvania Power and Light Company
at a total cost of $3 million.
The Company has a purchase agreement with SMECO, through
2015, for 84 megawatts of capacity supplied by a combustion
turbine installed and owned by SMECO at the Company's Chalk Point
Generating Station. The Company is responsible for all costs
associated with operating and maintaining the facility. The
capacity payment to SMECO is $462,000 per month.
Other Operation and Maintenance Expenses
----------------------------------------
Other operation and maintenance expenses totaled $298.7 million
for 1994. These expenses decreased by $2.8 million (.9%) in 1994
and increased by $6.2 million (2.1%) and $8.1 million (2.8%) in
1993 and 1992, respectively. The relative stability in other
operation and maintenance expense was achieved through the
Company's budget and cost control disciplines, which over the
past three years have resulted in a 6% decline in the number of
Company employees, and other programs to curb increases in
expenses. In September 1994, to further reduce future costs and
staffing levels, the Company announced a Voluntary Severance
Program (VSP). As an incentive to voluntarily sever employment
no later than the first quarter of 1995, the VSP offered a
severance payment to any full-time employee with five or more
years of service with the Company, based on two weeks of pay for
each year of service, not to exceed 52 weeks of pay.
Approximately 340 of the Company's employees will participate in
the VSP. During January 1995, approximately $7.4 million in
severance costs was expensed. For 1994 and 1993, respectively,
other operation expense included $8.7 million and $9.3 million
for the accrual of postretirement expenses other than pensions,
pursuant to Statement of Financial Accounting Standards (SFAS)
No. 106. See the discussion included in Note (3) of the Notes to
Consolidated Financial Statements, Pensions and Other
Postretirement and Postemployment Benefits, for additional
information.
8
Depreciation and Amortization Expense, Income Taxes and
Other Taxes
-------------------------------------------------------
Depreciation and amortization expense increased by $16.4 million
(10%), $13.8 million (9.2%) and $15.4 million (11.5%) in 1994,
1993 and 1992, respectively, due to additional investment in
property and plant and amortization of increased amounts of
conservation program costs. The increase in income taxes in 1994
reflects an increase in taxable operating income. The 1993
increase in income taxes reflect the higher federal income tax
rate which became effective in 1993 and higher taxable income.
Income taxes in 1992 reflect lower taxable income. Other taxes
increased by $4.8 million (2.4%), $7.1 million (3.6%) and $27.7
million (16.6%) in 1994, 1993 and 1992, respectively. The
increases reflect changes in the levels of operating revenue and
plant investment upon which taxes are based. The substantial
1992 increase resulted from increases in gross receipts and fuel
and energy tax rates.
Other Income, Net Utility Interest Charges and Allowance
for Funds Used During Construction
--------------------------------------------------------
Other income reflects the net earnings from the Company's
nonutility subsidiary of $19.1 million in 1994, $25.1 million in
1993 and $28.2 million in 1992. See the Nonutility Subsidiary
discussion below and the discussion included in Note (15) of the
Notes to Consolidated Financial Statements, Selected Nonutility
Subsidiary Financial Information. In addition, other income in
1994 reflects a total after tax reduction of approximately $4.1
million in connection with District of Columbia Public Service
Commission decisions. This includes disallowance of rate case
test period DSM program expenditures, adoption of an unbilled
revenue adjustment applicable to the District of Columbia portion
of the 1992 accounting change related to unbilled revenue and
adoption of a three-year phase-in period to reflect increased
postretirement benefit costs. See Base Rate Proceedings,
District of Columbia, for additional information. In addition,
other income reflects accrued capital cost recovery factor (CCRF)
amounts in "Other, net" of $10.2 million, $8 million and $2.9
million in 1994, 1993 and 1992, respectively. CCRF is a
mechanism which enables the Company to earn a return on certain
costs, principally unamortized DSM costs, which are not in rate
base. In general, CCRF is earned only on costs specifically
allowed by the Company's regulators with provision for cost
recovery on a jurisdictional basis. "Other, net" also includes
$2.8 million in 1993 from the adoption of SFAS No. 109. See Note
(4) of the Notes to Consolidated Financial Statements, Income
Taxes, for additional information.
9
Net utility interest charges were relatively stable during
the three-year period 1992 through 1994, notwithstanding
increased levels of borrowing. Short-term borrowing costs have
remained relatively low and, with the refinancing of higher cost
issues, the average cost of outstanding long-term utility debt
declined from 8.26% at the beginning of 1992 to 7.56% at the end
of 1994. Allowance For Funds Used During Construction (AFUDC)
credits, which decreased during the period 1992 through 1994,
relate to portions of the Company's Construction Work In Progress
investment. See the Construction and Capacity Additions
discussion below.
CAPITAL RESOURCES AND LIQUIDITY
-------------------------------
The Company's total investment in property and plant, at original
cost, was $5.9 billion at year-end 1994. Investment in property
and plant construction, net of AFUDC, was $926.1 million for the
period 1992 through 1994.
Internally generated cash from utility operations, after
dividends, totaled $268.4 million for the period 1992 through
1994. Sales of First Mortgage Bonds, Medium-Term Notes,
Convertible Debentures, Serial Preferred Stock and Common Stock
during the period 1992 through 1994 provided a total of $1.3
billion. During the years 1992 through 1994, the Company retired
$916.7 million in outstanding long-term securities, including
refinancings, scheduled debt maturities and sinking fund
retirements. Interim financing was provided principally through
the issuance of short-term commercial promissory notes. During
the three-year period 1995 through 1997, capital resources of
$233.5 million ($45.4 million in 1995) will be required to meet
scheduled debt maturities and sinking fund requirements, and
additional amounts will be required for working capital and other
needs. Approximately $758 million is expected to be available
from depreciation and amortization charges and income tax
deferrals over the three-year period of which approximately $244
million is the 1995 portion.
During 1994, the Company sold $80.8 million principal amount
of First Mortgage Bonds, $225 million principal amount of Medium-
Term Notes and $9.3 million of Common Stock. Proceeds, together
with proceeds from a sale and leaseback agreement discussed
below, were applied to meet construction requirements of $298.1
million, scheduled debt maturities, sinking fund requirements and
the refinancing of higher cost debt totaling $144.4 million and
to reduce short-term borrowings by $105 million. See the
discussion included in Notes (7) and (10) of the Notes to
Consolidated Financial Statements, Common Equity and Long-Term
Debt, respectively, for additional information.
10
Reflecting the refinancings of debt and the respective
principal amounts outstanding, total annualized interest costs
for all utility long-term debt outstanding at December 31, 1994
was $123.7 million, compared with $114 million and $131.9 million
at December 31, 1993 and 1992, respectively.
During December 1994, the Company entered into a sale (at
cost) and leaseback agreement for its new control center system
(system). The system is an integrated energy management system
used by the Company's power dispatchers to centrally control the
operation of the Company's electric system, which consists of all
of its generating units, the transmission system and the
distribution system. The Company has accounted for the lease of
the system as a capital lease, recorded at the present value of
future lease payments which totaled $152 million at December 31,
1994. The lease requires semi-annual payments of $7.6 million
over a 25-year period. This lease has been treated as an
operating lease for ratemaking purposes.
Dividends on preferred stock were $16.4 million in 1994,
$16.3 million in 1993 and $14.4 million in 1992. The embedded
cost of preferred stock was 6.37% at December 31, 1991, and 6.53%
at December 31, 1994.
The Company's capitalization ratios (excluding nonutility
subsidiary debt), at December 31, 1994, are presented below.
-----------------------------------------------------------------
Excluding Including
Amounts Due Amounts Due
In One Year In One Year
-----------------------------------------------------------------
Long-term debt 43.7% 41.2%
Redeemable serial preferred stock 3.6 3.4
Serial preferred stock 3.2 3.0
Common equity 49.5 46.8
Short-term debt and amounts due in
one year - 5.6
----- -----
Total capitalization 100.0% 100.0%
===== =====
-----------------------------------------------------------------
In September 1994, the Company filed for a 5.3% increase in
the Maryland fuel rate, 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
11
reflect a reduction in the unrecovered amount at October 31, 1994
to $21.1 million. A final order is expected during the first
quarter of 1995. Based on results for the period ended November
30, 1994, the Company filed for a fuel rate reduction in Maryland
of 5.3%.
Year-end 1994 outstanding utility short-term indebtedness
totaled $189.6 million compared with $294.6 million and $61.6
million at the end of 1993 and 1992, respectively. At year-end
1994, the formula adopted by the Securities and Exchange
Commission would have permitted the Company to issue, without
registration, a total of $448 million in commercial promissory
notes.
The Company maintains a minimum 100% line of credit back-up
for its outstanding commercial promissory notes, which was unused
during 1994, 1993 and 1992.
1994 Least-Cost Resource Plan
-----------------------------
The Company's 1994 energy plan, which was filed with regulators
in June 1994, is an integrated least-cost resource plan. As part
of the 1994 planning process, the Company has reassessed each of
its existing conservation programs. To reduce the near-term
upward pressure on prices and total customer bills, the Company
proposes to limit its current offering of DSM programs to those
with the strongest cost benefit results and has reduced
previously planned five-year conservation expenditures by
approximately $120 million.
Conservation
------------
The Company's conservation and energy use management 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. During 1994,
the Company reevaluated its conservation programs, including
additional review and consideration of the current and
prospective effect of these programs on customer rates and bills.
As a result of this reevaluation, the Company phased out several
conservation programs and reduced rebate levels for others. In
addition, in November 1994 the Company temporarily suspended
approval of additional applications for its Custom Rebate
Program. 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. The Company expects approximately 80% of the previously
estimated benefits from conservation for approximately 45% of
estimated cost.
12
For residential customers the Company continues to offer
rebates for high efficiency heating and air conditioning
equipment. These rebates are paid directly to customers when
customers buy equipment which significantly exceeds the
efficiency of average available equipment.
In 1995, the Company expects to resume operation of its
highly successful Custom Rebate Program for commercial customers.
This program pays rebates to customers who install energy
efficient lighting, motors, heating and cooling systems and other
measures. The Company also continues to operate the New Building
Design Program, which offers cash incentives as well as technical
assistance to developers and designers who incorporate energy
efficient designs and equipment in new commercial construction.
During 1994, the Company invested approximately $90 million
in energy conservation programs. The Company recovers the costs
of its conservation programs in its Maryland jurisdiction through
a rate surcharge which amortizes costs over a five year period
and permits the Company to earn a return on its conservation
investment while receiving compensation for lost revenue. In
addition, when the Company's performance exceeds its annual
goals, the Company earns a performance bonus. The Company was
awarded a bonus of approximately $5 million in 1994 based on its
1993 performance. At the end of 1994 the conservation surcharge
in Maryland was $.00338 per kilowatt-hour.
In the District of Columbia, conservation costs are
amortized over 10 years with an accrued return on unamortized
costs. To date, costs have been considered in base rate cases.
In March 1994, the District of Columbia Public Service Commission
denied cost recovery for 25% of the test year cost of operating
jurisdictional programs between rate case test years. The
disallowed costs totaled $2.2 million on an after tax basis. In
response to the Company's request for reconsideration, the
Commission directed that the Company's 1994 Least-Cost Plan
filing include a proposed mechanism for rate recognition of costs
between base rate cases. The Company has appealed the
disallowance of DSM costs to the District of Columbia Court of
Appeals on the basis of the absence of record evidence supporting
this action and expects to receive an order on appeal in the
second quarter of 1995.
In 1994, approximately 151,000 customers participated in
continuing energy use management programs which cycle air
conditioners and water heaters during peak periods. In addition,
the Company operates a commercial load program which provides
incentives to customers for reducing energy use during peak
periods. Time-of-use rates have been in effect since the early
1980s and currently approximately 60% of the Company's revenue is
based on time-of-use rates.
13
It is estimated that peak load reductions of approximately
525 megawatts have been achieved to date from conservation and
energy use management programs and that additional peak load
reductions of approximately 380 megawatts will be achieved in the
next five years. The Company also estimates that in 1994 energy
savings of more than 760 million kilowatt-hours have been
realized through operation of its conservation and energy use
management programs. 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.
Construction and Generating Capacity
------------------------------------
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
expenditures. In 1995, construction expenditures are projected
to total $215 million, which includes $33 million of estimated
Clean Air Act 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.
A 40-megawatt resource recovery facility with which the
Company has a contract is now under construction in Montgomery
County, Maryland. 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.
This project has received a certificate of convenience and
necessity from the Maryland Public Service Commission. These
nonutility generation projects are expected to begin operating in
1995 and 1996, respectively. The Company currently projects that
existing contracts for nonutility generation and the Company's
commitment to conservation will provide adequate reserve margins
to meet customers' needs 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 combustion turbine units, one of
which was installed in 1992 and one of which was installed in
1993.
14
CLEAN AIR ACT
-------------
The Company has developed cost-effective plans for complying with
the Clean Air Act (CAA) which requires the reduction of sulfur
dioxide and nitrogen oxides emissions in two phases to achieve
prescribed standards. Installation of scrubbers is not
contemplated for the Company's wholly owned plants. 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 CAA related capital expenditures totaling $165
million over the next five years. The plans call for replacement
of boiler burner equipment for nitrogen oxides emissions control,
the use of lower-sulfur fuel and cofiring with natural gas at
selected baseload plants. The CAA allows companies to achieve
required emission levels by using a market-based emission
allowance trading system. If economical, emission allowances may
be purchased in lieu of burning lower-sulfur fuel.
During 1994, the Company entered into an agreement with
Emissions Exchange Corporation (EX) to exchange emission
allowances. The Company delivered to EX 25,000 allowances with
vintage dates of 1999 or earlier in exchange for receiving 30,000
allowances with vintage dates of 2004 or earlier in equal
installments in each of the years 2000 through 2004. This
agreement allows the Company to enter the CAA Phase II with a
reserve bank of allowances by trading allowances not currently
required for a greater number of future allowances, avoiding
price risks associated with selling excess Phase I and purchasing
Phase II allowances.
The Company owns a 9.72% undivided interest in the Conemaugh
Generating Station located in western Pennsylvania. As a result
of installing flue gas scrubbing equipment to meet Phase I
requirements of the CAA, this station will receive additional
allowances. The Company's share of these "bonus" allowances may
be used to reduce the need for lower-sulfur fuel at its other
plants. See the discussion included in Note (6) of the Notes to
Consolidated Financial Statements, Jointly Owned Generating
Facilities, for additional information.
BASE RATE PROCEEDINGS
---------------------
The Company is subject to utility rate regulation based upon the
historical costs of plant investment, using recent test years to
measure the cost of providing service. The rate-making process
does not give recognition to the current cost of replacing plant
and the impact of inflation. Possible changes in industry
15
structure and regulation may affect the extent to which future
rates are based upon current costs of providing service. The
regulatory commissions have authorized fuel rates which provide
for billing customers on a timely basis for the actual cost of
fuel and interchange, for purchased capacity in the District of
Columbia and emission allowance costs in both retail
jurisdictions.
Annual base rate increases which became effective during the
period 1992 through 1994 are shown below.
-----------------------------------------------------------------
District
of
Year Total Maryland Columbia Wholesale
-----------------------------------------------------------------
(Millions of Dollars)
1994 $ 29.3 $ - $26.7 $2.6
1993 38.1 34.3 - 3.8
1992 51.2 18.0 30.4 2.8
------ ----- ----- ----
$118.6 $52.3 $57.1 $9.2
====== ===== ===== ====
-----------------------------------------------------------------
Maryland
--------
In October 1993, pursuant to a settlement agreement, the
Commission authorized a $27 million, or 3%, increase in base rate
revenue effective November 1, 1993. The settlement included a
new system composite depreciation rate of approximately 3.1%, up
from the 3% rate previously in effect. The Commission previously
authorized an increase in base rate revenue of $7.3 million,
effective June 1, 1993, pursuant to an October 1992 settlement
agreement. In connection with the settlement agreements, no
determination was made with respect to rate of return. The rate
of return on common stock equity most recently determined for the
Company in a fully litigated rate case was 12.75% established by
the Commission in a June 1991 rate increase order.
District of Columbia
--------------------
In its pending base rate proceeding, the Company is currently
seeking a $60.6 million, or 8.2%, increase in base rate revenue,
based upon a 1994 calendar year test period and a return of 9.92%
on average rate base, including a 12.75% return on common stock
equity. This case was filed on September 30, 1994, requesting a
$67 million, or 9%, increase in base rate revenue. The Company
updated its initial cost of service data filing to reduce the
request to $60.6 million to reflect subsequent events which
included the sale and leaseback of the Control Center Replacement
16
project, a reduction in the 1995 District of Columbia income tax
rate, an approved traffic signal maintenance deregulation
agreement with the District of Columbia and an increase in the
FICA tax wage base. In accordance with Commission directives,
the Company has included conservation program expenditures
subsequent to June 1993 in the proposed Environmental Cost
Recovery Rider in its pending Least-Cost Planning proceeding
filed in June 1994. It is expected that both proceedings will be
concluded by mid-1995. On January 17, 1995, the Commission Staff
filed testimony recommending a $37.1 million rate increase.
In May 1994, the Commission ruled on the application for
reconsideration of its March 1994 rate order. The Commission's
original order authorized the Company to increase its base rates
by a total of $25.4 million in two steps: an increase of $23.2
million effective March 16, 1994 and an increase of $2.2 million
effective June 5, 1994. The order on reconsideration authorized
an additional "step 2" base rate increase of $1.3 million
resulting in a total base rate increase of $26.7 million. Of the
"step 2" increase, $3 million was contingent on the June 1, 1994
in-service date of the final segment of a 500 kilovolt
transmission line which provides links in the transmission
systems of the Company, Baltimore Gas and Electric Company and
Virginia Power. This transmission line segment was placed in
service prior to June 1, 1994. The authorized rates are based on
a 9.05% rate of return on average rate base, including an 11%
return on common stock equity. Prior to the order, the Company
had filed updated cost of service data which demonstrated a need
for $55.4 million increase in District of Columbia base rate
revenue, based upon the requested return of 9.46% on average rate
base including an 11.8% return on common stock equity.
The Commission's rate increase order approved the Company's
proposal for including future changes in purchased capacity costs
in fuel adjustment billings. In addition, the Commission
reversed its longstanding practice of including Electric Plant
Held for Future Use in rate base. The Commission also authorized
an accounting change for postretirement benefit costs consistent
with SFAS No. 106 entitled "Employers' Accounting for
Postretirement Benefits Other Than Pensions" and adopted a three-
year phase-in approach for inclusion of these increased costs in
the Company's rates. In June 1994, the Company established a
regulatory asset for the increase in postretirement benefit costs
of $.6 million on an after tax basis which will be amortized over
a three year period.
The initial order also reduced the Company's revenue
requirement to reflect 20% of the cumulative effect of a 1992
accounting change related to unbilled revenue applicable to the
District of Columbia. The Commission's initial decision to adopt
an unbilled revenue adjustment, supplemented by its subsequent
decisions in response to the Company's application for
17
reconsideration and motion for clarification, has required the
Company to establish in June 1994 a regulatory liability of $2.5
million on an after tax basis which will be amortized in 1995 and
1996.
The Commission's initial decision, rejected the Company's
proposal to provide rate recognition of DSM costs through a
billing surcharge and consistent with prior decisions, included
$5.3 million in base rates to recognize DSM program costs without
provision for lost revenue between rate cases. In addition, the
initial decision and subsequent decisions in response to the
Company's application for reconsideration and motion for
clarification, disallowed the recovery of 25% of test period DSM
program expenditures which required the Company to write off $2.2
million on an after tax basis in June 1994. In its order on
reconsideration, the Commission stated that in the future the
appropriate forum for consideration for DSM cost recovery would
be the Company's least-cost resource planning cases, which the
Company files on a two-year cycle. Under this new process, DSM
approval and cost recovery will be linked together in the same
proceeding. Subsequent to June 1993, the Company has expended
through December 31, 1994, approximately $56 million on
conservation in the District of Columbia. The Company requested
a surcharge mechanism for billing unamortized DSM costs in its
June 1994 Least-Cost Planning Case filing.
In July 1994, the Company filed a Petition for Review with
the District of Columbia Court of Appeals related to the
Commission's decisions to disallow the recovery of 25% of test
period DSM program expenditures and to reject an adjustment to
reflect increases in employee benefit costs. The Company expects
to receive an order on appeal in the second quarter of 1995.
Wholesale
---------
The Company has a 10-year full service power supply contract with
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. The rates were increased by $2.6 million and $3.8
million effective January 1, 1994 and 1993, respectively. A rate
increase of $4.2 million is scheduled to become effective January
1, 1996.
18
THE COVE POINT JOINT VENTURE
----------------------------
Subsidiaries of the Company and the 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. These
facilities were previously owned by Columbia LNG Corporation, a
Columbia Gas subsidiary.
Under the agreement, Columbia LNG Corp. contributed its Cove
Point terminal and pipeline assets in exchange for an equity
interest in the Partnership, and the Company's subsidiaries
agreed to invest $25 million in the form of equity and debt.
This investment will be used by the Partnership to construct a
new liquefaction unit and to recommission certain existing
facilities at the terminal that will be used in the peaking
service discussed below. At December 31, 1994, the Company's
subsidiaries have invested $10 million in the Partnership.
In November 1993, the Partnership filed a request with the
Federal Energy Regulatory Commission (FERC) for approval of
proposed natural gas peak-shaving services to local gas
distribution companies and other natural gas users beginning with
the winter heating season of 1995-96. With the recent
restructuring of the natural gas industry under FERC Order 636,
this price-competitive service will provide supply security and
operating flexibility to local distribution companies in meeting
their customers' service obligations. On November 30, 1994, the
Partnership received a final order from the FERC granting
approval of the project on the basis of cost-of-service rates.
The Partnership accepted the FERC certificate during December
1994, and has begun construction and recommissioning activities.
The Partnership anticipates the new plant and recommissioned
facilities will be available for commercial operation in the fall
of 1995.
One of the Company's principal strategic interests in the
Cove Point project is to secure a reliable and cost-effective
source of transportation for gas to provide fuel to the
generators at its Chalk Point Generating Station. The Cove Point
pipeline is the sole means of delivering natural gas to southern
Maryland where Chalk Point is located. The Company has expanded
Chalk Point's fuel flexibility to burn increased amounts of gas
to comply with the CAA and minimize customer costs.
19
COMPETITION
-----------
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.
Based on the regulatory framework in which it operates, the
Company currently applies the provisions of SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation" in
accounting for its utility operations. SFAS No. 71 allows
regulated entities, in appropriate circumstances, to establish
regulatory assets and to defer the income statement impact of
certain costs that are expected to be recovered in future rates.
Deregulation of portions of the Company's business could, in the
future, result in not meeting the rate recovery criteria for
application of SFAS No. 71 for part or all of the business.
While the Company does not foresee such a situation at this time,
if this were to occur in the transition to a more competitive
business, accounting standards of enterprises in general would
apply which would entail the write-off of any previously deferred
costs to results of operations. Regulatory assets include
deferred income taxes recoverable through future rates,
unamortized conservation costs and unamortized debt reacquisition
costs.
NEW ACCOUNTING STANDARDS
------------------------
Effective January 1, 1994, the Company adopted SFAS No. 112
entitled "Employers' Accounting for Postemployment Benefits" and
SFAS No. 115 entitled "Accounting for Certain Investments in Debt
and Equity Securities." See the discussions included in Notes
(3) and (15) of the Notes to Consolidated Financial Statements,
Pensions and Other Postretirement and Postemployment Benefits;
and Selected Nonutility Subsidiary Financial Information,
respectively, for additional information.
20
ENVIRONMENTAL MATTERS
---------------------
The Company is subject to federal, state and local legislation
and regulation with respect to environmental matters, including
air and water quality and the handling of solid and hazardous
waste. As a result, the Company is subject to environmental
contingencies, principally related to possible obligations to
remove or mitigate the effects on the environment of the
disposal, effected in accordance with applicable laws at the
time, of certain substances at various sites. During 1994, the
Company was participating in environmental assessments and
cleanups under these laws at two federal Superfund sites and a
private party site as a result of litigation. While the total
cost of remediation at these sites may be substantial, the
Company shares liability with other potentially responsible
parties. Based on the information known to the Company at this
time, management is of the opinion that resolution of these
matters will not have a material effect on the results of
operations or financial position of the Company.
See the discussion included in Note (13) of the Notes to
Consolidated Financial Statements, Commitments and Contingencies,
for additional information.
NONUTILITY SUBSIDIARY
---------------------
RESULTS OF OPERATIONS
---------------------
PCI's net earnings totaled $19.1 million in 1994, compared with
$25.1 million in 1993 and $28.2 million in 1992. In 1994, PCI
contributed $.16 per share to PEPCO's consolidated earnings of
$1.79 per share. PCI contributed $.22, and $.25 per share,
respectively, to PEPCO's 1993 and 1992 consolidated earnings per
share. Earnings for the year 1994 were lower than 1993 primarily
as a result of the 1993 completion of a transaction whereby PCI
contributed aircraft, subject to direct finance leases, to a
majority-owned partnership. As a result of this transaction,
PCI's obligation for previously accrued deferred taxes was
reduced, resulting in after tax earnings of $21.3 million, after
provision for all costs of the transaction. The excess deferred
taxes were recognized in 1993 as a reduction in income tax
expense. During 1994, modifications to this 1993 transaction
resulted in additional after tax earnings of $10 million.
Lower rent revenue and increased operating and maintenance
expenses for certain aircraft also contributed to the decrease in
PCI's net earnings from 1993 to 1994. At year-end 1994, a
portion ($263 million carrying value) of PCI's aircraft leasing
portfolio consisted of equipment not on lease (four L-1011
21
aircraft returned by Trans World Airlines (TWA) when leases
expired in November 1994) and equipment on short-term, and in
some cases, usage-based operating leases with monthly rentals and
maintenance payments dependent upon hours used. Under these
leases, PCI is responsible for future operating and maintenance
expenses exceeding amounts provided therefor by lessees and,
during 1994, PCI provided net charges of $8.3 million (before
tax) against earnings to establish reserves against such future
estimated expenses. Most of the usage-based and short-term
leases include provisions for early termination by PCI if more
favorable transactions become available. In January 1995,
because of the lessee's inability to make timely rental payments
and to satisfy other lease obligations, Fortunair Canada returned
one B747 aircraft previously under short-term lease. PCI is
continuing to seek new leases with more favorable terms or to
sell the equipment on satisfactory terms.
All rental payments due under equipment leases are current.
Continental Airlines (Continental) has announced that it intends
to seek the termination of certain A-300 aircraft leases and,
effective February 1, 1995, the reduction of rental payments due
under certain leases of other widebody aircraft. Pending
discussions with lessors, Continental has indicated that it will
not be making payments to such lessors as required by the terms
of its contracts. Continental has approached PCI to request
discussions regarding the return of one A-300 aircraft and the
renegotiation of certain other leases of widebody aircraft.
Continental has indicated that payments under these leases could
include debt securities convertible into equity in lieu of full
cash payments. PCI has informed Continental that it expects all
lease obligations to be satisfied in full.
There can be no assurance that PCI will be able to obtain
new leases, sell or otherwise dispose of aircraft on satisfactory
terms, following scheduled or unscheduled lease terminations.
22
PCI's aircraft portfolio at December 31, 1994 is summarized
below.
-----------------------------------------------------------------
Type of Aircraft Year of
Lease Type (a) Lessee Quantity Manufacture
-----------------------------------------------------------------
Operating B747-200 United Airlines 2 1978
Continental
Airlines 1 1972
Air Club 1 1976
Fortunair Canada (c) 1 1977
B747-200F Atlas Air 1 1976
DC-10-30 Continental
Airlines (b) 5 1973(4), 1974
L1011-50 ING 2 1974
TWA 1 1975
L1011-100 None 4 1974, 1975(3)
A300-B4 Continental
Airlines 1 1979
F28-4000 USAir 2 1979, 1980
Direct
Finance DC-10-30 Continental
Airlines 1 1979
MD-82 Continental
Airlines (b) 3 1982, 1987(2)
B737-300 United Airlines (b) 4 1988
Leveraged B747-300 KLM (b) 1 1984
Singapore
Airlines (b) 1 1985
B757-200 Northwest Airlines 1 1986
MD-11F Federal Express 1 1993
-----------------------------------------------------------------
(a) Includes aircraft in which PCI has a greater than 10%
ownership interest. Not included in PCI's balance sheet at
December 31, 1994 are two DC-10-30 aircraft on operating
lease to PCI.
(b) PCI owns a partial interest in certain of these aircraft.
(c) Aircraft returned in January 1995.
The aircraft leasing business is highly competitive in all
of its phases, including the re-leasing and disposition of
aircraft. The performance of PCI's aircraft leasing business is
dependent upon aircraft market conditions including, among other
things, the terms upon which aircraft can be sold or leased, the
value of the equipment in the leasing portfolio and the
creditworthiness of the lessees of PCI's aircraft which include
both domestic and foreign commercial airlines, charter, air cargo
23
and express delivery operators. As discussed above, rental
income from the lease of aircraft equipment on short-term or
usage-based leases, as well as the market value of such aircraft
equipment, has been affected adversely by the lengthy adverse
economic cycle and market conditions in the airline industry.
There can be no assurance regarding the timing and degree of
recovery from these conditions and, therefore, no assurance that
PCI will be able to obtain new leases, sell, or otherwise dispose
of aircraft on satisfactory terms, following scheduled or
unscheduled lease terminations.
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 $111.3 million in 1994 compared with
$114.2 million and $122.1 million in 1993 and 1992, respectively.
The decrease in 1994 income from leasing activities as compared
with 1993 was primarily due to 1993 sales of aircraft that
resulted in pre-tax gains of $7.3 million.
PCI's marketable securities portfolio contributed pre-tax
income of $35.1 million in 1994 compared with $38.4 million and
$37.1 million in 1993 and 1992, respectively, which results
included net realized gains of $.8 million in 1994 compared with
$7 million and $7.5 million in 1993 and 1992, respectively.
Income from other activities increased during 1994 over 1993
primarily because 1993 income was reduced by a $13.5 million pre-
tax writedown related to the termination of obligations with
respect to a real estate limited partnership interest.
Expenses, before income taxes, which include interest,
depreciation and operating and administrative and general
expenses totaled $150.6 million, $159.3 million and $130.5
million for the years ended December 31, 1994, 1993 and 1992,
respectively. Of these expenses, interest was the largest single
component, amounting to $84.8 million, $77.9 million and $86.2
million in 1994, 1993 and 1992, respectively. Depreciation and
operating expenses were $55.6 million in 1994 as compared to
$66.8 million in 1993 and $34.6 million in 1992. The decrease in
1994 as compared to 1993 is primarily the result of costs related
to the 1993 aircraft partnership transaction. The decrease in
depreciation and operating expense was partially offset by
increased operating expenses incurred for aircraft not under
lease or under usage-based leases.
PCI had an income tax credit in 1994 of $22.7 million,
compared to $45.1 million in 1993 and an expense of $2.5 million
in 1992. The decrease in the income tax credit from 1993 to 1994
is primarily the result of the 1993 aircraft partnership
transaction referred to above.
24
CAPITAL RESOURCES AND LIQUIDITY
-------------------------------
Investments in leased equipment of $72.1 million in 1994 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. The remaining investment was for aircraft engine
purchases and the refurbishment and modification of existing
aircraft. Investments of $32.4 million in 1993 reflect the
purchase of a new MD-11 aircraft which was placed on long-term
leveraged lease at the same time older equipment under lease by
the same carrier was sold for proceeds of $108.1 million and a
pre-tax gain of $6.2 million and the refurbishment and
modification of existing aircraft. At the end of 1994, PCI had
no commitments for the purchase of additional aircraft or other
equipment leasing assets.
PCI's outstanding short-term debt totaled $48.4 million at
December 31, 1994, a decrease of $77.8 million from the $126.2
million outstanding at December 31, 1993. During 1994, PCI
issued $286.7 million in long-term debt, including non-recourse
debt, and debt repayments totaled $173.9 million. At December
31, 1994, PCI had $128.3 million available under its Medium-Term
Note Program and $320 million of unused short-term bank credit
lines.
PCI paid PEPCO a $15 million dividend in January 1994 and,
in January 1995, declared and paid a $9 million dividend to
PEPCO, resulting in cumulative dividends of $100 million paid
since PCI's inception. PCI remains adequately capitalized to
support future business plans, which are designed to supplement
utility earnings and build long-term shareholder value.
25
Management's Report
on the Consolidated Financial Statements
----------------------------------------
The accompanying consolidated financial statements have been
prepared in conformity with generally accepted accounting
principles and, with respect to its utility operations, the
Uniform System of Accounts promulgated by the Federal Energy
Regulatory Commission.
The consolidated financial statements are the responsibility
of management. The Company has established a system of internal
accounting controls to provide reasonable, but not absolute,
assurance as to the integrity of the consolidated financial
statements. The system of internal controls is examined by
management on a continuing basis for effectiveness and cost
efficiency. The system is also reviewed on a regular basis by an
internal audit staff which reports directly to the Chairman of
the Board. The Company's independent accountants, Price
Waterhouse LLP, regularly evaluate the system of internal
accounting controls and perform such tests and other procedures
as it deems necessary to express an opinion on the fairness of
the financial statements.
The report of Price Waterhouse LLP on its audits of the
accompanying consolidated financial statements appears on this
page. The report includes the accountants' opinion that the
consolidated financial statements present fairly, in all material
respects, the financial position of the Company and its
subsidiaries at December 31, 1994 and 1993, and the results of
operations and cash flows for each of the three years in the
period ended December 31, 1994.
The consolidated financial statements have been reviewed by
the Board of Directors of the Company. In addition, the Audit
Committee of the Board of Directors, consisting of five outside
directors, discusses accounting, auditing and financial reporting
matters with management and Price Waterhouse LLP on a regular
basis and reviews the program of audit work performed by the
internal audit staff. To ensure the auditors' independence, both
Price Waterhouse LLP and the internal audit staff have direct
access to the Audit Committee.
/s/ H. Lowell Davis
Vice Chairman and
Chief Financial Officer
January 26, 1995
26
Report of Independent Accountants
To the Shareholders and
Board of Directors of
Potomac Electric Power Company
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of earnings and of cash flows
present fairly, in all material respects, the financial position
of Potomac Electric Power Company and its subsidiaries at
December 31, 1994 and 1993, and the results of their operations
and their cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted
accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is
to express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed
above.
As discussed in Notes 1 and 3 of the Notes to Consolidated
Financial Statements, respectively, the Company changed its
methods of accounting for income taxes and other postretirement
benefits in 1993. As also discussed in Note 1, the Company
changed its method of accounting for unbilled revenue in 1992.
/s/ Price Waterhouse LLP
Washington, D.C.
January 26, 1995
27
<TABLE>
Consolidated Statements of Earnings
Potomac Electric Power Company and Subsidiaries
<CAPTION>
--------------------------------------------------------------------------------------------------
For the year ended December 31,
1994 1993 1992
--------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Revenue (Note 2)
Operating revenue $1,790,600 $1,702,442 $1,562,167
Interchange deliveries 32,474 22,763 39,391
---------- ---------- ----------
Total Revenue 1,823,074 1,725,205 1,601,558
---------- ---------- ----------
Operating Expenses
Fuel 392,730 354,282 345,549
Purchased energy 173,384 173,456 166,601
---------- ---------- ----------
Fuel and purchased energy 566,114 527,738 512,150
Capacity purchase payments (Note 13) 127,822 96,288 95,481
Other operation 206,106 207,814 204,481
Maintenance 92,614 93,668 90,756
Depreciation and amortization 179,986 163,607 149,785
Income taxes (Note 4) 119,859 110,176 75,272
Other taxes (Note 5) 206,080 201,252 194,180
---------- ---------- ----------
Total Operating Expenses 1,498,581 1,400,543 1,322,105
---------- ---------- ----------
Operating Income 324,493 324,662 279,453
---------- ---------- ----------
Other Income
Nonutility subsidiary (Note 15)
Income 147,006 139,341 161,154
Expenses, including interest and income taxes (127,918) (114,240) (132,993)
---------- ---------- ----------
Net earnings from nonutility subsidiary 19,088 25,101 28,161
Allowance for other funds used during construction 9,123 13,242 16,089
Other, net 4,046 10,221 1,506
---------- ---------- ----------
Total Other Income 32,257 48,564 45,756
---------- ---------- ----------
Income Before Utility Interest Charges 356,750 373,226 325,209
---------- ---------- ----------
Utility Interest Charges
Interest on debt 139,210 141,393 138,097
Allowance for borrowed funds used during construction (9,622) (9,746) (13,648)
---------- ---------- ----------
Net Utility Interest Charges 129,588 131,647 124,449
---------- ---------- ----------
Income Before Cumulative Effect of Accounting Change 227,162 241,579 200,760
Cumulative Effect of Accounting Change for Unbilled
Revenue (Net of Income Taxes of $9,458) (Note 1) - - 16,022
---------- ---------- ----------
Net Income 227,162 241,579 216,782
Dividends on Preferred Stock 16,437 16,255 14,392
---------- ---------- ----------
Earnings for Common Stock $ 210,725 $ 225,324 $ 202,390
========== ========== ==========
Average Common Shares Outstanding (000s) 118,006 115,640 112,390
Earnings Per Common Share <F1>
Before cumulative effect of accounting change $1.79 $1.95 $1.66
Cumulative effect of accounting change for unbilled
revenue - - .14
----- ----- -----
Total $1.79 $1.95 $1.80
===== ===== =====
Cash Dividends Per Common Share $1.66 $1.64 $1.60
<FN>
<F1> No material dilution would occur if all of the convertible preferred stock
and debentures were converted into common stock.
</FN>
28
</TABLE>
<TABLE>
Consolidated Balance Sheets
Potomac Electric Power Company and Subsidiaries
<CAPTION>
---------------------------------------------------------------------------------------------
December 31,
Assets 1994 1993
---------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C>
Property and Plant - at original cost (Notes 6 and 10)
Electric plant in service $ 5,765,210 $ 5,252,736
Construction work in progress 147,224 373,665
Electric plant held for future use 18,041 33,644
Nonoperating property 7,556 5,096
----------- -----------
5,938,031 5,665,141
Accumulated depreciation (1,639,771) (1,533,999)
----------- -----------
Net Property and Plant 4,298,260 4,131,142
----------- -----------
Current Assets
Cash and cash equivalents 7,198 7,439
Customer accounts receivable, less allowance for uncollectible
accounts of $2,432 and $2,748 107,351 100,973
Other accounts receivable, less allowance for uncollectible
accounts of $300 57,128 53,454
Accrued unbilled revenue (Note 1) 67,543 71,497
Prepaid taxes 34,352 30,531
Other prepaid expenses 10,391 6,053
Material and supplies - at average cost
Fuel 73,671 61,973
Construction and maintenance 72,447 70,262
----------- -----------
Total Current Assets 430,081 402,182
----------- -----------
Deferred Charges
Income taxes recoverable through future rates, net (Note 1) 251,357 233,431
Conservation costs, net 161,204 87,328
Unamortized debt reacquisition costs 56,725 53,868
Other 93,840 92,377
----------- -----------
Total Deferred Charges 563,126 467,004
----------- -----------
Nonutility Subsidiary Assets
Cash and cash equivalents - 2,625
Marketable securities (Notes 11 and 15) 473,608 466,153
Investment in finance leases (Note 15) 410,327 358,524
Operating lease equipment, net of accumulated depreciation
of $116,832 and $85,302 (Note 15) 544,064 565,443
Receivables, less allowance for uncollectible
accounts of $5,000 in 1994 76,426 84,726
Other investments 147,313 163,911
Other assets 22,551 23,750
----------- -----------
Total Nonutility Subsidiary Assets 1,674,289 1,665,132
----------- -----------
Total Assets $ 6,965,756 $ 6,665,460
=========== ===========
29
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
December 31,
Capitalization and Liabilities 1994 1993
---------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C>
Capitalization
Common equity (Note 7)
Common stock, $1 par value - authorized 200,000,000 shares,
issued 118,248,103 and 117,797,652 shares $ 118,248 $ 117,798
Premium on stock and other capital contributions 1,020,689 1,011,778
Capital stock expense (14,163) (13,800)
Retained income 830,524 839,433
----------- -----------
Total Common Equity 1,955,298 1,955,209
Preference stock, cumulative, $25 par value -
authorized 8,800,000 shares, no shares issued or outstanding - -
Serial preferred stock (Notes 8 and 11) 125,409 125,442
Redeemable serial preferred stock (Notes 9 and 11) 143,563 147,000
Long-term debt (Notes 10 and 11) 1,723,399 1,589,621
----------- -----------
Total Capitalization 3,947,669 3,817,272
----------- -----------
Other Non-Current Liabilities
Capital lease obligation (Note 13) 136,723 -
----------- -----------
Total Other Non-Current Liabilities 136,723 -
----------- -----------
Current Liabilities
Long-term debt and preferred stock redemption
due within one year 45,445 17,977
Short-term debt (Note 12) 189,600 294,615
Accounts payable and accrued payroll 117,909 116,526
Capital lease obligation due within one year 15,233 -
Taxes accrued 20,509 25,840
Interest accrued 36,840 32,476
Customer deposits 22,563 22,296
Other 84,842 81,337
----------- -----------
Total Current Liabilities 532,941 591,067
----------- -----------
Deferred Credits
Income taxes (Notes 1 and 4) 848,456 780,723
Investment tax credits (Note 4) 68,256 71,906
Other 31,766 28,916
----------- -----------
Total Deferred Credits 948,478 881,545
----------- -----------
Nonutility Subsidiary Liabilities
Long-term debt (Notes 10 and 11) 1,140,505 1,027,705
Short-term notes payable (Note 12) 48,400 126,250
Deferred taxes and other (Note 4) 211,040 221,621
----------- -----------
Total Nonutility Subsidiary Liabilities 1,399,945 1,375,576
----------- -----------
Commitments and Contingencies (Note 13)
Total Capitalization and Liabilities $ 6,965,756 $ 6,665,460
=========== ===========
30
</TABLE>
<TABLE>
Consolidated Statements of Cash Flows
Potomac Electric Power Company and Subsidiaries
<CAPTION>
-----------------------------------------------------------------------------------------------------
For the year ended December 31,
1994 1993 1992
-----------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Operating Activities
Income from utility operations $ 208,074 $ 216,478 $ 188,621
Adjustments to reconcile income to net cash
from operating activities:
Depreciation and amortization 179,986 163,607 149,785
Deferred income taxes and investment tax credits 44,641 27,711 43,414
Allowance for funds used during construction (18,745) (22,988) (29,737)
Changes in materials and supplies (13,883) 44,509 (11,144)
Changes in accounts receivable and accrued unbilled revenue (6,098) (35,399) (46,483)
Changes in accounts payable 8,257 (441) (5,716)
Changes in other current assets and liabilities (11,703) 4,317 6,325
Changes in deferred conservation costs (92,504) (59,639) (26,627)
Net other operating activities 5,303 (37,121) 8,078
Nonutility subsidiary:
Net earnings 19,088 25,101 28,161
Deferred income taxes 6,386 (32,814) 1,055
Changes in other assets and net other operating activities 47,648 56,897 7,037
--------- --------- ---------
Net Cash From Operating Activities 376,450 350,218 312,769
--------- --------- ---------
Investing Activities
Total investment in property and plant (316,890) (322,951) (357,732)
Allowance for funds used during construction 18,745 22,988 29,737
--------- --------- ---------
Net investment in property and plant (298,145) (299,963) (327,995)
Nonutility subsidiary:
Purchase of marketable securities (127,335) (254,213) (266,696)
Proceeds from sale or redemption of marketable securities 82,444 194,295 195,752
Investment in leased equipment (72,134) (32,360) (30,811)
Proceeds from sale or disposition of leased equipment 1,150 120,529 48,968
Purchase of other investments (7,191) (44,628) (7,143)
Proceeds from sale or distribution of other investments 18,429 - 42,513
Investment in promissory notes (542) (1,628) -
Proceeds from promissory notes 4,902 3,013 27,411
--------- --------- ---------
Net Cash Used by Investing Activities (398,422) (314,955) (318,001)
--------- --------- ---------
Financing Activities
Dividends on common stock (195,755) (189,837) (179,823)
Dividends on preferred stock (16,437) (16,255) (14,392)
Issuance of common stock 9,285 96,001 80,396
Issuance of preferred stock - - 50,000
Redemption of preferred stock (4,047) (1,500) (890)
Issuance of long-term debt 302,999 521,264 277,463
Reacquisition and retirement of long-term debt (144,422) (628,448) (137,387)
Proceeds from sale and leaseback of control center system 152,000 - -
Short-term debt, net (105,015) 233,015 (25,200)
Other financing activities (14,452) (26,199) (5,946)
Nonutility subsidiary:
Issuance of long-term debt 286,750 363,653 242,637
Repayment of long-term debt (173,950) (247,077) (274,991)
Short-term debt, net (77,850) (137,265) (7,390)
--------- --------- ---------
Net Cash From (Used by) Financing Activities 19,106 (32,648) 4,477
--------- --------- ---------
Net (Decrease) Increase In Cash and Cash Equivalents (2,866) 2,615 (755)
Cash and Cash Equivalents at Beginning of Year 10,064 7,449 8,204
--------- --------- ---------
Cash and Cash Equivalents at End of Year (Note 14) $ 7,198 $ 10,064 $ 7,449
========= ========= =========
31
</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 prior year 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
-------------
The Company changed its method of revenue recognition effective
January 1, 1992, to provide for the accrual of revenue for
service rendered but unbilled as of the end of each month. Prior
to 1992, revenue was recognized using the meters read method of
accounting whereby annual revenue reflected 12 monthly meter
readings for each customer. The new method was adopted to
provide a better matching of revenue and expenses and to conform
with the predominant practice within the utility industry. This
change in the method of revenue recognition resulted in an
increase in 1992 of approximately $16 million in net income or
$.14 per common share. This change in accounting method, which
has no significant effect on revenue over a 12-month period,
affects the timing of revenue recognition within the year,
principally increasing revenue in the second quarter and
decreasing revenue in the fourth quarter.
32
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
been made, the differences are accounted for as other deferred
charges or other deferred credits pending regulatory
determination.
Leasing Transactions
--------------------
Income from PCI investments in direct finance and leveraged lease
transactions, in which PCI is an equity participant, is reported
using the financing method. In accordance with the financing
method, investments in leased property are recorded as a
receivable from the lessee to be recovered through the collection
of future rentals. For direct finance leases, unearned income is
amortized to income over the lease term at a constant rate of
return on the net investment. Income, including investment tax
credits on leveraged equipment leases, is recognized over the
life of the lease at a level rate of return on the positive net
investment.
PCI investments in equipment under operating leases are
stated at cost less accumulated depreciation. Depreciation is
recorded on a straight line basis over the equipment's estimated
useful life.
Property and Plant
------------------
The cost of additions to, and replacements or betterments of,
retirement units of property and plant is capitalized. Such cost
includes material, labor, the capitalization of an Allowance for
Funds Used During Construction (AFUDC) and applicable indirect
costs, including engineering, supervision, payroll taxes and
employee benefits. The original cost of depreciable units of
plant retired, together with the cost of removal, net of salvage,
is charged to accumulated depreciation. Routine repairs and
maintenance are charged to operating expenses as incurred.
33
The Company uses separate depreciation rates for each
electric plant account. The rates, which vary from jurisdiction
to jurisdiction, were equivalent to a system-wide composite
depreciation rate of approximately 3.1% for 1994 and 1993 and 3%
for 1992.
Conservation
------------
In general, the Company accounts for conservation expenditures in
connection with its demand side management (DSM) program as a
deferred charge, and amortizes the costs over five to ten years.
District of Columbia conservation costs receive rate base
treatment, with a capital cost recovery factor accrued on the
unamortized balance in excess of amounts included in rate base.
In Maryland, conservation costs are recovered through a surcharge
included in base rates which reflects current year expenditures
and lost revenue.
Allowance for Funds Used During Construction
--------------------------------------------
In general, the Company capitalizes AFUDC with respect to
investments in Construction Work in Progress with the exception
of expenditures required to comply with federal, state or local
environmental regulations (pollution control projects), which are
included in rate base without capitalization of AFUDC. In 1992,
pursuant to orders from both the Maryland and District of
Columbia commissions, the Company commenced the accrual of 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 7.6% in 1994, 8.7% in 1993 and 9.1% in 1992,
compounded semiannually.
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.
34
Income Taxes
------------
Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 109 entitled
"Accounting for Income Taxes" which requires the use of an asset
and liability approach for financial reporting and accounting for
deferred income taxes. Deferred taxes are recorded for all
temporary differences based upon currently enacted tax rates.
The adoption of SFAS No. 109 increased net income for the twelve
months ended December 31, 1993 by $2.8 million which is reflected
on the Consolidated Statements of Earnings in "Other, net."
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 December 31, 1994 and 1993.
35
(2) Total Revenue
-------------
The Company's retail service area includes all of the District of
Columbia and major portions of Montgomery and Prince George's
counties in suburban Maryland. The Company supplies electricity,
at wholesale, under a contract with Southern Maryland Electric
Cooperative, Inc. (SMECO), and also delivers economy energy to
the Pennsylvania-New Jersey-Maryland Interconnection Association
(PJM) of which the Company is a member. PJM is composed of
eleven electric utilities which operate on a fully integrated
basis.
Total revenue for each year was comprised as shown below.
-----------------------------------------------------------------
1994 1993 1992
-------------------------------------------------
Amount % Amount % Amount %
-----------------------------------------------------------------
(Thousands of Dollars)
Residential $ 524,738 29.5 $ 505,173 29.8 $ 432,797 27.8
Commercial 834,323 46.8 791,357 46.6 748,550 48.1
U.S. Government 254,030 14.2 238,192 14.0 229,586 14.8
D.C. Government 56,655 3.2 53,551 3.2 49,815 3.2
Wholesale 113,318 6.3 108,162 6.4 95,350 6.1
---------- ----- --------- ----- ---------- -----
Sales of
electricity 1,783,064 100.0 1,696,435 100.0 1,556,098 100.0
===== ===== =====
Other electric
revenue 7,536 6,007 6,069
---------- ---------- ----------
Operating
revenue 1,790,600 1,702,442 1,562,167
Interchange
deliveries 32,474 22,763 39,391
---------- ---------- ----------
Total Revenue $1,823,074 $1,725,205 $1,601,558
========== ========== ==========
-----------------------------------------------------------------
Sales of electricity include base rate revenue and fuel rate
revenue. Fuel rate revenue was $557.4 million in 1994, $487.9
million in 1993 and $456.4 million in 1992.
36
The Company's Maryland fuel rate is based on historical net
fuel, interchange and emission allowance costs. The zero-based
rate may not be changed without prior approval of the Maryland
Public Service Commission. Application to the Commission for an
increase in the rate may only be made when the currently
calculated fuel rate, based on the most recent actual net fuel,
interchange and emission allowance costs, exceeds the currently
effective fuel rate by more than 5%. If the currently calculated
fuel rate is more than 5% below the currently effective fuel
rate, the Company must apply to the Commission for a fuel rate
reduction.
In September 1994, the Company filed for a 5.3% increase in
the Maryland fuel rate 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. A final order is expected during the first
quarter of 1995. Based on results for the period ended November
30, 1994, the Company filed for a fuel rate reduction in Maryland
of 5.3%.
The District of Columbia fuel rate is based upon an average
of historical and projected net fuel, interchange and emission
allowance costs and purchased capacity, and is adjusted monthly
to reflect changes in such costs.
Rates for service, at wholesale, to SMECO include a fuel
adjustment charge based upon estimated applicable fuel and
interchange costs for each billing month. The difference between
the estimated costs and the actual applicable fuel and
interchange costs incurred each month is reflected as an
adjustment to the fuel rate in the succeeding month.
Amounts received for interchange deliveries are a component
of the Company's fuel rates.
37
(3) Pensions and Other Postretirement and Postemployment
Benefits
----------------------------------------------------
The Company's General Retirement Program (Program), a
noncontributory defined benefit program, covers substantially all
full-time employees of the Company and its subsidiaries. The
Program provides for benefits to be paid to eligible employees at
retirement based primarily upon years of service with the Company
and their compensation rates for the three years preceding
retirement. Annual provisions for accrued pension cost are based
upon independent actuarial valuations. The Company's policy is
to fund accrued pension costs.
Pension expense included in net income was $14.3 million in
1994, $13.7 million in 1993 and $10.5 million in 1992. The net
periodic pension cost was computed as follows.
-----------------------------------------------------------------
1994 1993 1992
-----------------------------------------------------------------
(Thousands of Dollars)
Service cost-benefits earned $10,800 $10,300 $ 9,100
Interest cost on projected
benefit obligation 26,800 25,100 23,500
Actual return on Program assets (4,600) (24,300) (13,400)
Differences between actual
and expected return on
Program assets and net
amortization (18,700) 2,600 (8,700)
------- ------- -------
Pension cost $14,300 $13,700 $10,500
======= ======= =======
-----------------------------------------------------------------
38
Program assets are stated at fair value and were comprised
of approximately 70% and 68% of cash equivalents and fixed income
investments and the balance in equity investments at December 31,
1994 and 1993, respectively. The following table sets forth the
Program's funded status and amounts recognized on the
Consolidated Balance Sheets.
-----------------------------------------------------------------
1994 1993
-----------------------------------------------------------------
(Thousands of Dollars)
Actuarial present value of benefit obligations:
Program benefits:
Vested benefits $(252,300) $(249,600)
Nonvested benefits (30,000) (35,300)
--------- ---------
Accumulated benefit obligation $(282,300) $(284,900)
========= =========
Actuarial present value of projected
benefit obligation $(338,600) $(358,600)
Program assets at fair value 289,100 282,600
--------- ---------
Projected benefit obligation in excess of
Program assets (49,500) (76,000)
Unrecognized actuarial loss 35,600 58,500
Unrecognized prior service cost 17,600 12,900
Unrecognized net obligation at
January 1, 1987, being recognized
over 18 years 400 400
--------- ---------
Prepaid pension expense/accrued
pension (liability) $ 4,100 $ (4,200)
========= =========
-----------------------------------------------------------------
The assumed weighted average discount rate and weighted
average rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit
obligation were 8.5% and 4.5% in 1994 and 7.75% and 5% in 1993,
respectively. The assumed long-term rate of return on Program
assets was 9% in 1994 and 1993.
In addition to providing pension benefits, the Company
provides certain health care and life insurance benefits for
retired employees and inactive employees covered by disability
plans. The health care plan pays stated percentages of most
necessary medical expenses incurred by these employees, after
subtracting payments by Medicare or other providers and after a
stated deductible has been met. The life insurance plan pays
benefits based on base salary at the time of retirement and age
at the date of death. Participants become eligible for the
39
benefits of these plans if they retire under the provisions of
the Company's General Retirement Program with ten years of
service or become inactive employees under the Company's
disability plans.
Effective January 1, 1993, the Company adopted SFAS No. 106,
entitled "Employers' Accounting for Postretirement Benefits Other
Than Pensions" which requires "accrual basis" instead of "cash
basis" accounting for postretirement health care and life
insurance. The effect of this change in accounting was to
decrease 1993 pre-tax income by $2.2 million. The Company is
amortizing the unrecognized transition obligation measured at
January 1, 1993 over a 20-year period.
Postretirement benefit expense included in net income was
$8.7 million and $9.3 million in 1994 and 1993, respectively.
The cost of such benefits, recognized as an operating expense
when paid, was $5 million in 1992. The following table sets
forth the components of the postretirement expense.
-----------------------------------------------------------------
1994 1993
-----------------------------------------------------------------
(Thousands of Dollars)
Service cost-benefits attributable
to service during the year $ 2,600 $ 2,500
Interest cost on accumulated
postretirement benefit obligation 4,200 4,400
Actual loss (return) on plan assets 200 (400)
Amortization of transition
obligation 2,500 2,800
Difference between actual and
expected return on plan assets
and net amortization (800) -
------- -------
Net postretirement benefit cost $ 8,700 $ 9,300
======= =======
-----------------------------------------------------------------
40
The following table sets forth the accumulated
postretirement benefit obligation reconciled to the amounts
recognized on the Consolidated Balance Sheets.
-----------------------------------------------------------------
1994 1993
-----------------------------------------------------------------
(Thousands of Dollars)
Accumulated postretirement
benefit obligation to
Retirees and dependents $(34,600) $(29,700)
Active employees fully eligible (10,600) (10,300)
Active employees not fully
eligible (14,800) (14,800)
-------- --------
Total accumulated postretirement
benefit obligation (60,000) (54,800)
Plan assets at fair value 4,500 4,300
-------- --------
Accumulated postretirement benefit
obligation in excess of plan assets (55,500) (50,500)
Unrecognized transition obligation 45,200 47,700
Unrecognized actuarial loss 11,100 2,800
-------- --------
Prepaid postretirement benefit
cost $ 800 $ -
======== ========
-----------------------------------------------------------------
The Company's SFAS No. 106 obligation at December 31, 1994
and 1993 was based on discount rates of 8.5% and 7.75%,
respectively, and weighted average rates of increase in future
compensation levels of 4.5% and 5%, respectively. The current
health-care cost trend rate is 8% which declines to 5.5% after a
five year period. A one percentage point increase in the health-
care cost trend rate would increase the Accumulated
Postretirement Benefit Obligation by $3.7 million to
approximately $63.7 million and the sum of the service cost and
interest cost for 1994 by approximately $.5 million.
In January 1994 and 1993, the Company funded the 1994 and
1993 portions of its estimated liability for postretirement
medical and life insurance costs through the use of an Internal
Revenue Code (IRC) 401 (h) account, within the Company's pension
plan, and an IRC 501 (c)(9) Voluntary Employee Beneficiary
Association (VEBA). The Company plans to fund the 401(h) account
and the VEBA annually. Assets were comprised of cash
equivalents, fixed income investments and equity investments and
the assumed return on plan assets was 9% in 1994 and 1993.
41
In July 1993, a new three-year Agreement between the Company
and Local 1900 of the International Brotherhood of Electrical
Workers was ratified by Union members. As a result of this
Agreement, the Company reduced the costs of its postretirement
benefits by requiring all eligible employees who retired on or
after January 1, 1994, to share in the cost of these benefits.
These amendments were reflected in 1993.
The Company treats postretirement benefit costs as an
operating expense. The Company's Maryland tariff includes the
cost of postretirement benefits. In May 1994, the District of
Columbia Public Service Commission authorized an accounting
change for postretirement benefit costs consistent with SFAS No.
106 and adopted a three-year phase-in approach for inclusion of
these increased costs in the Company's rates.
Effective January 1, 1994, the Company adopted SFAS No. 112
entitled "Employers' Accounting for Postemployment Benefits"
which requires the accrual of the expected cost of providing
benefits to former or inactive employees after employment but
before retirement. The adoption of this pronouncement did not
have a material effect on the Company's consolidated financial
statements.
42
<TABLE>
(4) Income Taxes
------------
The provision for income taxes charged to continuing operations, reconciliation
of consolidated income tax expense and components of consolidated deferred tax
liabilities (assets) are set forth below.
<CAPTION>
Provisions for Income Taxes Charged to Continuing Operations
------------------------------------------------------------
---------------------------------------------------------------------------------------------------
1994 1993 1992
---------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Utility current tax expense
Federal $ 63,395 $ 69,007 $ 50,900
State and local 8,612 9,801 7,571
--------- --------- ---------
Total utility current tax expense 72,007 78,808 58,471
--------- --------- ---------
Utility deferred tax expense
Federal 42,070 26,784 26,584
State and local 6,221 5,100 4,682
Investment tax credits (3,650) (3,469) (3,314)
--------- --------- ---------
Total utility deferred tax expense 44,641 28,415 27,952
--------- --------- ---------
Total utility income tax expense 116,648 107,223 86,423
--------- --------- ---------
Nonutility subsidiary current tax expense
Federal (29,315) (13,022) 1,461
--------- --------- ---------
Nonutility subsidiary deferred tax expense
Federal 6,758 (31,360) 1,055
State and local (138) (696) -
--------- --------- ---------
Total nonutility subsidiary deferred tax expense 6,620 (32,056) 1,055
--------- --------- ---------
Total nonutility subsidiary income tax expense (22,695) (45,078) 2,516
--------- --------- ---------
Total consolidated income tax expense 93,953 62,145 88,939
Income taxes included in other income (25,906) (48,031) 4,209
Income taxes included in cumulative effect of accounting change - - 9,458
--------- --------- ---------
Income taxes included in utility operating expenses $ 119,859 $ 110,176 $ 75,272
========= ========= =========
43
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Consolidated Income Tax Expense
-------------------------------------------------
---------------------------------------------------------------------------------------------------
1994 1993 1992
---------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Income before income taxes (including cumulative effect
of accounting change) $ 321,115 $ 303,724 $ 305,721
========= ========= =========
Utility income tax at federal statutory rate $ 113,653 $ 113,295 $ 93,515
Increases (decreases) resulting from
Depreciation 8,022 5,096 4,204
Removal costs (4,086) (4,385) (5,109)
Allowance for funds used during construction (2,411) (3,852) (4,854)
Other (4,175) (6,477) (5,888)
State income taxes, net of federal effect 9,683 9,686 8,213
Tax credits (4,038) (3,873) (3,658)
Cumulative effect of tax rate change - (2,267) -
--------- --------- ---------
Total utility income tax expense 116,648 107,223 86,423
--------- --------- ---------
Nonutility subsidiary income tax at federal statutory rate (1,262) (6,992) 10,430
Increases (decreases) resulting from
Dividends received deduction (8,487) (7,672) (6,750)
Reversal of previously accrued deferred taxes (8,206) (35,904) -
Other (4,602) (408) (1,164)
State income taxes, net of federal effect (138) (696) -
Cumulative effect of tax rate change - 6,594 -
--------- --------- ---------
Total nonutility subsidiary income tax expense (22,695) (45,078) 2,516
--------- --------- ---------
Total consolidated income tax expense 93,953 62,145 88,939
Income taxes included in other income (25,906) (48,031) 4,209
Income taxes included in cumulative effect of accounting change - - 9,458
--------- --------- ---------
Income taxes included in utility operating expenses $ 119,859 $ 110,176 $ 75,272
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Components of Consolidated Deferred Tax Liabilities (Assets)
------------------------------------------------------------
At December 31,
----------------------
1994 1993
----------------------
(Thousands of Dollars)
<S> <C> <C>
Utility deferred tax liabilities (assets)
Depreciation and other book to tax basis differences $ 723,248 $ 672,625
Rapid amortization of certified pollution control
facilities 29,018 31,090
Deferred taxes on amounts to be collected through
future rates 95,465 88,787
Property taxes 11,212 10,218
Deferred fuel 177 4,644
Prepayment premium on debt retirement 21,537 11,215
Deferred investment tax credit (25,922) (27,435)
Contributions in aid of construction (24,954) (23,951)
Other 25,454 21,825
--------- ---------
Total utility deferred tax liabilities (net) 855,235 789,018
Current portion of utility deferred tax liabilities
(included in Other Current Liabilities) 6,779 8,295
--------- ---------
Total utility deferred tax liabilities (net) - non current $ 848,456 $ 780,723
========= =========
Nonutility subsidiary deferred tax liabilities (assets)
Finance leases $ 134,925 130,833
Operating leases 117,782 114,134
Reversal of previously accrued taxes related
to partnerships (16,385) (16,969)
Alternative minimum tax (77,167) (75,610)
Other (24,477) (9,789)
--------- ---------
Total nonutility subsidiary deferred tax liabilities (net),
(included in Deferred taxes and other) $ 134,678 $ 142,599
========= =========
44
</TABLE>
The Omnibus Budget Reconciliation Act of 1993, which was
enacted on August 10, 1993, increased the federal corporate
income tax rate from 34% to 35% for the periods beginning after
December 31, 1992.
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.
45
(5) Other Taxes
-----------
Taxes, other than income taxes, charged to utility operating
expenses for each period are shown below.
----------------------------------------------------------------
1994 1993 1992
----------------------------------------------------------------
(Thousands of Dollars)
Gross receipts $ 93,549 $ 88,044 $ 81,266
Property 60,443 58,193 55,965
Payroll 11,063 10,534 10,582
County fuel-energy 30,842 34,614 37,283
Environmental, use and
other 10,183 9,867 9,084
-------- -------- --------
$206,080 $201,252 $194,180
======== ======== ========
-----------------------------------------------------------------
46
(6) Jointly Owned Generating Facilities
-----------------------------------
The Company owns a 9.72% undivided interest in the Conemaugh
Generating Station located near Johnstown, Pennsylvania,
consisting of two baseload units totaling 1,700 megawatts. The
Company and other utilities own the station as tenants in common
and share costs and output in proportion to their ownership
shares. Each owner has arranged its own financing relating to
its share of the facility. The Company's share of the operating
expenses of the station is included in the Consolidated
Statements of Earnings. The Company's investment in the
Conemaugh facility of $81.1 million at December 31, 1994 and
$67.1 million at December 31, 1993, includes $9.5 million and
$23.4 million of Construction Work in Progress, respectively.
The Conemaugh Generating Station is required to comply with
certain provisions of the Clean Air Act Amendments of 1990. As
of December 31, 1994 nitrogen oxide reduction equipment has been
installed on both generating units and flue gas desulfurization
equipment has been installed on Unit 1. The Unit 2 flue gas
desulfurization equipment is scheduled for completion by December
31, 1995. The Company's share of the construction costs is
approximately $38 million. The project, at December 31, 1994,
was approximately 85% complete.
47
<TABLE>
(7) Common Equity
Changes in common stock, premium on stock and retained income are summarized
below.
<CAPTION>
---------------------------------------------------------------------------------------
Common Stock Premium Retained
Shares Par Value on Stock Income
---------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Balance, December 31, 1991 111,105,797 $ 111,106 $ 841,583 $ 776,140
Net income before net earnings
from nonutility subsidiary - - - 188,621
Nonutility subsidiary:
Net earnings - - - 28,161
Marketable equity securities
valuation allowance, net of tax - - - 4,067
Dividends:
Preferred stock - - - (14,392)
Common stock - - - (179,823)
Conversion of convertible
debentures 2,220 2 58 -
Conversion of preferred stock 22,318 22 169 -
Gain on acquisition of preferred
stock - - 24 -
Other capital contributions - - 25 -
Sale of common stock through
Shareholder Dividend
Reinvestment Plan 1,787,724 1,788 42,414 -
Issuance of common stock to
Employee Savings Plans 378,384 378 9,028 -
Sale of common stock through
public offerings 1,000,000 1,000 25,788 -
----------- ---------- ---------- ----------
Balance, December 31, 1992 114,296,443 114,296 919,089 802,774
Net income before net earnings
from nonutility subsidiary - - - 216,478
Nonutility subsidiary:
Net earnings - - - 25,101
Marketable equity securities
valuation allowance, net of tax - - - 1,172
Dividends:
Preferred stock - - - (16,255)
Common stock - - - (189,837)
Conversion of convertible
debentures 3,480 4 93 -
Conversion of preferred stock 5,534 6 42 -
Loss on acquisition of preferred
stock - - (24) -
Other capital contributions - - 69 -
Sale of common stock through
Shareholder Dividend
Reinvestment Plan 1,638,227 1,638 42,655 -
Issuance of common stock to
Employee Savings Plans 362,468 362 9,277 -
Sale of common stock through
public offerings 1,491,500 1,492 40,577 -
----------- ---------- ---------- ----------
Balance, December 31, 1993 117,797,652 117,798 1,011,778 839,433
Net income before net earnings
from nonutility subsidiary - - - 208,074
Nonutility subsidiary:
Net earnings - - - 19,088
Marketable securities net
unrealized loss, net of tax - - - (23,879)
Dividends:
Preferred stock - - - (16,437)
Common stock - - - (195,755)
Conversion of preferred stock 3,845 4 29 -
Gain on acquisition of preferred
stock - - 109 -
Other capital reductions - - (66) -
Sale of common stock through
Shareholder Dividend
Reinvestment Plan 355,198 355 6,603 -
Issuance of common stock to
Employee Savings Plans 91,408 91 2,236 -
----------- ---------- ---------- ----------
Balance, December 31, 1994 118,248,103 $ 118,248 $1,020,689 $ 830,524
=========== ========== ========== ==========
48
</TABLE>
The Company's Shareholder Dividend Reinvestment Plan (DRP)
provides that shares of common stock purchased through the plan
may be original issue shares or, at the option of the Company,
shares purchased in the open market. The DRP permits additional
cash investments by plan participants limited to one investment
per month of not less than $25 and not more than $5,000.
As of December 31, 1994, 48,869 shares of common stock were
reserved for issuance upon the conversion of convertible
preferred stock, 2,771,633 shares for issuance upon the
conversion of the 7% convertible debentures, 3,392,500 shares for
issuance upon the conversion of the 5% convertible debentures,
2,483,222 shares for issuance under the DRP and 1,299,867 shares
for issuance under the Employee Savings Plans.
Certain provisions of the Company's corporate charter,
relating to preferred and preference stock, would impose
restrictions on the payment of dividends under certain
circumstances. No portion of retained income was so restricted
at December 31, 1994.
49
(8) Serial Preferred Stock
----------------------
The Company has authorized 11,159,434 shares of cumulative $50
par value Serial Preferred Stock. At December 31, 1994 and 1993,
there were outstanding 5,379,433 shares and 5,461,038 shares,
respectively. The various series of Serial Preferred Stock
outstanding (excluding 2,871,251 shares of Redeemable Serial
Preferred Stock - See Note 9) and the per share redemption price
at which each series may be called by the Company are as follows.
-----------------------------------------------------------------
Redemption December 31,
Price 1994 1993
-----------------------------------------------------------------
(Thousands of
Dollars)
$2.44 Series of 1957, 300,000 shares $51.00 $15,000 $15,000
$2.46 Series of 1958, 300,000 shares $51.00 15,000 15,000
$2.28 Series of 1965, 400,000 shares $51.00 20,000 20,000
$3.82 Series of 1969, 500,000 shares $51.00 25,000 25,000
$2.44 Convertible Series of 1966,
8,182 and 8,838 shares,
respectively $50.00 409 442
Auction Series A, 1,000,000 shares $50.00 50,000 50,000
-------- --------
$125,409 $125,442
======== ========
-----------------------------------------------------------------
The $2.44 Convertible Series of 1966 is convertible into
common stock of the Company at a price based upon a formula that
is subject to adjustment in certain events. At December 31,
1994, 5.88 shares of common stock could be obtained upon the
conversion of each share of convertible preferred stock at the
then effective conversion price of $8.51 per share of common
stock. The number of shares of this series converted into common
stock was 656 shares in 1994, 948 shares in 1993 and 3,827 shares
in 1992.
Dividends on the Serial Preferred Stock, Auction Series A,
are cumulative and are based on the rate determined by auction
procedures prior to each dividend period. The maximum rate can
range from 110% to 200% of the applicable "AA" Composite
Commercial Paper Rate. The annual dividend rate is 4.833%
($2.4165) for the period December 1, 1994 through February 28,
1995. The average annual dividend rates were 3.55% ($1.775) in
1994 and 2.8% ($1.40) in 1993.
50
(9) Redeemable Serial Preferred Stock
---------------------------------
The outstanding series of $50 par value Redeemable Serial
Preferred Stock are shown below.
-----------------------------------------------------------------
December 31,
1994 1993
-----------------------------------------------------------------
(Thousands of Dollars)
$3.37 Series of 1987, 871,251 and
952,200 shares, respectively $ 43,563 $ 47,610
$3.89 Series of 1991, 1,000,000 shares 50,000 50,000
$3.40 Series of 1992, 1,000,000 shares 50,000 50,000
-------- --------
143,563 147,610
Redemption requirement due within
one year - (610)
-------- --------
$143,563 $147,000
======== ========
----------------------------------------------------------------
The shares of the $3.37 (6.74%) Series are subject to mandatory
redemption, at par, through the operation of a sinking fund.
Beginning June 1993, not less than 30,000 nor more than 60,000
shares will be redeemed annually. The option to redeem in excess
of 30,000 shares annually is not cumulative; however, shares
which are acquired or redeemed by the Company other than through
the operation of the sinking fund may, at the option of the
Company, be applied toward the satisfaction of sinking fund
requirements. Presently, the shares are callable for redemption
at a per share price of $52.25, which is reduced in succeeding
years, equaling par value beginning June 1, 2002.
The shares of the $3.89 (7.78%) Series are subject to
mandatory redemption, at par, through the operation of a sinking
fund which will redeem not less than 165,000 nor more than
330,000 shares annually, beginning June 1, 2001 and 175,000
shares on June 1, 2006. The option to redeem in excess of
165,000 shares annually is not cumulative. The shares may be
called for redemption at any time at a per share price of $53.89;
however, the shares are not redeemable prior to June 1, 1996,
through certain refunding operations. The redemption price is
reduced in succeeding years, equaling $50.98 beginning June 1,
2003.
51
The shares of the $3.40 (6.80%) Series are subject to
mandatory redemption, at par, through the operation of a sinking
fund which will redeem 50,000 shares annually, beginning
September 1, 2002 with the remaining shares redeemed on September
1, 2007. The shares are not redeemable prior to September 1,
2002; thereafter, the shares are redeemable at par.
In the event of default with respect to dividends, or
sinking fund or other redemption requirements relating to the
serial preferred stock, no dividends may be paid, nor any other
distribution made, on common stock. Payments of dividends on all
series of serial preferred or preference stock, including series
which are redeemable, must be made concurrently.
The sinking fund requirements through 1999 with respect to
the Redeemable Serial Preferred Stock are $1.1 million in 1997
and $1.5 million annually thereafter.
52
<TABLE>
(10) Long-Term Debt
<CAPTION>
Details of long-term debt are shown below.
------------------------------------------------------------------------------------------------------
Interest December 31,
Rate Maturity 1994 1993
------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
First Mortgage Bonds
Fixed Rate Series:
5-1/4% December 1, 1994 $ - $ 15,000
5% December 15, 1995 40,000 40,000
5-5/8% December 31, 1997 16,000 18,000
4-3/8% February 15, 1998 50,000 50,000
4-1/2% May 15, 1999 45,000 45,000
9% April 15, 2000 100,000 100,000
5-1/8% April 1, 2001 15,000 15,000
5-7/8% May 1, 2002 35,000 35,000
6-5/8% February 15, 2003 40,000 40,000
5-5/8% October 15, 2003 50,000 50,000
6-1/2% July 1, 2004 - 15,000
6-1/8% July 1, 2007 - 38,300
6-1/2% July 1, 2007 - 20,000
6-1/2% March 15, 2008 78,000 78,000
5-7/8% October 15, 2008 50,000 50,000
6-5/8% January 1, 2009 - 7,500
9-3/4% May 1, 2019 - 43,000
8-5/8% August 15, 2019 59,800 63,000
9% June 1, 2021 100,000 100,000
6% September 1, 2022 30,000 30,000
6-3/8% January 15, 2023 37,000 37,000
7-1/4% July 1, 2023 100,000 100,000
6-7/8% September 1, 2023 100,000 100,000
5-3/8% February 15, 2024 42,500 -
5-3/8% February 15, 2024 38,300 -
6-7/8% October 15, 2024 75,000 75,000
8-1/2% May 15, 2027 75,000 75,000
7-1/2% March 15, 2028 40,000 40,000
Variable Rate Series:
Adjustable rate December 1, 2001 50,000 50,000
---------- ----------
Total First Mortgage Bonds 1,266,600 1,329,800
Convertible Debentures
5% September 1, 2002 115,000 115,000
7% January 15, 2018 68,412 68,834
Medium-Term Notes
6.25% May 28, 1996 25,000 -
6.66% to 6.73% May 1997 100,000 -
9.08% July and August 1997 50,000 50,000
7.46% to 7.60% January 2002 40,000 40,000
7.64% January 17, 2007 35,000 35,000
6.25% January 20, 2009 50,000 -
7% January 15, 2024 50,000 -
---------- ----------
Total Utility Long-Term Debt 1,800,012 1,638,634
Net unamortized discount (31,168) (31,646)
Current portion (45,445) (17,367)
---------- ----------
Net Utility Long-Term Debt $1,723,399 $1,589,621
========== ==========
Nonutility Subsidiary Long-term Debt
Varying rates through 2011 $1,140,505 $1,027,705
========== ==========
53
</TABLE>
Utility Long-Term Debt
----------------------
The outstanding First Mortgage Bonds (bonds) are secured by a
lien on substantially all of the Company's property and plant.
Additional bonds may be issued under the mortgage as amended and
supplemented in compliance with the provisions of the indenture.
During 1994, the Company issued $80.8 million of 5-3/8%
First Mortgage Bonds and $225 million of 6-1/4% to 7% Medium-Term
Notes with various maturities. A portion of the proceeds from
these financings was used to redeem $127 million of higher cost
First Mortgage Bonds and to satisfy long-term debt maturities and
sinking fund requirements totaling $17 million.
The interest rate on the $50 million Adjustable Rate series
First Mortgage Bonds is adjusted annually on December 1, based
upon 116% of the 10-year "constant maturity" United States
Treasury bond rate for the preceding three-month period ended
October 31. Effective December 1, 1994, the applicable interest
rate is 8.68%. The applicable interest rate was 6.657% at
December 1, 1993 and 7.733% at December 1, 1992. The Bonds were
nonredeemable prior to December 1, 1994.
The 7% Convertible Debentures are convertible into shares of
common stock at a conversion price of $27 per share.
The 5% Convertible Debentures are convertible into shares of
common stock at a conversion rate of 29-1/2 shares for each
$1,000 principal amount.
The aggregate amounts of maturities and sinking fund
requirements for the Company's long-term debt outstanding at
December 31, 1994 are $45.4 million in 1995, $31 million in 1996,
$156 million in 1997, $50 million in 1998 and $45 million in
1999.
Nonutility Subsidiary Long-Term Debt
------------------------------------
Long-term debt at December 31, 1994 consisted of $1.1 billion
of recourse debt from institutional lenders maturing at various
dates between 1995 and 2003. The interest rates of such
borrowings ranged from 4.7% to 10.1%. The weighted average
interest rate was 7.47% at December 31, 1994, 7.45% at December
31, 1993 and 8.13% at December 31, 1992. Annual aggregate
principal repayments are $260.4 million in 1995, $188.5 million
in 1996, $135.5 million in 1997, $177.3 million in 1998, $126.5
million in 1999 and $179.5 million thereafter.
54
Long-term debt also includes $72.7 million of non-recourse
debt, $48.7 million of which was secured by aircraft currently
under operating lease. The debt is payable in monthly
installments at rates of LIBOR (London Interbank Offered Rate)
plus 1.25% and LIBOR plus 1.375% with final maturity on March 15,
2002. Non-recourse debt of $24 million is related to PCI's
majority-owned real estate partnerships of which $15.5 million is
due in consecutive monthly installments with maturity on May 11,
2001, based on a 30-year amortization period at a fixed rate of
interest of 9.05%. The remaining non-recourse real estate debt
consists of $8.5 million payable in monthly installments at a
fixed rate of interest of 9.66% with final maturity on October 1,
2011.
55
<TABLE>
(11) Fair Value of Financial Instruments
----------------------------------------
The estimated fair values of the Company's financial instruments at
December 31, 1994 and 1993 are shown below.
<CAPTION>
--------------------------------------------------------------------------------------------
December 31,
1994 1993
--------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Utility
Capitalization and Liabilities
Serial preferred stock $ 125,409 102,102 125,442 110,919
Redeemable serial
preferred stock $ 143,563 134,008 147,000 164,115
Long-term debt
First Mortgage Bonds $1,208,076 1,093,208 1,297,355 1,354,887
Medium-Term Notes $ 347,712 324,223 124,435 138,823
Convertible Debentures $ 167,611 146,098 167,831 177,107
Nonutility Subsidiary
Assets
Marketable securities $ 473,608 473,608 466,153 473,151
Notes receivable $ 61,278 58,616 60,688 60,300
Liabilities
Long-term debt $1,140,505 1,122,638 1,027,705 1,080,978
--------------------------------------------------------------------------------------------
56
</TABLE>
The methods and assumptions below were used to estimate, at
December 31, 1994 and 1993, 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 and excluding amounts
due within one year, 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.
(12) Short-Term Debt
---------------
The Company's short-term financing requirements have been
satisfied principally through the sale of commercial promissory
notes.
The Company maintains a minimum 100% line of credit back-up
for its outstanding commercial promissory notes, which was unused
during 1994, 1993 and 1992.
57
Nonutility Subsidiary Short-Term Notes Payable
----------------------------------------------
The nonutility subsidiary's short-term financing requirements
have been satisfied principally through the sale of commercial
promissory notes.
The nonutility subsidiary maintains a minimum 100% line of
credit back-up for its outstanding commercial promissory notes,
which was unused during 1994, 1993 and 1992.
(13) Commitments and Contingencies
-----------------------------
Leases
------
The Company leases its general office building and certain data
processing and duplicating equipment, motor vehicles,
communication system and construction equipment under long-term
lease agreements. The lease of the general office building
expires in 2002 and leases of equipment extend for periods of up
to 6 years. Charges under such leases are accounted for as
operating expenses or construction expenditures, as appropriate.
Rents, including property taxes and insurance, net of rental
income from subleases, aggregated approximately $14.9 million in
1994, $13.6 million in 1993 and $12.6 million in 1992. The
approximate annual commitments under all operating leases,
reduced by rentals to be received under subleases are $13.4
million in 1995, $12.4 million in 1996, $5.8 million in 1997,
$5.4 million in 1998, $5.2 million in 1999 and a total of $15.5
million in the years thereafter.
During December 1994, the Company entered into a sale (at
cost) and leaseback agreement for its control center system
(system). The system is an integrated energy management system
used by the Company's power dispatchers to centrally control the
operation of the Company's electric system, which consists of all
of its generating units, the transmission system and the
distribution system. The Company has accounted for the lease of
the system as a capital lease, recorded at the present value of
future lease payments which totaled $152 million at December 31,
1994. The lease requires semi-annual payments of $7.6 million
over a 25-year period and provides for transfer of ownership of
the system to the Company for $1 at the end of the lease term.
Under SFAS No. 71, the amortization of leased assets is modified
so that the total of interest on the obligation and amortization
of the leased asset is equal to the rental expense allowed for
ratemaking purposes. This lease has been treated as an operating
lease for ratemaking purposes.
58
Fuel Contracts
--------------
The Company has numerous coal contracts with various expiration
dates through 2003 for aggregate annual deliveries of
approximately 3.5 million tons. Deliveries under these contracts
are expected to provide approximately 58% of the estimated system
coal requirements in 1995. Approximately 42% of the estimated
system coal requirements in 1995 will be purchased under shorter
term agreements and on a spot basis from a variety of suppliers.
Prices under the Company's coal contracts are generally
determined by reference to base amounts adjusted to reflect
provisions for changes in suppliers' costs, which in turn are
determined by reference to published indices and limited by
current market prices.
Capacity Purchase Agreements
----------------------------
The Company's long-term capacity purchase agreements with Ohio
Edison and APS commenced June 1, 1987 and are expected to
continue at the 450 megawatt level through 2005. Under the terms
of the agreement with Ohio Edison, the Company is required to
make capacity payments, subject to certain contingencies, which
include a share of Ohio Edison's fixed operating and maintenance
cost. The approximate monthly capacity commitment under this
agreement, excluding an allocation of fixed operating and
maintenance cost, was $12,380 per megawatt through 1993, $18,060
per megawatt effective 1994 through 1998 and $25,620 per megawatt
from 1999 through 2005.
The Company began a 25-year purchase agreement in June 1990
with SMECO for 84 megawatts of capacity supplied by a combustion
turbine installed and owned by SMECO at the Company's Chalk Point
Generating Station. The Company is responsible for all costs
associated with operating and maintaining the facility. The
capacity payment to SMECO is $462,000 per month.
Environmental Contingencies
---------------------------
During 1993, the Company was served 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
59
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 the 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.
The Company is subject to contingencies associated with
environmental matters, principally related to possible
obligations to remove or mitigate the effects on the environment
of the disposal of certain substances at the sites discussed
below.
During 1993, the Company and two other potentially
responsible parties (PRPs) completed a removal action at a site
in Harmony, West Virginia pursuant to an Administrative Order
(AO) issued by the Environmental Protection Agency (EPA).
Approximately $3 million (of which the Company has paid one-
third, subject to possible reallocation) was expended on the
removal action, which the EPA has stated is in compliance with
the AO. The Company and two other PRPs have entered into
settlements with third parties to recover approximately $2.4
million of this cost. EPA oversight costs, which are not
expected to be material, have not yet been assessed. While
compliance with the AO has been completed, the Company cannot
determine whether it will be subject to any future liability with
respect to this site.
60
In October 1994 a Remedial Investigation/Feasibility Study
(RI/FS) report was submitted to the EPA with respect to a site in
Philadelphia, Pennsylvania. Pursuant to an agreement among the
participating PRPs, the Company is responsible for 12% of the
costs of the RI/FS. Total costs of the RI/FS, including legal
fees, are currently estimated to be $5.6 million. The Company
has paid $836,000 to date. The report includes a number of
possible remedies, the estimated costs of which range from $2
million to $90 million. While a remedy near the lower end of the
range is possible, the Company cannot predict what remedy may be
acceptable to the EPA. In addition, the Company cannot estimate
the total extent of the EPA's administrative and oversight costs.
To date, the Company has accrued approximately $1.7 million for
its share of this contingency.
Litigation
----------
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
-----
In September 1994, to further reduce future costs and staffing
levels, the Company announced a Voluntary Severance Program
(VSP). As an incentive to voluntarily sever employment no later
than the first quarter of 1995, the VSP offered a severance
payment to any full-time employee with five or more years of
service with the Company, based on two weeks of pay for each year
of service, not to exceed 52 weeks of pay. Approximately 340 of
the Company's employees will participate in the VSP. During
January 1995, approximately $7.4 million in severance costs was
expensed.
Subsidiaries of the Company and the Columbia Gas System,
Inc. have formed a joint venture partnership (the Partnership) to
own and operate natural gas and storage 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 December 31, 1994, the remaining $14.9
million of the loan commitment is yet to be drawn upon by the
Partnership.
61
Nonutility Subsidiary
---------------------
At December 31, 1994 a portion ($263 million carrying value) of
PCI's aircraft leasing portfolio consisted of equipment not on
lease (four L-1011 aircraft returned by TWA when leases expired
in November 1994) and equipment on short-term, and in some cases,
usage-based operating leases with monthly rentals and maintenance
payments dependent upon hours used. Under these leases, PCI is
responsible for future operating and maintenance expenses
exceeding amounts provided therefor by lessees and, during 1994,
PCI provided net charges of $8.3 million (before tax) against
earnings to establish reserves against such future estimated
expenses. Most of the usage-based and short-term leases include
provisions for early termination by PCI if more favorable
transactions become available. In January 1995, because of the
lessee's inability to make timely rental payments and to satisfy
other lease obligations, Fortunair Canada returned one B747
aircraft previously under short-term lease. PCI is continuing to
seek new leases with more favorable terms or to sell the
equipment on satisfactory terms.
All rental payments due under equipment leases are current.
Continental Airlines (Continental) has announced that it intends
to seek the termination of certain A-300 aircraft leases and,
effective February 1, 1995, the reduction of rental payments due
under certain leases of other widebody aircraft. Pending
discussions with lessors, Continental has indicated that it will
not be making payments to such lessors as required by the terms
of its contracts. Continental has approached PCI to request
discussions regarding the return of one A-300 aircraft and the
renegotiation of certain other leases of widebody aircraft.
Continental has indicated that payments under these leases could
include debt securities convertible into equity in lieu of full
cash payments. PCI has informed Continental that it expects all
lease obligations to be satisfied in full.
There can be no assurance that PCI will be able to obtain
new leases, sell or otherwise dispose of aircraft on satisfactory
terms, following scheduled or unscheduled lease terminations.
62
(14) Supplemental Cash Flow Information
----------------------------------
Listed below is supplemental disclosure of cash flow information.
-----------------------------------------------------------------
1994 1993 1992
-----------------------------------------------------------------
(Thousands of Dollars)
Cash paid for:
Interest, net of capitalized
interest (including nonutility
subsidiary interest of $83,724,
$76,556 and $86,917) $203,013 206,955 204,657
Income taxes $ 51,368 67,741 52,764
Nonutility subsidiary noncash
transactions:
Promissory note received in
exchange for equipment $ - - 10,000
Consolidation of majority-owned
subsidiaries $ - 35,320 -
-----------------------------------------------------------------
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.
63
(15) Selected Nonutility Subsidiary Financial Information
----------------------------------------------------
Selected financial information of the Company's principal
consolidated nonutility investment subsidiary, Potomac Capital
Investment Corporation (PCI) and its subsidiaries, is presented
below. The Company's equity investment in PCI was reduced from
$295 million to $271.1 million at December 31, 1994, by a $23.9
million allowance against retained income to recognize year-end
unrealized depreciation of marketable securities on an after-tax
basis. Subsidiary equity at December 31, 1993 was $290.9
million. During January 1995, PCI declared a $9 million dividend
payable to the Company on January 31, 1995. Dividends to the
Company were $15 million in 1994 and $14 million in 1993.
-----------------------------------------------------------------
For the year ended
December 31,
1994 1993 1992
-----------------------------------------------------------------
(Thousands of Dollars)
Income
Leasing activities $111,262 $114,226 $122,087
Marketable securities 35,148 38,417 37,062
Other 596 (13,302) 2,005
-------- -------- --------
147,006 139,341 161,154
-------- -------- --------
Expenses
Interest 84,783 77,861 86,156
Administrative and general 10,259 14,640 9,762
Depreciation and operating 55,571 66,817 34,559
Income tax (credit) expense (22,695) (45,078) 2,516
-------- -------- --------
127,918 114,240 132,993
-------- -------- --------
Net earnings from nonutility
subsidiary $ 19,088 $ 25,101 $ 28,161
======== ======== ========
64
Marketable Securities
---------------------
In January 1994, PCI adopted SFAS No. 115 entitled "Accounting
for Certain Investments in Debt and Equity Securities." At
December 31, 1994, PCI's marketable securities, all of which are
classified as available-for-sale as defined by 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 stockholder's equity.
At December 31, 1993, preferred stock with mandatory
redemption features and corporate debt securities were generally
carried at cost and amortized cost, respectively. Certain of
these securities which the Company believed had been permanently
impaired were carried at estimated net realizable value. Equity
securities at December 31, 1993 were carried at the lower of cost
or market and any unrealized losses thereon were recognized, net
of tax, in stockholder's equity.
65
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
December 31,
1994 1993
---------------------------------------------------------------
Gross
Market Unrealized Carrying Market
Cost Value Losses Value Value
-----------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Mandatory redeemable
preferred stock $ 511,791 $ 473,608 $ (38,183) $ 465,034 $ 472,633
Debt securities - - - 1,116 518
Equity securities 3 - (3) 3 -
---------- ---------- ---------- ---------- ----------
Total $ 511,794 $ 473,608 $ (38,186) $ 466,153 $ 473,151
========== ========== ========== ========== ==========
-----------------------------------------------------------------------------------------
66
</TABLE>
Net recognized gains from marketable securities amounted to
$7 million and $7.5 million in 1993 and 1992, respectively.
At December 31, 1994, the contractual maturities (in
thousands of dollars) for mandatory redeemable preferred stock
are shown below.
Within one year $ 13,192
One to five years 50,247
Five to ten years 189,797
Over ten years 258,555
--------
511,791
Less gross unrealized losses (38,183)
--------
$473,608
========
In determining gross realized gains and losses on sales or
maturities of securities, specific identification is used.
For the Year Ended
December 31, 1994
------------------
(Thousands of Dollars)
Gross realized gains $ 2,889
Gross realized losses (2,139)
-------
Net gain $ 750
=======
67
Leasing Activities
------------------
PCI's net investment in finance leases consists primarily of
direct finance leases and are summarized below.
-----------------------------------------------------------------
December 31,
1994 1993
-----------------------------------------------------------------
(Thousands of Dollars)
Rents receivable $517,052 $419,284
Estimated residual values 153,814 155,187
Less: Unearned and deferred income (260,539) (215,947)
-------- --------
Investment in finance leases 410,327 358,524
Less: Deferred taxes arising from
finance leases (134,925) (130,833)
-------- --------
Net investment in finance leases $275,402 $227,691
======== ========
-----------------------------------------------------------------
Minimum lease payments receivable from finance leases,
primarily aircraft, for each of the years 1995 through 1999 are
$43.5 million, $32.3 million, $27.1 million, $31.2 million and
$30 million, respectively. Net income from leveraged leases was
$5.6 million in 1994, $1.1 million in 1993 and $7.1 million in
1992.
Rent payments receivable from aircraft equipment operating
leases for each of the years 1995 through 1999 are $49.1 million
in 1995, $44.8 million in 1996, $42.5 million in 1997, $33.8
million in 1998 and $29.1 million in 1999.
During 1994, PCI purchased and leased back to a Dutch
electric generating company a one-third undivided interest in a
recently-constructed 650 megawatt (gross) baseload, coal and gas
fired power plant located in the Netherlands. PCI's equity
investment totaled $60 million and is accounted for as a
leveraged lease.
In September 1992, PCI entered into an operating lease, as
lessee of two aircraft with monthly rental payments of
approximately $850,000. The lease is scheduled to terminate in
September 1997.
68
<TABLE>
(16) Quarterly Financial Summary (Unaudited)
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
---------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars except Per Share Data)
<S> <C> <C> <C> <C> <C>
1994
Operating Revenue $ 374,910 458,431 605,023 352,236 1,790,600
Total Revenue $ 393,044 467,451 607,476 355,103 1,823,074
Operating Expenses $ 355,708 370,439 447,020 325,414 1,498,581
Operating Income $ 37,336 97,012 160,456 29,689 324,493
Net Income $ 14,414 64,293 134,702 13,753 227,162
Earnings for Common Stock $ 10,268 60,224 130,576 9,657 210,725
Earnings Per Common Share $ .09 .51 1.11 .08 1.79
Dividends Per Share $ .415 .415 .415 .415 1.66
1993
Operating Revenue $ 331,236 416,152 610,540 344,514 1,702,442
Total Revenue $ 339,455 419,693 614,261 351,796 1,725,205
Operating Expenses $ 302,833 332,796 442,306 322,608 1,400,543
Operating Income $ 36,622 86,897 171,955 29,188 324,662
Net Income $ 13,044 77,022 144,671 6,842 241,579
Earnings for Common Stock $ 8,931 72,974 140,631 2,788 225,324
Earnings Per Common Share $ .08 .63 1.21 0.02 1.95
Dividends Per Share $ .41 .41 .41 .41 1.64
1992
Operating Revenue $ 321,119 381,294 544,753 315,001 1,562,167
Total Revenue $ 325,946 390,536 553,631 331,445 1,601,558
Operating Expenses $ 296,616 320,874 405,903 298,712 1,322,105
Operating Income $ 29,330 69,662 147,728 32,733 279,453
Income Before Cumulative Effect of Accounting Change $ 8,049 49,159 122,804 20,748 200,760
Cumulative Effect of Accounting Change,
Net of Income Taxes $ 16,022 - - - 16,022
Net Income $ 24,071 49,159 122,804 20,748 216,782
Earnings for Common Stock $ 20,667 45,839 119,243 16,641 202,390
Earnings Per Common Share
Before Cumulative Effect of Accounting Change $ .04 .41 1.06 .15 1.66
Cumulative Effect of Accounting Change $ .14 - - - .14
Total $ .18 .41 1.06 .15 1.80
Dividends Per Share $ .40 .40 .40 .40 1.60
The Company's sales of electric energy are seasonal and, accordingly,
comparisons by quarter within a year are not meaningful.
The total of the four quarterly earnings per share may not equal
the earnings per share for the year due to changes in the number of
common shares outstanding during the year.
69
</TABLE>
<TABLE>
Stock Market Information
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
1994 High Low 1993 High Low
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1st Quarter $26-5/8 $21-3/4 1st Quarter $26-1/2 $23-7/8
2nd Quarter $23-1/2 $18-1/2 2nd Quarter $27-3/8 $25-5/8
3rd Quarter $21-1/2 $18-3/8 3rd Quarter $28-7/8 $27-1/8
4th Quarter $19-3/4 $18-1/4 4th Quarter $28-3/4 $24-5/8
(Close $18-3/8) (Close $26-3/4)
Shareholders at December 31, 1994: 96,638
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Selected Consolidated Financial Data
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1984
------------------------------------------------------------------------------------------------------------------------------
(Thousands except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Revenue $1,790,600 1,702,442 1,562,167 1,552,066 1,411,713 1,394,909 1,197,534
Total Revenue $1,823,074 1,725,205 1,601,558 1,619,315 1,501,728 1,531,024 1,363,998
Operating Expenses $1,498,581 1,400,543 1,322,105 1,329,084 1,245,579 1,256,553 1,129,148
Net Earnings from Nonutility
Subsidiary $ 19,088 25,101 28,161 23,351 5,035 31,100 6,618
Income Before Cumulative Effect of
Accounting Change $ 227,162 241,579 200,760 210,164 170,234 214,587 168,184
Cumulative Effect of Accounting
Change, Net of Income Taxes $ - - 16,022 - - - -
Net Income $ 227,162 241,579 216,782 210,164 170,234 214,587 168,184
Earnings for Common Stock $ 210,725 225,324 202,390 197,866 159,636 205,352 152,331
Average Common Shares Outstanding 118,006 115,640 112,390 105,911 98,621 95,203 94,340
Earnings Per Common Share
Utility Operation<F1> $ 1.63 1.73 1.55 <F1> 1.65 1.57 1.83 1.54
Nonutility Subsidiary $ .16 .22 .25 .22 .05 .33 .07
Consolidated $ 1.79 1.95 1.80 <F1> 1.87 1.62 2.16 1.61
Cash Dividends Per Common Share $ 1.66 1.64 1.60 1.56 1.52 1.46 0.97
Investment in Property
and Plant $5,938,031 5,665,141 5,367,624 5,048,121 4,659,280 4,270,718 3,201,287
Net Investment in Property
and Plant $4,298,260 4,131,142 3,931,257 3,706,866 3,397,992 3,097,532 2,374,217
Utility Assets $5,291,467 5,000,328 4,478,762 4,174,713 3,852,415 3,528,883 2,801,091
Nonutility Subsidiary Assets $1,674,289 1,665,132 1,663,508 1,679,079 1,387,247 1,113,827 264,366
Total Assets $6,965,756 6,665,460 6,142,270 5,853,792 5,239,662 4,642,710 3,065,457
Long-Term Utility Obligations
(including redeemable preferred
and preference stock) $1,866,962 1,736,621 1,727,609 1,662,157 1,516,073 1,286,429 1,096,272
------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Includes $.14 as the cumulative effect of an accounting change for
unbilled revenue.
</FN>
70
</TABLE>
Appendix A
1. The 1994 Use of Revenue pie chart presents the following
information.
Fuel and Purchased Energy 31%
Wages and Benefits 9
Materials and Services 5
Capacity Purchase Payments 7
Taxes 18*
Depreciation and Amortization 10*
Interest 7*
Preferred Stock Dividends 1*
Common Stock Dividends 11*
Retained Income 1*
---
100%
===
*Plant-Related Costs
Appendix A
2. The Cooling Degree Hours bar chart presents the following
information.
% of
20-Year
Average
-------
1990 85%
1991 123%
1992 62%
1993 122%
1994 105%
Appendix A
3. The System Fuel Costs line chart presents the following
information.
Year Coal Oil Gas System
---- ------ ----- ----- ------
1985 $1.83 $4.50 - $2.22
1986 $1.74 $3.07 $2.76 $1.92
1987 $1.64 $2.97 $2.69 $1.81
1988 $1.67 $2.74 $2.32 $1.84
1989 $1.69 $2.78 $2.52 $1.95
1990 $1.77 $3.00 $2.34 $1.94
1991 $1.78 $2.76 $2.18 $1.93
1992 $1.72 $2.50 $2.32 $1.85
1993 $1.72 $2.55 $2.88 $1.90
1994 $1.73 $2.70 $2.49 $1.95
Appendix A
4. The Construction Expenditures bar chart presents the
following information.
Construction
Expenditures Total Construction
(excluding AFUDC and Clean Air Act Expenditures
Clean Air Act) Expenditures (excluding AFUDC)
-------------------- ------------- ------------------
Actual:
1990 $393 - $393
1991 391 $ 8 399
1992 298 30 328
1993 237 63 300
1994 240 58 298
Forecast:
1995 182 33 215
1996 163 7 170
1997 178 32 210
1998 197 43 240
1999 200 50 250
