UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1995
------------------
Commission file number 1-1072
------
Potomac Electric Power Company
- ----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
District of Columbia and Virginia 53-0127880
- ----------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 Pennsylvania Avenue, N.W., Washington, D.C. 20068
- ----------------------------------------------------------------
(Address of principal executive office) (Zip Code)
(202) 872-2456
- ----------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for the past
90 days. Yes /X/. No / /.
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Class Outstanding at September 30, 1995
- ---------------------------- ---------------------------------
Common Stock, $1 par value 118,492,747
TABLE OF CONTENTS
PART I - Financial Information Page
Item 1 - Consolidated Financial Statements
Consolidated Statements of Earnings and Retained Income.. 2
Consolidated Balance Sheets.............................. 3
Consolidated Statements of Cash Flows.................... 4
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies......... 5
(2) Income Taxes....................................... 9
(3) Capitalization..................................... 12
(4) Fair Value of Financial Instruments................ 15
(5) Marketable Securities.............................. 17
(6) Commitments and Contingencies...................... 19
(7) Proposed Merger.................................... 22
Report of Independent Accountants on Review of Interim
Financial Information.................................... 24
Item 2 - Management's Discussion and Analysis of Consolidated
Results of Operations and Financial Condition
Utility
Proposed Merger........................................ 25
Results of Operations.................................. 25
Capital Resources and Liquidity........................ 28
Maryland Order in Generic Competition Proceeding....... 29
New Accounting Standard................................ 29
The Cove Point Joint Venture........................... 30
Joint Venture for Wireless Data Communication
Network and New Energy Services Subsidiary Formed.... 30
Nonutility Subsidiary
Results of Operations.................................. 30
Capital Resources and Liquidity........................ 36
PART II - Other Information
Item 1 - Legal Proceedings................................. 37
Item 5 - Other Information
Proposed Merger.......................................... 37
Other Financing Arrangements............................. 41
Base Rate Proceedings.................................... 42
Peak Load, Sales, Conservation and Construction and
Generating Capacity.................................... 44
Labor Agreement.......................................... 47
Selected Nonutility Subsidiary Financial Information..... 47
Statistical Data......................................... 49
Item 6 - Exhibits and Reports on Form 8-K.................. 50
Signatures................................................. 51
Computation of Earnings Per Common Share................... 52
Computation of Ratios - Parent Company Only................ 53
Computation of Ratios - Fully Consolidated................. 54
Independent Accountants Awareness Letter................... 55
1
<TABLE>
Part I FINANCIAL INFORMATION
- ------ ---------------------
Item 1 CONSOLIDATED FINANCIAL STATEMENTS
- ------ ---------------------------------
POTOMAC ELECTRIC POWER COMPANY
Consolidated Statements of Earnings and Retained Income
(Unaudited)
-------------------------------------------------------
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
-------------------- ---------- ----------- ----------------------
1995 1994 1995 1994 1995 1994
--------- --------- ---------- ---------- ---------- -----------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Revenue
Sales of electricity $ 640,253 $ 603,073 $1,440,266 $1,432,601 $1,790,729 $1,775,409
Other electric revenue 2,258 1,950 6,133 5,763 7,906 7,469
--------- --------- ---------- ---------- ---------- ----------
Total Operating Revenue 642,511 605,023 1,446,399 1,438,364 1,798,635 1,782,878
Interchange deliveries 21,073 2,453 27,453 29,607 30,319 36,890
--------- --------- ---------- ---------- ---------- ----------
Total Revenue 663,584 607,476 1,473,852 1,467,971 1,828,954 1,819,768
--------- --------- ---------- ---------- ---------- ----------
Operating Expenses
Fuel 111,842 90,916 265,013 307,907 349,836 393,473
Purchased energy 55,677 63,820 143,706 135,719 181,371 174,833
Capacity purchase payments 30,286 33,024 94,832 97,422 125,231 121,931
Other operation 53,291 51,531 164,725 150,575 220,257 209,806
Maintenance 21,930 21,066 65,803 66,604 91,813 95,117
--------- --------- ---------- ---------- ---------- ----------
Total Operation and Maintenance 273,026 260,357 734,079 758,227 968,508 995,160
Depreciation and amortization 55,507 47,576 151,600 133,066 198,521 175,485
Income taxes 90,926 77,603 125,320 121,800 123,378 119,474
Other taxes 60,889 61,484 157,560 160,074 203,565 205,656
--------- --------- ---------- ---------- ---------- ----------
Total Operating Expenses 480,348 447,020 1,168,559 1,173,167 1,493,972 1,495,775
--------- --------- ---------- ---------- ---------- ----------
Operating Income 183,236 160,456 305,293 294,804 334,982 323,993
--------- --------- ---------- ---------- ---------- ----------
Other (Loss) Income
Nonutility Subsidiary
Income 34,747 35,552 101,298 102,603 145,701 143,086
Loss on assets held for disposal - - (170,078) - (170,078) -
Expenses, including interest
and income taxes (38,827) (30,952) (55,173) (95,661) (87,429) (132,061)
--------- --------- ---------- ---------- ---------- ----------
Net (loss) earnings from nonutility
subsidiary (4,080) 4,600 (123,953) 6,942 (111,806) 11,025
Allowance for other funds
used during construction 367 1,309 1,084 7,315 2,892 10,242
Other, net 1,571 2,145 7,006 627 10,424 2,966
--------- --------- ---------- ---------- ---------- ----------
Total Other (Loss) Income (2,142) 8,054 (115,863) 14,884 (98,490) 24,233
--------- --------- ---------- ---------- ---------- ----------
Income Before Utility Interest Charges 181,094 168,510 189,430 309,688 236,492 348,226
--------- --------- ---------- ---------- ---------- ----------
Utility Interest Charges
Long-term debt 32,839 32,269 97,498 95,107 129,792 126,806
Other 4,091 2,975 12,536 8,638 15,707 10,796
Allowance for borrowed funds
used during construction (1,783) (1,436) (5,741) (7,466) (7,898) (9,626)
--------- --------- ---------- ---------- ---------- ----------
Net Utility Interest Charges 35,147 33,808 104,293 96,279 137,601 127,976
--------- --------- ---------- ---------- ---------- ----------
Net Income 145,947 134,702 85,137 213,409 98,891 220,250
Dividends on Preferred Stock 4,200 4,126 12,675 12,341 16,772 16,394
--------- --------- ---------- ---------- ---------- ----------
Earnings for Common Stock 141,747 130,576 72,462 201,068 82,119 203,856
Retained Income at Beginning of Period 689,475 800,385 830,524 839,433 877,755 884,768
Dividends on Common Stock (49,152) (48,956) (147,316) (146,758) (196,313) (194,881)
Subsidiary Marketable Securities Net
Unrealized Gain (Loss), Net of Tax 1,956 (4,250) 28,356 (15,988) 20,465 (15,988)
--------- --------- ---------- ---------- ---------- ----------
Retained Income at End of Period $ 784,026 $ 877,755 $ 784,026 $ 877,755 $ 784,026 $ 877,755
========= ========= ========== ========== ========== ==========
Average Common Shares
Outstanding (000's) 118,488 118,048 118,385 117,957 118,326 117,791
Earnings Per Common Share $1.20 $1.11 $0.61 $1.70 $0.69 $1.73
Cash Dividends Per Common Share $0.415 $0.415 $1.245 $1.245 $1.660 $1.655
Book Value Per Share $16.15 $16.93
Dividend Payout Ratio 240.6% 95.7%
Effective Federal Income Tax Rate 19.7% 25.5%
2
</TABLE>
<TABLE>
POTOMAC ELECTRIC POWER COMPANY
Consolidated Balance Sheets
(Unaudited at September 30, 1995 and 1994)
------------------------------------------
<CAPTION>
September 30, December 31, September 30,
ASSETS 1995 1994 1994
------ ------------- ------------- -------------
(Thousands of Dollars)
<S> <C> <C> <C>
Property and Plant - at original cost
Electric plant in service $ 5,957,833 $ 5,801,349 $ 5,563,170
Construction work in progress 134,167 147,224 318,362
Electric plant held for future use 4,061 18,041 17,831
Nonoperating property 22,770 7,556 7,542
------------- ------------- -------------
6,118,831 5,974,170 5,906,905
Accumulated depreciation (1,724,899) (1,639,771) (1,615,037)
------------- ------------- -------------
Net Property and Plant 4,393,932 4,334,399 4,291,868
------------- ------------- -------------
Current Assets
Cash and cash equivalents 21,866 7,198 1,853
Customer accounts receivable, less allowance
for uncollectible accounts of $1,656, $2,432
and $2,620 190,932 107,351 159,894
Other accounts receivable, less allowance for
uncollectible accounts of $300 34,712 57,128 26,836
Accrued unbilled revenue 111,320 67,543 105,940
Prepaid taxes 29,426 34,352 48,400
Other prepaid expenses 7,301 5,448 5,634
Material and supplies - at average cost
Fuel 64,336 73,671 71,467
Construction and maintenance 73,620 72,447 72,647
------------- ------------- -------------
Total Current Assets 533,513 425,138 492,671
------------- ------------- -------------
Deferred Charges
Income taxes recoverable through future rates, net 241,795 251,357 250,270
Conservation costs, net 221,552 161,204 143,162
Unamortized debt reacquisition costs 54,773 56,725 57,390
Other 122,664 98,783 105,474
------------- ------------- -------------
Total Deferred Charges 640,784 568,069 556,296
------------- ------------- -------------
Nonutility Subsidiary Assets
Cash and cash equivalents 1,678 - 8,980
Marketable securities 521,555 473,608 480,123
Investment in finance leases 490,252 410,327 414,525
Operating lease equipment, net of accumulated
depreciation of $69,432, $116,832 and $108,778 234,654 544,064 544,134
Assets held for disposal 104,370 - -
Receivables, less allowance for uncollectible
accounts of $5,000, $5,000 and $0 78,854 76,426 76,518
Other investments 131,946 147,313 153,479
Other assets 14,137 22,551 19,023
------------- ------------- -------------
Total Nonutility Subsidiary Assets 1,577,446 1,674,289 1,696,782
------------- ------------- -------------
Total Assets $ 7,145,675 $ 7,001,895 $ 7,037,617
============= ============= =============
CAPITALIZATION AND LIABILITIES
- ------------------------------
Capitalization
Common stock $ 118,493 $ 118,248 $ 118,147
Other common equity 1,794,582 1,837,050 1,882,517
Serial preferred stock 125,341 125,409 125,414
Redeemable serial preferred stock 143,485 143,563 145,063
Long-term debt 1,816,847 1,723,399 1,768,296
------------- ------------- -------------
Total Capitalization 3,998,748 3,947,669 4,039,437
------------- ------------- -------------
Other Non-Current Liabilities
Capital lease obligation 165,771 167,324 30,672
------------- ------------- -------------
Total Other Non-Current Liabilities 165,771 167,324 30,672
------------- ------------- -------------
Current Liabilities
Long-term debt due within one year 124,800 45,445 17,000
Short-term debt 68,750 189,600 232,675
Accounts payable and accrued expenses 242,238 175,258 228,831
Capital lease obligation due within one year 20,772 20,772 5,539
Other 111,911 107,404 113,420
------------- ------------- -------------
Total Current Liabilities 568,471 538,479 597,465
------------- ------------- -------------
Deferred Credits
Income taxes 880,093 848,456 831,063
Investment tax credits 65,519 68,256 69,169
Other 30,228 31,766 29,703
------------- ------------- -------------
Total Deferred Credits 975,840 948,478 929,935
------------- ------------- -------------
Nonutility Subsidiary Liabilities
Long-term debt 1,055,260 1,140,505 1,132,170
Short-term notes payable 221,200 48,400 94,590
Deferred taxes and other 160,385 211,040 213,348
------------- ------------- -------------
Total Nonutility Subsidiary Liabilities 1,436,845 1,399,945 1,440,108
------------- ------------- -------------
Total Capitalization and Liabilities $ 7,145,675 $ 7,001,895 $ 7,037,617
============= ============= =============
3
</TABLE>
<TABLE>
POTOMAC ELECTRIC POWER COMPANY
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------
<CAPTION>
Nine Months Ended Twelve Months Ended
September 30, September 30,
----------------------- -----------------------
1995 1994 1995 1994
--------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating Activities
Income from utility operations $ 209,090 $ 206,467 $ 210,697 $ 209,225
Adjustments to reconcile income to net
cash from operating activities:
Depreciation and amortization 151,600 133,066 198,521 175,485
Deferred income taxes and investment tax credits 34,358 33,790 45,209 36,575
Allowance for funds used during construction (6,825) (14,781) (10,790) (19,868)
Changes in materials and supplies 8,162 (11,879) 6,158 1,224
Changes in accounts receivable and accrued unbilled revenue (104,942) (66,746) (44,294) 15,489
Changes in accounts payable 26,339 8,273 26,323 409
Changes in other current assets and liabilities 51,423 34,305 10,359 (32,504)
Changes in deferred conservation costs (85,149) (69,166) (108,486) (91,840)
Net other operating activities (12,672) (16,969) 4,656 12,466
Nonutility subsidiary:
Net (loss) earnings (123,953) 6,942 (111,806) 11,025
Deferred income taxes (48,917) 1,366 (43,897) 7,910
Loss on assets held for disposal 170,078 - 170,078 -
Changes in other assets and net other operating activities 41,912 38,803 50,756 23,844
--------- --------- --------- ---------
Net Cash From Operating Activities 310,504 283,471 403,484 349,440
--------- --------- --------- ---------
Investing Activities
Total investment in property and plant (178,628) (234,831) (260,687) (322,761)
Allowance for funds used during construction 6,825 14,781 10,790 19,868
--------- --------- --------- ---------
Net investment in property and plant (171,803) (220,050) (249,897) (302,893)
Nonutility subsidiary:
Purchase of marketable securities (21,333) (119,077) (29,591) (195,596)
Proceeds from sale or redemption of marketable securities 19,275 80,263 21,456 157,315
Investment in leased equipment (102,981) (64,182) (110,933) (66,076)
Proceeds from sale or disposition of leased equipment - 1,150 - 1,150
Proceeds from sale of assets 1,500 - 1,500 -
Purchase of other investments (3,154) (6,785) (3,560) (41,580)
Proceeds from sale or distribution of other investments 15,111 15,425 18,115 15,080
Investment in promissory notes (913) (79) (1,376) (144)
Proceeds from promissory notes 5,644 3,560 6,986 4,167
--------- --------- --------- ---------
Net Cash Used by Investing Activities (258,654) (309,775) (347,300) (428,577)
--------- --------- --------- ---------
Financing Activities
Dividends on common stock (147,316) (146,758) (196,313) (194,881)
Dividends on preferred stock (12,675) (12,341) (16,772) (16,394)
Issuance of common stock 4,580 7,447 6,418 34,592
Redemption of preferred stock (78) (2,547) (1,578) (2,547)
Issuance of long-term debt 188,594 302,999 188,594 475,810
Reacquisition and retirement of long-term debt (17,623) (127,392) (34,653) (467,392)
Proceeds from sale and leaseback of control center system - - 152,000 -
Short-term debt, net (120,850) (61,940) (163,925) 154,875
Other financing activities (17,691) (5,199) (26,945) (16,233)
Nonutility subsidiary:
Issuance of long-term debt 150,000 239,750 197,000 239,750
Repayment of long-term debt (235,245) (135,286) (273,909) (237,781)
Short-term debt, net 172,800 (31,660) 126,610 81,290
--------- --------- --------- ---------
Net Cash (Used By) From Financing Activities (35,504) 27,073 (43,473) 51,089
--------- --------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 16,346 769 12,711 (28,048)
Cash and Cash Equivalents at Beginning of Period 7,198 10,064 10,833 38,881
--------- --------- --------- ---------
Cash and Cash Equivalents at End of Period $ 23,544 $ 10,833 $ 23,544 $ 10,833
========= ========= ========= =========
Cash paid for interest (net of capitalized interest) and income taxes:
Interest (including nonutility subsidiary
interest of $83,795, $75,119, $92,400 and $81,473) $ 190,481 $ 170,093 $ 223,907 $ 203,958
Income taxes $ 16,834 $ 15,277 $ 52,925 $ 61,944
Nonutility subsidiary noncash transactions:
Consolidation of majority-owned subsidiaries $ - $ - $ - $ 24,000
4
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
The Company's utility operations are regulated by the
Maryland and District of Columbia public service commissions and,
as to its wholesale business, the Federal Energy Regulatory
Commission (FERC). The Company complies with the Uniform System
of Accounts prescribed by the FERC and adopted by the Maryland
and District of Columbia regulatory commissions. In conformity
with generally accepted accounting principles (GAAP), 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.
The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could
differ from those estimates.
Certain 1994 amounts have been reclassified to conform to
the current year presentation.
A description of significant accounting policies follows:
Principles of Consolidation
- ---------------------------
The consolidated financial statements combine the financial
results of the Company and all majority-owned subsidiaries. The
Company's principal subsidiary is Potomac Capital Investment
Corporation (PCI). All material intercompany balances and
transactions have been eliminated.
Total Revenue
- -------------
Revenue is accrued for service rendered but unbilled as of
the end of each month. The Company includes in revenue the
amounts received for sales to other utilities related to pooling
and interconnection agreements. Amounts received for such
interchange deliveries are a component of the Company's fuel
rates.
The Company 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
5
includes all of the District of Columbia and major portions of
Montgomery and Prince George's counties in suburban Maryland.
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.
In the District of Columbia, pre-July 1993 conservation
costs receive rate base treatment. Conservation expenditures for
the period July 1993 to December 1994 are recovered through a
surcharge mechanism which initially became effective July 11,
1995, and which will be updated annually on June 1 to recover
1995 and subsequent conservation expenditures, including a
capital cost recovery factor. A procedure has been established
to consider lost revenue without the need for base rate
proceedings. In Maryland, conservation costs are recovered
through a surcharge rate which reflects amortization of program
costs including costs in the year during which the surcharge
commences, a capital cost recovery factor, incentives, applicable
taxes and estimated lost revenue. The surcharge is established
annually in a collaborative process with the recovery of lost
revenue subject to an earnings test performed on a quarterly
basis.
Leasing Transactions
- --------------------
Income from PCI investments in direct finance and leveraged
lease transactions, in which PCI is an equity participant, is
reported using the financing method. In accordance with the
financing method, investments in leased property are recorded as
a receivable from the lessee to be recovered through the
collection of future rentals. For direct finance leases,
unearned income is amortized to income over the lease term at a
constant rate of return on the net investment. Income, including
investment tax credits on leveraged equipment leases, is
recognized over the life of the lease at a level rate of return
on the positive net investment.
6
PCI investments in equipment under operating leases are
stated at cost less accumulated depreciation, except that
equipment held for disposal is carried at estimated fair value
less estimated costs to sell. Depreciation is recorded on a
straight line basis over the equipment's estimated useful life.
There will be no future depreciation on equipment held for
disposal.
Property and Plant
- ------------------
The cost of additions to, and replacements or betterments
of, retirement units of property and plant is capitalized. Such
cost includes material, labor, the capitalization of an Allowance
for Funds Used During Construction (AFUDC) and applicable
indirect costs, including engineering, supervision, payroll taxes
and employee benefits. The original cost of depreciable units of
plant retired, together with the cost of removal, net of salvage,
is charged to accumulated depreciation. Routine repairs and
maintenance are charged to operating expenses as incurred.
The Company uses separate depreciation rates for each
electric plant account. The rates, which vary from jurisdiction
to jurisdiction, were equivalent to a system-wide composite
depreciation rate of approximately 3.1% for 1995, 1994 and 1993.
Conservation
- ------------
In general, the Company accounts for conservation
expenditures in connection with its demand side management (DSM)
program as a deferred charge, and amortizes the costs over five
years in Maryland and ten years in the District of Columbia.
Allowance for Funds Used During Construction
- --------------------------------------------
In general, the Company capitalizes AFUDC with respect to
investments in Construction Work in Progress with the exception
of expenditures required to comply with federal, state or local
environmental regulations (pollution control projects), which are
included in rate base without capitalization of AFUDC. The
Company accrues a capital cost recovery factor on the retail
jurisdictional portion of certain pollution control projects
related to compliance with the Clean Air Act (CAA). The base for
calculating this return is the amount by which the retail
jurisdictional CAA expenditure balance exceeds the CAA balance
included in rate base in the Company's most recently completed
base rate proceeding.
7
The jurisdictional AFUDC capitalization rates are determined
as prescribed by the FERC. The effective capitalization rates
were approximately 8%, compounded semiannually, for the nine
months ended September 30, 1995, and approximately 7.6% in 1994
and 8.7% in 1993, compounded semiannually.
Cash and Cash Equivalents
- -------------------------
For purposes of the consolidated financial statements, cash
and cash equivalents include cash on hand, money market funds and
commercial paper with maturities of three months or less.
Nonutility Subsidiary Receivables
- ---------------------------------
PCI, the Company's nonutility subsidiary, continuously
monitors its receivables and establishes an allowance for
doubtful accounts against its notes receivable, when deemed
appropriate, on a specific identification basis. The direct
write-off method is used when trade receivables are deemed
uncollectible.
Income Taxes
- ------------
The Company's accounting for income taxes is in accordance
with Statement of Financial Accounting Standards (SFAS) No. 109
entitled "Accounting for Income Taxes" which requires the use of
an asset and liability approach for financial reporting and
accounting for deferred income taxes. Deferred taxes are being
recorded for all temporary differences based upon currently
enacted tax rates.
8
<TABLE>
(2) INCOME TAXES
- ----------------
Provision for Income Taxes Charged to Continuing Operations
- -----------------------------------------------------------
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
-------------------- ---------------------- ---------------------
1995 1994 1995 1994 1995 1994
-------- -------- ---------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Utility current tax expense
Federal $ 66,468 $ 56,543 $ 79,418 $ 74,121 $ 68,692 $ 66,023
State and local 9,229 7,915 10,658 10,249 9,021 9,092
-------- -------- --------- -------- -------- --------
Total utility current tax expense 75,697 64,458 90,076 84,370 77,713 75,115
-------- -------- --------- -------- -------- --------
Utility deferred tax expense
Federal 13,859 12,275 32,294 31,604 42,760 35,225
State and local 1,654 1,723 4,801 4,923 6,099 5,659
Investment tax credits (913) (912) (2,737) (2,737) (3,650) (3,604)
-------- -------- --------- -------- -------- --------
Total utility deferred tax expense 14,600 13,086 34,358 33,790 45,209 37,280
-------- -------- --------- -------- -------- --------
Total utility income tax expense 90,297 77,544 124,434 118,160 122,922 112,395
-------- -------- --------- -------- -------- --------
Nonutility subsidiary current tax expense
Federal (23,512) (18,730) (31,452) (22,416) (38,351) (31,412)
-------- -------- --------- -------- -------- --------
Nonutility subsidiary deferred tax expense
Federal 17,220 17,135 (49,441) 2,456 (45,139) 9,938
State and local - (222) - (1,091) 953 (922)
-------- -------- --------- -------- -------- --------
Total nonutility subsidiary deferred tax expense 17,220 16,913 (49,441) 1,365 (44,186) 9,016
-------- -------- --------- -------- -------- --------
Total nonutility subsidiary income tax credit (6,292) (1,817) (80,893) (21,051) (82,537) (22,396)
-------- -------- --------- -------- -------- --------
Total consolidated income tax expense 84,005 75,727 43,541 97,109 40,385 89,999
Income taxes included in other income (6,921) (1,876) (81,779) (24,691) (82,993) (29,475)
-------- -------- --------- -------- -------- --------
Income taxes included in utility operating expenses $ 90,926 $ 77,603 $ 125,320 $121,800 $123,378 $119,474
======== ======== ========= ======== ======== ========
9
</TABLE>
<TABLE>
Reconciliation of Consolidated Income Tax Expense
- -------------------------------------------------
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
-------------------- ---------------------- ---------------------
1995 1994 1995 1994 1995 1994
-------- -------- --------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Income before income taxes $229,952 $210,429 $ 128,678 $310,518 $139,276 $310,249
======== ======== ========= ======== ======== ========
Utility income tax at federal
statutory rate $ 84,113 72,676 $ 116,733 $113,619 $116,767 $112,567
Increases (decreases) resulting from
Depreciation 2,248 1,941 6,745 5,690 9,077 5,905
Removal costs (1,419) (966) (4,318) (3,296) (5,108) (4,903)
Allowance for funds used during
construction 161 (264) 488 (2,002) 79 (2,244)
Other (966) (1,196) (2,606) (3,018) (3,763) (4,488)
State income taxes, net of federal effect 7,073 6,265 10,129 9,904 9,908 9,631
Tax credits (913) (912) (2,737) (2,737) (4,038) (4,008)
Cumulative effect of tax rate change - - - - - (65)
-------- -------- --------- -------- -------- --------
Total utility income tax expense 90,297 77,544 124,434 118,160 122,922 112,395
-------- -------- --------- -------- -------- --------
Nonutility subsidiary income tax at federal
statutory rate (3,630) 974 (71,696) (4,938) (68,020) (3,980)
Increases (decreases) resulting from
Dividends received deduction (2,169) (2,120) (6,482) (6,269) (8,700) (8,290)
Reversal of previously accrued deferred taxes - - - (6,547) (1,659) (6,568)
Other (493) (449) (2,715) (2,206) (5,111) (2,333)
State income taxes, net of federal effect - (222) - (1,091) 953 (1,225)
-------- -------- --------- -------- -------- --------
Total nonutility subsidiary income tax credit (6,292) (1,817) (80,893) (21,051) (82,537) (22,396)
-------- -------- --------- -------- -------- --------
Total consolidated income tax expense 84,005 75,727 43,541 97,109 40,385 89,999
Income taxes included in other income (6,921) (1,876) (81,779) (24,691) (82,993) (29,475)
-------- -------- --------- -------- -------- --------
Income taxes included in utility operating expenses $ 90,926 $ 77,603 $ 125,320 $121,800 $123,378 $119,474
======== ======== ========= ======== ======== ========
10
</TABLE>
<TABLE>
Components of Consolidated Deferred Tax Liabilities (Assets)
- ------------------------------------------------------------
<CAPTION>
Sept. 30, Dec. 31, Sept. 30,
1995 1994 1994
--------- -------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
Utility deferred tax liabilities (assets)
Depreciation and other book to tax
basis differences $758,523 $723,248 $ 716,282
Rapid amortization of certified pollution
control facilities 27,864 29,018 29,171
Deferred taxes on amounts to be collected
through future rates 91,568 95,465 95,053
Property taxes 11,682 11,212 10,709
Deferred fuel (5,151) 177 4,768
Prepayment premium on debt retirement 20,722 21,537 12,427
Deferred investment tax credit (24,810) (25,922) (26,268)
Contributions in aid of construction (25,627) (24,954) (23,826)
Other 27,997 25,454 24,068
-------- -------- ---------
Total utility deferred tax liabilities (net) 882,768 855,235 842,384
Current portion of utility deferred tax liabilities
(included in Other Current Liabilities) 2,675 6,779 11,321
-------- -------- ---------
Total utility deferred tax liabilities (net) - noncurrent $880,093 $848,456 $ 831,063
======== ======== =========
Nonutility subsidiary deferred tax liabilities (assets)
Finance leases $136,553 134,925 $ 126,738
Operating leases 126,687 117,782 114,687
Reversal of previously accrued taxes related
to partnerships (15,223) (16,385) (16,030)
Alternative minimum tax (61,899) (77,167) (75,610)
Other (83,640) (24,477) (15,399)
-------- -------- ---------
Total nonutility subsidiary deferred tax liabilities
(net), (included in Deferred taxes and other) $102,478 $134,678 $ 134,386
======== ======== =========
11
</TABLE>
Certain provisions of SFAS No. 109, allow regulated
enterprises to recognize regulatory assets and liabilities for
income taxes to be recovered from or returned to customers in
future rates. No valuation allowance for deferred tax assets was
required or recorded at September 30, 1995.
(3) CAPITALIZATION
--------------
Common Equity
- -------------
At September 30, 1995, 118,492,747 shares of the Company's
$1 par value Common Stock were outstanding. A total of 200
million shares is authorized. As of September 30, 1995,
2,324,721 shares were reserved for issuance under the Shareholder
Dividend Reinvestment Plan; 1,221,624 shares were reserved for
issuance under the Employee Savings Plans; and 2,771,633 and
3,392,500 shares were reserved for conversion of the 7% and 5%
Convertible Debentures, respectively. Under the Stock Option
Agreement with Baltimore Gas and Electric Company, 23,579,900
shares could become issuable, contingent upon specific events
associated with termination of the Merger Agreement.
Serial Preferred, Redeemable Serial Preferred and Preference
- ------------------------------------------------------------
Stock and Long-Term Debt
------------------------
At September 30, 1995, the Company had outstanding 5,376,517
shares of its $50 par value Serial Preferred Stock, including the
Redeemable Serial Preferred Stock. A total of 11,159,434 shares
is authorized. At September 30, 1995, the aggregate annual
dividend requirements on the Serial Preferred Stock and the
Redeemable Serial Preferred Stock were approximately $6.5 million
and $10.2 million, respectively. Also, the Company has a total
of 8,800,000 shares of cumulative, $25 par value, Preference
Stock authorized and unissued.
The Company's $2.44 Convertible Preferred Stock, 1966 Series
(6,821 shares outstanding at September 30, 1995) is convertible
into Common Stock at $8.51 per share.
At September 30, 1995, the Company had outstanding one
million shares of its Serial Preferred Stock, Auction Series A.
The annual dividend rate is 4.36% ($2.18) for the period
September 1, 1995 through November 30, 1995. For the period June
1, 1995 through August 31, 1995, the annual dividend rate was
4.625% ($2.3125). The average rate at which dividends were paid
during the 12 months ended September 30, 1995 was 4.59% ($2.295).
12
At September 30, 1995, the Company had outstanding three
series of $50 par value Redeemable Serial Preferred Stock. There
are one million shares of the $3.89 (7.78%) Series of 1991 on
which the sinking fund requirement commences June 1, 2001. There
are one million shares of the $3.40 (6.80%) Series of 1992 on
which the sinking fund requirement commences September 1, 2002.
There are 869,696 shares of the $3.37 (6.74%) Series of 1987 on
which the sinking fund requires redemption beginning June 1993,
at par, of not less than 30,000 nor more than 60,000 shares
annually. Sinking fund requirements through 1999 with respect to
the three series of Redeemable Serial Preferred Stock are $1
million in 1997 and $1.5 million annually thereafter.
The Company's Long-Term Debt at September 30, 1995, is
summarized below:
(Thousands of Dollars)
First Mortgage Bonds $1,441,600
Convertible Debentures 181,789
Notes Payable 350,000
Net Unamortized Discount (31,742)
Current Portion (124,800)
----------
Net Utility Long-Term Debt $1,816,847
==========
Nonutility Subsidiary Long-Term Debt $1,055,260
==========
At September 30, 1995, the aggregate annual interest
requirement on the Company's long-term debt, including debt due
within one year, was $128.5 million; and the aggregate amounts of
long-term debt maturities are $99.8 million in 1995, $25 million
in 1996, $150 million in 1997, $50 million in 1998 and $45
million in 1999. At September 30, 1995, long-term debt due
within one year consisted of $59.8 million of 8-5/8% First
Mortgage Bonds, $40 million of 5% First Mortgage Bonds and $25
million of 6-1/4% Medium-Term Notes.
On September 6, 1995, the Company sold at 99.132%, $100
million of 6-1/2% First Mortgage Bonds due in 2005 and at
99.366%, $75 million of 7-3/8% First Mortgage Bonds due in 2025.
The bonds were rated A1 by Moody's Investors Service, A by
Standard & Poor's Corporation and AA- by Duff & Phelps, Inc.
Proceeds from these sales were used to refund short-term debt and
applied to the October 11, 1995 redemption, at 105.03% of
principal amount plus accrued interest, of $59.8 million of 8-
5/8% First Mortgage Bonds due in 2019.
13
Nonutility Subsidiary Long-Term Debt
- ------------------------------------
Long-term debt at September 30, 1995, consisted primarily of
unsecured borrowings from institutional lenders maturing at
various dates between 1995 and 2003. The interest rates of such
borrowings ranged from 5% to 10.1%. The weighted average
effective interest rate was 7.65% at September 30, 1995, 7.47% at
December 31, 1994 and 7.42% at September 30, 1994. Annual
aggregate principal repayments on these borrowings are $38.1
million in 1995, $230.5 million in 1996, $160.5 million in 1997,
$242.3 million in 1998, $126.5 million in 1999 and $189.5 million
thereafter. Also included in long-term debt is $67.8 million of
non-recourse debt which is due in monthly installments with final
maturities in 2001, 2002 and 2011.
Long-Term Debt Ratings
- ----------------------
On July 10, 1995, Moody's confirmed its A1 rating on the
outstanding senior secured debt of the Company, as well as its
other ratings of senior securities and commercial paper of both
the utility and PCI, removing those securities from the Negative
Watch List. In late September 1995, following announcement of
the proposed merger with Baltimore Gas and Electric Company,
Moody's, Standard & Poor's and Duff & Phelps affirmed their
ratings of securities of the Company and PCI, maintaining Company
senior debt ratings of A1, A and AA-, respectively. Standard &
Poor's placed the securities of the Company and PCI on credit
watch with positive implications.
14
<TABLE>
(4) FAIR VALUE OF FINANCIAL INSTRUMENTS
- ---------------------------------------
The estimated fair values of the Company's financial instruments at
September 30, 1995, December 31, 1994 and September 30, 1994 are shown below.
<CAPTION>
September 30, December 31, September 30,
1995 1994 1994
-------------------------- ------------------------- -------------------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
----------- ---------- ---------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Utility
Capitalization and Liabilities
Serial preferred stock $ 125,341 112,287 125,409 102,102 125,414 102,156
========== ========= ========= ========= ========= =========
Redeemable serial
preferred stock $ 143,485 145,525 143,563 134,008 145,063 139,981
========== ========= ========= ========= ========= =========
Long-term debt
First Mortgage Bonds $1,325,427 1,314,415 1,208,076 1,093,208 1,251,897 1,146,771
Medium-Term Notes $ 322,933 323,249 347,712 324,223 347,638 330,885
Convertible Debentures $ 168,487 171,634 167,611 146,098 168,761 158,635
---------- --------- --------- --------- --------- ---------
Total long-term debt $1,816,847 1,809,298 1,723,399 1,563,529 1,768,296 1,636,291
========== ========= ========= ========= ========= =========
Nonutility Subsidiary
Assets
Marketable securities $ 521,555 521,555 473,608 473,608 480,123 480,123
========== ========= ========= ========= ========= =========
Notes receivable $ 62,256 61,355 61,278 58,616 57,157 59,800
========== ========= ========= ========= ========= =========
Liabilities
Long-term debt $1,055,260 1,058,417 1,140,505 1,122,638 1,132,170 1,100,000
========== ========= ========= ========= ========= =========
15
</TABLE>
The methods and assumptions below were used to estimate, at
September 30, 1995, December 31, 1994 and September 30, 1994, the
fair value of each class of financial instruments shown above for
which it is practicable to estimate that value.
The fair value of the Company's long-term debt, which
includes First Mortgage Bonds, Medium-Term Notes and Convertible
Debentures, excluding amounts due within one year, was based on
the current market price, or for issues with no market price
available, was based on discounted cash flows using current rates
for similar issues with similar terms and remaining maturities.
The fair value of the Company's Serial Preferred Stock,
including Redeemable Serial Preferred Stock, was based on quoted
market prices or discounted cash flows using current rates of
preferred stock with similar terms.
The fair value of PCI's Marketable Securities was based on
quoted market prices.
The fair value of PCI's Notes Receivable was based on
discounted future cash flows using current rates and similar
terms.
The fair value of PCI's long-term debt, including non-
recourse debt, was based on current rates offered to similar
companies for debt with similar remaining maturities.
16
(5) MARKETABLE SECURITIES
---------------------
SFAS No. 115 entitled, "Accounting for Certain Investments
in Debt and Equity Securities," was adopted by PCI in January
1994. PCI's marketable securities, all of which are classified
as available-for-sale as defined in SFAS No. 115, consist
primarily of investment grade preferred stocks with mandatory
redemption features. Pursuant to SFAS No. 115, net unrealized
gains and losses on such securities are reflected, net of tax, in
stockholders equity. The net unrealized gains (losses) are shown
below:
As of September 30, 1995
---------------------------------------
Net
Market Unrealized
Cost Value Gains/(Losses)
---------- ---------- --------------
(Thousands of Dollars)
Mandatory redeemable
preferred stock $ 514,328 $ 521,285 $ 6,957
Equity securities 341 270 (71)
---------- ---------- ------------
Total $ 514,669 $ 521,555 $ 6,886
========== ========== ============
As of December 31, 1994
---------------------------------------
Net
Market Unrealized
Cost Value Losses
---------- ---------- --------------
(Thousands of Dollars)
Mandatory redeemable
preferred stock $ 511,791 $ 473,608 $ (38,183)
Equity securities 3 - (3)
---------- ---------- ------------
Total $ 511,794 $ 473,608 $ (38,186)
========== ========== ============
17
As of September 30, 1994
---------------------------------------
Net
Market Unrealized
Cost Value Losses
---------- ---------- --------------
(Thousands of Dollars)
Mandatory redeemable
preferred stock $ 505,687 $ 480,123 $ (25,564)
Equity securities 3 - (3)
---------- ---------- ------------
Total $ 505,690 $ 480,123 $ (25,567)
========== ========== ============
Included in net unrealized gains and losses are gross
unrealized gains of $15.1 million and gross unrealized losses of
$8.2 million at September 30, 1995; gross unrealized losses of
$40 million and gross unrealized gains of $1.8 million at
December 31, 1994; and gross unrealized losses of $29.2 million
and gross unrealized gains of $3.6 million at September 30, 1994.
At September 30, 1995, the contractual maturities (in
thousands of dollars) for mandatory redeemable preferred stock
were as follows:
Within one year $ 8,318
One to five years 91,127
Five to ten years 162,386
Over ten years 252,497
--------
514,328
Plus net unrealized
gains 6,957
--------
$521,285
========
In determining gross realized gains and losses on sales or
maturities of securities, specific identification is used. A
summary of realized gains and losses is shown below.
Three Months Nine Months
Ended Ended
September 30, 1995 September 30, 1995
------------------ ------------------
(Thousands of Dollars)
Gross realized
gains $ 73 $ 435
Gross realized
losses (12) (220)
--------- --------
Net gain $ 61 $ 215
========= ========
18
Three Months Nine Months
Ended Ended
September 30, 1994 September 30, 1994
------------------ ------------------
(Thousands of Dollars)
Gross realized
gains $ 560 $ 2,863
Gross realized
losses (127) (1,542)
Recognized losses - (598)
--------- --------
Net gain $ 433 $ 723
========= ========
(6) COMMITMENTS AND CONTINGENCIES
-----------------------------
Environmental Contingencies
- ---------------------------
On October 3, 1995, the Company received notice from the
U.S. Environmental Protection Agency (EPA) that it, along with
several hundred other companies, may be a potentially responsible
party (PRP) in connection with the Spectron Superfund Site
located in Elkton, Maryland. The site was operated as a
hazardous waste disposal, recycling, and processing facility from
1961 to 1988. A group of PRPs allege, based on records they have
collected, that the Company's share of liability at this site is
0.0042% (Forty-two Ten-thousandths of a percent). EPA's notice
requests a good faith proposal to conduct or finance a Remedial
Investigation/Feasibility Study (RI/FS) at the site. EPA has
also indicated that a de minimis settlement is likely to be
appropriate for this site. While the outcome of negotiations and
the ultimate liability with respect to this site cannot be
predicted, the Company believes that it is a candidate for a de
minimis settlement wherein its liability will be resolved and, in
any event, its liability at this site will not have a material
adverse effect on its financial position.
As discussed in the 1994 Form 10-K and the June 30, 1995
Form 10-Q, the Company was served in August 1993, with Amended
Complaints filed in three jurisdictions (Prince George's County,
Baltimore City, and Baltimore County) in separate ongoing,
consolidated proceedings each denominated "In re: Personal
Injury Asbestos Cases". The Company (and other defendants) were
brought into these cases on a theory of premises liability under
which plaintiffs argue that the Company was negligent in not
providing a safe work environment for employees of its
contractors who allegedly were exposed to asbestos while working
on the Company's property. Initially, a total of approximately
four hundred and forty-eight (448) individual plaintiffs added
19
the Company to their Complaints. While the pleadings are not
entirely clear, it appears that each plaintiff seeks $2 million
in compensatory damages and $4 million in punitive damages from
each defendant. In a related proceeding in the Baltimore City
case, the Company was served, in September 1993, with a third
party complaint by Owens Corning Fiberglass, Inc. (Owens Corning)
alleging that Owens Corning was in the process of settling
approximately 700 individual asbestos-related cases and seeking a
judgment for contribution against the Company on the same theory
of alleged negligence set forth above in the plaintiffs' case.
Subsequently, Pittsburgh Corning Corp. (Pittsburgh Corning) filed
a third party complaint against the Company, seeking contribution
for the same plaintiffs involved in the Owens Corning third party
complaint. Since the filings, a number of individual suits have
been disposed of without any payment by the Company. The third
party complaints involving Pittsburgh Corning and Owens Corning
were dismissed by the Baltimore City Court during 1994 without
any payment by the Company. While the aggregate amount specified
in the remaining suits would exceed $1 billion, the Company
believes the amounts are greatly exaggerated as were the claims
already disposed of. The amount of total liability, if any, and
any related insurance recovery cannot be precisely determined at
this time; however, based on information and relevant
circumstances known at this time, the Company does not believe
these suits will have a material adverse effect on its financial
position. However an unfavorable decision rendered against the
Company could have a material adverse effect on results of
operations in the fiscal year in which a decision is rendered.
As also discussed in the 1994 Form 10-K and the June 30,
1995 Form 10-Q, a RI/FS report was submitted to the EPA in
October 1994, with respect to a site in Philadelphia,
Pennsylvania. Pursuant to an agreement among the PRPs, the
Company is responsible for 12% of the costs of the RI/FS. Total
costs of the RI/FS and associated activities prior to the
issuance of a Record of Decision (ROD) by EPA, including legal
fees, are currently estimated to be $6.5 million. The Company
has paid $.8 million as of September 30, 1995. The report
included a number of possible remedies, the estimated costs of
which range from $2 million to $90 million. On July 20, 1995,
EPA announced its proposed remedial action plan for the site and
indicated it will accept comments on the plan from any interested
parties. EPA's estimate of the costs associated with
implementation of the plan is approximately $17 million. The
Company cannot predict whether EPA will include the plan in its
ROD as proposed or make changes as a result of comments received.
In addition, the Company cannot estimate the total extent of the
EPA's administrative and oversight costs. To date, the Company
has accrued $1.7 million for its share of this contingency.
20
As also discussed in the June 30, 1995 Form 10-Q, on July 3,
1995, the United States Attorney for the District of Maryland
filed a Complaint and Consent Decree resolving violations of the
Clean Water Act by the Company which occurred at its Faulkner Fly
Ash Storage Facility located in Charles County, Maryland.
Pursuant to the terms of the Consent Decree the Company agreed to
pay a civil penalty of $975,000, which has been accrued at
September 30, 1995. If approved by the court, the settlement
will bring to an end an environmental investigation, begun at the
Company's request in 1993, of unlawful activities by a former
Company employee and contractors. The environmental violations
were discovered by Company environmental investigators in 1993
and involved wastewater discharges from treatment ponds that
occurred over several years at the Company's Faulkner Fly Ash
Storage Facility in Charles County, Maryland. Upon discovering
the violations, the Company immediately reported them to federal
and state authorities and fully cooperated with these officials
in a thorough investigation that resulted in the criminal
conviction and sentencing of a former employee. The Company also
terminated the employee, his supervisor and several contractors.
The Company is involved in other legal and administrative
(including environmental) proceedings before various courts and
agencies with respect to matters arising in the ordinary course
of business. Management is of the opinion that the final
disposition of these proceedings will not have a material adverse
effect on the Company's financial position or results of
operations.
Other
- -----
Subsidiaries of the Company and Columbia Gas System, Inc.
have formed a joint venture partnership (the Partnership) to own
and operate natural gas storage and terminaling facilities at
Cove Point, Maryland, and an 87-mile natural gas pipeline that
extends from Cove Point to Loudoun County, Virginia. A Company
subsidiary has loaned the Partnership $15 million to recommission
certain existing facilities and for new construction, which has
been completed. Commercial operation began on September 28,
1995.
In May 1995, the Company announced that its subsidiary,
PepData, Inc., entered into a joint venture agreement with
Metricom, Inc. to own and operate a wireless data network in the
Washington, D.C. metropolitan area. The Company will invest $7
million and own 20 percent of the joint venture. See Part I,
Item 2, Management's Discussion and Analysis of Consolidated
Results of Operations and Financial Condition for additional
information.
21
Nonutility Subsidiary
- ---------------------
See discussion of PCI in Part I, Item 2, Management's
Discussion and Analysis of Consolidated Results of Operations and
Financial Condition.
On July 31, 1995, Atlas Air, Inc. filed suit in New York
Superior Court requesting a declaratory judgment that the
duration of its lease of one B-747-200F aircraft from PCI may be
extended by Atlas, without PCI's consent, from December 1995
until as late as December 1999. On August 22, 1995, PCI filed
its answer to Atlas' complaint, stating that Atlas' position is
contrary to the plain meaning of the lease agreement and Atlas'
own prior course of conduct acknowledging the December 1995 lease
termination date. Cross-motions for summary judgment have been
filed, and the parties have requested an expedited hearing to
resolve the dispute. The Company believes that the outcome of
this litigation will not have a material adverse effect on its
financial position.
(7) PROPOSED MERGER
---------------
On September 22, 1995, the Company entered into an Agreement
and Plan of Merger with Baltimore Gas and Electric Company (BGE)
and RH Acquisition Corporation. This agreement provides for a
strategic business combination of the companies and will create a
new combined company with an integrated, non-holding company
structure. Each outstanding share of the Company's common stock
will be converted into the right to receive 0.997 shares of
common stock of the new company and each outstanding share of BGE
common stock will be converted into the right to receive one
share of the new company's common stock. This transaction is
expected to qualify as a tax-free exchange of shares for the
holders of each company's common stock and as a pooling of
interests for accounting purposes. The new company is expected
to be one of the ten largest electric utility companies in the
United States, serving a population of 4.5 million with
approximately 1.8 million electric customers and over 530,000
natural gas customers. For the year ended December 31, 1994, the
combined revenues of the Company and BGE were approximately $4.8
billion and the combined total assets were approximately $15.1
billion. It is estimated that net savings from the combined
utility systems will approximate $1.3 billion over 10 years. It
is also anticipated that the new company will adopt BGE's
dividend policy and that the annual dividend rate will be $1.67
per share as of the expected closing date. The Company currently
pays $1.66 per share annually and BGE's annual dividend rate
currently is $1.56 per share. The agreement is subject to the
approval by shareholders of both companies and certain regulatory
agencies including the Federal Energy Regulatory Commission, the
Public Service Commissions of Maryland and the District of
22
Columbia, the Nuclear Regulatory Commission and the Securities
and Exchange Commission. All approvals are expected to be
completed in approximately 12 to 18 months. See Part II, Item 5,
Other Information, for additional information concerning the
proposed merger.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
The information furnished in the accompanying Consolidated
Statements of Earnings and Retained Income, Consolidated Balance
Sheets and Consolidated Statements of Cash Flows reflects all
adjustments (which consist only of normal recurring accruals)
which are, in the opinion of management, necessary to a fair
presentation of the results of operations for the interim
periods. The accompanying consolidated financial statements and
notes thereto should be read in conjunction with the consolidated
financial statements and notes included in the Company's 1994
Annual Report to the Securities and Exchange Commission on Form
10-K.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
This Quarterly Report on Form 10-Q, including the report of
Price Waterhouse LLP (on page 24) will automatically be
incorporated by reference in the Prospectuses constituting part
of the Company's Registration Statements on Form S-3
(Registration Nos. 33-58810 and 33-61379) and Form S-8
(Registration Nos. 33-36798, 33-53685 and 33-54197) filed under
the Securities Act of 1933. Such report of Price Waterhouse LLP,
however, is not a "report" or "part of the Registration
Statement" within the meaning of Sections 7 and 11 of the
Securities Act of 1933 and the liability provisions of Section
11(a) of such Act do not apply.
23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
Potomac Electric Power Company
We have reviewed the accompanying consolidated balance sheets of
Potomac Electric Power Company and consolidated subsidiaries (the
Company) at September 30, 1995 and 1994 and the related
consolidated statements of earnings and retained income for the
three, nine and twelve month periods then ended and the
consolidated statements of cash flows for the nine and twelve
month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying financial
information for it to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of December
31, 1994, and the related consolidated statement of earnings and
consolidated statement of cash flows for the year then ended (not
presented herein); and in our report dated January 26, 1995, we
expressed an unqualified opinion, with an explanatory paragraph
for a change in accounting principles, on those consolidated
financial statements. In our opinion, the information set forth
in the accompanying consolidated balance sheet information as of
December 31, 1994, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been
derived.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Washington, D.C.
October 30, 1995
24
Part I FINANCIAL INFORMATION
- ------ ---------------------
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
- ------ ----------------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
UTILITY
- -------
PROPOSED MERGER
- ---------------
On September 22, 1995, the Company, BGE and RH Acquisition
Corp. entered into an Agreement and Plan of Merger which provides
for a strategic business combination involving the Company and
BGE in a merger transaction. See Part I, Item 1, Notes to
Consolidated Financial Statements, (7) Proposed Merger, for
additional information.
RESULTS OF OPERATIONS
- ---------------------
TOTAL REVENUE
Total revenue increased for the three, nine and twelve
months ended September 30, 1995, as compared to the corresponding
periods in 1994. The increase in revenue from sales of
electricity for the three months ended September 30, 1995 was
primarily due to an increase in kilowatt-hour sales of 6.2% over
the corresponding period in 1994, an increase in revenue of
approximately $9.1 million associated with the Company's Demand
Side Management (DSM) surcharge tariff in its Maryland
jurisdiction and a 3.8% increase in District of Columbia rates
that became effective July 11, 1995. In addition, there was an
increase during the quarter in the interchange deliveries to the
Pennsylvania-New Jersey-Maryland Interconnection Association
(PJM) and other companies. The increase in kilowatt-hour sales
for the three months ended September 30, 1995, was primarily
attributable to hotter than average summer weather with cooling
degree hours 24% above the three months ended September 30, 1994
and 13% above the 20-year average for this period. The increases
in revenue from the sales of electricity for the nine and twelve
months ended September 30, 1995, were primarily due to increases
associated with the Company's DSM surcharge tariff in its
Maryland jurisdiction of $20.2 million and $26.2 million for the
nine and twelve months ended September 30, 1995, respectively, as
compared to the same periods in 1994 and effects of the July 1995
and March 1994 base rate increases in the District of Columbia;
partially offset by decreases of .5% and 1% in kilowatt-hour
sales for the nine and twelve months ended September 30, 1995,
respectively, over the corresponding periods in 1994 and
decreases in fuel rate revenue. In addition, there were
decreases in interchange deliveries to PJM for the nine and
25
twelve months ended September 30, 1995, as compared to the
corresponding periods in 1994. The decreases in kilowatt-hour
sales for the nine and twelve months ended September 30, 1995,
were primarily due to milder winter weather in 1995, as compared
to 1994 when record-breaking frigid temperatures in January
resulted in extraordinary high sales.
Recent rate orders received by the Company provided for
changes in annual base rate revenue as shown in the table below:
Rate
Increase % Effective
Regulatory Jurisdiction ($000) Change Date
- ----------------------- ---------- ------- ---------------
District of Columbia $27,900 3.8% July 1995
Federal - Wholesale 2,300 1.8 January 1995
District of Columbia 26,700 3.9 March/June 1994
Federal - Wholesale 2,600 2.3 January 1994
Maryland 27,000 3.0 November 1993
OPERATING EXPENSES
Fuel and purchased energy increased for the three months
ended September 30, 1995 and decreased for the nine and twelve
months then ended as compared to the corresponding periods ended
September 30, 1994. Fuel expense increased for the three months
ended September 30, 1995, primarily as the result of an increase
in net generation of 28.2%, due to increased customer usage
caused by the hotter than average summer weather during the
period as compared to below average summer weather during the
corresponding period in 1994. Fuel expense decreased for the
nine and twelve months ended September 30, 1995, primarily as the
result of decreases in net generation of 6.5% and 7.7%,
respectively, due to decreased customer usage caused by milder
winter weather during these periods and decreases in the system
average fuel cost. The decreases in purchased energy for the
three months ended and the increases for the nine and twelve
months ended September 30, 1995, reflect changes in the levels
and prices of energy purchased from PJM and other utilities.
The unit fuel costs for the comparative periods ended
September 30, were as follows:
Three Nine Twelve
Months Ended Months Ended Months Ended
------------ ------------- ------------
1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
System Average
Fuel Cost
per MBTU $1.74 $1.89 $1.74 $1.99 $1.75 $1.98
26
The decrease in system average unit fuel cost for the three
months ended September 30, 1995, is primarily due to a decrease
in the cost of natural gas and an increase in the percent of
natural gas contribution to the fuel mix. The decreases in the
system average unit fuel cost for the nine and twelve months
ended September 30, 1995 were primarily attributable to decreased
net generation due to decreased customer usage of electricity and
an increase in the actual percent of coal contribution to the
fuel mix. The Company's major cycling and certain peaking units
can burn natural gas or oil, adding flexibility in selecting the
most cost-effective fuel mix.
For the twelve month periods ended September 30, 1995 and
1994, the Company obtained 84% and 73%, respectively, of its
system generation from coal based upon percentage of Btus.
Capacity purchase payments decreased for the three and nine
months ended and increased for the twelve months ended September
30, 1995, as compared to the corresponding periods in 1994. The
decrease for the three months ended September 30, 1995 reflects a
decrease in fixed operating and maintenance expense associated
with the capacity agreements with Ohio Edison and Allegheny Power
System (APS) and the expiration of the 147 megawatts of capacity
that was purchased from Pennsylvania Power & Light Company for a
one year period June 1, 1994 through May 31, 1995. The decrease
for the nine months ended September 30, 1995 reflects a decrease
in fixed operating and maintenance expenses associated with the
capacity agreements with Ohio Edison and APS. The increase for
the twelve months ended September 30, 1995 reflects a January 1,
1994 increase in the cost of capacity under agreements with Ohio
Edison and APS and the 147 megawatts of capacity that was
purchased from Pennsylvania Power & Light Company. The cost of
capacity, under the Ohio Edison and APS agreements, increased
from $12,380 per megawatt, per month, in effect from 1987 to
1993, to $18,060 per megawatt, per month, plus an allocation of
fixed operating and maintenance expenses.
Operating expenses other than fuel, purchased energy and
capacity purchase payments increased for the three, nine and
twelve months ended September 30, 1995 as compared to the
corresponding periods ended September 30, 1994. The increase for
the three months ended September 30, 1995 was principally
attributable to increased income taxes due to higher taxable
income and increased depreciation and amortization expense due to
additional investment in property and plant and the amortization
of increased amounts of conservation program costs. The
increases for the nine and twelve months ended September 30, 1995
were principally attributable to increased depreciation and
amortization, increased rent expense associated with the Control
Center Lease, which began in December 1994, a nonrecurring charge
of $7.4 million taken in January 1995 for operating costs
associated with the Company's Voluntary Severance Program and
increased income taxes.
27
See "Legal Proceedings," under Part II, Item 1, Other
Information, for additional information.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
The Company's investment in property and plant, at original
cost before accumulated depreciation, was $6.1 billion at
September 30, 1995, an increase of $144.7 million from the
investment at December 31, 1994 and an increase of $211.9 million
from the investment at September 30, 1994. Cash invested in
property and plant construction, excluding AFUDC, amounted to
$171.8 million for the nine months ended September 30, 1995, and
$249.9 million for the twelve months then ended.
See Part I, Item 1, Notes to Consolidated Financial
Statements, (3) Capitalization for information with respect to
financing activity.
At September 30, 1995, the Company's capital structure,
excluding short-term debt, long-term debt due within one year,
and nonutility subsidiary debt, consisted of 45.4% long-term
debt, 3.1% serial preferred stock, 3.6% redeemable serial
preferred stock and 47.9% common equity.
The Company filed for a 5.3% increase in the Maryland fuel
rate, in September 1994, which became effective, subject to
refund, on November 1, 1994. The initial filing also included an
adjustment for a deferred fuel amortization charge to recover
over a twelve month period approximately $28.5 million of
previously unrecovered fuel costs incurred through July 31, 1994.
During the case, which is still pending, the Company updated the
proposed deferred fuel amortization, pursuant to a recommendation
of the Staff of the Maryland Public Service Commission, to
reflect a reduction in the unrecovered amount at October 31, 1994
to $21.1 million. Based on results for the period ended November
30, 1994, the Company, in January 1995, filed for a fuel rate
reduction in Maryland of 5.3%. Based on results for the period
ended February 28, 1995, the Company filed for an additional fuel
rate reduction in Maryland of 5.7% during April 1995, which
became effective subject to refund on May 1, 1995. The final
orders in these filings are expected in the fourth quarter.
Cash from utility operations, after dividends, was $111.4
million for the nine months ended September 30, 1995, and $125.3
million for the twelve months then ended as compared with $77.3
million and $95.4 million, respectively, for the same periods
ended September 30, 1994.
28
Outstanding utility short-term debt totaled $68.8 million at
September 30, 1995, a decrease of $120.8 million from the $189.6
million outstanding at December 31, 1994 and a decrease of $163.9
million from the $232.7 million outstanding at September 30,
1994.
MARYLAND ORDER IN GENERIC COMPETITION PROCEEDING
- ------------------------------------------------
On August 18, 1995, the Maryland Public Service Commission
issued an order in a generic proceeding dealing with electric
industry structure and the advent of competition. The Commission
found that competition at the wholesale level holds the greatest
potential for producing significant benefits, while competition
at the retail level would carry many potential problems and
difficult-to-find solutions. The Commission stated that it was
intrigued by a restructuring concept suggested by the Company,
which calls for functionally dividing the utility into generation
and transmission/ distribution segments. The Commission
encouraged the Company to develop the concept further and
suggested that other electric utilities in the state develop
similar proposals specific to their competitive positions.
NEW ACCOUNTING STANDARD
- -----------------------
In March 1995, the Financial Accounting Standards Board
issued SFAS No. 121 entitled "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
which will become effective for the Company's 1996 consolidated
financial statements. This statement requires the Company to
review long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recovered. In addition, regulated companies are
required to write-off regulatory assets whenever those assets no
longer meet the criteria for recognition of a regulatory asset as
defined by SFAS No. 71 entitled "Accounting for the Effects of
Certain Types of Regulation." The Company does not expect
implementation of this pronouncement to have a material impact on
its consolidated financial statements.
29
THE COVE POINT JOINT VENTURE
- ----------------------------
Subsidiaries of the Company and Columbia Gas System, Inc.,
formed a 50/50 joint venture partnership (the Partnership) to own
and operate natural gas storage and terminaling facilities at
Cove Point, Maryland, and an 87-mile natural gas pipeline that
extends from Cove Point to Loudoun County, Virginia.
Construction of a new liquefaction unit and recommissioning of
existing plant have been completed and commercial operation began
on September 28, 1995. At September 30, 1995, the Company's
subsidiaries have invested $25 million, in the form of equity and
debt, in the Partnership.
JOINT VENTURE FOR WIRELESS DATA COMMUNICATION NETWORK AND
- ---------------------------------------------------------
NEW ENERGY SERVICES SUBSIDIARY FORMED
-------------------------------------
In May 1995, the Company announced that its subsidiary,
PepData, Inc., entered into a joint venture agreement with
Metricom, Inc. to own and operate a wireless data network
providing economical data communication services to four million
people in the Washington, D.C. metropolitan area. The agreement
calls for the joint venture company, Metricom D.C. LLC, to
install radio devices on public and private facilities to create
a wireless data communication network. The Company will invest
$7 million and own 20 percent of the joint venture.
Also in May, a subsidiary, Pepco Services, Inc., was formed
to offer a range of energy-related technical, engineering,
management and financing services to businesses and government
organizations in the region.
NONUTILITY SUBSIDIARY
- ---------------------
RESULTS OF OPERATIONS
- ---------------------
PCI incurred net losses of $4.1 million, $124 million and
$111.8 million for the three, nine and twelve months ended
September 30, 1995 compared to earnings of $4.6 million, $6.9
million and $11 million for the same periods ended September 30,
1994, respectively. Net losses incurred in 1995 are primarily
the result of the adoption of a plan by PCI to exit the aircraft
equipment leasing business, resulting in a second quarter 1995
$110 million non-cash, after-tax charge to earnings.
PCI's net losses of $(.03), $(1.05) and $(.95) reduced the
Company's earnings per share for the three, nine and twelve
months ended September 30, 1995 as compared to contributions to
earnings of $.04, $.06 and $.09 for the same periods ended
30
September 30, 1994. Included in the loss per share for the nine
and twelve months ended September 30, 1995, was $(.93) per share
for a one-time non-cash charge upon the adoption of a plan to
exit the aircraft equipment leasing business and $(.04), $(.11)
and $(.11) per share, respectively, for the periods for a non-
cash valuation adjustment of aircraft equipment under master
lease, which was recorded in seven monthly installments of
approximately $1.7 million during the period beginning March 1995
and ended September 1995, the master lease expiration date.
In May 1995, PCI adopted a plan to exit the aircraft
equipment leasing business. The plan, which was developed
following a comprehensive review of the business, is designed to
permit a withdrawal from the aircraft leasing business on an
orderly basis designed to preserve value. The decision to exit
the aircraft leasing business was based on an accumulation of
factors which led PCI to conclude that the business was no longer
consistent with PCI's goal of providing a stable supplement to
consolidated earnings. These factors included the recent
inability to secure satisfactory leases for certain aircraft
returned by prior lessees, the continuing difficulties and credit
risks associated with certain lessees, including Trans World
Airlines (TWA) and Continental Airlines (Continental), and PCI's
evaluation of the prospects for its aircraft lease portfolio and
the airline industry in general.
Under the plan, PCI will make no new investments to increase
the size of the aircraft leasing portfolio. In addition,
thirteen aircraft, (seven L-1011 aircraft, two F-28-4000
aircraft, one A-300 aircraft, two B-747-200 aircraft and one
B747-200F aircraft) have been designated for sale over
approximately 18 to 24 months. These aircraft are subject to
short-term, usage-based leases, leases that will expire in the
near term, or are not currently under lease. The B747-200F
aircraft currently is the subject of litigation regarding the
duration of its lease term (See Part I, Item 1, Notes to
Consolidated Financial Statements, (6) Commitments and
Contingencies, Nonutility Subsidiary, for additional
information.) The book value of these aircraft (which, prior to
adoption of the plan, was $295 million) was reduced to an
estimated net realizable value of approximately $105 million.
After taking into account the elimination of a previously
established reserve of approximately $22 million for future
repair and maintenance expenditures and other minor adjustments,
the result was an immediate non-cash charge to after-tax earnings
of approximately $110 million for the second quarter of 1995.
There will be no future depreciation of, or accrual for repair
and maintenance expenditures with respect to, these aircraft.
In accordance with the plan, PCI will continue to hold and
closely monitor the remainder of its aircraft leasing portfolio,
with the objective of identifying future opportunities for
disposition of these investments on favorable terms. Included in
31
this portion of the portfolio are six wholly owned aircraft
(three DC-10-30 aircraft and three B-747-200 aircraft) and two
DC-10-30 aircraft held by partnerships in which PCI has a 50%
interest, all of which are under long-term operating leases to
Continental or United Airlines. Depreciation on each of these
aircraft has been increased in order to achieve book values at
lease expiration that will correspond to their respective
anticipated residual values. The net effect of this revised
depreciation, coupled with the elimination of further
depreciation on the aircraft designated for sale, will result in
higher depreciation charges through 1997, and lower depreciation
charges thereafter, as compared to the depreciation charges PCI
would have incurred absent the plan. No adjustments were made to
the remainder of PCI's aircraft leasing portfolio, which consists
of twelve full or partial interests in aircraft under leveraged
leases or direct finance leases (one DC-10-30 aircraft, three MD-
82 aircraft, four B737-300 aircraft, two B747-300 aircraft, one
B757-200 aircraft and one MD-11F aircraft).
At September 30, 1995, PCI's leasing portfolio included two
aircraft under a master lease agreement which were not carried on
its balance sheet. Separate from the plan, as a result of
differences between the guaranteed residual value and the
expected market value of these aircraft at the end of the initial
term of the master lease agreement, PCI, following generally
accepted accounting principles, recorded a monthly after-tax
charge against earnings of approximately $1.7 million during the
period March through September 1995. On September 26, 1995, PCI
exercised its option to purchase, out of the master lease, for
$52 million, the two DC-10-30 aircraft on operating sublease to
Canadian Airlines International Ltd. The purchase will take
place during October 1995. Depreciation and interest charges
following purchase will be substantially the same as the master
lease rental payments.
In January 1995, Continental announced its intention to seek
the early termination of all of its A-300 aircraft leases and
rental reductions under certain leases of other widebody
aircraft. Following negotiations, in April 1995, PCI signed an
agreement with Continental regarding this matter. As
compensation for the early return of the A-300 aircraft in 1995,
PCI received Continental 6% convertible debentures with an
aggregate face value of $9.55 million. In October 1995, PCI
agreed to sell the debentures for 97% of par value. The A-300
aircraft is one of the aircraft designated for sale by PCI under
its previously-discussed plan to exit the aircraft leasing
business. The agreement with Continental also provides for the
deferral of approximately 40% of aggregate monthly rentals from
the four wholly owned and two jointly owned DC-10-30 aircraft for
a period of sixteen months, commencing February 1995. The
deferred amounts are to be repaid over a three and one-half year
period with 8% interest, commencing June 1, 1996, at which time
the aggregate deferred amount will be approximately $20 million.
32
In addition, as part of the agreement, PCI obtained cross-default
provisions in its Continental leases and improvements in aircraft
return conditions.
PCI's aircraft portfolio at September 30, 1995 is summarized
below.
Aircraft
Designated for
Sale in Near Term Qty(1) Year(2) Lessee Lease Type
- ------------------ --------------------------------------------
A-300 aircraft 1 1979 Continental(5) Operating
B747-200 aircraft 2 1976/77 (4) N/A
B747-200F aircraft
& spare engine 1 1976 Atlas Air Operating
F-28-4000 aircraft
& spare engine 2 1979/80 USAir Operating
L1011-50 aircraft 2 1974 ING Operating
L1011-50 aircraft 1 1975 TWA Operating
L1011-100 aircraft 4 1974/75 (4) N/A
Aircraft
With Increased
Depreciation
- -------------------
B747-200 aircraft
& spare engines 1 1972 Continental Operating
B747-200 aircraft 1 1978 United Operating
B747-200 aircraft 1 1978 United Operating
DC-10-30 aircraft 4 1973 Continental(3) Operating
DC-10-30 aircraft 1 1974 Continental Operating
- -----------------------------------------------------------------
(1) Includes all equipment in which PCI has a greater than 10%
ownership interest. The aircraft portfolio also included
two DC-10-30 aircraft on operating lease to PCI which were
sub-leased to Canadian Airlines in March 1995 and were not
included in PCI's balance sheet at September 30, 1995. In
September 1995, PCI exercised its option to purchase the two
DC-10-30 aircraft. The purchase will take place during
October 1995 and the assets will be classified as Aircraft
With Increased Depreciation.
(2) Year of manufacture.
(3) PCI owns a partial interest in certain of this equipment.
(4) Currently not on lease.
(5) Expected to be returned to PCI in November 1995.
33
All Other Aircraft
Equipment Qty(1) Year(2) Lessee Lease Type
- ------------------ --------------------------------------------
B737-300 aircraft 4 1988 United(3) Direct
Finance
B747-300 Combi
aircraft 1 1984 KLM(3) Leveraged
B747-300 aircraft 1 1985 Singapore(3) Leveraged
B757-200 aircraft 1 1986 Northwest Leveraged
DC-10-30 aircraft 1 1979 Continental Direct
Finance
MD-11F aircraft 1 1993 Fed. Express Leveraged
MD-82 aircraft 1 1982 Continental Direct
Finance
MD-82 aircraft
& spare engine 2 1987 Continental(3) Direct
Finance
Assorted Aircraft
Engines 12 Various Various Operating
- -----------------------------------------------------------------
(1) Includes all equipment in which PCI has a greater than 10%
ownership interest. The aircraft portfolio also included
two DC-10-30 aircraft on operating lease to PCI which were
sub-leased to Canadian Airlines in March 1995 and were not
included in PCI's balance sheet at September 30, 1995. In
September 1995, PCI exercised its option to purchase the two
DC-10-30 aircraft. The purchase will take place during
October 1995 and the assets will be classified as Aircraft
With Increased Depreciation.
(2) Year of manufacture.
(3) PCI owns a partial interest in certain of this equipment.
During 1994, PCI purchased from and leased to a Dutch
electric utility company an approximate one-third undivided
interest in a recently-constructed 650 megawatt (gross) base
load, coal and gas-fired power plant located in The Netherlands.
PCI's original equity investment totaled $60 million and is
accounted for as a leveraged lease.
In September 1995, PCI purchased from and leased back to an
Australian governmental entity two 350 megawatt (gross) coal-
fired electric generating units located in Queensland, Australia.
PCI's original equity investment totaled $96 million and is being
accounted for as a leveraged lease.
In prior years the Company has invested in five 30-megawatt
Solar Electric Generating Systems (SEGS) projects in the Mojave
Desert in California. The Company owns 22%, 10%, 19%, 31%, and
25% of SEGS projects III through VII, respectively, representing
a net investment of $58 million included in PCI's investment in
finance leases at September 30, 1995.
34
The five SEGS power generating projects in which PCI has
invested sell electricity to Southern California Edison Company
(Edison) under thirty year Interim Standard Offer No. 4 power
purchase agreements which fix the energy rate paid by Edison for
the first ten years of the agreements. For the remaining term of
the agreements, energy rates are variable, based on Edison's
avoided cost of generation. The SEGS projects are scheduled to
convert to supplying electricity at avoided cost rates at various
times beginning in early 1997 through the end of 1998. As a
result of declines in Edison's avoided costs subsequent to the
inception of these agreements, revenue at these projects
currently are expected to be substantially lower than revenue
presently being realized under the fixed energy price terms of
the agreements. If current avoided cost levels were to continue,
PCI could experience reduced earnings or incur losses associated
with these projects. PCI is investigating and pursuing
alternatives for these projects, including but not limited to,
renegotiating the power purchase agreements and restructuring the
associated debt.
PCI generates income primarily from its leasing activities
and securities investments. Income from leasing activities,
which includes rental income, gains on asset sales, interest
income and fees totaled $25.2 million, $71.1 million and $108.7
million for the three, nine and twelve months ended September 30,
1995, respectively, compared to $25.2 million, $73.6 million and
$108.8 million for the corresponding periods ended in 1994. The
decrease in revenue for the nine months ended September 30, 1995
over 1994 was primarily due to a decrease in rental income from
operating leases.
PCI's marketable securities portfolio contributed pre-tax
income of $9 million, $27.5 million and $36.3 million for the
three, nine and twelve months ended September 30, 1995
respectively, compared to $9.1 million, $26.4 million and $36.4
million for the same periods ended September 30, 1994. Net
realized gains included in marketable securities income totaled
approximately $.06 million, $.2 million and $.2 million for the
three, nine and twelve months ended September 30, 1995,
respectively, and $.4 million, $.7 million and $2.5 million for
the corresponding periods in 1994.
Other income decreased for the three months and increased
for the nine and twelve months ended September 30, 1995, as
compared to the corresponding periods in 1994. The decrease
during the three months ended September 30, 1995 over 1994 was
primarily due to decreased income relating to PCI's energy
projects. The increase during the twelve months ended September
30, 1995 over 1994 was primarily due to a first quarter 1994
writeoff resulting from agreements settling lawsuits related to
PCI's construction and operation of a municipally-owned waste-to-
35
energy facility and to a fourth quarter 1994 gain on sale of real
estate. See Part II, Item 5, Other Information, Selected
Nonutility Subsidiary Information, for additional information.
The $170.1 million pretax charge included in the results of
operations for the nine and twelve months ended September 30,
1995 is the result of PCI's plan, adopted during the second
quarter of 1995, to exit the aircraft equipment leasing business.
Expenses before income taxes, which include interest,
depreciation and operating, and administrative and general
expenses totaled $45.1 million, $136.1 million and $170 million
for the three, nine and twelve months ended September 30, 1995,
respectively, compared to $32.8 million, $116.7 million and
$154.5 million for the same periods ended September 30, 1994.
Expenses increased for the three, nine and twelve months ended
September 30, 1995 over the same periods in 1994 primarily as a
result of a $2.7 million pretax monthly charge during the period
from March to September 1995 for the recognition of the
difference between the guaranteed residual value and the expected
market value of aircraft at the end of the initial term of a
master lease agreement in September 1995. Due to an increase in
outstanding debt and increased interest rates, interest expense
also increased for each of the three periods in 1995 over the
corresponding periods in 1994.
PCI had income tax credits of $6.3 million, $80.9 million
and $82.5 million for the three, nine and twelve months ended
September 30, 1995, respectively, compared to income tax credits
of $1.8 million, $21.1 million and $22.4 million for the
corresponding periods in 1994. The significant increase in
income tax credits for each of the three periods ended September
30, 1995 compared to September 30, 1994 was the result of the
previously mentioned charge relating to the decision to exit the
aircraft equipment leasing business.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
Investments in leased equipment of $103 million for the nine
month period ended September 30, 1995 were for the purchase of
two 350 megawatt (gross) coal-fired electric generating units
located in Australia for $96 million and $7.4 million for the
purchase of aircraft engines placed under operating leases. The
electric generating units were purchased and leased back under a
long-term leveraged lease to an Australian governmental entity.
The investments of $110.9 million in leased equipment for the
twelve month period ended September 30, 1995 also included
additional purchases of aircraft engines placed under operating
leases.
36
PCI's outstanding short-term debt totaled $221.2 million at
September 30, 1995, an increase of $172.8 million from the $48.4
million outstanding at December 31, 1994 and an increase of
$126.6 million over the $94.6 million outstanding at September
30, 1994. During the three, nine and twelve months ended
September 30, 1995, PCI issued $75 million, $150 million and $197
million, respectively, in long-term debt, including non-recourse
debt. Debt repayments totaled $57.8 million, $235.2 million and
$273.9 million, respectively, for the three, nine and twelve
months ended September 30, 1995. At September 30, 1995, PCI had
$426.3 million available under its Medium-Term Note Program and
$400 million of unused short-term bank credit lines.
PCI has paid a total of $100 million in dividends to the
Company, including a $9 million dividend paid in January 1995.
Dividend payments are considered based upon factors such as
future business plans, debt-to-equity ratios, and anticipated
capital requirements. PCI paid a dividend of $50 million to the
Company in December 1990, and subsequent dividend payments,
through January 1995, have been approximately 50% of annual net
earnings.
The $521.6 million securities portfolio, consisting
primarily of investment grade preferred stocks, provides PCI with
significant liquidity and flexibility to participate in
additional investment opportunities.
Part II OTHER INFORMATION
- ------- -----------------
Item 1 LEGAL PROCEEDINGS
- ------ -----------------
See Part I, Item 1, Notes to Consolidated Financial
Statements, (6) Commitments and Contingencies, for information on
various legal proceedings.
Item 5 OTHER INFORMATION
- ------ -----------------
PROPOSED MERGER
- ---------------
On September 22, 1995, the Company, a District of Columbia
and Virginia corporation, Baltimore Gas and Electric Company, a
Maryland corporation ("BGE"), and RH Acquisition Corp., a
Maryland corporation (the "New Company"), entered into an
Agreement and Plan of Merger (the "Merger Agreement") which
provides for a strategic business combination of the Company and
BGE in a merger transaction (the "Transaction"). The
Transaction, which was unanimously approved by the Boards of
Directors of the constituent companies, is expected to close
shortly after all of the conditions to the consummation of the
37
Transaction, including obtaining applicable regulatory approvals,
are met or waived. The regulatory approval process is expected
to take approximately 12 to 18 months.
Under the terms of the Merger Agreement, the Company and BGE
each will be merged with and into the New Company, with the New
Company being the surviving corporation. The New Company, which
currently is incorporated in the State of Maryland, also will be
incorporated under the laws of the Commonwealth of Virginia at or
prior to the time of the merger. The name of the New Company
will be changed prior to closing to a name agreed upon by the
Boards of Directors of the Company and BGE. The utility
businesses of the Company and BGE will be combined into an
integrated, non-holding company structure. The non-utility
operations of both companies will be combined, as appropriate, as
subsidiaries of the New Company.
Each outstanding share of common stock, par value $1.00 per
share, of the Company will be converted into the right to receive
0.997 shares of common stock, no par value per share, of the New
Company ("New Company Common Stock"). Each outstanding share of
BGE common stock, no par value per share, will be converted into
the right to receive one share of New Company Common Stock. As
of August 31, 1995, the Company had approximately 118.5 million
common shares outstanding and BGE had approximately 147.5 million
shares of common stock outstanding. Based on such
capitalization, the Transaction would result in the common
shareholders of the Company receiving 44.5% of the common equity
of the New Company and the common shareholders of BGE receiving
55.5% of the common equity of the New Company. Each outstanding
share of Serial Preferred Stock, par value $50.00 per share, of
the Company will be converted into the right to receive one share
of Series B Preferred Stock, par value $50.00 per share, of the
New Company with identical rights (including dividend rights) and
designations. Each outstanding share of BGE Preferred Stock, par
value $100.00 per share, likewise will be converted into the
right to receive one share of Series A Preferred Stock, par value
$100.00 per share, of the New Company with identical rights
(including dividend rights) and designations. Each outstanding
share of BGE Preference Stock, par value $100.00 per share, will
be converted into the right to receive one share of New Company
Preference Stock, par value $100.00 per share, with identical
rights (including dividend rights) and designations.
It is anticipated that the New Company will adopt BGE's
dividend policy and that the annual dividend rate as of the
expected 1997 closing date will be $1.67 per share. The Company
currently pays $1.66 per share annually, and BGE's annual
dividend rate currently is $1.56 per share.
The Transaction is subject to customary closing conditions,
including, without limitation, the receipt of required
shareholder approvals of the Company and BGE, the receipt of all
38
necessary governmental approvals and the making of all necessary
governmental filings, including approvals of utility regulators
in the District of Columbia, Maryland and certain other states,
the approval of the Federal Energy Regulatory Commission and the
Nuclear Regulatory Commission, and the filing of the requisite
notification with the Federal Trade Commission and the Department
of Justice under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, and the expiration of the applicable waiting
period thereunder. The Transaction also is subject to the
receipt of opinions of counsel that the Transaction will qualify
as a tax-free reorganization and assurances from the parties'
independent accountants that the Transaction will qualify as a
pooling-of-interests for accounting purposes. In addition, the
Transaction is conditioned upon the effectiveness of a combined
registration statement and proxy statement to be filed by the
Company, BGE and the New Company with the Securities and Exchange
Commission with respect to shares of New Company Common Stock to
be issued in the Transaction and the special stockholder
meetings, and upon the approval of the New Company Common Stock
for listing on the New York Stock Exchange. The special meetings
of the stockholders of the Company and BGE to vote on the
Transaction will be convened as soon as practicable and are
expected to be held in the first quarter of 1996.
The Merger Agreement contains certain covenants concerning
the activities of the parties pending the consummation of the
Transaction. Generally, each of the Company and BGE must carry
on its business in the ordinary course consistent with past
practice, except as otherwise permitted in accordance with a
financial plan provided to the other party, and may not increase
dividends on common stock beyond the indicated dividend rate for
the New Company. The Merger Agreement also contains restrictions
on, among other things, the issuance of capital stock, charter
and bylaw amendments, capital expenditures, acquisitions,
dispositions, incurrence of indebtedness and certain increases in
employee compensation and benefits.
The Merger Agreement provides that, after the effectiveness
of the Transaction (the "Effective Time"), the corporate
headquarters and principal executive offices of the New Company
will be located in the Annapolis, Maryland area, but that the New
Company also will maintain significant operations in the District
of Columbia and Maryland. The New Company's Board of Directors,
which will be divided into three classes, will consist of a total
of 16 directors, seven of whom will be designated by the Company
and nine of whom will be designated by BGE. Mr. Edward F.
Mitchell, the current Chairman of the Board and Chief Executive
Officer ("CEO") of the Company, will serve as Chairman of the
Board of the New Company at the Effective Time and for a period
of one year thereafter. Mr. Christian H. Poindexter, the current
Chairman of the Board and CEO of BGE, will serve as CEO of the
New Company. When Mr. Mitchell ceases to be Chairman, Mr.
Poindexter will assume the additional role of Chairman.
39
Mr. John M. Derrick, Jr., the current President of the Company,
will serve as President and Chief Operating Officer of the New
Company. Mr. Edward A. Crooke, BGE's current President, will
serve as the New Company's Vice Chairman and as Chairman of the
Board of the New Company's non-regulated subsidiaries.
The Merger Agreement may be terminated under certain
circumstances, including (1) by mutual consent of the Company and
BGE; (2) by either the Company or BGE if the Transaction is not
consummated by March 31, 1997 (provided, however, that such
termination date shall be extended to March 31, 1998, if all
conditions to closing the Transaction, other than the receipt of
certain statutory approvals, are capable of being satisfied on
March 31, 1997); (3) by either the Company or BGE if either the
Company's or BGE's shareholders vote against the Transaction or
if any state or federal law or court order prohibits the
Transaction; (4) by a non-breaching party if there exists a
breach of any material representation, warranty or covenant
contained in the Merger Agreement which is not cured within
twenty (20) days after notice from the other party; (5) by either
the Company or BGE if the Board of Directors of the other shall
withdraw or adversely modify its recommendation of the
Transaction; or (6) by either the Company or BGE, under certain
circumstances, as a result of a third-party tender offer or
business combination proposal which the Board of Directors of
such party in good faith and pursuant to the exercise by the
Board of Directors of its fiduciary duties determines to accept,
after the other party has first been given an opportunity to make
adjustments in the terms of the Merger Agreement so as to enable
the Transaction to proceed.
The Merger Agreement provides that if a breach described in
clause (4) of the previous paragraph occurs, the breaching party
must pay the non-breaching party, as liquidated damages, $10
million in cash in respect of out-of-pocket expenses. The Merger
Agreement also requires payment of a termination fee of $75
million in cash, plus $10 million in respect of out-of-pocket
expenses, by one party (the "Payor") to the other if (i) the
Merger Agreement is terminated (x) as a result of the acceptance
by the Payor of a third-party tender offer or business
combination proposal, (y) following a failure of the shareholders
of the Payor to approve the Transaction or (z) as a result of a
material failure of the Payor (other than pursuant to the
exercise by the Board of Directors of its fiduciary duties) to
convene a special shareholder meeting, distribute proxy materials
or recommend the Transaction to its shareholders; and (ii) at the
time of such termination or prior to the meeting of the Payor's
shareholders there shall have been a third-party tender offer or
business combination proposal which shall not have been rejected
by the Payor and withdrawn by such third party. In addition, if
either the Company or BGE terminates the Merger Agreement after
the Board of Directors of the other party withdraws or adversely
modifies its recommendation of the Transaction, a termination fee
40
of $75 million, plus $10 million in respect of out-of-pocket
expenses, is payable to the party that terminates the Merger
Agreement. The termination fees payable by the Company or BGE
under these provisions and the aggregate amount which could be
payable by the Company or BGE upon a required repurchase of the
options granted pursuant to the Stock Options Agreements may not
exceed $125 million in the aggregate.
Concurrently with the Merger Agreement, the Company and BGE
have entered into reciprocal stock option agreements (the "Stock
Option Agreements"), each granting the other an irrevocable
option to purchase up to that number of shares of common stock of
the other company which equals 19.9% of the number of shares of
common stock of the other company outstanding on August 31, 1995,
at an exercise price of $21.225 per share of the Company's common
stock, in the case of the Company's option, or $25.925 per share
of BGE common stock, in the case of the BGE option, if any of the
circumstances which trigger the $75 million payment occur. The
issuance of any stock upon the exercise of either Stock Option
Agreement is subject to regulatory approval. If either of the
options becomes exercisable, the party holding the option (the
"Exercising Party") may require that the other party repurchase
from the Exercising Party all or any portion of the option, or
any shares of common stock acquired upon the exercise thereof, at
the price specified in the applicable Stock Option Agreement.
The New Company is expected to be one of the ten largest
electric utility companies in the United States. For the year
ended December 31, 1994, the combined revenues of the Company and
BGE were approximately $4.8 billion, and the combined total
assets were approximately $15.1 billion. The New Company will
serve approximately 1.8 million electric customers and over
530,000 natural gas customers.
A preliminary estimate indicates that the Transaction will
result in net savings of approximately $1.3 billion in costs over
10 years. The allocation of the net savings between ratepayers
and shareholders of the New Company will be determined by various
regulatory agencies.
OTHER FINANCING ARRANGEMENTS - Credit Agreements
- ------------------------------------------------
The Company and PCI satisfy their short-term financing
requirements through the sale of commercial promissory notes.
The Company and PCI maintain minimum 100 percent lines of credit
back-up for their outstanding commercial promissory notes. These
lines of credit were unused during 1995 and 1994.
41
BASE RATE PROCEEDINGS
- ---------------------
Maryland
- --------
Pursuant to a settlement agreement, base rate revenue was
increased by $27 million, or 3%, effective November 1, 1993. 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.
Effective July 1, 1995, the DSM surcharge rate per KWH was
increased from $.00338 to $.00556, which will provide
approximately $29 million annually in increased revenue. The
surcharge includes a provision for the recovery of lost revenue,
amortization of pre-1995 actual program expenditures plus the
initial amortization of 1995 projected program costs, a capital
cost recovery factor of 9.46% on the unamortized balance, and an
incentive of $8.7 million awarded for exceeding 1994 energy
saving goals. The $8.7 million conservation incentive was
reflected in June 1995 utility results. An incentive of $5
million for exceeding 1993 goals was recorded in June 1994.
District of Columbia
- --------------------
On June 30, 1995, in Formal Case No. 939, the Commission
authorized a $27.9 million, or 3.8%, increase in base rate
revenue effective July 11, 1995. The authorized rates are based
on a 9.09% rate of return on average rate base, including an
11.1% return on common stock equity and a capital structure which
excludes short-term debt. In addition, the Commission approved
the Company's Least-Cost Plan filed in June 1994. DSM spending
caps for the period 1995-1998 were approved, and the time period
for filing Least-Cost Planning cases was increased from two to
three years. The Commission also approved the Company's proposal
to narrow the scope of DSM activities by discontinuing operation
of certain DSM programs and by reducing expenditures on the
remaining programs. The narrowing of the scope of DSM activities
and the adoption of the spending caps enable the Company to
implement cost-effective conservation programs while limiting the
impact on the price of electricity. An Environmental Cost
Recovery Rider (ECRR) was approved to provide for full cost
recovery of actual conservation program expenditures, through a
billing surcharge. Costs will be amortized over 10 years with a
return on unamortized amounts by means of a capital cost recovery
factor computed at the authorized rate of return. The initial
rate, which reflects all actual costs expended from July 1993
through December 1994, will result in $15 million of additional
42
revenue annually. Subsequent rate updates will be filed annually
on June 1 to reflect the prior year's actual costs within the
spending caps. Pre-July 1993 conservation costs receive rate
base treatment. Although the Commission denied the Company's
request to recover "lost revenue" due to DSM programs, through
the surcharge, a process has been established whereby the Company
can seek recovery of lost revenue in a separate proceeding.
Federal - Wholesale
- -------------------
The Company has a 10-year full service power supply contract
with the Southern Maryland Electric Cooperative, Inc. (SMECO), a
wholesale customer. The contract period is to be extended for an
additional year on January 1 of each year, unless notice is given
by either party of termination of the contract at the end of the
10-year period. The full service obligation can be reduced by
SMECO by up to 20% of its annual requirements with a five-year
advance notice for each such reduction. SMECO rates were
increased by $2.3 million effective January 1, 1995 and $2.6
million effective January 1, 1994. Although a rate increase of
$4.2 million is scheduled to become effective on January 1, 1996,
such increase is subject to revision to reflect significant
reductions in the Company's purchased capacity costs which have
occurred subsequent to the rate agreement.
Federal - Interchange and Purchased Energy
- ------------------------------------------
The Company's generating and transmission facilities are
interconnected with the other members of the Pennsylvania-New
Jersey-Maryland Interconnection Association (PJM) and other
utilities. The pricing of most PJM internal economy energy
transactions is based upon "split savings" so that the price of
such energy is halfway between the cost that the purchaser would
incur if the energy were supplied by its own sources and the cost
of production to the company actually supplying the energy.
In addition to PJM interchange activity, the Company has
interconnection agreements with Allegheny Power System (APS) and
Virginia Power. These agreements provide a mechanism and the
flexibility to purchase power from these parties or from others
with whom they are interconnected on an as-needed basis in
amounts mutually agreed to from time-to-time pursuant to
negotiated rates, terms and conditions.
Pursuant to long-term capacity purchase agreements with Ohio
Edison and APS, the Company is purchasing 450 megawatts of
capacity and associated energy through the year 2005. The
monthly capacity commitment under these agreements, excluding an
allocation of fixed operating and maintenance cost, increased
43
from $12,380 per megawatt through 1993 to $18,060 per megawatt,
effective January 1, 1994, with provision for escalation in 1999.
In addition, from June 1994 through May 1995, the Company
purchased 147 megawatts of capacity from Pennsylvania Power and
Light Company at a total cost of $3 million.
Duquesne Light Company Transmission Case
- ----------------------------------------
On March 29, 1995, FERC issued a Notice of Proposed
Rulemaking (NOPR) covering open access to transmission lines and
the recovery of stranded costs. These rules, if adopted, provide
for open access to the interstate electric transmission network.
Subsequent to this NOPR, Duquesne Light Company requested
that it be provided with 300 megawatts of transmission service,
firm and non-firm with flexible destinations, for 20 years on the
PJM and APS systems. During May 1995, FERC issued an order
directing the PJM and APS companies to provide Duquesne with the
transmission service it requested and to negotiate jointly, over
the next 45 days, the appropriate rates, terms and conditions.
On June 30, 1995, a "final offer" was submitted as directed by
the transmitting companies. This final offer contained the
allocation of the 300 megawatts among the member utilities and
each company's firm transmission rates. Final briefs were filed
with FERC on July 25, 1995. The transmitting companies are
currently awaiting a decision from FERC.
PEAK LOAD, SALES, CONSERVATION, AND CONSTRUCTION
- ------------------------------------------------
AND GENERATING CAPACITY
-----------------------
Peak Load and Sales Data
- ------------------------
Kilowatt-hour sales increased 6.2% for the three months
ended September 30, 1995 and decreased slightly for the nine and
twelve months ended September 30, 1995, as compared to sales for
the corresponding periods ended September 30, 1994. The increase
in sales for the three months ended September 30, 1995, reflects
increased customer usage due to warmer than average weather
during August 1995, as compared to cooler than average weather
during the same period in 1994. Cooling degree hours for the
quarter were 24% above the corresponding period in 1994, and were
13% above the 20-year average weather for this period. The
decline in sales for the nine and twelve months ended September
30, 1995 reflects decreased customer usage due to milder winter
weather in 1995, as compared to 1994 when record-breaking frigid
temperatures in January resulted in extraordinarily high sales.
44
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 1995 summary peak demand of 5,732 megawatts occurred on
August 4, 1995. This compares with the 1994 summer peak demand
of 5,660 megawatts, and 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
6,576 megawatts. To meet the 1995 summer peak demand, the
Company had approximately 270 megawatts available from its
dispatchable energy use management programs. Based on average
weather conditions, the Company estimates that its peak demand
will grow at a compound annual rate of approximately 1%,
reflecting continuing emphasis on conservation and energy use
management programs and anticipated service area growth trends.
The 1994-1995 winter season peak demand of 4,685 megawatts was
6.5% below the all-time winter peak demand of 5,010 megawatts
which was established in January 1994.
Conservation
- ------------
The Company's conservation and energy use management (EUM)
programs are designed to curb growth in demand in order to defer
the need for construction of additional generating capacity and
to cost-effectively increase the efficiency of energy use. To
reduce the near-term upward pressure on prices and total customer
bills, the Company is limiting the DSM programs being offered to
those with the strongest cost benefit results and has reduced
previously planned five-year conservation expenditures by
approximately $120 million. By narrowing its conservation
offerings, the Company expects to be able to continue to
encourage its customers to use energy efficiently without
significantly increasing electricity prices.
During 1994, the Company invested approximately $90 million
in energy conservation programs, all of which is currently being
recovered in rates. During the next five years, the Company
plans to expend an estimated $370 million ($86 million in 1995)
to encourage the efficient use of electric energy and to reduce
the need to build new generating facilities. The Company also
estimates that in 1994 energy savings of more than 810 million
kilowatt-hours were realized through operation of its
conservation and energy use management programs. It is further
estimated that peak load reductions of approximately 510
megawatts have been achieved to date from conservation and energy
use management programs and that additional peak load reductions
of approximately 395 megawatts will be achieved in the next five
years. See the discussions included in Summary of Significant
Accounting Policies, Total Revenue, and Base Rate Proceedings,
for additional information.
45
Construction and Generating Capacity
- ------------------------------------
The Company's construction expenditures, excluding AFUDC,
are projected to total $1.1 billion ($215 million in 1995) for
the five-year period 1995 through 1999, which includes $165
million ($33 million in 1995) of estimated Clean Air Act (CAA)
expenditures. Making use of the flexibilities in its long-term
construction plan, the Company in 1994 reduced projected
expenditures for the five years 1995 through 1999 by $190 million
from amounts previously planned. This reduction followed a $365
million reduction in 1993. The construction reductions and
deferrals are associated with lower rates of projected growth in
usage of electricity resulting in large part from implementing
economical conservation programs. The Company plans to finance
its construction program primarily through funds provided by
operations.
The electric utility industry is subject to increasing
competitive pressures, stemming from a combination of increasing
independent power production, greater reliance upon long-distance
transmission, and regulatory and legislative initiatives intended
to increase bulk power competition, including the Energy Policy
Act of 1992. Since the early 1980s, the Company has pursued
strategies which achieve financial flexibility through
conservation and energy use management programs, extension of the
useful life of generating equipment, cost-effective purchases
of capacity and energy and preservation of scheduling flexibility
to add new generating capacity in relatively small increments.
The Company serves a unique and stable service territory and is a
low-cost energy producer with customer prices which compare
favorably with regional and national averages.
The Company has developed cost-effective plans for complying
with the CAA which requires the reduction of sulfur dioxide and
nitrogen oxides emissions in two phases to achieve prescribed
standards. Both the District of Columbia and Maryland
commissions have approved the Company's plans for meeting Phase I
requirements including cost recovery of investment and inclusion
of emission allowance expenses in the Company's fuel adjustment
clause. The Company anticipates capital expenditures totaling
$165 million over the next five years pursuant to Phase II plans.
A 32-megawatt municipally owned resource recovery facility
is nearing completion in Montgomery County, Maryland. Under the
contract covering this project, the Company will initially
purchase energy without capacity payment obligations. In
addition, the Company has an agreement with Panda Energy
Corporation for a 230-megawatt gas-fueled combined-cycle
cogeneration project in Prince George's County, Maryland
scheduled for operation in 1996 with capacity payments commencing
in 1997. The Company currently projects that existing contracts
for nonutility generation and the Company's commitment to
46
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 existing combustion turbine units.
LABOR AGREEMENT
- ---------------
The Company has a labor contract expiring May 31, 1996, with
Local 1900 of the International Brotherhood of Electrical Workers
which represents approximately 2,800 of the Company's 4,500
employees.
SELECTED NONUTILITY SUBSIDIARY FINANCIAL INFORMATION
- ----------------------------------------------------
The Company's wholly owned nonutility subsidiary, Potomac
Capital Investment Corporation (PCI), was organized in late 1983
with the objective of supplementing utility earnings and building
long-term value. The principal assets of PCI are portfolios of
securities and equipment leases, and to a lesser extent real
estate and other investments. The $521.6 million securities
portfolio, consisting primarily of investment grade preferred
stocks, provides PCI with significant liquidity and flexibility
to participate in additional investment opportunities. The
Company's equity investment in PCI was $166.5 million at
September 30, 1995 and $266.8 million at September 30, 1994.
Dividend payments to the parent company of $9 million and $15
million were made in January 1995 and 1994, respectively.
47
<TABLE>
Consolidated Statements of Earnings:
- -----------------------------------
<CAPTION>
Three Nine Twelve
Months Ended Months Ended Months Ended
September 30, September 30, September 30,
-------------------- ------------------- -------------------
1995 1994 1995 1994 1995 1994
--------- -------- --------- -------- --------- --------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Income
Leasing activities $ 25,181 $ 25,199 $ 71,112 $ 73,625 $ 108,749 $108,786
Marketable securities 8,972 9,092 27,540 26,353 36,335 36,378
Other 594 1,261 2,646 2,625 617 (2,078)
--------- -------- --------- -------- --------- --------
34,747 35,552 101,298 102,603 145,701 143,086
--------- -------- --------- -------- --------- --------
Loss on assets held for disposal - - (170,078) - (170,078) -
--------- -------- --------- -------- --------- --------
Expenses
Interest 22,589 21,739 67,708 62,552 89,939 82,054
Administrative and general 2,393 2,551 7,821 7,555 10,524 12,344
Depreciation and
operating 20,137 8,479 60,537 46,605 69,503 60,059
Income tax credit (6,292) (1,817) (80,893) (21,051) (82,537) (22,396)
--------- -------- --------- -------- --------- --------
38,827 30,952 55,173 95,661 87,429 132,061
--------- -------- --------- -------- --------- --------
Net (loss) earnings from
nonutility subsidiary $ (4,080) $ 4,600 $(123,953) $ 6,942 $(111,806) $ 11,025
========= ======== ========= ======== ========= ========
Per share (reduction)
contribution to earnings of
the Company $(.03) $.04 $(1.05) $.06 $(.95) $.09
===== ==== ====== ==== ===== ====
Per share (reduction) contribution
includes:
Charge Upon Adoption of Plan
to End Investment in Aircraft
Equipment Leasing Business $ - $ - $(.93) $ - $(.93) $ -
Valuation Adjustment of
Aircraft Equipment Under
Master Lease $(.04) $ - $(.11) $ - $(.11) $ -
48
</TABLE>
<TABLE>
STATISTICAL DATA
- ----------------
<CAPTION>
Three Months Ended Twelve Months Ended
September 30, September 30,
--------------------------------- -------------------------------------
1995 1994 % Change 1995 1994 % Change
-------- -------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue from Sales
------------------
of Electricity
--------------
(Thousands of Dollars)
Residential $200,045 $181,291 10.3 $ 533,645 $ 528,013 1.1
General Service 381,957 366,900 4.1 1,067,488 1,056,343 1.1
Large Power Service <F1> 12,275 11,604 5.8 36,187 34,974 3.5
Street Lighting 2,918 3,363 (13.2) 12,682 14,023 (9.6)
Rapid Transit 8,378 8,010 4.6 28,176 27,162 3.7
Wholesale 34,680 31,905 8.7 112,551 114,894 (2.0)
-------- -------- ---------- ----------
System $640,253 $603,073 6.2 $1,790,729 $1,775,409 0.9
======== ======== ========== ==========
Energy Sales
------------
(Millions of KWH)
Residential 2,007 1,825 10.0 6,518 6,712 (2.9)
General Service 4,503 4,328 4.0 15,285 15,354 (0.4)
Large Power Service <F1> 196 179 9.5 695 684 1.6
Street Lighting 37 36 2.8 162 163 (0.6)
Rapid Transit 113 108 4.6 408 399 2.3
Wholesale 674 612 10.1 2,374 2,388 (0.6)
-------- -------- ---------- ----------
System 7,530 7,088 6.2 25,442 25,700 (1.0)
======== ======== ========== ==========
Average System Revenue
----------------------
per KWH (cents per KWH) 8.50 8.51 (0.1) 7.04 6.91 1.9
-----------------------
System Peak Demand
------------------
(Thousands of KW)
Summer - - 5,732 5,660
Winter - - 4,685 5,010
Net Generation
--------------
(Millions of KWH) 6,035 4,709 18,322 19,848
Fuel Mix (% of Btu)
-------------------
Coal (%) 76 77 84 73
Oil (%) 7 8 7 21
Gas (%) 17 15 9 6
Fuel Cost per MBtu
------------------
System Average $1.74 $1.89 $1.75 $1.98
Weather Data
------------
Heating Degree Days 30 5 3,660 4,311
20 Year Average 21 3,984
Cooling Degree Hours 9,336 7,501 11,198 11,468
20 Year Average 8,226 11,037
Heating Degree Days - The daily difference in degrees by which the
mean temperature is below 65 degrees Fahrenheit (dry bulb).
Cooling Degree Hours - The daily sum of the differences, by hours, by
which the temperature (effective temperature) for each hour exceeds
71 degrees Fahrenheit (effective temperature).
<FN>
<F1> Large Power Service customers are served at high voltage of 66KV or higher.
</FN>
49
</TABLE>
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
(a) Exhibits
Exhibit 10.1 - Employment Agreement - filed
herewith.
Exhibit 10.2 - Employment Agreement - filed
herewith.
Exhibit 10.3 - Employment Agreement - filed
herewith.
Exhibit 10.4 - Employment Agreement - filed
herewith.
Exhibit 10.5 - Amendment to Employment
Agreement - filed herewith.
Exhibit 10.6 - Severance Agreement - filed
herewith.
Exhibit 10.7 - Severance Agreement - filed
herewith.
Exhibit 10.8 - Severance Agreement - filed
herewith.
Exhibit 10.9 - Severance Agreement - filed
herewith.
Exhibit 11 - Computation of Earnings Per Common
Share - filed herewith.
Exhibit 12 - Computation of ratios - filed
herewith.
Exhibit 15 - Letter re unaudited interim
financial information - filed
herewith.
Exhibit 27 - Financial data schedule - filed
herewith.
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed by the
Company on September 26, 1995, providing
information regarding an Agreement and Plan of
Merger with Baltimore Gas and Electric Company.
50
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Potomac Electric Power Company
------------------------------
Registrant
By /s/ D. R. Wraase
------------------------------
(D. R. Wraase)
Senior Vice President,
Finance and Accounting
October 30, 1995
- ----------------
DATE
51
<TABLE>
Exhibit 11 Computations of Earnings Per Common Share
- ---------- -----------------------------------------
The following is the basis for the computation of primary and fully
diluted earnings per common share for the twelve months ended September 30, 1995
and the twelve months ended December 31, 1994 and 1993:
<CAPTION>
September 30, December 31, December 31,
1995 1994 1993
------------- ------------ ------------
<S> <C> <C> <C>
Average shares outstanding for
computation of primary earnings
per common share 118,325,885 118,005,847 115,639,668
============ ============ ============
Average shares outstanding for
fully diluted computation:
Average shares outstanding 118,325,885 118,005,847 115,639,668
Additional shares resulting from:
Conversion of Serial Preferred
Stock, $2.44 Convertible Series
of 1966 (the "Convertible
Preferred Stock") 40,107 48,110 51,967
Conversion of 7% Convertible
Debentures 2,471,193 2,531,244 2,546,858
Conversion of 5% Convertible
Debentures 3,392,500 3,392,500 3,392,500
------------ ------------ ------------
Average shares outstanding for
computation of fully diluted
earnings per common share 124,229,685 123,977,701 121,630,993
============ ============ ============
Earnings applicable to common stock $82,119,000 $210,725,000 $225,324,000
Add: Dividends paid or accrued on
Convertible Preferred Stock 17,000 20,000 22,000
Interest paid or accrued on
Convertible Debentures,
net of related taxes 6,477,000 6,537,000 6,548,000
------------ ------------ ------------
Earnings applicable to common stock,
including cumulative effect of
accounting change and assuming
conversion of convertible securities $88,613,000 $217,282,000 $231,894,000
============ ============ ============
Primary earnings per common share $0.69 $1.79 $1.95
Fully diluted earnings per common share $0.71 $1.75 $1.91
<FN>
This calculation is submitted in accordance with Regulation S-K item 601
(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15
because it produces an antidilutive result for the twelve months ended
September 30, 1995. In addition, the valuation is not required by
footnote 2 to paragraph 14 for 1994 and 1993 because it results in
dilution of less than 3%.
</FN>
52
</TABLE>
<TABLE>
Exhibit 12 Computation of Ratios
- ---------- ---------------------
The computations of the coverage of fixed charges, excluding the cumulative effect of the 1992
accounting change, before income taxes, and the coverage of combined fixed charges and preferred
dividends for the twelve months ended September 30, 1995 and for each of the preceding five years on
the basis of parent company operations only, are as follows.
<CAPTION>
Twelve
Months For The Year Ended December 31,
Ended -----------------------------------------------------
Sept. 30,
1995 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Net income before cumulative effect
of accounting change $210,697 $208,074 $216,478 $172,599 $186,813 $165,199
Taxes based on income 122,922 116,648 107,223 76,965 80,988 70,962
---------------------------------------------------------------
Income before taxes and cumulative effect
of accounting change 333,619 324,722 323,701 249,564 267,801 236,161
---------------------------------------------------------------
Fixed charges:
Interest charges 145,499 139,210 141,393 138,097 138,512 127,386
Interest factor in rentals 20,331 6,300 5,859 6,140 5,690 4,237
---------------------------------------------------------------
Total fixed charges 165,830 145,510 147,252 144,237 144,202 131,623
---------------------------------------------------------------
Income before income taxes, cumulative
effect of accounting change and
fixed charges $499,449 $470,232 $470,953 $393,801 $412,003 $367,784
======== ======== ======== ======== ======== ========
Coverage of fixed charges 3.01 3.23 3.20 2.73 2.86 2.79
==== ==== ==== ==== ==== ====
Preferred dividend requirements $16,772 $16,437 $16,255 $14,392 $12,298 $10,598
---------------------------------------------------------------
Ratio of pre-tax income to net income 1.58 1.56 1.50 1.45 1.43 1.43
---------------------------------------------------------------
Preferred dividend factor $26,500 $25,642 $24,383 $20,868 $17,586 $15,155
---------------------------------------------------------------
Total fixed charges and preferred dividends $192,330 $171,152 $171,635 $165,105 $161,788 $146,778
======== ======== ======== ======== ======== ========
Coverage of combined fixed charges
and preferred dividends 2.60 2.75 2.74 2.39 2.55 2.51
==== ==== ==== ==== ==== ====
53
</TABLE>
<TABLE>
Exhibit 12 Computation of Ratios
- ---------- ---------------------
The computations of the coverage of fixed charges, excluding the cumulative effect of the 1992
accounting change, before income taxes, and the coverage of combined fixed charges and preferred
dividends for the twelve months ened September 30, 1995 and for each of the preceding five years on a
fully consolidated basis are as follows.
<CAPTION>
Twelve
Months For The Year Ended December 31,
Ended -----------------------------------------------------
Sept. 30,
1995 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Net income before cumulative effect
of accounting change $98,891 $227,162 $241,579 $200,760 $210,164 $170,234
Taxes based on income 40,385 93,953 62,145 79,481 80,737 63,360
---------------------------------------------------------------
Income before taxes and cumulative effect
of accounting change 139,276 321,115 303,724 280,241 290,901 233,594
---------------------------------------------------------------
Fixed charges:
Interest charges 235,655 224,514 221,312 226,453 225,323 199,469
Interest factor in rentals 24,150 9,938 9,257 6,599 6,080 4,559
---------------------------------------------------------------
Total fixed charges 259,805 234,452 230,569 233,052 231,403 204,028
---------------------------------------------------------------
Nonutility subsidiary capitalized interest (217) (521) (2,059) (2,200) (6,542) -
---------------------------------------------------------------
Income before income taxes, cumulative
effect of accounting change and
fixed charges $398,864 $555,046 $532,234 $511,093 $515,762 $437,622
======== ======== ======== ======== ======== ========
Coverage of fixed charges 1.54 2.37 2.31 2.19 2.23 2.14
==== ==== ==== ==== ==== ====
Preferred dividend requirements $16,772 $16,437 $16,255 $14,392 $12,298 $10,598
---------------------------------------------------------------
Ratio of pre-tax income to net income 1.41 1.41 1.26 1.40 1.38 1.37
---------------------------------------------------------------
Preferred dividend factor $23,649 $23,176 $20,481 $20,149 $16,971 $14,519
---------------------------------------------------------------
Total fixed charges and preferred dividends $283,454 $257,628 $251,050 $253,201 $248,374 $218,547
======== ======== ======== ======== ======== ========
Coverage of combined fixed charges
and preferred dividends 1.41 2.15 2.12 2.02 2.08 2.00
==== ==== ==== ==== ==== ====
54
</TABLE>
Exhibit 15
October 30, 1995
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We are aware that Potomac Electric Power Company has incorporated
by reference our report dated October 30, 1995 (issued pursuant
to the provisions of Statement on Auditing Standards No. 71) in
the Prospectuses constituting parts of the Registration
Statements (Numbers 33-36798, 33-53685 and 33-54197) on Form S-8
filed on September 12, 1990, May 18, 1994 and June 17, 1994,
respectively, and (Numbers 33-58810 and 33-61379) on Form S-3
filed on February 26, 1993 and July 28, 1995, respectively. We
are also aware of our responsibilities under the Securities Act
of 1933.
Very truly yours,
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Washington, D.C.
55
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") is made as of August
1, 1995 between POTOMAC ELECTRIC POWER COMPANY (the "Company") and
JOHN M. DERRICK, JR. (the "Executive").
RECITALS:
The Board of Directors of Potomac Electric Power Company (the
"Board of Directors") recognizes that outstanding management of
the Company is essential to advancing the best interests of the
Company, its shareholders and its subsidiaries. The Board of
Directors believes that it is particularly important to have
stable, excellent management at the present time. The Board of
Directors believes that this objective may be achieved by giving
key management employees assurances of financial security for a
period of time, so that they will not be distracted by personal
risks and will continue to devote their full time and best efforts
to the performance of their duties.
The Human Resources Committee of the Board of Directors (the
"Committee") has recommended, and the Board of Directors has
approved, entering into employment agreements with the Company's
key management executives in order to achieve the foregoing
objectives. The Executive is a key management executive of the
Company and is a valuable member of the Company's management team.
The Company acknowledges that the Executive's contributions to the
past and future growth and success of the Company have been and
will continue to be substantial. The Company and the Executive
are entering into this Agreement to induce the Executive to remain
an employee of the Company and to continue to devote his full
energy to the Company's affairs. The Executive has agreed to
continue to be employed by the Company under the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing and the mutual
undertakings contained in this Agreement, the parties agree as
follows:
1. Employment. The Company will employ the Executive, and the
Executive will continue in the employment of the Company, as an
executive of the Company, for the period beginning August 1, 1995
and ending August 1, 2000 (the "Term of this Agreement"), according
to the terms of this Agreement.
2. Duties. The Company and the Executive agree that, during the
Term of this Agreement, the Executive will serve in a senior
management position with the Company. The Executive (i) will
devote his knowledge, skill and best efforts on a full-time basis
to performing his duties and obligations to the Company (with the
exception of absences on account of illness or vacation in
accordance with the Company's policies and civic and charitable
commitments not involving a conflict with the Company's business),
and (ii) will comply with the directions and orders of the Board
of Directors and Chief Executive Officer of the Company with
respect to the performance of his duties.
1
<PAGE>
3. Affiliates. Employment by an Affiliate of the Company or a
successor to the Company will be considered employment by the
Company for purposes of this Agreement, and termination of
employment with the Company means termination of employment with
the Company and all its Affiliates and successors. The term
"Company" as used in this Agreement will be deemed to include
Affiliates and successors. For purposes of this Agreement, the
term "Affiliate" means the subsidiaries of Potomac Electric Power
Company and other entities under common control with Potomac
Electric Power Company.
4. Compensation and Benefits.
(a) During the Term of this Agreement, while the Executive is
employed by the Company, the Company will pay to the Executive the
following salary and incentive awards for services rendered by the
Company:
(i) The Company will pay to the Executive an annual salary in an
amount not less than the base salary in effect for the Executive
as of the date on which this Agreement is executed.
(ii) The Executive will be entitled to receive incentive awards if
and to the extent that the Board of Directors determines that the
Executive's performance merits payment of an award.
If the Executive is employed by an Affiliate or a successor (as
described in Section (3), the term "Board of Directors" as used in
this Section 4(a) and in Section 5(a)(iii) means the Board of
Directors of the Executive's employer.
(b) During the Term of this Agreement, while the Executive is
employed by the Company, the Executive will be eligible to
participate in a similar manner as other senior executives of the
Company in retirement plans, fringe benefit plans and other
employee benefit plans and programs provided by the Company for
its employees from time to time.
5. Termination of Employment.
(a) If the Company terminates the Executive's employment, other
than for Cause (as defined in Section 7 below), during the Term of
this Agreement, the Company will pay the Executive a lump sum
payment equal to the greater of (1) the present value of the
Executive's annual base salary and annual cash incentive awards
(computed as described below) for the balance of the Term of this
Agreement (not to exceed three years), or (2) two times the
Executive's annual salary and target annual incentive award as in
effect at the time of termination. The lump sum payment will be
computed as follows:
(i) For purposes of this calculation, the Executive's annual
base salary for the balance of the Term of the Agreement will be
calculated at the highest annual base salary rate in effect for
the Executive during the three-year period preceding his
termination of employment. For purposes of this calculation, the
2
<PAGE>
Executive's annual cash incentive awards for the balance of the
Term of the Agreement will be calculated at a rate equal to the
highest annual incentive target award during the three-year period
preceding his termination of employment. Salary and bonus that
the Executive elected to defer will be taken into account for
purposes of this Agreement without regard to the deferral.
(ii) The salary and incentive award for any partial year in
the Term of this Agreement will be a pro-rated portion of the
annual amount.
(iii) If the Executive has not yet received an annual cash
incentive award for the year in which his employment terminates,
the lump sum payment will be increased to include a pro-rated
award for the portion of the year preceding the Executive's
termination of employment. If the Executive has not yet received
payment of his annual cash incentive award for the year preceding
his termination of employment, the lump sum payment will also be
increased to include an award for the year preceding the
Executive's termination of employment. The incentive award for
the year or portion of the year preceding the Executive's
termination of employment will be determined according to clause
(i) above, unless the Board of Directors made a good faith final
determination of the amount of the applicable incentive award
pursuant to Section 4(a)(ii) before the Executive's termination of
employment. If the Board of Directors made such a determination,
the applicable incentive award will be computed according to the
Board of Directors' determination.
(iv) Present value will be computed by the Company as of the
date of the Executive's termination of employment, based on a
discount rate equal to the applicable Federal short-term rate in
effect on the date as of which the present value is determined, as
determined under Section 1274(d) of the Code, compounded monthly.
(v) The lump sum payment will be paid within 30 days after
the Executive's termination of employment.
(b) If the Company terminates the Executive's employment, other
than for Cause, during the Term of this Agreement, the Executive
will be entitled to receive the following additional benefits
determined as of the date of his termination of employment:
(i) Any outstanding restricted stock that would become
vested (that is, transferable and nonforfeitable) if the Executive
remained an employee through the Term of this Agreement will
become vested as of the date of the Executive's termination of
employment (or as of the date described in the next sentence, if
applicable). In addition, if the Company has agreed to award the
Executive restricted stock at the end of a performance period,
subject to the Company's achievement of performance goals, and the
date as of which the restricted stock is to become vested falls
within the Term of this Agreement, the stock will be awarded and
become vested at the end of the performance period if and to the
extent that the performance goals are met.
3
<PAGE>
(ii) The Executive will be provided a supplemental
retirement benefit equal to the greater of (A) the benefit accrued
by the Executive under the Company's Supplemental Benefit Plan,
Executive Performance Supplemental Retirement Plan and
Supplemental Executive Retirement Plan or (B) a benefit equal to
the differential between (1) the amount the Executive would have
been entitled to receive under the Company's General Retirement
Plan and the Supplemental Benefit Plan determined as if the
Executive had attained age 55 and completed 30 years of service
immediately prior to the occurrence of the termination and (2) the
actual benefit accrued under the Company's General Retirement Plan
and the Supplemental Benefit Plan immediately prior to the
occurrence of the termination. For purposes of computing
Executive's Benefit under (B)(1) above, Executive's Final Average
Earnings shall be increased by the average of three highest target
awards under the Company's Executive Incentive Compensation Plan
within the five years immediately preceding the termination. If
Benefits become payable to Executive under (B) above, Executive's
rights to Benefits under the Plans referenced under (A) above,
will lapse. The Executive will begin receiving benefits from the
Company's General Retirement Plan at the first early retirement
date provided by the General Retirement Plan. The Executive will
also be provided any other benefits to retirees (i.e., medical) on
the same terms as any retiree who has attained age 55 and
completed 30 years of service.
(iii) The Company shall continue to pay all premium amounts
with respect to the Executive's policy under the Company's split
dollar insurance program for the lesser of ten (10) years from the
termination date or the period of time remaining until the
Executive's Roll out Qualification Date, whichever first occurs.
(c) If the Executive voluntarily terminates employment with the
Company during the Term of this Agreement under circumstances
described in this subsection (c), the Executive will be entitled
to receive the benefits described in subsections (a) and (b) above
as if the Company had terminated the Executive's employment other
than for Cause. Subject to the provisions of this subsection (c),
these benefits will be provided if the Executive voluntarily
terminates employment after (i) the Company reduces the
Executive's base salary (except a reduction consistent and
proportional with an overall reduction in management compensation,
due to extraordinary business conditions, imposed on other senior
executives of the Company), (ii) the Executive is not in good
faith considered for incentive awards as described in Section
4(a)(ii), (iii) the Company fails to provide benefits as required
by Section 4(b), (iv) the Company relocates the Executive's place
of employment to a location further than 50 miles from Washington,
DC, or (v) the Company demotes the Executive to a position that is
not a senior management position (other than on account of the
Executive's disability, as defined in Section 6 below). In order
for this subsection (c) to be effective: (1) the Executive must
give written notice to the Company indicating that the Executive
intends to terminate employment under this subsection (c), (2) the
Executive's voluntary termination under this subsection must occur
within 60 days after the Executive knows or reasonably should know
of an event described in clause (i), (ii), (iii), (iv), or (v)
above, or within 60 days after the last in a series of such
events, and (3) the Company must have failed to remedy the event
described in clause (i), (ii), (iii), (iv), or (v), as the case
may be, within 30 days after receiving the Executive's written
4
<PAGE>
notice. If the Company remedies the event described in clause
(i), (ii), (iii), (iv), or (v), as the case may be, within 30 days
after receiving the Executive's written notice, the Executive may
not terminate employment under this subsection (c) on account of
the event specified in the Executive's notice. Termination under
the circumstances above shall be deemed an involuntary termination
without Cause for purposes of non-qualified benefit plans.
6. Disability or Death. Upon the Executive's death or
disability, the provisions of Sections 1, 2, 4, and 5 of this
Agreement will terminate. This contract provides no additional
benefits due to disability or death in addition to any death,
disability and other benefit provided under the Company benefit
plans in which the executive participates.
7. Cause. For purposes of this Agreement, the term "Cause" means
(i) intentional fraud or material misappropriation with respect to
the business or assets of the Company, (ii) persistent refusal or
wilful failure of the Executive to perform substantially his
duties and responsibilities to the Company other than an asserted
responsibility which would give rise under Section 5 above to a
right to terminate and have such termination considered an
involuntary termination without Cause, which continues after the
Executive receives notice of such refusal or failure, (iii)
conduct that constitutes disloyalty to the Company, and that
materially damages the property, business or reputation of the
Company, or (iv) conviction of a felony involving moral turpitude.
8. This Agreement shall terminate upon the successful completion
of the Term of this Agreement provided either party has given
notice of such termination to the other party, which notice shall
have been received by the other party at least one year prior to
the end of such Term. In the event no such timely notice is
given, this Agreement shall be renewed for an additional five (5)
year term commencing on the day following the end of the Term of
this Agreement. No additional payments are required by the
termination of this Agreement. The Executive, if he has remained
an employee during the Term of this Agreement and has attained a
minimum of age 55 shall be considered vested in the benefits
provided under the Company's Supplemental Executive Retirement
Plan, Executive Performance Supplemental Retirement Plan and
Supplemental Benefit Plan.
9. Indemnification. The Company will pay all reasonable fees and
expenses, if any, (including, without limitation, legal fees and
expenses) that are incurred by the Executive to enforce this
Agreement and that result from a breach of this Agreement by the
Company.
10. Payment of Compensation and Taxes. All amounts payable under
this Agreement (other than restricted stock, which will be paid
according to the terms of the Company's Long-Term Incentive Plan)
will be paid in cash, subject to required income and payroll tax
withholdings.
11. Assignment. The rights and obligations of the Company under
this Agreement will inure to the benefit of and will be binding
upon the successors and assigns of the Company. If the Company is
consolidated or merged with or into another corporation, or if
another entity purchases all or substantially all of the Company's
assets, the surviving or acquiring corporation will succeed to the
5
<PAGE>
Company's rights and obligations under this Agreement. The
Executive's rights under this Agreement may not be assigned or
transferred in whole or in part, except that the personal
representative of the Executive's estate will receive any amounts
payable under this Agreement after the death of the Executive.
12. Rights Under this Agreement. The right to receive benefits
under the Agreement will not give the Executive any proprietary
interest in the Company or any of its assets. Benefits under the
Agreement will be payable from the general assets of the Company,
and there will be no required funding of amounts that may become
payable under the Agreement. The Executive will for all purposes
be a general creditor of the Company. The interest of the
Executive under the Agreement cannot be assigned, anticipated,
sold, encumbered or pledged and will not be subject to the claims
of the Executive's creditors.
13. Notice. For purposes of this Agreement, notices and all
other communications must be in writing and are effective when
delivered or mailed by United States registered mail, return
receipt requested, postage prepaid, addressed to the Executive or
his personal representative at his last known address. All
notices to the Company must be directed to the attention of the
Chief Executive Officer. Such other addresses may be used as
either party may have furnished to the other in writing. Notices
of change of address are effective only upon receipt.
14. Miscellaneous. To the extent not governed by federal law,
this Agreement will be construed in accordance with the law of the
State of Maryland without reference to its conflict of laws
rules. No provisions of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed
to in writing and the writing is signed by the Executive and the
Company. A waiver of any breach of or compliance with any
provision or condition of this Agreement is not a waiver of
similar or dissimilar provisions or conditions. The invalidity or
unenforceability of any provision of this Agreement will not
affect the validity or enforceability of any other provision of
this Agreement, which will remain in full force and effect. This
Agreement may be executed in one or more counterparts, all of
which will be considered one and the same agreement.
WITNESS the following signatures.
POTOMAC ELECTRIC POWER COMPANY EXECUTIVE
/s/ E. F. MITCHELL /s/ JOHN M. DERRICK
By:_______________________________ _________________________
Chairman of the Board and Chief Name
Executive Officer
6
This Agreement, made this 1st day of August, 1995 between Potomac
Electric Power Company, hereinafter referred to as the "Company" and H.
Lowell Davis, hereinafter referred to as "Davis",
WITNESSETH:
WHEREAS, Davis has served as Vice Chairman and Chief Financial
Officer of the Company since September, 1983; and has served as Chief
Executive Officer of the Company's subsidiary, Potomac Capital Investment
Corporation since its inception in 1983.
WHEREAS, the Company wishes to make provision for continuity and
orderly transition through the continued employment of Davis for the period
specified herein; and
WHEREAS, Davis is willing to continue employment upon the terms and
conditions hereinafter set forth;
NOW THEREFORE, the parties agree as follows:
1. For the period beginning on the date of execution of this
Agreement and ending May 1, 1997 (or such alternate date as may be mutually
agreed to in writing between the Company and Davis) Davis will continue to
serve as Vice Chairman of the Company, unless his services are sooner
terminated in accordance with the provisions of clause number 3 hereafter.
During the continuance of his employment, Davis will devote his full time,
energies and best efforts to the business of the Company through April 30,
1996. For the year commencing May 1, 1996 through April 30, 1997, Davis
will remain available to perform requested services and will continue to
serve as a director of the Company. Unless otherwise mutually agreed to in
writing between the Company and Davis, Davis will retire on May 1, 1997.
2. Davis' salary as an officer of the Company during the period of
this Agreement shall be payable monthly at an annual rate to be established
by the Company's Board of Directors from time to time, which rate shall be
no less than the base salary in effect at the date on which this Agreement
is executed.
3. Davis' services may be terminated at a time prior to May 1,
1997 (or such alternate date as may be mutually agreed to in writing
between the Company and Davis) in the following circumstances:
(a) The Board of Directors of the Company may terminate
Davis' services and effectuate his retirement upon a showing by clear and
convincing evidence of just cause and with six (6) months' notice to Davis.
(b) Davis' services shall be terminated upon a determination
by the Company that he has become totally and permanently disabled and
therefore unable to work for the Company due to physical or mental
disability.
4. Upon termination of Davis' services with the Company, whether
on or before May 1, 1997 (or such alternate date as may be mutually agreed
<PAGE>
to in writing between the Company and Davis) and for whatever reason, the
Company will determine the retirement amounts to be paid to Davis, pursuant
to the terms of the Company's General Retirement Plan, the Supplemental
Benefit Plan, the Executive Performance Supplemental Retirement Plan, and
the Supplemental Executive Retirement Plan (the "Retirement Plans"), based
upon the amounts paid or payable to Davis, in all cases computed without
reduction for deferrals under any deferred compensation plan or arrangement
made available to Davis by the Company. For purposes of computing Davis'
compensation attributable to incentive compensation for purposes of the
Retirement Plans, such amounts shall be determined based upon the greater
of (i) actual incentive award amounts payable to Davis or (ii) the
incentive award amounts which would be payable to Davis resulting from
application of the target annual award level specified in the Company's
Executive Incentive Compensation Plan guidelines for the position of Vice
Chairman.
5. For purposes of the Director and Executive Deferred
Compensation Plan, contractual payments to Davis pursuant to Section 5.03
of this plan shall commence the first day of the month following Davis'
65th birthday, notwithstanding his termination for any reason or retirement
prior to age 65.
6. For purposes of the Executive Split Dollar Insurance Plan,
"Rollout", as provided pursuant to Section 9 of this plan will occur upon
Davis' attainment of age 65, (the regular "Rollout Qualification Date"
specified in the plan), notwithstanding his termination for any reason or
retirement prior to age 65.
7. Should there be unvested restricted stock awards outstanding at
the date of Davis' termination for any reason or retirement, remaining
restrictions shall be waived and such stock would vest upon his termination
for any reason or at retirement.
8. This Agreement shall inure to the benefit of and be binding
upon the Company, its successors and assigns (including without limitation
any corporation which might acquire all or substantially all of the
Company's assets and business or with which the Company may be consolidated
or merged).
9. This Agreement is effective on the date of execution hereof.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officers, under its corporate seal, by the
order of its Board of Directors, and Davis has hereunto set his hand and
seal both as of the day and year first above written.
POTOMAC ELECTRIC POWER COMPANY
/s/ E. F. MITCHELL
By
_________________________
Chairman of the Board
Attest:
/s/ WILLIAM T. TORGERSON /s/ H. L. DAVIS
___________________________ _________________________(Seal)
Secretary H. Lowell Davis
2
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") is made as of August
1, 1995 between POTOMAC ELECTRIC POWER COMPANY (the "Company") and
W. T. TORGERSON (the "Executive").
RECITALS:
The Board of Directors of Potomac Electric Power Company (the
"Board of Directors") recognizes that outstanding management of
the Company is essential to advancing the best interests of the
Company, its shareholders and its subsidiaries. The Board of
Directors believes that it is particularly important to have
stable, excellent management at the present time. The Board of
Directors believes that this objective may be achieved by giving
key management employees assurances of financial security for a
period of time, so that they will not be distracted by personal
risks and will continue to devote their full time and best efforts
to the performance of their duties.
The Human Resources Committee of the Board of Directors (the
"Committee") has recommended, and the Board of Directors has
approved, entering into employment agreements with the Company's
key management executives in order to achieve the foregoing
objectives. The Executive is a key management executive of the
Company and is a valuable member of the Company's management team.
The Company acknowledges that the Executive's contributions to the
past and future growth and success of the Company have been and
will continue to be substantial. The Company and the Executive
are entering into this Agreement to induce the Executive to remain
an employee of the Company and to continue to devote his full
energy to the Company's affairs. The Executive has agreed to
continue to be employed by the Company under the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing and the mutual
undertakings contained in this Agreement, the parties agree as
follows:
1. Employment. The Company will employ the Executive, and the
Executive will continue in the employment of the Company, as an
executive of the Company, for the period beginning August 1, 1995
and ending August 1, 2000 (the "Term of this Agreement"), according
to the terms of this Agreement.
2. Duties. The Company and the Executive agree that, during the
Term of this Agreement, the Executive will serve in a senior
management position with the Company. The Executive (i) will
devote his knowledge, skill and best efforts on a full-time basis
to performing his duties and obligations to the Company (with the
exception of absences on account of illness or vacation in
accordance with the Company's policies and civic and charitable
commitments not involving a conflict with the Company's business),
and (ii) will comply with the directions and orders of the Board
of Directors and Chief Executive Officer of the Company with
respect to the performance of his duties.
1
<PAGE>
3. Affiliates. Employment by an Affiliate of the Company or a
successor to the Company will be considered employment by the
Company for purposes of this Agreement, and termination of
employment with the Company means termination of employment with
the Company and all its Affiliates and successors. The term
"Company" as used in this Agreement will be deemed to include
Affiliates and successors. For purposes of this Agreement, the
term "Affiliate" means the subsidiaries of Potomac Electric Power
Company and other entities under common control with Potomac
Electric Power Company.
4. Compensation and Benefits.
(a) During the Term of this Agreement, while the Executive is
employed by the Company, the Company will pay to the Executive the
following salary and incentive awards for services rendered by the
Company:
(i) The Company will pay to the Executive an annual salary in an
amount not less than the base salary in effect for the Executive
as of the date on which this Agreement is executed.
(ii) The Executive will be entitled to receive incentive awards if
and to the extent that the Board of Directors determines that the
Executive's performance merits payment of an award.
If the Executive is employed by an Affiliate or a successor (as
described in Section (3), the term "Board of Directors" as used in
this Section 4(a) and in Section 5(a)(iii) means the Board of
Directors of the Executive's employer.
(b) During the Term of this Agreement, while the Executive is
employed by the Company, the Executive will be eligible to
participate in a similar manner as other senior executives of the
Company in retirement plans, fringe benefit plans and other
employee benefit plans and programs provided by the Company for
its employees from time to time.
5. Termination of Employment.
(a) If the Company terminates the Executive's employment, other
than for Cause (as defined in Section 7 below), during the Term of
this Agreement, the Company will pay the Executive a lump sum
payment equal to the greater of (1) the present value of the
Executive's annual base salary and annual cash incentive awards
(computed as described below) for the balance of the Term of this
Agreement (not to exceed three years), or (2) two times the
Executive's annual salary and target annual incentive award as in
effect at the time of termination. The lump sum payment will be
computed as follows:
(i) For purposes of this calculation, the Executive's annual
base salary for the balance of the Term of the Agreement will be
calculated at the highest annual base salary rate in effect for
the Executive during the three-year period preceding his
termination of employment. For purposes of this calculation, the
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Executive's annual cash incentive awards for the balance of the
Term of the Agreement will be calculated at a rate equal to the
highest annual incentive target award during the three-year period
preceding his termination of employment. Salary and bonus that
the Executive elected to defer will be taken into account for
purposes of this Agreement without regard to the deferral.
(ii) The salary and incentive award for any partial year in
the Term of this Agreement will be a pro-rated portion of the
annual amount.
(iii) If the Executive has not yet received an annual cash
incentive award for the year in which his employment terminates,
the lump sum payment will be increased to include a pro-rated
award for the portion of the year preceding the Executive's
termination of employment. If the Executive has not yet received
payment of his annual cash incentive award for the year preceding
his termination of employment, the lump sum payment will also be
increased to include an award for the year preceding the
Executive's termination of employment. The incentive award for
the year or portion of the year preceding the Executive's
termination of employment will be determined according to clause
(i) above, unless the Board of Directors made a good faith final
determination of the amount of the applicable incentive award
pursuant to Section 4(a)(ii) before the Executive's termination of
employment. If the Board of Directors made such a determination,
the applicable incentive award will be computed according to the
Board of Directors' determination.
(iv) Present value will be computed by the Company as of the
date of the Executive's termination of employment, based on a
discount rate equal to the applicable Federal short-term rate in
effect on the date as of which the present value is determined, as
determined under Section 1274(d) of the Code, compounded monthly.
(v) The lump sum payment will be paid within 30 days after
the Executive's termination of employment.
(b) If the Company terminates the Executive's employment, other
than for Cause, during the Term of this Agreement, the Executive
will be entitled to receive the following additional benefits
determined as of the date of his termination of employment:
(i) Any outstanding restricted stock that would become
vested (that is, transferable and nonforfeitable) if the Executive
remained an employee through the Term of this Agreement will
become vested as of the date of the Executive's termination of
employment (or as of the date described in the next sentence, if
applicable). In addition, if the Company has agreed to award the
Executive restricted stock at the end of a performance period,
subject to the Company's achievement of performance goals, and the
date as of which the restricted stock is to become vested falls
within the Term of this Agreement, the stock will be awarded and
become vested at the end of the performance period if and to the
extent that the performance goals are met.
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(ii) The Executive will be provided a supplemental
retirement benefit equal to the greater of (A) the benefit accrued
by the Executive under the Company's Supplemental Benefit Plan,
Executive Performance Supplemental Retirement Plan and
Supplemental Executive Retirement Plan or (B) a benefit equal to
the differential between (1) the amount the Executive would have
been entitled to receive under the Company's General Retirement
Plan and the Supplemental Benefit Plan determined as if the
Executive had attained age 55 and completed 30 years of service
immediately prior to the occurrence of the termination and (2) the
actual benefit accrued under the Company's General Retirement Plan
and the Supplemental Benefit Plan immediately prior to the
occurrence of the termination. For purposes of computing
Executive's Benefit under (B)(1) above, Executive's Final Average
Earnings shall be increased by the average of three highest target
awards under the Company's Executive Incentive Compensation Plan
within the five years immediately preceding the termination. If
Benefits become payable to Executive under (B) above, Executive's
rights to Benefits under the Plans referenced under (A) above,
will lapse. The Executive will begin receiving benefits from the
Company's General Retirement Plan at the first early retirement
date provided by the General Retirement Plan. The Executive will
also be provided any other benefits to retirees (i.e., medical) on
the same terms as any retiree who has attained age 55 and
completed 30 years of service.
(iii) The Company shall continue to pay all premium amounts
with respect to the Executive's policy under the Company's split
dollar insurance program for the lesser of ten (10) years from the
termination date or the period of time remaining until the
Executive's Roll out Qualification Date, whichever first occurs.
(c) If the Executive voluntarily terminates employment with the
Company during the Term of this Agreement under circumstances
described in this subsection (c), the Executive will be entitled
to receive the benefits described in subsections (a) and (b) above
as if the Company had terminated the Executive's employment other
than for Cause. Subject to the provisions of this subsection (c),
these benefits will be provided if the Executive voluntarily
terminates employment after (i) the Company reduces the
Executive's base salary (except a reduction consistent and
proportional with an overall reduction in management compensation,
due to extraordinary business conditions, imposed on other senior
executives of the Company), (ii) the Executive is not in good
faith considered for incentive awards as described in Section
4(a)(ii), (iii) the Company fails to provide benefits as required
by Section 4(b), (iv) the Company relocates the Executive's place
of employment to a location further than 50 miles from Washington,
DC, or (v) the Company demotes the Executive to a position that is
not a senior management position (other than on account of the
Executive's disability, as defined in Section 6 below). In order
for this subsection (c) to be effective: (1) the Executive must
give written notice to the Company indicating that the Executive
intends to terminate employment under this subsection (c), (2) the
Executive's voluntary termination under this subsection must occur
within 60 days after the Executive knows or reasonably should know
of an event described in clause (i), (ii), (iii), (iv), or (v)
above, or within 60 days after the last in a series of such
events, and (3) the Company must have failed to remedy the event
described in clause (i), (ii), (iii), (iv), or (v), as the case
may be, within 30 days after receiving the Executive's written
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notice. If the Company remedies the event described in clause
(i), (ii), (iii), (iv), or (v), as the case may be, within 30 days
after receiving the Executive's written notice, the Executive may
not terminate employment under this subsection (c) on account of
the event specified in the Executive's notice. Termination under
the circumstances above shall be deemed an involuntary termination
without Cause for purposes of non-qualified benefit plans.
6. Disability or Death. Upon the Executive's death or
disability, the provisions of Sections 1, 2, 4, and 5 of this
Agreement will terminate. This contract provides no additional
benefits due to disability or death in addition to any death,
disability and other benefit provided under the Company benefit
plans in which the executive participates.
7. Cause. For purposes of this Agreement, the term "Cause" means
(i) intentional fraud or material misappropriation with respect to
the business or assets of the Company, (ii) persistent refusal or
wilful failure of the Executive to perform substantially his
duties and responsibilities to the Company other than an asserted
responsibility which would give rise under Section 5 above to a
right to terminate and have such termination considered an
involuntary termination without Cause, which continues after the
Executive receives notice of such refusal or failure, (iii)
conduct that constitutes disloyalty to the Company, and that
materially damages the property, business or reputation of the
Company, or (iv) conviction of a felony involving moral turpitude.
8. This Agreement shall terminate upon the successful completion
of the Term of this Agreement provided either party has given
notice of such termination to the other party, which notice shall
have been received by the other party at least one year prior to
the end of such Term. In the event no such timely notice is
given, this Agreement shall be renewed for an additional five (5)
year term commencing on the day following the end of the Term of
this Agreement. No additional payments are required by the
termination of this Agreement. The Executive, if he has remained
an employee during the Term of this Agreement and has attained a
minimum of age 55 shall be considered vested in the benefits
provided under the Company's Supplemental Executive Retirement
Plan, Executive Performance Supplemental Retirement Plan and
Supplemental Benefit Plan.
9. Indemnification. The Company will pay all reasonable fees and
expenses, if any, (including, without limitation, legal fees and
expenses) that are incurred by the Executive to enforce this
Agreement and that result from a breach of this Agreement by the
Company.
10. Payment of Compensation and Taxes. All amounts payable under
this Agreement (other than restricted stock, which will be paid
according to the terms of the Company's Long-Term Incentive Plan)
will be paid in cash, subject to required income and payroll tax
withholdings.
11. Assignment. The rights and obligations of the Company under
this Agreement will inure to the benefit of and will be binding
upon the successors and assigns of the Company. If the Company is
consolidated or merged with or into another corporation, or if
another entity purchases all or substantially all of the Company's
assets, the surviving or acquiring corporation will succeed to the
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Company's rights and obligations under this Agreement. The
Executive's rights under this Agreement may not be assigned or
transferred in whole or in part, except that the personal
representative of the Executive's estate will receive any amounts
payable under this Agreement after the death of the Executive.
12. Rights Under this Agreement. The right to receive benefits
under the Agreement will not give the Executive any proprietary
interest in the Company or any of its assets. Benefits under the
Agreement will be payable from the general assets of the Company,
and there will be no required funding of amounts that may become
payable under the Agreement. The Executive will for all purposes
be a general creditor of the Company. The interest of the
Executive under the Agreement cannot be assigned, anticipated,
sold, encumbered or pledged and will not be subject to the claims
of the Executive's creditors.
13. Notice. For purposes of this Agreement, notices and all
other communications must be in writing and are effective when
delivered or mailed by United States registered mail, return
receipt requested, postage prepaid, addressed to the Executive or
his personal representative at his last known address. All
notices to the Company must be directed to the attention of the
Chief Executive Officer. Such other addresses may be used as
either party may have furnished to the other in writing. Notices
of change of address are effective only upon receipt.
14. Miscellaneous. To the extent not governed by federal law,
this Agreement will be construed in accordance with the law of the
State of Maryland without reference to its conflict of laws
rules. No provisions of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed
to in writing and the writing is signed by the Executive and the
Company. A waiver of any breach of or compliance with any
provision or condition of this Agreement is not a waiver of
similar or dissimilar provisions or conditions. The invalidity or
unenforceability of any provision of this Agreement will not
affect the validity or enforceability of any other provision of
this Agreement, which will remain in full force and effect. This
Agreement may be executed in one or more counterparts, all of
which will be considered one and the same agreement.
WITNESS the following signatures.
POTOMAC ELECTRIC POWER COMPANY EXECUTIVE
/S/ E. F. MITCHELL /s/ WILLIAM T. TORGERSON
By:_______________________________ _________________________
Chairman of the Board and Chief Name
Executive Officer
6
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") is made as of August
1, 1995 between POTOMAC ELECTRIC POWER COMPANY (the "Company") and
DENNIS R. WRAASE (the "Executive").
RECITALS:
The Board of Directors of Potomac Electric Power Company (the
"Board of Directors") recognizes that outstanding management of
the Company is essential to advancing the best interests of the
Company, its shareholders and its subsidiaries. The Board of
Directors believes that it is particularly important to have
stable, excellent management at the present time. The Board of
Directors believes that this objective may be achieved by giving
key management employees assurances of financial security for a
period of time, so that they will not be distracted by personal
risks and will continue to devote their full time and best efforts
to the performance of their duties.
The Human Resources Committee of the Board of Directors (the
"Committee") has recommended, and the Board of Directors has
approved, entering into employment agreements with the Company's
key management executives in order to achieve the foregoing
objectives. The Executive is a key management executive of the
Company and is a valuable member of the Company's management team.
The Company acknowledges that the Executive's contributions to the
past and future growth and success of the Company have been and
will continue to be substantial. The Company and the Executive
are entering into this Agreement to induce the Executive to remain
an employee of the Company and to continue to devote his full
energy to the Company's affairs. The Executive has agreed to
continue to be employed by the Company under the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing and the mutual
undertakings contained in this Agreement, the parties agree as
follows:
1. Employment. The Company will employ the Executive, and the
Executive will continue in the employment of the Company, as an
executive of the Company, for the period beginning August 1, 1995
and ending August 1, 2000 (the "Term of this Agreement"), according
to the terms of this Agreement.
2. Duties. The Company and the Executive agree that, during the
Term of this Agreement, the Executive will serve in a senior
management position with the Company. The Executive (i) will
devote his knowledge, skill and best efforts on a full-time basis
to performing his duties and obligations to the Company (with the
exception of absences on account of illness or vacation in
accordance with the Company's policies and civic and charitable
commitments not involving a conflict with the Company's business),
and (ii) will comply with the directions and orders of the Board
of Directors and Chief Executive Officer of the Company with
respect to the performance of his duties.
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3. Affiliates. Employment by an Affiliate of the Company or a
successor to the Company will be considered employment by the
Company for purposes of this Agreement, and termination of
employment with the Company means termination of employment with
the Company and all its Affiliates and successors. The term
"Company" as used in this Agreement will be deemed to include
Affiliates and successors. For purposes of this Agreement, the
term "Affiliate" means the subsidiaries of Potomac Electric Power
Company and other entities under common control with Potomac
Electric Power Company.
4. Compensation and Benefits.
(a) During the Term of this Agreement, while the Executive is
employed by the Company, the Company will pay to the Executive the
following salary and incentive awards for services rendered by the
Company:
(i) The Company will pay to the Executive an annual salary in an
amount not less than the base salary in effect for the Executive
as of the date on which this Agreement is executed.
(ii) The Executive will be entitled to receive incentive awards if
and to the extent that the Board of Directors determines that the
Executive's performance merits payment of an award.
If the Executive is employed by an Affiliate or a successor (as
described in Section (3), the term "Board of Directors" as used in
this Section 4(a) and in Section 5(a)(iii) means the Board of
Directors of the Executive's employer.
(b) During the Term of this Agreement, while the Executive is
employed by the Company, the Executive will be eligible to
participate in a similar manner as other senior executives of the
Company in retirement plans, fringe benefit plans and other
employee benefit plans and programs provided by the Company for
its employees from time to time.
5. Termination of Employment.
(a) If the Company terminates the Executive's employment, other
than for Cause (as defined in Section 7 below), during the Term of
this Agreement, the Company will pay the Executive a lump sum
payment equal to the greater of (1) the present value of the
Executive's annual base salary and annual cash incentive awards
(computed as described below) for the balance of the Term of this
Agreement (not to exceed three years), or (2) two times the
Executive's annual salary and target annual incentive award as in
effect at the time of termination. The lump sum payment will be
computed as follows:
(i) For purposes of this calculation, the Executive's annual
base salary for the balance of the Term of the Agreement will be
calculated at the highest annual base salary rate in effect for
the Executive during the three-year period preceding his
termination of employment. For purposes of this calculation, the
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Executive's annual cash incentive awards for the balance of the
Term of the Agreement will be calculated at a rate equal to the
highest annual incentive target award during the three-year period
preceding his termination of employment. Salary and bonus that
the Executive elected to defer will be taken into account for
purposes of this Agreement without regard to the deferral.
(ii) The salary and incentive award for any partial year in
the Term of this Agreement will be a pro-rated portion of the
annual amount.
(iii) If the Executive has not yet received an annual cash
incentive award for the year in which his employment terminates,
the lump sum payment will be increased to include a pro-rated
award for the portion of the year preceding the Executive's
termination of employment. If the Executive has not yet received
payment of his annual cash incentive award for the year preceding
his termination of employment, the lump sum payment will also be
increased to include an award for the year preceding the
Executive's termination of employment. The incentive award for
the year or portion of the year preceding the Executive's
termination of employment will be determined according to clause
(i) above, unless the Board of Directors made a good faith final
determination of the amount of the applicable incentive award
pursuant to Section 4(a)(ii) before the Executive's termination of
employment. If the Board of Directors made such a determination,
the applicable incentive award will be computed according to the
Board of Directors' determination.
(iv) Present value will be computed by the Company as of the
date of the Executive's termination of employment, based on a
discount rate equal to the applicable Federal short-term rate in
effect on the date as of which the present value is determined, as
determined under Section 1274(d) of the Code, compounded monthly.
(v) The lump sum payment will be paid within 30 days after
the Executive's termination of employment.
(b) If the Company terminates the Executive's employment, other
than for Cause, during the Term of this Agreement, the Executive
will be entitled to receive the following additional benefits
determined as of the date of his termination of employment:
(i) Any outstanding restricted stock that would become
vested (that is, transferable and nonforfeitable) if the Executive
remained an employee through the Term of this Agreement will
become vested as of the date of the Executive's termination of
employment (or as of the date described in the next sentence, if
applicable). In addition, if the Company has agreed to award the
Executive restricted stock at the end of a performance period,
subject to the Company's achievement of performance goals, and the
date as of which the restricted stock is to become vested falls
within the Term of this Agreement, the stock will be awarded and
become vested at the end of the performance period if and to the
extent that the performance goals are met.
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(ii) The Executive will be provided a supplemental
retirement benefit equal to the greater of (A) the benefit accrued
by the Executive under the Company's Supplemental Benefit Plan,
Executive Performance Supplemental Retirement Plan and
Supplemental Executive Retirement Plan or (B) a benefit equal to
the differential between (1) the amount the Executive would have
been entitled to receive under the Company's General Retirement
Plan and the Supplemental Benefit Plan determined as if the
Executive had attained age 55 and completed 30 years of service
immediately prior to the occurrence of the termination and (2) the
actual benefit accrued under the Company's General Retirement Plan
and the Supplemental Benefit Plan immediately prior to the
occurrence of the termination. For purposes of computing
Executive's Benefit under (B)(1) above, Executive's Final Average
Earnings shall be increased by the average of three highest target
awards under the Company's Executive Incentive Compensation Plan
within the five years immediately preceding the termination. If
Benefits become payable to Executive under (B) above, Executive's
rights to Benefits under the Plans referenced under (A) above,
will lapse. The Executive will begin receiving benefits from the
Company's General Retirement Plan at the first early retirement
date provided by the General Retirement Plan. The Executive will
also be provided any other benefits to retirees (i.e., medical) on
the same terms as any retiree who has attained age 55 and
completed 30 years of service.
(iii) The Company shall continue to pay all premium amounts
with respect to the Executive's policy under the Company's split
dollar insurance program for the lesser of ten (10) years from the
termination date or the period of time remaining until the
Executive's Roll out Qualification Date, whichever first occurs.
(c) If the Executive voluntarily terminates employment with the
Company during the Term of this Agreement under circumstances
described in this subsection (c), the Executive will be entitled
to receive the benefits described in subsections (a) and (b) above
as if the Company had terminated the Executive's employment other
than for Cause. Subject to the provisions of this subsection (c),
these benefits will be provided if the Executive voluntarily
terminates employment after (i) the Company reduces the
Executive's base salary (except a reduction consistent and
proportional with an overall reduction in management compensation,
due to extraordinary business conditions, imposed on other senior
executives of the Company), (ii) the Executive is not in good
faith considered for incentive awards as described in Section
4(a)(ii), (iii) the Company fails to provide benefits as required
by Section 4(b), (iv) the Company relocates the Executive's place
of employment to a location further than 50 miles from Washington,
DC, or (v) the Company demotes the Executive to a position that is
not a senior management position (other than on account of the
Executive's disability, as defined in Section 6 below). In order
for this subsection (c) to be effective: (1) the Executive must
give written notice to the Company indicating that the Executive
intends to terminate employment under this subsection (c), (2) the
Executive's voluntary termination under this subsection must occur
within 60 days after the Executive knows or reasonably should know
of an event described in clause (i), (ii), (iii), (iv), or (v)
above, or within 60 days after the last in a series of such
events, and (3) the Company must have failed to remedy the event
described in clause (i), (ii), (iii), (iv), or (v), as the case
may be, within 30 days after receiving the Executive's written
4
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notice. If the Company remedies the event described in clause
(i), (ii), (iii), (iv), or (v), as the case may be, within 30 days
after receiving the Executive's written notice, the Executive may
not terminate employment under this subsection (c) on account of
the event specified in the Executive's notice. Termination under
the circumstances above shall be deemed an involuntary termination
without Cause for purposes of non-qualified benefit plans.
6. Disability or Death. Upon the Executive's death or
disability, the provisions of Sections 1, 2, 4, and 5 of this
Agreement will terminate. This contract provides no additional
benefits due to disability or death in addition to any death,
disability and other benefit provided under the Company benefit
plans in which the executive participates.
7. Cause. For purposes of this Agreement, the term "Cause" means
(i) intentional fraud or material misappropriation with respect to
the business or assets of the Company, (ii) persistent refusal or
wilful failure of the Executive to perform substantially his
duties and responsibilities to the Company other than an asserted
responsibility which would give rise under Section 5 above to a
right to terminate and have such termination considered an
involuntary termination without Cause, which continues after the
Executive receives notice of such refusal or failure, (iii)
conduct that constitutes disloyalty to the Company, and that
materially damages the property, business or reputation of the
Company, or (iv) conviction of a felony involving moral turpitude.
8. This Agreement shall terminate upon the successful completion
of the Term of this Agreement provided either party has given
notice of such termination to the other party, which notice shall
have been received by the other party at least one year prior to
the end of such Term. In the event no such timely notice is
given, this Agreement shall be renewed for an additional five (5)
year term commencing on the day following the end of the Term of
this Agreement. No additional payments are required by the
termination of this Agreement. The Executive, if he has remained
an employee during the Term of this Agreement and has attained a
minimum of age 55 shall be considered vested in the benefits
provided under the Company's Supplemental Executive Retirement
Plan, Executive Performance Supplemental Retirement Plan and
Supplemental Benefit Plan.
9. Indemnification. The Company will pay all reasonable fees and
expenses, if any, (including, without limitation, legal fees and
expenses) that are incurred by the Executive to enforce this
Agreement and that result from a breach of this Agreement by the
Company.
10. Payment of Compensation and Taxes. All amounts payable under
this Agreement (other than restricted stock, which will be paid
according to the terms of the Company's Long-Term Incentive Plan)
will be paid in cash, subject to required income and payroll tax
withholdings.
11. Assignment. The rights and obligations of the Company under
this Agreement will inure to the benefit of and will be binding
upon the successors and assigns of the Company. If the Company is
consolidated or merged with or into another corporation, or if
another entity purchases all or substantially all of the Company's
assets, the surviving or acquiring corporation will succeed to the
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Company's rights and obligations under this Agreement. The
Executive's rights under this Agreement may not be assigned or
transferred in whole or in part, except that the personal
representative of the Executive's estate will receive any amounts
payable under this Agreement after the death of the Executive.
12. Rights Under this Agreement. The right to receive benefits
under the Agreement will not give the Executive any proprietary
interest in the Company or any of its assets. Benefits under the
Agreement will be payable from the general assets of the Company,
and there will be no required funding of amounts that may become
payable under the Agreement. The Executive will for all purposes
be a general creditor of the Company. The interest of the
Executive under the Agreement cannot be assigned, anticipated,
sold, encumbered or pledged and will not be subject to the claims
of the Executive's creditors.
13. Notice. For purposes of this Agreement, notices and all
other communications must be in writing and are effective when
delivered or mailed by United States registered mail, return
receipt requested, postage prepaid, addressed to the Executive or
his personal representative at his last known address. All
notices to the Company must be directed to the attention of the
Chief Executive Officer. Such other addresses may be used as
either party may have furnished to the other in writing. Notices
of change of address are effective only upon receipt.
14. Miscellaneous. To the extent not governed by federal law,
this Agreement will be construed in accordance with the law of the
State of Maryland without reference to its conflict of laws
rules. No provisions of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed
to in writing and the writing is signed by the Executive and the
Company. A waiver of any breach of or compliance with any
provision or condition of this Agreement is not a waiver of
similar or dissimilar provisions or conditions. The invalidity or
unenforceability of any provision of this Agreement will not
affect the validity or enforceability of any other provision of
this Agreement, which will remain in full force and effect. This
Agreement may be executed in one or more counterparts, all of
which will be considered one and the same agreement.
WITNESS the following signatures.
POTOMAC ELECTRIC POWER COMPANY EXECUTIVE
/s/ E. F. MITCHELL /s/ D. R. WRAASE
By:_______________________________ _________________________
Chairman of the Board and Chief Name
Executive Officer
6
AGREEMENT TO EXTEND DATE
Pursuant to the provisions of Sections 1, 3 and 4 of the
Agreement (the "Agreement") made April 26, 1995 between Potomac
Electric Power Company (the "Company") and Edward F. Mitchell
("Mitchell"), the Company and Mitchell do hereby mutually agree to
a date subsequent to the January 1, 1997 date set forth in Sections
1, 3 and 4 of the Agreement with January 1, 1997 being changed to
the later of:
(i) January 1, 1997, or
(ii) the Effective Time as that term is defined in the
Agreement and Plan of Merger by and among the Company,
Baltimore Gas and Electric Company and RH Acquisition Corp.
dated as of September 22, 1995 (the "Merger Agreement"),
provided, however, if the Merger Agreement is terminated
without consummation of the transaction contemplated therein,
for purposes of this written agreement the Effective Time
shall be deemed to be the date of such termination.
Agreed to this 22nd day of September, 1995.
Potomac Electric Power Company
/s/ JOHN M. DERRICK
By:___________________________
John M. Derrick, Jr.
Attest:
/s/ ELLEN SHERIFF ROGERS
____________________________
Assistant Secretary
Edward F. Mitchell
/S/ EDWARD F. MITCHELL
______________________________
SEVERANCE AGREEMENT
This Agreement is made the 1st day of August, 1995, by and
between Potomac Electric Power Company (the "Company") and
Robert C. Grantley (the "Executive").
WHEREAS, the Company desires to establish a severance benefit
for the Executive when a Change in Control (as hereinafter defined)
occurs, to avoid the loss or the serious distraction of the
Executive to the detriment of the Company and its stockholders
during periods when the Executive's undivided attention and
commitment to the needs of the Company would be particularly
important; and
WHEREAS, the Executive desires to devote his time and energy
for the benefit of the Company and its stockholders and not to be
distracted during any potential change in control.
NOW, THEREFORE, the parties agree as follows:
1. Definitions
1.1 Change in Control. Change in Control shall be
deemed to have occurred as of the first day that any one or more of
the following conditions shall have been satisfied:
(a) Any "Person" (other than (i) those Persons in
control of the Company as of the Effective Date, (ii) any person or
persons acting on behalf of the Company in a distribution of stock
to the public, (iii) any trustee or other fiduciary holding
securities under any employee benefit plan of the Company, or (iv)
a corporation owned directly or indirectly by the stockholders
(immediately prior to such transaction) of the Company in
substantially the same proportions as their ownership of stock of
the Company) becomes a Beneficial Owner, directly or indirectly, of
securities of the Company representing thirty percent (30%) or more
of the combined voting power of the Company's then outstanding
securities; or
(b) (i) a complete or substantial liquidation of
the Company; or (ii) the sale or disposition of all or
substantially all the Company's assets; or (iii) a
merger, consolidation, or reorganization of the Company with or
involving any other corporation or entity, other than a merger,
consolidation, or reorganization that would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) at
least seventy percent (70%) of the combined voting power of the
voting securities of the Company (or such surviving entity)
outstanding immediately after such merger, consolidation or
reorganization.
In no event shall a Change in Control be deemed to have
occurred, with respect to the Executive, if the Executive is part
of a purchasing group which consummates the Change in Control
transaction. The Executive shall be deemed "part of a purchasing
group" for purposes of the preceding sentence if the Executive is
an equity Executive in the purchasing company or group (except for:
(i) passive ownership of less than one percent (1%) of the stock of
<PAGE>
the purchasing company; or (ii) ownership of equity participation
in the purchasing company or group which is otherwise not
significant, as determined prior to the Change in Control by a
majority of the nonemployee continuing directors of the Company).
1.2 Qualifying Termination
(a) The occurrence of any one or more of the following
events within twenty-four (24) calendar months after a Change in
Control of the Company shall constitute a "Qualifying Termination":
(i) The Company's involuntary termination of the
Executive's employment without Cause (as defined in Section 1.4);
(ii) The Executive's voluntary employment
termination for Good Reason (as defined in Section 1.3);
(iii) Failure or refusal by a successor company to
assume the Company's obligations under this Agreement in its
entirety, as required by Section 9 herein; or
(iv) Commission by the Company, or any successor
company, of a material breach of any of the provisions of this
Agreement.
(b) A Qualifying Termination also shall include an
involuntary termination of the Executive, without Cause, "in
contemplation of," but prior to, a Change in Control of the
Company. An involuntary termination shall be deemed to be "in
contemplation of," a Change in Control if it occurs at any time
subsequent to (but in no event after an actual Change in Control):
(i) The Board of Directors accepting, or
recommending to the Company's shareholders the acceptance of, an
offer from any Person (other than those Persons in control of the
Company as of the Effective Date, or other than a trustee or other
fiduciary holding securities under an employee benefit plan of the
Company, or a corporation owned directly or indirectly by the
stockholders of the Company (immediately prior to such transaction)
in substantially the same proportions as their ownership of stock
of the Company) to become the beneficial owner, directly or
indirectly, or securities of the Company representing thirty
percent (30%) or more of the combined voting power of the
Company's then outstanding securities; or
(ii) The Board of Directors approving, or
recommending to the Company's shareholders for approval: (a) a plan
of complete or substantial liquidation of the Company; or (b) an
agreement for the sale or disposition of all or substantially all
of the Company's assets; or (c) a merger, consolidation, or
reorganization of the Company with or involving any other
corporation or entity, other than a merger, consolidation or
reorganization that would result in the voting securities of the
Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted to
2
<PAGE>
voting securities of the surviving entity), at least seventy
percent (70%) of the combined voting power of the voting securities
of the Company (or such surviving entity) outstanding immediately
after such merger, consolidation, or reorganization.
(c) A Qualifying Termination shall not include a
termination of employment by reason of death, disability, or
voluntary normal retirement (as such term is defined under the
then-established rules of the company's tax-qualified retirement
plan), the Executive's voluntary termination without Good Reason,
or the Company's involuntary termination of the Executive's
employment for Cause.
1.3 Good Reason. Good Reason means, without the Executive's
express written consent, the occurrence after or in contemplation
of a Change in Control of the company, of any one or more of the
following:
(a) The assignment to the Executive of duties materially
inconsistent with the Executive's authorities, duties,
responsibilities, and status (including offices, title and
reporting relationships) as an executive and/or officer of the
Company, or a material reduction or alteration in the nature or
status of the Executive's authorities, duties, or responsibilities
from those in effect as of ninety (90) days prior to the Change in
Control (or, in the case of a termination in contemplation of a
Change in Control, 90 days prior to the occurrence described in
Section 1.2(b)(i) or (ii) above), unless such act is remedied by
the Company within 10 business days after receipt of written notice
thereof given by the Executive;
(b) A reduction by the Company of the Executive's base
salary in effect on the effective date of a Change in Control, or
as the same shall be increased from time to time, unless such
reduction is less than ten percent (10%) and its either (i)
replaced by an incentive opportunity equal in value; or is (ii)
consistent and proportional with an overall reduction in management
compensation due to extraordinary business conditions, including
but not limited to reduced profitability and other financial stress
(i.e., the base salary of the Executive will not be singled out for
reduction in a manner inconsistent to a reduction imposed on other
executives of the Company);
(c) The relocation of the Executive's office more than
50 miles from the Executive's office on the effective date of the
Change in Control.
The Executive's right to terminate employment for
Good Reason shall not be affected by the Executive's incapacity due
to physical or mental illness. The Executive's continued
employment shall not constitute consent to, or a waiver of rights
with respect to, any circumstance constituting Good Reason herein.
3
<PAGE>
1.4. Cause. Cause shall mean the occurrence of any one or
more of the following:
(a) The Executive is convicted of a felony involving
moral turpitude; or
(b) The Executive engages in conduct or activities that
constitutes disloyalty to the Company and such conduct or
activities are materially damaging to the property, business or
reputation of the Company; or
(c) The Executive persistently fails or refuses to
comply with any written direction of an authorized representative
of the Company other than a directive constituting an assignment
described in Section 1.3(a); or
(d) The Executive embezzles or knowingly, and with
intent, misappropriates property of the Company, or unlawfully
appropriates any corporate opportunity of the Company.
1.5 Annual Bonus Amount. The average of the annual target
bonuses applicable to the Executive during the three calendar years
preceding the calendar year in which the Qualifying Termination
occurs.
2. Severance Payment. Upon the occurrence of a Qualifying
Termination with respect to the Executive, the Company shall pay to
the Executive an amount equal to two times the Executive's annual
base salary (as in effect on the date of the Qualifying
Termination, not reduced by any reduction described in Section
1.3(b) above) and Annual Bonus Amount. The payment shall be made
in twenty-four (24) equal monthly installments beginning on the
first day of the month following Qualifying Termination.
3. Severance Health Benefits. Upon the occurrence of a
Qualifying Termination, and for the thirty-six (36) month period
thereafter, the Company shall provide to the Executive and
Executive's family medical, accidental death and dismemberment,
disability and death benefits as provided to other executive
officers who remain employed by the Company (or a surviving entity
other than the Company). The Executive shall be required to make
payments for such coverage in the same amount as is required of
executive officers who remain employed by the Company or a
successor.
4. Code Section 280G
4.1 Limitations. Notwithstanding Section 2 and 3, in the
event that a Change in Control occurs and the independent public
accountants for the Company (the "Accountants") determine that if
the benefits to be provided under Section 2 and 3 (together with
any other benefits payable to the Executive under any applicable
plan maintained by the Company) were paid to the Executive:
4
<PAGE>
(a) the Executive would incur an excise tax under
Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), and the Company would be denied a deduction under Section
280G of the Code of all or some of such amounts to be paid to the
Executive, and
(b) the net after tax benefits to the Executive
attributable to payments under Sections 2 and 3 hereof would not be
at least $10,000 greater than the net after tax benefits which
would accrue to the Executive if the amounts which would otherwise
cause the Executive to be subject to this excise tax were not paid,
the amounts payable to the Executive pursuant to Section 2 and 3
(or pursuant to such other plans maintained by the Company) shall
be reduced so that the amount payable to the Executive hereunder is
the greatest amount (as determined by the Accountants) that may be
paid by the Company to the Executive without any such amount being
subject to an excise tax under Section 4999 or being nondeductible
for the Company pursuant to Section 280G.
4.2 Executive's Election. If the amounts to be paid to the
Executive are to be reduced under paragraph 4.1 of this Section,
the Executive shall be given the opportunity to designate which
benefits or payments shall be reduced and in what order of
priority.
4.3 Later Adjustments.
(a) If the Executive receives reduced payments or
benefits pursuant to the preceding paragraph, or if it had been
determined that no such reduction was required, but it nonetheless
is established pursuant to the final determination of a court or an
Internal Revenue Service proceeding that, notwithstanding the good
faith of the Executive and the Company in applying the terms of
this Section, the aggregate amount paid to the Executive or for his
benefit would result in any amount being treated as an "excess
parachute payment" for purposes of Sections 280G and 4999 of the
Code, then an amount equal to the amount that would be an "excess
parachute payment" shall be deemed for all purposes a loan to the
Executive made on the date of the receipt of such excess amount,
which the Executive shall have an obligation to repay to the
Company on demand, together with interest on such amount at the
applicable Federal rate (as defined in Section 1274(d) of the Code)
from the date of the Executive's receipt of such excess until the
date of such repayment.
(b) In the event that it is determined for any reason
that the amount of "excess parachute payments" are less than
originally calculated, the Company shall promptly pay to the
Executive the amount necessary so that, after such adjustment, the
Executive will have received or be entitled to receive the maximum
payments payable under this Section without any of such payments
constituting an "excess parachute payment," together with
interest on such amount at the applicable Federal rate (as defined
in Section 1274(d) of the Code).
5
<PAGE>
5. Termination of Agreement. This Agreement shall continue until
and terminate three (3) years from the date first set forth above;
provided, however, that this Agreement shall be renewed
automatically for subsequent three-year periods unless notified by
the Chief Executive Officer at least six (6) months prior to the
end of the first three-year period or of any subsequent three-year
period, indicates that this Agreement shall not be renewed.
Further, if a Change in Control occurs during the term of this
Agreement, this Agreement shall continue until the Company or its
successor shall have fully performed all of its obligations
thereunder with respect to the Executive, with no future
performance being possible.
6. Amendment of Agreement. Subject to the provisions of Section
5, this Agreement may not be amended in any manner which has a
significant adverse effect on the rights of any executive without
the written consent of such executive. Notwithstanding the
foregoing, upon the occurrence of a Change in Control, this
Agreement may not be amended in any respect without the written
consent of the Executive.
7. Construction. Wherever any words are used herein in the
masculine gender they shall be construed as though they were also
used in the feminine gender in all cases where they would so apply,
and wherever any words are used herein in the singular form, they
shall be construed as though they were also used in the plural form
in all cases where they would so apply.
8. Governing Law. This Agreement shall be governed by the laws
of the District of Columbia.
9. Successors and Assigns. This Agreement shall be binding upon
the Company and any assignee or successor in interest to the
Company.
10. Dispute Resolution and Notice.
10.1 Dispute Resolution.
(a) Any good faith dispute or controversy arising under or in
connection with this Agreement shall be settled by binding
arbitration. Such proceeding shall be conducted by final and
binding arbitration before a single arbitrator mutually acceptable
to both the Company and the Executive, in accordance with the rules
of, and under the administration of the Center for Public
Resources, in New York.
(b) All reasonable costs and expenses arising out of such
arbitration proceedings shall be borne by the Company. The Company
shall in all events also pay its own costs (including its
attorneys' fees) incurred in connection with such arbitration and,
if Executive shall prevail on any issue that is material to the
resolution of the dispute before the arbitrator, the Company shall
also pay or reimburse Executive for his expenses incurred in
connection with the arbitration (including, without limitation, his
reasonable attorneys' fees).
6
<PAGE>
10.2 Notice. Any notices, requests, demands, or other
communications provided for by this Agreement shall be sufficient
if in writing and if sent by registered or certified mail to the
Executive at the last address he has filed in writing with the
Company, or in the case of the Company, to its principal offices.
POTOMAC ELECTRIC POWER COMPANY
/s/ E. F. MITCHELL
By:_____________________________________
Its Chief Executive Officer
_______________________________
"COMPANY"
/s/ ROBERT GRANTLEY
________________________________________
"EXECUTIVE"
SEVERANCE AGREEMENT
This Agreement is made the 1st day of August, 1995, by and
between Potomac Electric Power Company (the "Company") and
Anthony S. Macerollo (the "Executive").
WHEREAS, the Company desires to establish a severance benefit
for the Executive when a Change in Control (as hereinafter defined)
occurs, to avoid the loss or the serious distraction of the
Executive to the detriment of the Company and its stockholders
during periods when the Executive's undivided attention and
commitment to the needs of the Company would be particularly
important; and
WHEREAS, the Executive desires to devote his time and energy
for the benefit of the Company and its stockholders and not to be
distracted during any potential change in control.
NOW, THEREFORE, the parties agree as follows:
1. Definitions
1.1 Change in Control. Change in Control shall be
deemed to have occurred as of the first day that any one or more of
the following conditions shall have been satisfied:
(a) Any "Person" (other than (i) those Persons in
control of the Company as of the Effective Date, (ii) any person or
persons acting on behalf of the Company in a distribution of stock
to the public, (iii) any trustee or other fiduciary holding
securities under any employee benefit plan of the Company, or (iv)
a corporation owned directly or indirectly by the stockholders
(immediately prior to such transaction) of the Company in
substantially the same proportions as their ownership of stock of
the Company) becomes a Beneficial Owner, directly or indirectly, of
securities of the Company representing thirty percent (30%) or more
of the combined voting power of the Company's then outstanding
securities; or
(b) (i) a complete or substantial liquidation of
the Company; or (ii) the sale or disposition of all or
substantially all the Company's assets; or (iii) a
merger, consolidation, or reorganization of the Company with or
involving any other corporation or entity, other than a merger,
consolidation, or reorganization that would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) at
least seventy percent (70%) of the combined voting power of the
voting securities of the Company (or such surviving entity)
outstanding immediately after such merger, consolidation or
reorganization.
In no event shall a Change in Control be deemed to have
occurred, with respect to the Executive, if the Executive is part
of a purchasing group which consummates the Change in Control
transaction. The Executive shall be deemed "part of a purchasing
group" for purposes of the preceding sentence if the Executive is
an equity Executive in the purchasing company or group (except for:
(i) passive ownership of less than one percent (1%) of the stock of
<PAGE>
the purchasing company; or (ii) ownership of equity participation
in the purchasing company or group which is otherwise not
significant, as determined prior to the Change in Control by a
majority of the nonemployee continuing directors of the Company).
1.2 Qualifying Termination
(a) The occurrence of any one or more of the following
events within twenty-four (24) calendar months after a Change in
Control of the Company shall constitute a "Qualifying Termination":
(i) The Company's involuntary termination of the
Executive's employment without Cause (as defined in Section 1.4);
(ii) The Executive's voluntary employment
termination for Good Reason (as defined in Section 1.3);
(iii) Failure or refusal by a successor company to
assume the Company's obligations under this Agreement in its
entirety, as required by Section 9 herein; or
(iv) Commission by the Company, or any successor
company, of a material breach of any of the provisions of this
Agreement.
(b) A Qualifying Termination also shall include an
involuntary termination of the Executive, without Cause, "in
contemplation of," but prior to, a Change in Control of the
Company. An involuntary termination shall be deemed to be "in
contemplation of," a Change in Control if it occurs at any time
subsequent to (but in no event after an actual Change in Control):
(i) The Board of Directors accepting, or
recommending to the Company's shareholders the acceptance of, an
offer from any Person (other than those Persons in control of the
Company as of the Effective Date, or other than a trustee or other
fiduciary holding securities under an employee benefit plan of the
Company, or a corporation owned directly or indirectly by the
stockholders of the Company (immediately prior to such transaction)
in substantially the same proportions as their ownership of stock
of the Company) to become the beneficial owner, directly or
indirectly, or securities of the Company representing thirty
percent (30%) or more of the combined voting power of the
Company's then outstanding securities; or
(ii) The Board of Directors approving, or
recommending to the Company's shareholders for approval: (a) a plan
of complete or substantial liquidation of the Company; or (b) an
agreement for the sale or disposition of all or substantially all
of the Company's assets; or (c) a merger, consolidation, or
reorganization of the Company with or involving any other
corporation or entity, other than a merger, consolidation or
reorganization that would result in the voting securities of the
Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted to
2
<PAGE>
voting securities of the surviving entity), at least seventy
percent (70%) of the combined voting power of the voting securities
of the Company (or such surviving entity) outstanding immediately
after such merger, consolidation, or reorganization.
(c) A Qualifying Termination shall not include a
termination of employment by reason of death, disability, or
voluntary normal retirement (as such term is defined under the
then-established rules of the company's tax-qualified retirement
plan), the Executive's voluntary termination without Good Reason,
or the Company's involuntary termination of the Executive's
employment for Cause.
1.3 Good Reason. Good Reason means, without the Executive's
express written consent, the occurrence after or in contemplation
of a Change in Control of the company, of any one or more of the
following:
(a) The assignment to the Executive of duties materially
inconsistent with the Executive's authorities, duties,
responsibilities, and status (including offices, title and
reporting relationships) as an executive and/or officer of the
Company, or a material reduction or alteration in the nature or
status of the Executive's authorities, duties, or responsibilities
from those in effect as of ninety (90) days prior to the Change in
Control (or, in the case of a termination in contemplation of a
Change in Control, 90 days prior to the occurrence described in
Section 1.2(b)(i) or (ii) above), unless such act is remedied by
the Company within 10 business days after receipt of written notice
thereof given by the Executive;
(b) A reduction by the Company of the Executive's base
salary in effect on the effective date of a Change in Control, or
as the same shall be increased from time to time, unless such
reduction is less than ten percent (10%) and its either (i)
replaced by an incentive opportunity equal in value; or is (ii)
consistent and proportional with an overall reduction in management
compensation due to extraordinary business conditions, including
but not limited to reduced profitability and other financial stress
(i.e., the base salary of the Executive will not be singled out for
reduction in a manner inconsistent to a reduction imposed on other
executives of the Company);
(c) The relocation of the Executive's office more than
50 miles from the Executive's office on the effective date of the
Change in Control.
The Executive's right to terminate employment for
Good Reason shall not be affected by the Executive's incapacity due
to physical or mental illness. The Executive's continued
employment shall not constitute consent to, or a waiver of rights
with respect to, any circumstance constituting Good Reason herein.
3
<PAGE>
1.4. Cause. Cause shall mean the occurrence of any one or
more of the following:
(a) The Executive is convicted of a felony involving
moral turpitude; or
(b) The Executive engages in conduct or activities that
constitutes disloyalty to the Company and such conduct or
activities are materially damaging to the property, business or
reputation of the Company; or
(c) The Executive persistently fails or refuses to
comply with any written direction of an authorized representative
of the Company other than a directive constituting an assignment
described in Section 1.3(a); or
(d) The Executive embezzles or knowingly, and with
intent, misappropriates property of the Company, or unlawfully
appropriates any corporate opportunity of the Company.
1.5 Annual Bonus Amount. The average of the annual target
bonuses applicable to the Executive during the three calendar years
preceding the calendar year in which the Qualifying Termination
occurs.
2. Severance Payment. Upon the occurrence of a Qualifying
Termination with respect to the Executive, the Company shall pay to
the Executive an amount equal to two times the Executive's annual
base salary (as in effect on the date of the Qualifying
Termination, not reduced by any reduction described in Section
1.3(b) above) and Annual Bonus Amount. The payment shall be made
in twenty-four (24) equal monthly installments beginning on the
first day of the month following Qualifying Termination.
3. Severance Health Benefits. Upon the occurrence of a
Qualifying Termination, and for the thirty-six (36) month period
thereafter, the Company shall provide to the Executive and
Executive's family medical, accidental death and dismemberment,
disability and death benefits as provided to other executive
officers who remain employed by the Company (or a surviving entity
other than the Company). The Executive shall be required to make
payments for such coverage in the same amount as is required of
executive officers who remain employed by the Company or a
successor.
4. Code Section 280G
4.1 Limitations. Notwithstanding Section 2 and 3, in the
event that a Change in Control occurs and the independent public
accountants for the Company (the "Accountants") determine that if
the benefits to be provided under Section 2 and 3 (together with
any other benefits payable to the Executive under any applicable
plan maintained by the Company) were paid to the Executive:
4
<PAGE>
(a) the Executive would incur an excise tax under
Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), and the Company would be denied a deduction under Section
280G of the Code of all or some of such amounts to be paid to the
Executive, and
(b) the net after tax benefits to the Executive
attributable to payments under Sections 2 and 3 hereof would not be
at least $10,000 greater than the net after tax benefits which
would accrue to the Executive if the amounts which would otherwise
cause the Executive to be subject to this excise tax were not paid,
the amounts payable to the Executive pursuant to Section 2 and 3
(or pursuant to such other plans maintained by the Company) shall
be reduced so that the amount payable to the Executive hereunder is
the greatest amount (as determined by the Accountants) that may be
paid by the Company to the Executive without any such amount being
subject to an excise tax under Section 4999 or being nondeductible
for the Company pursuant to Section 280G.
4.2 Executive's Election. If the amounts to be paid to the
Executive are to be reduced under paragraph 4.1 of this Section,
the Executive shall be given the opportunity to designate which
benefits or payments shall be reduced and in what order of
priority.
4.3 Later Adjustments.
(a) If the Executive receives reduced payments or
benefits pursuant to the preceding paragraph, or if it had been
determined that no such reduction was required, but it nonetheless
is established pursuant to the final determination of a court or an
Internal Revenue Service proceeding that, notwithstanding the good
faith of the Executive and the Company in applying the terms of
this Section, the aggregate amount paid to the Executive or for his
benefit would result in any amount being treated as an "excess
parachute payment" for purposes of Sections 280G and 4999 of the
Code, then an amount equal to the amount that would be an "excess
parachute payment" shall be deemed for all purposes a loan to the
Executive made on the date of the receipt of such excess amount,
which the Executive shall have an obligation to repay to the
Company on demand, together with interest on such amount at the
applicable Federal rate (as defined in Section 1274(d) of the Code)
from the date of the Executive's receipt of such excess until the
date of such repayment.
(b) In the event that it is determined for any reason
that the amount of "excess parachute payments" are less than
originally calculated, the Company shall promptly pay to the
Executive the amount necessary so that, after such adjustment, the
Executive will have received or be entitled to receive the maximum
payments payable under this Section without any of such payments
constituting an "excess parachute payment," together with
interest on such amount at the applicable Federal rate (as defined
in Section 1274(d) of the Code).
5
<PAGE>
5. Termination of Agreement. This Agreement shall continue until
and terminate three (3) years from the date first set forth above;
provided, however, that this Agreement shall be renewed
automatically for subsequent three-year periods unless notified by
the Chief Executive Officer at least six (6) months prior to the
end of the first three-year period or of any subsequent three-year
period, indicates that this Agreement shall not be renewed.
Further, if a Change in Control occurs during the term of this
Agreement, this Agreement shall continue until the Company or its
successor shall have fully performed all of its obligations
thereunder with respect to the Executive, with no future
performance being possible.
6. Amendment of Agreement. Subject to the provisions of Section
5, this Agreement may not be amended in any manner which has a
significant adverse effect on the rights of any executive without
the written consent of such executive. Notwithstanding the
foregoing, upon the occurrence of a Change in Control, this
Agreement may not be amended in any respect without the written
consent of the Executive.
7. Construction. Wherever any words are used herein in the
masculine gender they shall be construed as though they were also
used in the feminine gender in all cases where they would so apply,
and wherever any words are used herein in the singular form, they
shall be construed as though they were also used in the plural form
in all cases where they would so apply.
8. Governing Law. This Agreement shall be governed by the laws
of the District of Columbia.
9. Successors and Assigns. This Agreement shall be binding upon
the Company and any assignee or successor in interest to the
Company.
10. Dispute Resolution and Notice.
10.1 Dispute Resolution.
(a) Any good faith dispute or controversy arising under or in
connection with this Agreement shall be settled by binding
arbitration. Such proceeding shall be conducted by final and
binding arbitration before a single arbitrator mutually acceptable
to both the Company and the Executive, in accordance with the rules
of, and under the administration of the Center for Public
Resources, in New York.
(b) All reasonable costs and expenses arising out of such
arbitration proceedings shall be borne by the Company. The Company
shall in all events also pay its own costs (including its
attorneys' fees) incurred in connection with such arbitration and,
if Executive shall prevail on any issue that is material to the
resolution of the dispute before the arbitrator, the Company shall
also pay or reimburse Executive for his expenses incurred in
connection with the arbitration (including, without limitation, his
reasonable attorneys' fees).
6
<PAGE>
10.2 Notice. Any notices, requests, demands, or other
communications provided for by this Agreement shall be sufficient
if in writing and if sent by registered or certified mail to the
Executive at the last address he has filed in writing with the
Company, or in the case of the Company, to its principal offices.
POTOMAC ELECTRIC POWER COMPANY
/s/ E. F. MITCHELL
By:_____________________________________
Its Chief Executive Officer
_______________________________
"COMPANY"
/s/ A. S. MACEROLLO
________________________________________
"EXECUTIVE"
SEVERANCE AGREEMENT
This Agreement is made the 1st day of August, 1995, by and
between Potomac Electric Power Company (the "Company") and
William J. Sim (the "Executive").
WHEREAS, the Company desires to establish a severance benefit
for the Executive when a Change in Control (as hereinafter defined)
occurs, to avoid the loss or the serious distraction of the
Executive to the detriment of the Company and its stockholders
during periods when the Executive's undivided attention and
commitment to the needs of the Company would be particularly
important; and
WHEREAS, the Executive desires to devote his time and energy
for the benefit of the Company and its stockholders and not to be
distracted during any potential change in control.
NOW, THEREFORE, the parties agree as follows:
1. Definitions
1.1 Change in Control. Change in Control shall be
deemed to have occurred as of the first day that any one or more of
the following conditions shall have been satisfied:
(a) Any "Person" (other than (i) those Persons in
control of the Company as of the Effective Date, (ii) any person or
persons acting on behalf of the Company in a distribution of stock
to the public, (iii) any trustee or other fiduciary holding
securities under any employee benefit plan of the Company, or (iv)
a corporation owned directly or indirectly by the stockholders
(immediately prior to such transaction) of the Company in
substantially the same proportions as their ownership of stock of
the Company) becomes a Beneficial Owner, directly or indirectly, of
securities of the Company representing thirty percent (30%) or more
of the combined voting power of the Company's then outstanding
securities; or
(b) (i) a complete or substantial liquidation of
the Company; or (ii) the sale or disposition of all or
substantially all the Company's assets; or (iii) a
merger, consolidation, or reorganization of the Company with or
involving any other corporation or entity, other than a merger,
consolidation, or reorganization that would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) at
least seventy percent (70%) of the combined voting power of the
voting securities of the Company (or such surviving entity)
outstanding immediately after such merger, consolidation or
reorganization.
In no event shall a Change in Control be deemed to have
occurred, with respect to the Executive, if the Executive is part
of a purchasing group which consummates the Change in Control
transaction. The Executive shall be deemed "part of a purchasing
group" for purposes of the preceding sentence if the Executive is
an equity Executive in the purchasing company or group (except for:
(i) passive ownership of less than one percent (1%) of the stock of
<PAGE>
the purchasing company; or (ii) ownership of equity participation
in the purchasing company or group which is otherwise not
significant, as determined prior to the Change in Control by a
majority of the nonemployee continuing directors of the Company).
1.2 Qualifying Termination
(a) The occurrence of any one or more of the following
events within twenty-four (24) calendar months after a Change in
Control of the Company shall constitute a "Qualifying Termination":
(i) The Company's involuntary termination of the
Executive's employment without Cause (as defined in Section 1.4);
(ii) The Executive's voluntary employment
termination for Good Reason (as defined in Section 1.3);
(iii) Failure or refusal by a successor company to
assume the Company's obligations under this Agreement in its
entirety, as required by Section 9 herein; or
(iv) Commission by the Company, or any successor
company, of a material breach of any of the provisions of this
Agreement.
(b) A Qualifying Termination also shall include an
involuntary termination of the Executive, without Cause, "in
contemplation of," but prior to, a Change in Control of the
Company. An involuntary termination shall be deemed to be "in
contemplation of," a Change in Control if it occurs at any time
subsequent to (but in no event after an actual Change in Control):
(i) The Board of Directors accepting, or
recommending to the Company's shareholders the acceptance of, an
offer from any Person (other than those Persons in control of the
Company as of the Effective Date, or other than a trustee or other
fiduciary holding securities under an employee benefit plan of the
Company, or a corporation owned directly or indirectly by the
stockholders of the Company (immediately prior to such transaction)
in substantially the same proportions as their ownership of stock
of the Company) to become the beneficial owner, directly or
indirectly, or securities of the Company representing thirty
percent (30%) or more of the combined voting power of the
Company's then outstanding securities; or
(ii) The Board of Directors approving, or
recommending to the Company's shareholders for approval: (a) a plan
of complete or substantial liquidation of the Company; or (b) an
agreement for the sale or disposition of all or substantially all
of the Company's assets; or (c) a merger, consolidation, or
reorganization of the Company with or involving any other
corporation or entity, other than a merger, consolidation or
reorganization that would result in the voting securities of the
Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted to
2
<PAGE>
voting securities of the surviving entity), at least seventy
percent (70%) of the combined voting power of the voting securities
of the Company (or such surviving entity) outstanding immediately
after such merger, consolidation, or reorganization.
(c) A Qualifying Termination shall not include a
termination of employment by reason of death, disability, or
voluntary normal retirement (as such term is defined under the
then-established rules of the company's tax-qualified retirement
plan), the Executive's voluntary termination without Good Reason,
or the Company's involuntary termination of the Executive's
employment for Cause.
1.3 Good Reason. Good Reason means, without the Executive's
express written consent, the occurrence after or in contemplation
of a Change in Control of the company, of any one or more of the
following:
(a) The assignment to the Executive of duties materially
inconsistent with the Executive's authorities, duties,
responsibilities, and status (including offices, title and
reporting relationships) as an executive and/or officer of the
Company, or a material reduction or alteration in the nature or
status of the Executive's authorities, duties, or responsibilities
from those in effect as of ninety (90) days prior to the Change in
Control (or, in the case of a termination in contemplation of a
Change in Control, 90 days prior to the occurrence described in
Section 1.2(b)(i) or (ii) above), unless such act is remedied by
the Company within 10 business days after receipt of written notice
thereof given by the Executive;
(b) A reduction by the Company of the Executive's base
salary in effect on the effective date of a Change in Control, or
as the same shall be increased from time to time, unless such
reduction is less than ten percent (10%) and its either (i)
replaced by an incentive opportunity equal in value; or is (ii)
consistent and proportional with an overall reduction in management
compensation due to extraordinary business conditions, including
but not limited to reduced profitability and other financial stress
(i.e., the base salary of the Executive will not be singled out for
reduction in a manner inconsistent to a reduction imposed on other
executives of the Company);
(c) The relocation of the Executive's office more than
50 miles from the Executive's office on the effective date of the
Change in Control.
The Executive's right to terminate employment for
Good Reason shall not be affected by the Executive's incapacity due
to physical or mental illness. The Executive's continued
employment shall not constitute consent to, or a waiver of rights
with respect to, any circumstance constituting Good Reason herein.
3
<PAGE>
1.4. Cause. Cause shall mean the occurrence of any one or
more of the following:
(a) The Executive is convicted of a felony involving
moral turpitude; or
(b) The Executive engages in conduct or activities that
constitutes disloyalty to the Company and such conduct or
activities are materially damaging to the property, business or
reputation of the Company; or
(c) The Executive persistently fails or refuses to
comply with any written direction of an authorized representative
of the Company other than a directive constituting an assignment
described in Section 1.3(a); or
(d) The Executive embezzles or knowingly, and with
intent, misappropriates property of the Company, or unlawfully
appropriates any corporate opportunity of the Company.
1.5 Annual Bonus Amount. The average of the annual target
bonuses applicable to the Executive during the three calendar years
preceding the calendar year in which the Qualifying Termination
occurs.
2. Severance Payment. Upon the occurrence of a Qualifying
Termination with respect to the Executive, the Company shall pay to
the Executive an amount equal to two times the Executive's annual
base salary (as in effect on the date of the Qualifying
Termination, not reduced by any reduction described in Section
1.3(b) above) and Annual Bonus Amount. The payment shall be made
in twenty-four (24) equal monthly installments beginning on the
first day of the month following Qualifying Termination.
3. Severance Health Benefits. Upon the occurrence of a
Qualifying Termination, and for the thirty-six (36) month period
thereafter, the Company shall provide to the Executive and
Executive's family medical, accidental death and dismemberment,
disability and death benefits as provided to other executive
officers who remain employed by the Company (or a surviving entity
other than the Company). The Executive shall be required to make
payments for such coverage in the same amount as is required of
executive officers who remain employed by the Company or a
successor.
4. Code Section 280G
4.1 Limitations. Notwithstanding Section 2 and 3, in the
event that a Change in Control occurs and the independent public
accountants for the Company (the "Accountants") determine that if
the benefits to be provided under Section 2 and 3 (together with
any other benefits payable to the Executive under any applicable
plan maintained by the Company) were paid to the Executive:
4
<PAGE>
(a) the Executive would incur an excise tax under
Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), and the Company would be denied a deduction under Section
280G of the Code of all or some of such amounts to be paid to the
Executive, and
(b) the net after tax benefits to the Executive
attributable to payments under Sections 2 and 3 hereof would not be
at least $10,000 greater than the net after tax benefits which
would accrue to the Executive if the amounts which would otherwise
cause the Executive to be subject to this excise tax were not paid,
the amounts payable to the Executive pursuant to Section 2 and 3
(or pursuant to such other plans maintained by the Company) shall
be reduced so that the amount payable to the Executive hereunder is
the greatest amount (as determined by the Accountants) that may be
paid by the Company to the Executive without any such amount being
subject to an excise tax under Section 4999 or being nondeductible
for the Company pursuant to Section 280G.
4.2 Executive's Election. If the amounts to be paid to the
Executive are to be reduced under paragraph 4.1 of this Section,
the Executive shall be given the opportunity to designate which
benefits or payments shall be reduced and in what order of
priority.
4.3 Later Adjustments.
(a) If the Executive receives reduced payments or
benefits pursuant to the preceding paragraph, or if it had been
determined that no such reduction was required, but it nonetheless
is established pursuant to the final determination of a court or an
Internal Revenue Service proceeding that, notwithstanding the good
faith of the Executive and the Company in applying the terms of
this Section, the aggregate amount paid to the Executive or for his
benefit would result in any amount being treated as an "excess
parachute payment" for purposes of Sections 280G and 4999 of the
Code, then an amount equal to the amount that would be an "excess
parachute payment" shall be deemed for all purposes a loan to the
Executive made on the date of the receipt of such excess amount,
which the Executive shall have an obligation to repay to the
Company on demand, together with interest on such amount at the
applicable Federal rate (as defined in Section 1274(d) of the Code)
from the date of the Executive's receipt of such excess until the
date of such repayment.
(b) In the event that it is determined for any reason
that the amount of "excess parachute payments" are less than
originally calculated, the Company shall promptly pay to the
Executive the amount necessary so that, after such adjustment, the
Executive will have received or be entitled to receive the maximum
payments payable under this Section without any of such payments
constituting an "excess parachute payment," together with
interest on such amount at the applicable Federal rate (as defined
in Section 1274(d) of the Code).
5
<PAGE>
5. Termination of Agreement. This Agreement shall continue until
and terminate three (3) years from the date first set forth above;
provided, however, that this Agreement shall be renewed
automatically for subsequent three-year periods unless notified by
the Chief Executive Officer at least six (6) months prior to the
end of the first three-year period or of any subsequent three-year
period, indicates that this Agreement shall not be renewed.
Further, if a Change in Control occurs during the term of this
Agreement, this Agreement shall continue until the Company or its
successor shall have fully performed all of its obligations
thereunder with respect to the Executive, with no future
performance being possible.
6. Amendment of Agreement. Subject to the provisions of Section
5, this Agreement may not be amended in any manner which has a
significant adverse effect on the rights of any executive without
the written consent of such executive. Notwithstanding the
foregoing, upon the occurrence of a Change in Control, this
Agreement may not be amended in any respect without the written
consent of the Executive.
7. Construction. Wherever any words are used herein in the
masculine gender they shall be construed as though they were also
used in the feminine gender in all cases where they would so apply,
and wherever any words are used herein in the singular form, they
shall be construed as though they were also used in the plural form
in all cases where they would so apply.
8. Governing Law. This Agreement shall be governed by the laws
of the District of Columbia.
9. Successors and Assigns. This Agreement shall be binding upon
the Company and any assignee or successor in interest to the
Company.
10. Dispute Resolution and Notice.
10.1 Dispute Resolution.
(a) Any good faith dispute or controversy arising under or in
connection with this Agreement shall be settled by binding
arbitration. Such proceeding shall be conducted by final and
binding arbitration before a single arbitrator mutually acceptable
to both the Company and the Executive, in accordance with the rules
of, and under the administration of the Center for Public
Resources, in New York.
(b) All reasonable costs and expenses arising out of such
arbitration proceedings shall be borne by the Company. The Company
shall in all events also pay its own costs (including its
attorneys' fees) incurred in connection with such arbitration and,
if Executive shall prevail on any issue that is material to the
resolution of the dispute before the arbitrator, the Company shall
also pay or reimburse Executive for his expenses incurred in
connection with the arbitration (including, without limitation, his
reasonable attorneys' fees).
6
<PAGE>
10.2 Notice. Any notices, requests, demands, or other
communications provided for by this Agreement shall be sufficient
if in writing and if sent by registered or certified mail to the
Executive at the last address he has filed in writing with the
Company, or in the case of the Company, to its principal offices.
POTOMAC ELECTRIC POWER COMPANY
/s/ E. F. MITCHELL
By:_____________________________________
Its Chief Executive Officer
_______________________________
"COMPANY"
/s/ WILLIAM SIM
________________________________________
"EXECUTIVE"
SEVERANCE AGREEMENT
This Agreement is made the 1st day of August, 1995, by and
between Potomac Electric Power Company (the "Company") and
Andrew W. Williams (the "Executive").
WHEREAS, the Company desires to establish a severance benefit
for the Executive when a Change in Control (as hereinafter defined)
occurs, to avoid the loss or the serious distraction of the
Executive to the detriment of the Company and its stockholders
during periods when the Executive's undivided attention and
commitment to the needs of the Company would be particularly
important; and
WHEREAS, the Executive desires to devote his time and energy
for the benefit of the Company and its stockholders and not to be
distracted during any potential change in control.
NOW, THEREFORE, the parties agree as follows:
1. Definitions
1.1 Change in Control. Change in Control shall be
deemed to have occurred as of the first day that any one or more of
the following conditions shall have been satisfied:
(a) Any "Person" (other than (i) those Persons in
control of the Company as of the Effective Date, (ii) any person or
persons acting on behalf of the Company in a distribution of stock
to the public, (iii) any trustee or other fiduciary holding
securities under any employee benefit plan of the Company, or (iv)
a corporation owned directly or indirectly by the stockholders
(immediately prior to such transaction) of the Company in
substantially the same proportions as their ownership of stock of
the Company) becomes a Beneficial Owner, directly or indirectly, of
securities of the Company representing thirty percent (30%) or more
of the combined voting power of the Company's then outstanding
securities; or
(b) (i) a complete or substantial liquidation of
the Company; or (ii) the sale or disposition of all or
substantially all the Company's assets; or (iii) a
merger, consolidation, or reorganization of the Company with or
involving any other corporation or entity, other than a merger,
consolidation, or reorganization that would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) at
least seventy percent (70%) of the combined voting power of the
voting securities of the Company (or such surviving entity)
outstanding immediately after such merger, consolidation or
reorganization.
In no event shall a Change in Control be deemed to have
occurred, with respect to the Executive, if the Executive is part
of a purchasing group which consummates the Change in Control
transaction. The Executive shall be deemed "part of a purchasing
group" for purposes of the preceding sentence if the Executive is
an equity Executive in the purchasing company or group (except for:
(i) passive ownership of less than one percent (1%) of the stock of
<PAGE>
the purchasing company; or (ii) ownership of equity participation
in the purchasing company or group which is otherwise not
significant, as determined prior to the Change in Control by a
majority of the nonemployee continuing directors of the Company).
1.2 Qualifying Termination
(a) The occurrence of any one or more of the following
events within twenty-four (24) calendar months after a Change in
Control of the Company shall constitute a "Qualifying Termination":
(i) The Company's involuntary termination of the
Executive's employment without Cause (as defined in Section 1.4);
(ii) The Executive's voluntary employment
termination for Good Reason (as defined in Section 1.3);
(iii) Failure or refusal by a successor company to
assume the Company's obligations under this Agreement in its
entirety, as required by Section 9 herein; or
(iv) Commission by the Company, or any successor
company, of a material breach of any of the provisions of this
Agreement.
(b) A Qualifying Termination also shall include an
involuntary termination of the Executive, without Cause, "in
contemplation of," but prior to, a Change in Control of the
Company. An involuntary termination shall be deemed to be "in
contemplation of," a Change in Control if it occurs at any time
subsequent to (but in no event after an actual Change in Control):
(i) The Board of Directors accepting, or
recommending to the Company's shareholders the acceptance of, an
offer from any Person (other than those Persons in control of the
Company as of the Effective Date, or other than a trustee or other
fiduciary holding securities under an employee benefit plan of the
Company, or a corporation owned directly or indirectly by the
stockholders of the Company (immediately prior to such transaction)
in substantially the same proportions as their ownership of stock
of the Company) to become the beneficial owner, directly or
indirectly, or securities of the Company representing thirty
percent (30%) or more of the combined voting power of the
Company's then outstanding securities; or
(ii) The Board of Directors approving, or
recommending to the Company's shareholders for approval: (a) a plan
of complete or substantial liquidation of the Company; or (b) an
agreement for the sale or disposition of all or substantially all
of the Company's assets; or (c) a merger, consolidation, or
reorganization of the Company with or involving any other
corporation or entity, other than a merger, consolidation or
reorganization that would result in the voting securities of the
Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted to
2
<PAGE>
voting securities of the surviving entity), at least seventy
percent (70%) of the combined voting power of the voting securities
of the Company (or such surviving entity) outstanding immediately
after such merger, consolidation, or reorganization.
(c) A Qualifying Termination shall not include a
termination of employment by reason of death, disability, or
voluntary normal retirement (as such term is defined under the
then-established rules of the company's tax-qualified retirement
plan), the Executive's voluntary termination without Good Reason,
or the Company's involuntary termination of the Executive's
employment for Cause.
1.3 Good Reason. Good Reason means, without the Executive's
express written consent, the occurrence after or in contemplation
of a Change in Control of the company, of any one or more of the
following:
(a) The assignment to the Executive of duties materially
inconsistent with the Executive's authorities, duties,
responsibilities, and status (including offices, title and
reporting relationships) as an executive and/or officer of the
Company, or a material reduction or alteration in the nature or
status of the Executive's authorities, duties, or responsibilities
from those in effect as of ninety (90) days prior to the Change in
Control (or, in the case of a termination in contemplation of a
Change in Control, 90 days prior to the occurrence described in
Section 1.2(b)(i) or (ii) above), unless such act is remedied by
the Company within 10 business days after receipt of written notice
thereof given by the Executive;
(b) A reduction by the Company of the Executive's base
salary in effect on the effective date of a Change in Control, or
as the same shall be increased from time to time, unless such
reduction is less than ten percent (10%) and its either (i)
replaced by an incentive opportunity equal in value; or is (ii)
consistent and proportional with an overall reduction in management
compensation due to extraordinary business conditions, including
but not limited to reduced profitability and other financial stress
(i.e., the base salary of the Executive will not be singled out for
reduction in a manner inconsistent to a reduction imposed on other
executives of the Company);
(c) The relocation of the Executive's office more than
50 miles from the Executive's office on the effective date of the
Change in Control.
The Executive's right to terminate employment for
Good Reason shall not be affected by the Executive's incapacity due
to physical or mental illness. The Executive's continued
employment shall not constitute consent to, or a waiver of rights
with respect to, any circumstance constituting Good Reason herein.
3
<PAGE>
1.4. Cause. Cause shall mean the occurrence of any one or
more of the following:
(a) The Executive is convicted of a felony involving
moral turpitude; or
(b) The Executive engages in conduct or activities that
constitutes disloyalty to the Company and such conduct or
activities are materially damaging to the property, business or
reputation of the Company; or
(c) The Executive persistently fails or refuses to
comply with any written direction of an authorized representative
of the Company other than a directive constituting an assignment
described in Section 1.3(a); or
(d) The Executive embezzles or knowingly, and with
intent, misappropriates property of the Company, or unlawfully
appropriates any corporate opportunity of the Company.
1.5 Annual Bonus Amount. The average of the annual target
bonuses applicable to the Executive during the three calendar years
preceding the calendar year in which the Qualifying Termination
occurs.
2. Severance Payment. Upon the occurrence of a Qualifying
Termination with respect to the Executive, the Company shall pay to
the Executive an amount equal to two times the Executive's annual
base salary (as in effect on the date of the Qualifying
Termination, not reduced by any reduction described in Section
1.3(b) above) and Annual Bonus Amount. The payment shall be made
in twenty-four (24) equal monthly installments beginning on the
first day of the month following Qualifying Termination.
3. Severance Health Benefits. Upon the occurrence of a
Qualifying Termination, and for the thirty-six (36) month period
thereafter, the Company shall provide to the Executive and
Executive's family medical, accidental death and dismemberment,
disability and death benefits as provided to other executive
officers who remain employed by the Company (or a surviving entity
other than the Company). The Executive shall be required to make
payments for such coverage in the same amount as is required of
executive officers who remain employed by the Company or a
successor.
4. Code Section 280G
4.1 Limitations. Notwithstanding Section 2 and 3, in the
event that a Change in Control occurs and the independent public
accountants for the Company (the "Accountants") determine that if
the benefits to be provided under Section 2 and 3 (together with
any other benefits payable to the Executive under any applicable
plan maintained by the Company) were paid to the Executive:
4
<PAGE>
(a) the Executive would incur an excise tax under
Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), and the Company would be denied a deduction under Section
280G of the Code of all or some of such amounts to be paid to the
Executive, and
(b) the net after tax benefits to the Executive
attributable to payments under Sections 2 and 3 hereof would not be
at least $10,000 greater than the net after tax benefits which
would accrue to the Executive if the amounts which would otherwise
cause the Executive to be subject to this excise tax were not paid,
the amounts payable to the Executive pursuant to Section 2 and 3
(or pursuant to such other plans maintained by the Company) shall
be reduced so that the amount payable to the Executive hereunder is
the greatest amount (as determined by the Accountants) that may be
paid by the Company to the Executive without any such amount being
subject to an excise tax under Section 4999 or being nondeductible
for the Company pursuant to Section 280G.
4.2 Executive's Election. If the amounts to be paid to the
Executive are to be reduced under paragraph 4.1 of this Section,
the Executive shall be given the opportunity to designate which
benefits or payments shall be reduced and in what order of
priority.
4.3 Later Adjustments.
(a) If the Executive receives reduced payments or
benefits pursuant to the preceding paragraph, or if it had been
determined that no such reduction was required, but it nonetheless
is established pursuant to the final determination of a court or an
Internal Revenue Service proceeding that, notwithstanding the good
faith of the Executive and the Company in applying the terms of
this Section, the aggregate amount paid to the Executive or for his
benefit would result in any amount being treated as an "excess
parachute payment" for purposes of Sections 280G and 4999 of the
Code, then an amount equal to the amount that would be an "excess
parachute payment" shall be deemed for all purposes a loan to the
Executive made on the date of the receipt of such excess amount,
which the Executive shall have an obligation to repay to the
Company on demand, together with interest on such amount at the
applicable Federal rate (as defined in Section 1274(d) of the Code)
from the date of the Executive's receipt of such excess until the
date of such repayment.
(b) In the event that it is determined for any reason
that the amount of "excess parachute payments" are less than
originally calculated, the Company shall promptly pay to the
Executive the amount necessary so that, after such adjustment, the
Executive will have received or be entitled to receive the maximum
payments payable under this Section without any of such payments
constituting an "excess parachute payment," together with
interest on such amount at the applicable Federal rate (as defined
in Section 1274(d) of the Code).
5
<PAGE>
5. Termination of Agreement. This Agreement shall continue until
and terminate three (3) years from the date first set forth above;
provided, however, that this Agreement shall be renewed
automatically for subsequent three-year periods unless notified by
the Chief Executive Officer at least six (6) months prior to the
end of the first three-year period or of any subsequent three-year
period, indicates that this Agreement shall not be renewed.
Further, if a Change in Control occurs during the term of this
Agreement, this Agreement shall continue until the Company or its
successor shall have fully performed all of its obligations
thereunder with respect to the Executive, with no future
performance being possible.
6. Amendment of Agreement. Subject to the provisions of Section
5, this Agreement may not be amended in any manner which has a
significant adverse effect on the rights of any executive without
the written consent of such executive. Notwithstanding the
foregoing, upon the occurrence of a Change in Control, this
Agreement may not be amended in any respect without the written
consent of the Executive.
7. Construction. Wherever any words are used herein in the
masculine gender they shall be construed as though they were also
used in the feminine gender in all cases where they would so apply,
and wherever any words are used herein in the singular form, they
shall be construed as though they were also used in the plural form
in all cases where they would so apply.
8. Governing Law. This Agreement shall be governed by the laws
of the District of Columbia.
9. Successors and Assigns. This Agreement shall be binding upon
the Company and any assignee or successor in interest to the
Company.
10. Dispute Resolution and Notice.
10.1 Dispute Resolution.
(a) Any good faith dispute or controversy arising under or in
connection with this Agreement shall be settled by binding
arbitration. Such proceeding shall be conducted by final and
binding arbitration before a single arbitrator mutually acceptable
to both the Company and the Executive, in accordance with the rules
of, and under the administration of the Center for Public
Resources, in New York.
(b) All reasonable costs and expenses arising out of such
arbitration proceedings shall be borne by the Company. The Company
shall in all events also pay its own costs (including its
attorneys' fees) incurred in connection with such arbitration and,
if Executive shall prevail on any issue that is material to the
resolution of the dispute before the arbitrator, the Company shall
also pay or reimburse Executive for his expenses incurred in
connection with the arbitration (including, without limitation, his
reasonable attorneys' fees).
6
<PAGE>
10.2 Notice. Any notices, requests, demands, or other
communications provided for by this Agreement shall be sufficient
if in writing and if sent by registered or certified mail to the
Executive at the last address he has filed in writing with the
Company, or in the case of the Company, to its principal offices.
POTOMAC ELECTRIC POWER COMPANY
/s/ E. F. MITCHELL
By:_____________________________________
Its Chief Executive Officer
_______________________________
"COMPANY"
/s/ ANDREW W. WILLIAMS
________________________________________
"EXECUTIVE"
<TABLE> <S> <C>
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<NAME> POTOMAC CAPITAL INVESTMENT CORPORATION
<MULTIPLIER> 1,000
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
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<TOTAL-ASSETS> 7,145,675
<COMMON> 118,493
<CAPITAL-SURPLUS-PAID-IN> 1,010,556
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<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,913,075
143,485
125,341
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0
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<TOT-CAPITALIZATION-AND-LIAB> 7,145,675
<GROSS-OPERATING-REVENUE> 1,473,852
<INCOME-TAX-EXPENSE> 125,320
<OTHER-OPERATING-EXPENSES> 1,043,239
<TOTAL-OPERATING-EXPENSES> 1,168,559
<OPERATING-INCOME-LOSS> 305,293
<OTHER-INCOME-NET> (115,863)
<INCOME-BEFORE-INTEREST-EXPEN> 189,430
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12,675
<EARNINGS-AVAILABLE-FOR-COMM> 72,462
<COMMON-STOCK-DIVIDENDS> 147,316
<TOTAL-INTEREST-ON-BONDS> 128,500<F2>
<CASH-FLOW-OPERATIONS> 310,504
<EPS-PRIMARY> $.61
<EPS-DILUTED> 0<F3>
<FN>
<F1>Included on the Balance Sheet in the caption "Short-term debt."
<F2>Total annualized interest costs for all utility long-term debt outstanding
at September 30, 1995.
<F3>If all the convertible preferred stock and debentures were converted into
common stock, the result would be anti-dilutive.
</FN>
</TABLE>
