<PAGE>
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-33495
PROSPECTUS SUPPLEMENT
(To Prospectus Dated August 13, 1997)
$175,000,000
POTOMAC ELECTRIC POWER COMPANY
FIRST MORTGAGE BONDS, 6 1/4% SERIES DUE 2007
The New Bonds will mature on October 15, 2007. Interest on the New Bonds is
payable semiannually on April 15 and October 15, commencing April 15, 1998.
The New Bonds will not be redeemable prior to maturity. Each New Bond will be
repayable, in whole or in part, on October 15, 2004, at the option of the
holder. See "Description of the New Bonds--Repayment at Option of Holder."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT COMPANY(2)
<S> <C> <C> <C>
Per New Bond....................... 99.850% .320% 99.530%
Total.............................. $174,737,500 $560,000 $174,177,500
</TABLE>
- -------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from the date of delivery to the
Underwriters.
(2) Before deduction of expenses payable by the Company, estimated at
$1,100,000.
The New Bonds are offered subject to receipt and acceptance by the
Underwriters, to prior sale and to the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the New Bonds will be made at the
office of Salomon Brothers Inc, Seven World Trade Center, New York, New York,
on or about October 9, 1997.
SALOMON BROTHERS INC
SMITH BARNEY INC.
LEGG MASON WOOD WALKER
INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
OPPENHEIMER & CO., INC.
The date of this Prospectus Supplement is October 2, 1997.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NEW BONDS,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN THE
NEW BONDS, AND THE IMPOSITION OF A PENALTY BID, DURING AND AFTER THIS
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
THE ISSUE IN BRIEF
The following is a summary of certain pertinent facts, and is qualified in
its entirety by detailed information and financial statements appearing
elsewhere in this Prospectus Supplement or the accompanying Prospectus, or in
documents incorporated by reference in the accompanying Prospectus. See
"Incorporation of Certain Documents by Reference" in the accompanying
Prospectus.
THE OFFERING
<TABLE>
<S> <C>
Company............................. Potomac Electric Power Company
Securities Offered.................. $175,000,000 First Mortgage Bonds, 6 1/4%
Series due 2007
Interest Payment Dates.............. April 15 and October 15, commencing
April 15, 1998
Redemption at Option of Company..... Not redeemable prior to maturity
Repayment at Option of Holder....... See "Description of the New Bonds--
Repayment at Option of Holder"
Use of Proceeds..................... See "Use of Proceeds"
THE COMPANY
Business and Service Area........... Generation, transmission, distribution and
sale of electric energy in the Washington,
D.C. metropolitan area
1996 Source of Energy............... Coal 77%; Oil and Natural Gas 7%; Purchased
Capacity 15%; Cogeneration 1%
</TABLE>
For selected financial information and the Company's ratios of earnings to
fixed charges see "Selected Financial Information" and "Ratios of Earnings to
Fixed Charges" in the accompanying Prospectus.
DESCRIPTION OF THE NEW BONDS
The following description of the particular terms of the New Bonds offered
hereby supplements the description of the general terms and provisions of the
New Bonds set forth in the accompanying Prospectus, to which description
reference is hereby made. See "Description of Bonds and Mortgage" in the
accompanying Prospectus.
GENERAL
The $175,000,000 aggregate principal amount of New Bonds offered hereby will
mature on October 15, 2007, and will bear interest at the rate set forth in
the title thereof, payable semiannually on April 15 and October 15 in each
year, commencing April 15, 1998.
REDEMPTION OF NEW BONDS AT OPTION OF COMPANY
The New Bonds offered hereby will not be redeemable at the option of the
Company prior to maturity.
REPAYMENT AT OPTION OF HOLDER
The New Bonds will be repayable on October 15, 2004, at the option of the
holders thereof, at 100% of their principal amount, together with accrued and
unpaid interest to October 15, 2004. In order for a New Bond to be repaid, the
Company must receive at the corporate trust office of The Bank of New York
(the "Trustee"), which is currently at 101 Barclay Street, New York, New York
10286, during the period from and including August 16, 2004 to and including
the close of business on September 15, 2004 (or, if August 16, 2004 or
September 15, 2004, is not a business day, the next succeeding business day)
(i) the New Bond (the "Redeemable Bond") with the form entitled "Option to
Elect Repayment" on, or otherwise accompanying, the Redeemable Bond duly
completed or (ii) a facsimile transmission or letter from a
S-2
<PAGE>
member of a national securities exchange or the National Association of
Securities Dealers, Inc. or a commercial bank or a trust company in the United
States of America setting forth the name of the holder of the Redeemable Bond,
the principal amount of the Redeemable Bond, the principal amount of the
Redeemable Bond to be repaid, a statement that the option to elect repayment
is being exercised thereby and a guarantee that the Redeemable Bond to be
repaid (with the form entitled "Option to Elect Repayment" on, or otherwise
accompanying, the Redeemable Bond duly completed) will be received at the
Trustee's principal corporate trust office not later than five business days
after the date of such facsimile transmission or letter, and such Redeemable
Bond and form duly completed are received at the Trustee's principal corporate
trust office by such fifth business day. Effective exercise of the repayment
option by the holder of any Redeemable Bond shall be irrevocable. No transfer
or exchange of any Redeemable Bond (or, in the event that any Redeemable Bond
is to be repaid in part, such portion of the Redeemable Bond to be repaid)
will be permitted after exercise of the repayment option. The repayment option
may be exercised by the holder of a Redeemable Bond for less than the entire
principal amount of the Redeemable Bond, provided the principal amount which
is to be repaid is set forth on the form entitled "Option to Elect Repayment"
and is equal to $1,000 or any integral multiple thereof. All questions as to
the validity, eligibility (including time of receipt) and acceptance of any
Redeemable Bond for repayment will be determined by the Company, whose
determination will be final, binding and non-appealable. The term "business
day" means any day that is not a day on which banks in the City of New York
are authorized by law to close.
USE OF PROCEEDS
The proceeds from the sale of the New Bonds will be used (i) to refund
short-term debt incurred to finance, on a temporary basis, the Company's
ongoing utility construction program and operations and to pay at maturity, in
July and August 1997, $50,000,000 principal amount of the Company's 9.08%
Medium-Term Notes and (ii) to pay at maturity $50,000,000 principal amount of
the Company's First Mortgage Bonds, 4 3/8% Series due February 15, 1998.
UNDERWRITING
Under the terms and subject to the conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the Underwriters named
below (the "Underwriters"), and each of the Underwriters, for whom Salomon
Brothers Inc is acting as representative, has severally agreed to purchase,
the principal amount of the New Bonds set forth opposite its name below.
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITERS AMOUNT
------------ ------------
<S> <C>
Salomon Brothers Inc ...................................... $ 72,500,000
Smith Barney Inc. ......................................... 72,500,000
Legg Mason Wood Walker, Incorporated ...................... 10,000,000
Morgan Keegan & Company, Inc. ............................. 10,000,000
Oppenheimer & Co., Inc. ................................... 10,000,000
------------
Total.................................................. $175,000,000
============
</TABLE>
Under the terms and subject to the conditions of the Underwriting Agreement,
the Underwriters are committed to take and pay for all of the New Bonds, if
any are taken.
The Underwriters propose to offer the New Bonds in part directly to retail
purchasers at the public offering price set forth on the cover page of this
Prospectus Supplement and in part to certain securities dealers at such price
less a concession of .25% of the principal amount of the New Bonds. The
Underwriters may allow and such dealers may reallow a concession not in excess
of .20% of the principal amount of the New Bonds on sales to certain other
brokers and dealers. After the New Bonds are released for sale to the public,
the public offering price and other selling terms may be changed.
In connection with the offering, the Underwriters may purchase and sell the
New Bonds in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover short positions created by
the Underwriters in connection with the offering. Stabilizing transactions
consist of certain bids or purchases for the purpose of preventing or
retarding a decline in the market price of the New Bonds; and short positions
created by the Underwriters involve the sale by the Underwriters of a greater
number of New Bonds than they are required to purchase from the Company in the
offering.
S-3
<PAGE>
The Underwriters also may impose a penalty bid, whereby selling concessions
allowed to broker-dealers in respect of the New Bonds sold in the offering may
be reclaimed by the Underwriters if such New Bonds are repurchased by the
Underwriters in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the New Bonds,
which may be higher than the price that might otherwise prevail in the open
market; and these activities, if commenced, may be discontinued at any time.
These transactions may be effected in the over-the-counter market or
otherwise.
The Company has agreed to indemnify the several Underwriters against certain
civil liabilities, including certain liabilities under the Securities Act of
1933, as amended.
The Company has been advised by the Underwriters that one or more of the
Underwriters currently intend to make a market in the New Bonds, but that they
are not obligated to do so and may discontinue making a market at any time
without notice. The Company currently has no intention to list the New Bonds
on any securities exchange, and there can be no assurance given as to the
liquidity of the trading market for the New Bonds.
It is expected that delivery of the New Bonds will be made against payment
therefor on or about the date specified in the last paragraph on the cover
page of this Prospectus Supplement, which is the fifth business day following
the date hereof. Under Rule 15c6-1 under the Securities Exchange Act of 1934,
as amended, trades in the secondary market generally are required to settle in
three business days, unless the parties to any such trade expressly agree
otherwise at the time of the transaction. Accordingly, purchasers who wish to
trade the New Bonds on the date hereof or the next succeeding business day
will be required, by virtue of the fact that the New Bonds initially will
settle in T+5, to specify an alternate settlement cycle at the time of any
such trade to prevent a failed settlement. Purchasers of the New Bonds who
wish to trade the New Bonds on the date hereof or the next succeeding business
day should consult their own advisor.
PROPOSED MERGER
In September 1995, the Company announced a proposed merger (the "Merger")
with Baltimore Gas & Electric Company ("BGE") to form Constellation Energy
Corporation ("Constellation Energy"). The Merger Agreement was approved by the
Board of Directors of each company on September 22, 1995, and by the
shareholders of each company on March 29, 1996. The Merger requires the
approval of certain regulatory agencies, including the Federal Energy
Regulatory Commission ("FERC") and the Public Service Commissions of Maryland
and the District of Columbia.
On April 16, 1997, FERC approved the Merger without conditions. Also on
April 16, 1997, the Maryland Public Service Commission unanimously approved
the Merger. However, the Company and BGE believe the Maryland Order contains
elements that must be revised for the Merger to take place. On May 2, 1997,
the companies filed a request for reconsideration of the Order with the
Maryland Public Service Commission. In the request, the companies detailed
areas of the Order that need to be revised for the Merger to proceed and
proposed a modified plan to address these concerns. There can be no assurance
that the Maryland Commission will grant the request for reconsideration or
that the Maryland Order will be changed as requested. On May 1, 1997, the
International Brotherhood of Electrical Workers, Local 1900, filed a petition
with the Circuit Court of Baltimore County to appeal the Maryland Public
Service Commission's Order approving the Merger. A hearing on the appeal has
been scheduled for October 20, 1997. The request for reconsideration cannot be
considered by the Maryland Commission until the appeal has been finally
considered by the Maryland courts.
The District of Columbia Commission conducted hearings on the proposed
Merger in February and March 1997. The case was placed before the District of
Columbia Commission for decision in March 1997. The waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act has been terminated. The Nuclear
Regulatory Commission has approved the transfer of BGE's operating licenses
for its two nuclear generating units to Constellation Energy. The State
Corporation Commission of Virginia and the Pennsylvania Public Utility
Commission have approved the Merger.
The Company is unable to predict when final decisions will be reached by the
Maryland or District of Columbia Public Service Commissions or the Circuit
Court of Baltimore County. The Merger will not proceed unless the regulatory
approvals conform to the Company's and BGE's fundamental requirement that
their shareholders have a reasonable opportunity to share in the expected
benefits of the Merger.
S-4
<PAGE>
POTOMAC ELECTRIC POWER COMPANY
FIRST MORTGAGE BONDS
----------------
Potomac Electric Power Company (the "Company") may offer from time to time
up to $200,000,000 aggregate principal amount of its First Mortgage Bonds (the
"New Bonds"), which may be offered in one or more series in amounts, at prices
and on terms to be determined by market conditions at the time of sale. The
aggregate principal amount, rate (or method of calculation) and time of
payment of interest, maturity, offering price, any redemption terms and other
specific terms of the series of New Bonds in respect of which this Prospectus
is being delivered, are set forth in the accompanying Prospectus Supplement
(the "Prospectus Supplement"). The amount of First Mortgage Bonds to be
offered hereby will be reduced by the amount of any Medium-Term Notes sold
pursuant to the Registration Statements of which this Prospectus is a part.
See "Description of Bonds and Mortgage."
The Company may sell the New Bonds through underwriters designated by the
Company or through dealers, directly to a limited number of institutional
purchasers, or through agents. See "Plan of Distribution." The Prospectus
Supplement sets forth the names of such underwriters, dealers or agents, if
any, any applicable commissions or discounts and the net proceeds to the
Company from such sale.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
THE DATE OF THIS PROSPECTUS IS AUGUST 13, 1997
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT IN CONNECTION WITH
THE OFFER MADE BY THIS PROSPECTUS AND ANY PROSPECTUS SUPPLEMENT AND, IF GIVEN
OR MADE, ANY SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THIS PROSPECTUS NOR ANY
PROSPECTUS SUPPLEMENT IS AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
BUY, BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION. EXCEPT AS OTHERWISE INDICATED HEREIN, THIS PROSPECTUS
AND ANY PROSPECTUS SUPPLEMENT SPEAKS AS OF THE DATE THEREOF AND DOES NOT
PURPORT TO REFLECT ANY CHANGES IN THE AFFAIRS OF THE COMPANY THEREAFTER.
----------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and in accordance therewith
files periodic and current reports and other information with the Securities
and Exchange Commission (the "Commission"). Information concerning directors
and officers, their remuneration and any material interest of such persons in
transactions with the Company, as of particular dates, is disclosed in such
reports and in proxy statements distributed to shareholders of the Company and
filed with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities of
the Commission at 450 Fifth Street, N.W., Washington, D.C.; 500 West Madison
Street, Suite 1400, Chicago, Illinois; and 7 World Trade Center, 13th Floor,
New York, New York. Copies of such material can also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Such reports, proxy statements and
other information also may be obtained from the Commission's Electronic Data
Gathering and Retrieval ("EDGAR") database located at the website maintained
by the Commission at http://www.sec.gov. In addition, reports, proxy
statements and other information concerning the Company can be inspected at
the offices of the New York Stock Exchange, Inc., where certain securities of
the Company are listed.
The Company has filed with the Commission registration statements on Form S-
3 relating to the First Mortgage Bonds (herein, together with all amendments
and exhibits, referred to as the "Registration Statements") under the
Securities Act of 1933, as amended (the "1933 Act"). This Prospectus does not
contain all of the information set forth in the Registration Statements,
certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information, reference is hereby
made to the Registration Statements.
----------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company with the Commission
under the 1934 Act are incorporated by reference in this Prospectus:
(a) The Company's Annual Report on Form 10-K for the year ended December
31, 1996.
(b) The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997 and June 30, 1997.
(c) The Company's Current Reports on Form 8-K dated April 7, 1997, April
17, 1997, May 5, 1997, July 14, 1997 and August 6, 1997.
All documents subsequently filed by the Company with the Commission pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the 1934 Act after the date of this
Prospectus and prior to the termination of this offering shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of the filing of such documents. Any statement contained in an
incorporated document shall be deemed to be modified or superseded for
purposes of this Prospectus to the extent that a statement contained herein or
in any other incorporated document subsequently filed or in an accompanying
Prospectus Supplement modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
2
<PAGE>
THE COMPANY HEREBY UNDERTAKES TO FURNISH, WITHOUT CHARGE, TO EACH PERSON,
INCLUDING ANY BENEFICIAL OWNER, TO WHOM A COPY OF THIS PROSPECTUS HAS BEEN
DELIVERED, ON THE WRITTEN OR ORAL REQUEST OF ANY SUCH PERSON, A COPY OF ANY OR
ALL OF THE DOCUMENTS REFERRED TO ABOVE WHICH HAVE BEEN OR MAY BE INCORPORATED
BY REFERENCE IN THIS PROSPECTUS, OTHER THAN EXHIBITS TO SUCH DOCUMENTS.
REQUESTS FOR SUCH DOCUMENTS SHOULD BE DIRECTED TO ELLEN SHERIFF ROGERS,
ASSOCIATE GENERAL COUNSEL, SECRETARY AND ASSISTANT TREASURER, POTOMAC ELECTRIC
POWER COMPANY, 1900 PENNSYLVANIA AVENUE, N.W., WASHINGTON, D.C. 20068 (202-
872-3526).
3
<PAGE>
THE COMPANY
Potomac Electric Power Company, a District of Columbia and Virginia
corporation (the "Company"), is engaged in the generation, transmission,
distribution and sale of electric energy in the Washington, D.C. metropolitan
area, including the District of Columbia and major portions of Montgomery and
Prince George's Counties in Maryland. It also supplies, at wholesale, electric
energy to the Southern Maryland Electric Cooperative, Inc., which distributes
electricity in Calvert, Charles, Prince George's and St. Mary's Counties in
southern Maryland. The Company's wholly owned nonutility subsidiary, Potomac
Capital Investment Corporation ("PCI"), was organized in late 1983 to provide
a vehicle to conduct the Company's ongoing nonutility businesses. 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 is also involved with activities which
provide telecommunication and energy services. In addition, PCI has
investments in real estate properties in the Washington, D.C. metropolitan
area. The mailing address of the Company's executive offices is 1900
Pennsylvania Avenue, N.W., Washington, D.C. 20068, and its telephone number is
202-872-2000.
USE OF PROCEEDS
The Company may offer from time to time pursuant to this Prospectus up to an
aggregate principal amount of $200,000,000 of its First Mortgage Bonds.
The proceeds from the sale of the First Mortgage Bonds will be used to
refund short-term debt incurred primarily to finance, on a temporary basis,
the Company's utility construction program and operations, and to refund the
Company's senior securities, including the retirement of long-term debt and
the satisfaction of contractual sinking fund requirements.
4
<PAGE>
SELECTED FINANCIAL INFORMATION
The following is a selection of certain consolidated financial information
of the Company which was derived from, and is qualified in its entirety by,
the audited consolidated financial statements contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996, and the
unaudited consolidated financial information contained in its Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997, which are available as
described herein under "Incorporation of Certain Documents by Reference." The
interim financial data are unaudited; however, in the opinion of the
management of the Company, such data reflect all adjustments, consisting of
normal recurring accruals, necessary for a fair statement of the results of
operations for the interim periods presented.
<TABLE>
<CAPTION>
12 MONTHS ENDED
-----------------------------------------------
JUNE 30, DEC. 31, DEC. 31, DEC. 31,
1997 1996 1995 1994
----------- ----------- ----------- -----------
(THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Income Statement Data:
Total Revenue................. $ 1,911,969 $ 2,010,311 $ 1,876,102 $ 1,823,074
Operating Revenue............. 1,800,921 1,834,857 1,822,432 1,790,600
Net Income.................... 223,080 236,960 94,391 227,162
Earnings for Common Stock..... 206,490 220,356 77,540 210,725
Earnings Per Share of Common
Stock........................ 1.74 1.86 .65 1.79
Balance Sheet Data at end of
period:
Property and Plant, net....... $ 4,443,141 $ 4,423,249 $ 4,400,311 $ 4,334,399
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
1997
-----------------
AMOUNT RATIO
----------- -----
(THOUSANDS)
<S> <C> <C>
Capital Structure (excluding nonutility subsidiary debt
and current maturities):
Long-Term Debt........................................ $1,727,065 44.9%
Preferred Stock....................................... 266,293 6.9
Common Equity......................................... 1,857,120 48.2
---------- -----
Total Capitalization................................ $3,850,478 100.0%
==========
Parent Company Long-Term Debt and Preferred Stock
Redemption Due in One Year and Short-Term Debt......... $ 412,585
==========
</TABLE>
RATIOS OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
12 MONTHS ENDED
-----------------------------------------------------
JUNE 30, DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Parent company only....... 2.90 3.08 3.05 3.23 3.20 2.73
Fully consolidated........ 2.26 2.24 1.52 2.37 2.31 2.19
</TABLE>
For purposes of computing the ratio of earnings to fixed charges for rate-
regulated public utilities, earnings represent net income before cumulative
effect of accounting changes plus income taxes and fixed charges. Fixed
charges represent interest charges on debt (exclusive of credits arising from
the allowance for funds used during construction) and the portion of rentals
deemed representative of the interest factor.
5
<PAGE>
DESCRIPTION OF BONDS AND MORTGAGE
GENERAL. The New Bonds are to be issued under the Mortgage and Deed of Trust
dated July 1, 1936, between the Company and The Bank of New York, New York,
N.Y., as Trustee and as successor in such capacity to The Riggs National Bank
of Washington, D.C. (the "Trustee"), as amended and supplemented and as to be
supplemented by a separate supplemental indenture (the "Supplemental
Indenture") each time New Bonds are offered under this Prospectus and the
accompanying Prospectus Supplement. Said mortgage, as so amended and
supplemented and to be supplemented, is herein sometimes called the
"Mortgage." Copies of the documents currently constituting the Mortgage are
exhibits to the Registration Statements, as is the form of the Supplemental
Indenture.
Reference is made to the Prospectus Supplement which accompanies this
Prospectus for the following terms and other information with respect to the
New Bonds being offered thereby: (1) the designation and aggregate principal
amount of such New Bonds; (2) the date on which such New Bonds will mature;
(3) the rate per annum at which such New Bonds will bear interest, or the
method of determining such rate; (4) the dates on which such interest will be
payable; (5) any redemption terms; and (6) other specific terms applicable to
the New Bonds.
The New Bonds will be available only in fully registered form without
coupons in denominations of $1,000 or any multiple thereof, except as may be
set forth in the accompanying Prospectus Supplement. Both principal and
interest on the New Bonds will be payable at the agency of the Company, The
Bank of New York, New York, N.Y. The Company will not impose charges for any
exchanges of New Bonds.
The Supplemental Indenture will contain no provisions for an improvement and
sinking fund or any maintenance and replacement requirement or dividend
restriction; neither does the Mortgage nor any indenture supplemental thereto
relating to any outstanding Series of Bonds contain any such provisions.
The Mortgage does not contain any covenants or other provisions that
specifically are intended to afford holders of the New Bonds special
protection in the event of a highly leveraged transaction.
The following statements are outlines of certain provisions contained in the
Mortgage and do not purport to be complete. They are qualified by express
reference to the cited Sections and Articles of the Mortgage. Certain terms
used are as defined in the Mortgage.
SECURITY. The New Bonds will be secured, together with all other Bonds now
or hereafter issued under the Mortgage, by a valid and direct first lien
(subject to certain leases, Permitted Liens and other minor matters) on
substantially all the properties and franchises of the Company (the principal
properties being its generating stations and its electric transmission and
distribution systems), other than cash, accounts receivable and other liquid
assets, securities (including securities evidencing investments in
subsidiaries of the Company), 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 Company's 9.72% undivided interest in a
mine-mouth, steam-electric generating station, known as the Conemaugh
Generating Station, which is located in Indiana County, Pennsylvania, and its
associated transmission lines is that of a tenant in common with eight other
utility owners. Substantially all of the Company's transmission and
distribution lines of less than 230,000 volts, portions of its 230,000 and
500,000 volt transmission lines, substantially all of the Conemaugh
transmission lines, and 11 substations are located on land owned by others or
on public streets and highways.
The Mortgage contains provisions subjecting after-acquired property (subject
to pre-existing and Permitted Liens) to the lien thereof. The lien on such
property is, however, subject to rights of persons having superior equities
attaching prior to the recording or filing of an appropriate supplemental
indenture.
ISSUANCE OF ADDITIONAL BONDS. Additional Bonds ranking equally with the New
Bonds may be issued in an aggregate amount of up to (i) 60% of the Net
Bondable Value of Property Additions not subject to an
6
<PAGE>
Unfunded Prior Lien, (ii) the amount of cash deposited with the Trustee (which
may thereafter be withdrawn on the same basis that Additional Bonds are
issuable under (i) and (iii)), and (iii) the amounts of Bonds retired or to be
retired (except out of trust moneys or by any sinking or analogous fund if the
fund prevents such use) (Secs. 4, 6 and 7, Art. III; Sec. 4, Art. VIII).
Additional Bonds may not be issued unless Net Earnings of the Company
Available for Interest and Property Retirement Appropriations (i.e., earnings
before depreciation, amortization, income taxes and interest charges) during
12 of the immediately preceding 15 months shall have been at least twice the
annual interest charges on all Bonds and Prior Lien Bonds then outstanding and
then being issued, unless they are being issued on the basis of Bonds paid at
or redeemed or purchased within two years of maturity or on the basis of
Property Additions subject to an Unfunded Prior Lien (which simultaneously
becomes a Funded Prior Lien) and the Bonds are issued within two years of the
maturity of the Prior Lien Bonds secured by such Prior Liens (Secs. 3, 4 and
7, Art. III). Giving effect to the issuance of the New Bonds at an assumed
rate of interest of 8%, such Net Earnings for the twelve months ended June 30,
1997 would be approximately 5.8 times the aggregate annual interest charges
referred to above. Such coverage would permit issuance of approximately $2.6
billion of mortgage bonds (in addition to the New Bonds) at an assumed average
interest rate of 8% per annum, against property additions or cash deposits,
although only approximately $530 million of such additional bonds could
currently be issued in compliance with unbonded net property addition
limitations contained in the Mortgage.
So long as any New Bonds are outstanding, Property Additions constructed or
acquired on or before December 31, 1946 may not be made the basis for the
issue of Bonds, or the withdrawal of cash, or the reduction of cash required
to be paid to the Trustee (Sec. 2, Part IV, Supplemental Indenture).
Prior Lien Bonds secured by an Unfunded Prior Lien may be issued under the
circumstances and subject to the limitations contained in the Mortgage (Sec.
16, Art. IV).
After giving effect to the issuance of the New Bonds (which are to be issued
against Property Additions), approximately $880 million of the Property
Additions as of June 30, 1997 will remain available for the purposes permitted
in the Mortgage, including the issuance of Bonds.
RELEASE OF PROPERTY. The Mortgage permits property to be released from the
lien of the Mortgage upon compliance with the provisions thereof. Such
provisions generally require that cash be deposited with the Trustee in an
amount equal to the fair value of the property to be released. The Mortgage
permits the Company to reduce such amounts of cash otherwise required to be
deposited by substituting a like amount of Bonds retired. The Mortgage also
contains certain requirements relating to the withdrawal of cash deposited to
obtain a release of property (Art. VII and Art. VIII).
MODIFICATION OF MORTGAGE. With the consent of the holders of 80% in amount
of Bonds and of 80% in amount of Bonds of each series affected if less than
all are affected, the Mortgage may be changed except to affect the terms of
payment of the principal or interest on any Bonds or to reduce the percentage
of Bondholders required to effect any change (Sec. 6, Art. XV).
The Supplemental Indenture, however, provides that the foregoing percentages
shall be reduced to 60% upon the consent or agreement to such change by the
holders of all outstanding Bonds. Purchasers of the New Bonds will be deemed
to have agreed to such reduction pursuant to the terms of the Supplemental
Indenture.
EVENTS OF DEFAULT. The holders of 25% in amount of Bonds, upon any Event of
Default, may require the Trustee to accelerate maturity of the Bonds (although
a majority in amount of Bonds may waive such default and rescind such
acceleration if such default is cured) and to enforce the lien of the Mortgage
upon being indemnified to its satisfaction (Sec. 1 and 4, Art. IX).
The holders of a majority in amount of Bonds may direct proceedings for the
sale of the trust estate, or for the appointment of a receiver or any other
proceedings under the Mortgage, but have no right to involve the Trustee in
any personal liability without indemnifying it to its satisfaction (Sec. 11,
Art. IX).
7
<PAGE>
Events of Default include failure to pay principal, failure for 30 days to
pay interest or to satisfy any improvement, maintenance or sinking fund
obligation, failure for 60 days (after notice by the Trustee or the holders of
15% in amount of Bonds) to perform any other covenant, and certain events of
bankruptcy, insolvency or reorganization (Sec. 1, Art. IX).
While the Mortgage by its terms does not require that periodic evidence be
furnished to the Trustee as to the absence of default or as to compliance with
the terms of the Mortgage, the Trust Indenture Act of 1939, as amended,
requires that annual certificates as to the absence of such defaults be
furnished to the Trustee.
RELATIONSHIPS WITH TRUSTEE. The Bank of New York is the trustee under
indentures for the Company's medium-term notes, 5% Convertible Debentures due
2002 and 7% Convertible Debentures due 2018, and in connection with a sale and
leaseback of the Company's Control Center. The Company has with the Trustee
and its affiliates, as it has with various other banks, a demand deposit
account and conventional and revolving credit arrangements. The Bank of New
York is the Issuing and Paying Agent for medium-term notes issued by PCI.
PLAN OF DISTRIBUTION
The Company may sell the New Bonds: (i) through underwriters or dealers;
(ii) directly to one or more purchasers; (iii) through agents; or (iv) through
a combination of any such methods of sale. The Prospectus Supplement with
respect to any New Bonds being offered thereby sets forth the terms of the
offering of such New Bonds, including the name or names of any underwriters,
the purchase price of such New Bonds and the proceeds to the Company from such
sale, any underwriting discounts and other items constituting underwriters'
compensation, any initial public offering price and any discounts or
concessions allowed or reallowed or paid to dealers and any securities
exchanges on which such New Bonds may be listed.
If underwriters are used in the sale, the New Bonds will be acquired by the
underwriters for their own account and may be resold from time to time in one
or more transactions, including negotiated transactions, at a fixed public
offering price or at varying prices determined at the time of sale. The New
Bonds may be offered to the public, either through underwriting syndicates
represented by the underwriter or underwriters to be designated by the Company
or directly by one or more of such firms. Unless otherwise set forth in the
Prospectus Supplement, the obligations of the underwriters to purchase the New
Bonds offered thereby will be subject to certain conditions precedent, and the
underwriters will be obligated to purchase all such New Bonds if any are
purchased. Any initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers may be changed from time to time.
New Bonds may be sold directly by the Company or through agents designated
by the Company from time to time. The Prospectus Supplement sets forth the
name of any agent involved in the offer or sale of the New Bonds in respect of
which the Prospectus Supplement is delivered as well as any commission payable
by the Company to such agent. Unless otherwise indicated in the Prospectus
Supplement, any such agent is acting on a best efforts basis for the period of
its appointment.
If so indicated in the Prospectus Supplement, the Company will authorize
agents, underwriters or dealers to solicit offers by certain specified
institutions to purchase the New Bonds from the Company at the public offering
price set forth in the Prospectus Supplement pursuant to delayed delivery
contracts providing for payment and delivery on a specified date in the
future. Such contracts will be subject to those conditions set forth in the
Prospectus Supplement, and the Prospectus Supplement will set forth the
commission payable for solicitation of such contracts.
Agents and underwriters may be entitled under agreements entered into with
the Company to indemnification by the Company against certain civil
liabilities, including liabilities under the 1933 Act. Agents and underwriters
may be customers of, engaged in transactions with, or perform services for the
Company in the ordinary course of business.
8
<PAGE>
EXPERTS
The consolidated financial statements incorporated in this Prospectus by
reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 have been so incorporated in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm
as experts in auditing and accounting.
With respect to the unaudited consolidated financial information of the
Company for the three- and twelve-month periods ended March 31, 1997 and 1996,
and the three-, six- and twelve-month periods ended June 30, 1997 and 1996
incorporated by reference in this Prospectus, Price Waterhouse LLP reported
that they have applied limited procedures in accordance with professional
standards for a review of such information. However, their separate reports
dated May 14, 1997 and August 13, 1997, incorporated by reference herein,
state that they did not audit and they do not express opinions on that
unaudited consolidated financial information. Price Waterhouse LLP has not
carried out any significant or additional audit tests beyond those which would
have been necessary if such reports had not been included. Accordingly, the
degree of reliance on their reports on such information should be restricted
in light of the limited nature of the review procedures applied. Price
Waterhouse LLP is not subject to the liability provisions of Section 11 of the
1933 Act for their reports on the unaudited consolidated financial information
because each such report is not a "report" or a "part" of the registration
statement prepared or certified by Price Waterhouse LLP within the meaning of
Sections 7 and 11 of the 1933 Act.
The statements as to matters of law and legal conclusions contained under
"Description of Bonds and Mortgage--Security" have been prepared under the
supervision of, and reviewed by, William T. Torgerson, Esq., Senior Vice
President and General Counsel for the Company, and are made on his authority.
LEGAL OPINIONS
Certain legal matters in connection with the securities to be offered hereby
will be passed upon for the Company by Covington & Burling, 1201 Pennsylvania
Avenue, N.W., Washington, D.C., and William T. Torgerson, Esq., 1900
Pennsylvania Avenue, N.W., Washington, D.C. Mr. Torgerson is regularly
employed by the Company as Senior Vice President and General Counsel. Unless
otherwise indicated in the accompanying Prospectus Supplement, the legality of
such securities will be passed upon for the underwriter, dealer or agents by
Winthrop, Stimson, Putnam & Roberts, One Battery Park Plaza, New York, N.Y.,
who will, however, not pass on the incorporation of the Company.
9
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN CONNECTION WITH THE
OFFER CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OF-
FERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. THE DELIVERY OF THIS PROSPEC-
TUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
The Issue in Brief................................................. S-2
Description of the New Bonds....................................... S-2
Use of Proceeds.................................................... S-3
Underwriting....................................................... S-3
Proposed Merger.................................................... S-4
PROSPECTUS
Available Information.............................................. 2
Incorporation of Certain Documents by Reference.................... 2
The Company........................................................ 4
Use of Proceeds.................................................... 4
Selected Financial Information..................................... 5
Ratios of Earnings to Fixed Charges................................ 5
Description of Bonds and Mortgage.................................. 6
Plan of Distribution............................................... 8
Experts............................................................ 9
Legal Opinions..................................................... 9
</TABLE>
$175,000,000
POTOMAC ELECTRIC
POWER COMPANY
FIRST MORTGAGE BONDS,
6 1/4% SERIES DUE 2007
[LOGO OF PEPCO APPEARS HERE]
SALOMON BROTHERS INC
SMITH BARNEY INC.
LEGG MASON WOOD WALKER
INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
OPPENHEIMER & CO., INC.
PROSPECTUS SUPPLEMENT
DATED OCTOBER 2, 1997
