UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995 Commission file number 1-1072
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Potomac Electric Power Company
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(Exact name of registrant as specified in its charter)
District of Columbia and Virginia 53-0127880
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 Pennsylvania Avenue, N.W.
Washington, D. C. 20068
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (202) 872-2000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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7% Convertible Debentures due 2018 - ) New York Stock Exchange, Inc.
due January 15, 2018 )
5% Convertible Debentures due 2002 - )
due September 1, 2002 )
Continued
Name of each exchange on
Title of each class which registered
------------------- -----------------------------
Serial Preferred Stock, ) New York Stock Exchange, Inc.
$50 par value (entitled to )
cumulative dividends) )
$3.37 Series of 1987 )
$3.89 Series of 1991 )
$2.44 Convertible )
Series of 1966 )
Common Stock, $1 par value )
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
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Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. X .
---
As of March 5, 1996, Potomac Electric Power Company had 118,495,235
shares of its $1 par value Common Stock outstanding, and the aggregate market
value of these common shares (based upon the closing price of these shares on
the New York Stock Exchange on that date) held by nonaffiliates was
approximately $3.2 billion.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's 1995 Annual Report to shareholders are
incorporated by reference into Parts II and IV of this Form 10-K.
Portions of the Notice of Annual Meeting of Shareholders and Proxy
Statement, dated March 22, 1996, are incorporated by reference into Part III
of this Form 10-K.
2
POTOMAC ELECTRIC POWER COMPANY
Form 10-K - 1995
TABLE OF CONTENTS
PART I Page
Item 1 - Business ----
Proposed Merger .................................................... 5
General ............................................................ 5
Sales .............................................................. 7
Capacity Planning .................................................. 8
Construction Program ............................................... 10
Fuel ............................................................... 12
Regulation ......................................................... 15
Rates .............................................................. 16
Competition ........................................................ 19
Environmental Matters .............................................. 20
Labor .............................................................. 25
Nonutility Subsidiary .............................................. 25
Item 2 - Properties .................................................. 28
Item 3 - Legal Proceedings ........................................... 29
Item 4 - Submission of Matters to a Vote of Security Holders ......... 30
PART II
Item 5 - Market for the Registrant's Common Equity and Related
Stockholder Matters ....................................... 30
Item 6 - Selected Financial Data ..................................... 31
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................. 31
Item 8 - Financial Statements and Supplementary Data ................. 31
Item 9 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure .................................. 31
PART III
Item 10 - Directors and Executive Officers of the Registrant ......... 32
Item 11 - Executive Compensation ..................................... 34
Item 12 - Security Ownership of Certain Beneficial Owners and
Management................................................ 34
Item 13 - Certain Relationships and Related Transactions ............. 34
PART IV
Item 14 - Exhibits, Financial Statement Schedule and Reports on
Form 8-K ................................................. 35
Schedule VIII - Valuation and Qualifying Accounts .................. 43
Signatures ........................................................... 44
Exhibit 11 - Computation of Earnings Per Common Share ........... 46
Exhibit 12 - Computation of Ratios .............................. 47
Exhibit 21 - Subsidiaries of the Registrant ..................... 49
Exhibit 23 - Consent of Independent Accountants ................. 50
Report of Independent Accountants on Consolidated Financial
Statement Schedule ............................................... 51
3
PAGE LEFT BLANK
INTENTIONALLY
4
Part I
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Item 1 BUSINESS
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PROPOSED MERGER
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In September 1995, Potomac Electric Power Company (the Company)
announced a proposed merger (the Merger) with Baltimore Gas and Electric
Company (BGE). The Merger Agreement was approved by the Board of Directors of
each company on September 22, 1995. The Merger requires the approval of
shareholders of each company and certain regulatory agencies, including the
Federal Energy Regulatory Commission, the Public Service Commissions of
Maryland and the District of Columbia and the Nuclear Regulatory Commission.
The approval process is expected to take until the end of the first quarter of
1997 to complete.
The Company believes that the Merger will provide opportunities to
achieve benefits for its shareholders, customers, employees and communities
that would not be available to the Company as a separate entity, including
expanded opportunities in both the core utility operations and nonutility
businesses. Additional information regarding the Merger is presented in Note
13 of "Notes to Consolidated Financial Statements" incorporated by reference
in Item 8.
GENERAL
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The Company, which was incorporated in the District of Columbia in 1896
and in the Commonwealth of Virginia in 1949, is engaged in the generation,
transmission, distribution and sale of electric energy in the Washington, D.C.
metropolitan area. The Company's retail service territory includes the
District of Columbia and major portions of Montgomery and Prince George's
counties in suburban Maryland. The area served at retail covers approximately
640 square miles and had a population of approximately 1.9 million at the end
of 1995 and 1994. The Company also sells electricity, at wholesale, to
Southern Maryland Electric Cooperative, Inc. (SMECO), which distributes
electricity in Calvert, Charles, Prince George's and St. Mary's counties in
southern Maryland. During 1995, approximately 59% of the Company's revenue
were derived from Maryland sales (including wholesale) and 41% from sales in
the District of Columbia. About 30% of the Company's revenue were derived
from residential customers, 64% from sales to commercial and government
customers and 6% from sales at wholesale. Approximately 14% and 3% of 1995
revenue were derived from sales to the U.S. and D.C. governments,
respectively.
The Company holds valid franchises, permits and other rights adequate
for its business in the territory it serves, and such franchises, permits and
other rights contain no unduly burdensome restrictions.
5
The Company is a member of the Pennsylvania-New Jersey-Maryland
Interconnection Association (PJM) pursuant to an agreement under which its
generating and transmission facilities are operated on an integrated basis
with those of the other PJM member utilities in Pennsylvania, New Jersey,
Maryland, Delaware and a small portion of Virginia. The purpose of PJM is to
improve the operating economy and reliability of the systems in the group and
to provide capital economies by permitting lower reserve requirements than
would be required on a system basis. The Company also has direct high voltage
connections with the Potomac Edison Company, a subsidiary of Allegheny Power
System, Inc. (APS), and Virginia Power, neither of which is a member of PJM.
In November 1995, PJM members filed a detailed proposal with the FERC
that offers a regional energy market and open access to PJM high-voltage
transmission lines to all generators and wholesale buyers of electricity.
Under the proposal, PJM will be transformed into an Independent System
Operator (ISO), which will administer a rate structure designed to eliminate
dealing with each company separately for transactions through PJM. The ISO
will administer operations, operate the regional energy market and administer
transmission service. PJM expects to implement the new structure, which is
not expected to have a material effect on the Company's operations, by year-
end 1996.
Additional information concerning the restructuring of the bulk power
market is presented in Management's Discussion and Analysis incorporated by
reference in Item 7.
6
SALES
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The following data presents the Company's sales and revenue by class of
service and by customer type, including data as to sales to the United States
and District of Columbia governments.
1995 1994 1993
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Electric Energy Sales (Thousands of Kilowatt-hours)
---------------------
Kilowatt-hours Sold - Total 25,910,047 25,546,210 25,693,999
========== ========== ==========
By Class of Service -
Residential service 6,720,267 6,586,970 6,739,987
General service 15,448,416 15,345,484 15,388,525
Large power service (a) 703,416 683,762 704,292
Street lighting 162,897 162,439 163,827
Rapid transit 409,837 404,634 370,428
Wholesale 2,465,214 2,362,921 2,326,940
By Type of Customer -
Residential 6,706,775 6,574,199 6,726,520
Commercial 11,861,248 11,685,351 11,750,542
U.S. Government 3,998,052 4,009,810 3,986,149
D.C. Government 878,758 913,929 903,848
Wholesale 2,465,214 2,362,921 2,326,940
Electric Revenue (Thousands of Dollars)
----------------
Sales of Electricity - Total (b) $1,813,790 $1,783,064 $1,696,435
========== ========== ==========
By Class of Service -
Residential service $ 544,517 $ 525,660 $ 506,096
General service 1,075,142 1,066,710 1,010,552
Large power service (a) 36,183 35,701 33,913
Street lighting 12,555 13,783 13,605
Rapid transit 28,276 27,892 24,107
Wholesale 117,117 113,318 108,162
By Type of Customer -
Residential $ 543,532 $ 524,738 $ 505,173
Commercial 848,892 834,323 791,357
U.S. Government 252,144 254,030 238,192
D.C. Government 52,105 56,655 53,551
Wholesale 117,117 113,318 108,162
(a) Large power service customers are served at a voltage of 66KV or
higher.
(b) Exclusive of Other Electric Revenue (000s omitted) of $8,642 in 1995,
$7,536 in 1994 and $6,007 in 1993.
7
The Company's sales of electric energy are seasonal, and, accordingly,
rates have been designed to closely reflect the daily and seasonal variations
in the cost of producing electricity, in part by raising summer rates and
lowering winter rates. Mild weather during the summer billing months of June
through October, when base rates are high to encourage customer conservation
and peak load shifting, has an adverse effect on revenue and, conversely, hot
weather during these months has a favorable effect.
The Company includes in revenue the amounts received for sales to other
utilities related to pooling and interconnection agreements. Amounts received
for such interchange deliveries are a component of the Company's fuel rates.
CAPACITY PLANNING
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General
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During the period 1996 through 2005 the Company estimates that its peak
demand will grow at a compound annual rate of approximately 1%. Based upon
average weather conditions, the Company expects its compound annual growth in
kilowatt-hour sales to range between 1% and 2% over the next decade. The
Company's ongoing strategies to meet the increasing energy needs of its
customers include conservation and energy use management programs which are
designed to curb growth in peak demand. The need for new capacity has been
further reduced by programs to maintain older generating units to ensure their
continued efficiency over an extended life and the cost-effective purchase of
capacity and energy.
Conservation
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Cost-effective conservation programs have been a major component of the
Company's success in limiting the need for new construction during the past
decade.
The Company's conservation and energy use management programs (EUM) 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. In 1994, the Company reevaluated its conservation
programs, including additional review and consideration of the current and
prospective effect of these programs on customer rates and bills. As a result
of this reevaluation, the Company phased out several conservation programs and
reduced rebate levels for others. In a June 1995 order, the Public Service
Commission of the District of Columbia adopted conservation spending limits
for the four-year period 1995 through 1998. By narrowing its conservation
offerings and limiting conservation spending, the Company expects to continue
to encourage its customers to use energy efficiently without significantly
increasing electricity prices. The Company expects to realize approximately
80% of the previously estimated benefits from conservation for approximately
45% of the previously estimated costs.
8
During 1995, the Company invested approximately $100 million in energy
conservation programs. The Company recovers the costs of its conservation
programs in its Maryland jurisdiction through a base rate surcharge which
amortizes costs over a five-year period and permits the Company to earn a
return on its conservation investment while receiving compensation for lost
revenue. In addition, when the Company's performance exceeds its annual
goals, the Company earns a performance bonus. The Company was awarded a bonus
of $8.7 million in 1995, based on 1994 performance, which followed a bonus of
$5 million in 1994, based on 1993 performance. In the District of Columbia,
conservation costs are amortized over 10 years with an accrued return on
unamortized costs. In June 1995, the District of Columbia Public Service
Commission adopted a base rate surcharge for the recovery of actual
conservation costs prudently incurred for the period July 1993 to December
1994. Subsequent rate updates will be filed annually on June 1 to reflect the
prior year's actual costs, subject to the annual surcharge recovery limit
within a four year spending cap for the period 1995-1998 (amounts spent in
excess of the annual surcharge recovery limit, but within the four year
spending cap, are deferred for future recovery). Pre-July 1993 conservation
costs receive base rate treatment. This surcharge includes both a
conservation expenditure component and a component for recovering certain
expenditures associated with complying with the Clean Air Act Amendments of
1990. The conservation component is to be updated annually in the spring of
each year, while the Clean Air Act component is updated quarterly.
In 1995, approximately 157,000 customers participated in continuing
energy use management programs which cycle air conditioners and water heaters
during peak periods. In addition, the Company operates a commercial load
program which provides incentives to customers for reducing energy use during
peak periods. Time-of-use rates have been in effect since the early 1980s and
currently approximately 60% of the Company's revenue is based on time-of-use
rates.
It is estimated that in 1995 peak load reductions of over 600 megawatts
were achieved from conservation and energy use management programs and that
additional peak load reductions of approximately 430 megawatts will be
achieved in the next five years. The Company also estimates that, in 1995,
energy savings of more than 1.2 billion kilowatt-hours were realized through
operation of its conservation and energy use management programs. During the
next five years, the Company's projected costs for these programs to encourage
the efficient use of electric energy and to reduce the need to build new
generating facilities total $364 million ($77 million in 1996).
Although the Company is continuing its conservation and energy use
management efforts, new sources of supply will be needed to assure the future
reliability of electric service to the Washington area beyond the year 2000.
These new sources of supply will be provided through the Company's plans for
purchases of capacity and energy and through its ongoing construction program.
9
Purchase of Capacity and Energy
- -------------------------------
Pursuant to the Company's long-term capacity purchase agreements with
Ohio Edison and APS, the Company is purchasing 450 megawatts of capacity and
associated energy through the year 2005. In addition, from June 1994 through
May 1995, the Company purchased 147 megawatts of capacity from Pennsylvania
Power and Light Company. The Company also has a purchase agreement with
SMECO, through 2015, for 84 megawatts of capacity supplied by a combustion
turbine installed and owned by SMECO at the Company's Chalk Point Generating
Station. The Company is responsible for all costs associated with operating
and maintaining the facility. In addition, during 1995 the Company entered
into an agreement with PECO Energy Company (PECO) to purchase up to 300, but
not less than 200, megawatt-hours of energy each hour beginning on June 1,
1995. The purchase of energy by the Company under this agreement was
terminated on January 31, 1996.
The Company has been exploring other cost-effective sources of energy
and has entered into contracts for two nonutility generation projects which
total 262 megawatts of capacity. A 32-megawatt municipally financed resource
recovery facility in Montgomery County, Maryland, began commercial operation
in August 1995. 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 to begin operation in the
fourth quarter of 1996. The project was financed in April 1995 and is
currently one-third complete.
CONSTRUCTION PROGRAM
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The Company carries on a continuous construction program, the nature and
extent of which is determined by the Company's strategic planning process
which integrates supply-side and demand-side resource options.
From January 1, 1993 to December 31, 1995, the Company made property
additions, net of an Allowance for Funds Used During Construction (AFUDC), of
$820 million (of which $222 million were made in 1995) and had property
retirements of $126 million (of which $42 million were made in 1995).
The Company's current construction program calls for estimated
expenditures, excluding AFUDC, of $170 million in 1996, $220 million in 1997,
$240 million in 1998, $240 million in 1999 and $255 million in 2000, an
aggregate of $1.1 billion for the five-year period. AFUDC is estimated to be
$7 million in 1996, $7 million in 1997, $8 million in 1998, $8 million in 1999
and $11 million in 2000. The 1996-2000 construction program includes
approximately $538 million for generating facilities (including $112 million
for Clean Air Act compliance), $23 million for transmission facilities, $558
million for distribution, service and other facilities, and $6 million
associated with the Company's energy use management programs. As a result of
lower rates of projected load growth resulting in large part from implementing
economical conservation programs, the Company previously reduced its projected
construction expenditures by $155 million in 1994 and $425 million in 1993.
10
The Company plans to finance its construction program primarily through funds
provided by operations.
The construction program includes amounts for the construction of
facilities that will not be completed until after 1999. Although the program
includes provision for escalation of construction costs, generally at an
annual rate of 3.5%, the aggregate budget for long lead time projects will
increase or decrease depending upon the actual rates of inflation in
construction costs. The program is reviewed continually and is revised as
appropriate to reflect changes in projections of demand, consumption patterns
and economic trends.
The Clean Air Act Amendments of 1990 (CAA) require utilities to reduce
emissions of sulfur dioxide and nitrogen oxides in two phases, January 1995
(Phase I) and January 2000 (Phase II). The Company has implemented cost-
effective plans for complying with Phase I of the CAA to achieve prescribed
standards. Anticipated capital expenditures for complying with the second
phase of the CAA total $112 million over the next five years. The Company's
plans call for continued replacement of boiler burner equipment for nitrogen
oxides emissions control and further use of lower-sulfur fuel and co-firing
with natural gas for sulfur dioxide (SO2) emissions control. If economical,
the Company will purchase SO2 emission allowances in lieu of burning lower-
sulfur fuel.
Installation of scrubbers is not contemplated for the Company's wholly
owned plants. Both the District of Columbia and Maryland commissions have
approved the Company's plans for meeting Phase I requirements including cost
recovery of investment and inclusion of emission allowance expenses in the
Company's fuel adjustment clause.
The Company owns a 9.72% undivided interest in the Conemaugh Generating
Station located in western Pennsylvania. Nitrogen oxides emissions reduction
equipment and flue gas desulfurization equipment have been installed at the
station for compliance with Phases I and II of the CAA. The Company's share
of the construction costs for this equipment was $36.2 million. As a result
of installing the flue gas desulfurization equipment, the station has received
additional SO2 emission allowances. The Company's share of these bonus
allowances will be used to reduce the need for lower-sulfur fuel at its other
plants.
11
FUEL
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For customer billing purposes, all of the Company's kilowatt-hour sales
are covered by separately stated fuel rates (see Item 8 - Note 2 of "Notes to
Consolidated Financial Statements").
The age of the Company's generating units, all of which are in
operation, is presented in the table below.
Generating Number Age
Station of Units (a) (Years) Service Type
-------------- ------------ ------- --------------------
Benning 2 23-27 Cycling
Buzzard Point 16 27 Peaking
Potomac River 2/3 38-46 Cycling/Base
Dickerson 3/3 2-36 Base/Peaking
Chalk Point (a) 2/2/7(b) 4-31 Base/Cycling/Peaking
Morgantown 2/6 22-25 Base/Peaking
(a) By service type.
(b) Includes a combustion turbine unit owned by SMECO and operated by
the Company.
Since the 1970s, the Company has conducted continuing programs to extend the
useful life of generating units and to ensure their continued availability and
efficiency.
The Company's generating units burn only fossil fuels. The principal
fuel is coal. The Company owns no nuclear generation facilities. The
following table sets forth the quantities of each type of fuel used by the
Company in the years 1995, 1994 and 1993 and the contribution, on the basis of
Btus, of each fuel to energy generated.
1995 1994 1993
-------------- -------------- --------------
% of % of % of
Quantity Btu Quantity Btu Quantity Btu
-------- ----- -------- ----- -------- -----
Coal
(000s net tons) 6,312 85.4 5,788 76.1 6,010 79.4
Residual oil
(000s barrels) 1,348 4.4 4,868 15.7 4,835 15.9
Natural gas
(000s dekatherms) 16,387 8.5 10,780 5.5 6,090 3.2
No. 2 fuel oil
(000s barrels) 580 1.7 919 2.7 480 1.5
12
The following table sets forth the average cost of each type of fuel
burned, for the years shown.
1995 1994 1993
------ ------ ------
Coal: per ton $41.84 $44.39 $43.69
per million Btu 1.60 1.73 1.72
Residual oil: per barrel 18.01 15.31 15.09
per million Btu 2.88 2.44 2.39
Natural gas: per dekatherm 2.10 2.49 2.88
per million Btu 2.10 2.49 2.88
No. 2 fuel oil: per barrel 23.71 24.34 24.98
per million Btu 4.06 4.17 4.30
The average cost of fuel burned per million Btu was $1.74 in 1995,
compared with $1.95 in 1994 and $1.90 in 1993. The 1995 system average unit
fuel cost decreased by approximately 11% which was primarily the result of the
increased use of lower-cost coal and gas and decreased net generation. The
increase of approximately 3% in 1994 system average unit fuel cost compared
with the 1993 system average resulted from increased use of major cycling and
peaking generation units which burn higher cost fuels. The Company's major
cycling and certain peaking units can burn natural gas or oil, adding
flexibility in selecting the most cost-effective fuel mix. The increase in
the percent of gas burned in 1995 and 1994 reflects the decreased price of gas
and the increased price of oil. The decrease in the contribution of coal to
the fuel mix in 1994 primarily reflects major outages for construction related
to Clean Air Act additions on baseload coal-fired generation units.
Ten of the Company's sixteen steam-electric generating units can burn
only coal; two can burn only residual oil; two can burn either coal or
residual oil or a combination of both and two units can burn either residual
oil or natural gas. Those units capable of burning either coal or residual
oil normally burn coal as their primary fuel. The Company also has combustion
turbines, some of which can burn only No. 2 fuel oil, and others which can
burn natural gas or No. 2 fuel oil. The following table provides details of
the Company's generating capability from the standpoint of plant configuration
as well as actual energy generation (see Item 2 - Properties for additional
information on type of fuel used in generating facilities).
13
Net Generating Net
Capability and Energy
Purchased Capacity Generated
------------------ ------------------
1995 1994 1993 1995 1994 1993
---- ---- ---- ---- ---- ----
Steam Generation
Dual fuel units, capable
of burning coal, residual
oil or a combination of
coal and residual oil.... 18% 17% 18% 29% 28% 29%
Units capable of burning
coal only................ 28% 28% 28% 46% 43% 45%
Units capable of burning
residual oil only........ 8% 8% 8% 1% 1% 1%
Units capable of burning
residual oil or natural
gas...................... 19% 18% 19% 6% 12% 10%
Combustion Turbines
Units capable of burning
No. 2 fuel oil only...... 9% 9% 9% )
Units capable of burning ) 3% 3% 2%
No. 2 fuel oil or natural )
gas...................... 11% 11% 11% )
Purchased capacity........... 7% 9% 7% 15%(a) 13%(a) 13%(a)
(a) Includes purchases under cogeneration agreements.
The Company's fuel mix objective is to obtain a minimum unit cost of
energy through the use of its generating facilities. The actual use of coal,
oil and natural gas is influenced by the availability of the generating units,
the relative cost of the fuels, energy and demand requirements of other
utilities with which the Company has interconnection arrangements, regulatory
requirements (for future units), environmental constraints, weather conditions
and fuel supply constraints, if any.
The Company has numerous coal contracts with various expiration dates
through 2003 for aggregate annual deliveries of approximately 3.2 million
tons. Deliveries under these contracts are expected to provide approximately
48% of the estimated system coal requirements in 1996. Approximately 52% of
the estimated system coal requirements in 1996 will be purchased under shorter
term agreements and on a spot basis from a variety of suppliers. Each of the
Company's longer term coal contracts, which are not fixed price contracts,
14
contains price escalation/de-escalation provisions whereby the adjusted base
price to-be-paid to the supplier for coal received by the Company is adjusted
on a quarterly basis. Contract price adjustments are calculated according to
changes in the contract specified published indices and are limited by current
spot market prices.
Most of the coal currently used by the Company is surface mined in
Pennsylvania, West Virginia and Maryland. The Company believes that it will
be able to continue to obtain the quantities of coal needed to operate at its
current fuel mix objective. The costs of coal to the Company may be affected
by increases in the costs of production, including the costs of complying with
federal legislation (such as amendments to the CAA, discussed above, the costs
of surface mining reclamation and black lung benefits), the imposition of (or
changes in) state severance taxes and by modification of contracts with
Conrail, CSX Transportation and Norfolk Southern which cover all of the coal
movements to the Company's generating stations.
The Company purchases both domestically refined and imported residual
oil. Residual oil is purchased under one two-year and one one-year contracts.
Prices under the contracts are determined by reference to base contract
prices, as adjusted to reflect current market prices. Prior to expiration of
the contracts, the Company expects to solicit bids for new contracts to supply
its residual oil requirements. The Company also purchases No. 2 fuel oil
under two one-year contracts.
Certain units at the Company's Chalk Point and Dickerson Generating
Stations are capable of burning natural gas as well as oil. The Company has a
contract with Washington Gas Light Company to purchase natural gas for Chalk
Point extending through December 1998. In addition, the Company actively
pursues spot market natural gas purchases when there is economic benefit. The
Company has a one-year contract with Consolidated Natural Gas for the
Dickerson combustion turbine units through March 31, 1996. Both contracts are
for an interruptible supply of natural gas with provisions for price review
and adjustment each month. The actual use of natural gas for these units will
be dependent upon operational requirements, the relative costs of natural gas
and oil, and the availability of natural gas.
REGULATION
- ----------
The Company's utility operations are regulated by the Maryland and
District of Columbia public service commissions and, as to its wholesale
business, the Federal Energy Regulatory Commission (FERC). In addition, in
certain limited respects relating to its participation in the Conemaugh
Generating Station and related transmission lines, the Company is subject to
regulation by the Pennsylvania Public Utility Commission.
The Company's operations are subject to certain portions of the National
Energy Act designed to promote the conservation of energy and the development
and use of more plentiful domestic fuels through various regulatory and tax
provisions. The legislation, among other things, requires states to develop
residential energy conservation plans and requires utilities to enter into
cogeneration purchases with operators of qualified facilities. To date, this
15
legislation has fostered nonutility generation (cogeneration and solid waste
fired generation) supplying the Company with approximately 40 megawatts. As
noted above under "Purchase of Capacity and Energy," the Company's plans
include additional nonutility generation projects.
RATES
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General
- -------
The Company's retail rates for electric service in Maryland and the
District of Columbia are based on allowed rates of return to the Company's
jurisdictional original cost rate base investments as determined in base rate
proceedings before the regulatory commissions by reference to the test periods
used in setting rates. Rate base in each of these jurisdictions generally has
included (1) the Company's full investments in Electric Plant in Service (net
of depreciation, certain pre-1981 investment tax credits and plant related
deferred income taxes) and the pollution control portion of Construction Work
in Progress (CWIP), (2) inventories of fuels and other materials and supplies
and (3) an allowance for cash working capital. The Company has employed,
since 1978, Allowance for Funds Used During Construction (AFUDC) accounting.
In general, the Company capitalizes AFUDC with respect to investments in CWIP
with the exception of expenditures required to comply with federal, state or
local environmental regulations (pollution control projects), which are
included in rate base without capitalization of AFUDC. In 1992, pursuant to
orders from both the Maryland and District of Columbia commissions, the
Company commenced the accrual of a capital cost recovery factor on the retail
jurisdictional portion of certain pollution control projects related to
compliance with the CAA. The base for calculating this return is the amount
by which the retail jurisdictional CAA expenditure balance exceeds the CAA
balance included in rate base in the Company's most recently completed base
rate proceeding. The jurisdictional AFUDC capitalization rates are determined
on a gross basis pursuant to formulas prescribed by the FERC. The effective
capitalization rates were approximately 7.9% in 1995, 7.6% in 1994 and 8.7% in
1993, compounded semiannually.
Rate orders received by the Company during the past three years provided
for increases in annual base rate revenue as shown in the table below.
Rate
Increase % 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
Federal-Wholesale 3,801 3.1 January 1993
Maryland 25,300 3.0 1992/1993
16
Fuel Rates
- ----------
The Company has separately stated fuel rates in each jurisdiction. Such
rates include the delivered cost of fuel and the applicable costs and/or
credits from the interchange of energy with other electric utilities, to the
extent not provided for in base rates. (See Item 8 - Note 2 of "Notes to
Consolidated Financial Statements" for additional information).
Maryland
- --------
Pursuant to a settlement agreement, base rate revenue was increased by
$27 million, or 3%, effective November 1, 1993. The Commission previously
authorized an increase in base rate revenue of $7.3 million, effective June 1,
1993, and $18 million, effective December 1, 1992, pursuant to an October 1992
settlement agreement. In connection with the settlement agreements, no
determination was made with respect to rate of return. The rate of return on
common stock equity most recently determined for the Company in a fully
litigated rate case was 12.75%, established by the Commission in a June 1991
rate increase order.
The Company's Maryland DSM Surcharge, which provides for the recovery of
conservation program costs over a five-year period and includes provisions for
the recovery of lost revenue, a capital cost recovery factor, calculated at
9.46%, on unrecovered program balances and an incentive amount based on
achieving prior-year goals, was increased effective July 1, 1995. The new
rate will result in an increase in the annual surcharge recovery of
approximately $29 million, including the initial amortization of 1995
projected program costs and the previously mentioned incentives of $8.7
million and $5 million for exceeding 1994 and 1993 program goals,
respectively.
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. A four-year DSM spending cap for the
period 1995-1998 was approved, consistent with 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. This will
enable the Company to implement cost-effective conservation programs while
limiting the impact of such programs 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
17
additional revenue annually. Subsequent rate updates will be filed annually
on June 1 to reflect the prior year's actual costs, subject to the annual
surcharge recovery limit within the four-year spending cap for the period
1995-1998 (amounts spent in excess of the annual surcharge recovery limit, but
within the four-year spending cap, are deferred for future recovery). Pre-
July 1993 conservation costs receive base rate 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. The
Commission also increased the time period for filing Least-Cost Planning cases
from two to three years. The Commission previously authorized an increase in
base rate revenue of $23.2 million effective March 16, 1994, and $2.2 million
effective June 5, 1994. A further base rate increase of $1.3 million was
authorized pursuant to a May 1994 order on reconsideration of the Commission's
March 1994 rate order.
Wholesale
- ---------
The Company has a 10-year full service power supply contract with SMECO,
a wholesale customer. The contract period is to be extended for an additional
year on January 1 of each year, unless notice is given by either party of
termination of the contract at the end of the 10-year period. The full
service obligation can be reduced by SMECO by up to 20% of its annual
requirements with a five-year advance notice for each such reduction.
SMECO rates were increased by $2.3 million, $2.6 million and $3.8
million effective January 1, in each of the years 1995, 1994 and 1993,
respectively. A new agreement was recently concluded with SMECO for the years
1996 through 1998. A rate reduction of $2 million from the 1995 rate level is
scheduled to become effective January 1, 1996, with an additional $2.5 million
rate reduction scheduled to become effective January 1, 1998. Approval of the
rate settlement by the Federal Energy Regulatory Commission is expected in
April 1996. SMECO has agreed not to give the Company a notice of reduction or
termination of service prior to December 15, 1998.
Interchange of Power
- --------------------
The Company's generating and transmission facilities are interconnected
with the other members of PJM and other utilities. The pricing of most PJM
internal economy energy transactions is based upon "split savings" so that the
price of such energy is halfway between the cost that the purchaser would
incur if the energy were supplied by its own sources and the cost of
production to the company actually supplying the energy.
On November 30, 1995, the PJM members filed with the FERC a detailed
proposal that offers to all generators and wholesale buyers of electricity a
regional energy market and open access to PJM high-voltage transmission lines.
Under the proposal, PJM will be transformed into an Independent System
Operator (ISO), which will administer a rate structure designed to eliminate
dealing with each company separately for transactions through PJM. The ISO
will administer operations, operate the regional energy market and administer
18
transmission service. PJM expects to implement the new structure by year-end
1996. This change is not expected to have a material effect on the operations
of the Company.
The Company has interconnection agreements with 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. In addition, during 1995 the Company
entered into an agreement with PECO to purchase up to 300, but not less than
200, megawatt-hours of energy each hour beginning on June 1, 1995. The
purchase of energy by the Company under this agreement was terminated on
January 31, 1996.
In early 1995, the Federal Energy Regulatory Commission (FERC) approved
a power sales tariff, filed by the Company, which allows both sales from
Company-owned generation and sales of energy purchased by the Company. This
tariff expands the Company's opportunities to participate in direct energy
sales with other utilities and power marketers. Through the use of similar
tariffs, many other parties are now in a position to buy and sell energy. The
Company is actively encouraging this market by buying energy for its own use,
selling energy and buying energy for contemporaneous resale, when economic
transactions are available.
Pursuant to the Company's long-term capacity purchase agreements with
Ohio Edison and APS, the Company is purchasing 450 megawatts of capacity and
associated energy through the year 2005. The monthly capacity commitment
under these agreements, excluding an allocation of fixed operating and
maintenance cost, increased from $12,380 per megawatt through 1993 to $18,060
per megawatt effective January 1994, with provision for escalation in 1999.
In addition, from June 1994 through May 1995, the Company purchased 147
megawatts of capacity from Pennsylvania Power and Light Company.
The Company has a purchase agreement with SMECO, through 2015, for 84
megawatts of capacity supplied by a combustion turbine installed and owned by
SMECO at the Company's Chalk Point Generating Station. The Company is
responsible for all costs associated with operating and maintaining the
facility. The capacity payment to SMECO is $462,000 per month.
COMPETITION
- -----------
The 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.
19
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. A proceeding dealing with structure
and competition was initiated by the District of Columbia Commission during
1995.
Additional information concerning competition is presented in
Management's Discussion and Analysis incorporated by reference in Item 7.
ENVIRONMENTAL MATTERS
- ---------------------
General
- -------
The Company is subject to federal, state and local legislation and
regulation with respect to environmental matters, including air and water
quality and the handling of solid and hazardous waste. Air quality
requirements relate to both ambient air quality and emissions from facilities,
including particulate matter, sulfur dioxide, nitrogen oxides, carbon
monoxide, volatile organic compounds and visible emissions. Water quality
requirements relate to intake and discharge of water from facilities,
including water used for cooling purposes in electric generating facilities.
Waste requirements relate to the generation, treatment, storage,
transportation and disposal of specified wastes. Compliance with such
requirements may limit or prevent certain operations or substantially increase
the cost of construction and operation of the Company's existing and future
generating installations. The Company has expended approximately $596 million
through December 31, 1995, for the construction of pollution control
facilities. The $538 million 1996-2000 construction program for generating
facilities includes estimated provision for pollution control facilities,
including expenditures for CAA compliance, of $16 million for 1996, $41
million for 1997, $53 million for 1998, $42 million for 1999 and $36 million
for 2000. The Company is unable to predict the future course of environmental
regulations generally, the manner in which compliance with such regulations
will be required, the availability of technology to meet such regulations and
any budget amendments which may be required to recognize the costs which may
ultimately be associated with such compliance.
Air Quality
- -----------
Under authority of the Clean Air Act of 1970, as amended, the U.S.
Environmental Protection Agency (EPA) has issued national primary and
secondary standards for the following air pollutants: sulfur dioxide,
nitrogen dioxide, particulate matter, carbon monoxide, ozone and lead. The
20
EPA has also enacted regulations designed to prevent significant deterioration
of air quality in areas where air quality levels are better than the secondary
ambient air quality standards. The appropriate agencies in Maryland, the
District of Columbia and Virginia have issued regulations designed to
implement EPA's standards and regulations.
In 1990, Congress enacted amendments to the CAA that require the
reduction of sulfur dioxide and nitrogen oxides emissions from electric
generating units. The Company cannot fully predict the financial and
operating effects of this new legislation until all of the related
implementing regulations are adopted by EPA and by appropriate agencies in
each of the jurisdictions where the Company's generating facilities are
located. However, the Company has implemented cost-effective plans for
complying with Phase I of the CAA to achieve prescribed standards.
Anticipated capital expenditures for complying with the second phase of the
CAA total $112 million over the next five years. The Company's plans call for
continued replacement of boiler burner equipment for nitrogen oxides emissions
control and further use of lower-sulfur fuel and co-firing with natural gas
for sulfur dioxide (SO2) emissions control. If economical, the Company will
purchase SO2 emission allowances in lieu of burning lower-sulfur fuel.
Maryland, the District of Columbia and Northern Virginia are members of
the Ozone Transport Commission, established by the CAA for the purpose of
developing a regional solution to attainment of the ambient ozone standard in
the northeastern United States. The Company has implemented a cost-effective
approach for complying with state rules under Title I of the CAA which
required the retrofit of existing generating units with Reasonably Available
Control Technology (RACT) for nitrogen oxides control by mid-1995. The
Company cannot predict the impact of future standards which may be required
under Title I.
The Company is unaware of any respect in which its generating stations
are not presently in compliance with federal and state air quality
regulations, with the exception of visible emissions from the Dickerson
Station. Recognizing that the station cannot continuously satisfy its
applicable standards, the Company is working with Maryland regulators to
establish revised visible emissions standards.
Water Quality
- -------------
The Company's generating stations operate under National Pollutant
Discharge Elimination System (NPDES) permits. NPDES renewal applications
submitted in December 1991 for the Dickerson station, in March 1992 for the
Chalk Point station and in July 1993 for the Benning station are pending.
NPDES permits were issued for the Potomac River station in February 1994 and
for the Morgantown station in February 1995.
The Maryland Department of the Environment promulgated regulations
effective April 16, 1990 that, among other things, set numeric criteria for
toxic substances in surface waters. These criteria, if incorporated into the
NPDES permits for the Company's Chalk Point, Morgantown and Dickerson
generating stations, had the potential to cause the Company to incur
21
significant costs to achieve compliance. The Company, in conjunction with
other utilities, industrial companies, and the Maryland Chamber of Commerce,
filed a suit in May 1990 that challenged the validity of the regulations. The
parties entered into a settlement agreement and revised regulations were
adopted on May 6, 1993 in accordance with the settlement agreement. These
revised regulations received EPA approval and the suit was dismissed on July
25, 1994. It is currently not anticipated that these regulations will result
in any significant adverse economic impact on the Company.
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.
Pursuant to the terms of the Consent Decree, the Company paid a civil penalty
of $975,000. The settlement brought 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.
Toxic Substances
- ----------------
The Company was notified by the EPA on December 18, 1987, that it, along
with five other utilities and eight non-utilities, is a potentially
responsible party (PRP) under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended (CERCLA or Superfund), in
connection with the polychlorinated biphenyl compounds (PCBs) contamination of
soil, ground water and surface water occurring at a Philadelphia, Pennsylvania
site owned by an unaffiliated company. Additional PRPs have since been
identified and the number is continually subject to change. In the early
1970s, the Company sold scrap transformers, some of which may have contained
some level of PCBs, to a metal reclaimer operating at the site. In October
1994, a Remedial Investigation/Feasibility Study (RI/FS) report was submitted
to the EPA. 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
the EPA, including legal fees, are currently estimated to be $7.5 million.
The Company has paid $.8 million as of December 31, 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, the EPA announced its proposed
remedial action plan for the site and indicated it will accept comments on the
plan from any interested parties. The EPA's estimate of the costs associated
with implementation of the plan is approximately $17 million. The Company
cannot predict whether the EPA will include the plan in its ROD as proposed or
make changes as a result of comments received. In addition, the Company
22
cannot estimate the total extent of the EPA's administrative and oversight
costs. To date, the Company has accrued $1.7 million for its share of this
contingency.
On September 19, 1989, an unaffiliated company, the Richmond,
Fredericksburg and Potomac Railroad (RF&P), requested the Company to
participate in the investigation and remediation of a 3-acre site in
Arlington, Virginia owned by RF&P at which it is alleged that soil and
groundwater have been contaminated by PCB compounds. Subsequently, the
Virginia Department of Waste Management requested information from the Company
related to transformers which may have been sold or sent to the site operator.
On December 7, 1990, a Summons and Complaint filed by RF&P in the United
States District Court for the Eastern District of Virginia against the Company
and seven other defendants was received. The Complaint alleges that the
defendant site operator released PCBs and other hazardous substances at the
site during the course of its operation, and that the sole source of PCBs and
other hazardous substances is from the defendant operator's operations and
from transformers and capacitors supplied by other defendants. Subsequently,
additional defendants were added to the Complaint. The Complaint seeks
contribution and other equitable remedies for remediation of the site. In
October 1993, the parties reached, and the Court approved, a settlement
subject to confirmation by additional site testing that remediation can be
accomplished at or below, and that no regulatory authority will require a
remediation which exceeds, approximately $4 million.
During 1993, the Company and two other PRPs completed a removal action
at a site in Harmony, West Virginia, pursuant to an Administrative Order (AO)
issued by the EPA. Approximately $3 million (of which the Company has paid
one-third, subject to possible reallocation) was expended on the removal
action, which the EPA has stated is in compliance with the AO. The Company
and two other PRPs have entered into settlements with third parties to recover
approximately $2.4 million of this cost. EPA oversight costs, which are not
expected to be material, have not yet been assessed. While compliance with
the AO has been completed, the Company cannot determine whether it will be
subject to any future liability with respect to the site.
During 1993, the Company was served with Amended Complaints filed in
three jurisdictions (Prince George's County, Baltimore City, and Baltimore
County), in separate ongoing, consolidated proceedings each denominated "In
re: Personal Injury Asbestos Case." The Company (and other defendants) were
brought into these cases on a theory of premises liability under which
plaintiffs argue that the Company was negligent in not providing a safe work
environment for employees of its contractors who allegedly were exposed to
asbestos while working on the Company's property. Initially, a total of
approximately four hundred and forty-eight (448) individual plaintiffs added
the Company to their Complaints. While the pleadings are not entirely clear,
it appears that each plaintiff seeks $2 million in compensatory damages and $4
million in punitive damages from each defendant. In a related proceeding in
the Baltimore City case, the Company was served, in September 1993, with a
third party complaint by Owens Corning Fiberglass, Inc. (Owens Corning)
alleging that Owens Corning was in the process of settling approximately 700
individual asbestos-related cases and seeking a judgment for contribution
against the Company on the same theory of alleged negligence set forth above
23
in the plaintiffs' case. Subsequently, Pittsburgh Corning Corp. (Pittsburgh
Corning) filed a third-party complaint against the Company, seeking
contribution for the same plaintiffs involved in the Owens Corning third-party
complaint. Since the filings, a number of the individual suits have been
disposed of without any payment by the Company. The third party complaints
involving Pittsburgh Corning and Owens Corning were dismissed by the Baltimore
City Court during 1994 without any payment by the Company. While the
aggregate amount specified in the remaining suits would exceed $1 billion, the
Company believes the amounts are greatly exaggerated as were the claims
already disposed of. The amount of total liability, if any, and any related
insurance recovery cannot be precisely determined at this time; however, based
on information and relevant circumstances known at this time, the Company does
not believe these suits will have a material adverse effect on its financial
position. However, an unfavorable decision rendered against the Company could
have a material adverse effect on results of operations in the fiscal year in
which a decision is rendered.
On October 3, 1995, the Company received notice from the EPA that it,
along with several hundred other companies, may be a 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 .0042%. The
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 its liability at this site will not have a material adverse effect on its
financial position or results of operations.
On December 5, 1995, the Company received notice from the EPA that it is
a PRP under CERCLA with respect to the release or threatened release of
radioactive and mixed radioactive and hazardous wastes at a site in Denver,
Colorado, operated by RAMP Industries, Inc. Evidence indicates that the
Company's connection to the site arises from an agreement with a vendor to
package, transport and dispose of two laboratory instruments containing small
amounts of radioactive material at a Nevada facility. While the Company
cannot predict its liability at this site, the Company believes that it will
not have a material adverse effect on its financial position or results of
operations.
Solid and Hazardous Waste
- -------------------------
The Resource Conservation and Recovery Act of 1976 (RCRA) provides
federal mandates and authority for dealing with the generation, treatment,
storage, transportation and disposal of solid or hazardous waste. The
principal utility wastes of fly ash, bottom ash and scrubber sludge are exempt
from EPA regulation as hazardous waste. The Company sends its wastes
designated as hazardous to appropriately licensed facilities for hazardous
waste treatment, storage and disposal. The current impact of regulations
under RCRA is not substantial. The only permit which will be required at this
time is for the Morgantown Generating Station, where the Company burns certain
24
amounts of PCB-contaminated mineral oil. Maryland regulations provide for a
special "limited facility permit" for this activity and the Company's
application for such permit is pending.
LABOR
- -----
The Company has approved, in conjunction with the Merger with BGE, a
severance plan for all exempt and non-bargaining unit employees who lose
employment due to the Merger. Employees who lose employment as a result of
the Merger will receive two weeks of pay per year of service, with a minimum
payment of eight weeks of pay. In addition, employees will receive company-
sponsored health and dental insurance for two weeks per year of service, with
a minimum of eight weeks of insurance coverage.
In December 1995, an extension of the current 1993 Labor Agreement
between the Company and Local 1900 of the International Brotherhood of
Electrical Workers was ratified by the Union members. The 1995 Agreement
extends the 1993 Agreement, which was due to expire on June 1, 1996, for two
years or until the effective date of the Merger with BGE, whichever occurs
first. This Agreement provides severance benefits, previously approved by the
Company for exempt and non-bargaining unit employees, for all union members
and provides for a lump-sum payment of 2% of base pay, which was paid on
January 5, 1996, a lump-sum payment of 1% of base pay on June 7, 1996, and a
lump-sum payment of 3% of base pay on June 6, 1997, or the effective date of
the Merger, whichever occurs first.
NONUTILITY SUBSIDIARY
- ---------------------
Potomac Capital Investment Corporation (PCI), the Company's principal
wholly owned subsidiary, was formed in late 1983 to provide a vehicle for
ongoing nonutility investment business.
At December 31, 1995, PCI's assets totaled $1.6 billion, including
$762.4 million in finance and operating equipment leases and $530.3 million in
marketable securities, principally investment grade sinking fund preferred
stock. The Company's equity investment in PCI was $168.4 million, including
$15.9 million of subsidiary retained earnings. Additional financial
information concerning assets, income, expenses and net earnings is presented
in the consolidated financial statements incorporated by reference in Item 8.
PCI's equipment-leasing portfolio consists primarily of wide-body
commercial aircraft. Income from leasing activities includes rental and
interest income, gains on asset sales and service fees.
PCI's aircraft leasing business has been adversely affected by the
lengthy economic downturn in the airline industry during the 1990s. In May
1995, PCI adopted a plan to exit the aircraft equipment leasing business. The
plan, which was developed following comprehensive review, is designed to
permit a withdrawal from the aircraft leasing business on an orderly basis
designed to preserve value. Under the plan, PCI will make no new
25
investments to increase the size of the aircraft leasing portfolio. In
addition, 13 aircraft were designated for sale over 18 to 24 months from the
date the plan was announced. These aircraft were subject to short-term,
usage-based leases, long-term leases expiring in the near term, or not
currently under lease. 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 $104 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 noncash charge to after-tax earnings of
approximately $110 million for the second quarter of 1995. There will be no
future depreciation of, or routine accrual for repair and maintenance
expenditures with respect to these aircraft. During January 1996, two B747-
200 aircraft were sold. Negotiations continue with respect to the sale of the
remainder of these aircraft. Depending upon the outcome of these negotiations
and recent activity in the marketplace, adjustments to the carrying value of
this portfolio may be required in the future.
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. Depreciation on two wholly owned aircraft, six majority-
owned aircraft and two aircraft held by partnerships in which PCI has a 50%
interest, 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 12 full or partial interests in
aircraft under leveraged leases or direct finance leases.
PCI will continue to market and sell the aircraft designated for sale
and will continue to closely monitor the aircraft in its portfolio not
designated for near-term sale with the objective of identifying future
opportunities for sale or other disposition on favorable terms. Satisfactory
execution of the entire plan may be affected by future aircraft market
conditions and events, which may have an impact on equipment values and sales
opportunities and, in the case of the portion of the portfolio on long-term
lease, the creditworthiness of PCI's lessees.
In April 1995, PCI reached agreement with Continental providing for the
deferral of approximately 40% of aggregate monthly rentals from the four
majority-owned and two jointly owned DC-10-30 aircraft for a period of 16
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.
As part of the agreement, PCI obtained cross-default provisions in its
Continental leases and improvements in aircraft return conditions.
26
During July 1995, Atlas Air, Inc. filed suit in New York Superior Court
requesting a declaratory judgment that the duration of its lease of one B747-
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 lease agreement and Atlas' own prior course of conduct acknowledging the
December 1995 lease termination date. Cross-motions for summary judgment were
filed, and the Court ruled in Atlas' favor on December 27, 1995. PCI has
appealed this decision. A new and separate complaint, based on PCI's
termination of the lease agreement because of Atlas' failure to make certain
lease payments, was filed by PCI on December 29, 1995. The parties agreed to
an expedited procedural schedule, and PCI's motion for summary judgment was
submitted on January 10, 1996. While the final outcome of these lawsuits
cannot be predicted, management is of the opinion that the outcome will not
have a material adverse effect on its financial position or results of
operations.
PCI's real estate activity consists of real estate projects and holdings
in the Washington metropolitan area. PCI also owns leasehold interests in oil
and natural gas producing properties in Texas.
Additional information concerning leasing activities is presented in
Management's Discussion and Analysis incorporated by reference in Item 7.
27
<TABLE>
Part I
- ------
Item 2 PROPERTIES
- ------ ----------
<CAPTION>
Megawatts of Net Capability
Steam --------------------------- Net Megawatt-
Generation Steam Combustion Hours Generated
Generating Station Location Primary Fuel Generation Turbine<F1> in 1995
- ------------------ --------------------------------------- -------------- ------------ ------------ ---------------
(Thousands)
<S> <C> <C> <C> <C> <C>
Benning Benning Road and Anacostia River, N.E. No. 4 Oil 550 - 174
Washington, D.C.
Buzzard Point 1st and V Streets, S.W. - - 256 15
Washington, D.C.
Potomac River Bashford Lane and Potomac River Coal 482 - 1,972
Alexandria, Virginia
Dickerson Potomac River, South of Little Monocacy Coal 546 291 3,777
River, Dickerson, Maryland
Chalk Point Patuxent River at Swanson Creek Coal/ 1,907 516 <F2> 5,470
Aquasco, Maryland Residual Oil/
Natural Gas
Morgantown Potomac River, South of Route 301 Coal/ 1,164 248 6,681
Newburg, Maryland Residual Oil
----------- ----------- -----------
Total - Wholly owned Units 4,649 1,311 18,089
Conemaugh Indiana County, Pennsylvania Coal 165 1 1,145
----------- ----------- -----------
Total - All Stations Operated 4,814 1,312 19,234
===========
Cogneration - - 154
===========
Purchased Capacity
Ohio Edison <F3> 450 - 3,223
----------- ----------- ===========
Total System 5,264 1,312
=========== ===========
<FN>
All of the above properties are held in fee, but as to Conemaugh, the
Company holds a 9.72% undivided interest as a tenant in common.
<F1>Combustion turbines burn No. 2 fuel oil and certain units can also
burn natural gas.
<F2>Includes 84 megawatts supplied by a combustion turbine owned by SMECO
and operated by the Company.
<F3>Generating capacity under long-term agreements with Ohio Edison and
Allegheny Power System, Inc.
</FN>
28
</TABLE>
The five steam-electric generating stations, together with combustion
turbines, had an aggregate net capability at December 31, 1995, of 5,960
megawatts (including the 84 megawatt combustion turbine owned by SMECO at the
Company's Chalk Point Generating Station), assuming all units are available
for service at the time and for the usual duration of the system peak (which
occurs in the summer). The Company also has 166 megawatts of net capability
available from its 9.72% undivided interest in a mine-mouth, steam-electric
generating station known as the Conemaugh Generating Station, located in
Indiana County, Pennsylvania, which it owns with eight other utilities as
tenants in common. The Company also receives generating capacity and
associated energy from Ohio Edison under long-term agreements with Ohio Edison
and APS. The agreements, which provide for 450 megawatts of capacity and
associated energy, are expected to continue at that level through the year
2005. The net 60-minute peak load in 1995 was 5,732 megawatts, which occurred
on August 4, 1995, and was .6% below the all-time summer peak demand of 5,769
megawatts. To meet the 1995 summer peak demand, the Company also had
approximately 270 megawatts available from its dispatchable energy use
management programs. For additional information regarding the Company's net
generating capability, see "Construction Program" and "Fuel" under Item 1 -
Business.
The Company owns the transmission and distribution facilities serving
its customers. As stated above, the Company's interest in the Conemaugh
Generating Station and its associated transmission lines is that of a tenant
in common with eight other owners. Substantially all of such Conemaugh
transmission lines, substantially all of the Company's transmission and
distribution lines of less than 230,000 volts, small portions of its 230,000
volt transmission lines and certain of its substations are located on land
owned by others or in public streets and highways. Substantially all of the
Company's property and plant is subject to the mortgage which secures its
bonded indebtedness.
Item 3 LEGAL PROCEEDINGS
- ------ -----------------
For information regarding pending environmental legal proceedings, see
"Environmental Matters" under Item 1 - Business.
The Company was a defendant in employment discrimination litigation
which was pending in the United States District Court for the District of
Columbia. In February 1993, the parties to the case reached tentative
settlement of the claims and, in April 1993, the Company paid $38.26 million
into a trust fund pursuant to the terms of the Agreement. The funds have been
disbursed from the trust fund to certain covered classes of current and former
employees and applicants for employment and to cover the plaintiffs' legal and
expert fees and costs. The Court approved the settlement agreement, effective
in July 1993. The Company has received insurance payments of $38.3 million
through December 31, 1995. Subsequently, in January 1996, the Company
received an additional insurance recovery of $2.9 million.
29
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
None.
Part II
- -------
Item 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- ------ -----------------------------------------------------------------
MATTERS
-------
The following table presents the dividends per share of Common Stock and
the high and low of the daily Common Stock transaction prices as reported in
The Wall Street Journal during each period. The New York Stock Exchange is
the principal market on which the Company's Common Stock is traded.
Dividends Price Range
Period Per Share High Low
--------------------- --------------- -------- ---------
1995:
First Quarter...... $.415 $20-1/8 $18-3/8
Second Quarter..... .415 22-1/2 18-1/2
Third Quarter...... .415 24-5/8 20-1/2
Fourth Quarter..... .415 $1.66 26-1/4 24
1994:
First Quarter...... $.415 $26-5/8 $21-3/4
Second Quarter..... .415 23-1/2 18-1/2
Third Quarter...... .415 21-1/2 18-3/8
Fourth Quarter..... .415 $1.66 19-3/4 18-1/4
The number of holders of Common Stock was 95,631 at March 5, 1996 and
96,958 at December 31, 1995.
There were 118,495,235 and 118,494,577 shares of the Company's $1 par
value Common Stock outstanding at March 5, 1996, and December 31, 1995,
respectively. A total of 200 million shares is authorized.
In January 1996, a dividend of 41-1/2 cents per share was declared
payable March 29, 1996, to holders of record of the Company's common stock on
February 28, 1996.
In connection with the Merger of the Company and BGE into Constellation
Energy Corporation, BGE's dividend policy will be adopted and the annual
dividend at the expected 1997 closing date is expected to be $1.67 per share.
The Company currently pays $1.66 per share annually and BGE's annual dividend
rate is currently $1.56 per share. However, no assurance can be given that
the $1.67 dividend rate will be in effect and Constellation Energy Corporation
30
reserves the right to increase or decrease the dividend on Common Stock as may
be required by law or contract or as may be determined by its Board of
Directors, in its discretion, to be advisable.
Item 6 SELECTED FINANCIAL DATA
- ------ -----------------------
The information required by Item 6 is incorporated herein by reference
to "Selected Consolidated Financial Data" in the Financial Information of the
Company's 1995 Annual Report to shareholders.
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------ ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The information required by Item 7 is incorporated herein by reference
to the "Management's Discussion and Analysis of Consolidated Results of
Operations and Financial Condition" in the Financial Information section of
the Company's 1995 Annual Report to shareholders.
See "Nonutility Subsidiary" under Item 1 - Business for additional
information concerning the Company's nonutility subsidiary.
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
The consolidated financial statements, together with the report thereon
of Price Waterhouse LLP dated January 19, 1996, and supplementary data from
the Company's 1995 Annual Report to shareholders are incorporated herein by
reference. With the exception of the aforementioned information and the
information incorporated in Items 5, 6, 7 and 8, the 1995 Annual Report to
shareholders is not deemed filed as part of this Form 10-K Annual Report.
Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------ ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
31
Part III
- --------
Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
The information required by Item 10 consisting of information required
by Item 401 of Regulation S-K with regard to Directors of the registrant and
the information required by Item 405 of Regulation S-K is incorporated herein
by reference to the Company's Notice of Annual Meeting of Shareholders and
Proxy Statement dated March 22, 1996.
Information with regard to the executive officers of the registrant as
of March 5, 1996, is as follows:
Served in
such position
Name Position Age since
- -------------------- -------------------------------- --- -------------
Edward F. Mitchell Chairman of the Board and Chief
Executive Officer 64 1992 (1)
John M. Derrick, Jr. President and Chief Operating
Officer and Director 55 1992 (2)
H. Lowell Davis Vice Chairman and Chief Financial
Officer and Director 63 1983
William T. Torgerson Senior Vice President, General
Counsel and Secretary 51 1994 (3)
Dennis R. Wraase Senior Vice President -
Finance and Accounting 51 1992 (4)
Iraline G. Barnes Vice President - Corporate 48 1990
Relations
Earl K. Chism Vice President and Comptroller 60 1994 (5)
Kirk J. Emge Vice President - Regulatory
Law 46 1994 (6)
Susann D. Felton Vice President - Materials 47 1992 (7)
William R. Gee, Jr. Vice President - Energy Planning
and Economy 55 1991 (8)
Robert C. Grantley Vice President - Customers
and Community Relations 47 1989
Anthony J. Kamerick Vice President and Treasurer 48 1994 (9)
32
Served in
such position
Name Position Age since
- -------------------- -------------------------------- --- -------------
Anthony S. Macerollo Vice President - Corporate
Administration and Services 54 1989
James S. Potts Vice President - Environment 50 1993 (10)
William J. Sim Vice President - Power Supply
and Delivery 51 1991 (11)
Andrew W. Williams Vice President - Energy and
Market Policy and Development 46 1989
None of the above persons has a "family relationship" with any other officer
listed or with any director or nominee for director.
The term of office for each of the above persons is from April 26, 1995
to April 24, 1996.
(1) Mr. Mitchell was elected to the position of Chairman of the Board on
December 21, 1992. He was elected Chief Executive Officer effective
September 1, 1989.
(2) Mr. Derrick was elected to the position of President on December 21,
1992. He was elected Executive Vice President and Chief Operating
Officer on July 27, 1989.
(3) Mr. Torgerson was elected Senior Vice President and General Counsel on
April 27, 1994. He was elected Secretary effective August 22, 1994.
Prior to 1994 he held the position of Vice President and General
Counsel.
(4) Mr. Wraase was elected to his present position on April 22, 1992. He
was elected Senior Vice President and Comptroller on July 27, 1989.
(5) Mr. Chism was elected to his present position on April 27, 1994.
Prior to that time he held the position of Vice President and Treasurer
since July 1989.
(6) Mr. Emge was elected to his present position on April 27, 1994. Prior
to that time he held the position of Deputy General Counsel.
(7) Ms. Felton was elected to her present position on April 22, 1992. Prior
to that time she held the position of Manager, Materials.
(8) Mr. Gee was elected to his present position on April 24, 1991. Prior to
that time he held the position of Vice President - Generating
Engineering and Construction, since 1989.
33
(9) Mr. Kamerick was elected to his present position on April 27, 1994.
Prior to that time he held the position of Comptroller from 1992 to
1994. Prior to 1992 he held the position of Assistant Comptroller.
(10) Mr. Potts was elected to his present position on April 28, 1993. Prior
to that time he held the position of Manager, Generating Strategic
Support since 1991. Prior to 1991 he held the position of Manager,
Production Performance.
(11) Mr. Sim was elected to his present position on April 24, 1991. Prior to
that time he was President of the American Energy division of the
Company's nonutility subsidiary, Potomac Capital Investment Corporation,
since 1988.
Item 11 EXECUTIVE COMPENSATION
- ------- ----------------------
The information required by Item 11 is incorporated herein by reference
to the Company's Notice of Annual Meeting of Shareholders and Proxy Statement
dated March 22, 1996.
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- --------------------------------------------------------------
The information required by Item 12 is incorporated herein by reference
to the Company's Notice of Annual Meeting of Shareholders and Proxy Statement
dated March 22, 1996. There is no shareholder that is known to the Company to
be the beneficial owner of more than five percent of any class of the
Company's voting securities.
Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
None.
34
Part IV
- -------
Item 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
- ------- --------------------------------------------------------------
(a) Documents List
--------------
1. Financial Statements
The following documents are filed as part of this report as incorporated
herein by reference from the indicated pages of the Company's 1995 Annual
Report.
Reference (Page)
----------------
Form 10-K
Annual Report Annual Report
to Shareholders Exhibit 13
--------------- -------------
Consolidated Statements of
Earnings - for the years
ended December 31, 1995,
1994 and 1993 19 31
Consolidated Balance Sheets -
December 31, 1995 and 1994 20-21 32-33
Consolidated Statements of
Cash Flows - for the years
ended December 31, 1995,
1994 and 1993 22 34
Notes to Consolidated Financial
Statements 23-35 35-74
Report of Independent Accountants 36 30
2. Financial Statement Schedule
Unaudited supplementary data entitled "Quarterly Financial Summary
(Unaudited)" is incorporated herein by reference in Item 8 (included in "Notes
to Consolidated Financial Statements" as Note 16).
Schedule VIII (Valuation and Qualifying Accounts) and the Report of
Independent Accountants on Consolidated Financial Statement Schedule is
submitted pursuant to Item 14(d).
35
All other schedules are omitted because they are not applicable, or the
required information is presented in the financial statements.
3. Exhibits required by Securities and Exchange Commission Regulation
S-K (summarized below).
Exhibit
No. Description of Exhibit Reference*
- ------- ---------------------- ----------
2.1 Agreement and Plan of Merger
dated as of September 22,
1995................................ Exh. 2-1 to Form 8-K,
9/26/95.
2.2 PEPCO Stock Option Agreement
dated as of September 22,
1995................................ Exh. 2-2 to Form 8-K,
9/26/95.
2.3 BGE Stock Option Agreement
dated as of September 22,
1995................................ Exh. 2-3 to Form 8-K,
9/26/95.
3.1 Charter of the Company.............. Filed herewith.
3.2 By-Laws of the Company.............. Filed herewith.
4 Mortgage and Deed of Trust dated
July 1, 1936, of the Company to The
Riggs National Bank of Washington,
D.C., as Trustee, securing First
Mortgage Bonds of the Company, and
Supplemental Indenture dated
July 1, 1936........................ Exh. B-4 to First Amendment,
6/19/36, to Registration
Statement No. 2-2232.
Supplemental Indentures, to the
aforesaid Mortgage and Deed of
Trust, dated -
December 1, 1939 and December
10, 1939.......................... Exhs. A & B to Form 8-K,
1/3/40.
August 1, 1940...................... Exh. A to Form 8-K, 9/25/40.
July 15, 1942 and August 10,
1942................................ Exh. B-1 to Amendment No. 2,
8/24/42, and B-3 to Post-
Effective Amendment,
8/31/42, to Registration
Statement No. 2-5032.
36
Exhibit
No. Description of Exhibit Reference*
- ------- ---------------------- ----------
4 August 1, 1942...................... Exh. B-4 to Form 8-A,
(cont.) 10/8/42.
October 15, 1942.................... Exh. A to Form 8-K, 12/7/42.
October 15, 1947.................... Exh. A to Form 8-K, 12/8/47.
January 1, 1948..................... Exh.7-B to Post-Effective
Amendment No. 2, 1/28/48,
to Registration Statement
No. 2-7349.
December 31, 1948................... Exh. A-2 to Form 10-K,
4/13/49.
May 1, 1949......................... Exh. 7-B to Post-Effective
Amendment No. 1,
5/10/49, to Registration
Statement No. 2-7948.
December 31, 1949................... Exh. (a)-1 to Form 8-K,
2/8/50.
May 1, 1950......................... Exh. 7-B to Amendment No. 2,
5/8/50, to Registration
Statement No. 2-8430.
February 15, 1951................... Exh. (a) to Form 8-K, 3/9/51.
March 1, 1952....................... Exh. 4-C to Post-Effective
Amendment No. 1, 3/12/52,
to Registration Statement
No. 2-9435.
February 16, 1953................... Exh. (a)-1 to Form 8-K,
3/5/53.
May 15, 1953........................ Exh. 4-C to Post-Effective
Amendment No. 1, 5/26/53,
to Registration Statement
No. 2-10246.
March 15, 1954 and March 15,
1955................................ Exh. 4-B to Registration
Statement No. 2-11627,
5/2/55.
May 16, 1955........................ Exh. A to Form 8-K, 7/6/55.
March 15, 1956...................... Exh. C to Form 10-K, 4/4/56.
June 1, 1956........................ Exh. A to Form 8-K, 7/2/56.
April 1, 1957....................... Exh. 4-B to Registration
Statement No. 2-13884,
2/5/58.
May 1, 1958......................... Exh. 2-B to Registration
Statement No. 2-14518,
11/10/58.
37
Exhibit
No. Description of Exhibit Reference*
- ------- ---------------------- ----------
4 December 1, 1958.................... Exh. A to Form 8-K, 1/2/59.
(cont.) May 1, 1959......................... Exh. 4-B to Amendment No. 1,
5/13/59, to Registration
Statement No. 2-15027.
November 16, 1959................... Exh. A to Form 8-K, 1/4/60.
May 2, 1960......................... Exh. 2-B to Registration
Statement No. 2-17286,
11/9/60.
December 1, 1960 and April 3,
1961................................ Exh. A-1 to Form 10-K,
4/24/61.
May 1, 1962......................... Exh. 2-B to Registration
Statement No. 2-21037,
1/25/63.
February 15, 1963................... Exh. A to Form 8-K, 3/4/63.
May 1, 1963......................... Exh. 4-B to Registration
Statement No. 2-21961,
12/19/63.
April 23, 1964...................... Exh. 2-B to Registration
Statement No. 2-22344,
4/24/64.
May 15, 1964........................ Exh. A to Form 8-K, 6/2/64.
May 3, 1965......................... Exh. 2-B to Registration
Statement No. 2-24655,
3/16/66.
April 1, 1966....................... Exh. A to Form 10-K, 4/21/66.
June 1, 1966........................ Exh. 1 to Form 10-K, 4/11/67.
April 28, 1967...................... Exh. 2-B to Post-Effective
Amendment No. 1 to
Registration Statement No.
2-26356, 5/3/67.
May 1, 1967......................... Exh. A to Form 8-K, 6/1/67.
July 3, 1967........................ Exh. 2-B to Registration
Statement No. 2-28080,
1/25/68.
February 15, 1968................... Exh. II-I to Form 8-K, 3/7/68.
May 1, 1968......................... Exh. 2-B to Registration
Statement No. 2-31896,
2/28/69.
March 15, 1969...................... Exh. A-2 to Form 8-K, 4/8/69.
June 16, 1969....................... Exh. 2-B to Registration
Statement No. 2-36094,
1/27/70.
February 15, 1970................... Exh. A-2 to Form 8-K, 3/9/70.
May 15, 1970........................ Exh. 2-B to Registration
Statement No. 2-38038,
7/27/70.
38
Exhibit
No. Description of Exhibit Reference*
- ------- ---------------------- ----------
4 August 15, 1970..................... Exh. 2-D to Registration
(cont.) Statement No. 2-38038,
7/27/70.
September 1, 1971................... Exh. 2-C to Registration
Statement No. 2-45591, 9/1/72.
September 15, 1972.................. Exh. 2-E to Registration
Statement No. 2-45591, 9/1/72.
April 1, 1973....................... Exh. A to Form 8-K, 5/9/73.
January 2, 1974..................... Exh. 2-D to Registration
Statement No. 2-49803,
12/5/73.
August 15, 1974..................... Exhs. 2-G and 2-H to
Amendment No. 1 to
Registration Statement
No. 2-51698, 8/14/74.
June 15, 1977....................... Exh. 4-A to Form 10-K,
3/19/81.
July 1, 1979........................ Exh. 4-B to Form 10-K,
3/19/81.
June 16, 1981....................... Exh. 4-A to Form 10-K,
3/19/82.
June 17, 1981....................... Exh. 2 to Amendment No. 1,
6/18/81, to Form 8-A.
December 1, 1981.................... Exh. 4-C to Form 10-K,
3/19/82.
August 1, 1982...................... Exh. 4-C to Amendment No. 1
to Registration Statement
No. 2-78731, 8/17/82.
October 1, 1982..................... Exh. 4 to Form 8-K, 11/8/82.
April 15, 1983...................... Exh. 4 to Form 10-K, 3/23/84.
November 1, 1985.................... Exh. 2-B to Form 8-A, 11/1/85.
March 1, 1986....................... Exh. 4 to Form 10-K, 3/28/86.
November 1, 1986.................... Exh. 2-B to Form 8-A, 11/5/86.
March 1, 1987....................... Exh. 2-B to Form 8-A, 3/2/87.
September 16, 1987.................. Exh. 4-B to Registration
Statement No. 33-18229,
10/30/87.
May 1, 1989......................... Exh. 4-C to Registration
Statement No. 33-29382,
6/16/89.
August 1, 1989...................... Exh. 4 to Form 10-K, 3/23/90.
April 5, 1990....................... Exh. 4 to Form 10-K, 3/29/91.
May 21, 1991........................ Exh. 4 to Form 10-K, 3/27/92.
39
Exhibit
No. Description of Exhibit Reference*
- ------- ---------------------- ----------
4 May 7, 1992......................... Exh. 4 to Form 10-K, 3/26/93.
(cont.) September 1, 1992................... Exh. 4 to Form 10-K, 3/26/93.
November 1, 1992.................... Exh. 4 to Form 10-K, 3/26/93.
March 1, 1993....................... Exh. 4 to Form 10-K, 3/26/93.
March 2, 1993....................... Exh. 4 to Form 10-K, 3/26/93.
July 1, 1993........................ Exh. 4.4 to Registration
Statement No. 33-49973,
8/11/93.
August 20, 1993..................... Exh. 4.4 to Registration
Statement No. 33-50377,
9/23/93.
September 29, 1993.................. Exh. 4 to Form 10-K, 3/25/94.
September 30, 1993.................. Exh. 4 to Form 10-K, 3/25/94.
October 1, 1993..................... Exh. 4 to Form 10-K, 3/25/94.
February 10, 1994................... Exh. 4 to Form 10-K, 3/25/94.
February 11, 1994................... Exh. 4 to Form 10-K, 3/25/94.
March 10, 1995...................... Exh. 4.3 to Registration
Statement No. 61379, 7/28/95.
September 6, 1995................... Filed herewith.
September 7, 1995................... Filed herewith.
4-A Indenture, dated as of January 15,
1988, between the Company and
Centerre Trust Company of St. Louis
(now known as Boatmen's Trust
Company), Trustee for the Company's
$75,000,000 issue of 7% Convertible
Debentures due 2018 ................ Exh. 4-A to Form 10-K,
3/25/88.
4-B Indenture, dated as of July 28,
1989, between the Company and
The Bank of New York, Trustee,
with respect to the Company's
Medium-Term Note Program............ Exh. 4 to Form 8-K, 6/21/90.
4C Indenture, dated as of August 15,
1992, between the Company and the
Bank of New York, Trustee, for the
Company's $115,000,000 issue of 5%
Convertible Debentures due 2002..... Exh. 4-C to Form 10-K,
3/26/93.
10 Agreement, effective July 23, 1993,
between the Company and the
International Brotherhood of
Electrical Workers (Local Union
#1900).............................. Exh. 10 to Form 10-Q, 7/30/93.
40
Exhibit
No. Description of Exhibit Reference*
- ------- ---------------------- ----------
**10.1 Amendment to Employment Agreement... Filed herewith.
**10.2 Amendment to Employment Agreement... Filed herewith.
**10.3 Amendment to Employment Agreement... Filed herewith.
**10.4 Severance Agreement................. Filed herewith.
**10.5 Severance Agreement................. Filed herewith.
**10.6 Severance Agreement................. Filed herewith.
**10.7 Severance Agreement................. Filed herewith.
**10.8 Severance Agreement................. Filed herewith.
**10.9 Severance Agreement................. Filed herewith.
**10.10 Severance Agreement................. Filed herewith.
**10.11 Severance Agreement................. Filed herewith.
**10.12 Severance Agreement................. Filed herewith.
10.13 Amendment to Agreement, dated
December 8, 1995 between the
Company and the International
Brotherhood of Electrical Workers
(Local Union #1900) and Contract
Ratification Notification dated
December 22, 1995................... Filed herewith.
11 Computation of Earnings Per
Common Share...................... Filed herewith.
12 Computation of Ratios............... Filed herewith.
13 Financial Information Section of
Annual Report .................... Filed herewith.
21 Subsidiaries of the Registrant...... Filed herewith.
41
Exhibit
No. Description of Exhibit Reference*
- ------- ---------------------- ----------
23 Consent of Independent Accountants.. Filed herewith.
27 Financial Data Schedule............. Exh. 27 to Form 8-K,
2/6/96.
27.1 Restated Financial Data Schedule.... Exh. 27.1 to Form 8-K,
2/6/96.
*The exhibits referred to in this column by specific designations and
date have heretofore been filed with the Securities and Exchange
Commission under such designations and are hereby incorporated herein
by reference. The Forms 8-A, 8-K and 10-K referred to were filed by
the Company under the Commission's File No. 1-1072 and the
Registration Statements referred to are registration statements of
the Company.
**These exhibits are submitted pursuant to Item 14(c).
(b) Reports on Form 8-K
-------------------
None.
42
<TABLE>
POTOMAC ELECTRIC POWER COMPANY
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
------ ------ ------ ------ ------
Additions
Balance ------------------------- Balance
at Charged to Charged to at
Beginning Costs and Other End
Description of Period Expenses Accounts<F1> Deductions<F2> of Period
- ------------------------------------------- --------- ---------- ----------- ------------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1995
Allowance for uncollectible accounts -
customer and other accounts receivable
Utility operations $ 2,732 $ 7,171 $ 1,070 $ (9,004) $ 1,969
Nonutility subsidiary $ 5,000 $ 1,000 $ - $ - $ 6,000
Year Ended December 31, 1994
Allowance for uncollectible accounts -
customer and other accounts receivable
Utility operations $ 3,048 $ 6,967 $ 893 $ (8,176) $ 2,732
Nonutility subsidiary $ - $ 5,000 $ - $ - $ 5,000
Year Ended December 31, 1993
Allowance for uncollectible accounts -
customer and other accounts receivable
Utility operations $ 2,709 $ 6,451 $ 658 $ (6,770) $ 3,048
Nonutility subsidiary $ - $ - $ - $ - $ -
<FN>
<F1>Collection of accounts previously written off.
<F2>Uncollectible accounts written off.
</FN>
43
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Washington, District of Columbia, on the 29th day of March, 1996.
POTOMAC ELECTRIC POWER COMPANY
(Registrant)
By /s/ E. F. Mitchell
--------------------------
(Edward F. Mitchell,
Chairman of the Board and
Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
(i) Principal Executive Officers
/s/ E. F. Mitchell
--------------------------- Chairman of the Board and
(Edward F. Mitchell) Chief Executive Officer
/s/ John M. Derrick Jr.
--------------------------- President and Director
(John M. Derrick Jr.)
(ii) Principal Financial Officer
/s/ H. L. Davis
--------------------------- Vice Chairman and Chief
(H. Lowell Davis) Financial Officer and Director
(iii) Principal Accounting Officer
/s/ D. R. Wraase
--------------------------- Senior Vice President
(Dennis R. Wraase) Finance and Accounting
April 1, 1996
44
Signature Title Date
--------- ----- ----
(iv) Directors:
/s/ Roger R. Blunt
------------------------- Director
(Roger R. Blunt Sr.)
/s/ A. J. Clark
------------------------- Director
(A. James Clark)
/s/ R. E. Marriott
------------------------- Director
(Richard E. Marriott)
------------------------ Director
(David O. Maxwell)
/s/ Floretta D. McKenzie
------------------------- Director
(Floretta D. McKenzie)
/s/ Ann D. McLaughlin
------------------------- Director
(Ann D. McLaughlin)
/s/ Peter F. O'Malley
------------------------- Director
(Peter F. O'Malley)
/s/ Louis A. Simpson
------------------------- Director
(Louis A. Simpson)
/s/ A. T. Young
------------------------- Director
(A. Thomas Young)
April 1, 1996
45
<TABLE>
Exhibit 11 Computations of Earnings Per Common Share <F1>
- ---------- ------------------------------------------
The following is the basis for the computation of primary and fully
diluted earnings per common share for each of the years 1995, 1994 and 1993:
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Average shares outstanding for
computation of primary earnings
per common share 118,412,478 118,005,847 115,639,668
============ ============ ============
Average shares outstanding for
fully diluted computation:
Average shares outstanding 118,412,478 118,005,847 115,639,668
Additional shares resulting from:
Conversion of Serial Preferred
Stock, $2.44 Convertible Series
of 1966 (the "Convertible
Preferred Stock") 38,255 48,110 51,967
Conversion of 7% Convertible
Debentures 2,469,639 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 124,312,872 123,977,701 121,630,993
============ ============ ============
Earnings applicable to common stock $77,540,000 $210,725,000 $225,324,000
Add: Dividends paid or accrued on
Convertible Preferred Stock 16,000 20,000 22,000
Interest paid or accrued on
Convertible Debentures,
net of related taxes 6,475,000 6,537,000 6,548,000
------------ ------------ ------------
Earnings applicable to common stock,
assuming conversion of convertible
securities $84,031,000 $217,282,000 $231,894,000
============ ============ ============
Primary earnings per common share $0.65 $1.79 $1.95
Fully diluted earnings per common share $0.68 $1.75 $1.91
<FN>
<F1>This calculation is submitted in accordance with Regulation S-K item 601 (b)
(11) although it is contrary to paragraph 40 of APB No. 15 because it produces
an antidilutive result for 1995. In addition, the valuation is not required by
footnote 2 to paragraph 14 of APB No. 15 for 1994 and 1993 because it results
in dilution of less than 3%.
</FN>
46
</TABLE>
<TABLE>
Exhibit 12 Computation of Ratios
- ---------- ---------------------
The computations of the coverage of fixed charges, excluding the cumulative
effect of the 1992 accounting change, before income taxes, and the coverage of
combined fixed charges and preferred dividends for each of the years 1995
through 1991 on the basis of parent company operations only, are as follows.
<CAPTION>
For The Year Ended December 31,
---------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Net income before cumulative effect
of accounting change $218,788 $208,074 $216,478 $172,599 $186,813
Taxes based on income 129,439 116,648 107,223 76,965 80,988
--------- --------- --------- --------- ---------
Income before taxes and cumulative effect
of accounting change 348,227 324,722 323,701 249,564 267,801
--------- --------- --------- --------- ---------
Fixed charges:
Interest charges 146,558 139,210 141,393 138,097 138,512
Interest factor in rentals 23,431 6,300 5,859 6,140 5,690
--------- --------- --------- --------- ---------
Total fixed charges 169,989 145,510 147,252 144,237 144,202
--------- --------- --------- --------- ---------
Income before income taxes, cumulative
effect of accounting change and
fixed charges $518,216 $470,232 $470,953 $393,801 $412,003
========= ========= ========= ========= =========
Coverage of fixed charges 3.05 3.23 3.20 2.73 2.86
==== ==== ==== ==== ====
Preferred dividend requirements $16,851 $16,437 $16,255 $14,392 $12,298
--------- --------- --------- --------- ---------
Ratio of pre-tax income to net income 1.59 1.56 1.50 1.45 1.43
--------- --------- --------- --------- ---------
Preferred dividend factor $26,793 $25,642 $24,383 $20,868 $17,586
--------- --------- --------- --------- ---------
Total fixed charges and preferred dividends $196,782 $171,152 $171,635 $165,105 $161,788
========= ========= ========= ========= =========
Coverage of combined fixed charges
and preferred dividends 2.63 2.75 2.74 2.39 2.55
==== ==== ==== ==== ====
47
</TABLE>
<TABLE>
Exhibit 12 Computation of Ratios
- ---------- ---------------------
The computations of the coverage of fixed charges, excluding the cumulative
effect of the 1992 accounting change, before income taxes, and the coverage of
combined fixed charges and preferred dividends for each of the years 1995
through 1991 on a fully consolidated basis are as follows.
<CAPTION>
For The Year Ended December 31,
---------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Net income before cumulative effect
of accounting change $94,391 $227,162 $241,579 $200,760 $210,164
Taxes based on income 43,731 93,953 62,145 79,481 80,737
--------- --------- --------- --------- ---------
Income before taxes and cumulative effect
of accounting change 138,122 321,115 303,724 280,241 290,901
--------- --------- --------- --------- ---------
Fixed charges:
Interest charges 238,724 224,514 221,312 226,453 225,323
Interest factor in rentals 26,685 9,938 9,257 6,599 6,080
--------- --------- --------- --------- ---------
Total fixed charges 265,409 234,452 230,569 233,052 231,403
--------- --------- --------- --------- ---------
Nonutility subsidiary capitalized interest (529) (521) (2,059) (2,200) (6,542)
--------- --------- --------- --------- ---------
Income before income taxes, cumulative
effect of accounting change and
fixed charges $403,002 $555,046 $532,234 $511,093 $515,762
======== ======== ======== ======== ========
Coverage of fixed charges 1.52 2.37 2.31 2.19 2.23
==== ==== ==== ==== ====
Preferred dividend requirements $16,851 $16,437 $16,255 $14,392 $12,298
--------- --------- --------- --------- ---------
Ratio of pre-tax income to net income 1.46 1.41 1.26 1.40 1.38
--------- --------- --------- --------- ---------
Preferred dividend factor $24,602 $23,176 $20,481 $20,149 $16,971
--------- --------- --------- --------- ---------
Total fixed charges and preferred dividends $290,011 $257,628 $251,050 $253,201 $248,374
======== ======== ======== ======== ========
Coverage of combined fixed charges
and preferred dividends 1.39 2.15 2.12 2.02 2.08
==== ==== ==== ==== ====
48
</TABLE>
Exhibit 21 Subsidiaries of the Registrant
- ---------- ------------------------------
The Company has two wholly owned nonutility subsidiary companies,
Potomac Capital Investment Corporation and PEPCO Enterprises, Inc., (PEI) both
of which were incorporated in Delaware in 1983. Subsidiaries of PEI have
entered into the joint venture, new energy services and construction
activities discussed in Part II, Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
49
Exhibit 23 Consent of Independent Accountants
- ---------- ----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (Numbers 33-36798, 33-53685 and 33-54197) and to the
incorporation by reference in the Prospectuses constituting part of the
Registration Statements on Forms S-3 (Numbers 33-58810 and 33-61379) of
Potomac Electric Power Company and to the incorporation by reference in the
Joint Proxy Statement/Prospectus constituting part of the Registration
Statement on Form S-4 (Number 33-64799) of Constellation Energy Corporation of
our report dated January 19, 1996 appearing in the Annual Report to
shareholders which is also incorporated by reference in this Annual Report on
Form 10-K. We also consent to the incorporation by reference of our report on
the Consolidated Financial Statement Schedule, which appears under Item 14(a)
of this Form 10-K.
/s/ Price Waterhouse LLP
Washington, D.C.
April 1, 1996
50
Report of Independent Accountants on Consolidated
- -------------------------------------------------
Financial Statement Schedule
- ----------------------------
January 19, 1996
To the Board of Directors of
Potomac Electric Power Company
Our audits of the consolidated financial statements referred to in our report
dated January 19, 1996 appearing in the 1995 Annual Report to shareholders of
Potomac Electric Power Company (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the consolidated financial statement schedule
listed in Item 14(a) of this Form 10-K. In our opinion, this consolidated
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ Price Waterhouse LLP
Washington, D.C.
51
RESTATED ARTICLES OF INCORPORATION
AND ARTICLES OF RESTATEMENT
OF
POTOMAC ELECTRIC POWER COMPANY
These Restated Articles of Incorporation and Articles of
Restatement were duly adopted on December 21, 1992 by the Board of
Directors of Potomac Electric Power Company (hereinafter sometimes
called the "Company"), a District of Columbia corporation and a
domestic corporation of the Commonwealth of Virginia, in accordance
with the provisions of Section 58a of the District of Columbia
Business Corporation Act, D.C. Code Section 29-358.1, and Chapter
522 of the Virginia State Corporation Act, Va. Code Section
13.1-711 (1989 Replacement Volume). The Company's Articles of
Incorporation were originally filed in the District of Columbia on
April 28, 1896, and Articles of Reincorporation of an Existing
Domestic Corporation were filed in the District of Columbia on
January 20, 1957.
The Restated Articles of Incorporation and Articles of
Restatement only restate and integrate and do not further amend the
provisions of the Company's articles of incorporation as previously
amended or supplemented, and there is no discrepancy between those
provisions and the provisions of these restated articles.
The Restated Articles of Incorporation and Articles of
Restatement of the Company are as follows:
I. The name of the Company is
POTOMAC ELECTRIC POWER COMPANY.
II. The duration of the Company shall be perpetual.
III. The purposes for which the Company is organized are:
(A) To manufacture, produce, generate, buy, sell,
lease, deal in, transmit and distribute (i) power, light, energy
and heat in the form of electricity or otherwise, (ii) by-products
thereof and (iii) appliances, facilities and equipment for use in
connection therewith;
(B) To acquire (by construction, purchase,
condemnation, lease or otherwise), use, maintain, operate, deal in
and dispose of, power plants, dams, substations, office buildings,
service buildings, transmission lines, distribution lines, and all
other buildings, machinery, property (real, personal or mixed) and
facilities (including water power and other sites), and all
fixtures, equipments and appliances, necessary, appropriate,
incidental or convenient for its corporate purposes; and
(C) To conduct business as a public service company,
which business is briefly described as the purchase, manufacture,
generation, transmission, distribution and sale, both at wholesale
and at retail, of electricity or other power or energy for light,
heat and power purposes in the District of Columbia, the
Commonwealth of Virginia, the State of Maryland and elsewhere.
IV. The aggregate number of shares which the Company shall have
authority to issue is 215,042,227 divided into three classes: the
first consisting of 6,242,227 shares of the par value of $50 each;
the second consisting of 8,800,000 shares of the par value of $25
each; and the third consisting of 200,000,000 shares of the par
value of $1 each.
V. Said 6,242,227 shares of the par value of $50 each are
designated as Serial Preferred Stock; said 8,800,000 shares of the
par value of $25 each are designated as Preference Stock; and said
200,000,000 shares of the par value of $1 each are designated as
Common Stock. Such of said authorized shares of Serial Preferred
Stock, Preference Stock and Common Stock as are unissued at any
time may be issued, in whole or in part, at any time or from time
to time by action of the Board of Directors of the Company, subject
to the laws in force in the District of Columbia and the
Commonwealth of Virginia and the terms and conditions set forth in
the Articles of Incorporation, as amended, of the Company.
The preferences, qualifications, limitations, and
restrictions, the special or relative rights, and the voting power
in respect of the shares of each said class are as follows:
(A) SERIAL PREFERRED STOCK
(a) Subject to the provisions hereafter in this subdivision
(A) set forth, the Serial Preferred Stock may be divided into and
issued, from time to time, in one or more series as the Board of
Directors may determine, and the Board of Directors is hereby
expressly authorized to adopt from time to time resolutions, in
respect of any unissued shares of Serial Preferred Stock, to fix
and determine:
(1) The division of such shares into series and the
designation and authorized number of the shares of the particular
series;
(2) The rate of dividend for the particular series;
(3) The price or prices at and the terms and
conditions on which shares of the particular series may be
redeemed;
(4) The amount payable upon shares of the particular
series in the event of voluntary liquidation;
(5) Sinking fund provisions (if any) for the
redemption or purchase of shares of the particular series; and
(6) The terms and conditions (if any) on which the
shares of the particular series may be converted into other classes
of stock of the Company;
All shares of Serial Preferred Stock shall be of equal rank with
each other, regardless of series, and all shares thereof shall be
identical except as to the above listed relative rights and
preferences, in respect of any or all of which there may be
variations between different series as fixed and determined by the
Board of Directors in said resolutions. All shares of the Serial
Preferred Stock of any one series shall be identical with each
other in all respects.
(b) The following terms, as used in this subdivision (A),
shall have the following meanings:
(1) The term senior stock shall mean any class of
stock ranking in its claim to assets or dividends prior to the
1,600,000 shares of Serial Preferred Stock created hereby;
(2) The term parity stock shall mean any class of
stock ranking in its claim to assets or dividends on a parity with
the Serial Preferred Stock, but shall not include any of the
1,600,000 shares of Serial Preferred Stock created hereby, nor
shall it include any increase in the authorized amount of the
Serial Preferred Stock; and
(3) The term junior stock shall mean the Common Stock
and any other class of stock ranking in its claim to assets or
dividends junior to the Serial Preferred Stock.
(c) The holders of the Serial Preferred Stock shall be
entitled to receive, but only when and as declared by the Board of
Directors, cumulative cash dividends in the case of each series at
the annual rate for such series theretofore fixed by the Board of
Directors as hereinbefore provided, payable quarter-yearly on the
first days of March, June, September and December in each year to
stockholders of record on the respective dates fixed for the
purpose by the Board of Directors as dividends are declared.
No dividend shall be declared on any shares of the
Serial Preferred Stock unless there shall likewise be declared on
all shares of the Serial Preferred Stock at the time outstanding
like dividends, ratably in proportion to the respective annual
dividend rates fixed therefor.
The dividends on shares of the Serial Preferred Stock
shall be cumulative from the quarter-yearly dividend payment date
next preceding the date of issue of such shares, unless such shares
shall have been issued after the record date and before the payment
date for a particular dividend, in which case the dividends shall
be cumulative from the quarter-yearly dividend payment date next
ensuing after the date of issue of such shares. Unless dividends
on all outstanding shares of the Serial Preferred Stock, at the
annual dividend rate or rates fixed therefor, shall have been paid
for all past quarter-yearly dividend periods to which they are
entitled, and the full dividend thereon at said rate or rates for
the quarter-yearly dividend period current at the time shall have
been paid or declared and set apart for payment, but without
interest on accumulated dividends, and unless all sinking fund
payments, if any, theretofore required to have been made shall have
been made or provided for, no dividends shall be declared and no
other distribution shall be made on any junior stock, and no junior
stock shall be purchased, retired or otherwise acquired for value
by the Company. No dividend shall be declared on any junior stock
payable more than 120 days after the date of declaration.
The holders of the Serial Preferred Stock shall not be
entitled to receive any dividends thereon other than the dividends
referred to in this subdivision (c).
(d) The Company, at the option of the Board of Directors or
by the operation of the sinking fund, if any, provided for the
Serial Preferred Stock of any series, may, from time to time,
subject to such terms and conditions, if any, as may be fixed by
the Board of Directors with respect to any series as hereinbefore
provided, redeem the whole or any part of such series at any time
outstanding, by paying in cash the applicable redemption price
therefor theretofore fixed by the Board of Directors as
hereinbefore provided.
Notice of every such redemption shall be given by
publication at least once in each of two calendar weeks in each of
two daily newspapers printed in the English language, one published
and of general circulation in the City of Washington, District of
Columbia, and the other in the Borough of Manhattan, The City of
New York, the first publication to be at least thirty days and not
more than sixty days prior to the date fixed for such redemption.
At least thirty days' and not more than sixty days' previous notice
of every such redemption shall also be mailed to the holders of
record of the shares so to be redeemed, at their respective
addresses as the same shall appear on the books of the Company; but
failure to mail such notice or any defect therein or in the mailing
thereof shall not affect the validity of the proceedings for the
redemption of any shares so to be redeemed.
In case of the redemption of a part only of any series
of the Serial Preferred Stock at the time outstanding, the Company
or its duly authorized agent shall select by lot the shares so to
be redeemed. The Board of Directors shall have full power and
authority, subject to the limitations and provisions herein
contained, to prescribe the manner in which the drawings by lot
shall be conducted and the terms and conditions upon which the
Serial Preferred Stock shall be redeemed from time to time.
If such notice of redemption shall have been duly given
by publication, and if on or before the redemption date specified
therein the funds necessary for such redemption shall have been set
aside by the Company, separate and apart from its other funds, in
trust for the account of the holders of the shares so called for
redemption, so as to be and continue to be available therefor,
then, notwithstanding that any certificate for shares so called for
redemption shall not have been surrendered for cancellation, the
shares represented thereby shall no longer be deemed to be
outstanding on and after such redemption date, and all rights with
respect to such shares shall forthwith on such redemption date
cease and terminate, except only the right of the holders thereof
to receive the amount payable upon redemption thereof, without
interest.
Provided, however, in the alternative, that, after
giving notice by publication of any such redemption as hereinbefore
provided or after giving to the bank or trust company referred to
below irrevocable authorization to give or complete such notice by
publication, and prior to the redemption date specified in such
notice, the Company may deposit in trust, for the account of the
holders of the shares of Serial Preferred Stock so to be redeemed,
the funds necessary for such redemption with a bank or trust
company in good standing, organized and doing business under the
laws of the United States or of any state or territory or of the
District of Columbia and having its principal office in the City of
Washington, District of Columbia, or in the Borough of Manhattan,
The City of New York, having capital, surplus and undivided profits
aggregating at least Ten Million Dollars, designated in such notice
of redemption, and thereupon all shares of the Serial Preferred
Stock with respect to which such deposit shall have been made shall
no longer be deemed to be outstanding, and all rights with respect
to such shares of Serial Preferred Stock shall forthwith upon such
deposit in trust cease and terminate, except only the right of the
holders thereof to receive from such bank or trust company at any
time after the time of such deposit the funds so deposited, without
interest and the right to exercise, on or before such redemption
date privileges of conversion or exchange, if any, not theretofore
expiring.
Shares of Serial Preferred Stock purchased or redeemed
pursuant to any obligation of the Company to purchase or redeem
shares for a sinking fund, shares redeemed pursuant to the
provisions hereof or purchased and for which credit shall have been
taken against any sinking fund obligation, and shares surrendered
pursuant to any conversion right, shall not be reissued or
otherwise disposed of and shall be canceled. Any other shares of
Serial Preferred Stock redeemed or otherwise acquired by the
Company shall continue to be part of the authorized capital stock
of the Company and may thereafter, in the discretion of the Board
of Directors and to the extent permitted by law, be sold or
reissued from time to time, as part of the same or another series,
subject to the terms and conditions herein set forth.
If and so long as the Company shall be in default in
the payment of any quarter-yearly dividend on shares of any series
of the Serial Preferred Stock, or shall be in default in the
payment of funds into or the setting aside of funds for any sinking
fund created for any series of the Serial Preferred Stock, the
Company may not (other than by the use of unapplied funds, if any,
paid into or set aside for a sinking fund or funds prior to such
default) (i) redeem any shares of the Serial Preferred Stock unless
all shares thereof are redeemed, or (ii) purchase or otherwise
acquire for a consideration any shares of the Serial Preferred
Stock, except pursuant to offers of sale made by holders of the
Serial Preferred Stock in response to an invitation for tenders
given simultaneously by the Company by mail to the holders of
record of all shares of the Serial Preferred Stock then
outstanding.
(e) In the event of any voluntary liquidation, dissolution
or winding up of the Company, then, before any distribution or
payment shall be made to the holders of any junior stock, the
holder of each share of the Serial Preferred Stock shall be
entitled to be paid in full in cash the amount fixed with respect
to such share by the Board of Directors as hereinbefore provided,
together with an amount computed at the annual dividend rate
therefor from the date upon which dividends thereon became
cumulative to the date fixed for the payment thereof, less the
aggregate of the dividends theretofore paid thereon. If such
payments shall have been made in full to the holders of the Serial
Preferred Stock, the remaining assets and funds of the Company
shall be distributed among the holders of the Common Stock and any
other junior stock according to their respective rights,
preferences, restrictions, qualifications and shares.
In the event of any involuntary liquidation,
dissolution or winding up of the Company, then, before any
distribution or payment shall be made to the holders of any junior
stock, the holder of each share of the Serial Preferred Stock shall
be entitled to be paid in full the par value thereof in cash,
together with an amount computed at the annual dividend rate
therefor from the date upon which dividends thereon became
cumulative to the date fixed for the payment thereof, less the
aggregate of the dividends theretofore paid thereon. If such
payments shall have been made in full to the holders of the Serial
Preferred Stock, the remaining assets and funds of the Company
shall be distributed among the holders of the Common Stock and any
other junior stock according to their respective rights,
preferences, restrictions, qualifications and shares.
With respect to the payments to be made in the event of
voluntary or involuntary liquidation, dissolution or winding up of
the Company, all series of the Serial Preferred Stock shall rank
ratably according to their respective interests without preference
of any series thereof over any other series.
(f) Subject to the limitations hereinafter specified,
whenever the full dividends on the Serial Preferred Stock at the
time outstanding for all past quarter-yearly dividend periods shall
have been paid and the full dividend thereon for the quarter-yearly
dividend period then current shall have been paid or declared and
a sum sufficient for the payment thereof set apart, then such
dividends (payable in cash, stock or otherwise) as may be
determined by the Board of Directors may be declared on the Common
Stock and any other junior stock, and the Serial Preferred Stock
shall not be entitled to participate in any such dividends.
(g) So long as any shares of the Serial Preferred Stock are
outstanding, no amendment to the Articles of Incorporation of the
Company which would (i) create, change any junior stock into, or
increase the rights and preferences of, any senior or parity stock,
(ii) increase the authorized amount of the Serial Preferred Stock
in excess of the 1,600,000 shares created hereby or the authorized
amount of any senior or parity stock, or (iii) change the express
terms of the outstanding shares of Serial Preferred Stock in any
manner substantially prejudicial to the holders thereof, shall be
made without the affirmative consent (given in writing without a
meeting or by a vote at a meeting duly called for the purpose) of
the holders of more than two thirds of the aggregate number of
shares of the Serial Preferred Stock then outstanding; but any such
amendment may be made with such affirmative consent, together with
such additional vote or consent of stockholders as from time to
time may be required by law; provided, however, that if any such
amendment would change the express terms of the outstanding shares
of Serial Preferred Stock of any particular series in any manner
substantially prejudicial to the holders thereof without
correspondingly affecting the holders of the outstanding shares of
Serial Preferred Stock of all series, then, in lieu of such consent
of the holders of Serial Preferred Stock (or, if such consent of
the holders of the outstanding shares of Serial Preferred Stock is
required by law, in addition thereto), a like affirmative consent
of the holders of more than two thirds of the Serial Preferred
Stock of the affected series at the time outstanding shall be
necessary for making such amendment.
(h) So long as any shares of the Serial Preferred Stock are
outstanding, the Company shall not, without the affirmative consent
(given in writing without a meeting or by a vote at a meeting duly
called for the purpose) of the holders of at least a majority of
the aggregate number of shares of the Serial Preferred Stock then
outstanding:
(1) issue any shares of the Serial Preferred Stock,
in excess of 300,000 shares thereof at any one time outstanding, or
issue any shares of senior or parity stock (either directly or by
reclassification), unless for a period of twelve consecutive
calendar months within the fifteen calendar months next preceding
the date on which such shares are to be issued net earnings (after
depreciation and taxes but before deducting interest) have been at
least one and one-half times the annual interest charges and
dividend requirements on all indebtedness of the Company and on all
shares of Serial Preferred Stock and senior and parity stock which
shall then be outstanding; for the purpose of such computation, the
shares and any indebtedness proposed to be issued in connection
with such issue shall be included, but any indebtedness or shares
proposed to be retired in connection with such issue shall be
excluded, and in determining such net earnings, the Board of
Directors of the Company shall make such adjustments, by way of
increase or decrease in such net earnings, as shall in their
opinion be necessary to give effect, for the entire twelve months
for which such net earnings are determined, to any acquisition or
disposition of property the earnings of which can be separately
ascertained, and to any issue, sale, assumption or retirement of
securities, which shall have occurred after the commencement of
such twelve months' period and prior to or in connection with the
issue of the shares of the Serial Preferred Stock or senior or
parity stock; or
(2) issue any shares of the Serial Preferred Stock,
in excess of 300,000 shares thereof at any one time outstanding, or
issue any shares of senior or parity stock (either directly or by
reclassification), unless immediately after such proposed issue the
aggregate of (i) the capital of the Company applicable to its stock
ranking junior as to assets and dividends and (ii) the surplus of
the Company shall be not less than the aggregate amount payable
upon involuntary liquidation to the holders of the Serial Preferred
Stock and of senior and parity stock then to be outstanding,
excluding from such computation all stock to be retired through
such proposed issue; or
(3) issue any unsecured notes, debentures or other
securities representing unsecured indebtedness, or assume or
guarantee any such unsecured securities, other than for the
extension, renewal or refunding of outstanding debt securities
theretofore issued or assumed, or for the redemption or retirement
of shares of the Serial Preferred Stock or of any senior or parity
stock, if immediately after such issue or assumption the total
principal amount of such unsecured securities then outstanding
would exceed twenty-five per cent of the aggregate of (i) the total
principal amount of all bonds or other securities representing
secured indebtedness issued, assumed or guaranteed by the Company
and then to be outstanding and (ii) the capital and surplus of the
Company as then stated on its books less any known excess of book
value of the Company's physical property which is devoted to public
use over (I) the actual cost thereof to the Company and (II) as to
such property as was not acquired as the result of arm's length
negotiations, the actual cost thereof to the one first devoting the
same to public use; or
(4) merge or consolidate with or into any other
corporation or corporations or sell or lease all or substantially
all of its assets, unless such merger, consolidation, sale or
lease, or the issue and assumption of all securities to be issued
or assumed in connection with any such merger, consolidation, sale
or lease shall have been ordered, approved or permitted by the
regulatory authority or authorities having jurisdiction in the
premises; provided that the provisions of this clause (4) shall not
apply to a purchase, lease or other acquisition by the Company of
the franchises or assets of another corporation, or otherwise apply
in any manner which does not involve a merger or consolidation or
sale or lease by the Company of all or substantially all of its
assets.
(i) So long as any shares of the Serial Preferred Stock are
outstanding, the Company shall not pay any dividends on its Common
Stock (other than dividends payable in Common Stock) or make any
distribution on, or purchase or otherwise acquire for value, any of
its Common Stock (each such payment, distribution, purchase and/or
acquisition being herein referred to as a "Common Stock dividend"),
except to the extent permitted by the following provisions:
(1) No Common Stock dividend shall be declared or
paid in an amount which, together with all other Common Stock
dividends declared in the year ending on (and including) the date
of the declaration of such Common Stock dividend, would in the
aggregate exceed 50% of the net earnings of the Company for the
period consisting of the twelve consecutive calendar months ending
on the last day of the calendar month next preceding the
declaration of such Common Stock dividend, after deducting from
such net earnings dividends accruing on any stock other than Common
Stock of the Company during such period, if at the end of such
period, the ratio (herein referred to as the "capitalization
ratio") of the sum of (i) the capital represented by the Common
Stock (including premiums on Common Stock) and (ii) the surplus
accounts of the Company, to the sum of (I) the total capital and
(II) the surplus accounts of the Company (after adjustment in each
case of the surplus accounts to reflect payment of such Common
Stock dividend) would be less than 20%.
(2) If such capitalization ratio, determined as
aforesaid, shall be 20% or more, but less than 25%, no Common Stock
dividend shall be declared or paid in an amount which, together
with all other Common Stock dividends declared in the year ending
on (and including) the date of the declaration of such Common Stock
dividend, would in the aggregate exceed 75% of the net earnings of
the Company for the period consisting of the twelve consecutive
calendar months ending on the last day of the calendar month next
preceding the declaration of such Common Stock dividend after
deducting from such net earnings dividends accruing on any stock
other than the Common Stock of the Company during such period; and
(3) If such capitalization ratio, determined as
aforesaid, shall be in excess of 25%, no Common Stock dividend
shall be declared or paid which would reduce such capitalization
ratio to less than 25% except to the extent permitted by the next
preceding subparagraphs (1) and (2).
For the purposes of this subdivision (i) the total capital of
the Company shall be deemed to consist of the aggregate of (x) the
principal amount of all outstanding indebtedness of the Company
represented by bonds, notes or other evidences of indebtedness
maturing by their terms one year or more after the date of the
issue thereof and (y) the par or stated value of all outstanding
capital stock (including premiums on capital stock) of all classes
of the Company. All indebtedness and shares of stock of the
Company acquired by the Company and held in its treasury shall be
excluded in determining total capital.
Purchases or other acquisitions of Common Stock shall be
deemed, for the purposes of the foregoing provisions of this
subdivision (i), to have been declared as dividends as of the date
on which such purchases or acquisitions are consummated.
(j) No holder of Serial Preferred Stock shall be entitled
as such as a matter of right to subscribe for or purchase any part
of any new or additional issue of stock, or securities convertible
into, or carrying or evidencing any right to purchase, stock, of
any class whatever, whether now or hereafter authorized, and
whether issued for cash, property, services or otherwise.
(k) Except as otherwise in subdivisions (g) and (h) of this
subdivision (A) or by statute specifically provided, the Serial
Preferred Stock shall have no voting power unless and until
dividends payable thereon are in default in an amount equivalent to
four full quarter-yearly dividends on the Serial Preferred Stock at
the time outstanding. In such event and until such default shall
have been remedied as hereinafter provided, the holders of Serial
Preferred Stock, voting separately, shall become entitled to elect
twenty-five percent of the Board of Directors, or the smallest
number of directors that exceeds twenty-five percent of the Board,
but in no event less than two directors, and the other stockholders
then entitled to vote for the election of directors, voting
separately by classes if so required by the provisions applicable
to such classes, shall be entitled to elect the remaining directors
of the Company. Upon the accrual of such special right to the
holders of Serial Preferred Stock a meeting of the stockholders
then entitled to vote for the election of directors shall be held
upon notice promptly given, as provided in the By-Laws for a
special meeting, by the President or the Chairman of the Board of
the Company. If within fifteen days after the accrual of such
special right to the holders of Serial Preferred Stock, the
President and the Chairman of the Board of the Company shall fail
to call such meeting, then such meeting shall be held upon notice,
as provided in the By-Laws for a special meeting, given by the
holders of not less than five hundred shares of Serial Preferred
Stock after filing with the Company notice of their intention so to
do. The terms of office of all persons who may be directors of the
Company at the time shall terminate upon the election of directors
by the holders of Serial Preferred Stock, whether or not at the
time of such termination the remaining directors of the Company
shall have been elected; and thereafter and during the continuance
of such special right of the holders of Serial Preferred Stock, the
Board of Directors shall be divided into two or more classes, one
class consisting of the directors to be elected by the holders of
Serial Preferred Stock and the other class or classes consisting of
the directors to be elected by the other stockholders entitled to
vote for the election of directors, and the directors of each such
class elected at such meeting, or at any adjournment thereof, and
the directors of each such class elected at any subsequent annual
meeting for the election of directors, held during the continuance
of such special right, shall hold office until the next succeeding
annual election and until their respective successors by classes
are elected and qualified.
However, if and when all dividends then in default on the
Serial Preferred Stock shall be paid (and such dividends shall be
declared and paid as soon as reasonably practicable out of surplus
or net profits, but without diminishing the amount of capital of
the Company), the holders of Serial Preferred Stock shall be
divested of such special right, but subject always to the same
provisions for the revesting of such special right in the holders
of Serial Preferred Stock in the case of any similar future default
or defaults. Whenever the holders of Serial Preferred Stock shall
be so divested of such special right, the method of election of the
Board of Directors by the vote of the other stockholders entitled
to vote for the election of directors exclusively shall be
restored, and the election of directors shall take place at the
next succeeding annual meeting for the election of directors, or at
any adjournment thereof.
(l) Except as hereinafter provided, during the continuance
of the special right of the holders of Serial Preferred Stock to
elect directors as provided in subdivision (k) of this subdivision
(A), at all meetings for the election of directors the presence in
person or by proxy of the holders of record of a majority of the
outstanding shares of Serial Preferred Stock shall be necessary to
constitute a quorum for the election of directors whom the holders
of Serial Preferred Stock are entitled to elect, and the presence
in person or by proxy of the holders of record of a majority of the
outstanding shares of each other class of stock then entitled to
vote for the election of directors shall be necessary to constitute
a quorum for the election of the directors whom the holders of such
class of stock are entitled to elect. In the absence of such a
quorum of the holders of stock of any particular class then
entitled to vote for the election of directors, the holders of a
majority of the shares of the stock of such class so present in
person or represented by proxy may adjourn from time to time the
meeting for the election of directors to be elected by such stock,
without notice other than announcement at the meeting, until the
requisite quorum of holders of such stock shall be obtained.
However, at the first meeting for the election of directors after
any accrual of the special right of the holders of Serial Preferred
Stock, and at any subsequent annual meeting for the election of
directors held during the continuance of such special right, if
there shall not be such a quorum of the holders of Serial Preferred
Stock the meeting shall be adjourned from time to time as above
provided until such quorum shall have been obtained; provided that,
if such quorum shall not have been obtained within ninety days from
the date of such meeting as originally called (or, in the case of
any annual meeting held during the continuance of such special
right, from the date fixed for such annual meeting), the presence
in person or by proxy of the holders of record of one third of the
outstanding shares of Serial Preferred Stock shall then be
sufficient to constitute a quorum for the election of the directors
whom the holders of Serial Preferred Stock are then entitled to
elect. The absence of a quorum of the holders of any class of
stock then entitled to vote for the election of directors shall
not, except as hereinafter provided, prevent or invalidate the
election by the other class or classes of stockholders of the
directors which they are entitled to elect, if the necessary quorum
of stockholders of such other class or classes is present in person
or represented by proxy at any such meeting or any adjournment
thereof. However, at the first meeting for the election of
directors after any accrual of the special right of the holders of
Serial Preferred Stock to elect directors as provided in
subdivision (k) of this subdivision (A), the absence of a quorum
of the holders of Serial Preferred Stock shall prevent the election
of directors by the holders of Common Stock until the election of
directors by the holders of Serial Preferred Stock after a quorum
of the holders of Serial Preferred Stock shall have been obtained.
(B) PREFERENCE STOCK
(a) Subject to the provisions hereafter in this subdivision
(B) set forth, the Preference Stock may be divided into and issued,
from time to time, in one or more series as the Board of Directors
may determine, and the Board of Directors is hereby expressly
authorized to adopt from time to time resolutions, in respect of
any unissued shares of Preference Stock, to fix and determine:
(1) The division of such shares into series and the
designation and authorized number of shares of the particular
series;
(2) The rate of dividend and the time of payment for
the particular series and the dates from which dividends on all
shares of such series issued prior to the record date for the first
dividend on shares of such series shall be cumulative;
(3) The price or prices at and the terms and
conditions on which shares of the particular series may be
redeemed;
(4) The amount payable upon shares of the particular
series in the event of voluntary liquidation;
(5) Sinking fund provisions (if any) for the
redemption or purchase of shares of the particular series; and
(6) The terms and conditions (if any) on which the
shares of the particular series may be converted into other classes
of stock of the Company.
All shares of Preference Stock shall be of equal rank with each
other, regardless of series, and all shares thereof shall be
identical except as to the above listed relative rights and
preferences, in respect of any or all of which there may be
variations between different series as fixed and determined by the
Board of Directors in said resolutions. All shares of the
Preference Stock of any one series shall be identical with each
other in all respects. All shares of the Preference Stock shall be
subject to the prior rights and preferences of the Serial Preferred
Stock as defined in subdivision (A) above and any other senior
stock as defined in subdivision (b) (1) below hereafter authorized.
(b) The following terms, as used in this subdivision (B),
shall have the following meanings:
(1) The term senior stock as used in this subdivision
(B) shall mean the Serial Preferred Stock and any other class of
stock ranking in its claim to assets or dividends prior to the
5,000,000 shares of Preference Stock created hereby;
(2) The term parity stock as used in this subdivision
(B) shall mean any class of stock ranking in its claim to assets or
dividends on a parity with the Preference Stock, but shall not
include any of the 8,800,000 shares of Preference Stock provided
for hereby, nor shall it include any increase in the authorized
amount of the Preference Stock; and
(3) The term junior stock as used in this subdivision
(B) shall mean the Common Stock and any other class of stock
ranking in its claim to assets or dividends junior to the
Preference Stock.
(c) The holders of the Preference Stock shall be entitled,
subject to the prior rights and preferences of senior stock, to
receive, but only when and as declared by the Board of Directors,
cumulative cash dividends in the case of each series at the annual
rate for such series theretofore fixed by the Board of Directors as
hereinbefore provided, payable quarter-yearly on the first days of
March, June, September and December (or such other quarter-yearly
dates for a particular series as the Board of Directors may
determine prior to the issue thereof as hereinbefore provided) in
each year to stockholders of record on the respective dates fixed
for the purpose by the Board of Directors as dividends are
declared.
No dividend shall be declared on any shares of
Preference Stock of any series for any particular dividend period
unless dividends in full have been paid or declared and set apart
for payment or are contemporaneously declared and set apart for
payment on the Preference Stock of all series then outstanding for
all dividend periods terminating at or before the end of the
particular dividend period. When dividends at the respective
annual dividend rates are not paid in full on any shares of
Preference Stock, the shares of all series of Preference Stock
shall share ratably in the payment of dividends including
accumulations, if any, in accordance with the sums which would be
payable on such shares if all dividends were declared and paid in
full.
The dividends on shares of Preference Stock shall be
cumulative in the case of all shares of each particular series (a)
if issued prior to the record date for the first dividend on shares
of such series, then from the date theretofore fixed for the
purpose by the Board of Directors as hereinbefore provided, or, if
no such date is so fixed, then from the date on which the shares of
such series shall have been originally issued, (b) if issued after
the record date for a dividend on shares of such series and before
the payment date for such dividend then from such dividend payment
date; and (c) otherwise from the quarterly dividend payment date
next preceding the date of issue of such shares. Unless dividends
on all outstanding shares of the Preference Stock, at the annual
dividend rate or rates fixed therefor, shall have been paid for all
past quarter-yearly dividend periods to which they are entitled,
and the full dividend thereon at said rate or rates for the
quarter-yearly dividend periods current at the time shall have been
paid or declared and set apart for payment, but without interest on
accumulated dividends, and unless all sinking fund payments, if
any, theretofore required to have been made shall have been made or
provided for, no dividends shall be declared and no other
distribution shall be made on any junior stock, and no junior stock
shall be purchased, retired or otherwise acquired for value by the
Company. No dividend shall be declared on any junior stock payable
more than 120 days after the date of declaration.
The holders of the Preference Stock shall not be
entitled to receive any dividends thereon other than the dividends
referred to in this subdivision (c).
(d) The Company, at the option of the Board of Directors or
by the operation of the sinking fund, if any, provided for the
Preference Stock of any series, may, from time to time, subject to
such terms and conditions, if any, as may be fixed by the Board of
Directors with respect to any series as hereinbefore provided, and
subject to the prior rights and preferences of senior stock, redeem
the whole or any part of such series at any time outstanding, by
paying in cash the applicable redemption price theretofore fixed by
the Board of Directors as hereinbefore provided.
Notice of every such redemption shall be given by
publication at least once in each of two calendar weeks in each of
two daily newspapers printed in the English language, one published
and of general circulation in the City of Washington, District of
Columbia, and the other in the Borough of Manhattan, The City of
New York, the first publication to be at least thirty days and not
more than sixty days prior to the date fixed for such redemption.
At least thirty days' and not more than sixty days' previous notice
of every such redemption shall also be mailed to the holders of
record of the shares so to be redeemed, at their respective
addresses as the same shall appear on the books of the Company; but
failure to mail such notice or any defect therein or in the mailing
thereof shall not affect the validity of the proceedings for the
redemption of any shares so to be redeemed.
In case of the redemption of a part only of any series
of the Preference Stock at the time outstanding, the Company or its
duly authorized agent shall select by lot the shares so to be
redeemed. The Board of Directors shall have full power and
authority, subject to the limitations and provisions herein
contained, to prescribe the manner in which the drawings by lot
shall be conducted and the terms and conditions upon which the
Preference Stock shall be redeemed from time to time.
If such notice of redemption shall have been duly given
by publication, and if on or before the redemption date specified
therein the funds necessary for such redemption shall have been set
aside by the Company, separate and apart from its other funds, in
trust for the account of the holders of the shares so called for
redemption so as to be and continue to be available therefor, then,
notwithstanding that any certificate for shares so called for
redemption shall not have been surrendered for cancellation, the
shares represented thereby shall no longer be deemed to be
outstanding on and after such redemption date, and all rights with
respect to such shares shall forthwith on such redemption date
cease and terminate, except only the right of the holders thereof
to receive the amount payable upon redemption thereof, without
interest.
Provided, however, in the alternative, that after
giving notice by publication of any such redemption as hereinbefore
provided or after giving to the bank or trust company referred to
below irrevocable authorization to give or complete such notice by
publication, and prior to the redemption date specified in such
notice, the Company may deposit in trust, for the account of the
holders of the shares of Preference Stock so to be redeemed, the
funds necessary for such redemption with a bank or trust company in
good standing, organized and doing business under the laws of the
United States or of any state or territory or of the District of
Columbia and having its principal office in the City of Washington,
District of Columbia, or in the Borough of Manhattan, The City of
New York, having capital, surplus and undivided profits aggregating
at least Ten Million Dollars, designated in such notice of
redemption, and thereupon all shares of the Preference Stock with
respect to which such deposit shall have been made shall no longer
be deemed to be outstanding, and all rights with respect to such
shares of Preference Stock shall forthwith upon such deposit in
trust cease and terminate, except only the right of the holders
thereof to receive from such bank or trust company at any time
after the time of such deposit the funds so deposited, without
interest and the right to exercise, on or before such redemption
date privileges of conversion or exchange, if any, not theretofore
expiring.
Shares of Preference Stock purchased or redeemed
pursuant to any obligation of the Company to purchase or redeem
shares for a sinking fund, shares redeemed pursuant to the
provisions hereof or purchased and for which credit shall have been
taken against any sinking fund obligation, and shares surrendered
pursuant to any conversion right, shall not be reissued or
otherwise disposed of and shall be cancelled. Any other shares of
Preference Stock redeemed or otherwise acquired by the Company
shall continue to be part of the authorized capital stock of the
Company and may thereafter, in the discretion of the Board of
Directors and to the extent permitted by law, be sold or reissued
from time to time, as part of the same or another series, subject
to the terms and conditions herein set forth.
If and so long as the Company shall be in default in
the payment of any quarter-yearly dividend on shares of any series
of the Preference Stock, or shall be in default in the payment of
funds into or the setting aside of funds for any sinking fund
created for any series of the Preference Stock, the Company may not
(other than by the use of unapplied funds, if any, paid into or set
aside for a sinking fund or funds prior to such default) (i) redeem
any shares of the Preference Stock unless all shares thereof are
redeemed, or (ii) purchase or otherwise acquire for a consideration
any shares of the Preference Stock, except pursuant to offers of
sale made by holders of the Preference Stock in response to an
invitation for tenders given simultaneously by the Company by mail
to the holders of record of all shares of the Preference Stock then
outstanding.
(e) In the event of any voluntary liquidation, dissolution
or winding up of the Company, then, before any distribution or
payment shall be made to the holders of any junior stock, the
holder of each share of the Preference Stock shall be entitled,
subject to the prior rights and preferences of senior stock, to be
paid in full in cash the amount fixed with respect to such share by
the Board of Directors as hereinbefore provided, together with an
amount computed at the annual dividend rate therefor from the date
upon which dividends thereon became cumulative to the date fixed
for the payment thereof, less the aggregate of the dividends
theretofore paid thereon. If such payments shall have been made in
full to the holders of the Preference Stock, the remaining assets
and funds of the Company shall be distributed among the holders of
the Common Stock and any other junior stock according to their
respective rights, preferences, restrictions, qualifications and
shares.
In the event of any involuntary liquidation,
dissolution or winding up of the Company, then, before any
distribution or payment shall be made to the holders of any junior
stock, the holder of each share of the Preference Stock shall be
entitled, subject to the prior rights and preferences of senior
stock, to be paid in full the par value thereof in cash, together
with an amount computed at the annual dividend rate therefor from
the date upon which dividends thereon became cumulative to the date
fixed for the payment thereof, less the aggregate of the dividends
theretofore paid thereon. If such payments shall have been made in
full to the holders of the Preference Stock, the remaining assets
and funds of the Company shall be distributed among the holders of
the Common Stock and any other junior stock according to their
respective rights, preferences, restrictions, qualifications and
shares.
With respect to the payments to be made in the event of
voluntary or involuntary liquidation, dissolution or winding up of
the Company, all series of the Preference Stock shall rank ratably
according to their respective interests without preference of any
series thereof over any other series.
(f) Whenever the full dividends on the Preference Stock at
the time outstanding for all past quarter-yearly dividend periods
shall have been paid and the full dividend thereon for the quarter-
yearly dividend period then current shall have been paid or
declared and a sum sufficient for the payment thereof set apart,
then such dividends (payable in cash, stock or otherwise) as may be
determined by the Board of Directors may be declared on the Common
Stock and any other junior stock, and the Preference Stock shall
not be entitled to participate in any such dividends.
(g) So long as any shares of the Preference Stock are
outstanding, no amendment to the Articles of Incorporation of the
Company which would (i) create, change any junior stock into, or
increase the rights and preferences of, any senior or parity stock,
(ii) increase the authorized amount of the Preference Stock in
excess of the 5,000,000 shares created hereby or the authorized
amount of any senior or parity stock, or (iii) change the express
terms of the outstanding shares of Preference Stock in any manner
substantially prejudicial to the holders thereof, shall be made
without the affirmative consent (given in writing without a meeting
or by a vote at a meeting duly called for the purpose) of the
holders of more than two thirds of the aggregate number of shares
of the Preference Stock then outstanding; but any such amendment
may be made with such affirmative consent, together with such
additional vote or consent of stockholders as from time to time may
be required by law; provided, however, that if any such amendment
would change the express terms of the outstanding shares of
Preference Stock of any particular series in any manner
substantially prejudicial to the holders thereof without
correspondingly affecting the holders of the outstanding shares of
Preference Stock of all series, then, in lieu of such consent of
the holders of Preference Stock (or, if such consent of the holders
of the outstanding shares of Preference Stock is required by law,
in addition thereto), a like affirmative consent of the holders of
more than two thirds of the Preference Stock of the affected series
at the time outstanding shall be necessary for making such
amendment.
(h) So long as any shares of the Preference Stock are
outstanding, the Company shall not, without the affirmative consent
(given in writing without a meeting or by a vote at a meeting duly
called for the purpose) of the holders of at least a majority of
the aggregate number of shares of the Preference Stock then
outstanding, merge or consolidate with or into any other
corporation or corporations or sell or lease all or substantially
all of its assets, unless such merger, consolidation, sale or
lease, or the issue and assumption of all securities to be issued
or assumed in connection with any such merger, consolidation, sale
or lease shall have been ordered, approved or permitted by the
regulatory authority or authorities having jurisdiction in the
premises; provided that the provisions of this subdivision (h)
shall not apply to a purchase, lease or other acquisition by the
Company of the franchises or assets of another corporation, or
otherwise apply in any manner which does not involve a merger or
consolidation or sale or lease by the Company of all or
substantially all of its assets.
(i) No holder of Preference Stock shall be entitled as such
as a matter of right to subscribe for or purchase any part of any
new or additional issue of stock, or securities convertible into,
or carrying or evidencing any right to purchase, stock, of any
class whatever, whether now or hereafter authorized, and whether
issued for cash, property, services or otherwise.
(j) Except as otherwise in subdivisions (g) and (h) of this
subdivision (B) or by statute specifically provided, the Preference
Stock shall have no voting power unless and until dividends payable
thereon are in default in an amount equivalent to six full quarter-
yearly dividends on the Preference Stock at the time outstanding.
In such event and until such default shall have been remedied as
hereinafter provided, the holders of Preference Stock, voting
separately, shall become entitled to elect two directors of the
Company at the next meeting of stockholders for the election of
directors (unless all dividends then in default on the Preference
Stock shall have been paid), and the other stockholders then
entitled to vote for the election of directors, voting separately
by classes if so required by the provisions applicable to such
classes, shall be entitled to elect the remaining directors of the
Company. During the continuance of such special right of the
holders of Preference Stock, the Board of Directors shall be
divided into two or more classes, one consisting of the directors
to be elected by the holders of Preference Stock and the other
class or classes consisting of the directors to be elected by the
other stockholders entitled to vote for the election of directors,
and the directors of each such class elected at any meeting for the
election of directors, held during the continuance of such special
right, shall hold office, subject to the rights of any senior
stock, until the next succeeding annual election and until their
respective successors by classes are elected and qualified.
However, if and when all dividends then in default on
the Preference Stock shall be paid (and such dividends shall be
declared and paid as soon as reasonably practicable out of surplus
or net profits, but without diminishing the amount of capital of
the Company), the holders of Preference Stock shall be divested of
such special right, but subject always to the same provisions for
the revesting of such special right in the holders of Preference
Stock in the case of any similar future default or defaults.
Whenever the holders of Preference Stock shall be so divested of
such special right, the method of election of the Board of
Directors by the vote of the other stockholders entitled to vote
for the election of directors exclusively shall be restored and the
election of directors shall take place at the next succeeding
annual meeting for the election of directors, or at any adjournment
thereof.
(k) Except as hereinafter provided, during the continuance
of the special right of the holders of Preference Stock to elect
directors as provided in subdivision (j) of this subdivision (B),
at all meetings for the election of directors the presence in
person or by proxy of the holders of record of a majority of the
outstanding shares of Preference Stock shall be necessary to
constitute a quorum for the election of directors whom the holders
of Preference Stock are entitled to elect, and the presence in
person or by proxy of the holders of record of a majority of the
outstanding shares of each other class of stock then entitled to
vote for the election of directors shall, except as otherwise
provided in subdivision (1) of subdivision (A), be necessary to
constitute a quorum for the election of the directors whom the
holders of such class of stock are entitled to elect. In the
absence of such a quorum of the holders of stock of any particular
class then entitled to vote for the election of directors, the
holders of a majority of the shares of the stock of such class so
present in person or represented by proxy may adjourn from time to
time the meeting for the election of directors to be elected by
such stock, without notice other than announcement at the meeting,
until the requisite quorum of holders of such stock shall be
obtained. The absence of a quorum of the holders of any class of
stock then entitled to vote for the election of directors shall
not, except as hereinbefore provided, prevent or invalidate the
election by the other class or classes of stockholders of the
directors which they are entitled to elect, if the necessary quorum
of stockholders of such other class or classes is present in person
or represented by proxy at any such meeting or any adjournment
thereof.
(C) COMMON STOCK
(a) No holder of Common Stock shall be entitled as such as
a matter of right to subscribe for or purchase any part of any new
or additional issue of stock, or securities convertible into, or
carrying or evidencing any right to purchase, stock, of any class
whatever, whether now or hereafter authorized, and whether issued
for cash, property, services or otherwise.
(b) Except as otherwise provided by statute or by this
Article V, voting rights for all purposes shall be vested
exclusively in the holders of the Common Stock, who shall have one
vote for each share held by them.
VI. The following provisions are set forth herein for the
regulation of the internal affairs of the Company:
At the date hereof, the Company has issued and
outstanding $120,000,000 aggregate principal amount of First
Mortgage Bonds issued under and secured by the lien of the
Company's Mortgage and Deed of Trust dated July 1, 1936, as amended
and supplemented, heretofore made by the Company to The Riggs
National Bank of Washington, D.C., as Trustee, which Mortgage and
Deed of Trust, as amended and supplemented, constitutes a lien on
substantially all the properties and franchises of the Company,
other than cash, accounts receivable and other liquid assets,
securities, leases by the Company as lessor, equipment and
materials not installed as part of the fixed property, and electric
energy and other materials, merchandise or supplies produced or
purchased by the Company for sale, distribution or use. The Board
of Directors of the Company may from time to time cause to be
issued additional First Mortgage Bonds to be secured by said
Mortgage and Deed of Trust, as heretofore or hereafter amended and
supplemented, without limitation as to principal amount and without
action by or approval of the Company's shareholders, and in
connection therewith may cause to be executed and delivered by the
Company such supplemental indentures, containing such additional
covenants, as the Board may approve.
Without the assent of the shareholders of any class the
stated capital of the Company may, from time to time, be reduced in
respect of shares of its Serial Preferred Stock reacquired in
conversion and cancelled.
VII. The address of the Company's registered office in the
District of Columbia is 1900 Pennsylvania Avenue, N. W.; and the
name of its registered agent at such address is Jack E. Strausman.
The address of the Company's registered office in Virginia is
8280 Greensboro Drive, #900, P.O. Box 9346, Tyson's Corner, McLean,
Virginia 22102; and the name of its registered agent at such
address is John S. Stump, who is a resident of Virginia and a
member of the Virginia State Bar.
VIII. Unless otherwise provided in the By-Laws, the number of
directors of the Company shall be twelve (12).
IX. The business and affairs of the Company shall be managed by
or under the direction of the Board of Directors. The number of
directors shall be determined in accordance with the provisions of
Article VIII. The directors shall be divided into three classes,
designated Class I, Class II and Class III. Each class shall
consist, as nearly as may be possible, of one-third of the total
number of directors constituting the entire Board of Directors. At
the 1987 annual meeting of shareholders, Class I directors shall be
elected for a one-year term, Class II directors for a two-year
term, and Class III directors for a three-year term. At each
succeeding annual meeting of shareholders beginning in 1988,
successors to the class of directors whose term expires at that
annual meeting shall be elected for a three-year term. If the
number of directors is changed in accordance with the provisions of
Article VIII, any increase or decrease shall be apportioned among
the classes so as to maintain the number of directors in each class
as nearly equal as possible, and any additional director of any
class elected to fill a vacancy resulting from an increase in such
class shall hold office for a term that shall coincide with the
remaining term of that class, but in no case will a decrease in the
number of directors shorten the term of any incumbent director. A
director shall hold office until the annual meeting for the year in
which his term expires and until his successor shall be elected and
shall qualify, subject, however, to prior death, resignation,
retirement, age and service limitations as may be set forth in the
By-Laws, disqualification or removal from office. Any vacancy on
the Board of Directors that results from other than an increase in
the number of directors may be filled by a majority of the Board of
Directors then in office even if less than a quorum, or by a sole
remaining director. The term of any director elected by the Board
of Directors to fill a vacancy not resulting from an increase in
the number of directors shall expire at the next shareholders'
meeting at which directors are elected, and the remainder of such
term, if any, shall be filled by a director elected at such
meeting.
Notwithstanding the foregoing, whenever the holders of any
class of stock issued by the Company shall have the right, voting
separately by class or series, to elect directors at an annual or
special meeting of shareholders, the election, term of office,
filling of vacancies and other features of such directorships shall
be governed by the terms of the Articles of Incorporation
applicable thereto, and such directors so elected shall not be
divided into classes pursuant to this Article IX unless expressly
provided by such terms.
Subject to the provisions of the preceding paragraphs,
directors elected pursuant to this Article IX may be removed only
for cause.
X. In addition to any other vote that may be required by law or
these Articles of Incorporation or the By-Laws of the Company, the
affirmative vote of the holders of four-fifths of all the capital
stock entitled to vote shall be required to amend, alter, or repeal
Articles IX and X of these Articles of Incorporation, and Article
I, Section 1, the second through the fourth paragraphs, Article I,
Section 2, and Article II, Section 1 of the By-Laws of the Company;
provided, however, that the power of the Board of Directors to
amend, alter, or repeal the By-Laws shall not be affected by this
Article X.
XI. (A) In addition to any affirmative vote required by law or
these Articles of Incorporation or the By-Laws of the Company, and
except as otherwise expressly provided in Paragraph (B) of this
Article XI, a Business Combination (as hereinafter defined) shall
require the affirmative vote of not less than sixty-six and two-
thirds percent (66-2/3%) of the votes entitled to be cast by the
holders of all the then outstanding shares of Voting Stock (as
hereinafter defined), voting together as a single class, excluding
Voting Stock beneficially owned by any Interested Shareholder (as
hereinafter defined). Such affirmative vote shall be required
notwithstanding the fact that no vote may be required, or that a
lesser percentage or separate class vote may be specified, by law
or in any agreement with any national securities exchange or
otherwise.
(B) The provisions of the preceding Paragraph (A) shall not
be applicable to any particular Business Combination, and such
Business Combination shall require only such affirmative vote, if
any, as is required by law or by any other provision of these
Articles of Incorporation or the By-Laws of the Company, or any
agreement with any national securities exchange, if all of the
conditions specified in either of the following Paragraphs (1) or
(2) are met or, in the case of a Business Combination not involving
the payment of consideration to the holders of the Company's
outstanding Capital Stock (as hereinafter defined), if the
condition specified in the following Paragraph (1) is met:
(1) The Business Combination shall have been approved
by a majority (whether such approval is made prior to or subsequent
to the acquisition of beneficial ownership of the Voting Stock that
caused the Interested Shareholder to become an Interested
Shareholder) of the Continuing Directors (as hereinafter defined).
(2) All of the following conditions shall have been
met with respect to every class or series of outstanding Capital
Stock, whether or not the Interested Shareholder has previously
acquired beneficial ownership of any shares of a particular class
or series of Capital Stock:
(a) The aggregate amount of cash and the Fair
Market Value (as hereinafter defined), as of the date of the
consummation of the Business Combination, of consideration other
than cash to be received per share by holders of Common Stock in
such Business Combination shall be at least equal to the highest
amount determined under clauses (i), (ii), (iii), and (iv) below:
(i) (if applicable) the highest per share
price (including any brokerage commissions, transfer taxes and
soliciting dealers' fees) paid by or on behalf of the Interested
Shareholder for any share of Common Stock in connection with the
acquisition by the Interested Shareholder of beneficial ownership
of shares of Common Stock (x) within the two-year period
immediately prior to the first public announcement of the proposed
Business Combination (the "Announcement Date") or (y) in the
transaction in which it became an Interested Shareholder, whichever
is higher, in either case as adjusted for any subsequent stock
split, stock dividend, subdivision or reclassification with respect
to Common Stock;
(ii) the Fair Market Value per share of
Common Stock on the Announcement Date or on the date on which the
Interested Shareholder became an Interested Shareholder (the
"Determination Date"), whichever is higher, as adjusted for any
subsequent stock split, stock dividend, subdivision or
reclassification with respect to Common Stock;
(iii) (if applicable) the price per
share equal to the Fair Market Value per share of Common Stock
determined pursuant to the immediately preceding clause (ii),
multiplied by the ratio of (x) the highest per share price
(including any brokerage commissions, transfer taxes and soliciting
dealers' fees) paid by or on behalf of the Interested Shareholder
for any share of Common Stock in connection with the acquisition by
the Interested Shareholder of beneficial ownership of shares of
Common Stock within the two-year period immediately prior to the
Announcement Date, as adjusted for any subsequent stock split,
stock dividend, subdivision or reclassification with respect to
Common Stock to (y) the Fair Market Value per share of Common Stock
on the first day in such two-year period on which the Interested
Shareholder acquired beneficial ownership of any share of Common
Stock, as adjusted for any subsequent stock split, stock dividend,
subdivision or reclassification with respect to Common Stock; and
(iv) the Company's net income per share of
Common Stock for the four full consecutive fiscal quarters
immediately preceding the Announcement Date, multiplied by the
higher of the then price/earnings multiple (if any) of such
Interested Shareholder or the highest price/earnings multiple of
the Company within the two-year period immediately preceding the
Announcement Date (such price/earnings multiples being determined
by dividing the highest price per share during a day as reported in
the Wall Street Journal from the Composite Tape for the New York
Stock Exchange by the immediately preceding publicly reported
twelve-months earnings per share).
(b) The aggregate amount of cash and the Fair Market
Value, as of the date of the consummation of the Business
Combination, of consideration other than cash to be received per
share by holders of shares of any class or series of outstanding
Capital Stock, other than Common Stock, shall be at least equal to
the highest amount determined under clauses (i), (ii), (iii), and
(iv) below:
(i) (if applicable) the highest per share
price (including any brokerage commissions, transfer taxes and
soliciting dealers' fees) paid by or on behalf of the Interested
Shareholder for any share of such class or series of Capital Stock
in connection with the acquisition by the Interested Shareholder of
beneficial ownership of shares of such class or series of Capital
Stock (x) within the two-year period immediately prior to the
Announcement Date or (y) in the transaction in which it became an
Interested Shareholder, whichever is higher, in either case as
adjusted for any subsequent stock split, stock dividend,
subdivision or reclassification with respect to such class or
series of Capital Stock;
(ii) the Fair Market Value per share of
such class or series of Capital Stock on the Announcement Date or
on the Determination Date, whichever is higher, as adjusted for any
subsequent stock split, stock dividend, subdivision or
reclassification with respect to such class or series of Capital
Stock;
(iii) (if applicable) the price per
share equal to the Fair Market Value per share of such class or
series of Capital Stock determined pursuant to the immediately
preceding clause (ii), multiplied by the ratio of (x) the highest
per share price (including any brokerage commissions, transfer
taxes and soliciting dealers' fees) paid by or on behalf of the
Interested Shareholder for any share of such class or series of
Capital Stock in connection with the acquisition by the Interested
Shareholder of beneficial ownership of shares of such class or
series of Capital Stock within the two-year period immediately
prior to the Announcement Date, as adjusted for any subsequent
stock split, stock dividend, subdivision or reclassification with
respect to such class or series of Capital Stock to (y) the Fair
Market Value per share of such class or series of Capital Stock on
the first day in such two-year period on which the Interested
Shareholder acquired beneficial ownership of any share of such
class or series of Capital Stock, as adjusted for any subsequent
stock split, stock dividend, subdivision or reclassification with
respect to such class or series of Capital Stock; and
(iv) (if applicable) the highest
preferential amount per share to which the holders of shares of
such class or series of Capital Stock would be entitled in the
event of any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Company regardless of whether the
Business Combination to be consummated constitutes such an event.
(c) The consideration to be received by holders
of a particular class or series of outstanding Capital Stock shall
be in cash or in the same form as previously has been paid by or on
behalf of the Interested Shareholder in connection with its direct
or indirect acquisition of beneficial ownership of shares of such
class or series of Capital Stock. If the consideration previously
paid by the Interested Shareholder to acquire shares of any class
or series of Capital Stock varied among the recipients thereof as
to form, the form of consideration to be paid for such class or
series of Capital Stock in connection with the Business Combination
shall be either cash or the form used to acquire beneficial
ownership of the largest number of shares of such class or series
of Capital Stock previously acquired by the Interested Shareholder.
(d) After the Determination Date and prior to
the consummation of such Business Combination: (i) except as
approved by a majority of the Continuing Directors, there shall
have been no failure to declare and pay at the regular date
therefor any full quarterly dividends (whether or not cumulative)
payable in accordance with the terms of any outstanding Capital
Stock; (ii) there shall have been no reduction in the annual rate
of dividends paid on the Common Stock (except as necessary to
reflect any stock split, stock dividend or subdivision of the
Common Stock), except as approved by a majority of the Continuing
Directors; (iii) there shall have been an increase in the annual
rate of dividends paid on the Common Stock as necessary to reflect
any reclassification (including any reverse stock split),
recapitalization, reorganization or any similar transaction that
has the effect of reducing the number of outstanding shares of
Common Stock, unless the failure so to increase such annual rate is
approved by a majority of the Continuing Directors; and (iv) such
Interested Shareholder shall not have become the beneficial owner
of any additional shares of Capital Stock except as part of the
transaction that results in such Interested Shareholder becoming an
Interested Shareholder and except in a transaction that, after
giving effect thereto, would not result in any increase in the
Interested Shareholder's percentage of beneficial ownership of any
class or series of Capital Stock.
(e) After the Determination Date, such
Interested Shareholder shall not have received the benefit,
directly or indirectly (except proportionately as a shareholder of
the Company), of any loans, advances, guarantees, pledges or other
financial assistance or any tax credits or other tax advantages
provided by the Company, whether in anticipation of or in
connection with such Business Combination or otherwise.
(f) A proxy or information statement describing
the proposed Business Combination and complying with the
requirements of the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder (the "Act") (or any
subsequent provisions replacing such Act, rules or regulations)
shall be mailed to all shareholders of the Company at least 30 days
prior to the consummation of such Business Combination (whether or
not such proxy or information statement is required to be mailed
pursuant to such Act or subsequent provisions). The proxy or
information statement shall contain on the first page thereof, in
a prominent place, any statement as to the advisability (or
inadvisability) of the Business Combination that the Continuing
Directors, or any of them, may choose to make and, if deemed
advisable by a majority of the Continuing Directors, the opinion of
an investment banking firm selected by a majority of the Continuing
Directors as to the fairness (or not) of the terms of the Business
Combination from a financial point of view to the holders of the
outstanding shares of Capital Stock other than the Interested
Shareholder and its Affiliates or Associates (as hereinafter
defined), such investment banking firm to be paid a reasonable fee
for its services by the Company.
(g) Such Interested Shareholder shall not have
made any major change in the Company's business or equity capital
structure without the approval of a majority of the Continuing
Directors.
(C) The following definitions shall apply with respect to
this Article XI:
(1) The term "Business Combination" shall mean:
(a) any merger or consolidation of the Company
or any Subsidiary (as hereinafter defined) with (i) any Interested
Shareholder or (ii) any other company (whether or not itself an
Interested Shareholder) which is or after such merger or
consolidation would be an Affiliate or Associate of an Interested
Shareholder; or
(b) any sale, lease, exchange, mortgage,
pledge, transfer or other disposition or security arrangement,
investment, loan, advance, guarantee, agreement to purchase,
agreement to pay, extension of credit, joint venture participation
or other arrangement (in one transaction or a series of
transactions) with or for the benefit of any Interested Shareholder
or any Affiliate or Associate of any Interested Shareholder
involving any assets, securities or commitments of the Company or
any Subsidiary having an aggregate Fair Market Value and/or
involving aggregate commitments of $10,000,000 or more or
constituting more than 5 percent of the book value of the total
assets (in the case of transactions involving assets or commitments
other than Capital Stock) or 5 percent of the shareholders' equity
(in the case of transactions in Capital Stock) of the entity in
question (the "Substantial Part"), as reflected in the most recent
fiscal year-end consolidated balance sheet of such entity existing
at the time the shareholders of the Company would be required,
pursuant to Paragraph A of this Article XI, to approve or authorize
the Business Combination involving the assets, securities and/or
commitments constituting any Substantial Part; or
(c) the adoption of any plan or proposal for
the liquidation or dissolution of the Company which is voted for or
consented to by any Interested Shareholder or any Affiliate or
Associate thereof; or
(d) any reclassification of securities
(including any reverse stock split), or recapitalization of the
Company, or any merger or consolidation of the Company with any of
its Subsidiaries or any other transaction (whether or not with or
otherwise involving an Interested Shareholder) that has the effect,
directly or indirectly, of increasing the proportionate share of
any class or series of Capital Stock, or any securities convertible
into Capital Stock or into equity securities of any Subsidiary,
that is beneficially owned by any Interested Shareholder or any
Affiliate or Associate of any Interested Shareholder; or
(e) any agreement, contract or other
arrangement providing for any one or more of the actions specified
in the foregoing clauses (a) to (d).
(2) The term "Capital Stock" shall mean all capital
stock of the Company authorized to be issued from time to time
under Article IV of these Articles of Incorporation, and the term
"Voting Stock" shall mean all Capital Stock that by its terms may
be voted on all matters submitted to shareholders of the Company
generally.
(3) The term "person" shall mean any individual,
firm, company or other entity and shall include any group comprised
of any person and any other person with whom such person or any
Affiliate or Associate of such person has any agreement,
arrangement or understanding, directly or indirectly, for the
purpose of acquiring, holding, voting or disposing of Capital
Stock.
(4) The term "Interested Shareholder" shall mean any
person (other than the Company or any Subsidiary and other than any
profit-sharing, employee stock ownership or other employee benefit
plan of the Company or any Subsidiary or any trustee of or
fiduciary with respect to any such plan when acting in such
capacity) who (a) is the beneficial owner of Voting Stock
representing ten percent (10%) or more of the votes entitled to be
cast by the holders of all then outstanding shares of Voting Stock;
or (b) is an Affiliate or Associate of the Company and at any time
within the two-year period immediately prior to the Announcement
Date was the beneficial owner of Voting Stock representing ten
percent (10%) or more of the votes entitled to be cast by the
holders of all then outstanding shares of Voting Stock.
(5) A person shall be a "beneficial owner" of any
Capital Stock (a) which such person or any of its Affiliates or
Associates beneficially owns, directly or indirectly; (b) which
such person or any of its Affiliates or Associates has, directly or
indirectly, (i) the right to acquire (whether such right is
exercisable immediately or subject only to the passage of time),
pursuant to any agreement, arrangement or understanding or upon the
exercise of conversion rights, exchange rights, warrants or
options, or otherwise, or (ii) the right to vote pursuant to any
agreement, arrangement or understanding; or (c) which is
beneficially owned, directly or indirectly, by any other person
with which such person or any of its Affiliates or Associates has
any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of any shares of Capital
Stock. For purposes of determining whether a person is an
Interested Shareholder pursuant to Paragraph (4) of this Section
(C), the number of shares of Capital Stock deemed to be outstanding
shall include shares deemed beneficially owned by such person
through application of this Paragraph (5) of Section (C), but shall
not include any other shares of Capital Stock that may be issuable
pursuant to any agreement, arrangement or understanding, or upon
exercise of conversion rights, warrants or options, or otherwise.
(6) The terms "Affiliate" and "Associate" shall have
the respective meanings ascribed to such terms in Rule 12b-2 under
the Act as in effect on the date that Article XI is approved by the
Board (the term "registrant" in said Rule 12b-2 meaning in this
case the Company).
(7) The term "Subsidiary" means any company of which
a majority of any class of equity security is beneficially owned by
the Company; provided, however, that for the purposes of the
definition of Interested Shareholder set forth in Paragraph (4) of
this Section (C), the term "Subsidiary" shall mean only a company
of which a majority of each class of equity security is
beneficially owned by the Company.
(8) The term "Continuing Director" means any member
of the Board of Directors of the Company (the "Board of
Directors"), while such person is a member of the Board of
Directors, who is not an Affiliate or Associate or representative
of the Interested Shareholder and was a member of the Board of
Directors prior to the time that the Interested Shareholder became
an Interested Shareholder, and any successor of a Continuing
Director while such successor is a member of the Board of
Directors, who is not an Affiliate or Associate or representative
of the Interested Shareholder and is recommended or elected to
succeed the Continuing Director by a majority of Continuing
Directors.
(9) The term "Fair Market Value" means (a) in the
case of cash, the amount of such cash; (b) in the case of stock,
the highest closing sale price during the 30-day period immediately
preceding the date in question of a share of such stock on the
Composite Tape for New York Stock Exchange-Listed Stocks, or, if
such stock is not quoted on the Composite Tape, on the New York
Stock Exchange, or, if such stock is not listed on such Exchange,
on the principal United States securities exchange registered under
the Act on which such stock is listed, or, if such stock is not
listed on any such exchange, the highest closing bid quotation with
respect to a share of such stock during the 30-day period preceding
the date in question on the National Association of Securities
Dealers, Inc. Automated Quotations System or any similar system
then in use, or if no such quotations are available, the fair
market value on the date in question of a share of such stock as
determined by a majority of the Continuing Directors in good faith;
and (c) in the case of property other than cash or stock, the fair
market value of such property on the date in question as determined
in good faith by a majority of the Continuing Directors.
(10) In the event of any Business Combination in which
the Company survives, the phrase "consideration other than cash to
be received" as used in Paragraphs (2)(a) and (2)(b) of Section (B)
of this Article XI shall include the shares of Common Stock and/or
the shares of any other class or series of Capital Stock retained
by the holders of such shares.
(D) A majority of the Continuing Directors shall have the
power and duty to determine for the purposes of this Article XI, on
the basis of information known to them after reasonable inquiry,
(a) whether a person is an Interested Shareholder, (b) the number
of shares of Capital Stock or other securities beneficially owned
by any person, (c) whether a person is an Affiliate or Associate of
another, (d) whether the assets that are the subject of any
Business Combination have, or the consideration to be received for
the issuance or transfer of securities by the Company or any
Subsidiary in any Business Combination has, an aggregate Fair
Market Value of $10,000,000 or more, and (e) whether the assets or
securities that are the subject of any Business Combination
constitute a Substantial Part. Any such determination made in good
faith shall be binding and conclusive on all parties.
(E) Nothing contained in this Article XI shall be construed
to relieve any Interested Shareholder from any fiduciary obligation
imposed by law.
(F) The fact that any Business Combination complies with
the provisions of Section (B) of this Article XI shall not be
construed to impose any fiduciary duty, obligation or
responsibility on the Board of Directors, or any member thereof, to
approve such Business Combination or recommend its adoption or
approval to the shareholders of the Company, nor shall such
compliance limit, prohibit or otherwise restrict in any manner the
Board of Directors, or any member thereof, with respect to
evaluations of or actions and responses taken with respect to such
Business Combination.
(G) Notwithstanding any other provisions of these Articles
of Incorporation or the By-Laws of the Company (and notwithstanding
the fact that a lesser percentage or separate class vote may be
specified by law, these Articles of Incorporation or the By-Laws of
the Company), the affirmative vote of the holders of not less than
four-fifths of the votes entitled to be cast by the holders of all
the then outstanding shares of Voting Stock, voting together as a
single class, shall be required to amend or repeal, or adopt any
provisions inconsistent with, this Article XI; provided, however,
that this Section (G) shall not apply to, and such four-fifths vote
shall not be required for, any amendment, repeal or adoption
unanimously recommended by the Board of Directors if all of such
directors are persons who would be eligible to serve as Continuing
Directors within the meaning of Section (C), Paragraph (8) of this
Article XI.
IN WITNESS WHEREOF, Potomac Electric Power Company has duly
caused these Restated Articles of Incorporation to be duly executed
(in duplicate) in its name by Dennis R. Wraase, one of its Senior
Vice Presidents, and by Betty K. Cauley, its Secretary, and its
corporate seal to be hereunto affixed and duly attested by Betty K.
Cauley, its Secretary, all as of the 22nd day of December, 1992.
POTOMAC ELECTRIC POWER COMPANY
[Corporate Seal]
Attest: By /s/ D. R. WRAASE
Dennis R. Wraase
Senior Vice President
/s/ BETTY K. CAULEY By /s/ BETTY K. CAULEY
Betty K. Cauley Betty K. Cauley
Secretary Secretary
DISTRICT OF COLUMBIA, ss.:
I, Indiana C. Shepp, a notary public, do hereby certify that
on this 22nd day of December, 1992, personally appeared before me
Dennis R. Wraase, who, being by me first duly sworn, declared that
he is a Senior Vice President of Potomac Electric Power Company,
that he signed the foregoing document as Senior Vice President of
the corporation, and that the statements therein contained are
true.
/s/ INDIANA C. SHEPP
[NOTARIAL SEAL] Notary Public, D. C.
My commission expires: June 14, 1992.
CERTIFICATE OF
POTOMAC ELECTRIC POWER COMPANY
Pursuant to Virginia Code Section 13.1-711 D., Potomac
Electric Power Company, through Betty K. Cauley, it Secretary and
Associate General Counsel, hereby certifies that the accompanying
Restated Articles of Incorporation and Articles of Restatement do
not contain an amendment to the Articles of Incorporation requiring
shareholder approval and were duly adopted by the Board of
Directors of the Company on December 21, 1992.
WHEREFORE, this Certificate has been duly executed this 22nd
day of December, 1992.
POTOMAC ELECTRIC POWER COMPANY
By: /s/ BETTY K. CAULEY
Betty K. Cauley
Secretary and Associate General Counsel
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
POTOMAC ELECTRIC POWER COMPANY
Pursuant to the provisions of Section 29-356 of Title 29 of
the District of Columbia Code (Section 56 of the District of
Columbia Business Corporation Act, as amended) and Section 13.1-710
of the Code of Virginia (chapter 522 of the Virginia Stock
Corporation Act), the undersigned corporation adopts these Articles
of Amendment to its Articles of Incorporation.
FIRST:
The name of the Company is Potomac Electric Power Company.
SECOND:
The following amendment to the Articles of Incorporation was
adopted by the shareholders of the corporation in the manner
prescribed by the District of Columbia Business Corporation Act and
the Virginia State Corporation Act:
Article IV of the Articles of Incorporation is hereby amended
to read as follows:
IV. The aggregate number of shares which the Company
shall have authority to issue is 220,042,227 divided into three
classes: the first consisting of 11,242,227 shares of the par
value of $50 each; the second consisting of 8,800,000 shares of the
par value of $25 each; and the third consisting of 200,000,000
shares of the par value of $1 each.
The first paragraph of Article V of the Articles of
Incorporation is hereby amended to read as follows:
V. Said 11,242,227 shares of the par value of $50 each
are designated as Serial Preferred Stock; said 8,800,000 shares of
the par value of $25 each are designated as Preference Stock; and
said 200,000,000 shares of the par value of $1 each are designated
as Common Stock. Such of said authorized shares of Serial
Preferred Stock, Preference Stock and Common Stock as are unissued
at any time may be issued, in whole or in part, at such time, or
from time to time, by action of the Board of Directors of the
Company, subject to the laws in force in the District of Columbia
and the Commonwealth of Virginia and the terms and conditions set
forth in the Articles of Incorporation, as amended of the Company.
The number of shares of Serial Preferred Stock appearing in
Article V, Section (A), subparagraphs (b)(1) and (2) and (g) is
hereby amended to read 11,242,227.
THIRD:
The amendment to increase by 5,000,000 shares the authorized
number of shares of Serial Preferred Stock was proposed and
recommended by the Board of Directors of the corporation and
submitted to and approved by its shareholders in accordance with
the corporation's Articles of Incorporation and applicable law.
FOURTH:
The amendment was adopted by the shareholders on May 20,
1993. The number of shares of the corporation outstanding at the
time of such adoption was 120,430,936. The number of shares
entitled to vote at such time on the amendment was 119,962,841, the
designation and number of which shares of each class were as
follows:
Class Number of Shares
Common Stock 114,471,011
Serial Preferred Stock 5,491,830
The number of shares of each class entitled to vote on the
amendment that were voted for and against the amendment were:
Number of Shares Voted
Class For Against
Common Stock 78,854,276 7,415,274
Serial Preferred Stock 4,263,996 234,178
FIFTH:
The amendment does not provide for an exchange,
reclassification, or cancellation of issued shares.
SIXTH:
The amendment does not effect a change in the amount of
stated capital, or paid-in surplus, or both, of the corporation.
IN WITNESS WHEREOF, the Potomac Electric Power Company has
caused these Articles of Amendment to be duly executed (in
duplicate) in its name by William T. Torgerson, one of its Vice
Presidents, and by Mary T. Howard, one of its Assistant
Secretaries, and its corporate seal to be hereunto affixed and
duly attested by Mary T. Howard, one of its Assistant
Secretaries, all as of the 20th day of May, 1993.
POTOMAC ELECTRIC POWER COMPANY
(Corporate Seal)
By: /s/ WILLIAM T. TORGERSON
Vice President
ATTEST:
/s/ M. T. HOWARD By: /s/ M. T. HOWARD
Assistant Secretary Assistant Secretary
DISTRICT OF COLUMBIA, ss.:
I, Indiana C. Shepp, a notary public, do hereby certify that
on this 20th day of May, 1993, personally appeared before me
William T. Torgerson, who, being by me first duly sworn, declared
that he is a Vice President of Potomac Electric Power Company, that
he signed the foregoing document as Vice President of the
corporation, and that the statements therein are true.
/s/ INDIANA C. SHEPP
Notary Public, D. C.
[NOTARIAL SEAL]
My commission expires: June 14, 1995
DISTRICT OF COLUMBIA
STATEMENT OF
CANCELLATION OF REDEEMABLE SHARES
OF
POTOMAC ELECTRIC POWER COMPANY
Under the provisions of Section 29-359 of Chapter 3 of Title
29 of the District of Columbia Code, 1981 Edition (Section 59 of
the District of Columbia Business Corporation Act, as amended), the
undersigned corporation submits this statement of cancellation,
pursuant to the provisions of its articles of incorporation, of
redeemable shares of the corporation reacquired by it subsequent to
the close of business on December 17, 1992, and prior to the close
of business on December 16, 1993, through their conversion, in
accordance with their terms, into shares of its common stock, and
through redemption subsequent to the close of business on December
17, 1992, and prior to the close of business on December 16, 1993
of 30,000 shares of Serial Preferred Stock, $3.37 Series of 1987:
FIRST: The name of the corporation is Potomac Electric Power
Company.
SECOND: The aggregate number of shares which the corporation
had authority to issue is 220,042,227, itemized as follows:
CLASS SERIES NUMBER OF SHARES
Common Stock - 200,000,000
Preference Stock Undesignated as to series 8,800,000
Serial Preferred
Stock $2.44 Series of 1957 300,000
$2.46 Series of 1958 300,000
$2.28 Series of 1965 400,000
$2.44 Convertible
Series of 1966 10,027
$3.82 Series of 1969 500,000
$3.37 Series of 1987 982,200
Auction Series A 1,000,000
$3.89 Series of 1991 1,000,000
$3.40 Series of 1992 1,000,000
Undesignated as to series 5,750,000
THIRD: The number of shares of the corporation so cancelled is
31,183 itemized as follows:
CLASS SERIES NUMBER OF SHARES
Serial Preferred
Stock $2.44 Convertible Series of 1966 1,183
$3.37 Series of 1987 30,000
FOURTH: The number of shares which the corporation has
authority to issue after giving effect to such cancellation is
220,011,044, itemized as follows:
CLASS SERIES NUMBER OF SHARES
Common Stock - 200,000,000
Preference Stock Undesignated as to series 8,800,000
Serial Preferred
Stock $2.44 Series of 1957 300,000
$2.46 Series of 1958 300,000
$2.28 Series of 1965 400,000
$2.44 Convertible
Series of 1966 8,844
$3.82 Series of 1969 500,000
$3.37 Series of 1987 952,200
Auction Series A 1,000,000
$3.89 Series of 1991 1,000,000
$3.40 Series of 1992 1,000,000
Undesignated as to series 5,750,000
FIFTH: The aggregate number of issued shares of the
corporation after giving effect to such cancellation is 122,926,152
itemized as follows:
CLASS SERIES NUMBER OF SHARES
Common Stock - 117,465,108
Preference Stock - NONE
Serial Preferred
Stock $2.44 Series of 1957 300,000
$2.46 Series of 1958 300,000
$2.28 Series of 1965 400,000
$2.44 Convertible
Series of 1966 8,844
$3.82 Series of 1969 500,000
$3.37 Series of 1987 952,200
Auction Series A 1,000,000
$3.89 Series of 1991 1,000,000
$3.40 Series of 1992 1,000,000
SIXTH: After giving effect to such cancellation, the amounts
of the stated capital and paid-in surplus of the corporation,
computed in accordance with the provisions of the District of
Columbia Business Corporation Act, as amended, are $390,517,308 and
$989,419,430.89, respectively.
DATED: December 21, 1993
POTOMAC ELECTRIC POWER COMPANY
By /s/ H. L. DAVIS
H. Lowell Davis
Vice Chairman and
Chief Financial Officer
[Corporate Seal]
Attest:
/s/ M. T. HOWARD
M. T. Howard
Assistant Secretary
DISTRICT OF COLUMBIA, ss.:
I, Lisa A. Poole, a Notary Public, do hereby certify that on
this 21st day of December, 1993, personally appeared before me
H. Lowell Davis, who, being by me first duly sworn, declared that
he is Vice Chairman and Chief Financial Officer of Potomac Electric
Power Company, that he signed the foregoing document as Vice
Chairman and Chief Financial Officer of the corporation, and that
the statements therein contained are true.
/s/ LISA A. POOLE
Notary Public, D. C.
[Notarial Seal]
ARTICLES OF AMENDMENT
OF
POTOMAC ELECTRIC POWER COMPANY
Under the provisions of Section 13.1-652 of the Code of
Virginia, as amended, the undersigned corporation submits these
Articles of Amendment.
FIRST: The name of the corporation is Potomac Electric Power
Company.
SECOND: The reduction in the number of authorized shares of the
corporation is 31,183, itemized as follows:
CLASS SERIES NUMBER OF SHARES
Serial Preferred
Stock $2.44 Convertible
Series of 1966 1,183
$3.37 Series of 1987 30,000
THIRD: The total number of authorized shares of the
corporation remaining after giving effect to such reduction is
220,011,044, itemized as follows:
CLASS SERIES NUMBER OF SHARES
Common Stock - 200,000,000
Preference Stock Undesignated as to series 8,800,000
Serial Preferred
Stock $2.44 Series of 1957 300,000
$2.46 Series of 1958 300,000
$2.28 Series of 1965 400,000
$2.44 Convertible
Series of 1966 8,844
$3.82 Series of 1969 500,000
$3.37 Series of 1987 952,200
Auction Series A 1,000,000
$3.89 Series of 1991 1,000,000
$3.40 Series of 1992 1,000,000
Undesignated as to series 5,750,000
The Articles of Incorporation prohibit the reissuance of
acquired shares.
FOURTH: The reduction in the number of authorized shares was
duly authorized by the Board of Directors on December 20, 1993.
DATED: December 21, 1993
POTOMAC ELECTRIC POWER COMPANY
By /s/ H. L. DAVIS
H. Lowell Davis
Vice Chairman and
Chief Financial Officer
[Corporate Seal]
Attest:
/s/ M. T. HOWARD
M. T. Howard
Assistant Secretary
DISTRICT OF COLUMBIA
STATEMENT OF
CANCELLATION OF REDEEMABLE SHARES
OF
POTOMAC ELECTRIC POWER COMPANY
Under the provisions of Section 29-359 of Chapter 3 of Title
29 of the District of Columbia Code, 1981 Edition (Section 59 of
the District of Columbia Business Corporation Act, as amended), the
undersigned corporation submits this statement of cancellation,
pursuant to the provisions of its articles of incorporation, of
redeemable shares of the corporation reacquired by it subsequent to
the close of business on December 16, 1993, and prior to the close
of business on December 12, 1994, through their conversion, in
accordance with their terms, into shares of its common stock, and
through redemption subsequent to the close of business on
December 16, 1993, and prior to the close of business on
December 12, 1994 of 50,949 shares of Serial Preferred Stock, $3.37
Series of 1987:
FIRST: The name of the corporation is Potomac Electric Power
Company.
SECOND: The aggregate number of shares which the corporation
had authority to issue is 220,011,044, itemized as follows:
CLASS SERIES NUMBER OF SHARES
Common Stock - 200,000,000
Preference Stock Undesignated as to series 8,800,000
Serial Preferred
Stock $2.44 Series of 1957 300,000
$2.46 Series of 1958 300,000
$2.28 Series of 1965 400,000
$2.44 Convertible Series of 1966 8,844
$3.82 Series of 1969 500,000
$3.37 Series of 1987 952,200
Auction Series A 1,000,000
$3.89 Series of 1991 1,000,000
$3.40 Series of 1992 1,000,000
Undesignated as to series 5,750,000
THIRD: The number of shares of the corporation so cancelled is
51,610 itemized as follows:
CLASS SERIES NUMBER OF SHARES
Serial Preferred
Stock $2.44 Convertible Series of 1966 661
$3.37 Series of 1987 50,949
FOURTH: The number of shares which the corporation has
authority to issue after giving effect to such cancellation is
219,959,434, itemized as follows:
CLASS SERIES NUMBER OF SHARES
Common Stock - 200,000,000
Preference Stock Undesignated as to series 8,800,000
Serial Preferred
Stock $2.44 Series of 1957 300,000
$2.46 Series of 1958 300,000
$2.28 Series of 1965 400,000
$2.44 Convertible Series of 1966 8,183
$3.82 Series of 1969 500,000
$3.37 Series of 1987 901,251
Auction Series A 1,000,000
$3.89 Series of 1991 1,000,000
$3.40 Series of 1992 1,000,000
Undesignated as to series 5,750,000
FIFTH: The aggregate number of issued shares of the
corporation after giving effect to such cancellation is 123,557,532
itemized as follows:
CLASS SERIES NUMBER OF SHARES
Common Stock - 118,148,098
Preference Stock - NONE
Serial Preferred
Stock $2.44 Series of 1957 300,000
$2.46 Series of 1958 300,000
$2.28 Series of 1965 400,000
$2.44 Convertible Series of 1966 8,183
$3.82 Series of 1969 500,000
$3.37 Series of 1987 901,251
Auction Series A 1,000,000
$3.89 Series of 1991 1,000,000
$3.40 Series of 1992 1,000,000
SIXTH: After giving effect to such cancellation, the amounts
of the stated capital and paid-in surplus of the corporation,
computed in accordance with the provisions of the District of
Columbia Business Corporation Act, as amended, are $388,619,798 and
$1,004,683,941.72, respectively.
DATED: December 16, 1994
POTOMAC ELECTRIC POWER COMPANY
By /s/ H. L. DAVIS
H. Lowell Davis
Vice Chairman and
Chief Financial Officer
[Corporate Seal]
Attest:
/s/ M. T. HOWARD
M. T. Howard
Assistant Secretary
DISTRICT OF COLUMBIA, ss.:
I, Indiana C. Shepp, a Notary Public, do hereby certify that
on this 16th day of December, 1994, personally appeared before me
H. Lowell Davis, who, being by me first duly sworn, declared that
he is Vice Chairman and Chief Financial Officer of Potomac Electric
Power Company, that he signed the foregoing document as Vice
Chairman and Chief Financial Officer of the corporation, and that
the statements therein contained are true.
/s/ INDIANA C. SHEPP
Notary Public, D. C.
[Notarial Seal] My commission expires: June 14, 1995
ARTICLES OF AMENDMENT
OF
POTOMAC ELECTRIC POWER COMPANY
Under the provisions of Section 13.1-652 of the Code of
Virginia, as amended, the undersigned corporation submits these
Articles of Amendment.
FIRST: The name of the corporation is Potomac Electric Power
Company.
SECOND: The reduction in the number of authorized shares of the
corporation is 51,610, itemized as follows:
CLASS SERIES NUMBER OF SHARES
Serial Preferred
Stock $2.44 Convertible Series of 1966 661
$3.37 Series of 1987 50,949
THIRD: The total number of authorized shares of the
corporation remaining after giving effect to such reduction is
219,959,434, itemized as follows:
CLASS SERIES NUMBER OF SHARES
Common Stock - 200,000,000
Preference Stock Undesignated as to series 8,800,000
Serial Preferred
Stock $2.44 Series of 1957 300,000
$2.46 Series of 1958 300,000
$2.28 Series of 1965 400,000
$2.44 Convertible Series of 1966 8,183
$3.82 Series of 1969 500,000
$3.37 Series of 1987 901,251
Auction Series A 1,000,000
$3.89 Series of 1991 1,000,000
$3.40 Series of 1992 1,000,000
Undesignated as to series 5,750,000
The Articles of Incorporation prohibit the reissuance of
acquired shares.
FOURTH: The reduction in the number of authorized shares was
duly authorized by the Board of Directors on December 15, 1994.
DATED: December 16, 1994
POTOMAC ELECTRIC POWER COMPANY
By /s/ H. L. DAVIS
H. Lowell Davis
Vice Chairman and
Chief Financial Officer
[Corporate Seal]
Attest:
/s/ M. T. HOWARD
M. T. Howard
Assistant Secretary
DISTRICT OF COLUMBIA
STATEMENT OF
CANCELLATION OF REDEEMABLE SHARES
OF
POTOMAC ELECTRIC POWER COMPANY
Under the provisions of Section 29-359 of Chapter 3 of Title
29 of the District of Columbia Code, 1981 Edition (Section 59 of
the District of Columbia Business Corporation Act, as amended), the
undersigned corporation submits this statement of cancellation,
pursuant to the provisions of its articles of incorporation, of
redeemable shares of the corporation reacquired by it subsequent to
the close of business on December 12, 1994, and prior to the close
of business on December 14, 1995, through their conversion, in
accordance with their terms, into shares of its common stock, and
through redemption subsequent to the close of business on December
12, 1994, and prior to the close of business on December 14, 1995
of 31,555 shares of Serial Preferred Stock, $3.37 Series of 1987:
FIRST: The name of the corporation is Potomac Electric Power
Company.
SECOND: The aggregate number of shares which the corporation
had authority to issue is 219,959,434 itemized as follows:
CLASS SERIES NUMBER OF SHARES
Common Stock - 200,000,000
Preference Undesignated as to series 8,800,000
Serial Preferred
Stock $2.44 Series of 1957 300,000
$2.46 Series of 1958 300,000
$2.28 Series of 1965 400,000
$2.44 Convertible Series of 1966 8,183
$3.82 Series of 1969 500,000
$3.37 Series of 1987 901,251
Auction Series A 1,000,000
$3.89 Series of 1991 1,000,000
$3.40 Series of 1992 1,000,000
Undesignated as to series 5,750,000
THIRD: The number of shares of the corporation so cancelled is
33,212 itemized as follows:
CLASS SERIES NUMBER OF SHARES
Serial Preferred
Stock $2.44 Convertible Series of 1966 1,657
$3.37 Series of 1987 31,555
FOURTH: The number of shares which the corporation has
authority to issue after giving effect to such cancellation is
219,926,222, itemized as follows:
CLASS SERIES NUMBER OF SHARES
Common Stock - 200,000,000
Preference Stock Undesignated as to series 8,800,000
Serial Preferred
Stock $2.44 Series of 1957 300,000
$2.46 Series of 1958 300,000
$2.28 Series of 1965 400,000
$2.44 Convertible Series of 1966 6,526
$3.82 Series of 1969 500,000
$3.37 Series of 1987 869,696
Auction Series A 1,000,000
$3.89 Series of 1991 1,000,000
$3.40 Series of 1992 1,000,000
Undesignated as to series 5,750,000
FIFTH: The aggregate number of issued shares of the
corporation after giving effect of such cancellation is 123,870,682
itemized as follows:
CLASS SERIES NUMBER OF SHARES
Common Stock - 118,494,460
Preference Stock - NONE
Serial Preferred
Stock $2.44 Series of 1957 300,000
$2.46 Series of 1958 300,000
$2.28 Series of 1965 400,000
$2.44 Convertible Series of 1966 6,526
$3.82 Series of 1969 500,000
$3.37 Series of 1987 869,696
Auction Series A 1,000,000
$3.89 Series of 1991 1,000,000
$3.40 Series of 1992 1,000,000
SIXTH: After giving effect to such cancellation, the amounts
of the stated capital and paid-in surplus of the corporation,
computed in accordance with the provisions of the District of
Columbia Business Corporation Act, as amended, are $387,305,560 and
$1,010,531,171.08, respectively.
DATED: December 20, 1995
POTOMAC ELECTRIC POWER COMPANY
By /s/ H. L. DAVIS
H. Lowell Davis
Vice Chairman and
Chief Financial Officer
[Corporate Seal]
Attest:
/s/ ELLEN SHERIFF ROGERS
Ellen Sheriff Rogers
Assistant Secretary
DISTRICT OF COLUMBIA, ss.:
I, Michelle T. Brown, a Notary Public, do hereby certify that
on this 20th day of December, 1995, personally appeared before me
H. Lowell Davis, who, being by first duly sworn, declared that he
is Vice Chairman and Chief Financial Officer of Potomac Electric
Power Company, that he signed the foregoing document as Vice
Chairman and Chief Financial Officer of the corporation, and that
the statements therein contained are true.
/s/ MICHELLE T. BROWN
Notary Public, D. C.
[Notarial Seal] My commission expires: 11-14-97
ARTICLES OF AMENDMENT
OF
POTOMAC ELECTRIC POWER COMPANY
Under the provisions of Section 13.1-652 of the Code of
Virginia, as amended, the undersigned corporation submits these
Articles of Amendment.
FIRST: The name of the corporation is Potomac Electric Power
Company.
SECOND: The reduction in the number of authorized shares of the
corporation is 33,212, itemized as follows:
CLASS SERIES NUMBER OF SHARES
Serial Preferred
Stock $2.44 Convertible
Series of 1966 1,657
$3.37 Series of 1987 31,555
THIRD: The total number of authorized shares of the
corporation remaining after giving effect to such reduction is
219,926,222, itemized as follows:
CLASS SERIES NUMBER OF SHARES
Common Stock - 200,000,000
Preference Stock Undesignated as to series 8,800,000
Serial Preferred
Stock $2.44 Series of 1957 300,000
$2.46 Series of 1958 300,000
$2.28 Series of 1965 400,000
$2.44 Convertible Series of 1966 6,526
$3.82 Series of 1969 500,000
$3.37 Series of 1987 869,696
Auction Series A 1,000,000
$3.89 Series of 1991 1,000,000
$3.40 Series of 1992 1,000,000
Undesignated as to series 5,750,000
The Articles of Incorporation prohibit the reissuance of
acquired shares.
FOURTH: The reduction in the number of authorized shares was
duly authorized by the Board of Directors on December 18, 1995.
DATED: December 20, 1995
POTOMAC ELECTRIC POWER COMPANY
By /s/ H. LOWELL DAVIS
H. Lowell Davis
Vice Chairman and
Chief Financial Officer
[Corporate Seal]
Attest:
/s/ ELLEN SHERIFF ROGERS
Ellen Sheriff Rogers
Assistant Secretary
================================================================
BY-LAWS
of
POTOMAC ELECTRIC POWER COMPANY
WASHINGTON, D. C.
As amended through
January 25, 1996
================================================================
POTOMAC ELECTRIC POWER COMPANY
BY-LAWS
______
ARTICLE I
SECTION 1. The annual meeting of the stockholders of the
Company shall be held on such day, at such time and place within
or without the District of Columbia as the Board of Directors or
the Executive Committee shall designate for the purpose of
electing directors and of transacting such other business as may
properly be brought before the meeting.
At an annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual meeting,
business must be specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board,
otherwise properly brought before the meeting by or at the
direction of the Board, or otherwise properly brought before the
meeting by a stockholder. In addition to any other applicable
requirements, for business to be properly brought before an
annual meeting by a stockholder, the stockholder must have given
timely notice thereof in writing to the Secretary of Potomac
Electric Power Company. To be timely, a stockholder's notice
must be received at the principal executive offices of the
Company not less than 50 days nor more than 75 days prior to the
meeting; provided, however, that in the event that less than 65
days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the
stockholder to be timely must be so received not later than the
close of business on the fifteenth day following the day on which
such notice of the date of the annual meeting was mailed or such
public disclosure was made, whichever first occurs. A
stockholder's notice to the Secretary shall set forth (i) a brief
description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at
the annual meeting, (ii) the name and record address of the
stockholder proposing such business, (iii) the class and number
of shares of the Company that are beneficially owned by the
stockholder, and (iv) any material interest of the stockholder in
such business.
Notwithstanding anything in the By-Laws to the contrary, no
business shall be conducted at the annual meeting except in
accordance with the procedures set forth in this Article I,
Section 1; provided, however, that nothing in this Article I,
Section 1 shall be deemed to preclude discussion by any
stockholder of any business properly brought before the annual
meeting in accordance with such procedures.
The Chairman of an annual meeting shall, if the facts
warrant, determine that business was not properly brought before
the meeting in accordance with the provisions of this Article I,
Section 1, and if he should so determine, he shall so declare to
the meeting and any such business not properly brought before the
meeting shall not be transacted.
SECTION 2. Special meetings of the stockholders, when
called, shall be held at such time and place within or without
the District of Columbia and may be called by the Board of
Directors, or the Executive Committee, or the holders of record
of not less than one-fifth of all the outstanding shares entitled
to vote at the meeting, or, if the meeting is for the purpose of
enabling the holders of the Serial Preferred Stock of the Company
to elect directors upon the conditions set forth in the Articles
of Incorporation of the Company, such meeting shall be called as
therein provided.
SECTION 3. Written notice stating the place, day and hour
of each meeting of the stockholders and the purpose or purposes
for which the meeting is called shall be given not less than ten
days (or such longer period as may be prescribed by law) and not
more than fifty days before the date of the meeting to each
stockholder of record entitled to vote at the meeting, by
depositing such notice in the United States mail addressed to the
respective stockholders at their addresses as they appear on the
records of the Company, with postage thereon prepaid.
In connection with the first election of a portion of the
members of the Board of Directors by the holders of the Serial
Preferred Stock upon accrual of such right, as provided in the
Articles of Incorporation of the Company, the Company shall
prepare and mail to the holders of the Serial Preferred Stock
entitled to vote thereon such proxy forms, communications and
documents as may be deemed appropriate for the purpose of
soliciting proxies for the election of directors by the holders
of the Serial Preferred Stock.
The Secretary or an Assistant Secretary of the Company shall
cause to be made, at least ten days before each meeting of
stockholders, a complete list of the stockholders entitled to
vote at such meeting or any adjournment thereof, with the address
of and the number of shares held by each. Such list, for a
period of ten days prior to such meeting, shall be kept on file
at the principal place of business of the Company and shall be
subject to inspection for any proper purpose by any stockholder
at any time during usual business hours. Such list shall also be
produced and kept open at the time and place of the meeting and
shall be subject to the inspection for any proper purpose of any
stockholder during the whole time of the meeting.
SECTION 4. At each meeting of stockholders the holders of
record of a majority of the outstanding shares entitled to vote
at such meeting, represented in person or by proxy, shall
constitute a quorum, except as otherwise provided by law or by
the Articles of Incorporation of the Company. The affirmative
vote of the holders of a majority of the shares represented at a
duly organized meeting at which a quorum was present at the time
of organization, and entitled to vote on the subject matter,
shall be the act of the stockholders, unless the vote of the
holders of a greater number, or voting by classes, is required by
law or by the Articles of Incorporation of the Company and except
that in elections of directors those receiving the greatest
numbers of votes shall be deemed elected even though not
receiving a majority. If a meeting cannot be organized because a
quorum has not attended, the holders of a majority of the shares
represented at the meeting may adjourn the meeting from time to
time, without notice other than announcement at the meeting,
until a quorum shall have been obtained, when any business may be
transacted which might have been transacted at the meeting as
first convened had there been a quorum.
SECTION 5. Meetings of the stockholders shall be presided
over by the Chairman of the Board or, if he is not present, by
the President or, if neither is present, by a Vice Chairman or,
if no such officer is present, by a chairman to be chosen at the
meeting. The Secretary of the Company or, if he is not present,
an Assistant Secretary of the Company or, if neither is present,
a secretary to be chosen at the meeting, shall act as Secretary
of the meeting.
SECTION 6. Each stockholder entitled to vote at any meeting
may so vote either in person or by proxy executed in writing by
the stockholder or by his duly authorized attorney-in-fact and
shall be entitled to one vote on each matter submitted to a vote
for each share of stock of the Company having voting power
thereon registered in his name at the date fixed for the
determination of the stockholders entitled to vote at the
meeting.
SECTION 7. At all elections of directors the voting shall
be by ballot. At all such elections, the Chairman of the meeting
shall appoint two inspectors of election, unless such appointment
shall be unanimously waived by the stockholders present in person
or represented by proxy at the meeting and entitled to vote for
the election of directors. No director or candidate for the
office of director shall be appointed as such inspector. The
inspectors, before entering upon the discharge of their duties,
shall take and subscribe an oath or affirmation faithfully to
execute the duties of inspector at such meeting with strict
impartiality and according to the best of their ability, and
shall take charge of the polls and after the balloting shall make
a certificate of the result of the vote taken.
SECTION 8. In order to determine who are stockholders of
the Company for any proper purpose, the Board of Directors either
may close the stock transfer books or, in lieu thereof, may fix
in advance a date as the record date for such determination, such
date in any case to be not more than fifty days (and, in the case
of a meeting of stockholders, not less than ten days or such
longer period as may be required by law) prior to the date on
which the particular action, requiring such determination, is to
be taken. When such a record date has been so fixed for the
determination of stockholders entitled to vote at a meeting, such
determination shall apply to any adjournment thereof.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. The Board of Directors of the Company shall
consist of twelve persons, each of whom shall be a stockholder of
the Company. The directors shall be divided into three classes,
designated Class I, Class II, and Class III. Each of the classes
shall have four directors. At the 1987 annual meeting of
stockholders, Class I directors shall be elected for a one-year
term, Class II directors for a two-year term, and Class III
directors for a three-year term. At each succeeding annual
meeting of stockholders beginning in 1988, successors to the
class of directors whose term expires at that annual meeting
shall be elected for a three-year term. Except as otherwise
provided in the Articles of Incorporation of the Company and in
these By-Laws, the directors shall hold office until the annual
meeting of the stockholders for the year in which their
respective terms expire and until their respective successors
shall have been elected and qualified. No person shall be
eligible for election as a director after he shall have attained
his seventieth birthday, and no person shall be eligible to serve
as a director beyond the next annual meeting after he shall have
attained his seventieth birthday. Except for a director who is
serving or has served as Chief Executive Officer, no director who
is a full time employee of the Company shall be eligible to serve
as a director beyond the next annual meeting after termination of
his employment with the Company. Seven members of the Board
shall constitute a quorum for the transaction of business, but if
any meeting of the Board cannot be organized because a quorum has
not attended, a majority of those present may adjourn the meeting
from time to time, without notice other than announcement at the
meeting, until a quorum shall have been obtained, when any
business may be transacted which might have been transacted at
the meeting as first convened had there been a quorum. The acts
of a majority of the directors present at a meeting at which a
quorum is present shall, except as otherwise provided by law, by
the Articles of Incorporation of the Company, or by these By-
Laws, be the acts of the Board of Directors.
Only persons who are nominated in accordance with the
following procedures shall be eligible for election as Directors.
Nominations of persons for election to the Board of the Company
may be made at the annual meeting of stockholders by or at the
direction of the Board of Directors, by any nominating committee
or person appointed by the Board, or by any stockholder of the
Company entitled to vote for the election of Directors at the
meeting who complies with the notice procedures set forth in this
Article II, Section 1. Such nominations, other than those made
by or at the direction of the Board, shall be made pursuant to
timely notice in writing to the Secretary of Potomac Electric
Power Company. To be timely, a stockholder's notice shall be
received at the principal executive offices of the Company not
less than 50 days nor more than 75 days prior to the meeting;
provided, however, that in the event that less than 65 days'
notice or prior public disclosure of the date of the meeting is
given or made to stockholders, notice by the stockholder to be
timely must be so received not later than the close of business
on the fifteenth day following the day on which such notice of
the date of the meeting was mailed or such public disclosure was
made, whichever first occurs. Such stockholder's notice to the
Secretary shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or reelection as a
Director, (i) the name, age, business address and residence
address of the person, (ii) the principal occupation or
employment of the person, (iii) the class and number of shares of
capital stock of the Company that are beneficially owned by the
person and (iv) any other information relating to the person that
is required to be disclosed in solicitations for proxies for
election of Directors pursuant to Section 14(a) of the Securities
Exchange Act of 1934, as amended; and (b) as to the stockholder
giving the notice (i) the name and record address of the
stockholder and (ii) the class and number of shares of capital
stock of the Company that are beneficially owned by the
stockholder. The Company may require any proposed nominee to
furnish such other information as may reasonably be required by
the Company to determine the eligibility of such proposed nominee
to serve as Director of the Company. No person shall be eligible
for election as a Director of the Company unless nominated in
accordance with the procedures set forth herein.
The Chairman of the meeting shall, if the facts warrant,
determine that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so
declare to the meeting and the defective nomination shall be
disregarded.
The Board of Directors, as soon as is reasonably practicable
after the initial election of Directors by the stockholders in
each year, shall elect one of its number Chairman of the Board,
who may be, but is not required to be, an officer and employee of
the Company.
SECTION 2. Any vacancy, from any cause other than an
increase in the number of Directors, occurring among the
directors shall be filled without undue delay by a majority of
the remaining directors who were elected, or whose predecessors
in office were elected, by the same class of stockholders as that
which elected the last incumbent of the vacant directorship. The
term of any director elected by the remaining directors to fill a
vacancy (other than one caused by an increase in the number of
directors) shall expire at the next stockholders' meeting at
which directors are elected.
SECTION 3. Regular meetings of the Board of Directors shall
be held at the office of the Company in the District of Columbia
(unless otherwise fixed by resolution of the Board) at such time
as may from time to time be fixed by resolution of the Board.
Special meetings of the Board may be held upon call of the
Executive Committee, or the Chairman of the Board, or the
President, or a Vice Chairman, by oral, telegraphic or written
notice, setting forth the time and place (either within or
without the District of Columbia) of the meeting, duly served on
or sent or mailed to each director not less than two days before
the meeting. A meeting of the Board may be held without notice,
immediately after, and at the same place as, the annual meeting
of the stockholders. A waiver in writing of any notice, signed
by a director, whether before or after the time stated therein,
shall be deemed equivalent to the giving of such notice to such
director. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the Board need be
specified in any notice, or waiver of notice, of such meeting.
SECTION 4. Meetings of the Board of Directors shall be
presided over by the Chairman of the Board or, if he is not
present, by the President or, if neither is present, by a Vice
Chairman or, if no such officer is present, by a chairman to be
chosen at the meeting. The Secretary of the Company or, if he is
not present, an Assistant Secretary of the Company or, if neither
is present, a secretary to be chosen at the meeting, shall act as
secretary of the meeting.
SECTION 5. The Board of Directors may, by resolution or
resolutions adopted by not less than the number of directors
necessary to constitute a quorum of the Board, designate an
Executive Committee consisting of not less than three nor more
than seven directors. Except as otherwise provided by law, the
Executive Committee shall have and may exercise, when the Board
is not in session, all of the powers of the Board in the
management of the property, business and affairs of the Company;
but the Executive Committee shall not have power to fill
vacancies in the Board, or to change the membership of, or to
fill vacancies in, the Executive Committee, or to adopt, alter,
amend, or repeal by-laws of the Company. The Board shall have
the power at any time to fill vacancies in, to change the
membership of, or to dissolve, the Executive Committee. The
Executive Committee may make rules for the conduct of its
business and fix the time and place of its meetings, and may
appoint such committees and assistants as it shall from time to
time deem necessary. A majority of the members of the Executive
Committee shall constitute a quorum, and the acts of a majority
of the members of the Committee present at a meeting at which a
quorum is present shall be the acts of said Committee. All
action taken by the Executive Committee shall be reported to the
Board at its regular meeting next succeeding the taking of such
action.
SECTION 6. The Board of Directors may also, by resolution
or resolutions adopted by not less than the number of directors
necessary to constitute a quorum of the Board, designate one or
more other committees, each such committee to consist of such
number of directors as the Board may from time to time determine,
which, to the extent provided in said resolution or resolutions,
shall have and may exercise such limited authority as the Board
may authorize. Such committee or committees shall have such name
or names as the Board may from time to time determine. The Board
shall have the power at any time to fill vacancies in, to change
the membership of, or to dissolve, any such committee. A
majority, or such other number as the Board may designate, of the
members of any such committee shall constitute a quorum. Each
such committee may make rules for the conduct of its business and
fix the time and place of its meetings unless the Board shall
otherwise provide. All action taken by any such committee shall
be reported to the Board at its regular meeting next succeeding
the taking of such action, unless otherwise directed.
SECTION 7. The Board of Directors shall fix the
compensation to be paid to each director who is not a salaried
employee of the Company for serving as a director and for
attendance at meetings of the Board and committees thereof, and
may authorize the payment to directors of expenses incurred in
attending any such meeting or otherwise incurred in connection
with the business of the Company. This By-Law shall not be
construed to preclude any Director from serving the Company in
any other capacity and receiving compensation therefor.
SECTION 8. At a special meeting called expressly for such
purpose (i) any director elected by the holders of the Serial
Preferred Stock, or elected by directors to fill a vacancy among
the directors elected by the holders of such stock, may be
removed, only for cause, by a vote of the holders of a majority
of the shares of Serial Preferred Stock, and the resulting
vacancy may be filled, for the unexpired term of the director so
removed, by a vote of the holders of such Stock; and (ii) any
director elected by the holders of the Common Stock, or elected
by directors to fill a vacancy among the directors elected by the
holders of such stock, may be removed, only for cause, by a vote
of the holders of a majority of the shares of Common Stock, and
the resulting vacancy may be filled, for the unexpired term of
the director so removed, by a vote of the holders of such Stock.
SECTION 9. With respect to a Company officer, director, or
employee, the Company shall indemnify, and with respect to any
other individual the Company may indemnify, any person who was or
is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding (an "Action"),
whether civil, criminal, administrative, arbitrative or
investigative (including an Action by or in the right of the
Company) by reason of the fact that he is or was a director,
officer, employee or agent of the Company, or is or was serving
at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust
or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by him in connection with such Action;
except in relation to matters as to which he shall be finally
adjudged in such Action to have knowingly violated the criminal
law or be liable for willful misconduct in the performance of his
duty to the Company. The termination of any Action by judgment,
order, settlement, conviction, or upon a plea of nolo contendere
or its equivalent, shall not of itself create a presumption that
the person was guilty of willful misconduct.
Any indemnification (unless ordered by a court) shall be
made by the Company only as authorized in the specific case upon
a determination that indemnification of the director, officer,
employee or agent is proper in the circumstances because he has
met the applicable standard of conduct set forth above. In the
case of any director, such determination shall be made: (1) by
the Board of Directors by a majority vote of a quorum consisting
of directors who were not parties to such Action; or (2) if such
a quorum is not obtainable, by majority vote of a committee duly
designated by the Board of Directors (in which designation
directors who are parties may participate) consisting solely of
two or more directors not at the time parties to the proceeding;
or (3) by special legal counsel selected by the Board of
Directors or its committee in the manner prescribed by clause (1)
or (2) of this paragraph, or if such a quorum is not obtainable
and such a committee cannot be designated, by majority vote of
the Board of Directors, in which selection directors who are
parties may participate; or (4) by vote of the shareholders, in
which vote shares owned by or voted under the control of
directors, officers and employees who are at the time parties to
the Action may not be voted. In the case of any officer,
employee, or agent other than a director, such determination may
be made (i) by the Board of Directors or a committee thereof;
(ii) by the Chairman of the Board of the Company or, if the
Chairman is a party to such Action, the President of the Company,
or (iii) such other officer of the Company, not a party to such
Action, as such person specified in clause (i) or (ii) of this
paragraph may designate. Authorization of indemnification and
evaluation as to reasonableness of expenses shall be made in the
same manner as the determination that indemnification is
permissible, except that if the determination is made by special
legal counsel, authorization of indemnification and evaluation as
to reasonableness of expenses shall be made by those entitled
hereunder to select such legal counsel.
Expenses incurred in defending an Action for which
indemnification may be available hereunder shall be paid by the
Company in advance of the final disposition of such Action as
authorized in the manner provided in the preceding paragraph,
subject to execution by the person being indemnified of a written
undertaking to repay such amount if and to the extent that it
shall ultimately be determined by a court that such
indemnification by the Company is not permitted under applicable
law.
It is the intention of the Company that the indemnification
set forth in this Section 9 of Article II, shall be applied to no
less extent than the maximum indemnification permitted by law.
In the event that any right to indemnification or other right
hereunder may be deemed to be unenforceable or invalid, in whole
or in part, such unenforceability or invalidity shall not affect
any other right hereunder, or any right to the extent that it is
not deemed to be unenforceable. The indemnification provided
herein shall be in addition to, and not exclusive of, any other
rights to which those indemnified may be entitled under any by-
law, agreement, vote of stockholders, or otherwise, and shall
continue as to a person who has ceased to be a director, officer,
employee, or agent and inure to the benefit of such person's
heirs, executors, and administrators.
SECTION 10. The Board of Directors may, in its discretion,
at any time elect one or more persons to the position of Advisory
Director, to serve as such during the pleasure of the Board, but
no person shall be eligible to serve as an Advisory Director
beyond the next annual meeting after he shall have attained his
seventy-second birthday. Advisory Directors so elected by the
Board shall be entitled to attend, and take part in discussions
at, meetings of the Board of Directors, but shall not be
considered members of the Board for quorum or voting purposes.
Advisory Directors shall receive the same compensation as members
of the Board.
SECTION 11. In any proceeding brought by a stockholder in
the right of the Company or brought by or on behalf of the
stockholders of the Company, no monetary damages shall be
assessed against an officer or director. The liability of an
officer or director shall not be limited as provided in this
section if the officer or director engaged in willful misconduct
or a knowing violation of the criminal law.
ARTICLE III
OFFICERS
SECTION 1. The Board of Directors, as soon as reasonably
practicable after the initial election of directors by
stockholders in each year, shall elect a President, may elect one
or more Vice Chairmen and shall elect one or more Vice Presidents
(who may be given such other descriptive titles as the Board may
specify), a Secretary, a Treasurer and a Comptroller, and from
time to time may elect such Assistant Secretaries, Assistant
Treasurers, Assistant Comptrollers and other officers, and
appoint such other agents, as it may deem desirable. Any two or
more offices may be held by the same person, except the offices
of President and Secretary. The Board of Directors shall elect
the Chairman of the Board or one of the above officers Chief
Executive Officer of the Company.
SECTION 2. The term of office of all officers shall be
until the next succeeding annual election of officers and until
their respective successors shall have been elected and
qualified; but any officer or agent elected or appointed by the
Board of Directors may be removed, with or without cause, by the
affirmative vote of a majority of the members of the Board
whenever in their judgment the best interests of the Company will
be served thereby. Such removal shall be without prejudice to
contract rights, if any, of the person so removed. Election or
appointment of an officer or agent shall not of itself create
contract rights. Unless specifically authorized by resolution of
the Board of Directors, no agreement for the employment of any
officer for a period longer than one year shall be made.
SECTION 3. Subject to such limitations as the Board of
Directors or the Executive Committee may from time to time
prescribe, the officers of the Company shall each have such
authority and perform such duties in the management of the
property, business and affairs of the Company as by custom
generally pertain to their respective offices, as well as such
authority and duties as from time to time may be conferred by the
Board of Directors, the Executive Committee or the Chief
Executive Officer.
SECTION 4. The salaries of all officers, employees and
agents of the Company shall be determined and fixed by the Board
of Directors, or pursuant to such authority as the Board may from
time to time prescribe.
ARTICLE IV
CERTIFICATES OF STOCK
SECTION 1. The shares of the capital stock of the Company
shall be represented by certificates, provided that the Board of
Directors of the Company may provide by resolution that some or
all of the shares of any or all of its classes or series of
capital stock may be uncertificated shares. Except as otherwise
expressly provided by law, the rights and obligations of the
holders of uncertificated shares and the rights and obligations
of the holders of certificates representing shares of the same
class and series shall be identical. Shares of the capital stock
of the Company that are evidenced by certificates shall be in
such form as the Board of Directors may from time to time
prescribe. Such certificates shall be signed by the President or
a Vice President and by the Secretary or an Assistant Secretary,
shall be sealed with the seal of the Company, or a facsimile
thereof, shall be countersigned and registered in such manner, if
any, as the Board may by resolution prescribe. Where such a
certificate is countersigned by a transfer agent (other than the
Company or an employee of the Company), or by a transfer clerk
and registered by a registrar, the signatures thereon of the
President or Vice President and the Secretary or Assistant
Secretary may be facsimiles. In case any officer who has signed
or whose facsimile signature has been placed upon any such
certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the Company with the
same effect as if such officer had not ceased to hold such office
at the date of its issue.
SECTION 2. The shares of the capital stock of the Company
shall be transferable on the books of the Company by the holders
thereof in person or by duly authorized attorney, and, if
represented by certificates, upon surrender and cancellation of
the certificates evidencing such shares, with duly executed
assignment and power of transfer endorsed thereon or attached
thereto, and with such proof of the authenticity of the
signatures as the Company or its agents may reasonably require
and, if uncertificated, upon receipt of appropriate instructions.
SECTION 3. No certificate evidencing shares of the capital
stock of the Company shall be issued in place of any certificate
alleged to have been lost, stolen, or destroyed, except upon
production of such evidence of the loss, theft or destruction,
and upon such indemnification of the Company and its agents by
such person or persons and in such manner, as the Board of
Directors may from time to time prescribe.
ARTICLE V
CHECKS, NOTES, CONTRACTS, ETC.
All checks and drafts on the Company's bank accounts, bills
of exchange, promissory notes, acceptances, obligations, other
instruments for the payment of money, and endorsements other than
for deposit in a bank account of the Company shall be signed by
the Treasurer or an Assistant Treasurer and shall be
countersigned by the Chief Executive Officer, the President, a
Vice Chairman or a Vice President, unless otherwise authorized by
the Board of Directors; provided that checks drawn on the
Company's dividend and/or special accounts may bear the manual
signature, or the facsimile signature, affixed thereto by a
mechanical device, of such officer or agent as the Board of
Directors shall authorize.
All contracts, bonds and other agreements and undertakings
of the Company shall be executed by the Chief Executive Officer,
the President, a Vice Chairman or a Vice President and by such
other officer or officers, if any, as may be designated, from
time to time, by the Board of Directors and, in the case of any
such document required to be under seal, the corporate seal shall
be affixed thereto and attested by the Secretary or an Assistant
Secretary.
Whenever any instrument is required by this Article to be
signed by more than one officer of the Company, no person shall
so sign in more than one capacity.
ARTICLE VI
FISCAL YEAR
The fiscal year of the Company shall begin on the first day
of January in each year and shall end on the thirty-first day of
December following.
ARTICLE VII
OFFICES
The principal office of the Company shall be situated in the
District of Columbia. The registered office of the Company in
Virginia shall be situated in the County of Fairfax. The Company
may have such other offices at such places, within the District
of Columbia, the Commonwealth of Virginia, or elsewhere, as shall
be determined from time to time by the Board of Directors or by
the Chief Executive Officer.
ARTICLE VIII
AMENDMENTS
Except as otherwise provided by law, the Board of Directors
may alter, amend, or repeal the By-Laws of the Company, or adopt
new By-Laws, at any meeting of the Board, by the affirmative vote
of not less than the number of directors necessary to constitute
a quorum of the Board.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
POTOMAC ELECTRIC POWER COMPANY
1900 PENNSYLVANIA AVENUE, N.W., WASHINGTON, D.C.
TO
THE RIGGS NATIONAL BANK
OF WASHINGTON, D.C.
808-17TH STREET, N.W., WASHINGTON, D.C.
As Trustee
------------------
Supplemental Indenture
DATED AS OF SEPTEMBER 6, 1995
------------------
SUPPLEMENTAL TO MORTGAGE AND DEED OF TRUST
DATED JULY 1, 1936
------------------
FIRST MORTGAGE BONDS, 6 1/2% SERIES DUE 2005
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
POTOMAC ELECTRIC POWER COMPANY
Supplemental Indenture Dated As of September 6, 1995
TABLE OF CONTENTS*
------------------
Page
Parties.................................................................. 1
Recitals................................................................. 1
PART I
Description of Bonds
Section 1. General description of Bonds of 2005 Series.................. 6
Section 2. Form of face of Bond of 2005 Series.......................... 7
Form of Trustee's certificate................................ 10
Text appearing on reverse side of Bond of 2005 Series........ 10
Section 3. Denominations of Bonds of 2005 Series........................ 12
Section 4. Execution and form of temporary Bonds........................ 13
PART II
Issue of Bonds
Section 1. Limitation as to principal amount............................ 13
Section 2. Issue of Bonds............................................... 13
PART III
Redemption
Bonds of 2005 Series not redeemable prior to maturity ................... 14
PART IV
Additional Particular Covenants of the Company
Section 1. Company not to withdraw moneys pursuant to Section 2 of
Article VIII in excess of an amount equal to principal
amount of issued refundable bonds........................... 14
Section 2. No property additions made on or prior to December 31, 1946
to be used for any purpose under the Indenture.............. 14
- ---------
* The Table of Contents is not part of the Supplemental Indenture and should
not be considered as such. It is included herein only for purposes of
convenient reference.
<PAGE>
ii
PART V
Page
Amendment of Indenture to Permit Qualification Under Trust Indenture Act
of 1939................................................................. 14
PART VI
Amendment of Original Indenture........................................... 15
PART VII
The Trustee
Acceptance of trusts by the Trustee....................................... 15
Trustee not responsible for validity of the Supplemental Indenture........ 15
PART VIII
Miscellaneous Provisions
Execution of Supplemental Indenture in counterparts....................... 16
Appointment of attorneys-in-fact by parties............................... 16
TESTIMONIUM............................................................... 16
EXECUTION................................................................. 17
COMPANY'S ACKNOWLEDGMENTS................................................. 18
TRUSTEE'S ACKNOWLEDGMENTS................................................. 20
<PAGE>
SUPPLEMENTAL INDENTURE, dated as of the sixth day of September, nineteen hun-
dred and ninety-five (1995), made by and between POTOMAC ELECTRIC POWER COMPA-
NY, a corporation organized and existing under the laws of the District of Co-
lumbia and a domestic corporation of the Commonwealth of Virginia (hereinafter
sometimes called the "Company"), party of the first part, and THE RIGGS NA-
TIONAL BANK OF WASHINGTON, D.C., a national banking association organized and
existing under the laws of the United States of America (hereinafter sometimes
called the "Trustee"), as Trustee under the Mortgage and Deed of Trust dated
July 1, 1936, hereinafter mentioned, party of the second part;
WHEREAS, The Company has heretofore executed and delivered its Mortgage and
Deed of Trust, dated July 1, 1936 (hereinafter sometimes referred to as the
"Original Indenture"), to the Trustee, to secure an issue of First Mortgage
Bonds of the Company, issuable in series; and
WHEREAS, pursuant to the terms and provisions of the Original Indenture, in-
dentures supplemental thereto dated as of July 1, 1936, December 1, 1939, Au-
gust 1, 1940, August 1, 1942, January 1, 1948, May 1, 1949, May 1, 1950, March
1, 1952, May 15, 1953, May 16, 1955, June 1, 1956, December 1, 1958, November
16, 1959, December 1, 1960, February 15, 1963, May 15, 1964, April 1, 1966,
May 1, 1967, February 15, 1968, March 15, 1969, February 15, 1970, August 15,
1970, September 15, 1972, April 1, 1973, January 2, 1974, August 15, 1974, Au-
gust 15, 1974, June 15, 1977, July 1, 1979, June 16, 1981, June 17, 1981, De-
cember 1, 1981, August 1, 1982, October 1, 1982, April 15, 1983, November 1,
1985, March 1, 1986, November 1, 1986, March 1, 1987, September 16, 1987, May
1, 1989, August 1, 1989, April 5, 1990, May 21, 1991, May 7, 1992, September
1, 1992, November 1, 1992, March 1, 1993, March 2, 1993, July 1, 1993, August
20, 1993, September 29, 1993, September 30, 1993, October 1, 1993, February
10, 1994, February 11, 1994 and March 10, 1995 have been heretofore entered
into between the Company and the Trustee to provide, respectively, for the
creation of the first through the fifty-ninth series of Bonds thereunder and,
in the case of the supplemental indentures dated January 1, 1948, March 1,
1952, May 15, 1953, May 16, 1955, June 1, 1956, September 15, 1972, July 1,
1979, June 17, 1981, November 1, 1985, September 16, 1987, May 1, 1989, May
21, 1991, May 7, 1992, July 1, 1993 and one of the supplemental indentures
dated August 15, 1974, to convey additional property; and
<PAGE>
2
WHEREAS, $20,000,000 principal amount of Bonds of the 3 1/4% Series due 1966
(the first series), $5,000,000 principal amount of Bonds of the 3 1/4% Series
due 1974 (the second series), $10,000,000 principal amount of Bonds of the 3
1/4% Series due 1975 (the third series), $5,000,000 principal amount of Bonds
of the 3 1/4% Series due 1977 (the fourth series), $15,000,000 principal
amount of Bonds of the 3% Series due 1983 (the fifth series), $10,000,000
principal amount of Bonds of the 2 7/8% Series due 1984 (the sixth series),
$30,000,000 principal amount of Bonds of the 2 3/4% Series due 1985 (the sev-
enth series), $15,000,000 principal amount of Bonds of the 3 1/4% Series due
1987 (the eighth series), $10,000,000 principal amount of Bonds of the 3 7/8%
Series due 1988 (the ninth series), $10,000,000 principal amount of Bonds of
the 3 3/8% Series due 1990 (the tenth series), $10,000,000 principal amount of
Bonds of the 3 5/8% Series due 1991 (the eleventh series), $25,000,000 princi-
pal amount of Bonds of the 4 5/8% Series due 1993 (the twelfth series),
$15,000,000 principal amount of Bonds of the 5 1/4% Series due 1994 (the thir-
teenth series), $45,000,000 principal amount of Bonds of the 7 3/4% Series due
2004 (the twentieth series), $35,000,000 principal amount of Bonds of the
8.85% Series due 2005 (the twenty-first series), $70,000,000 principal amount
of Bonds of the 9 1/2% Series due August 15, 2005 (the twenty-second series),
$50,000,000 principal amount of Bonds of the 7 3/4% Series due 2007 (the twen-
ty-third series), $25,000,000 principal amount of Bonds of the 5 5/8% Series
due 1997 (the twenty-fourth series), $100,000,000 principal amount of Bonds of
the 8 3/8% Series due 2009 (the twenty-fifth series), $50,000,000 principal
amount of Bonds of the 10 1/4% Series due 1981 (the twenty-sixth series),
$50,000,000 principal amount of Bonds of the 10 3/4% Series due 2004 (the
twenty-seventh series), $38,300,000 principal amount of Bonds of the 6 1/8%
Series due 2007 (the twenty-eighth series), $15,000,000 principal amount of
Bonds of the 6 1/2% Series due 2004 (the twenty-ninth series), $20,000,000
principal amount of Bonds of the 6 1/2% Series due 2007 (the thirtieth se-
ries), $7,500,000 principal amount of Bonds of the 6 5/8% Series due 2009 (the
thirty-first series), $30,000,000 principal amount of Bonds of the Floating
Rate Series due 2010 (the thirty-second series), $50,000,000 principal amount
of Bonds of the 14 1/2% Series due 1991 (the thirty-third series), $60,000,000
principal amount of Bonds of the 14 1/4% Series due 1992 (the thirty-fifth se-
ries), $50,000,000 principal amount of Bonds of the 11 7/8% Series due 1989
(the thirty-sixth series), $37,000,000
<PAGE>
3
principal amount of Bonds of the 8 3/4% Series due 2010 (the thirty-seventh
series), $75,000,000 principal amount of Bonds of the 11 1/4% Series due 2015
(the thirty-eighth series), $75,000,000 principal amount of Bonds of the 9
1/4% Series due 2016 (the thirty-ninth series), $75,000,000 principal amount
of Bonds of the 8 3/4% Series due 2016 (the fortieth series), $75,000,000
principal amount of Bonds of the 8 1/4% Series due 2017 (the forty-first se-
ries), $75,000,000 principal amount of Bonds of the 9% Series due 1990 (the
forty-second series) and $75,000,000 principal amount of Bonds of the 9 3/4%
Series due 2019 (the forty-third series), have been heretofore redeemed and
retired and there are now issued and outstanding under the Original Indenture
and under the supplemental indentures referred to above: $40,000,000 principal
amount of Bonds of the 5% Series due 1995 (the fourteenth series); $50,000,000
principal amount of Bonds of the 4 3/8% Series due 1998 (the fifteenth se-
ries); $45,000,000 principal amount of Bonds of the 4 1/2% Series due 1999
(the sixteenth series); $15,000,000 principal amount of Bonds of the 5 1/8%
Series due 2001 (the seventeenth series); $35,000,000 principal amount of
Bonds of the 5 7/8% Series due 2002 (the eighteenth series); $40,000,000 prin-
cipal amount of Bonds of the 6 5/8% Series due 2003 (the nineteenth series);
$50,000,000 principal amount of Bonds of the Adjustable Rate Series due 2001
(the thirty-fourth series); $59,800,000 principal amount of Bonds of the 8
5/8% Series due 2019 (the forty-fourth series); $100,000,000 principal amount
of Bonds of the 9% Series due 2000 (the forty-fifth series); $100,000,000
principal amount of Bonds of the 9% Series due 2021 (the forty-sixth series);
$75,000,000 principal amount of Bonds of the 8 1/2% Series due 2027 (the for-
ty-seventh series); $30,000,000 principal amount of Bonds of the 6% Series due
2022 (the forty-eighth series); $37,000,000 principal amount of Bonds of the 6
3/8% Series due 2023 (the forty-ninth series); $78,000,000 principal amount of
Bonds of the 6 1/2% Series due 2008 (the fiftieth series); $40,000,000 princi-
pal amount of Bonds of the 7 1/2% Series due 2028 (the fifty-first series);
$100,000,000 principal amount of Bonds of the 7 1/4% Series due 2023 (the fif-
ty-second series); $100,000,000 principal amount of Bonds of the 6 7/8% Series
due 2023 (the fifty-third series); $50,000,000 principal amount of Bonds of
the 5 5/8% Series due 2003 (the fifty-fourth series); $50,000,000 principal
amount of Bonds of the 5 7/8% Series due 2008 (the fifty-fifth series);
$75,000,000 principal amount of Bonds of the 6 7/8% Series due 2024 (the fif-
ty-sixth series); $42,500,000 principal amount of
<PAGE>
4
Bonds of the 5 3/8% Series due 2024 (the fifty-seventh series); $38,300,000
principal amount of Bonds of the 5 3/8% Series due 2024 (the fifty-eighth se-
ries); and $16,000,000 principal amount of Bonds of the 5 3/4% Series due 2010
(the fifty-ninth series); and
WHEREAS, for the purpose of conforming the Original Indenture to the stan-
dards prescribed by the Trust Indenture Act of 1939 or otherwise modifying
certain of the provisions of the Original Indenture, indentures supplemental
thereto dated December 10, 1939, August 10, 1942, October 15, 1942, April 1,
1966, June 16, 1981, June 17, 1981, December 1, 1981, August 1, 1982, October
1, 1982, April 15, 1983, November 1, 1985, March 1, 1986, November 1, 1986,
March 1, 1987, September 16, 1987, May 1, 1989, August 1, 1989, April 5, 1990,
May 21, 1991, May 7, 1992, September 1, 1992, November 1, 1992, March 1, 1993,
March 2, 1993, July 1, 1993, August 20, 1993, September 29, 1993, September
30, 1993, October 1, 1993, February 10, 1994, February 11, 1994 and March 10,
1995 have been heretofore entered into between the Company and the Trustee,
and for the purpose of conveying additional property, indentures supplemental
thereto dated July 15, 1942, October 15, 1947, December 31, 1948, December 31,
1949, February 15, 1951, February 16, 1953, March 15, 1954, March 15, 1955,
March 15, 1956, April 1, 1957, May 1, 1958, May 1, 1959, May 2, 1960, April 3,
1961, May 1, 1962, May 1, 1963, April 23, 1964, May 3, 1965, June 1, 1966,
April 28, 1967, July 3, 1967, May 1, 1968, June 16, 1969, May 15, 1970, Sep-
tember 1, 1971, June 17, 1981, November 1, 1985, September 16, 1987, May 1,
1989, May 21, 1991, May 7, 1992 and July 1, 1993 have been heretofore entered
into between the Company and the Trustee, and for the purpose of better secur-
ing and protecting the Bonds then or thereafter issued and confirming the lien
of the Original Indenture, an indenture dated October 15, 1942 supplemental
thereto has been heretofore entered into between the Company and the Trustee;
the Original Indenture as heretofore amended and supplemented being hereinaf-
ter referred to as the "Original Indenture as amended"; and
WHEREAS, the Company is entitled to have authenticated and delivered addi-
tional Bonds on the basis of the net bondable value of property additions,
upon compliance with the provisions of Section 4 of Article III of the Origi-
nal Indenture as amended; and
<PAGE>
5
WHEREAS, the Company has determined to issue a sixtieth series of Bonds under
the Original Indenture as amended in the principal amount of $100,000,000, to
be known as First Mortgage Bonds, 6 1/2% Series due 2005 (hereinafter called
"Bonds of 2005 Series"); and
WHEREAS, the Original Indenture as amended provides that certain terms and
provisions, as determined by the Board of Directors of the Company, of the
Bonds of any particular series may be expressed in and provided by the execu-
tion of an appropriate supplemental indenture; and
WHEREAS, the Original Indenture as amended provides that the Company and the
Trustee may enter into indentures supplemental thereto to add to the covenants
and agreements of the Company contained therein other covenants and agreements
thereafter to be observed; and to surrender any right or power reserved to or
conferred upon the Company in the Original Indenture as amended; and
WHEREAS, the Company, in the exercise of the powers and authority conferred
upon and reserved to it under the provisions of the Original Indenture as
amended and pursuant to appropriate resolutions of its Board of Directors, has
duly resolved and determined to make, execute and deliver to the Trustee a
Supplemental Indenture in the form hereof for the purposes herein provided;
and
WHEREAS, all conditions and requirements necessary to make this Supplemental
Indenture a valid, binding and legal instrument have been done, performed and
fulfilled, and the execution and delivery hereof have been in all respects
duly authorized;
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
THAT POTOMAC ELECTRIC POWER COMPANY, in consideration of the premises and of
One Dollar to it duly paid by the Trustee at or before the ensealing and de-
livery of these presents, and for other valuable considerations, the receipt
whereof is hereby acknowledged, hereby covenants, declares and agrees with the
Trustee and its successors in the trust under the Original Indenture as amend-
ed, for the benefit of those who hold the Bonds and coupons, or any of them,
issued or to be issued hereunder or under the Original Indenture as amended,
as follows:
<PAGE>
6
PART I.
DESCRIPTION OF BONDS.
SECTION 1. The Bonds of 2005 Series shall, subject to the provisions of Sec-
tion 1 of Article II of the Original Indenture as amended, be designated as
"First Mortgage Bonds, 6 1/2% Series due 2005" of the Company. The Bonds of
2005 Series shall be executed, authenticated and delivered in accordance with
the provisions of, and shall in all respects be subject to, all of the terms,
conditions and covenants of the Original Indenture as amended, except in so
far as the terms and provisions of the Original Indenture as amended are
amended or modified by this Supplemental Indenture.
The Bonds of 2005 Series shall mature September 15, 2005, and shall bear in-
terest at the rate of six and one-half per cent (6 1/2%) per annum, payable
semiannually, commencing March 15, 1996, on the fifteenth day of March and the
fifteenth day of September in each year (each such March 15 and September 15
being hereinafter called an "interest payment date"). The Bonds of 2005 Series
shall be payable as to principal and interest in lawful money of the United
States of America, and shall be payable (as well the interest as the principal
thereof) at the Agency of the Company in the City of Washington, D.C., or at
the Agency of the Company in the Borough of Manhattan, The City of New York.
The interest so payable on any interest payment date shall be paid to the
persons in whose names the Bonds of 2005 Series are registered at the close of
business on the last business day (hereinafter called the "record date") which
is more than ten days prior to such interest payment date, a "business day"
being any day that is not a day on which banks in the City of Washington,
D.C., are authorized by law to close; except that if the Company shall default
in the payment of any interest due on such interest payment date, such de-
faulted interest shall be paid to the persons in whose names the Bonds of 2005
Series are registered on the date of payment of such defaulted interest, or in
accordance with the regulations of any securities exchange on which the Bonds
of 2005 Series are listed.
Except as provided hereinafter, every Bond of 2005 Series shall be dated as
of the date of its authentication and delivery, or if that is an
<PAGE>
7
interest payment date, the next day, and shall bear interest from the interest
payment date next preceding its date or the date of delivery of the initial
Bonds of 2005 Series, whichever is later. Notwithstanding Section 6 of Article
II of the Original Indenture, any Bond of 2005 Series authenticated and deliv-
ered by the Trustee after the close of business on the record date with re-
spect to any interest payment date and prior to such interest payment date
shall be dated as of the date next following such interest payment date and
shall bear interest from such interest payment date; except that if the Com-
pany shall default in the payment of any interest due on such interest payment
date, such Bond shall bear interest from the next preceding interest payment
date or the date of delivery of the initial Bonds of 2005 Series, whichever is
later.
SECTION 2. The Bonds of 2005 Series, and the Trustee's certificate to be en-
dorsed on the Bonds of 2005 Series, shall be substantially in the following
forms, respectively:
[FORM OF FACE OF BOND OF 2005 SERIES]
POTOMAC ELECTRIC POWER COMPANY
(A District of Columbia and Virginia corporation)
FIRST MORTGAGE BOND, 6 1/2% SERIES DUE 2005
No. $
POTOMAC ELECTRIC POWER COMPANY, a corporation organized and existing under
the laws of the District of Columbia and a domestic cor- poration of the Com-
monwealth of Virginia (hereinafter called the "Company", which term shall in-
clude any successor corporation as defined in the Amended Indenture hereinaf-
ter referred to), for value received, hereby promises to pay to
................... or registered assigns, the sum of .................. dol-
lars, on the fifteenth day of September, 2005, in lawful money of the United
States of America, and to pay interest thereon in like money from the later of
the date of delivery of the initial Bonds of 2005 Series or the interest pay-
ment date March 15 or September 15 next preceding the date of this Bond, or if
the Company shall default in the payment of interest due on such interest pay-
ment date,
<PAGE>
8
then from the next preceding interest payment date or the date of delivery of
the initial Bonds of 2005 Series, whichever is later, at the rate of six and
one-half percent (6 1/2%) per annum, payable semiannually, commencing March
15, 1996, on the fifteenth day of March and September in each year until matu-
rity, or, if the Company shall default in the payment of the principal hereof,
until the Company's obligation with respect to the payment of such principal
shall be discharged as provided in the Amended Indenture. The interest so pay-
able on any March 15 or September 15 will, subject to certain exceptions pro-
vided in the indenture dated as of September 6, 1995 supplemental to the
Amended Indenture, be paid to the person in whose name this Bond is registered
at the close of business on the last business day which is more than ten days
prior to such March 15 or September 15. Both principal of, and interest on,
this Bond are payable at the agency of the Company in the City of Washington,
D.C., or, at the option of the holder, at the agency of the Company in the
Borough of Manhattan, The City of New York.
Reference is made to the further provisions of this Bond set forth on the re-
verse hereof, and such further provisions shall for all purposes have the same
effect as though fully set forth at this place.
This Bond shall not be entitled to any benefit under the Amended Indenture or
any indenture supplemental thereto, or become valid or
obligatory for any purpose, until The Riggs National Bank of Washington, D.C.,
the Trustee under the Amended Indenture, or a successor trustee thereto under
the Amended Indenture, shall have signed the form of certificate endorsed
hereon.
<PAGE>
9
IN WITNESS WHEREOF, Potomac Electric Power Company has caused this Bond to be
signed in its name by the signature (or a facsimile thereof) of its President
or a Vice President, and its corporate seal (or a facsimile thereof) to be
hereto affixed and attested by the facsimile signature of its Secretary or an
Assistant Secretary.
Dated,
POTOMAC ELECTRIC POWER COMPANY
By......................................
Vice President
Attest:
...................................
Secretary
<PAGE>
10
[FORM OF TRUSTEE'S CERTIFICATE]
This Bond is one of the Bonds, of the series designated therein, described in
the within-mentioned Amended Indenture and the Supplemental Indenture dated as
of September 6, 1995.
THE RIGGS NATIONAL BANK OF WASHINGTON, D.C.
Trustee.
By..........................................
Authorized Officer
[TEXT APPEARING ON REVERSE SIDE OF BOND OF 2005 SERIES]
This Bond is one of a duly authorized issue of Bonds of the Company (herein-
after called the "Bonds") in unlimited aggregate principal amount, of the se-
ries hereinafter specified, all issued and to be issued under and equally se-
cured (except in so far as any purchase or sinking fund or analogous provi-
sions for any particular series of Bonds, established by any indenture supple-
mental to the Amended Indenture hereinafter mentioned, may afford additional
security for such Bonds) by a mortgage and deed of trust, dated July 1, 1936,
executed by the Company to The Riggs National Bank of Washington, D.C. (herein
called the "Trustee"), as trustee, as amended by indentures supplemental
thereto dated December 10, 1939, August 10, 1942, October 15, 1942, April 1,
1966, June 16, 1981, June 17, 1981, December 1, 1981, August 1, 1982, October
1, 1982, April 15, 1983, November 1, 1985, March 1, 1986, November 1, 1986,
March 1, 1987, September 16, 1987, May 1, 1989, August 1, 1989, April 5, 1990,
May 21, 1991, May 7, 1992, September 1, 1992, November 1, 1992, March 1, 1993,
March 2, 1993, July 1, 1993, August 20, 1993, September 29, 1993, September
30, 1993, October 1, 1993, February 10, 1994, February 11, 1994 and March 10,
1995 (said mortgage and deed of trust, as so amended, being herein called the
"Amended Indenture") and all indentures supplemental thereto, to which Amended
Indenture and supplemental indentures reference is hereby made for a descrip-
tion of the properties mortgaged and pledged, the nature and extent of the se-
curity, the rights of the owners of the Bonds and of the Trustee in respect
thereto, and the
<PAGE>
11
terms and conditions upon which the Bonds are, and are to be, secured. To the
extent permitted by, and as provided in, the Amended Indenture, modifications
or alterations of the Amended Indenture, or of any indenture supplemental
thereto, and of the rights and obligations of the Company and of the holders
of the Bonds may be made with the consent of the Company by an affirmative
vote of not less than 80% in amount of the Bonds entitled to vote then out-
standing, at a meeting of Bondholders called and held as provided in the
Amended Indenture, and by an affirmative vote of not less than 80% in amount
of the Bonds of any series entitled to vote then outstanding and affected by
such modification or alteration, in case one or more but less than all of the
series of Bonds then outstanding under the Amended Indenture are so affected;
provided, however, that no such modification or alteration shall be made which
will affect the terms of payment of the principal of, or interest on, this
Bond, which are unconditional, or which reduces the percentage of Bonds the
affirmative vote of which is required for the making of such modifications or
alterations. The Company is proposing an amendment to the Amended Indenture
which would replace "80%" with "60%" in the preceding sentence, which amend-
ment will become effective upon the consent or agreement thereto of the hold-
ers of all the outstanding Bonds. The holder of this Bond will be deemed to
have approved such amendment. The Bonds may be issued in series, for various
principal sums, may mature at different times, may bear interest at different
rates and may otherwise vary as in the Amended Indenture provided.
This Bond is one of a series designated as the "First Mortgage Bonds, 6 1/2%
Series due 2005" (herein called the "Bonds of 2005 Series") of the Company,
issued under and secured by the Amended Indenture and all indentures supple-
mental thereto and described in the indenture (herein called the "New Supple-
mental Indenture"), dated as of September 6, 1995, between the Company and the
Trustee, supplemental to the Amended Indenture.
The Bonds of 2005 Series are not subject to redemption prior to maturity.
In case an event of default, as defined in the Amended Indenture, shall oc-
cur, the principal of all the Bonds at any such time outstanding under
<PAGE>
12
the Amended Indenture may be declared or may become due and payable, upon the
conditions and in the manner and with the effect provided in the Amended In-
denture. The Amended Indenture provides that such declaration may in certain
events be waived by the holders of a majority in principal amount of the Bonds
entitled to vote then outstanding.
This Bond is transferable by the registered owner hereof, in person or by
duly authorized attorney, on the books of the Company to be kept for that pur-
pose at the agency of the Company in the City of Washington, D.C., or at the
agency of the Company in the Borough of Manhattan, The City of New York, upon
surrender and cancellation of this Bond and on presentation of a duly executed
written instrument of transfer, and thereupon a new Bond or Bonds of the same
series, of the same aggregate principal amount and in authorized denominations
will be issued to the transferee or transferees in exchange therefor; and this
Bond, with or without others of the same series, may in like manner be ex-
changed for one or more new Bonds of the same series of other authorized de-
nominations but of the same aggregate principal amount; all subject to the
terms and conditions set forth in the Amended Indenture.
No recourse shall be had for the payment of the principal of, or the interest
on, this Bond, or for any claim based hereon or otherwise in respect hereof or
of the Amended Indenture or any indenture supplemental thereto, against any
incorporator, or against any stockholder, director or officer, past, present
or future, of the Company or of any predecessor or successor corporation, ei-
ther directly or through the Company or any such predecessor or successor cor-
poration, whether for amounts unpaid on stock subscriptions or by virtue of
any constitution, statute or rule of law, or by the enforcement of any assess-
ment or penalty or otherwise, all such liability, whether at common law, in
equity, by any constitution, statute or otherwise, of incorporators, stock-
holders, directors or officers being released by every owner hereof by the ac-
ceptance of this Bond and as part of the consideration for the issue hereof,
and being likewise released by the terms of the Amended Indenture.
SECTION 3. The Bonds of 2005 Series shall be registered Bonds without coupons
in denominations of any multiple of $1,000, numbered consecutively upwards
from R1.
<PAGE>
13
SECTION 4. Until Bonds of 2005 Series in definitive form are ready for deliv-
ery, the Company may execute, and upon its request in writing the Trustee
shall authenticate and deliver, in lieu thereof, Bonds for such series in tem-
porary form, as provided in Section 9 of Article II of the Original Indenture
as amended.
PART II.
ISSUE OF BONDS.
SECTION 1. Except for Bonds of 2005 Series issued pursuant to Section 13 of
Article II of the Original Indenture as amended, the principal amount of Bonds
of 2005 Series which may be authenticated and delivered hereunder is limited
to $100,000,000 aggregate principal amount.
SECTION 2. Bonds of 2005 Series in the aggregate principal amount permitted
in Section 1 of this Part II, may at any time subsequent to the execution
hereof be executed by the Company and delivered to the Trustee and shall be
authenticated by the Trustee and delivered (either before or after the record-
ing hereof) to or upon the order of the Company evidenced by a writing or
writings, signed by its President or one of its Vice Presidents and its Trea-
surer or one of its Assistant Treasurers, at such time or times as may be re-
quested by the Company subsequent to the receipt by the Trustee of
(1) the certified resolution and the officers' certificate required by Sec-
tion 3(a) and Section 3(b) of Article III of the Original Indenture as
amended;
(2) the opinion of counsel required by Section 3(c) of Article III of the
Original Indenture as amended;
(3) cash, if any, in the amount required to be deposited by Section 3(d) of
Article III of the Original Indenture as amended, which shall be held and
applied by the Trustee as provided in said Section 3(d);
(4) the certificates, instruments, opinions of counsel, prior lien bonds
and cash, if any, required by Section 4 of Article III of the Original In-
denture as amended, except that, as required by Part IV of this Supplemental
Indenture, property additions purchased, constructed or
<PAGE>
14
otherwise acquired on or before December 31, 1946 shall not be made the ba-
sis for the authentication and delivery of Bonds of 2005 Series; and
(5) the certificates and opinions required by Article XVIII of the Original
Indenture as amended.
PART III.
REDEMPTION.
The Bonds of 2005 Series are not redeemable prior to maturity.
PART IV.
ADDITIONAL PARTICULAR COVENANTS OF THE COMPANY.
The Company hereby covenants, warrants and agrees that so long as any Bonds
of 2005 Series are outstanding:
SECTION 1. The Company will not withdraw, pursuant to the provisions of Sec-
tion 2 of Article VIII of the Original Indenture as amended, any moneys held
by the Trustee as part of the trust estate in excess of an amount equal to the
aggregate principal amount of such of the refundable Bonds as were theretofore
issued by the Company; and that upon any such withdrawal by the Company re-
fundable Bonds equal in aggregate principal amount to the amount so withdrawn
shall be deemed to have been made the basis of such withdrawal.
SECTION 2. Property additions purchased, constructed or otherwise acquired on
or before December 31, 1946 shall not be made the basis for the authentication
and delivery of Bonds, or the withdrawal of cash, or the reduction of the
amount of cash required to be paid to the Trustee under any provision of the
Indenture.
PART V.
AMENDMENT OF INDENTURE TO PERMIT QUALIFICATION
UNDER TRUST INDENTURE ACT OF 1939.
The Company and the Trustee, from time to time and at any time, without any
vote or consent of the holders of the Bonds of 2005 Series,
<PAGE>
15
may enter into such indentures supplemental to the Original Indenture as may
or shall by them be deemed necessary or desirable to add to or modify or amend
any of the provisions of the Original Indenture so as to permit the qualifica-
tion of the Original Indenture under the Trust Indenture Act of 1939.
Except to the extent specifically provided herein, no provision of this Sup-
plemental Indenture is intended to modify, and the parties hereto do hereby
adopt and confirm, the provisions of Section 318(c) of the Trust Indenture Act
of 1939 which amend and supersede provisions of the Original Indenture, as
supplemented, in effect prior to November 15, 1990.
PART VI.
AMENDMENT OF ORIGINAL INDENTURE.
Notwithstanding any other provisions of the Original Indenture as amended,
the holders of the Bonds of 2005 Series, by their holding of such Bonds, are
deemed to have approved the following amendment to the Original Indenture as
amended and to have authorized the Trustee to take any action necessary to ev-
idence or effectuate such approval:
Sections 5 and 6 of Article XV of the Original Indenture as amended are
hereby amended by changing the words and figures "eighty percent. (80%)" to
the words and figures "sixty percent. (60%)" wherever in such Sections such
words and figures occur.
PART VII.
THE TRUSTEE.
The Trustee hereby accepts the trusts hereby declared and provided and agrees
to perform the same upon the terms and conditions in the Original Indenture as
amended set forth and upon the following terms and conditions:
The Trustee shall not be responsible in any manner whatsoever for or in re-
spect of the validity or sufficiency of this Supplemental Indenture or the due
execution hereof by the Company or for or in respect of the
<PAGE>
16
recitals contained herein, all of which recitals are made by the Company sole-
ly. In general, each and every term and condition contained in Article XIII of
the Original Indenture as amended shall apply to this Supplemental Indenture
with the same force and effect as if the same were herein set forth in full,
with such omissions, variations and modifications thereof as may be appropri-
ate to make the same conform to this Supplemental Indenture.
PART VIII.
MISCELLANEOUS PROVISIONS.
This Supplemental Indenture may be simultaneously executed in any number of
counterparts, each of which when so executed shall be deemed to be an origi-
nal; but such counterparts shall together constitute but one and the same in-
strument.
Potomac Electric Power Company hereby constitutes and appoints Dennis R.
Wraase, one of its Senior Vice Presidents, to be its true and lawful attorney-
in-fact, for it and in its name to appear before any officer authorized by law
to take and certify acknowledgments of deeds to be recorded in the District of
Columbia, in the State of Maryland, in the Commonwealth of Virginia, and in
the Commonwealth of Pennsylvania and to acknowledge and deliver these presents
as the act and deed of said Potomac Electric Power Company.
The Riggs National Bank of Washington, D.C., hereby constitutes and appoints
James B. Lynn, one of its Vice Presidents, to be its true and lawful attorney-
in-fact, for it and in its name to appear before any officer authorized by law
to take and certify acknowledgments of deeds to be recorded in the District of
Columbia, in the State of Maryland, in the Commonwealth of Virginia, and in
the Commonwealth of Pennsylvania and to acknowledge and deliver these presents
as the act and deed of said The Riggs National Bank of Washington, D.C.
<PAGE>
17
IN WITNESS WHEREOF, said Potomac Electric Power Company has caused this Sup-
plemental Indenture to be executed on its behalf by its President or one of
its Vice Presidents and its corporate seal to be hereto affixed and said seal
and this Supplemental Indenture to be attested by its Secretary or one of its
Assistant Secretaries; and said The Riggs National Bank of Washington, D.C.,
in evidence of its acceptance of the trust hereby created, has caused this
Supplemental Indenture to be executed on its behalf by its President or one of
its Senior Vice Presidents, and its corporate seal to be hereto affixed and
said seal and this Supplemental Indenture to be attested by one of its Corpo-
rate Trust Officers, all as of the 6th day of September, One thousand nine
hundred and ninety-five.
Potomac Electric Power Company
(Corporate Seal)
/s/ D. R. Wraase
By.............................
DENNIS R. WRAASE,
Senior Vice President
Attested:
/s/ Ellen Sheriff Rogers
...................................
ELLEN SHERIFF ROGERS,
Assistant Secretary
Signed, sealed and delivered by
Potomac Electric Power Company in
the presence of:
/S/ L. J. Epperly
...................................
/s/ D. Gardner
...................................
As Witnesses
The Riggs National Bank of
Washington, D.C.
(Corporate Seal)
/s/ James B. Lynn
By............................
JAMES B. LYNN,
Vice President
Attested:
/s/ O. Clinton Jones, III
...................................
O. CLINTON JONES, III,
Senior Corporate Trust Officer
Signed, sealed and delivered by The
Riggs National Bank of Washington,
D.C. in the presence of:
/s/ David Tanenholtz
...................................
/s/ Puneet Rikhy
...................................
As Witnesses
<PAGE>
18
CITY OF WASHINGTON,
DISTRICT OF COLUMBIA, ss.:
I, Lisa A. Poole, a Notary Public in and for the District of Columbia, United
States of America, whose commission as such will expire July 31, 1997, do hereby
certify that Dennis R. Wraase and Ellen Sheriff Rogers, whose names as Senior
Vice President and Assistant Secretary, respectively, of Potomac Electric Power
Company, a corporation, are signed to the foregoing and hereto attached deed,
bearing date as of the 6th day of September, 1995, personally appeared this
day before me in my District aforesaid and acknowledged themselves to be, re-
spectively, a Senior Vice President and an Assistant Secretary of Potomac
Electric Power Company, and that they as such, being authorized so to do, exe-
cuted the said deed by signing the name of Potomac Electric Power Company by
Dennis R. Wraase, as Senior Vice President, and attested by Ellen Sheriff Rog-
ers, as Assistant Secretary, and acknowledged the same before me in my Dis-
trict aforesaid and acknowledged the foregoing instrument to be the act and
deed of Potomac Electric Power Company.
Given under my hand and official seal this 7th day of September, 1995.
(NOTARIAL SEAL)
/s/ Lisa A. Poole
............................................
Notary Public
District of Columbia
<PAGE>
19
CITY OF WASHINGTON,
DISTRICT OF COLUMBIA, ss.:
I, Lisa A. Poole, a Notary Public in and for the District of Columbia, United
States of America, do hereby certify that Dennis R. Wraase, a Senior Vice
President of Potomac Electric Power Company, a corporation, one of the parties
to the foregoing instrument bearing date as of the 6th day of September, 1995,
and hereto annexed, this day personally appeared before me in the City of
Washington, the said Dennis R. Wraase being personally well known to me as the
person who executed the said instrument as a Senior Vice President of and on
behalf of said Potomac Electric Power Company and known to me to be the
attorney-in-fact duly appointed therein to acknowledge and deliver said
instrument on behalf of said corporation, and, as such attorney-in-fact, he
acknowledged said instrument to be the act and deed of said Potomac Electric
Power Company, and delivered the same as such. I further certify that the said
Dennis R. Wraase, being by me duly sworn, did depose and say that he knows the
seal of said corporation; that the seal affixed to said instrument is such
corporate seal and was so affixed by order of the Board of Directors of said
corporation; and that he signed his name thereto by like order. My commission
expires July 31, 1997.
Given under my hand and official seal this 7th day of September, 1995.
(NOTARIAL SEAL)
/s/ Lisa A. Poole
............................................
Notary Public
District of Columbia
<PAGE>
20
CITY OF WASHINGTON,
DISTRICT OF COLUMBIA, ss.:
I, William K. Scott, a Notary Public in and for the District of Columbia,
United States of America, do hereby certify that James B. Lynn and O. Clinton
Jones,III, whose names as Vice President and Senior Corporate Trust Officer,
respectively, of The Riggs National Bank of Washington, D.C., a corporation, are
signed to the foregoing and hereto attached deed, bearing date as of the 6th day
of September, 1995, personally appeared before me this day in my District afore-
said and acknowledged themselves to be, respectively, a Vice President and a
Senior Corporate Trust Officer of The Riggs National Bank of Washington, D.C.,
and that they as such, being authorized so to do, executed the said deed by
signing the name of The Riggs National Bank of Washington, D.C., by James B.
Lynn as Vice President, and attested by O. Clinton Jones, III, as Senior Cor-
porate Trust Officer, and acknowledged the same before me in my District
aforesaid and acknowledged the foregoing instrument to be the act and deed of
The Riggs National Bank of Washington, D.C., as therein set forth.
Given under my hand and notarial seal this 7th day of September, 1995.
(NOTARIAL SEAL)
/s/ William K. Scott
...............................................
Notary Public
District of Columbia
My Commission Expires August 31, 1999.
<PAGE>
21
CITY OF WASHINGTON,
DISTRICT OF COLUMBIA, ss.:
JAMES B. LYNN, of full age, being sworn according to law, on his oath deposes
and says that he is a Vice President of THE RIGGS NATIONAL BANK OF WASHINGTON,
D.C., the Trustee named in the foregoing Supplemental Indenture, dated as of
the 6th day of September, 1995, that he is the agent of said Trustee for the
purpose of perfecting such Supplemental Indenture and that the consideration
in the Original Indenture referred to therein and in all indentures supplemen-
tal to said Original Indenture, including the foregoing Supplemental Inden-
ture, is true and bona fide as therein set forth.
/s/ James B. Lynn
............................................
JAMES B. LYNN
Subscribed and sworn to before me
this 7th day of September, 1995.
/s/ William K. Scott
...................................
Notary Public
District of Columbia
My Commission Expires August 31, 1999.
(NOTARIAL SEAL)
<PAGE>
22
CITY OF WASHINGTON,
DISTRICT OF COLUMBIA, ss.:
I, William K. Scott, a Notary Public in and for the District of Columbia,
United States of America, do hereby certify that James B. Lynn a Vice President
of THE RIGGS NATIONAL BANK OF WASHINGTON, D.C., a corporation, one of the
parties to the foregoing instrument bearing date as of the 6th day of September,
1995, and hereto annexed, this day personally appeared before me in the City of
Washington, the said James B. Lynn, being personally well known to me as the
person who executed the said instrument as a Vice President of and on behalf of
said The Riggs National Bank of Washington, D.C., and known to me to be the
attorney-in-fact duly appointed therein to acknowledge and deliver said
instrument on behalf of said corporation, and, as such attorney-in-fact, he
acknowledged said instrument to be the act and deed of said The Riggs National
Bank of Washington, D.C., and delivered the same as such. I further certify that
the said James B. Lynn, being by me duly sworn, did depose and say that he knows
the seal of said corporation; that the seal affixed to said instrument is such
corporate seal and was so affixed by order of the Board of Directors of said
corporation; and that he signed his name thereto by like order.
Given under my hand and official seal this 7th day of September, 1995.
(NOTARIAL SEAL)
/s/ William K. Scott
...............................................
Notary Public
District of Columbia
My Commission Expires August 31, 1999.
<PAGE>
23
CERTIFICATE OF RESIDENCE
The Riggs National Bank of Washington, D.C., Mortgagee and Trustee within
named, hereby certifies that its precise residence is 808-17th Street, N.W.,
Washington, D.C. 20006.
THE RIGGS NATIONAL BANK OF
WASHINGTON, D.C.
/s/ James B. Lynn
By..........................................
JAMES B. LYNN,
Vice President
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
POTOMAC ELECTRIC POWER COMPANY
1900 PENNSYLVANIA AVENUE, N.W., WASHINGTON, D.C.
TO
THE RIGGS NATIONAL BANK
OF WASHINGTON, D.C.
808-17TH STREET, N.W., WASHINGTON, D.C.
As Trustee
------------------
Supplemental Indenture
DATED AS OF SEPTEMBER 7, 1995
------------------
SUPPLEMENTAL TO MORTGAGE AND DEED OF TRUST
DATED JULY 1, 1936
------------------
FIRST MORTGAGE BONDS, 7 3/8% SERIES DUE 2025
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
POTOMAC ELECTRIC POWER COMPANY
Supplemental Indenture Dated as of September 7, 1995
TABLE OF CONTENTS*
------------------
Page
PARTIES.................................................................. 1
RECITALS................................................................. 1
PART I
Description of Bonds
SECTION 1. General description of Bonds of 2025 Series.................. 6
SECTION 2. Form of face of Bond of 2025 Series.......................... 7
Form of Trustee's certificate................................ 10
Text appearing on reverse side of Bond of 2025 Series........ 10
SECTION 3. Denominations of Bonds of 2025 Series........................ 13
SECTION 4. Execution and form of temporary Bonds........................ 13
PART II
Issue of Bonds
SECTION 1. Limitation as to principal amount............................ 13
SECTION 2. Issue of Bonds............................................... 14
PART III
Redemption
SECTION 1. Bonds of 2025 Series redeemable ............................. 14
SECTION 2. Notice of Redemption, etc. .................................. 15
PART IV
ADDITIONAL PARTICULAR COVENANTS OF THE COMPANY
SECTION 1. Company not to withdraw moneys pursuant to Section 2 of
Article VIII in excess of an amount equal to principal
amount of issued refundable bonds........................... 15
SECTION 2. No property additions made on or prior to December 31, 1946
to be used for any purpose under the Indenture.............. 15
- ---------
* The Table of Contents is not part of the Supplemental Indenture and should
not be considered as such. It is included herein only for purposes of
convenient reference.
<PAGE>
ii
PART V
Page
Amendment of Indenture to Permit Qualification Under Trust Indenture Act
of 1939................................................................. 16
PART VI
Amendment of Original Indenture........................................... 16
PART VII
THE TRUSTEE
Acceptance of trusts by the Trustee....................................... 16
Trustee not responsible for validity of the Supplemental Indenture........ 17
PART VIII
MISCELLANEOUS PROVISIONS
Execution of Supplemental Indenture in counterparts....................... 17
Appointment of attorneys-in-fact by parties............................... 17
TESTIMONIUM............................................................... 18
EXECUTION................................................................. 18
COMPANY'S ACKNOWLEDGMENTS................................................. 19
TRUSTEE'S ACKNOWLEDGMENTS................................................. 21
<PAGE>
SUPPLEMENTAL INDENTURE, dated as of the seventh day of September, nineteen
hundred and ninety-five (1995), made by and between POTOMAC ELECTRIC POWER
COMPANY, a corporation organized and existing under the laws of the District
of Columbia and a domestic corporation of the Commonwealth of Virginia (here-
inafter sometimes called the "Company"), party of the first part, and THE
RIGGS NATIONAL BANK OF WASHINGTON, D.C., a national banking association orga-
nized and existing under the laws of the United States of America (hereinafter
sometimes called the "Trustee"), as Trustee under the Mortgage and Deed of
Trust dated July 1, 1936, hereinafter mentioned, party of the second part;
WHEREAS, The Company has heretofore executed and delivered its Mortgage and
Deed of Trust, dated July 1, 1936 (hereinafter sometimes referred to as the
"Original Indenture"), to the Trustee, to secure an issue of First Mortgage
Bonds of the Company, issuable in series; and
WHEREAS, pursuant to the terms and provisions of the Original Indenture, in-
dentures supplemental thereto dated as of July 1, 1936, December 1, 1939, Au-
gust 1, 1940, August 1, 1942, January 1, 1948, May 1, 1949, May 1, 1950, March
1, 1952, May 15, 1953, May 16, 1955, June 1, 1956, December 1, 1958, November
16, 1959, December 1, 1960, February 15, 1963, May 15, 1964, April 1, 1966,
May 1, 1967, February 15, 1968, March 15, 1969, February 15, 1970, August 15,
1970, September 15, 1972, April 1, 1973, January 2, 1974, August 15, 1974, Au-
gust 15, 1974, June 15, 1977, July 1, 1979, June 16, 1981, June 17, 1981, De-
cember 1, 1981, August 1, 1982, October 1, 1982, April 15, 1983, November 1,
1985, March 1, 1986, November 1, 1986, March 1, 1987, September 16, 1987, May
1, 1989, August 1, 1989, April 5, 1990, May 21, 1991, May 7, 1992, September
1, 1992, November 1, 1992, March 1, 1993, March 2, 1993, July 1, 1993, August
20, 1993, September 29, 1993, September 30, 1993, October 1, 1993, February
10, 1994, February 11, 1994, March 10, 1995 and September 6, 1995 have been
heretofore entered into between the Company and the Trustee to provide, re-
spectively, for the creation of the first through the sixtieth series of Bonds
thereunder and, in the case of the supplemental indentures dated January 1,
1948, March 1, 1952, May 15, 1953, May 16, 1955, June 1, 1956, September 15,
1972, July 1, 1979, June 17, 1981, November 1, 1985, September 16, 1987, May
1, 1989, May 21, 1991, May 7, 1992, July 1, 1993 and one of the supplemental
indentures dated August 15, 1974, to convey additional property; and
<PAGE>
2
WHEREAS, $20,000,000 principal amount of Bonds of the 3 1/4% Series due 1966
(the first series), $5,000,000 principal amount of Bonds of the 3 1/4% Series
due 1974 (the second series), $10,000,000 principal amount of Bonds of the 3
1/4% Series due 1975 (the third series), $5,000,000 principal amount of Bonds
of the 3 1/4% Series due 1977 (the fourth series), $15,000,000 principal
amount of Bonds of the 3% Series due 1983 (the fifth series), $10,000,000
principal amount of Bonds of the 2 7/8% Series due 1984 (the sixth series),
$30,000,000 principal amount of Bonds of the 2 3/4% Series due 1985 (the sev-
enth series), $15,000,000 principal amount of Bonds of the 3 1/4% Series due
1987 (the eighth series), $10,000,000 principal amount of Bonds of the 3 7/8%
Series due 1988 (the ninth series), $10,000,000 principal amount of Bonds of
the 3 3/8% Series due 1990 (the tenth series), $10,000,000 principal amount of
Bonds of the 3 5/8% Series due 1991 (the eleventh series), $25,000,000 princi-
pal amount of Bonds of the 4 5/8% Series due 1993 (the twelfth series),
$15,000,000 principal amount of Bonds of the 5 1/4% Series due 1994 (the thir-
teenth series), $45,000,000 principal amount of Bonds of the 7 3/4% Series due
2004 (the twentieth series), $35,000,000 principal amount of Bonds of the
8.85% Series due 2005 (the twenty-first series), $70,000,000 principal amount
of Bonds of the 9 1/2% Series due August 15, 2005 (the twenty-second series),
$50,000,000 principal amount of Bonds of the 7 3/4% Series due 2007 (the twen-
ty-third series), $25,000,000 principal amount of Bonds of the 5 5/8% Series
due 1997 (the twenty-fourth series), $100,000,000 principal amount of Bonds of
the 8 3/8% Series due 2009 (the twenty-fifth series), $50,000,000 principal
amount of Bonds of the 10 1/4% Series due 1981 (the twenty-sixth series),
$50,000,000 principal amount of Bonds of the 10 3/4% Series due 2004 (the
twenty-seventh series), $38,300,000 principal amount of Bonds of the 6 1/8%
Series due 2007 (the twenty-eighth series), $15,000,000 principal amount of
Bonds of the 6 1/2% Series due 2004 (the twenty-ninth series), $20,000,000
principal amount of Bonds of the 6 1/2% Series due 2007 (the thirtieth se-
ries), $7,500,000 principal amount of Bonds of the 6 5/8% Series due 2009 (the
thirty-first series), $30,000,000 principal amount of Bonds of the Floating
Rate Series due 2010 (the thirty-second series), $50,000,000 principal amount
of Bonds of the 14 1/2% Series due 1991 (the thirty-third series), $60,000,000
principal amount of Bonds of the 14 1/4% Series due 1992 (the thirty-fifth se-
ries), $50,000,000 principal amount of Bonds of the 11 7/8% Series due 1989
(the thirty-sixth series), $37,000,000
<PAGE>
3
principal amount of Bonds of the 8 3/4% Series due 2010 (the thirty-seventh
series), $75,000,000 principal amount of Bonds of the 11 1/4% Series due 2015
(the thirty-eighth series), $75,000,000 principal amount of Bonds of the 9
1/4% Series due 2016 (the thirty-ninth series), $75,000,000 principal amount
of Bonds of the 8 3/4% Series due 2016 (the fortieth series), $75,000,000
principal amount of Bonds of the 8 1/4% Series due 2017 (the forty-first se-
ries), $75,000,000 principal amount of Bonds of the 9% Series due 1990 (the
forty-second series) and $75,000,000 principal amount of Bonds of the 9 3/4%
Series due 2019 (the forty-third series), have been heretofore redeemed and
retired and there are now issued and outstanding under the Original Indenture
and under the supplemental indentures referred to above: $40,000,000 principal
amount of Bonds of the 5% Series due 1995 (the fourteenth series); $50,000,000
principal amount of Bonds of the 4 3/8% Series due 1998 (the fifteenth se-
ries); $45,000,000 principal amount of Bonds of the 4 1/2% Series due 1999
(the sixteenth series); $15,000,000 principal amount of Bonds of the 5 1/8%
Series due 2001 (the seventeenth series); $35,000,000 principal amount of
Bonds of the 5 7/8% Series due 2002 (the eighteenth series); $40,000,000 prin-
cipal amount of Bonds of the 6 5/8% Series due 2003 (the nineteenth series);
$50,000,000 principal amount of Bonds of the Adjustable Rate Series due 2001
(the thirty-fourth series); $59,800,000 principal amount of Bonds of the 8
5/8% Series due 2019 (the forty-fourth series); $100,000,000 principal amount
of Bonds of the 9% Series due 2000 (the forty-fifth series); $100,000,000
principal amount of Bonds of the 9% Series due 2021 (the forty-sixth series);
$75,000,000 principal amount of Bonds of the 8 1/2% Series due 2027 (the for-
ty-seventh series); $30,000,000 principal amount of Bonds of the 6% Series due
2022 (the forty-eighth series); $37,000,000 principal amount of Bonds of the 6
3/8% Series due 2023 (the forty-ninth series); $78,000,000 principal amount of
Bonds of the 6 1/2% Series due 2008 (the fiftieth series); $40,000,000 princi-
pal amount of Bonds of the 7 1/2% Series due 2028 (the fifty-first series);
$100,000,000 principal amount of Bonds of the 7 1/4% Series due 2023 (the fif-
ty-second series); $100,000,000 principal amount of Bonds of the 6 7/8% Series
due 2023 (the fifty-third series); $50,000,000 principal amount of Bonds of
the 5 5/8% Series due 2003 (the fifty-fourth series); $50,000,000 principal
amount of Bonds of the 5 7/8% Series due 2008 (the fifty-fifth series);
$75,000,000 principal amount of Bonds of the 6 7/8% Series due 2024 (the fif-
ty-sixth series); $42,500,000 principal amount of
<PAGE>
4
Bonds of the 5 3/8% Series due 2024 (the fifty-seventh series); $38,300,000
principal amount of Bonds of the 5 3/8% Series due 2024 (the fifty-eighth se-
ries); $16,000,000 principal amount of Bonds of the 5 3/4% Series due 2010
(the fifty-ninth series); and $100,000,000 principal amount of Bonds of the 6
1/2% series due 2005 (the sixtieth series); and
WHEREAS, for the purpose of conforming the Original Indenture to the stan-
dards prescribed by the Trust Indenture Act of 1939 or otherwise modifying
certain of the provisions of the Original Indenture, indentures supplemental
thereto dated December 10, 1939, August 10, 1942, October 15, 1942, April 1,
1966, June 16, 1981, June 17, 1981, December 1, 1981, August 1, 1982, October
1, 1982, April 15, 1983, November 1, 1985, March 1, 1986, November 1, 1986,
March 1, 1987, September 16, 1987, May 1, 1989, August 1, 1989, April 5, 1990,
May 21, 1991, May 7, 1992, September 1, 1992, November 1, 1992, March 1, 1993,
March 2, 1993, July 1, 1993, August 20, 1993, September 29, 1993, September
30, 1993, October 1, 1993, February 10, 1994, February 11, 1994, March 10,
1995 and September 6, 1995 have been heretofore entered into between the Com-
pany and the Trustee, and for the purpose of conveying additional property,
indentures supplemental thereto dated July 15, 1942, October 15, 1947, Decem-
ber 31, 1948, December 31, 1949, February 15, 1951, February 16, 1953, March
15, 1954, March 15, 1955, March 15, 1956, April 1, 1957, May 1, 1958, May 1,
1959, May 2, 1960, April 3, 1961, May 1, 1962, May 1, 1963, April 23, 1964,
May 3, 1965, June 1, 1966, April 28, 1967, July 3, 1967, May 1, 1968, June 16,
1969, May 15, 1970, September 1, 1971, June 17, 1981, November 1, 1985, Sep-
tember 16, 1987, May 1, 1989, May 21, 1991, May 7, 1992 and July 1, 1993 have
been heretofore entered into between the Company and the Trustee, and for the
purpose of better securing and protecting the Bonds then or thereafter issued
and confirming the lien of the Original Indenture, an indenture dated October
15, 1942 supplemental thereto has been heretofore entered into between the
Company and the Trustee; the Original Indenture as heretofore amended and sup-
plemented being hereinafter referred to as the "Original Indenture as amend-
ed"; and
WHEREAS, the Company is entitled to have authenticated and delivered addi-
tional Bonds on the basis of the net bondable value of property additions,
upon compliance with the provisions of Section 4 of Article III of the Origi-
nal Indenture as amended; and
<PAGE>
5
WHEREAS, the Company has determined to issue a sixty-first series of Bonds
under the Original Indenture as amended in the principal amount of
$75,000,000, to be known as First Mortgage Bonds, 7 3/8% Series due 2025
(hereinafter called "Bonds of 2025 Series"); and
WHEREAS, the Original Indenture as amended provides that certain terms and
provisions, as determined by the Board of Directors of the Company, of the
Bonds of any particular series may be expressed in and provided by the execu-
tion of an appropriate supplemental indenture; and
WHEREAS, the Original Indenture as amended provides that the Company and the
Trustee may enter into indentures supplemental thereto to add to the covenants
and agreements of the Company contained therein other covenants and agreements
thereafter to be observed; and to surrender any right or power reserved to or
conferred upon the Company in the Original Indenture as amended; and
WHEREAS, the Company, in the exercise of the powers and authority conferred
upon and reserved to it under the provisions of the Original Indenture as
amended and pursuant to appropriate resolutions of its Board of Directors, has
duly resolved and determined to make, execute and deliver to the Trustee a
Supplemental Indenture in the form hereof for the purposes herein provided;
and
WHEREAS, all conditions and requirements necessary to make this Supplemental
Indenture a valid, binding and legal instrument have been done, performed and
fulfilled, and the execution and delivery hereof have been in all respects
duly authorized;
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
THAT POTOMAC ELECTRIC POWER COMPANY, in consideration of the premises and of
One Dollar to it duly paid by the Trustee at or before the ensealing and de-
livery of these presents, and for other valuable considerations, the receipt
whereof is hereby acknowledged, hereby covenants, declares and agrees with the
Trustee and its successors in the trust under the Original Indenture as amend-
ed, for the benefit of those who hold the Bonds and coupons, or any of them,
issued or to be issued hereunder or under the Original Indenture as amended,
as follows:
<PAGE>
6
PART I.
DESCRIPTION OF BONDS.
SECTION 1. The Bonds of 2025 Series shall, subject to the provisions of Sec-
tion 1 of Article II of the Original Indenture as amended, be designated as
"First Mortgage Bonds, 7 3/8% Series due 2025" of the Company. The Bonds of
2025 Series shall be executed, authenticated and delivered in accordance with
the provisions of, and shall in all respects be subject to, all of the terms,
conditions and covenants of the Original Indenture as amended, except in so
far as the terms and provisions of the Original Indenture as amended are
amended or modified by this Supplemental Indenture.
The Bonds of 2025 Series shall mature September 15, 2025, and shall bear in-
terest at the rate of seven and three-eighths per cent (7 3/8%) per annum,
payable semiannually, commencing March 15, 1996, on the fifteenth day of March
and the fifteenth day of September in each year (each such March 15 and Sep-
tember 15 being hereinafter called an "interest payment date"). The Bonds of
2025 Series shall be payable as to principal and interest in lawful money of
the United States of America, and shall be payable (as well the interest as
the principal thereof) at the Agency of the Company in the City of Washington,
D.C., or at the Agency of the Company in the Borough of Manhattan, The City of
New York.
The interest so payable on any interest payment date shall be paid to the
persons in whose names the Bonds of 2025 Series are registered at the close of
business on the last business day (hereinafter called the "record date") which
is more than ten days prior to such interest payment date, a "business day"
being any day that is not a day on which banks in the City of Washington,
D.C., are authorized by law to close; except that if the Company shall default
in the payment of any interest due on such interest payment date, such de-
faulted interest shall be paid to the persons in whose names the Bonds of 2025
Series are registered on the date of payment of such defaulted interest, or in
accordance with the regulations of any securities exchange on which the Bonds
of 2025 Series are listed.
Except as provided hereinafter, every Bond of 2025 Series shall be dated as
of the date of its authentication and delivery, or if that is an
<PAGE>
7
interest payment date, the next day, and shall bear interest from the interest
payment date next preceding its date or the date of delivery of the initial
Bonds of 2025 Series, whichever is later. Notwithstanding Section 6 of Article
II of the Original Indenture, any Bond of 2025 Series authenticated and deliv-
ered by the Trustee after the close of business on the record date with re-
spect to any interest payment date and prior to such interest payment date
shall be dated as of the date next following such interest payment date and
shall bear interest from such interest payment date; except that if the Com-
pany shall default in the payment of any interest due on such interest payment
date, such Bond shall bear interest from the next preceding interest payment
date or the date of delivery of the initial Bonds of 2025 Series, whichever is
later.
SECTION 2. The Bonds of 2025 Series, and the Trustee's certificate to be en-
dorsed on the Bonds of 2025 Series, shall be substantially in the following
forms, respectively:
[FORM OF FACE OF BOND OF 2025 SERIES]
POTOMAC ELECTRIC POWER COMPANY
(A District of Columbia and Virginia corporation)
FIRST MORTGAGE BOND, 7 3/8% SERIES DUE 2025
No. $
POTOMAC ELECTRIC POWER COMPANY, a corporation organized and existing under
the laws of the District of Columbia and a domestic cor- poration of the Com-
monwealth of Virginia (hereinafter called the "Company", which term shall in-
clude any successor corporation as defined in the Amended Indenture hereinaf-
ter referred to), for value received, hereby promises to pay to
................... or registered assigns, the sum of .................. dol-
lars, on the fifteenth day of September, 2025, in lawful money of the United
States of America, and to pay interest thereon in like money from the later of
the date of delivery of the initial Bonds of 2025 Series or the interest pay-
ment date March 15 or September 15 next preceding the date of this Bond, or if
the Company shall default in the payment of interest due on such interest pay-
ment date,
<PAGE>
8
then from the next preceding interest payment date or the date of delivery of
the initial Bonds of 2025 Series, whichever is later, at the rate of seven and
three-eighths percent (7 3/8%) per annum, payable semiannually, commencing
March 15, 1996, on the fifteenth day of March and September in each year until
maturity, or, if the Company shall default in the payment of the principal
hereof, until the Company's obligation with respect to the payment of such
principal shall be discharged as provided in the Amended Indenture. The inter-
est so payable on any March 15 or September 15 will, subject to certain excep-
tions provided in the indenture dated as of September 7, 1995 supplemental to
the Amended Indenture, be paid to the person in whose name this Bond is regis-
tered at the close of business on the last business day which is more than ten
days prior to such March 15 or September 15. Both principal of, and interest
on, this Bond are payable at the agency of the Company in the City of Washing-
ton, D.C., or, at the option of the holder, at the agency of the Company in
the Borough of Manhattan, The City of New York.
Reference is made to the further provisions of this Bond set forth on the re-
verse hereof, and such further provisions shall for all purposes have the same
effect as though fully set forth at this place.
This Bond shall not be entitled to any benefit under the Amended Indenture or
any indenture supplemental thereto, or become valid or
obligatory for any purpose, until The Riggs National Bank of Washington, D.C.,
the Trustee under the Amended Indenture, or a successor trustee thereto under
the Amended Indenture, shall have signed the form of certificate endorsed
hereon.
<PAGE>
9
IN WITNESS WHEREOF, Potomac Electric Power Company has caused this Bond to be
signed in its name by the signature (or a facsimile thereof) of its President
or a Vice President, and its corporate seal (or a facsimile thereof) to be
hereto affixed and attested by the facsimile signature of its Secretary or an
Assistant Secretary.
Dated,
POTOMAC ELECTRIC POWER COMPANY
By......................................
Vice President
Attest:
...................................
Secretary
<PAGE>
10
[FORM OF TRUSTEE'S CERTIFICATE]
This Bond is one of the Bonds, of the series designated therein, described in
the within-mentioned Amended Indenture and the Supplemental Indenture dated as
of September 7, 1995.
THE RIGGS NATIONAL BANK OF WASHINGTON, D.C.
Trustee.
By...................................
Authorized Officer
[TEXT APPEARING ON REVERSE SIDE OF BOND OF 2025 SERIES]
This Bond is one of a duly authorized issue of Bonds of the Company (herein-
after called the "Bonds") in unlimited aggregate principal amount, of the se-
ries hereinafter specified, all issued and to be issued under and equally se-
cured (except in so far as any purchase or sinking fund or analogous provi-
sions for any particular series of Bonds, established by any indenture supple-
mental to the Amended Indenture hereinafter mentioned, may afford additional
security for such Bonds) by a mortgage and deed of trust, dated July 1, 1936,
executed by the Company to The Riggs National Bank of Washington, D.C. (herein
called the "Trustee"), as trustee, as amended by indentures supplemental
thereto dated December 10, 1939, August 10, 1942, October 15, 1942, April 1,
1966, June 16, 1981, June 17, 1981, December 1, 1981, August 1, 1982, October
1, 1982, April 15, 1983, November 1, 1985, March 1, 1986, November 1, 1986,
March 1, 1987, September 16, 1987, May 1, 1989, August 1, 1989, April 5, 1990,
May 21, 1991, May 7, 1992, September 1, 1992, November 1, 1992, March 1, 1993,
March 2, 1993, July 1, 1993, August 20, 1993, September 29, 1993, September
30, 1993, October 1, 1993, February 10, 1994, February 11, 1994, March 10,
1995 and September 6, 1995 (said mortgage and deed of trust, as so amended,
being herein called the "Amended Indenture") and all indentures supplemental
thereto, to which Amended Indenture and supplemental indentures reference is
hereby made for a description of the properties mortgaged and pledged, the na-
ture and extent of the security, the rights of the owners of the Bonds and of
the Trustee in respect there-
<PAGE>
11
to, and the terms and conditions upon which the Bonds are, and are to be, se-
cured. To the extent permitted by, and as provided in, the Amended Indenture,
modifications or alterations of the Amended Indenture, or of any indenture
supplemental thereto, and of the rights and obligations of the Company and of
the holders of the Bonds may be made with the consent of the Company by an af-
firmative vote of not less than 80% in amount of the Bonds entitled to vote
then outstanding, at a meeting of Bondholders called and held as provided in
the Amended Indenture, and by an affirmative vote of not less than 80% in
amount of the Bonds of any series entitled to vote then outstanding and af-
fected by such modification or alteration, in case one or more but less than
all of the series of Bonds then outstanding under the Amended Indenture are so
affected; provided, however, that no such modification or alteration shall be
made which will affect the terms of payment of the principal of, or interest
on, this Bond, which are unconditional, or which reduces the percentage of
Bonds the affirmative vote of which is required for the making of such modifi-
cations or alterations. The Company is proposing an amendment to the Amended
Indenture which would replace "80%" with "60%" in the preceding sentence,
which amendment will become effective upon the consent or agreement thereto of
the holders of all the outstanding Bonds. The holder of this Bond will be
deemed to have approved such amendment. The Bonds may be issued in series, for
various principal sums, may mature at different times, may bear interest at
different rates and may otherwise vary as in the Amended Indenture provided.
This Bond is one of a series designated as the "First Mortgage Bonds, 7 3/8%
Series due 2025" (herein called the "Bonds of 2025 Series") of the Company,
issued under and secured by the Amended Indenture and all indentures supple-
mental thereto and described in the indenture (herein called the "New Supple-
mental Indenture"), dated as of September 7, 1995, between the Company and the
Trustee, supplemental to the Amended Indenture.
The Bonds of 2025 Series are subject to redemption, at any time or from time
to time after September 14, 2005 and prior to maturity, at the option of the
Company, either as a whole or in part by lot, upon payment of the redemption
prices applicable to the respective period set forth below, together, in each
case, with accrued interest to the redemption
<PAGE>
12
date, all subject to the conditions and as more fully set forth in the Amended
Indenture and the New Supplemental Indenture:
<TABLE>
<CAPTION>
REDEMPTION PRICE
IF REDEEMED EXPRESSED AS
DURING THE PERCENTAGE OF
12 MONTH PERIOD THE PRINCIPAL
NDING SEPTEMBER 14E AMOUNT OF BONDS
- ------------------- ----------------
<S> <C>
2006............. 103.38%
2007............. 103.04
2008............. 102.70
2009............. 102.36
2010............. 102.03
2011............. 101.69
</TABLE>
<TABLE>
<CAPTION>
REDEMPTION PRICE
IF REDEEMED EXPRESSED AS
DURING THE PERCENTAGE OF
12 MONTH PERIOD THE PRINCIPAL
ENDING SEPTEMBER 14 AMOUNT OF BONDS
------------------- ----------------
<S> <C>
2012.................... 101.35%
2013.................... 101.02
2014.................... 100.68
2015.................... 100.34
2016 and thereafter..... 100.00
</TABLE>
Notice of any redemption shall be sent by the Company through the mails,
postage prepaid, at least thirty days and not more than sixty days prior to
the redemption date, to the registered owners of any of the Bonds to be re-
deemed, at their addresses as the same shall appear on the transfer register
of the Company, all subject to the conditions and as more fully set forth in
the Amended Indenture and New Supplemental Indenture. Any notice so mailed
shall be conclusively presumed to have been duly given, whether or not the
owner receives it.
In case an event of default, as defined in the Amended Indenture, shall oc-
cur, the principal of all the Bonds at any such time outstanding under the
Amended Indenture may be declared or may become due and payable, upon the con-
ditions and in the manner and with the effect provided in the Amended Inden-
ture. The Amended Indenture provides that such declaration may in certain
events be waived by the holders of a majority in principal amount of the Bonds
entitled to vote then outstanding.
This Bond is transferable by the registered owner hereof, in person or by
duly authorized attorney, on the books of the Company to be kept for that pur-
pose at the agency of the Company in the City of Washington, D.C., or at the
agency of the Company in the Borough of Manhattan, The City of New York, upon
surrender and cancellation of this Bond and on presentation of a duly executed
written instrument of transfer, and thereupon a new Bond or Bonds of the same
series, of the same aggregate principal amount and in authorized denominations
will be issued to the transferee or transferees in exchange therefor; and this
Bond, with or without others of the same series, may in like manner be ex-
changed
<PAGE>
13
for one or more new Bonds of the same series of other authorized denominations
but of the same aggregate principal amount; all subject to the terms and con-
ditions set forth in the Amended Indenture.
No recourse shall be had for the payment of the principal of, or the interest
on, this Bond, or for any claim based hereon or otherwise in respect hereof or
of the Amended Indenture or any indenture supplemental thereto, against any
incorporator, or against any stockholder, director or officer, past, present
or future, of the Company or of any predecessor or successor corporation, ei-
ther directly or through the Company or any such predecessor or successor cor-
poration, whether for amounts unpaid on stock subscriptions or by virtue of
any constitution, statute or rule of law, or by the enforcement of any assess-
ment or penalty or otherwise, all such liability, whether at common law, in
equity, by any constitution, statute or otherwise, of incorporators, stock-
holders, directors or officers being released by every owner hereof by the ac-
ceptance of this Bond and as part of the consideration for the issue hereof,
and being likewise released by the terms of the Amended Indenture.
SECTION 3. The Bonds of 2025 Series shall be registered Bonds without coupons
in denominations of any multiple of $1,000, numbered consecutively upwards
from R1.
SECTION 4. Until Bonds of 2025 Series in definitive form are ready for deliv-
ery, the Company may execute, and upon its request in writing the Trustee
shall authenticate and deliver, in lieu thereof, Bonds for such series in tem-
porary form, as provided in Section 9 of Article II of the Original Indenture
as amended.
PART II.
ISSUE OF BONDS.
SECTION 1. Except for Bonds of 2025 Series issued pursuant to Section 13 of
Article II of the Original Indenture as amended, the principal amount of Bonds
of 2025 Series which may be authenticated and delivered hereunder is limited
to $75,000,000 aggregate principal amount.
<PAGE>
14
SECTION 2. Bonds of 2025 Series in the aggregate principal amount permitted
in Section 1 of this Part II, may at any time subsequent to the execution
hereof be executed by the Company and delivered to the Trustee and shall be
authenticated by the Trustee and delivered (either before or after the record-
ing hereof) to or upon the order of the Company evidenced by a writing or
writings, signed by its President or one of its Vice Presidents and its Trea-
surer or one of its Assistant Treasurers, at such time or times as may be re-
quested by the Company subsequent to the receipt by the Trustee of
(1) the certified resolution and the officers' certificate required by Sec-
tion 3(a) and Section 3(b) of Article III of the Original Indenture as
amended;
(2) the opinion of counsel required by Section 3(c) of Article III of the
Original Indenture as amended;
(3) cash, if any, in the amount required to be deposited by Section 3(d) of
Article III of the Original Indenture as amended, which shall be held and
applied by the Trustee as provided in said Section 3(d);
(4) the certificates, instruments, opinions of counsel, prior lien bonds
and cash, if any, required by Section 4 of Article III of the Original In-
denture as amended, except that, as required by Part IV of this Supplemental
Indenture, property additions purchased, constructed or otherwise acquired
on or before December 31, 1946 shall not be made the basis for the authenti-
cation and delivery of Bonds of 2025 Series; and
(5) the certificates and opinions required by Article XVIII of the Original
Indenture as amended.
PART III.
REDEMPTION.
SECTION 1. The Bonds of 2025 Series are not redeemable up to and including
September 14, 2005. The Bonds of 2025 Series shall, in accordance with the
provisions of Article V of the Original Indenture as amended, be redeemable,
at any time or from time to time after September 14, 2005 and prior to maturi-
ty, at the option of the Company, either
<PAGE>
15
as a whole or in part by lot, upon payment of the redemption prices applicable
to the respective periods set forth in the form of Bond of 2025 Series con-
tained in Section 2 of Part I hereof, together, in each case, with accrued in-
terest to the redemption date.
SECTION 2. In accordance with the provisions of Article V of the Original In-
denture as amended, notice of any redemption shall be sent by the Company
through the mails, postage prepaid, at least thirty days and not more than
sixty days prior to the date of redemption, to the registered owners of any of
the Bonds to be redeemed at their addresses as the same shall appear on the
transfer register of the Company. Any notice so mailed shall be conclusively
presumed to have been duly given, whether or not the owner receives it.
All Bonds delivered to or redeemed by the Trustee pursuant to the provisions
of this Part III shall forthwith be cancelled.
PART IV.
ADDITIONAL PARTICULAR COVENANTS OF THE COMPANY.
The Company hereby covenants, warrants and agrees that so long as any Bonds
of 2025 Series are outstanding:
SECTION 1. The Company will not withdraw, pursuant to the provisions of Sec-
tion 2 of Article VIII of the Original Indenture as amended, any moneys held
by the Trustee as part of the trust estate in excess of an amount equal to the
aggregate principal amount of such of the refundable Bonds as were theretofore
issued by the Company; and that upon any such withdrawal by the Company re-
fundable Bonds equal in aggregate principal amount to the amount so withdrawn
shall be deemed to have been made the basis of such withdrawal.
SECTION 2. Property additions purchased, constructed or otherwise acquired on
or before December 31, 1946 shall not be made the basis for the authentication
and delivery of Bonds, or the withdrawal of cash, or the reduction of the
amount of cash required to be paid to the Trustee under any provision of the
Indenture.
<PAGE>
16
PART V.
AMENDMENT OF INDENTURE TO PERMIT QUALIFICATION
UNDER TRUST INDENTURE ACT OF 1939.
The Company and the Trustee, from time to time and at any time, without any
vote or consent of the holders of the Bonds of 2025 Series, may enter into
such indentures supplemental to the Original Indenture as may or shall by them
be deemed necessary or desirable to add to or modify or amend any of the pro-
visions of the Original Indenture so as to permit the qualification of the
Original Indenture under the Trust Indenture Act of 1939.
Except to the extent specifically provided herein, no provision of this Sup-
plemental Indenture is intended to modify, and the parties hereto do hereby
adopt and confirm, the provisions of Section 318(c) of the Trust Indenture Act
of 1939 which amend and supersede provisions of the Original Indenture, as
supplemented, in effect prior to November 15, 1990.
PART VI.
AMENDMENT OF ORIGINAL INDENTURE.
Notwithstanding any other provisions of the Original Indenture as amended,
the holders of the Bonds of 2025 Series, by their holding of such Bonds, are
deemed to have approved the following amendment to the Original Indenture as
amended and to have authorized the Trustee to take any action necessary to ev-
idence or effectuate such approval:
Sections 5 and 6 of Article XV of the Original Indenture as amended are
hereby amended by changing the words and figures "eighty percent. (80%)" to
the words and figures "sixty percent. (60%)" wherever in such Sections such
words and figures occur.
PART VII.
THE TRUSTEE.
The Trustee hereby accepts the trusts hereby declared and provided and agrees
to perform the same upon the terms and conditions in the
<PAGE>
17
Original Indenture as amended set forth and upon the following terms and con-
ditions:
The Trustee shall not be responsible in any manner whatsoever for or in re-
spect of the validity or sufficiency of this Supplemental Indenture or the due
execution hereof by the Company or for or in respect of the recitals contained
herein, all of which recitals are made by the Company solely. In general, each
and every term and condition contained in Article XIII of the Original Inden-
ture as amended shall apply to this Supplemental Indenture with the same force
and effect as if the same were herein set forth in full, with such omissions,
variations and modifications thereof as may be appropriate to make the same
conform to this Supplemental Indenture.
PART VIII.
MISCELLANEOUS PROVISIONS.
This Supplemental Indenture may be simultaneously executed in any number of
counterparts, each of which when so executed shall be deemed to be an origi-
nal; but such counterparts shall together constitute but one and the same in-
strument.
Potomac Electric Power Company hereby constitutes and appoints Dennis R.
Wraase, one of its Senior Vice Presidents, to be its true and lawful attorney-
in-fact, for it and in its name to appear before any officer authorized by law
to take and certify acknowledgments of deeds to be recorded in the District of
Columbia, in the State of Maryland, in the Commonwealth of Virginia, and in
the Commonwealth of Pennsylvania and to acknowledge and deliver these presents
as the act and deed of said Potomac Electric Power Company.
The Riggs National Bank of Washington, D.C., hereby constitutes and appoints
James B. Lynn, one of its Vice Presidents, to be its true and lawful attorney-
in-fact, for it and in its name to appear before any officer authorized by law
to take and certify acknowledgments of deeds to be recorded in the District of
Columbia, in the State of Maryland, in the Commonwealth of Virginia, and in
the Commonwealth of Pennsylvania and to acknowledge and deliver these presents
as the act and deed of said The Riggs National Bank of Washington, D.C.
<PAGE>
18
IN WITNESS WHEREOF, said Potomac Electric Power Company has caused this Sup-
plemental Indenture to be executed on its behalf by its President or one of
its Vice Presidents and its corporate seal to be hereto affixed and said seal
and this Supplemental Indenture to be attested by its Secretary or one of its
Assistant Secretaries; and said The Riggs National Bank of Washington, D.C.,
in evidence of its acceptance of the trust hereby created, has caused this
Supplemental Indenture to be executed on its behalf by its President or one of
its Senior Vice Presidents, and its corporate seal to be hereto affixed and
said seal and this Supplemental Indenture to be attested by one of its Corpo-
rate Trust Officers, all as of the 7th day of September, One thousand nine
hundred and ninety-five.
POTOMAC ELECTRIC POWER COMPANY
(CORPORATE SEAL)
/s/ Dennis R. Wraase
By..................................
DENNIS R. WRAASE,
Senior Vice President
Attested:
/s/ Ellen Sheriff Rogers
...................................
ELLEN SHERIFF ROGERS,
Assistant Secretary
Signed, sealed and delivered by
Potomac Electric Power Company in
the presence of:
/s/ P. G. Middleton
...................................
/s/ Wanda P. Hepler
...................................
As Witnesses
THE RIGGS NATIONAL BANK OF
WASHINGTON, D.C.
(CORPORATE SEAL)
/s/ James B. Lynn
By..................................
JAMES B. LYNN,
Vice President
Attested:
/s/ O. Clinton Jones, III
...................................
O. CLINTON JONES, III,
Senior Corporate Trust Officer
Signed, sealed and delivered by The
Riggs National Bank of Washington,
D.C. in the presence of:
/s/ David Tanenholtz
...................................
/s/ Puneet Rikhy
...................................
As Witnesses
<PAGE>
19
CITY OF WASHINGTON,
DISTRICT OF COLUMBIA, ss.:
I, Lisa A. Poole, a Notary Public in and for the District of Columbia, United
States of America, whose commission as such will expire July 31, 1997, do hereby
certify that Dennis R. Wraase and Ellen Sheriff Rogers, whose names as Senior
Vice President and Assistant Secretary, respectively, of POTOMAC ELECTRIC POWER
COMPANY, a corporation, are signed to the foregoing and hereto attached deed,
bearing date as of the 7th day of September, personally appeared this day be-
fore me in my District aforesaid and acknowledged themselves to be, respec-
tively, a Senior Vice President and an Assistant Secretary of Potomac Electric
Power Company, and that they as such, being authorized so to do, executed the
said deed by signing the name of Potomac Electric Power Company by Dennis R.
Wraase, as Senior Vice President, and attested by Ellen Sheriff Rogers, as As-
sistant Secretary, and acknowledged the same before me in my District afore-
said and acknowledged the foregoing instrument to be the act and deed of Poto-
mac Electric Power Company.
Given under my hand and official seal this 7th day of September, 1995.
(NOTARIAL SEAL)
/s/ Lisa A. Poole
............................................
Notary Public
District of Columbia
<PAGE>
20
CITY OF WASHINGTON,
DISTRICT OF COLUMBIA, ss.:
I, Lisa A. Poole, a Notary Public in and for the District of Columbia, United
States of America, do hereby certify that Dennis R. Wraase, a Senior Vice
President of POTOMAC ELECTRIC POWER COMPANY, a corporation, one of the parties
to the foregoing instrument bearing date as of the 7th day of September, and
hereto annexed, this day personally appeared before me in the City of
Washington, the said Dennis R. Wraase being personally well known to me as the
person who executed the said instrument as a Senior Vice President of and on
behalf of said Potomac Electric Power Company and known to me to be the attorney
- -in-fact duly appointed therein to acknowledge and deliver said instrument on
behalf of said corporation, and, as such attorney-in-fact, he acknowledged said
instrument to be the act and deed of said Potomac Electric Power Company, and
delivered the same as such. I further certify that the said Dennis R. Wraase,
being by me duly sworn, did depose and say that he knows the seal of said
corporation; that the seal affixed to said instrument is such corporate seal and
was so affixed by order of the Board of Directors of said corporation; and that
he signed his name thereto by like order. My commission expires July 31, 1997.
Given under my hand and official seal this 7th day of September, 1995.
(NOTARIAL SEAL)
/s/ Lisa A. Poole
............................................
Notary Public
District of Columbia
<PAGE>
21
CITY OF WASHINGTON,
DISTRICT OF COLUMBIA, ss.:
I, William K. Scott, a Notary Public in and for the District of Columbia,
United States of America, do hereby certify that James B. Lynn and O. Clinton
Jones, III, whose names as Vice President and Senior Corporate Trust Officer,
respectively, of THE RIGGS NATIONAL BANK OF WASHINGTON, D.C., a corporation, are
signed to the foregoing and hereto attached deed, bearing date as of the 7th day
of September, 1995, personally appeared before me this day in my District afore-
said and acknowledged themselves to be, respectively, a Vice President and a
Senior Corporate Trust Officer of The Riggs National Bank of Washington, D.C.,
and that they as such, being authorized so to do, executed the said deed by
signing the name of The Riggs National Bank of Washington, D.C., by James B.
Lynn as Vice President, and attested by O. Clinton Jones, III, as Senior Cor-
porate Trust Officer, and acknowledged the same before me in my District
aforesaid and acknowledged the foregoing instrument to be the act and deed of
The Riggs National Bank of Washington, D.C., as therein set forth.
Given under my hand and notarial seal this 7th day of September, 1995.
(NOTARIAL SEAL)
/s/ William K. Scott
...............................................
Notary Public
District of Columbia
My Commission Expires August 31, 1999.
<PAGE>
22
CITY OF WASHINGTON,
DISTRICT OF COLUMBIA, ss.:
James B. Lynn, of full age, being sworn according to law, on his oath deposes
and says that he is a Vice President of THE RIGGS NATIONAL BANK OF WASHINGTON,
D.C., the Trustee named in the foregoing Supplemental Indenture, dated as of
the 7th day of September, 1995, that he is the agent of said Trustee for the
purpose of perfecting such Supplemental Indenture and that the consideration
in the Original Indenture referred to therein and in all indentures supplemen-
tal to said Original Indenture, including the foregoing Supplemental Inden-
ture, is true and bona fide as therein set forth.
/s/ James B. Lynn
............................................
JAMES B. LYNN
Subscribed and sworn to before me
this 7th day of September, 1995.
/s/ William K. Scott
...................................
Notary Public
District of Columbia
My Commission Expires August 31, 1999.
(NOTARIAL SEAL)
<PAGE>
23
CITY OF WASHINGTON,
DISTRICT OF COLUMBIA, ss.:
I, William K. Scott, a Notary Public in and for the District of Columbia,
United States of America, do hereby certify that James B. Lynn a Vice President
of THE RIGGS NATIONAL BANK OF WASHINGTON, D.C., a corporation, one of the
parties to the foregoing instrument bearing date as of the 7th day of September,
1995, and hereto annexed, this day personally appeared before me in the City of
Washington, the said James B. Lynn, being personally well known to me as the
person who executed the said instrument as a Vice President of and on behalf of
said The Riggs National Bank of Washington, D.C., and known to me to be the
attorney-in-fact duly appointed therein to acknowledge and deliver said
instrument on behalf of said corporation, and, as such attorney-in-fact, he
acknowledged said instrument to be the act and deed of said The Riggs National
Bank of Washington, D.C., and delivered the same as such. I further certify that
the said James B. Lynn, being by me duly sworn, did depose and say that he knows
the seal of said corporation; that the seal affixed to said instrument is such
corporate seal and was so affixed by order of the Board of Directors of said
corporation; and that he signed his name thereto by like order.
Given under my hand and official seal this 7th day of September, 1995.
(NOTARIAL SEAL)
/s/ William K. Scott
...............................................
Notary Public
District of Columbia
My Commission Expires August 31, 1999.
<PAGE>
24
CERTIFICATE OF RESIDENCE
The Riggs National Bank of Washington, D.C., Mortgagee and Trustee within
named, hereby certifies that its precise residence is 808-17th Street, N.W.,
Washington, D.C. 20006.
THE RIGGS NATIONAL BANK OF
WASHINGTON, D.C.
/s/ James B. Lynn
By..........................................
JAMES B. LYNN,
Vice President
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the "Amendment") is made as of
the 15th day of December, 1995 between POTOMAC ELECTRIC POWER COMPANY (the
"Company") and JOHN M. DERRICK, JR. (the "Executive").
RECITALS:
WHEREAS, the Company and the Executive have entered into an Employment
Agreement dated as of August 1, 1995 (the "Agreement"); and
WHEREAS, the Company and the Executive would like to amend the Agreement
in certain respects.
NOW THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. Paragraph 5(b)(i) of the Agreement and any references thereto
within the Agreement are hereby deleted in their entirety. Paragraphs
5(b)(ii) and 5(b)(iii) shall not be renumbered.
2. Except as amended herein, the Agreement shall remain in full force
and effect.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of the date set forth above.
POTOMAC ELECTRIC POWER COMPANY EXECUTIVE
/s/ Edward F. Mitchell /s/ John M. Derrick, Jr.
By: _____________________________ ___________________________
Edward F. Mitchell John M. Derrick, Jr.
Chairman of the Board and
Chief Executive Officer
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the "Amendment") is made as of
the 15th day of December, 1995 between POTOMAC ELECTRIC POWER COMPANY (the
"Company") and WILLIAM T. TORGERSON (the "Executive").
RECITALS:
WHEREAS, the Company and the Executive have entered into an Employment
Agreement dated as of August 1, 1995 (the "Agreement"); and
WHEREAS, the Company and the Executive would like to amend the Agreement
in certain respects.
NOW THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. Paragraph 5(b)(i) of the Agreement and any references thereto
within the Agreement are hereby deleted in their entirety. Paragraphs
5(b)(ii) and 5(b)(iii) shall not be renumbered.
2. Except as amended herein, the Agreement shall remain in full force
and effect.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of the date set forth above.
POTOMAC ELECTRIC POWER COMPANY EXECUTIVE
/s/ Edward F. Mitchell /s/ William T. Torgerson
By: _____________________________ ___________________________
Edward F. Mitchell William T. Torgerson
Chairman of the Board and
Chief Executive Officer
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the "Amendment") is made as of
the 15th day of December, 1995 between POTOMAC ELECTRIC POWER COMPANY (the
"Company") and DENNIS R. WRAASE (the "Executive").
RECITALS:
WHEREAS, the Company and the Executive have entered into an Employment
Agreement dated as of August 1, 1995 (the "Agreement"); and
WHEREAS, the Company and the Executive would like to amend the Agreement
in certain respects.
NOW THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. Paragraph 5(b)(i) of the Agreement and any references thereto
within the Agreement are hereby deleted in their entirety. Paragraphs
5(b)(ii) and 5(b)(iii) shall not be renumbered.
2. Except as amended herein, the Agreement shall remain in full force
and effect.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of the date set forth above.
POTOMAC ELECTRIC POWER COMPANY EXECUTIVE
/s/ Edward F. Mitchell /s/ Dennis R. Wraase
By: _____________________________ ___________________________
Edward F. Mitchell Dennis R. Wraase
Chairman of the Board and
Chief Executive Officer
SEVERANCE AGREEMENT
This Agreement is made the 1st day of November, 1995, by and
between Potomac Electric Power Company (the "Company") and
Iraline G. Barnes (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/ John M. Derrick
By:_____________________________________
Its President
_______________________________
"COMPANY"
/s/ Iraline G. Barnes
________________________________________
"EXECUTIVE"
SEVERANCE AGREEMENT
This Agreement is made the 1st day of November, 1995, by and
between Potomac Electric Power Company (the "Company") and
Earl K. Chism (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/ John M. Derrick
By:_____________________________________
Its President
_______________________________
"COMPANY"
/s/ Earl K. Chism
________________________________________
"EXECUTIVE"
SEVERANCE AGREEMENT
This Agreement is made the 1st day of November, 1995, by and
between Potomac Electric Power Company (the "Company") and
Kirk J. Emge (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/ John M. Derrick
By:_____________________________________
Its President
_______________________________
"COMPANY"
/s/ Kirk J. Emge
________________________________________
"EXECUTIVE"
SEVERANCE AGREEMENT
This Agreement is made the 1st day of November, 1995, by and
between Potomac Electric Power Company (the "Company") and
Susann D. Felton (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/ John M. Derrick
By:_____________________________________
Its President
_______________________________
"COMPANY"
/s/ Susann D. Felton
________________________________________
"EXECUTIVE"
SEVERANCE AGREEMENT
This Agreement is made the 1st day of November, 1995, by and
between Potomac Electric Power Company (the "Company") and
William R. Gee, Jr. (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/ John M. Derrick
By:_____________________________________
Its President
_______________________________
"COMPANY"
/s/ William R. Gee, Jr.
________________________________________
"EXECUTIVE"
SEVERANCE AGREEMENT
This Agreement is made the 1st day of November, 1995, by and
between Potomac Electric Power Company (the "Company") and
Anthony J. Kamerick (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/ John M. Derrick
By:_____________________________________
Its President
_______________________________
"COMPANY"
/s/ Anthony J. Kamerick
________________________________________
"EXECUTIVE"
SEVERANCE AGREEMENT
This Agreement is made the 1st day of November, 1995, by and
between Potomac Electric Power Company (the "Company") and
Eddie R. Mayberry (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/ John M. Derrick
By:_____________________________________
Its President
_______________________________
"COMPANY"
/s/ E. R. Mayberry
________________________________________
"EXECUTIVE"
SEVERANCE AGREEMENT
This Agreement is made the 1st day of November, 1995, by and
between Potomac Electric Power Company (the "Company") and
John D. McCallum (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/ John M. Derrick
By:_____________________________________
Its President
_______________________________
"COMPANY"
/s/ John D. McCallum
________________________________________
"EXECUTIVE"
SEVERANCE AGREEMENT
This Agreement is made the 1st day of November, 1995, by and
between Potomac Electric Power Company (the "Company") and
James S. Potts (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/ John M. Derrick
By:_____________________________________
Its President
_______________________________
"COMPANY"
/s/ James S. Potts
________________________________________
"EXECUTIVE"
GENERAL MEMORANDUM OF UNDERSTANDING (GMU)
Whereas, the Potomac Electric Power Company (the "Company") and Local 1900 of
the International Brotherhood of Electrical Workers (the "Union") by mutual
agreement conducted early negotiations to extend the 1993 Collective
Bargaining Agreement;
Whereas, the Company and Union have agreed to a successor Collective
Bargaining Agreement (hereinafter referred to as the "1995 Collective
Bargaining Agreement"), whose terms are set forth below; and,
Whereas, the Company and Union have agreed that the 1995 Collective Bargaining
Agreement shall be effective upon ratification except as provided elsewhere in
the Agreement;
It is, therefore, further agreed and understood between the Company and Union
that:
I. The 1995 Collective Bargaining Agreement shall extend the 1993
Collective Bargaining Agreement (except to the extent modified herein) for two
(2) years (until 6/1/98) or until the merger between the Company and BGE is
effective -- whichever occurs first. The merger shall be deemed effective at
such time as the Articles of Merger are filed with the required state and
District of Columbia authorities. The surviving corporation will be named
"Constellation Energy Corporation."
II. On January 5, 1996, each employee who is a member of the bargaining
unit on December 23, 1995, shall be paid a lump sum payment equal to 2% of
that employee's bargaining unit earnings for productive and non-productive
hours during 1995, less applicable taxes. On June 7, 1996, each employee who
is a member of the bargaining unit on June 1, 1996 shall be paid a lump sum
payment equal to 1% of that employee's bargaining unit earnings for productive
and non-productive hours during 1995, less applicable taxes.
III. On June 6, 1997, or the last day prior to the effective date of
the merger between the Company and BGE -- whichever occurs first -- each
employee who is a member of the bargaining unit on that date or as soon as
practicable thereafter shall be paid a lump sum payment equal to 3% of that
employee's bargaining unit earnings for productive and non-productive hours
during 1996, less applicable taxes.
IV. In addition to the days set forth in Section 11.01 of the 1993
Collective Bargaining Agreement, the following days will be observed as
uniform and fixed holidays during the 1995 Collective Bargaining Agreement:
Inauguration Day 1997
December 24, 1996
December 26, 1997
V. Severance Terms
The Company and Union have agreed that the Union will accept a Severance
Program (hereinafter, the "Program") that is similar to the one offered by the
<PAGE>
Company to Non-Bargaining Unit, Non-Exempt Employees and most Exempt Employees
in functional areas where there are planned reductions as a result of the
merger. Employees who involuntarily lose employment due to the merger are
eligible to participate in the Program, providing they remain employed until
they are no longer needed. Specific eligibility requirements will be
determined by the Company. The Program shall, at a minimum, contain the
following:
A. Severance Benefit for Eligible Employees: Two (2) weeks of
pay for every complete year of service, based on the Basic Wage Rate in effect
when the employee loses employment. The minimum severance payment will be 8
weeks of pay. A partial year of service will be credited in the severance
calculation as 1/2 year if the employee has at least 6 months of service at
the time of separation. For example, if an employee has 5 years and 7 months
of service, he/she would get 11 weeks of severance, but if the employee had 5
years and 5 months, he/she would get 10 weeks of severance. The severance
payment will be paid as a lump sum to employees who participate in the
Severance Program as soon as practicable after they lose employment.
B. Employees who participate in the Program will have company-
subsidized health and dental coverage, 2 weeks for each complete year of
service with a minimum of 8 weeks. Employees participating in the Severance
Program will pay whatever contributions then-covered employees normally pay
for such coverage. Failure to make timely contributions will cause subsidized
coverage to permanently lapse. After company-subsidized benefits expire, the
employee may then elect COBRA coverage.
C. Employees who participate in the Severance Program will
receive a pro rata share of any earned Gainsharing awards under the Company's
Gainsharing Program.
D. Outplacement Services (as defined by the Company) will be
made available to employees who participate in the Severance Program.
E. To receive severance benefits, employees must execute
releases prepared by the Company that waives and releases the Company and
Constellation Energy Corporation from any claim, lawsuit, or cause of action
related to the employee's employment with the Company, including his/her
failure to obtain a position in Constellation Energy Corporation.
F. Employees who participate in the Severance Program will not
be required to reimburse the Company for educational assistance provided under
the Company's Tuition Aid Program.
G. Should the Company improve the benefits referenced in A., B.
Page 2
<PAGE>
or C. above in the Program offered to Non-Bargaining Unit, Non-Exempt
Employees and most Exempt Employees who are eligible for the Severance
Program, it will provide similar improvements to Bargaining Unit employees
eligible for the Severance Program.
H. Nothing contained herein prevents the establishment of
further rules and parameters regarding the Program without further
consultation or negotiation with the Union so long as they are not
inconsistent with the above and so long as the Program offered to bargaining
unit employees is similar to the one offered to Non-Bargaining Unit, Non-
Exempt Employees and most Exempt Employees who are eligible for the Severance
Program.
VI. In view of the announced merger of the Company and BGE, the
Company agrees that it will negotiate with the Union, upon the Union's
request, regarding the effects of the merger on the Company's bargaining-unit
employees. The parties have already negotiated the Severance Terms, as
reflected in Section V. immediately above. The parties recognize that there
are other matters appropriate for effects bargaining, including, for example,
treatment of "Carryover Bank Days," "Comp Time" hours, and floating holidays
that are unused as of the effective date of the merger. The Union will be
preparing a list of all items about which it wishes to negotiate. The Company
and Union will bargain about all properly-raised issues as early as mutually
convenient and appropriate, recognizing that some issues may not be able to be
addressed in the near future.
IN WITNESS WHEREOF, on this 8th day of December 1995, the parties have caused
their appropriate and duly authorized representatives to sign this General
Memorandum of Understanding, signifying thereby their agreement hereon.
For the Union For the Company
_______________ ____________________
James L. Hunter Anthony S. Macerollo
President - Financial Group Vice-President
Secretary - Bus. Mgr Corp. Admin. & Srvs
____________________
Barbara C. Alexander
Manager, Human Resources
____________________
William J. Wolverton
Mgr, Ind. Rel. & Emp. Bens.
Page 3
<PAGE>
December 22, 1995
Mr. William J. Wolverton
Manager, Industrial Relations
Potomac Electric Power Company
1900 Pennsylvania Avenue, N.W.
Washington, D.C. 20068
RE: Contract Ratification Notification
Dear Mr. Wolverton:
This is to advise the Company that on Friday, December 15, 1995 the members of
Local 1900, I.B.E.W. voted, by a large majority, to accept the offer to extend
the current collective bargaining agreement between the parties.
Sincerely,
/s/ John A. Coleman
John A. Coleman,
Vice President/Business Representative
Local 1900, I.B.E.W.
Exhibit 13
Financial Information
- ---------------------
Potomac Electric Power Company and Subsidiaries
Contents
- --------
Management's Discussion and Analysis of
Consolidated Results of Operations and
Financial Condition...................................... 2
Report of Independent Accountants.......................... 30
Consolidated Statements of Earnings........................ 31
Consolidated Balance Sheets................................ 32
Consolidated Statements of Cash Flows...................... 34
Notes to Consolidated Financial Statements................. 35
Selected Consolidated Financial Data....................... 75
Explanation of Graphic Material.................... Appendix A
1
Management's Discussion and Analysis of Consolidated
Results of Operations and Financial Condition
- ----------------------------------------------------
PROPOSED MERGER
- ---------------
In September 1995, Potomac Electric Power Company (the Company,
PEPCO) announced a proposed merger (the Merger) with Baltimore
Gas and Electric Company (BGE). The Merger Agreement was
approved by the Board of Directors of each company on September
22, 1995. The Merger requires the approval of shareholders of
each company and certain regulatory agencies, including the
Federal Energy Regulatory Commission, the Public Service
Commissions of Maryland and the District of Columbia and the
Nuclear Regulatory Commission. The approval process is expected
to take until the end of the first quarter of 1997 to complete.
The Company believes that the Merger will provide
opportunities to achieve benefits for its shareholders,
customers, employees and communities that would not be available
to the Company as a separate entity, including expanded
opportunities in both the core utility operations and nonutility
businesses. Preliminary estimates indicate that the Merger will
result in savings of approximately $1.3 billion, net of costs to
achieve, over 10 years primarily through economies of scale and
eliminating duplicate functions which will result in a reduction
in the combined work force of approximately 10%. Sharing of the
net savings between customers and shareholders of the Company
will be determined in regulatory proceedings. See the Notes to
Consolidated Financial Statements, (13) Commitments and
Contingencies, for additional information.
GENERAL
- -------
As an investor-owned electric utility, the Company is capital
intensive, with a gross investment in property and plant of
approximately $3 for each $1 of annual total revenue. The costs
associated with property and plant investment amounted to 47% of
the Company's total revenue in 1995. Fuel and purchased energy,
capacity purchase payments and other operating expenses were 53%
of total revenue. The Company's principal wholly owned
subsidiary, Potomac Capital Investment Corporation (PCI),
conducts nonutility investment programs with the objective of
supplementing current utility earnings and building long-term
shareholder value.
The information set forth below discusses the results of
operations, capital resources and liquidity during the period
1993 through 1995 for the Company and PCI.
2
The Company's earnings for common stock during 1995 totaled
$77.5 million, as compared to $210.7 million in 1994. As set
forth below, utility earnings increased from $1.63 in 1994 to
$1.70 in 1995. With noncash, nonrecurring charges of $1.04
related to the decision to end aircraft equipment leasing
investment by PCI, consolidated earnings per share for common
stock decreased from $1.79 in 1994 to $.65 for 1995.
- -----------------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------
Utility Operations $1.70 $1.63 $1.73
Nonutility Subsidiary (1.05) .16 .22
----- ----- -----
Consolidated $ .65 $1.79 $1.95
===== ===== =====
- -----------------------------------------------------------------
The average number of common shares outstanding at December 31,
1995, increased by .4 million shares as compared to December 31,
1994.
3
UTILITY
- -------
RESULTS OF OPERATIONS
- ---------------------
Total Revenue
- -------------
The changes in total revenue are shown in the following table.
- -----------------------------------------------------------------
Increase (Decrease)
from Prior Year
1995 1994 1993
- -----------------------------------------------------------------
(Millions of Dollars)
Change in kilowatt-hour sales $ 27.2 $(18.7) $ 87.0
Change in base rate revenue 42.8 32.2 45.4
Change in fuel adjustment clause
billings to cover cost of
fuel and interchange and
capacity purchase payments (39.3) 73.2 8.0
Change in other revenue 1.1 1.5 (.1)
------ ------ ------
Change in Operating Revenue 31.8 88.2 140.3
------ ------ ------
Change in interchange deliveries 21.2 9.7 (16.7)
------ ------ ------
Change in Total Revenue $ 53.0 $ 97.9 $123.6
====== ====== ======
- -----------------------------------------------------------------
The $42.8 million change in 1995 base rate revenue compared
to 1994 reflects the effects of a District of Columbia rate
increase of $27.9 million (effective in July 1995), the continued
effect of a 1994 rate increase in the District of Columbia and an
increase of $29.2 million associated with the Company's Demand
Side Management (DSM) surcharge tariff rate in Maryland, which
includes $8.7 million for achieving specified 1994 Maryland
energy goals associated with the conservation incentive provision
of the tariff.
The increase in base rate revenue in 1994 as compared to
1993 reflects the effect of a District of Columbia rate increase
of $26.7 million (effective primarily in March 1994) and the
continued effect of 1993 rate increases in Maryland. Also, 1994
revenue reflects cooler weather during the summer billing months
as compared to the warmer than average weather during the
corresponding period in 1993. The Company's base rates in the
summer period are higher than at other times of the year, and for
4
many customers incorporate time-of-use rates, to encourage
customer conservation and peak load shifting. In addition, 1994
base rate revenue reflects $5 million for achieving specified
1993 Maryland energy goals associated with the conservation
incentive provision of the Company's DSM surcharge tariff.
The increase in base rate revenue in 1993 as compared to
1992 reflects the effects of Maryland rate increases of $7.3
million (effective June 1993) and $27 million (effective November
1993) and the continued effect of 1992 rate increases in both of
the Company's retail jurisdictions. Also, 1993 revenue reflects
warmer than average weather during the summer billing months of
June through October.
An increase in 1995 and 1994 and a decrease in 1993 in
revenue from interchange deliveries reflect changes in levels and
pricing in energy delivered to the Pennsylvania-New Jersey-
Maryland Interconnection Association (PJM). Interchange
deliveries in 1995 also reflect an increase in the number of
companies involved in power sales tariff interchange
transactions, where the Company buys energy from one party for
the purpose of selling that energy to a third party. Interchange
deliveries continue to be a component of the Company's fuel
rates.
5
Kilowatt-hour Sales
- -------------------
- -----------------------------------------------------------------
1995 1994
vs. vs.
1995 1994 1993 1994 1993
- -----------------------------------------------------------------
(Millions of Kilowatt-hours)
By Customer Type
Residential 6,707 6,574 6,727 2.0% (2.3)%
Commercial 11,861 11,685 11,751 1.5 (.6)
U.S. Government 3,998 4,010 3,986 (.3) .6
D.C. Government 879 914 903 (3.8) 1.2
Wholesale 2,465 2,363 2,327 4.3 1.5
------ ------ ------
Total energy sales 25,910 25,546 25,694 1.4 (.6)
====== ====== ======
Interchange
Energy deliveries 1,784 800 483 - 65.6
====== ====== ======
By Geographic Area
Maryland, including
wholesale 15,594 15,251 15,319 2.2 (.4)
District of Columbia 10,316 10,295 10,375 .2 (.8)
------ ------ ------
Total energy sales 25,910 25,546 25,694 1.4 (.6)
====== ====== ======
- -----------------------------------------------------------------
Kilowatt-hour sales increased 1.4% in 1995 resulting in part
from a 1% increase in customers. Cooling degree hours and
heating degree days remained relatively stable as compared to
1994, but were above the 20-year averages by 4% for cooling
degree hours and 5% for heating degree days. Kilowatt-hour sales
decreased slightly in 1994 as compared to 1993 as customer usage
was down because of 14% fewer cooling degree hours in the summer
of 1994. 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.
6
The 1995 summer 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. In addition, the Company had approximately 270
megawatts available from its dispatchable energy use management
programs to meet the 1995 summer peak demand. Based on average
weather conditions, the Company estimates that its peak demand
will grow at a compound annual rate of approximately 1%,
reflecting continuing success with 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.
Operating Expenses
- ------------------
Fuel, Purchased Energy and Capacity Purchase Payments
- -----------------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------
(Millions of Dollars)
Fuel expense $355.4 $392.7 $354.3
------ ------ ------
Purchased energy
PJM receipts 79.4 108.8 108.9
Other purchases 114.2 64.6 64.5
------ ------ ------
Total purchased energy 193.6 173.4 173.4
------ ------ ------
Fuel and purchased energy $549.0 $566.1 $527.7
====== ====== ======
Capacity purchase payments $125.8 $127.8 $ 96.3
====== ====== ======
- -----------------------------------------------------------------
Net System Generation and Purchased Energy were as follows.
- -----------------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------
(Millions of Kilowatt-hours)
Net system generation 19,234 19,320 19,145
====== ====== ======
Purchased energy 9,755 8,356 8,448
====== ====== ======
- -----------------------------------------------------------------
7
The 1995 decrease in fuel expense reflects the decrease in
the system average fuel cost summarized below and a .4% decrease
in net generation. The 1994 increase in fuel expense reflects an
increase of .9% in net generation and increased use of major
cycling and peaking generation units which burn higher cost
fuels. During January 1994, severe cold weather sent demand for
electricity to a new winter peak, which required significantly
increased net generation. Major cycling and peaking generation
units were used to meet the increased demand. The 1993 increase
in fuel expense primarily reflects a 4.8% increase in net
generation resulting from the increase in kilowatt-hour sales,
partially offset by the Company's ability to purchase low-cost
economy energy from PJM, which helped keep the fuel expense
increase to a minimum.
The Company's unit costs of fuel burned and the percentages
of system fuel requirements obtained from coal, oil and natural
gas were as shown in the following table.
- -----------------------------------------------------------------
Percent of Unit Cost
Fuel Burned of Fuel Burned
------------------- --------------------------------
System
Coal Oil Gas Coal Oil Gas Average
- -----------------------------------------------------------------
(Per Million Btu)
1995 85.4 6.1 8.5 $1.60 $3.22 $2.10 $1.74
1994 76.1 18.4 5.5 1.73 2.70 2.49 1.95
1993 79.4 17.4 3.2 1.72 2.55 2.88 1.90
- -----------------------------------------------------------------
The 1995 system average unit fuel cost decreased by
approximately 11% which was primarily the result of the increased
use of lower-cost coal and gas and decreased net generation. The
increase of approximately 3% in the 1994 system average unit fuel
cost compared with the 1993 system average resulted from
increased use of major cycling and peaking generation units which
burn higher cost fuels. The Company's major cycling and certain
peaking units can burn natural gas or oil, adding flexibility in
selecting the most cost-effective fuel mix. The increase in the
percent of gas burned in 1995 and 1994 reflects the decreased
price of gas and the increased price of oil. The decrease in the
actual percent of coal contribution to the fuel mix in 1994
primarily reflects major outages for construction related to
Clean Air Act additions on baseload coal-fired generation units.
The Company's generating and transmission facilities are
interconnected with the other members of PJM and other utilities.
The pricing of most PJM internal economy energy transactions is
based upon "split savings" so that the price of such energy is
8
halfway between the cost that the purchaser would incur if the
energy were supplied by its own sources and the cost of
production to the company actually supplying the energy.
In addition to PJM interchange activity, the Company has
interconnection agreements with Allegheny Power System (APS) and
Virginia Power. These agreements provide a mechanism and the
flexibility to purchase power from these parties or from others
with whom they are interconnected on an as-needed basis in
amounts mutually agreed to from time-to-time pursuant to
negotiated rates, terms and conditions. "Other purchases"
includes the cost of this energy together with purchases of
energy from Ohio Edison under the Company's 1987 long-term
capacity purchase agreements with Ohio Edison and APS. During
1995, the Company entered into an agreement with PECO Energy
Company (PECO) to purchase up to 300, but not less than 200
megawatt-hours of energy each hour beginning on June 1, 1995.
The agreement will remain in effect until either party gives 30-
day notice of termination.
In early 1995, the Federal Energy Regulatory Commission
(FERC) approved a power sales tariff, filed by the Company, which
allows both sales from Company-owned generation and sales of
energy purchased by the Company. This tariff expands the
Company's opportunities to participate in direct energy sales
with other utilities and power marketers. Through the use of
similar tariffs, many other parties are now in a position to buy
and sell energy. The Company is actively encouraging this market
by buying energy for its own use, selling energy and buying
energy for contemporaneous resale, when economic transactions are
available.
Pursuant to the Company's long-term capacity purchase
agreements with Ohio Edison and APS, the Company is purchasing
450 megawatts of capacity and associated energy through the year
2005. The monthly capacity commitment under these agreements,
excluding an allocation of fixed operating and maintenance cost,
increased from $12,380 per megawatt through 1993 to $18,060 per
megawatt effective January 1994, with provision for escalation in
1999. In addition, from June 1994 through May 1995, the Company
purchased 147 megawatts of capacity from Pennsylvania Power and
Light Company.
The Company has a purchase agreement with Southern Maryland
Electric Cooperative, Inc. (SMECO), through 2015, for 84
megawatts of capacity supplied by a combustion turbine installed
and owned by SMECO at the Company's Chalk Point Generating
Station. The Company is responsible for all costs associated
with operating and maintaining the facility. The capacity
payment to SMECO is $462,000 per month. Capacity purchase
payments incurred under agreements with Ohio Edison and SMECO,
compare favorably with other long-term capacity and energy
alternatives.
9
Other Operation and Maintenance Expenses
- ----------------------------------------
Other operation and maintenance expenses totaled $316.9 million
for 1995. These expenses increased by $18.2 million (6.1%) in
1995, including $15.2 million relating to the December 1994 sale
and leaseback of the Company's control center system. These
expenses decreased by $2.8 million (.9%) in 1994 and increased by
$6.2 million (2.1%) in 1993. The Company's budget and cost
control disciplines have resulted in a 16% decline in the number
of Company employees since 1989. Utility operating results were
also affected by a nonrecurring charge of $7.4 million in January
1995 for one-time operating costs associated with the Company's
successful Voluntary Severance Program, which will provide annual
savings in operating and construction costs of approximately $15
million. Bad debt expense, as a percent of revenues, was .4% in
1995, 1994 and 1993. At December 31, 1995, accounts receivable
included $23.4 million, or 9.4% of outstanding receivables, due
from agencies of the District of Columbia for electric service
and maintenance, of which $17.8 million, or 7.2% of outstanding
receivables, was in arrears. As of February 2, 1996, the
District of Columbia accounts receivable balance had been reduced
to $10.2 million due to the receipt of additional payments. The
Company believes that amounts owned by the District of Columbia
will be paid and, accordingly, has not established a bad debt
reserve for this receivable balance.
Depreciation and Amortization Expense, Income Taxes and
Other Taxes
- -------------------------------------------------------
Depreciation and amortization expense increased by $25.5 million
(14.2%), $16.4 million (10%) and $13.8 million (9.2%) in 1995,
1994 and 1993, respectively, due to additional investment in
property and plant and amortization of increased amounts of
conservation costs associated with the Company's DSM program.
The increase in income taxes in 1995 and 1994, reflects higher
taxable operating income. The increase in income taxes in 1993
reflects the higher federal income tax rate which became
effective in 1993 and higher taxable income. Other taxes
decreased by $3.4 million (1.6%) in 1995, and increased by $4.8
million (2.4%) and $7.1 million (3.6%) in 1994 and 1993,
respectively. The decrease in 1995 reflects the reduction in the
county fuel-energy tax rates. The increases in 1994 and 1993
reflect changes in the levels of operating revenue and plant
investment upon which taxes are based.
10
Other Income, Net Utility Interest Charges and Allowance
for Funds Used During Construction
- --------------------------------------------------------
Other income reflected the net (loss) earnings from PCI of
$(124.4) million in 1995, $19.1 million in 1994 and $25.1 million
in 1993. See the Nonutility Subsidiary discussion below and the
discussion included in Note (15) of the Notes to Consolidated
Financial Statements, Selected Nonutility Subsidiary Financial
Information. In addition, other income, which included credits
for the capital cost recovery factor associated with unamortized
DSM costs, in 1994 reflects a total after-tax reduction of
approximately $4.1 million in connection with District of
Columbia Public Service Commission decisions. This included
disallowance of rate case test period DSM program expenditures,
adoption of an unbilled revenue adjustment applicable to the
District of Columbia portion of the 1992 accounting change
related to unbilled revenue and adoption of a three-year phase-in
period to reflect increased postretirement benefit costs. In
1993, "Other, net" also included $2.8 million from the adoption
of Statement of Financial Accounting Standards (SFAS) No. 109
entitled "Accounting for Income Taxes".
Net utility interest charges were relatively stable during
the three-year period 1993 through 1995, notwithstanding
increased levels of borrowing. Short-term borrowing costs have
remained relatively low and, with the refinancing of higher cost
issues, the average cost of outstanding long-term utility debt
declined from 8.1% at the beginning of 1993 to 7.51% at the end
of 1995.
Allowance For Funds Used During Construction (AFUDC)
credits, which decreased during the period 1993 through 1995,
relate to portions of the Company's Construction Work In Progress
investment. See the Construction and Generating Capacity
discussion below. In 1995, AFUDC decreased by $9.7 million,
primarily due to the control center system which came on-line in
December 1994. See the Capital Resources and Liquidity
discussion below.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
The Company's total investment in property and plant, at original
cost, was $6.2 billion at year-end 1995. Investment in property
and plant construction, net of AFUDC, was $819.7 million for the
period 1993 through 1995.
Internally generated cash from utility operations, after
dividends, totaled $270 million for the period 1993 through 1995.
Sales of First Mortgage Bonds, Medium-Term Notes and Common Stock
during the period 1993 through 1995 provided a total of $1.1
billion. During the years 1993 through 1995, the Company retired
11
$896 million in outstanding long-term securities, including
refinancings, scheduled debt maturities and sinking fund
retirements. Interim financing was provided principally through
the issuance of short-term commercial promissory notes. During
the three-year period 1996 through 1998, capital resources of
$228.8 million ($26.3 million in 1996) will be required to meet
scheduled debt maturities and sinking fund requirements, and
additional amounts will be required for working capital and other
needs. Approximately $870 million is expected to be available
from depreciation and amortization charges and income tax
deferrals over the three-year period of which approximately $317
million is the 1996 portion.
During 1995, the Company sold $191 million principal amount
of First Mortgage Bonds, $4.6 million of Common Stock and short-
term borrowings increased by $68.9 million. Proceeds were
applied to meet construction requirements of $221.6 million, and
scheduled debt maturities and the refinancing of higher cost debt
or shorter maturity debt totaling $117.5 million. See the
discussion included in Notes (7) and (10) of the Notes to
Consolidated Financial Statements, Common Equity and Long-Term
Debt, respectively, for additional information.
Reflecting the refinancings of debt and the respective
principal amounts outstanding, total annualized interest costs
for all utility long-term debt outstanding at December 31, 1995,
was $127.9 million, compared with $123.7 million and $114 million
at December 31, 1994 and 1993, respectively.
During December 1994, the Company entered into a sale (at
cost) and leaseback agreement for its new control center system
(system). The system is an integrated energy management system
used by the Company's power dispatchers to centrally control the
operation of the Company's electric system, which consists of all
of its generating units, the transmission system and the
distribution system. The Company has accounted for the lease of
the system as a capital lease, recorded at the present value of
future lease payments which totaled $152 million. This lease has
been treated as an operating lease for ratemaking purposes.
Dividends on preferred stock were $16.9 million in 1995,
$16.4 million in 1994 and $16.3 million in 1993. The embedded
cost of preferred stock was 6.43% at December 31, 1995, 6.53% at
December 31, 1994, and 6.2% at December 31, 1993.
12
The Company's capitalization ratios (excluding nonutility
subsidiary debt), at December 31, 1995, are presented below.
- -----------------------------------------------------------------
Excluding Including
Amounts Due Amounts Due
In One Year In One Year
- -----------------------------------------------------------------
Long-term debt 45.9% 42.8%
Redeemable serial preferred stock 3.6 3.4
Serial preferred stock 3.2 3.0
Common equity 47.3 44.1
Short-term debt and amounts due in
one year - 6.7
----- -----
Total capitalization 100.0% 100.0%
===== =====
- -----------------------------------------------------------------
Year-end 1995 outstanding utility short-term indebtedness
totaled $258.5 million compared with $189.6 million and $294.6
million at the end of 1994 and 1993, respectively.
The Company maintains 100% line of credit back-up for its
outstanding commercial promissory notes, which was unused during
1995, 1994 and 1993.
Conservation
- ------------
The Company's conservation and energy use management programs
(EUM) 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. In 1994,
the Company reevaluated its conservation programs, including
additional review and consideration of the current and
prospective effect of these programs on customer rates and bills.
As a result of this reevaluation, the Company phased out several
conservation programs and reduced rebate levels for others. In a
June 1995 order, the Public Service Commission of the District of
Columbia adopted conservation spending limits for the four-year
period 1995 through 1998. By narrowing its conservation
offerings and limiting conservation spending, the Company expects
to continue to encourage its customers to use energy efficiently
without significantly increasing electricity prices. The Company
expects to realize approximately 80% of the previously estimated
benefits from conservation for approximately 45% of estimated
cost.
During 1995, the Company invested approximately $100 million
in energy conservation programs. The Company recovers the costs
of its conservation programs in its Maryland jurisdiction through
a base rate surcharge which amortizes costs over a five-year
13
period and permits the Company to earn a return on its
conservation investment while receiving compensation for lost
revenue. In addition, when the Company's performance exceeds its
annual goals, the Company earns a performance bonus. The Company
was awarded a bonus of $8.7 million in 1995, based on 1994
performance, which followed a bonus of $5 million in 1994, based
on 1993 performance.
In the District of Columbia, conservation costs are
amortized over 10 years with an accrued return on unamortized
costs. In June 1995, the Commission adopted a base rate
surcharge for the recovery of actual conservation costs prudently
incurred since June 30, 1993; prior to this decision,
conservation costs had been considered in base rate cases. This
surcharge includes both a conservation expenditure component and
a component for recovering certain expenditures associated with
complying with the Clean Air Act Amendments of 1990. The
conservation component is to be updated annually in the spring of
each year, while the Clean Air Act component is updated
quarterly.
In 1995, approximately 157,000 customers participated in
continuing energy use management programs which cycle air
conditioners and water heaters during peak periods. In addition,
the Company operates a commercial load program which provides
incentives to customers for reducing energy use during peak
periods. Time-of-use rates have been in effect since the early
1980s and currently approximately 60% of the Company's revenue is
based on time-of-use rates.
It is estimated that peak load reductions of over 600
megawatts have been achieved to date from conservation and energy
use management programs and that additional peak load reductions
of approximately 430 megawatts will be achieved in the next five
years. The Company also estimates that, in 1995, energy savings
of more than 1.2 billion kilowatt-hours have been realized
through operation of its conservation and energy use management
programs. During the next five years, the Company's projected
costs for these programs to encourage the efficient use of
electric energy and to reduce the need to build new generating
facilities total $364 million ($77 million in 1996).
Construction and Generating Capacity
- ------------------------------------
Construction expenditures, excluding AFUDC, are projected to
total $1.1 billion for the five-year period 1996 through 2000,
which includes $112 million of estimated Clean Air Act
expenditures. In 1996, construction expenditures are projected
to total $170 million, which includes $6 million of estimated
Clean Air Act expenditures. As a result of lower rates of
projected load growth resulting in large part from implementing
economical conservation programs, the Company previously reduced
14
its projected construction expenditures by $155 million in 1994
and $425 million in 1993. The Company plans to finance its
construction program primarily through funds provided by
operations.
A 32-megawatt municipally financed resource recovery
facility in Montgomery County, Maryland, began commercial
operation in August 1995. 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 the fourth quarter
of 1996. The 25-year agreement currently requires capacity
purchase payments to Panda Energy Corporation of approximately
$1.6 million per month from January 1, 1997, through December 31,
1998. Capacity payments in 1999 and 2000 are approximately $3
million per month and generally increase thereafter, peaking at
approximately $4.5 million per month. The project was financed
in April 1995 and is currently one-third complete. The Company
projects that existing contracts for nonutility generation and
the Company's commitment to conservation will provide adequate
reserve margins to meet customers' needs well beyond the year
2000. In 1995, the Maryland Public Service Commission issued an
order that requires electric utilities to competitively procure
future capacity resources. The Company believes that completion
of the first combined-cycle unit at its Station H facility in
Dickerson, Maryland, currently scheduled for 2004, is likely to
be the most cost-effective alternative for the next increment of
capacity. This will add a steam cycle to the two existing
combustion turbine units.
CLEAN AIR ACT
- -------------
The Company has implemented cost-effective plans for complying
with Phase I of the Clean Air Act (CAA) which requires the
reduction of sulfur dioxide and nitrogen oxides emissions to
achieve prescribed standards. Boiler burner equipment for
nitrogen oxides emissions control has been replaced and the use
of lower, sulfur coal has been instituted at the Company's Phase
I affected stations, Chalk Point and Morgantown. Anticipated
capital expenditures for complying with the second phase of the
CAA total $112 million over the next five years. The Company's
plans call for continued replacement of boiler burner equipment
for nitrogen oxides emissions control and further use of
lower-sulfur fuel and cofiring with natural gas for sulfur
dioxide (SO2) emissions control. If economical, the Company will
purchase SO2 emission allowances in lieu of burning lower-sulfur
fuel.
15
The Company owns a 9.72% undivided interest in the Conemaugh
Generating Station located in western Pennsylvania. Nitrogen
oxides emissions reduction equipment and flue gas desulfurization
equipment have been installed at the station for compliance with
Phase I of the CAA. The Company's share of construction costs
for this equipment was $36.2 million. As a result of installing
the flue gas desulfurization equipment, the station has received
additional SO2 emission allowances. The Company's share of these
bonus allowances will be used to reduce the need for lower-sulfur
fuel at its other plants.
BASE RATE PROCEEDINGS
- ---------------------
The Company is subject to utility rate regulation based upon the
historical costs of plant investment, using recent test years to
measure the cost of providing service. The rate-making process
does not give recognition to the current cost of replacing plant
and the impact of inflation. Changes in industry structure and
regulation may affect the extent to which future rates are based
upon current costs of providing service. The regulatory
commissions have authorized fuel rates which provide for billing
customers on a timely basis for the actual cost of fuel and
interchange and for emission allowance costs and, in the District
of Columbia, for purchased capacity.
Annual base rate increases which became effective during the
period 1993 through 1995 are shown below.
- -----------------------------------------------------------------
District
of
Year Total Maryland Columbia Wholesale
- -----------------------------------------------------------------
(Millions of Dollars)
1995 $ 30.2 $ - $27.9 $2.3
1994 29.3 - 26.7 2.6
1993 38.1 34.3 - 3.8
------ ----- ----- ----
$ 97.6 $34.3 $54.6 $8.7
====== ===== ===== ====
- -----------------------------------------------------------------
Maryland
- --------
Pursuant to a settlement agreement, base rate revenue was
increased by $27 million, or 3%, effective November 1, 1993. The
Commission previously authorized an increase in base rate revenue
of $7.3 million, effective June 1, 1993, pursuant to an October
1992 settlement agreement. In connection with the settlement
agreements, no determination was made with respect to rate of
16
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.
The Company's Maryland DSM Surcharge, which provides for the
recovery of conservation program costs over a five-year period
and includes provisions for the recovery of lost revenue, a
capital cost recovery factor, calculated at 9.46%, on unrecovered
program balances and an incentive amount based on achieving
prior-year goals, was increased effective July 1, 1995. The new
rate will result in an increase in the annual surcharge recovery
of approximately $29 million, including the initial amortization
of 1995 projected program costs and the previously mentioned
incentives of $8.7 million and $5 million for exceeding 1994 and
1993 program goals, respectively.
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. A four-year
DSM spending cap for the period 1995-1998 was approved,
consistent with 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. This will
enable the Company to implement cost-effective conservation
programs while limiting the impact of such programs on the price
of electricity. An Environmental Cost Recovery Rider (ECRR) was
approved to provide for full cost recovery of actual conservation
program expenditures, through a billing surcharge. Costs will be
amortized over 10 years, with a return on unamortized amounts by
means of a capital cost recovery factor computed at the
authorized rate of return. The initial rate, which reflects all
actual costs expended from July 1993 through December 1994, will
result in $15 million of additional revenue annually. Subsequent
rate updates will be filed annually on June 1 to reflect the
prior year's actual costs, subject to the annual surcharge
recovery limit within the four-year spending cap (amounts spent
in excess of the annual surcharge recovery limit, but within the
four-year spending cap, are deferred for future recovery). 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. The
Commission also increased the time period for filing Least-Cost
Planning cases from two to three years.
17
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. A new agreement was recently
concluded with SMECO for the years 1996 through 1998. A rate
reduction of $2 million from the 1995 rate level is scheduled to
become effective January 1, 1996, with an additional $2.5 million
rate reduction effective January 1, 1998. Approval of the rate
settlement by the Federal Energy Regulatory Commission is
expected in February 1996. SMECO has agreed not to give the
Company a notice of reduction or termination of service (to take
effect after five years or nine years, respectively) prior to
December 15, 1998.
COMPETITION
- -----------
The electric utility industry is subject to increasing
competitive pressures, stemming from a combination of increasing
independent power production, greater reliance upon long-distance
transmission, and regulatory and legislative initiatives intended
to increase bulk power competition, including the Energy Policy
Act of 1992. Since the early 1980s, the Company has pursued
strategies which achieve financial flexibility through
conservation and energy use management programs, extension of the
useful life of generating equipment, cost-effective purchases of
capacity and energy and preservation of scheduling flexibility to
add new generating capacity in relatively small increments. The
Company serves a unique and stable service territory and is a
low-cost energy producer with customer prices which compare
favorably with regional and national averages.
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
18
similar proposals specific to their competitive positions. A
proceeding dealing with structure and competition was initiated
by the District of Columbia Commission during 1995.
Based on the regulatory framework in which it operates, the
Company currently applies the provisions of SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation" in
accounting for its utility operations. SFAS No. 71 allows
regulated entities, in appropriate circumstances, to establish
regulatory assets and to defer the income statement impact of
certain costs that are expected to be recovered in future rates.
Deregulation of portions of the Company's business could, in the
future, result in not meeting the rate recovery criteria for
application of SFAS No. 71 for part or all of the business.
While the Company does not foresee such a situation at this time,
if this were to occur in the transition to a more competitive
business, accounting standards of enterprises in general would
apply which would entail the write-off of any previously deferred
costs to results of operations. Regulatory assets include
deferred income taxes, unamortized conservation costs and
unamortized debt reacquisition costs recoverable through future
rates.
RESTRUCTURING OF THE BULK POWER MARKET
- --------------------------------------
In March 1995, the FERC issued a Notice of Proposed Rulemaking
(NOPR) on competition in the wholesale energy market. The FERC's
goal is to achieve greater competition in the bulk power market
through open access to utilities' high voltage transmission
lines. The Company, through its membership in PJM, endorses the
goals of the FERC. PJM has many years of experience in providing
economically efficient transmission and generation services
throughout the Mid-Atlantic region, and has achieved for its
members, including the Company, significant cost savings through
shared generating reserves and integrated operations. In order
to meet the FERC's goals, the PJM members plan to implement
significant market-oriented changes which will support broader
market participation and achieve even greater efficiencies. The
PJM members are working to transform today's coordinated cost-
based pool dispatch into a vigorous price-based regional energy
market operating under a standard of transmission service
comparability. The Company, together with PJM, supports the
evolution of new market-based structures to make competition
truly effective.
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 the
appropriate rates, terms and conditions. On June 30, 1995, a
19
"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.
On November 30, 1995, the PJM members filed with the FERC a
detailed proposal that offers to all generators and wholesale
buyers of electricity a regional energy market and open access to
PJM high voltage transmission lines. Under the proposal, PJM
will be transformed into an Independent System Operator (ISO),
which will administer a rate structure designed to eliminate
dealing with each company separately for transactions through
PJM. The ISO will administer operations, operate the regional
energy market and administer transmission service. PJM expects
to implement the new structure by year-end 1996. This change is
not expected to have a material effect on the operations of the
Company.
THE COVE POINT JOINT VENTURE
- ----------------------------
Subsidiaries of the Company and Columbia Gas System, Inc., have
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. These
facilities were previously owned by Columbia LNG Corporation, a
Columbia Gas subsidiary.
Under the agreement, Columbia LNG Corp. contributed its Cove
Point terminal and pipeline assets and $7 million in cash in
exchange for an equity interest in the Partnership, and the
Company's subsidiaries invested $25 million in the form of equity
and debt. This investment was used by the Partnership to
construct a new liquefaction unit and to recommission certain
existing facilities at the terminal that are being used in the
peaking service business. In November 1994, the FERC approved
the project based on cost-of-service rates. Commercial operation
began on September 28, 1995, and to date, in accordance with the
business plan, the Partnership has sold storage service for one
of the four storage tanks.
One of the Company's principal strategic interests in the
Cove Point project is to secure a reliable and cost-effective
source of transportation for gas to provide fuel to the
generators at its Chalk Point Generating Station. The 87-mile
Cove Point pipeline is the sole means of delivering natural gas
to southern Maryland where Chalk Point is located. The FERC-
approved transportation rates on the pipeline resulted in a 49%
decrease from the transportation rates previously paid by the
20
Company. The Company has expanded Chalk Point's fuel flexibility
to burn increased amounts of gas to comply with the CAA and
minimize customer costs.
JOINT VENTURE FOR WIRELESS DATA COMMUNICATION NETWORK AND NEW
- -------------------------------------------------------------
ENERGY SERVICES SUBSIDIARY FORMED; W. A. CHESTER, L.L.C.
--------------------------------------------------------
ACQUIRED
--------
In May 1995, a subsidiary of the Company, PepData, Inc. and
Metricom, Inc., entered into a joint venture agreement to own and
operate a wireless data communication network which will offer
economical data communication services to approximately four
million people in the Washington, D.C. metropolitan area. The
agreement calls for the Company to invest $7 million and to own
20 percent of the joint venture company, Metricom DC L.L.C.,
which will install radio devices on public and private facilities
to create the wireless data communication service. This data
service, known as "Ricochet," will enable computer users to
access on-line services such as the Internet, E-Mail and local
area networks. The service will be offered at a fixed monthly
rate, which will include unlimited use of the service and access
to the Internet. The joint venture is currently obtaining the
necessary state and local approvals required for the deployment
and operation of the communication service. Operation is
expected to begin during 1996. As of December 31, 1995, the
Company has invested $.1 million in the joint venture.
Also in May 1995, a subsidiary, PEPCO Services, Inc., was
formed to offer a range of energy-related services to businesses
and government organizations in the region. The energy-related
services provided by the subsidiary include assessment of
existing energy systems, installation of lighting, heating,
cooling and refrigeration systems including provision of
financing and leasing arrangements or shared-savings
arrangements, and facilities management. As of December 31,
1995, the Company has invested $1.3 million in this subsidiary.
On December 31, 1995, a newly formed, wholly owned
subsidiary acquired, for $1 million, the assets of the W. A.
Chester Division of Fischbach Power Services, Inc., which
specializes in providing underground cable construction and
maintenance services for utility companies. The new company
known as W. A. Chester, L.L.C. intends to provide a broad array
of high-quality, cost-saving services for utility and
telecommunications companies.
21
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 are probable of recovery from customers through future
rates. The Company does not expect implementation of this
pronouncement to have a material impact on its consolidated
financial statements.
ENVIRONMENTAL MATTERS
- ---------------------
The Company is subject to federal, state and local legislation
and regulation with respect to environmental matters, including
air and water quality and the handling of solid and hazardous
waste. As a result, the Company is subject to environmental
contingencies, principally related to possible obligations to
remove or mitigate the effects on the environment of the
disposal, effected in accordance with applicable laws at the
time, of certain substances at various sites. During 1995, the
Company was participating in environmental assessments and
cleanups under these laws at four federal Superfund sites and a
private party site as a result of litigation. While the total
cost of remediation at these sites may be substantial, the
Company shares liability with other potentially responsible
parties. Based on the information known to the Company at this
time, management is of the opinion that resolution of these
matters will not have a material effect on the results of
operations or financial position of the Company.
See the discussion included in Note (13) of the Notes to
Consolidated Financial Statements, Commitments and Contingencies,
for additional information.
22
NONUTILITY SUBSIDIARY
- ---------------------
RESULTS OF OPERATIONS
- ---------------------
In 1995, PCI incurred a net operating loss of $124.4 million
($1.05 per share) of which $122.2 million ($1.04 per share) was
the result of nonrecurring, noncash, after-tax charges associated
with the Company's decision to exit the aircraft equipment
leasing business. This compared with contributions to
consolidated net earnings of $19.1 million ($.16 per share) in
1994 and $25.1 million ($.22 per share) in 1993. As summarized
below, in May 1995, PCI adopted a plan to end its investment in
the aircraft equipment leasing business and made a second quarter
$110 million noncash, after-tax charge against earnings.
Additional noncash, after-tax charges of $12.2 million were made
to recognize a noncash valuation adjustment for aircraft
equipment under a master lease agreement.
The plan to exit the aircraft equipment leasing business was
developed following comprehensive review and analysis, and is
designed to preserve value through an orderly withdrawal from the
business. The decision to exit the business was based on an
accumulation of factors which led to the conclusion that the
aircraft leasing business was no longer consistent with PCI's
goal of providing a stable supplement to consolidated earnings.
These factors include the recent inability to secure satisfactory
leases for certain aircraft returned by prior lessees, continuing
difficulties and credit risks associated with certain lessees,
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, 13
aircraft, (seven L1011 aircraft, two F28-4000 aircraft, one A300
aircraft, two B747-200 aircraft and one B747-200F aircraft) were
designated for sale over 18 to 24 months from the date the plan
was announced. These aircraft are subject to short-term, usage-
based leases, long-term leases that will expire in the near term,
or are not currently under lease. Negotiations continue with
respect to the sale of these aircraft. The B747-200F aircraft
currently is the subject of litigation with the lessee. (See the
Notes to Consolidated Financial Statements, (13) 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 noncash charge to after-tax earnings
of approximately $110 million for the second quarter of 1995.
23
There will be no future depreciation of, or routine accrual for
repair and maintenance expenditures with respect to, these
aircraft. For accounting purposes, gains or losses from the sale
of individual aircraft will be deferred until completion of the
disposal process.
Also as a result of differences between the guaranteed
residual value and the expected market value of the two aircraft
under the master lease agreement, PCI, following generally
accepted accounting principles, recorded $12.2 million in
additional after-tax charges against 1995 earnings. In October
1995, PCI terminated the master lease, purchasing for $52 million
the two DC-10-30 aircraft on operating lease to Canadian Airlines
International, Ltd. (Canadian Airlines). Depreciation and
interest charges following purchase are substantially the same as
the master lease rental payments.
In accordance with the plan, PCI will continue to hold and
closely monitor the remainder of its aircraft leasing portfolio,
with the objective of identifying future opportunities for
disposition of these investments on favorable terms. Included in
this portion of the portfolio are two wholly owned DC-10-30
aircraft, six majority-owned aircraft (three DC-10-30 aircraft
and three B747-200 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 Canadian Airlines,
Continental Airlines 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 12 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).
As a part of its plan to exit the aircraft equipment leasing
business, PCI has formed a joint venture with an affiliate of a
major institutional investor to assist with the disposition of 19
portfolio aircraft. All the assets of the venture are fully
consolidated on PCI's financial statements with the outside
investor's portion reflected as minority interest.
24
In January 1995, Continental announced its intention to seek
the early termination of all of its A300 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 1995 early return and lease termination of
the A300 aircraft, PCI received Continental 6% convertible
debentures with an aggregate face value of $9.6 million. In
November 1995, PCI sold the debentures for 97% of par value,
resulting in a pre-tax gain of $7.1 million. The agreement with
Continental also provides for the deferral of approximately 40%
of aggregate monthly rentals from the four majority-owned and two
jointly owned DC-10-30 aircraft for a period of 16 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. In addition, as part
of the agreement, PCI obtained cross-default provisions in its
Continental leases and improvements in aircraft return
conditions.
25
PCI's aircraft portfolio at December 31, 1995, is summarized
below.
Aircraft
Designated for
Sale in Near Term Qty(1) Year(2) Lessee Lease Type
- ------------------ --------------------------------------------
A300 aircraft 1 1979 (4) N/A
B747-200 aircraft 2 1976/77 (3) (4) N/A
B747-200F aircraft
& spare engine 1 1976 Atlas Air Operating
F28-4000 aircraft
& spare engine 2 1979/80 USAir(3) Operating
L1011-50 aircraft 2 1974 ING(3) Operating
L1011-50 aircraft 1 1975 TWA(3) Operating
L1011-100 aircraft 4 1974/75 (3) (4) N/A
Aircraft
With Increased
Depreciation
- -------------------
B747-200 aircraft
& spare engine 1 1972 Continental(3) Operating
B747-200 aircraft 2 1978 United(3) Operating
DC-10-30 aircraft 4 1973 Continental(3) Operating
DC-10-30 aircraft 1 1974 Continental(3) Operating
DC-10-30 aircraft 2 1975/76 Canadian(5) Operating
- -----------------------------------------------------------------
(1) Includes all equipment in which PCI has a greater than 10%
ownership interest.
(2) Year of manufacture.
(3) PCI owns a partial interest in certain of this equipment.
(4) Currently not on lease.
(5) Subject to a master lease agreement prior to October 1995.
26
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(3) Direct
Finance
MD-11F aircraft 1 1993 Fed. Express Leveraged
MD-82 aircraft 1 1982 Continental(3) Direct
Finance
MD-82 aircraft
& spare engine 2 1987 Continental(3) Direct
Finance
Aircraft Engines 10 Various Various Operating
- -----------------------------------------------------------------
(1) Includes all equipment in which PCI has a greater than 10%
ownership interest.
(2) Year of manufacture.
(3) PCI owns a partial interest in certain of this equipment.
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
accounted for as a leveraged lease.
During 1994, PCI purchased from and leased back 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.
PCI's investment in finance leases at December 31, 1995,
included a net investment of $50.6 million 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. During
December 1995, PCI recorded a $3.2 million pre-tax writedown
related to its investment in the SEGS III project. The five SEGS
power generating projects sell electricity to Southern California
Edison Company (Edison) under 30 year Interim Standard Offer No.
4 power purchase agreements which fix the capacity charge for the
term of the agreement and fix the energy rate paid by Edison for
the first 10 years of the agreements. For the remaining term of
the agreements, energy rates are variable, based on Edison's
27
avoided cost of generation. The SEGS projects are scheduled to
begin 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 is 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 additional losses
associated with these projects. In conjunction with other
project investors, PCI is investigating and pursuing alternatives
for these projects, including but not limited to, renegotiating
the power purchase agreements and restructuring the associated
non-recourse 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 $100.7 million in 1995 compared to $111.3
million in 1994 and $114.2 million in 1993. The decrease in 1995
revenue from leasing activities over 1994 was primarily due to a
decrease in rental income from operating leases and reduced fee
income.
PCI's marketable securities portfolio contributed pre-tax
income of $36.1 million in 1995 compared with $35.1 million and
$38.4 million in 1994 and 1993, respectively, which results
included net realized gains of $.4 million in 1995 compared with
$.8 million and $7 million in 1994 and 1993, respectively.
Other income decreased in 1995 compared to 1994 primarily
due to a 1994 sale of real estate held for development.
28
Expenses, before income taxes, which include interest,
depreciation and operating, and administrative and general
expenses totaled $174.5 million in 1995 compared to $150.6
million and $159.3 million in 1994 and 1993, respectively.
Expenses increased in 1995 over 1994 primarily as a result of the
$18.8 million pre-tax charge in 1995 to recognize the difference
between the guaranteed residual value and the expected market
value of aircraft subject to the master lease agreement which
expired in September 1995. Depreciation expense also increased
in 1995 as a result of the plan to exit the aircraft equipment
leasing business.
PCI had income tax credits of $85.7 million in 1995 compared
to income tax credits of $22.7 million and $45.1 million in 1994
and 1993, respectively. The increase in income tax credits in
1995 over 1994 and 1993 was the result of the previously
mentioned charge relating to the decision to exit the aircraft
equipment leasing business.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
The $530.3 million securities portfolio, consisting primarily of
investment grade preferred stocks, provides PCI significant
liquidity and investment flexibility.
Investments in leased equipment of approximately $155
million in 1995 were for the purchase of two 350 megawatt (gross)
coal-fired electric generating units located in Australia for $96
million, two DC-10-30 aircraft previously under a master lease
for $52 million and $7.4 million for the purchase of aircraft
engines placed under operating leases. The aircraft are on
operating lease to Canadian Airlines. The electric generating
units were purchased and leased back under a long-term leveraged
lease to an Australian governmental entity.
PCI's outstanding short-term debt totaled $223.4 million at
December 31, 1995, an increase of $175 million from the $48.4
million outstanding at December 31, 1994. During 1995, PCI
issued $182 million in long-term debt, including non-recourse
debt, and debt repayments totaled $275 million. At December 31,
1995, PCI had $394 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 PEPCO,
including a $9 million dividend paid in January 1995. 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, with consideration
given to future business plans, debt-to-equity ratios and
anticipated capital requirements.
29
Report of Independent Accountants
To the Shareholders and
Board of Directors of
Potomac Electric Power Company
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of earnings and of cash flows
present fairly, in all material respects, the financial position
of Potomac Electric Power Company and its subsidiaries at
December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted
accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is
to express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
Washington, D.C.
January 19, 1996
30
<TABLE>
Consolidated Statements of Earnings
Potomac Electric Power Company and Subsidiaries
<CAPTION>
- ------------------------------------------------------------------------------------------------------
For the year ended December 31,
1995 1994 1993
- ------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Revenue (Note 2)
Operating revenue $1,822,432 $1,790,600 $1,702,442
Interchange deliveries 53,670 32,474 22,763
---------- ---------- ----------
Total Revenue 1,876,102 1,823,074 1,725,205
---------- ---------- ----------
Operating Expenses
Fuel 355,453 392,730 354,282
Purchased energy 193,592 173,384 173,456
---------- ---------- ----------
Fuel and purchased energy 549,045 566,114 527,738
Capacity purchase payments (Note 13) 125,769 127,822 96,288
Other operation 224,030 206,106 207,814
Maintenance 92,859 92,614 93,668
Depreciation and amortization 205,490 179,986 163,607
Income taxes (Note 4) 128,460 119,859 110,176
Other taxes (Note 5) 202,708 206,080 201,252
---------- ---------- ----------
Total Operating Expenses 1,528,361 1,498,581 1,400,543
---------- ---------- ----------
Operating Income 347,741 324,493 324,662
---------- ---------- ----------
Other (Loss) Income
Nonutility subsidiary (Note 15)
Income 134,493 147,006 139,341
Loss on assets held for disposal (170,078) - -
Expenses, including interest and income taxes (88,812) (127,918) (114,240)
---------- ---------- ----------
Net (loss) earnings from nonutility subsidiary (124,397) 19,088 25,101
Allowance for other funds used during construction 1,548 9,123 13,242
Other, net 8,549 4,046 10,221
---------- ---------- ----------
Total Other (Loss) Income (114,300) 32,257 48,564
---------- ---------- ----------
Income Before Utility Interest Charges 233,441 356,750 373,226
---------- ---------- ----------
Utility Interest Charges
Interest on debt 146,558 139,210 141,393
Allowance for borrowed funds used during construction (7,508) (9,622) (9,746)
---------- ---------- ----------
Net Utility Interest Charges 139,050 129,588 131,647
---------- ---------- ----------
Net Income 94,391 227,162 241,579
Dividends on Preferred Stock 16,851 16,437 16,255
---------- ---------- ----------
Earnings for Common Stock $ 77,540 $ 210,725 $ 225,324
========== ========== ==========
Average Common Shares Outstanding (000s) 118,412 118,006 115,640
Earnings Per Common Share <F1> $.65 $1.79 $1.95
Cash Dividends Per Common Share $1.66 $1.66 $1.64
<FN>
<F1>No material dilution would occur if all of the convertible preferred stock
and debentures were converted into common stock.
</FN>
31
</TABLE>
<TABLE>
Consolidated Balance Sheets
Potomac Electric Power Company and Subsidiaries
<CAPTION>
- ---------------------------------------------------------------------------------------------
December 31,
Assets 1995 1994
- ---------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C>
Property and Plant - at original cost (Notes 6 and 10)
Electric plant in service $ 6,041,203 $ 5,801,349
Construction work in progress 93,047 147,224
Electric plant held for future use 4,082 18,041
Nonoperating property 22,771 7,556
----------- -----------
6,161,103 5,974,170
Accumulated depreciation (1,760,792) (1,639,771)
----------- -----------
Net Property and Plant 4,400,311 4,334,399
----------- -----------
Current Assets
Cash and cash equivalents 5,844 7,198
Customer accounts receivable, less allowance for uncollectible
accounts of $1,669 and $2,432 137,456 107,351
Other accounts receivable, less allowance for uncollectible
accounts of $300 36,765 57,128
Accrued unbilled revenue (Note 1) 73,622 67,543
Prepaid taxes 36,255 34,352
Other prepaid expenses 7,562 5,448
Material and supplies - at average cost
Fuel 63,203 73,671
Construction and maintenance 70,497 72,447
----------- -----------
Total Current Assets 431,204 425,138
----------- -----------
Deferred Charges
Income taxes recoverable through future rates, net (Note 4) 244,181 251,357
Conservation costs, net 230,412 161,204
Unamortized debt reacquisition costs 58,360 56,725
Other 138,619 98,783
----------- -----------
Total Deferred Charges 671,572 568,069
----------- -----------
Nonutility Subsidiary Assets
Cash and cash equivalents 1,594 -
Marketable securities (Notes 11 and 15) 530,323 473,608
Investment in finance leases (Note 15) 489,430 410,327
Operating lease equipment, net of accumulated depreciation
of $79,275 and $116,832 (Note 15) 272,947 544,064
Assets held for disposal 104,370 -
Receivables, less allowance for uncollectible
accounts of $6,000 and $5,000 74,957 76,426
Other investments 125,783 147,313
Other assets 15,659 22,551
----------- -----------
Total Nonutility Subsidiary Assets 1,615,063 1,674,289
----------- -----------
Total Assets $ 7,118,150 $ 7,001,895
=========== ===========
32
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
December 31,
Capitalization and Liabilities 1995 1994
- ---------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C>
Capitalization
Common equity (Note 7)
Common stock, $1 par value - authorized 200,000,000 shares,
issued 118,494,577 and 118,248,103 shares $ 118,495 $ 118,248
Premium on stock and other capital contributions 1,025,088 1,020,689
Capital stock expense (14,567) (14,163)
Retained income 742,296 830,524
----------- -----------
Total Common Equity 1,871,312 1,955,298
Preference stock, cumulative, $25 par value -
authorized 8,800,000 shares, no shares issued or outstanding - -
Serial preferred stock (Notes 8 and 11) 125,325 125,409
Redeemable serial preferred stock (Notes 9 and 11) 143,485 143,563
Long-term debt (Notes 10 and 11) 1,817,077 1,723,399
----------- -----------
Total Capitalization 3,957,199 3,947,669
----------- -----------
Other Non-Current Liabilities
Capital lease obligation (Note 13) 165,235 167,324
----------- -----------
Total Other Non-Current Liabilities 165,235 167,324
----------- -----------
Current Liabilities
Long-term debt due within one year 26,280 45,445
Short-term debt (Note 12) 258,465 189,600
Accounts payable and accrued payroll 104,396 117,909
Capital lease obligation due within one year 20,772 20,772
Taxes accrued 19,111 20,509
Interest accrued 38,532 36,840
Customer deposits 23,372 22,563
Other 62,662 84,841
----------- -----------
Total Current Liabilities 553,590 538,479
----------- -----------
Deferred Credits
Income taxes (Note 4) 892,544 848,456
Investment tax credits (Note 4) 64,607 68,256
Other 35,089 31,766
----------- -----------
Total Deferred Credits 992,240 948,478
----------- -----------
Nonutility Subsidiary Liabilities
Long-term debt (Notes 10 and 11) 1,047,484 1,140,505
Short-term notes payable (Note 12) 223,350 48,400
Deferred taxes and other (Note 4) 179,052 211,040
----------- -----------
Total Nonutility Subsidiary Liabilities 1,449,886 1,399,945
----------- -----------
Commitments and Contingencies (Note 13)
Total Capitalization and Liabilities $ 7,118,150 $ 7,001,895
=========== ===========
33
</TABLE>
<TABLE>
Consolidated Statements of Cash Flows
Potomac Electric Power Company and Subsidiaries
<CAPTION>
- -----------------------------------------------------------------------------------------------------
For the year ended December 31,
1995 1994 1993
- -----------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Operating Activities
Income from utility operations $ 218,788 $ 208,074 $ 216,478
Adjustments to reconcile income to net cash
from operating activities:
Depreciation and amortization 205,490 179,986 163,607
Deferred income taxes and investment tax credits 51,774 44,641 27,711
Allowance for funds used during construction (9,056) (18,745) (22,988)
Changes in materials and supplies 12,418 (13,883) 44,509
Changes in accounts receivable and accrued unbilled revenue (15,822) (6,098) (35,399)
Changes in accounts payable (14,419) 8,257 (441)
Changes in other current assets and liabilities (1,484) (6,760) 4,317
Changes in deferred conservation costs (104,796) (92,504) (59,639)
Net other operating activities (45,664) 360 (37,121)
Nonutility subsidiary:
Net (loss) earnings (124,397) 19,088 25,101
Deferred income taxes (49,697) 6,386 (32,814)
Loss on assets held for disposal 170,078 - -
Changes in other assets and net other operating activities 83,509 47,648 56,897
--------- --------- ---------
Net Cash From Operating Activities 376,722 376,450 350,218
--------- --------- ---------
Investing Activities
Total investment in property and plant (230,675) (316,890) (322,951)
Allowance for funds used during construction 9,056 18,745 22,988
--------- --------- ---------
Net investment in property and plant (221,619) (298,145) (299,963)
Nonutility subsidiary:
Purchase of marketable securities (35,221) (127,335) (254,213)
Proceeds from sale or redemption of marketable securities 27,846 82,444 194,295
Investment in leased equipment (154,766) (72,134) (32,360)
Proceeds from sale or disposition of leased equipment - 1,150 120,529
Proceeds from sale of assets 5,966 - -
Purchase of other investments (3,818) (7,191) (44,628)
Proceeds from sale or distribution of other investments 15,614 18,429 -
Investment in promissory notes (7,955) (542) (1,628)
Proceeds from promissory notes 7,977 4,902 3,013
--------- --------- ---------
Net Cash Used by Investing Activities (365,976) (398,422) (314,955)
--------- --------- ---------
Financing Activities
Dividends on common stock (196,469) (195,755) (189,837)
Dividends on preferred stock (16,851) (16,437) (16,255)
Issuance of common stock 4,580 9,285 96,001
Redemption of preferred stock (78) (4,047) (1,500)
Issuance of long-term debt 188,594 302,999 521,264
Reacquisition and retirement of long-term debt (117,465) (144,422) (628,448)
Proceeds from sale and leaseback of control center system - 152,000 -
Short-term debt, net 68,865 (105,015) 233,015
Other financing activities (23,611) (14,452) (26,199)
Nonutility subsidiary:
Issuance of long-term debt 182,000 286,750 363,653
Repayment of long-term debt (275,021) (173,950) (247,077)
Short-term debt, net 174,950 (77,850) (137,265)
--------- --------- ---------
Net Cash (Used by) From Financing Activities (10,506) 19,106 (32,648)
--------- --------- ---------
Net Increase (Decrease) In Cash and Cash Equivalents 240 (2,866) 2,615
Cash and Cash Equivalents at Beginning of Year 7,198 10,064 7,449
--------- --------- ---------
Cash and Cash Equivalents at End of Year (Note 14) $ 7,438 $ 7,198 $ 10,064
========= ========= =========
34
</TABLE>
Notes to Consolidated Financial Statements
- ------------------------------------------
(1) Summary of Significant Accounting Policies
------------------------------------------
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
includes all of the District of Columbia and major portions of
Montgomery and Prince George's counties in suburban Maryland.
Potomac Capital Investment Corporation (PCI), a wholly owned
subsidiary of the Company, was formed in 1983 to provide a
permanent vehicle for the conduct of the Company's ongoing
nonutility investment programs. PCI's principal investments have
been in aircraft and power generation equipment, equipment
leasing and marketable securities, primarily preferred stock with
mandatory redemption features. PCI also has investments in real
estate properties in the Washington, D.C. metropolitan area.
The Company's utility operations are regulated by the
Maryland and District of Columbia public service commissions and
its wholesale business by 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. Based upon the
regulatory framework in which it operates, the Company currently
applies the provisions of Statement of Financial Accounting
Standards (SFAS) No. 71 entitled "Accounting for the Effects of
Certain Types of Regulation" in accounting for certain deferred
charges and credits to be recognized in future customer billings
pursuant to regulatory authorization: deferred income taxes,
unamortized conservation costs and unamortized debt reacquisition
costs.
The preparation of financial statements in conformity with
generally accepted accounting principles 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 and
assumptions.
Certain prior year amounts have been reclassified to conform
to the current year presentation.
A description of significant accounting policies follows.
35
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 PCI. All material intercompany
balances and transactions have been eliminated.
Total Revenue
- -------------
Revenue is accrued for service rendered but unbilled as of the
end of each month. The Company includes in revenue the amounts
received for sales to other utilities related to pooling and
interconnection agreements. Amounts received for such
interchange deliveries are a component of the Company's fuel
rates.
In each jurisdiction, the Company's rate schedules include
fuel rates. The fuel rate provisions are designed to provide for
separately stated fuel billings which cover applicable net fuel
and interchange costs, purchased capacity in the District of
Columbia, and emission allowance costs in the Company's retail
jurisdictions, or changes in the applicable costs from levels
incorporated in base rates. Differences between applicable net
costs incurred and fuel rate revenue billed in any given period
are accounted for as other current assets or other current
liabilities in those cases where specific provision has been made
by the appropriate regulatory commission for the resolution of
such differences within one year. Where no such provision has
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, which is a mechanism that enables
the Company to earn a return on certain costs, principally
unamortized demand side management (DSM) costs not in rate base.
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.
36
Leasing Transactions
- --------------------
Income from PCI investments in direct finance and leveraged lease
transactions, in which PCI is an equity participant, is reported
using the financing method. In accordance with the financing
method, investments in leased property are recorded as a
receivable from the lessee to be recovered through the collection
of future rentals. For direct finance leases, unearned income is
amortized to income over the lease term at a constant rate of
return on the net investment. Income, including investment tax
credits on leveraged equipment leases, is recognized over the
life of the lease at a level rate of return on the positive net
investment.
PCI investments in equipment under operating leases are
stated at cost less accumulated depreciation, except that assets
held for disposal are 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. No
depreciation is taken on assets 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 DSM program as a deferred charge, and
amortizes the costs over five years in Maryland and 10 years in
the District of Columbia. At December 31, 1995, unamortized
conservation costs totaled $105.5 million in Maryland and $124.9
million in the District of Columbia.
37
Allowance for Funds Used During Construction
- --------------------------------------------
In general, the Company capitalizes AFUDC with respect to
investments in Construction Work in Progress with the exception
of expenditures required to comply with federal, state or local
environmental regulations (pollution control projects), which are
included in rate base without capitalization of AFUDC. The
Company accrues a capital cost recovery factor on the retail
jurisdictional portion of certain pollution control projects
related to compliance with the Clean Air Act (CAA). The base for
calculating this return is the amount by which the retail
jurisdictional CAA expenditure balance exceeds the CAA balance
included in rate base in the Company's most recently completed
base rate proceeding.
The jurisdictional AFUDC capitalization rates are determined
as prescribed by the FERC. The effective capitalization rates
were approximately 7.9% in 1995, 7.6% in 1994 and 8.7% in 1993,
compounded semiannually.
Amortization of Debt Issuance and Reacquisition Costs
- -----------------------------------------------------
The Company defers and amortizes expenses incurred in connection
with the issuance of long-term debt, including premiums and
discounts associated with such debt, over the lives of the
respective issues. Costs associated with the reacquisition of
debt are also deferred and amortized over the lives of the new
issues.
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 are probable of recovery from customers through future
rates. The Company does not expect implementation of this
pronouncement to have a material impact on its consolidated
financial statements.
38
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.
(2) Total Revenue
-------------
The Company's retail service area includes all of the District of
Columbia and major portions of Montgomery and Prince George's
counties in suburban Maryland. The Company supplies electricity,
at wholesale, under a contract with Southern Maryland Electric
Cooperative, Inc. (SMECO), and also delivers economy energy to
the Pennsylvania-New Jersey-Maryland Interconnection Association
(PJM) of which the Company is a member. PJM is composed of 11
electric utilities which operate on a fully integrated basis.
Total revenue for each year was comprised as shown below.
- -----------------------------------------------------------------
1995 1994 1993
-------------------------------------------------
Amount % Amount % Amount %
- -----------------------------------------------------------------
(Thousands of Dollars)
Residential $ 543,532 30.0 $ 524,738 29.5 $ 505,173 29.8
Commercial 848,892 46.8 834,323 46.8 791,357 46.6
U.S. Government 252,144 13.9 254,030 14.2 238,192 14.0
D.C. Government 52,105 2.9 56,655 3.2 53,551 3.2
Wholesale 117,117 6.4 113,318 6.3 108,162 6.4
---------- ----- --------- ----- ---------- -----
Sales of
electricity 1,813,790 100.0 1,783,064 100.0 1,696,435 100.0
===== ===== =====
Other electric
revenue 8,642 7,536 6,007
---------- ---------- ----------
Operating
revenue 1,822,432 1,790,600 1,702,442
Interchange
deliveries 53,670 32,474 22,763
---------- ---------- ----------
Total Revenue $1,876,102 $1,823,074 $1,725,205
========== ========== ==========
- -----------------------------------------------------------------
39
Sales of electricity include base rate revenue and fuel rate
revenue. Fuel rate revenue was $526.6 million in 1995, $557.4
million in 1994 and $487.9 million in 1993.
The Company's Maryland fuel rate is based on historical net
fuel, interchange and emission allowance costs. The zero-based
rate may not be changed without prior approval of the Maryland
Public Service Commission. Application to the Commission for an
increase in the rate may only be made when the currently
calculated fuel rate, based on the most recent actual net fuel,
interchange and emission allowance costs, exceeds the currently
effective fuel rate by more than 5%. If the currently calculated
fuel rate is more than 5% below the currently effective fuel
rate, the Company must apply to the Commission for a fuel rate
reduction.
The District of Columbia fuel rate is based upon an average
of historical and projected net fuel, interchange and emission
allowance costs and purchased capacity, and is adjusted monthly
to reflect changes in such costs.
Rates for service, at wholesale, to SMECO include a fuel
adjustment charge based upon estimated applicable fuel and
interchange costs for each billing month. The difference between
the estimated costs and the actual applicable fuel and
interchange costs incurred each month is reflected as an
adjustment to the fuel rate in the succeeding month.
Amounts received for interchange deliveries are a component
of the Company's fuel rates.
(3) Pensions and Other Postretirement and Postemployment
Benefits
----------------------------------------------------
The Company's General Retirement Program (Program), a
noncontributory defined benefit program, covers substantially all
full-time employees of the Company and its subsidiaries. The
Program provides for benefits to be paid to eligible employees at
retirement based primarily upon years of service with the Company
and their compensation rates for the three years preceding
retirement. Annual provisions for accrued pension cost are based
upon independent actuarial valuations. The Company's policy is
to fund accrued pension costs.
40
Pension expense included in net income was $13.9 million in
1995, $14.3 million in 1994 and $13.7 million in 1993. The net
periodic pension cost was computed as follows.
- -----------------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------
(Thousands of Dollars)
Service cost-benefits earned $ 9,900 $10,800 $10,300
Interest cost on projected
benefit obligation 28,400 26,800 25,100
Actual return on Program assets (51,900) (4,600) (24,300)
Differences between actual
and expected return on
Program assets and net
amortization 27,500 (18,700) 2,600
------- ------- -------
Pension cost $13,900 $14,300 $13,700
======= ======= =======
- -----------------------------------------------------------------
41
Program assets are stated at fair value and were comprised
of approximately 60% and 70% of cash equivalents and fixed income
investments and the balance in equity investments at December 31,
1995 and 1994, respectively. The following table sets forth the
Program's funded status and amounts recognized on the
Consolidated Balance Sheets.
- -----------------------------------------------------------------
1995 1994
- -----------------------------------------------------------------
(Thousands of Dollars)
Actuarial present value of benefit obligations:
Program benefits:
Vested benefits $(295,700) $(252,300)
Nonvested benefits (44,000) (30,000)
--------- ---------
Accumulated benefit obligation $(339,700) $(282,300)
========= =========
Actuarial present value of projected
benefit obligation $(399,400) $(338,600)
Program assets at fair value 360,500 289,100
--------- ---------
Projected benefit obligation in excess of
Program assets (38,900) (49,500)
Unrecognized actuarial loss 55,600 35,600
Unrecognized prior service cost 16,300 17,600
Unrecognized net obligation at
January 1, 1987, being recognized
over 18 years 300 400
--------- ---------
Prepaid pension expense $ 33,300 $ 4,100
========= =========
- -----------------------------------------------------------------
The assumed weighted average discount rate and weighted
average rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit
obligation were 7.5% and 4% in 1995 and 8.5% and 4.5% in 1994,
respectively. The assumed long-term rate of return on Program
assets was 9% in 1995 and 1994.
In addition to providing pension benefits, the Company
provides certain health care and life insurance benefits for
retired employees and inactive employees covered by disability
plans. The health care plan pays stated percentages of most
necessary medical expenses incurred by these employees, after
subtracting payments by Medicare or other providers and after a
stated deductible has been met. The life insurance plan pays
benefits based on base salary at the time of retirement and age
at the date of death. Participants become eligible for the
42
benefits of these plans if they retire under the provisions of
the Company's General Retirement Program with 10 years of service
or become inactive employees under the Company's disability
plans. The Company is amortizing the unrecognized transition
obligation measured at January 1, 1993, over a 20-year period.
Postretirement benefit expense included in net income was $9
million, $8.7 million and $9.3 million in 1995, 1994 and 1993,
respectively. The following table sets forth the components of
the postretirement expense.
- -----------------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------
(Thousands of Dollars)
Service cost-benefits attributable
to service during the year $ 2,300 $ 2,600 $ 2,500
Interest cost on accumulated
postretirement benefit obligation 4,500 4,200 4,400
Actual (return) loss on plan assets (1,900) 200 (400)
Amortization of transition
obligation 2,100 2,500 2,800
Difference between actual and
expected return on plan assets
and net amortization 2,000 (800) -
------- ------- -------
Net postretirement benefit cost $ 9,000 $ 8,700 $ 9,300
======= ======= =======
- -----------------------------------------------------------------
43
The following table sets forth the accumulated
postretirement benefit obligation reconciled to the amounts
recognized on the Consolidated Balance Sheets.
- -----------------------------------------------------------------
1995 1994
- -----------------------------------------------------------------
(Thousands of Dollars)
Accumulated postretirement
benefit obligation to
Retirees and dependents $(40,100) $(34,600)
Active employees fully eligible (9,300) (10,600)
Active employees not fully
eligible (15,200) (14,800)
-------- --------
Total accumulated postretirement
benefit obligation (64,600) (60,000)
Plan assets at fair value 7,800 4,500
-------- --------
Accumulated postretirement benefit
obligation in excess of plan assets (56,800) (55,500)
Unrecognized transition obligation 35,800 45,200
Unrecognized actuarial loss 23,100 11,100
-------- --------
Prepaid postretirement benefit
cost $ 2,100 $ 800
======== ========
- -----------------------------------------------------------------
The Company's obligation at December 31, 1995 and 1994, was
based on discount rates of 7.5% and 8.5%, respectively, and
weighted average rates of increase in future compensation levels
of 4% and 4.5%, respectively. The assumed health-care cost trend
rate is 7.5% which declines to 5.5% after a four-year period. A
one percentage point increase in the health-care cost trend rate
would increase the Accumulated Postretirement Benefit Obligation
by $3.1 million to approximately $67.7 million and the sum of the
service cost and interest cost for 1995 by approximately $.4
million.
In January 1995 and 1994, the Company funded the 1995 and
1994 portions of its estimated liability for postretirement
medical and life insurance costs through the use of an Internal
Revenue Code (IRC) 401 (h) account, within the Company's pension
plan, and an IRC 501 (c)(9) Voluntary Employee Beneficiary
Association (VEBA). The Company plans to fund the 401(h) account
and the VEBA annually. In January 1996, the 1996 portion of the
Company's estimated liability will be funded. Assets were
comprised of cash equivalents, fixed income investments and
equity investments and the assumed return on plan assets was 9%
in 1995 and 1994.
44
<TABLE>
(4) Income Taxes
------------
The provision for income taxes, reconciliation of consolidated income tax expense
and components of consolidated deferred tax liabilities (assets) are set forth below.
<CAPTION>
Provisions for Income Taxes
- ---------------------------
- ---------------------------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Utility current tax expense
Federal $ 68,492 $ 63,395 $ 69,007
State and local 9,173 8,612 9,801
--------- --------- ---------
Total utility current tax expense 77,665 72,007 78,808
--------- --------- ---------
Utility deferred tax expense
Federal 48,339 42,070 26,784
State and local 7,084 6,221 5,100
Investment tax credits (3,649) (3,650) (3,469)
--------- --------- ---------
Total utility deferred tax expense 51,774 44,641 28,415
--------- --------- ---------
Total utility income tax expense 129,439 116,648 107,223
--------- --------- ---------
Nonutility subsidiary current tax expense
Federal (35,592) (29,315) (13,022)
--------- --------- ---------
Nonutility subsidiary deferred tax expense
Federal (50,116) 6,758 (31,360)
State and local - (138) (696)
--------- --------- ---------
Total nonutility subsidiary deferred tax expense (50,116) 6,620 (32,056)
--------- --------- ---------
Total nonutility subsidiary income tax expense (85,708) (22,695) (45,078)
--------- --------- ---------
Total consolidated income tax expense 43,731 93,953 62,145
Income taxes included in other income (84,729) (25,906) (48,031)
--------- --------- ---------
Income taxes included in utility operating expenses $ 128,460 $ 119,859 $ 110,176
========= ========= =========
45
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Consolidated Income Tax Expense
- -------------------------------------------------
- ---------------------------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Income before income taxes $ 138,122 $ 321,115 $ 303,724
========= ========= =========
Utility income tax at federal statutory rate $ 121,879 $ 113,653 $ 113,295
Increases (decreases) resulting from
Depreciation 9,173 8,022 5,096
Removal costs (7,204) (4,086) (4,385)
Allowance for funds used during construction 595 (2,411) (3,852)
Other (1,613) (4,175) (6,477)
State income taxes, net of federal effect 10,648 9,683 9,686
Tax credits (4,039) (4,038) (3,873)
Cumulative effect of tax rate change - - (2,267)
--------- --------- ---------
Total utility income tax expense 129,439 116,648 107,223
--------- --------- ---------
Nonutility subsidiary income tax at federal statutory rate (73,537) (1,262) (6,992)
Increases (decreases) resulting from
Dividends received deduction (8,524) (8,487) (7,672)
Reversal of previously accrued deferred taxes - (8,206) (35,904)
Other (3,647) (4,602) (408)
State income taxes, net of federal effect - (138) (696)
Cumulative effect of tax rate change - - 6,594
--------- --------- ---------
Total nonutility subsidiary income tax expense (85,708) (22,695) (45,078)
--------- --------- ---------
Total consolidated income tax expense 43,731 93,953 62,145
Income taxes included in other income (84,729) (25,906) (48,031)
--------- --------- ---------
Income taxes included in utility operating expenses $ 128,460 $ 119,859 $ 110,176
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Components of Consolidated Deferred Tax Liabilities (Assets)
- ------------------------------------------------------------
At December 31,
----------------------
1995 1994
----------------------
(Thousands of Dollars)
<S> <C> <C>
Utility deferred tax liabilities (assets)
Depreciation and other book to tax basis differences $ 773,323 $ 723,248
Rapid amortization of certified pollution control
facilities 26,640 29,018
Deferred taxes on amounts to be collected through
future rates 92,472 95,465
Property taxes 11,808 11,212
Deferred fuel (7,154) 177
Prepayment premium on debt retirement 22,080 21,537
Deferred investment tax credit (24,464) (25,922)
Contributions in aid of construction (27,206) (24,954)
Contributions to pension plan 10,859 -
Other 25,124 25,454
--------- ---------
Total utility deferred tax liabilities (net) 903,482 855,235
Current portion of utility deferred tax liabilities
(included in Other Current Liabilities) 10,938 6,779
--------- ---------
Total utility deferred tax liabilities (net) - noncurrent $ 892,544 $ 848,456
========= =========
Nonutility subsidiary deferred tax liabilities (assets)
Finance leases $ 149,103 134,925
Operating leases 66,802 117,782
Reversal of previously accrued taxes related
to partnerships (11,593) (16,385)
Alternative minimum tax (84,512) (77,167)
Other (16,840) (24,477)
--------- ---------
Total nonutility subsidiary deferred tax liabilities (net),
(included in Deferred taxes and other) $ 102,960 $ 134,678
========= =========
46
</TABLE>
The utility net deferred tax liability represents the tax
effect, at presently enacted tax rates, of temporary differences
between the financial statement and tax bases of assets and
liabilities. The portion of the utility net deferred tax
liability applicable to utility operations, which has not been
reflected in current service rates, represents income taxes
recoverable through future rates, net and is recorded as a
Deferred Charge on the balance sheet. No valuation allowance for
deferred tax assets was required or recorded at December 31, 1995
and 1994.
The Tax Reform Act of 1986 repealed the Investment Tax
Credit (ITC) for property placed in service after December 31,
1985, except for certain transition property. ITC previously
earned on utility property continues to be normalized over the
remaining service lives of the related assets.
The Company and its subsidiaries file a consolidated federal
income tax return. The Company's federal income tax liabilities
for all years through 1991 have been finally determined. The
Company is of the opinion that the final settlement of its
federal income tax liabilities for subsequent years will not have
a material adverse effect on its financial position.
47
(5) Other Taxes
-----------
Taxes, other than income taxes, charged to utility operating
expenses for each period are shown below.
- ----------------------------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------
(Thousands of Dollars)
Gross receipts $ 95,158 $ 93,549 $ 88,044
Property 64,991 60,443 58,193
Payroll 11,269 11,063 10,534
County fuel-energy 21,887 30,842 34,614
Environmental, use and
other 9,403 10,183 9,867
-------- -------- --------
$202,708 $206,080 $201,252
======== ======== ========
- -----------------------------------------------------------------
48
(6) Jointly Owned Generating Facilities
-----------------------------------
The Company owns a 9.72% undivided interest in the Conemaugh
Generating Station located near Johnstown, Pennsylvania,
consisting of two baseload units totaling 1,700 megawatts. The
Company and other utilities own the station as tenants in common
and share costs and output in proportion to their ownership
shares. Each owner has arranged its own financing relating to
its share of the facility. The Company's share of the operating
expenses of the station is included in the Consolidated
Statements of Earnings. The Company's investment in the
Conemaugh facility of $85.7 million at December 31, 1995, and
$81.1 million at December 31, 1994, includes $1.3 million and
$9.5 million of Construction Work in Progress, respectively.
49
<TABLE>
(7) Common Equity
Changes in common stock, premium on stock and retained income are summarized
below.
<CAPTION>
- ---------------------------------------------------------------------------------------
Common Stock Premium Retained
Shares Par Value on Stock Income
- ---------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Balance, December 31, 1992 114,296,443 $ 114,296 $ 919,089 $ 802,774
Net income before net earnings
from nonutility subsidiary - - - 216,478
Nonutility subsidiary:
Net earnings - - - 25,101
Marketable equity securities
valuation allowance, net of tax - - - 1,172
Dividends:
Preferred stock - - - (16,255)
Common stock - - - (189,837)
Conversion of convertible
debentures 3,480 4 93 -
Conversion of preferred stock 5,534 6 42 -
Loss on acquisition of preferred
stock - - (24) -
Other capital contributions - - 69 -
Sale of common stock through
Shareholder Dividend
Reinvestment Plan 1,638,227 1,638 42,655 -
Issuance of common stock to
Employee Savings Plans 362,468 362 9,277 -
Sale of common stock through
public offerings 1,491,500 1,492 40,577 -
----------- ---------- ---------- ----------
Balance, December 31, 1993 117,797,652 117,798 1,011,778 839,433
Net income before net earnings
from nonutility subsidiary - - - 208,074
Nonutility subsidiary:
Net earnings - - - 19,088
Marketable securities net
unrealized loss, net of tax - - - (23,879)
Dividends:
Preferred stock - - - (16,437)
Common stock - - - (195,755)
Conversion of preferred stock 3,845 4 29 -
Gain on acquisition of preferred
stock - - 109 -
Other capital reductions - - (66) -
Sale of common stock through
Shareholder Dividend
Reinvestment Plan 355,198 355 6,603 -
Issuance of common stock to
Employee Savings Plans 91,408 91 2,236 -
----------- ---------- ---------- ----------
Balance, December 31, 1994 118,248,103 118,248 1,020,689 830,524
Net income before net loss
from nonutility subsidiary - - - 218,788
Nonutility subsidiary:
Net loss - - - (124,397)
Marketable securities net
unrealized gain, net of tax - - - 30,701
Dividends:
Preferred stock - - - (16,851)
Common stock - - - (196,469)
Conversion of preferred stock 9,730 10 74 -
Gain on acquisition of preferred
stock - - 5 -
Other capital reductions - - (23) -
Sale of common stock through
Shareholder Dividend
Reinvestment Plan 158,501 159 2,881 -
Issuance of common stock to
Employee Savings Plans 78,243 78 1,462 -
----------- ---------- ---------- ----------
Balance, December 31, 1995 118,494,577 $ 118,495 $1,025,088 $ 742,296
=========== ========== ========== ==========
50
</TABLE>
The Company's Shareholder Dividend Reinvestment Plan (DRP)
provides that shares of common stock purchased through the plan
may be original issue shares or, at the option of the Company,
shares purchased in the open market. The DRP permits additional
cash investments by plan participants limited to one investment
per month of not less than $25 and not more than $5,000.
As of December 31, 1995, 39,139 shares of common stock were
reserved for issuance upon the conversion of convertible
preferred stock, 2,771,633 and 3,392,500 shares were reserved for
conversion of the 7% and 5% convertible debentures, respectively,
2,324,721 shares were reserved for issuance under the DRP and
1,221,624 shares were reserved for issuance under the Employee
Savings Plans. 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. See Note (13) Commitments
and Contingencies for additional information.
Certain provisions of the Company's corporate charter,
relating to preferred and preference stock, would impose
restrictions on the payment of dividends under certain
circumstances. No portion of retained income was so restricted
at December 31, 1995.
51
(8) Serial Preferred Stock
----------------------
The Company has authorized 11,126,222 shares of cumulative $50
par value Serial Preferred Stock. At December 31, 1995 and 1994,
there were outstanding 5,376,202 shares and 5,379,433 shares,
respectively. The various series of Serial Preferred Stock
outstanding (excluding 2,869,696 shares of Redeemable Serial
Preferred Stock - See Note 9) and the per share redemption price
at which each series may be called by the Company are as follows.
- -----------------------------------------------------------------
Redemption December 31,
Price 1995 1994
- -----------------------------------------------------------------
(Thousands of
Dollars)
$2.44 Series of 1957, 300,000 shares $51.00 $15,000 $15,000
$2.46 Series of 1958, 300,000 shares $51.00 15,000 15,000
$2.28 Series of 1965, 400,000 shares $51.00 20,000 20,000
$3.82 Series of 1969, 500,000 shares $51.00 25,000 25,000
$2.44 Convertible Series of 1966,
6,506 and 8,182 shares,
respectively $50.00 325 409
Auction Series A, 1,000,000 shares $50.00 50,000 50,000
-------- --------
$125,325 $125,409
======== ========
- -----------------------------------------------------------------
The $2.44 Convertible Series of 1966 is convertible into
common stock of the Company at a price based upon a formula that
is subject to adjustment in certain events. At December 31,
1995, 5.88 shares of common stock could be obtained upon the
conversion of each share of convertible preferred stock at the
then effective conversion price of $8.51 per share of common
stock. The number of shares of this series converted into common
stock was 1,676 shares in 1995, 656 shares in 1994 and 948 shares
in 1993.
Dividends on the Serial Preferred Stock, Auction Series A,
are cumulative and are based on the rate determined by auction
procedures prior to each dividend period. The maximum rate can
range from 110% to 200% of the applicable "AA" Composite
Commercial Paper Rate. The annual dividend rate is 4.335%
($2.1675) for the period December 1, 1995, through February 29,
1996. The average annual dividend rates were 4.638% ($2.319) in
1995 and 3.55% ($1.775) in 1994.
52
(9) Redeemable Serial Preferred Stock
---------------------------------
The outstanding series of $50 par value Redeemable Serial
Preferred Stock are shown below.
- -----------------------------------------------------------------
December 31,
1995 1994
- -----------------------------------------------------------------
(Thousands of Dollars)
$3.37 Series of 1987, 869,696 and
871,251 shares, respectively $ 43,485 $ 43,563
$3.89 Series of 1991, 1,000,000 shares 50,000 50,000
$3.40 Series of 1992, 1,000,000 shares 50,000 50,000
-------- --------
$143,485 $143,563
======== ========
- ----------------------------------------------------------------
The shares of the $3.37 (6.74%) Series are subject to
mandatory redemption, at par, through the operation of a sinking
fund. Beginning June 1993, not less than 30,000 nor more than
60,000 shares will be redeemed annually. The option to redeem in
excess of 30,000 shares annually is not cumulative; however,
shares which are acquired or redeemed by the Company other than
through the operation of the sinking fund may, at the option of
the Company, be applied toward the satisfaction of sinking fund
requirements. Presently, the shares are callable for redemption
at a per share price of $52.25, which is reduced in succeeding
years, equaling par value beginning June 1, 2002.
The shares of the $3.89 (7.78%) Series are subject to
mandatory redemption, at par, through the operation of a sinking
fund which will redeem not less than 165,000 nor more than
330,000 shares annually, beginning June 1, 2001, and 175,000
shares on June 1, 2006. The option to redeem in excess of
165,000 shares annually is not cumulative. The shares may be
called for redemption at any time at a per share price of $53.89;
however, the shares are not redeemable prior to June 1, 1996,
through certain refunding operations. The redemption price is
reduced in succeeding years, equaling $50.98 beginning June 1,
2003.
53
The shares of the $3.40 (6.80%) Series are subject to
mandatory redemption, at par, through the operation of a sinking
fund which will redeem 50,000 shares annually, beginning
September 1, 2002, with the remaining shares redeemed on
September 1, 2007. The shares are not redeemable prior to
September 1, 2002; thereafter, the shares are redeemable at par.
In the event of default with respect to dividends, or
sinking fund or other redemption requirements relating to the
serial preferred stock, no dividends may be paid, nor any other
distribution made, on common stock. Payments of dividends on all
series of serial preferred or preference stock, including series
which are redeemable, must be made concurrently.
The sinking fund requirements through 2000 with respect to
the Redeemable Serial Preferred Stock are $1 million in 1997 and
$1.5 million annually thereafter.
54
<TABLE>
(10) Long-Term Debt
<CAPTION>
Details of long-term debt are shown below.
- ------------------------------------------------------------------------------------------------------
Interest December 31,
Rate Maturity 1995 1994
- ------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
First Mortgage Bonds
Fixed Rate Series:
5% December 15, 1995 $ - $ 40,000
5-5/8% December 31, 1997 - 16,000
4-3/8% February 15, 1998 50,000 50,000
4-1/2% May 15, 1999 45,000 45,000
9% April 15, 2000 100,000 100,000
5-1/8% April 1, 2001 15,000 15,000
5-7/8% May 1, 2002 35,000 35,000
6-5/8% February 15, 2003 40,000 40,000
5-5/8% October 15, 2003 50,000 50,000
6-1/2% September 15, 2005 100,000 -
6-1/2% March 15, 2008 78,000 78,000
5-7/8% October 15, 2008 50,000 50,000
5-3/4% March 15, 2010 16,000 -
8-5/8% August 15, 2019 - 59,800
9% June 1, 2021 100,000 100,000
6% September 1, 2022 30,000 30,000
6-3/8% January 15, 2023 37,000 37,000
7-1/4% July 1, 2023 100,000 100,000
6-7/8% September 1, 2023 100,000 100,000
5-3/8% February 15, 2024 42,500 42,500
5-3/8% February 15, 2024 38,300 38,300
6-7/8% October 15, 2024 75,000 75,000
7-3/8% September 15, 2025 75,000 -
8-1/2% May 15, 2027 75,000 75,000
7-1/2% March 15, 2028 40,000 40,000
Variable Rate Series:
Adjustable rate December 1, 2001 50,000 50,000
---------- ----------
Total First Mortgage Bonds 1,341,800 1,266,600
Convertible Debentures
5% September 1, 2002 115,000 115,000
7% January 15, 2018 66,747 68,412
Medium-Term Notes
6.25% May 28, 1996 25,000 25,000
6.66% to 6.73% May 1997 100,000 100,000
9.08% July and August 1997 50,000 50,000
7.46% to 7.60% January 2002 40,000 40,000
7.64% January 17, 2007 35,000 35,000
6.25% January 20, 2009 50,000 50,000
7% January 15, 2024 50,000 50,000
---------- ----------
Total Utility Long-Term Debt 1,873,547 1,800,012
Net unamortized discount (30,190) (31,168)
Current portion (26,280) (45,445)
---------- ----------
Net Utility Long-Term Debt $1,817,077 $1,723,399
========== ==========
Nonutility Subsidiary Long-term Debt
Varying rates through 2011 $1,047,484 $1,140,505
========== ==========
55
</TABLE>
Utility Long-Term Debt
- ----------------------
The outstanding First Mortgage Bonds (bonds) are secured by a
lien on substantially all of the Company's property and plant.
Additional bonds may be issued under the mortgage as amended and
supplemented in compliance with the provisions of the indenture.
During 1995, the Company issued $100 million of 6-1/2% First
Mortgage Bonds, $75 million of 7-3/8% First Mortgage Bonds and
$16 million of 5-3/4% First Mortgage Bonds with various
maturities. A portion of the proceeds from these financings was
used to redeem $75.8 million of higher cost or shorter maturity
First Mortgage Bonds, to satisfy current long-term debt
maturities of $40 million and to refund short-term debt.
The interest rate on the $50 million Adjustable Rate series
First Mortgage Bonds is adjusted annually on December 1, based
upon 116% of the 10-year "constant maturity" United States
Treasury bond rate for the preceding three-month period ended
October 31. Effective December 1, 1995, the applicable interest
rate is 7.443%. The applicable interest rate was 8.68% at
December 1, 1994, and 6.657% at December 1, 1993.
The 7% Convertible Debentures are convertible into shares of
common stock at a conversion price of $27 per share.
The 5% Convertible Debentures are convertible into shares of
common stock at a conversion rate of 29-1/2 shares for each
$1,000 principal amount.
The aggregate amounts of maturities for the Company's long-
term debt outstanding at December 31, 1995, are $26.3 million in
1996, $150 million in 1997, $50 million in 1998, $45 million in
1999 and $100 million in 2000.
Nonutility Subsidiary Long-Term Debt
- ------------------------------------
Long-term debt at December 31, 1995, consisted of $981.3 million
of recourse debt from institutional lenders maturing at various
dates between 1996 and 2003. The interest rates of such
borrowings ranged from 5% to 10.1%. The weighted average
interest rate was 7.66% at December 31, 1995, 7.47% at December
31, 1994, and 7.45% at December 31, 1993. Annual aggregate
principal repayments are $230.5 million in 1996, $169.5 million
in 1997, $251.3 million in 1998, $140.5 million in 1999, $93
million in 2000 and $96.5 million thereafter.
56
Long-term debt also includes $66.2 million of non-recourse
debt, $42.6 million of which was secured by aircraft currently
under operating lease. The debt is payable in monthly
installments at rates of LIBOR (London Interbank Offered Rate)
plus 1.25% and LIBOR plus 1.375% with final maturity on March 15,
2002. Non-recourse debt of $23.6 million is related to PCI's
majority-owned real estate partnerships of which $15.4 million is
due in consecutive monthly installments with maturity on May 11,
2001, based on a 30-year amortization period at a fixed rate of
interest of 9.05%. The remaining non-recourse real estate debt
consists of $8.2 million payable in monthly installments at a
fixed rate of interest of 9.66% with final maturity on October 1,
2011.
57
<TABLE>
(11) Fair Value of Financial Instruments
- ----------------------------------------
The estimated fair values of the Company's financial instruments at December 31, 1995,
and 1994 are shown below.
<CAPTION>
- ------------------------------------------------------------------------------------------------
December 31,
1995 1994
- ------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Utility
Capitalization and Liabilities
Serial preferred stock $ 125,325 114,590 125,409 102,102
Redeemable serial
preferred stock $ 143,485 145,046 143,563 134,008
Long-term debt
First Mortgage Bonds $1,326,560 1,385,609 1,208,076 1,093,208
Medium-Term Notes $ 323,007 336,351 347,712 324,223
Convertible Debentures $ 167,510 174,054 167,611 146,098
Nonutility Subsidiary
Assets
Marketable securities $ 530,323 530,323 473,608 473,608
Notes receivable $ 62,175 63,184 61,278 58,616
Liabilities
Long-term debt $1,047,484 1,071,354 1,140,505 1,122,638
- ------------------------------------------------------------------------------------------------
58
</TABLE>
The methods and assumptions below were used to estimate, at
December 31, 1995 and 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.
The carrying amounts of all other financial instruments
approximate fair value.
(12) Short-Term Debt
---------------
The Company's short-term financing requirements have been
satisfied principally through the sale of commercial promissory
notes. Interest rates for the Company's short-term financing
during the year ranged from 5.7% to 6.1%.
The Company maintains a minimum 100% line of credit back-up
for its outstanding commercial promissory notes, which was unused
during 1995, 1994 and 1993.
59
Nonutility Subsidiary Short-Term Notes Payable
- ----------------------------------------------
The nonutility subsidiary's short-term financing requirements
have been satisfied principally through the sale of commercial
promissory notes.
The nonutility subsidiary maintains a minimum 100% line of
credit back-up for its outstanding commercial promissory notes,
which was unused during 1995, 1994 and 1993.
(13) Commitments and Contingencies
-----------------------------
Proposed Merger
- ---------------
On September 22, 1995, the Company entered into an Agreement and
Plan of Merger with Baltimore Gas and Electric Company (BGE).
This Agreement provides for a strategic business combination in
which each company will merge into Constellation Energy
Corporation (Constellation Energy), a newly formed company to
create an integrated, non-holding company structure (the Merger).
Each outstanding share of the Company's common stock will be
converted into the right to receive .997 of a share of common
stock of Constellation Energy and each outstanding share of BGE
common stock will be converted into the right to receive one
share of Constellation Energy'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. Constellation Energy will
serve a population of approximately 4.5 million with
approximately 1.8 million electric customers and over 530,000
natural gas customers. It is estimated that savings from the
combined utility systems will approximate $1.3 billion over 10
years, net of costs to achieve. The allocation of the net
savings between customers and shareholders of the Company will be
determined in regulatory proceedings. The Merger requires the
approval of shareholders of each company and certain regulatory
agencies including the Federal Energy Regulatory Commission, the
Public Service Commissions of Maryland and the District of
Columbia and the Nuclear Regulatory Commission. The approval
process is expected to take until the end of the first quarter of
1997 to complete.
If the Merger Agreement is terminated by either the Company
or BGE due to a material breach by the other party, 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 cash in respect of out-
of-pocket expenses, by one party to the other if the Merger
60
Agreement is terminated under certain circumstances including, 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. The termination
fees payable by the Company under these provisions and the
aggregate amount which could be payable by the Company upon a
required repurchase of an option (or shares of common stock
issued pursuant to the exercise of the option) granted by the
Company to BGE in connection with entry into the Merger Agreement
may not exceed $125 million in the aggregate.
The Company has approved a severance plan for all exempt and
non-bargaining unit employees who lose employment due to the
Merger. Employees who lose employment as a result of the Merger
will receive two weeks of pay per year of service, with a minimum
payment of eight weeks of pay. In addition, employees will
receive company-subsidized health and dental insurance for two
weeks for each year of service, with a minimum of eight weeks of
insurance coverage.
In December 1995, an extension of the current 1993 Labor
Agreement between the Company and Local 1900 of the International
Brotherhood of Electrical Workers was ratified by the Union
members. The 1995 Agreement extends the 1993 Agreement, which
was due to expire on June 1, 1996, for two years or until the
effective date of the Merger with BGE, whichever occurs first.
This Agreement provides severance benefits, previously approved
by the Company for exempt and non-bargaining unit employees, for
all union members and provides for a lump-sum payment of 2% of
base pay on January 5, 1996, a lump-sum payment of 1% of base pay
on June 7, 1996, and a lump-sum payment of 3% of base pay on June
6, 1997, or the effective date of the Merger, whichever occurs
first.
Leases
- ------
The Company leases its general office building and certain data
processing and duplicating equipment, motor vehicles,
communication system and construction equipment under long-term
lease agreements. The lease of the general office building
expires in 2002 and leases of equipment extend for periods of up
to six years. Charges under such leases are accounted for as
operating expenses or construction expenditures, as appropriate.
Rents, including property taxes and insurance, net of rental
income from subleases, aggregated approximately $15.6 million in
1995, $14.9 million in 1994 and $13.6 million in 1993. The
approximate annual commitments under all operating leases,
reduced by rentals to be received under subleases are $13.8
million in 1996, $7.7 million in 1997, $6.2 million in 1998, $5.6
million in 1999, $4.6 million in 2000 and a total of $10.8
million in the years thereafter.
61
The Company entered into a sale (at cost) and leaseback
agreement, in December 1994, for its control center system
(system). The system is an integrated energy management system
used by the Company's power dispatchers to centrally control the
operation of the Company's electric system, which consists of all
of its generating units, the transmission system and the
distribution system. The lease of the system is accounted for as
a capital lease, and was recorded at the present value of future
lease payments which totaled $152 million. The lease requires
semi-annual payments of $7.6 million over a 25-year period and
provides for transfer of ownership of the system to the Company
for $1 at the end of the lease term. Under SFAS No. 71, the
amortization of leased assets is modified so that the total of
interest on the obligation and amortization of the leased asset
is equal to the rental expense allowed for ratemaking purposes.
This lease has been treated as an operating lease for ratemaking
purposes.
Fuel Contracts
- --------------
The Company has numerous coal contracts with various expiration
dates through 2003 for aggregate annual deliveries of
approximately 3.2 million tons. Deliveries under these contracts
are expected to provide approximately 48% of the estimated system
coal requirements in 1996. Approximately 52% of the estimated
system coal requirements in 1996 will be purchased under shorter
term agreements and on a spot basis from a variety of suppliers.
Prices under the Company's coal contracts are generally
determined by reference to base amounts adjusted to reflect
provisions for changes in suppliers' costs, which in turn are
determined by reference to published indices and limited by
current market prices.
Capacity Purchase Agreements
- ----------------------------
The Company's long-term capacity purchase agreements with Ohio
Edison and APS commenced June 1, 1987, and are expected to
continue at the 450 megawatt level through 2005. Under the terms
of the agreement with Ohio Edison, the Company is required to
make capacity payments, subject to certain contingencies, which
include a share of Ohio Edison's fixed operating and maintenance
cost. The approximate monthly capacity commitment under this
agreement, excluding an allocation of fixed operating and
maintenance cost, is $18,060 per megawatt through 1998 and
$25,620 per megawatt from 1999 through 2005.
62
The Company began a 25-year purchase agreement in June 1990
with SMECO for 84 megawatts of capacity supplied by a combustion
turbine installed and owned by SMECO at the Company's Chalk Point
Generating Station. The Company is responsible for all costs
associated with operating and maintaining the facility. The
Company is accounting for this agreement as a capital lease,
recorded at fair market value which totaled $37.1 million at the
date construction was complete. The capacity payment to SMECO is
$462,000 per month. Under SFAS No. 71, amortization of leased
assets is modified so that the total of interest on the
obligation and amortization of the leased asset is equal to
rental expense allowed for ratemaking purposes. This agreement
has been treated as an operating lease for ratemaking purposes.
The Company has a 25-year agreement with Panda Energy
Corporation for 230 megawatts of capacity supplied by a gas-
fueled combined-cycle cogenerator which is scheduled for
operation in the fourth quarter of 1996. The agreement currently
requires capacity purchase payments to Panda Energy Corporation
of approximately $1.6 million per month from January 1, 1997,
through December 31, 1998. Capacity payments in 1999 and 2000
are approximately $3 million per month and generally increase
thereafter peaking at approximately $4.5 million per month.
Environmental Contingencies
- ---------------------------
The Company is subject to contingencies associated with
environmental matters, principally related to possible
obligations to remove or mitigate the effects on the environment
of the disposal of certain substances at the sites discussed
below.
During 1993, the Company and two other potentially
responsible parties (PRP) completed a removal action at a site in
Harmony, West Virginia, pursuant to an Administrative Order (AO)
issued by the U.S. Environmental Protection Agency (EPA).
Approximately $3 million (of which the Company has paid one-
third, subject to possible reallocation) was expended on the
removal action, which the EPA has stated is in compliance with
the AO. The Company and two other PRPs have entered into
settlements with third parties to recover approximately $2.4
million of this cost. EPA oversight costs, which are not
expected to be material, have not yet been assessed. While
compliance with the AO has been completed, the Company cannot
determine whether it will be subject to any future liability with
respect to this site.
In October 1994, a Remedial Investigation/Feasibility Study
(RI/FS) report was submitted to the EPA with respect to a site in
Philadelphia, Pennsylvania. Pursuant to an agreement among the
PRPs, the Company is responsible for 12% of the costs of the
RI/FS. Total costs of the RI/FS and associated activities prior
63
to the issuance of a Record of Decision (ROD) by the EPA,
including legal fees, are currently estimated to be $5.6 million.
The Company has paid $2.5 million as of December 31, 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, the EPA announced its proposed remedial action plan for the
site and indicated it will accept comments on the plan from any
interested parties. The EPA's estimate of the costs associated
with implementation of the plan is approximately $17 million.
The Company cannot predict whether the EPA will include the plan
in its ROD as proposed or make changes as a result of comments
received. In addition, the Company cannot estimate the total
extent of the EPA's administrative and oversight costs. To date,
the Company has accrued $1.7 million for its share of this
contingency.
On October 3, 1995, the Company received notice from the EPA
that it, along with several hundred other companies, may be a 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 .0042%. The 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 its liability at this site
will not have a material adverse effect on its financial position
or results of operations.
On December 5, 1995, the Company received notice from the
EPA that it is a PRP under the Comprehensive Environmental
Response Compensation and Liability Act (CERCLA or Superfund)
with respect to the release or threatened release of radioactive
and mixed radioactive and hazardous wastes at a site in Denver,
Colorado, operated by RAMP Industries, Inc. A preliminary
investigation by the Company indicates that the Company's
connection to the site arises from an agreement with a vendor to
package, transport and dispose of two laboratory instruments
containing small amounts of radioactive material at a Nevada
facility. While the Company cannot predict its liability at this
site, the Company believes that it will not have a material
adverse effect on its financial position or results of
operations.
Litigation
- ----------
During 1993, the Company was served with Amended Complaints filed
in three jurisdictions (Prince George's County, Baltimore City,
and Baltimore County), in separate ongoing, consolidated
proceedings each denominated "In re: Personal Injury Asbestos
Case." The Company (and other defendants) were brought into
64
these cases on a theory of premises liability under which
plaintiffs argue that the Company was negligent in not providing
a safe work environment for employees of its contractors who
allegedly were exposed to asbestos while working on the Company's
property. Initially, a total of approximately four hundred and
forty-eight (448) individual plaintiffs added the Company to
their Complaints. While the pleadings are not entirely clear, it
appears that each plaintiff seeks $2 million in compensatory
damages and $4 million in punitive damages from each defendant.
In a related proceeding in the Baltimore City case, the Company
was served, in September 1993, with a third-party complaint by
Owens Corning Fiberglass, Inc. (Owens Corning) alleging that
Owens Corning was in the process of settling approximately 700
individual asbestos-related cases and seeking a judgment for
contribution against the Company on the same theory of alleged
negligence set forth above in the plaintiffs' case.
Subsequently, Pittsburgh Corning Corp. (Pittsburgh Corning) filed
a third-party complaint against the Company, seeking contribution
for the same plaintiffs involved in the Owens Corning third-party
complaint. Since the filings, a number of the individual suits
have been disposed of without any payment by the Company. The
third-party complaints involving Pittsburgh Corning and Owens
Corning were dismissed by the Baltimore City Court during 1994
without any payment by the Company. While the aggregate amount
specified in the remaining suits would exceed $1 billion, the
Company believes the amounts are greatly exaggerated as were the
claims already disposed of. The amount of total liability, if
any, and any related insurance recovery cannot be precisely
determined at this time; however, based on information and
relevant circumstances known at this time, the Company does not
believe these suits will have a material adverse effect on its
financial position. However, an unfavorable decision rendered
against the Company could have a material adverse effect on
results of operations in the fiscal year in which a decision is
rendered.
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.
Nonutility Subsidiary
- ---------------------
In May 1995, PCI adopted a plan to exit the aircraft equipment
leasing business. The plan, which was developed following
comprehensive review, is designed to permit a withdrawal from the
aircraft leasing business on an orderly basis designed to
preserve value. Under the plan, PCI will make no new investments
to increase the size of the aircraft leasing portfolio. In
65
addition, thirteen aircraft have been designated for sale over 18
to 24 months from the date the plan was announced. These
aircraft are subject to short-term, usage-based leases, long-term
leases that will expire in the near term, or are not currently
under lease. 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 noncash charge to after-tax earnings
of approximately $110 million for the second quarter of 1995.
There will be no future depreciation of, or routine accrual for
repair and maintenance expenditures with respect to these
aircraft. For accounting purposes, gains or losses from the sale
of individual aircraft will be deferred until completion of the
disposal process.
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.
Depreciation on two wholly owned aircraft, six majority-owned
aircraft and two aircraft held by partnerships, in which PCI has
a 50% interest, 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 12 full or partial interests in aircraft under leveraged
leases or direct finance leases.
PCI will continue to market and sell the 13 aircraft
designated for sale and will continue to closely monitor the
aircraft in its portfolio not designated for near term sale with
the objective of identifying future opportunities for sale or
other disposition on favorable terms. Satisfactory execution of
the entire plan may be affected by future aircraft market
conditions and events, which may have an impact on equipment
values and sales opportunities and, in the case of the portion of
the portfolio on long-term lease, the creditworthiness of PCI's
lessees.
In April 1995, PCI reached agreement with Continental
providing for the deferral of approximately 40% of aggregate
monthly rentals from the four majority-owned and two jointly
owned DC-10-30 aircraft for a period of 16 months, commencing
February 1995. The deferred amounts are to be repaid over a
three and one-half year period with 8% interest, commencing
66
June 1, 1996, at which time the aggregate deferred amount will be
approximately $20 million. As part of the agreement, PCI
obtained cross-default provisions in its Continental leases and
improvements in aircraft return conditions.
During July 1995, Atlas Air, Inc. filed suit in New York
Superior Court requesting a declaratory judgment that the
duration of its lease of one B747-200F 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 were filed,
and the Court ruled in Atlas' favor on December 27, 1995. A new
and separate complaint, based on PCI's termination of the lease
agreement because of Atlas' failure to make certain lease
payments, was filed by PCI on December 29, 1995. The parties
have agreed to an expedited procedural schedule, and PCI's motion
for summary judgment was submitted on January 10, 1996.
Management is of the opinion that the outcome of this litigation
will not have a material adverse effect on its financial position
or results of operations.
67
(14) Supplemental Disclosure of Cash Flow Information
------------------------------------------------
Listed below is supplemental disclosure of cash flow information.
- -----------------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------
(Thousands of Dollars)
Cash paid for:
Interest, net of capitalized
interest (including nonutility
subsidiary interest of $93,672,
$83,724 and $76,556) $223,789 203,013 206,955
Income taxes $ 44,725 51,368 67,741
Nonutility subsidiary noncash
transactions:
Consolidation of majority-owned
subsidiaries $ - - 35,320
- -----------------------------------------------------------------
For purposes of the consolidated financial statements, cash
and cash equivalents include cash on hand, money market funds and
commercial paper with maturities of three months or less.
68
(15) Selected Nonutility Subsidiary Financial Information
----------------------------------------------------
Selected financial information of the Company's principal
consolidated nonutility investment subsidiary, Potomac Capital
Investment Corporation (PCI) and its subsidiaries, is presented
below. Subsidiary equity at December 31, 1995, and December 31,
1994, was $168.4 million and $271.1 million, respectively. These
amounts include $6.8 million of unrealized appreciation and $23.9
million of unrealized depreciation, respectively, at December 31,
1995 and 1994 relating to the marketable securities portfolio on
an after-tax basis. PCI paid dividends to the parent Company of
$9 million in 1995 and $15 million in 1994.
- -----------------------------------------------------------------
For the year ended
December 31,
1995 1994 1993
- -----------------------------------------------------------------
(Thousands of Dollars)
Income
Leasing activities $ 100,640 $111,262 $114,226
Marketable securities 36,121 35,148 38,417
Other (2,268) 596 (13,302)
--------- -------- --------
134,493 147,006 139,341
--------- -------- --------
Loss on assets held for
disposal (170,078) - -
--------- -------- --------
Expenses
Interest 91,637 84,783 77,861
Administrative and general 10,479 10,259 14,640
Depreciation and operating 72,404 55,571 66,817
Income tax credit (85,708) (22,695) (45,078)
--------- -------- --------
88,812 127,918 114,240
--------- -------- --------
Net (loss) earnings from
nonutility subsidiary $(124,397) $ 19,088 $ 25,101
========= ======== ========
69
Marketable Securities
- ---------------------
PCI's marketable securities are classified as available-for-sale
for financial reporting purposes. Investment grade preferred
stocks with mandatory redemption features made up 96% of the
portfolio at December 31, 1995. Net unrealized gains and losses
on such securities are reflected, net of tax, in stockholder's
equity.
70
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
December 31,
1995 1994
-----------------------------------------------------------------
Net
Market Unrealized Market
Cost Value Gain (Loss) Cost Value
- -------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Mandatory redeemable
preferred stock $ 519,488 $ 530,115 $ 10,627 $ 511,791 $ 473,608
Equity securities 341 208 (133) 3 -
---------- ---------- ----------- ---------- ----------
Total $ 519,829 $ 530,323 $ 10,494 $ 511,794 $ 473,608
========== ========== =========== ========== ==========
- -------------------------------------------------------------------------------------------
71
</TABLE>
Included in net unrealized gains and losses are gross
unrealized gains of $17.1 million and gross unrealized losses of
$6.6 million at December 31, 1995, and gross unrealized gains of
$1.8 million and gross unrealized losses of $40 million at
December 31, 1994.
In determining gross realized gains and losses on sales or
maturities of securities, specific identification is used. Gross
realized gains were $.8 million and $2.9 million for 1995 and
1994, respectively. Gross realized losses were $.4 million and
$2.1 million for 1995 and 1994, respectively.
Net recognized gains from marketable securities amounted to
$7 million in 1993.
At December 31, 1995, the contractual maturities for
mandatory redeemable preferred stock are $65.1 million within one
year, $93 million from one to five years, $115.8 million from
five to 10 years and $245.6 million for over 10 years.
72
Leasing Activities
- ------------------
PCI's net investment in finance leases are summarized below.
- -----------------------------------------------------------------
December 31,
1995 1994
- -----------------------------------------------------------------
(Thousands of Dollars)
Rents receivable $691,371 $517,052
Estimated residual values 153,815 153,814
Less: Unearned and deferred income (355,756) (260,539)
-------- --------
Investment in finance leases 489,430 410,327
Less: Deferred taxes arising from
finance leases (149,103) (134,925)
-------- --------
Net investment in finance leases $340,327 $275,402
======== ========
- -----------------------------------------------------------------
Minimum lease payments receivable from finance leases,
primarily aircraft, for each of the years 1996 through 2000 are
$32.3 million, $27.1 million, $31.2 million, $30 million and
$32.8 million, respectively. Net income from leveraged leases
was $11 million in 1995, $5.6 million in 1994 and $1.1 million in
1993.
Rent payments receivable from aircraft equipment operating
leases for each of the years 1996 through 2000 are $46.4 million
in 1996, $38.8 million in 1997, $31.4 million in 1998, $25.3
million in 1999 and $25.1 million in 2000.
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.
During 1994, PCI purchased from and leased back to a Dutch
electric utility company an approximate one-third undivided
interest in a recently-constructed 650 megawatt (gross) baseload,
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.
73
<TABLE>
(16) Quarterly Financial Summary (Unaudited)
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
- ---------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars except Per Share Data)
<S> <C> <C> <C> <C> <C>
1995
Operating Revenue $ 363,433 440,455 642,511 376,033 1,822,432
Total Revenue $ 364,909 445,359 663,584 402,250 1,876,102
Operating Expenses $ 334,091 354,120 480,348 359,802 1,528,361
Operating Income $ 30,818 91,239 183,236 42,448 347,741
Net (Loss) Income $ (3,972) (56,838) 145,947 9,254 94,391
(Loss) Earnings for Common Stock $ (8,213) (61,072) 141,747 5,078 77,540
(Loss) Earnings Per Common Share $ (.07) (.52) 1.20 .04 .65
Dividends Per Share $ .415 .415 .415 .415 1.66
1994
Operating Revenue $ 374,910 458,431 605,023 352,236 1,790,600
Total Revenue $ 393,044 467,451 607,476 355,103 1,823,074
Operating Expenses $ 355,708 370,439 447,020 325,414 1,498,581
Operating Income $ 37,336 97,012 160,456 29,689 324,493
Net Income $ 14,414 64,293 134,702 13,753 227,162
Earnings for Common Stock $ 10,268 60,224 130,576 9,657 210,725
Earnings Per Common Share $ .09 .51 1.11 .08 1.79
Dividends Per Share $ .415 .415 .415 .415 1.66
1993
Operating Revenue $ 331,236 416,152 610,540 344,514 1,702,442
Total Revenue $ 339,455 419,693 614,261 351,796 1,725,205
Operating Expenses $ 302,833 332,796 442,306 322,608 1,400,543
Operating Income $ 36,622 86,897 171,955 29,188 324,662
Net Income $ 13,044 77,022 144,671 6,842 241,579
Earnings for Common Stock $ 8,931 72,974 140,631 2,788 225,324
Earnings Per Common Share $ .08 .63 1.21 .02 1.95
Dividends Per Share $ .41 .41 .41 .41 1.64
The Company's sales of electric energy are seasonal and, accordingly,
comparisons by quarter within a year are not meaningful.
The total of the four quarterly earnings per share may not equal
the earnings per share for the year due to changes in the number of
common shares outstanding during the year.
74
</TABLE>
<TABLE>
Stock Market Information
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1995 High Low 1994 High Low
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1st Quarter $20-1/8 $18-3/8 1st Quarter $26-5/8 $21-3/4
2nd Quarter $22-1/2 $18-1/2 2nd Quarter $23-1/2 $18-1/2
3rd Quarter $24-5/8 $20-1/2 3rd Quarter $21-1/2 $18-3/8
4th Quarter $26-1/4 $24 4th Quarter $19-3/4 $18-1/4
(Close $26-1/4) (Close $18-3/8)
Shareholders at December 31, 1995: 96,958
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Selected Consolidated Financial Data
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1985
- ---------------------------------------------------------------------------------------------------------------------------------
(Thousands except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Revenue $1,822,432 1,790,600 1,702,442 1,562,167 1,552,066 1,411,713 1,315,699
Total Revenue $1,876,102 1,823,074 1,725,205 1,601,558 1,619,315 1,501,728 1,398,768
Operating Expenses $1,528,361 1,498,581 1,400,543 1,322,105 1,329,084 1,245,579 1,144,436
Net (Loss) Earnings from
Nonutility Subsidiary $ (124,397) 19,088 25,101 28,161 23,351 5,035 14,878
Income Before Cumulative Effect of
Accounting Change $ 94,391 227,162 241,579 200,760 210,164 170,234 183,618
Cumulative Effect of Accounting
Change, Net of Income Taxes $ - - - 16,022 - - -
Net Income $ 94,391 227,162 241,579 216,782 210,164 170,234 183,618
Earnings for Common Stock $ 77,540 210,725 225,324 202,390 197,866 159,636 169,093
Average Common Shares Outstanding 118,412 118,006 115,640 112,390 105,911 98,621 94,230
Earnings (Loss) Per Common Share
Utility Operations $ 1.70 1.63 1.73 1.55 <F1> 1.65 1.57 1.63
Nonutility Subsidiary $ (1.05) .16 .22 .25 .22 .05 .16
Consolidated $ .65 1.79 1.95 1.80 <F1> 1.87 1.62 1.79
Cash Dividends Per Common Share $ 1.66 1.66 1.64 1.60 1.56 1.52 1.08
Investment in Property
and Plant $6,161,103 5,974,170 5,701,550 5,404,265 5,084,964 4,695,966 3,339,911
Net Investment in Property
and Plant $4,400,311 4,334,399 4,167,551 3,967,898 3,743,709 3,434,678 2,454,559
Utility Assets $5,503,087 5,327,606 5,036,737 4,515,403 4,211,556 3,889,101 2,881,110
Nonutility Subsidiary Assets $1,615,063 1,674,289 1,665,132 1,663,508 1,679,079 1,387,247 366,704
Total Assets $7,118,150 7,001,895 6,701,869 6,178,911 5,890,635 5,276,348 3,247,814
Long-Term Utility Obligations
(including redeemable preferred
stock) $1,960,562 1,866,962 1,736,621 1,727,609 1,662,157 1,516,073 1,144,671
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1>Includes $.14 as the cumulative effect of an accounting change for unbilled revenue.
</FN>
75
</TABLE>
Appendix A
1. The System Fuel Costs line chart presents the following
information.
Year Coal Oil Gas System
---- ----- ----- ----- ------
1986 $1.74 $3.07 $2.76 $1.92
1987 $1.64 $2.97 $2.69 $1.81
1988 $1.67 $2.74 $2.32 $1.84
1989 $1.69 $2.78 $2.52 $1.95
1990 $1.77 $3.00 $2.34 $1.94
1991 $1.78 $2.76 $2.18 $1.93
1992 $1.72 $2.50 $2.32 $1.85
1993 $1.72 $2.55 $2.88 $1.90
1994 $1.73 $2.70 $2.49 $1.95
1995 $1.60 $3.22 $2.10 $1.74
Appendix A
2. The Construction Expenditures bar chart presents the
following information.
Total
Construction Construction
Expenditures Clean Air Expenditures
(excluding AFUDC Act (excluding
Year and Clean Air Act) Expenditures AFUDC)
---- ------------------ ------------ ------------
Actual: 1991 $391 $ 8 $399
1992 298 30 328
1993 237 63 300
1994 240 58 298
1995 220 27 247
Forecast: 1996 164 6 170
1997 199 21 220
1998 210 30 240
1999 211 29 240
2000 228 27 255
