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, 1996 Commission file number 1-1072
----------------- ------
Potomac Electric Power Company
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
District of Columbia and Virginia 53-0127880
- --------------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 Pennsylvania Avenue, N.W.
Washington, D. C. 20068
- --------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (202) 872-2000
-------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- -----------------------------
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 .
--- ---
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. .
---
As of January 31, 1997, Potomac Electric Power Company had
118,496,828 shares of its $1 par value Common Stock outstanding, and the
aggregate market value of these common shares (based upon the closing price of
these shares on the New York Stock Exchange on that date) held by
nonaffiliates was approximately $2.9 billion.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's 1996 Annual Report to shareholders are
incorporated by reference into Parts II and IV of this Form 10-K.
2
POTOMAC ELECTRIC POWER COMPANY
Form 10-K - 1996
TABLE OF CONTENTS
PART I Page
Item 1 - Business ----
Proposed Merger .................................................... 5
General ............................................................ 6
Sales .............................................................. 8
Capacity Planning .................................................. 9
Construction Program ............................................... 11
Fuel ............................................................... 13
Regulation ......................................................... 17
Rates .............................................................. 17
Competition ........................................................ 21
Environmental Matters .............................................. 22
Labor .............................................................. 27
Nonutility Subsidiary .............................................. 27
Item 2 - Properties .................................................. 30
Item 3 - Legal Proceedings ........................................... 31
Item 4 - Submission of Matters to a Vote of Security Holders ......... 31
PART II
Item 5 - Market for the Registrant's Common Equity and Related
Stockholder Matters ....................................... 32
Item 6 - Selected Financial Data ..................................... 33
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................. 33
Item 8 - Financial Statements and Supplementary Data ................. 33
Item 9 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure .................................. 33
PART III
Item 10 - Directors and Executive Officers of the Registrant ......... 34
Item 11 - Executive Compensation ..................................... 39
Item 12 - Security Ownership of Certain Beneficial Owners and
Management................................................ 48
Item 13 - Certain Relationships and Related Transactions ............. 49
PART IV
Item 14 - Exhibits, Financial Statement Schedule and Reports on
Form 8-K ................................................. 50
Schedule VIII - Valuation and Qualifying Accounts .................. 58
Signatures ........................................................... 59
Exhibit 11 - Computations of Earnings Per Common Share .......... 61
Exhibit 12 - Computation of Ratios .............................. 62
Exhibit 21 - Subsidiaries of the Registrant ..................... 64
Exhibit 23 - Consent of Independent Accountants ................. 65
Report of Independent Accountants on Consolidated Financial
Statement Schedule ............................................... 66
3
PAGE LEFT BLANK
INTENTIONALLY
4
Part I
- ------
Item 1 BUSINESS
- ------ --------
PROPOSED MERGER
- ---------------
Shareholders of Potomac Electric Power Company (the Company, PEPCO) and
Baltimore Gas and Electric Company (BGE), at separate special meetings during
March 1996, approved a proposed merger (the Merger) to form Constellation
Energy Corporation (Constellation Energy). The Company and BGE filed a joint
Application for Authorization and Approval of the Merger with the Federal
Energy Regulatory Commission (FERC) on January 11, 1996, and with the Maryland
and District of Columbia Public Service Commissions on April 8, 1996. On July
31, 1996, FERC set the application for hearing on the issue of whether the
Merger would impact competition. Hearings began on October 21, 1996, and the
Administrative Law Judge certified the record to the Commission on October 25,
1996. The case was placed before FERC for decision in December 1996. The
Maryland Commission conducted hearings during June, September and December
1996. The case was placed before the Maryland Commission for decision in
January 1997. A prehearing conference was conducted by the District of
Columbia Commission in May 1996 and a procedural schedule was published in
July 1996. The hearings, which were originally scheduled to take place in
December 1996, have been rescheduled for February 1997. The case is expected
to be before the District of Columbia Commission for decision in March 1997.
On January 29, 1997, the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act was terminated and the parties may close the Merger after
regulatory approvals from other federal and state agencies are received. The
Nuclear Regulatory Commission has approved the transfer of BGE's ownership
interest in the operating licenses for the two generating units at the Calvert
Cliffs Nuclear Power Plant to Constellation Energy at the effective time of
the Merger. In addition, the State Corporation Commission of Virginia has
approved the Merger. The Merger also requires approval from the Pennsylvania
Public Utility Commission. Completion of the approval process is expected to
take until the end of the first quarter of 1997.
The combination of the Company and BGE will create a larger, stronger
company better able to maintain the low costs which will be essential to
compete effectively in the future, and better able to contribute to economic
and job development in the area. The Merger will result in lower operating
costs than either company could produce alone. Over the first 10 years
following the Merger, Constellation Energy expects to achieve net merger-
related savings of $1.3 billion. Additional information regarding the Merger
is presented in Note 13 of "Notes to Consolidated Financial Statements"
incorporated by reference in Item 8.
5
GENERAL
- -------
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 1996 and 1995. 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 1996, approximately 59% of the Company's revenue
was derived from Maryland sales (including wholesale) and 41% from sales in
the District of Columbia. About 30% of the Company's revenue was derived from
residential customers, 63% from sales to commercial and government customers
and 7% from sales at wholesale. Approximately 14% and 3% of 1996 revenue were
derived from sales to the U.S. and D.C. governments, respectively.
The Company holds valid franchises, permits and other rights adequate
for its business in the territory it serves, and such franchises, permits and
other rights contain no unduly burdensome restrictions.
The Company is a member of the Pennsylvania-New Jersey-Maryland
Interconnection Association (PJM) pursuant to an agreement under which its
generating and transmission facilities are operated on an integrated basis
with those of the other PJM member utilities in Pennsylvania, New Jersey,
Maryland, Delaware and a small portion of Virginia. The purpose of PJM is to
improve the operating economy and reliability of the systems in the group and
to provide capital economies by permitting lower reserve requirements than
would be required on a system basis. The Company also has direct high voltage
connections with the Potomac Edison Company, a subsidiary of Allegheny Power
System, Inc. (APS), and Virginia Power, neither of which is a member of PJM.
On July 24, 1996, nine of 10 PJM member companies, excluding PECO Energy
Company (PECO), filed, with the FERC, a comprehensive proposal to establish an
Independent System Operator (ISO) which would administer transmission service
under a PJM control area transmission tariff and operate the energy market in
a manner that assures comparable treatment for all participants. In early
August 1996, PECO filed a competing plan, opposing certain key features of the
previous proposal. On November 13, 1996, the FERC found that it could not
accept either proposal and ordered the PJM members to amend its proposals to
comport with Order No. 888 regarding open access tariffs and to attempt to
reach a consensus with other stakeholders. On December 31, 1996, the PJM
member companies filed a joint response to the FERC's order, which would, if
accepted, establish a single poolwide transmission tariff and modify the
membership and governance provisions of the PJM agreement. This compliance
filing is intended as an interim solution until a more comprehensive proposal
can be developed. These changes are not expected to have a material effect on
the operating results of the Company.
6
Additional information concerning the restructuring of the bulk power
market is presented in Management's Discussion and Analysis incorporated by
reference in Item 7.
7
SALES
- -----
The following data present 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.
1996 1995 1994
---------- ---------- ----------
Electric Energy Sales (Thousands of Kilowatt-hours)
---------------------
Kilowatt-hours Sold - Total 25,899,889 25,910,047 25,546,210
========== ========== ==========
By Class of Service -
Residential service 6,882,313 6,720,267 6,586,970
General service 15,185,506 15,448,416 15,345,484
Large power service (a) 686,713 703,416 683,762
Street lighting 163,536 162,897 162,439
Rapid transit 411,577 409,837 404,634
Wholesale 2,570,244 2,465,214 2,362,921
By Type of Customer -
Residential 6,868,516 6,706,775 6,574,199
Commercial 11,711,865 11,861,248 11,685,351
U.S. Government 3,902,378 3,998,052 4,009,810
D.C. Government 846,886 878,758 913,929
Wholesale 2,570,244 2,465,214 2,362,921
Electric Revenue (Thousands of Dollars)
----------------
Sales of Electricity - Total (b) $1,824,741 $1,813,790 $1,783,064
========== ========== ==========
By Class of Service -
Residential service $ 549,147 $ 544,517 $ 525,660
General service 1,076,602 1,075,142 1,066,710
Large power service (a) 35,667 36,183 35,701
Street lighting 12,469 12,555 13,783
Rapid transit 28,707 28,276 27,892
Wholesale 122,149 117,117 113,318
By Type of Customer -
Residential $ 548,108 $ 543,532 $ 524,738
Commercial 852,497 848,892 834,323
U.S. Government 250,422 252,144 254,030
D.C. Government 51,565 52,105 56,655
Wholesale 122,149 117,117 113,318
(a) Large power service customers are served at a voltage of 66KV or
higher.
(b) Exclusive of Other Electric Revenue (000s omitted) of $10,116 in 1996,
$8,642 in 1995 and $7,536 in 1994.
8
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
- -----------------
General
- -------
During the period 1997 through 2006 the Company estimates that its peak
demand will grow at a compound annual rate of approximately 1.5%. 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 demand side management (DSM) and energy use management (EUM)
programs which are designed to curb growth in peak demand. The need for new
capacity has been further reduced by programs to maintain older generating
units to ensure their continued efficiency over an extended life and the cost-
effective purchase of capacity and energy.
Conservation
- ------------
Cost-effective conservation programs have been a major component of the
Company's success in limiting the need for new construction during the past
decade.
The Company's DSM and EUM programs are designed to curb growth in demand
in order to defer the need for construction of additional generating capacity
and to cost-effectively increase the efficiency of energy use. To reduce the
near-term upward pressure on customer rates and bills, the Company has, since
1994, phased out several conservation programs and reduced rebate levels for
others. 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. In a
June 1995 order, the Public Service Commission of the District of Columbia
adopted a DSM spending cap for the four-year period 1995 through 1998. The
Company continues to manage its existing portfolio of DSM programs to ensure
that the costs of these programs do not exceed the spending limit. In
December 1996, the Company announced the suspension of the New Building Design
Program in the District of Columbia because current commitments for rebates
are projected to reach the spending limit for commercial programs. In
addition, the Company has not accepted new applications in the Custom Rebate
Program since its suspension in November 1994. Remaining allowable
expenditures under the DSM spending cap totaled $15 million at December 31,
9
1996. The Company expects to realize approximately 80% of the previously
estimated benefits from its demand side management programs for approximately
45% of the previously estimated costs.
During 1996, the Company invested approximately $27 million in Maryland
DSM programs. The Company recovers the costs of Maryland DSM programs through
a base rate surcharge which amortizes costs over a five-year period and
permits the Company to earn a return on its DSM investment while receiving
compensation for lost revenue. In addition, when energy savings exceed annual
goals, the Company earns a bonus. The Company was awarded a bonus of $8.9
million in 1996, based on 1995 performance, which followed bonuses of $8.7
million in 1995, based on 1994 performance and $5 million in 1994, based on
1993 performance. Maryland DSM program goals for 1996 have been reduced to
reflect lower DSM expenditures. Consequently, the performance bonus in 1997
is expected to be significantly lower than amounts awarded for performance in
prior years.
Investment in District of Columbia DSM programs totaled approximately
$18 million in 1996. These DSM 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 DSM costs prudently incurred
since June 30, 1993; prior to this decision, DSM costs had been considered in
base rate cases. Subsequent rate updates are scheduled to 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).
Remaining allowable expenditures under the spending cap totaled $15 million at
December 31, 1996. Pre-July 1993 DSM 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 updated annually in
the spring of each year, while the Clean Air Act component is updated
quarterly. On June 3, 1996, the Company filed an application with the
District of Columbia Public Service Commission requesting approval for an
updated conservation component to reflect the recoverable DSM costs expended
during 1995. The proposed rate is expected to increase annual revenue by
approximately $8 million. No action has been taken by the District of
Columbia Public Service Commission on the proposed surcharge rate.
In 1996, approximately 160,000 customers participated in continuing EUM
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 derived from time-of-use rates.
It is estimated that peak load reductions of nearly 700 megawatts have
been achieved to date from DSM and EUM programs and that additional peak load
reductions of approximately 400 megawatts will be achieved in the next five
years. The Company also estimates that, in 1996, energy savings of more than
1.6 billion kilowatt-hours have been realized through operation of its DSM and
10
EUM programs. During the next five years, the Company's projected costs for
conservation programs that encourage the efficient use of electric energy and
reduce the need to build new generating facilities total $330 million ($55
million in 1997).
Although the Company is continuing its DSM and EUM 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.
Purchase of Capacity and Energy
- -------------------------------
Throughout 1996, the Company purchased energy from Ohio Edison under the
Company's 1987 long-term capacity purchase agreements with Ohio Edison and
APS, and from the Northeast Maryland Waste Disposal Authority under an avoided
cost-based purchase agreement for a 32-megawatt Montgomery County Resource
Recovery Facility. 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. Capacity payments
for the Montgomery County Resource Recovery facility are not expected to
commence until after the year 2000. In August 1996, the Company began
purchasing energy from the Panda Brandywine L.P. (Panda) facility, pursuant to
a 25-year power purchase agreement for 230 megawatts of capacity supplied by a
gas-fueled combined-cycle cogenerator. The Panda facility achieved full
commercial operation in October 1996. Capacity payments under this agreement
commence in January 1997.
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.
In October 1996, the Company began selling capacity to GPU, Inc. in the
amount of 100 megawatts during both October and November 1996 and 90 megawatts
for December 1996. Capacity sales are expected to continue during 1997.
CONSTRUCTION PROGRAM
- --------------------
The Company carries on a continuous construction program, the nature and
extent of which is determined by the Company's strategic planning process
which integrates supply-side and demand-side resource options.
From January 1, 1994, to December 31, 1996, the Company made property
additions, net of an Allowance for Funds Used During Construction (AFUDC) and
Capital Cost Recovery Factor (CCRF), of $686 million (of which $180 million
were made in 1996) and had property retirements of $117 million (of which $31
million were made in 1996).
11
The Company's current construction program calls for estimated
expenditures, excluding AFUDC and CCRF, of $215 million in 1997, $230 million
in 1998, $235 million in 1999, $245 million in 2000 and $280 million in 2001,
an aggregate of $1.2 billion for the five-year period. AFUDC and CCRF are
estimated to be $16 million in 1997, $17 million in 1998, $18 million in 1999,
$21 million in 2000 and $27 million in 2001. The 1997-2001 construction
program includes approximately $590 million for generating facilities
(including $18 million for Clean Air Act compliance), $60 million for
transmission facilities, $551 million for distribution, service and other
facilities, and $4 million associated with the Company's energy use management
programs. The Company plans to finance its construction program primarily
through funds provided by operations. Actual construction expenditures and
activity during the period 1997 through 2001 may vary from projections once
the Merger with BGE becomes effective.
The construction program includes amounts for the construction of
facilities that will not be completed until after 2001. 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 Acid Rain portion of the 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 installed 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 $18 million over the next five years. Plans for
complying with the second phase of the CAA are being reviewed in anticipation
of the pending Merger with BGE. If economical, continued use of lower-sulfur
coal, cofiring with natural gas and the purchase of sulfur dioxide (SO2)
emission allowances is expected. Nitrogen oxides emissions reductions will be
achieved by installing control equipment in the most cost-effective manner
after considering the characteristics of each of the merged company's boilers.
In addition to the Acid Rain portion of the CAA, the State of Maryland and
District of Columbia are required, by Title I of the CAA, to achieve
compliance with ambient air quality standards for ground-level ozone. This
provision is likely to result in further nitrogen oxides emissions reductions
from the Company's boilers; however, the extent of reductions and associated
cost cannot be estimated at this time.
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.
12
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 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.
FUEL
- ----
For customer billing purposes, all of the Company's kilowatt-hour sales
are covered by separately stated fuel rates (see Item 8 - Note 2 of "Notes to
Consolidated Financial Statements").
The ages of the Company's generating units, all of which are in
operation, are presented in the table below.
Generating Number Age
Station of Units (a) (Years) Service Type
-------------- ------------ ------- --------------------
Benning 2 24-28 Cycling
Buzzard Point 16 28 Peaking
Potomac River 2/3 39-47 Cycling/Base
Dickerson 3/3 3-37 Base/Peaking
Chalk Point 2/2/7(b) 5-32 Base/Cycling/Peaking
Morgantown 2/6 23-26 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 lives of generating units and to ensure their continued availability
and efficiency.
13
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 1996, 1995 and 1994 and the contribution, on the basis of
Btus, of each fuel to energy generated.
1996 1995 1994
-------------- -------------- --------------
% of % of % of
Quantity Btu Quantity Btu Quantity Btu
-------- ----- -------- ----- -------- -----
Coal
(000s net tons) 6,224 89.7 6,312 85.4 5,788 76.1
Residual oil
(000s barrels) 1,365 4.8 1,348 4.4 4,868 15.7
Natural gas
(000s dekatherms) 6,111 3.4 16,387 8.5 10,780 5.5
No. 2 fuel oil
(000s barrels) 657 2.1 580 1.7 919 2.7
The following table sets forth the average cost of each type of fuel
burned, for the years shown.
1996 1995 1994
------ ------ ------
Coal: per ton $42.17 $41.84 $44.39
per million Btu 1.62 1.60 1.73
Residual oil: per barrel 20.04 18.01 15.31
per million Btu 3.19 2.88 2.44
Natural gas: per dekatherm 2.92 2.10 2.49
per million Btu 2.92 2.10 2.49
No. 2 fuel oil: per barrel 25.34 23.71 24.34
per million Btu 4.34 4.06 4.17
The average cost of fuel burned per million Btu was $1.80 in 1996,
compared with $1.74 in 1995 and $1.95 in 1994. The 1996 system average unit
fuel cost increased by approximately 3% which was primarily the result of the
increase in the cost of residual oil and an increase in the percent of
residual oil contribution to the fuel mix. The decrease of approximately 11%
in the 1995 system average unit fuel cost compared with the 1994 system
average resulted from increased use of lower-cost coal and gas and decreased
net generation. The Company's major cycling and certain peaking units can
burn either natural gas or oil, adding flexibility in selecting the most cost-
effective fuel mix. The decrease in the percent of gas burned in 1996
reflects the increased price of gas and the increased usage of lower-cost
coal. The increase in the percent of gas burned in 1995 reflects the
decreased price of gas and the increased price of oil.
14
Ten of the Company's 16 steam-electric generating units can burn only
coal; two can burn only residual oil; two can burn either coal or residual oil
or a combination of both and two units can burn either residual oil or natural
gas. Those units capable of burning either coal or residual oil normally burn
coal as their primary fuel. The Company also has combustion turbines, some of
which can burn only No. 2 fuel oil, and others which can burn natural gas or
No. 2 fuel oil. The following table provides details of the Company's
generating capability from the standpoint of plant configuration as well as
actual energy generation (see Item 2 - Properties for additional information
on type of fuel used in generating facilities).
Net Generating Net
Capability and Energy
Purchased Capacity Generated
------------------ ------------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
Steam Generation
Dual fuel units, capable
of burning coal, residual
oil or a combination of
coal and residual oil.... 17% 18% 17% 33% 29% 28%
Units capable of burning
coal only................ 28% 28% 28% 45% 46% 43%
Units capable of burning
residual oil only........ 8% 8% 8% 1% 1% 1%
Units capable of burning
residual oil or natural
gas...................... 18% 19% 18% 4% 6% 12%
Combustion Turbines
Units capable of burning
No. 2 fuel oil only...... 8% 9% 9% )
Units capable of burning ) 1% 3% 3%
No. 2 fuel oil or natural )
gas...................... 11% 11% 11% )
Purchased capacity........... 10% 7% 9% 16%(a) 15%(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
15
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
54% of the estimated system coal requirements in 1997. Approximately 46% of
the estimated system coal requirements in 1997 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,
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 deep 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 two one-year contracts.
Prices under the contracts are determined by reference to base contract
prices, as adjusted to reflect current market prices. Prior to expiration of
the contracts, the Company expects to solicit bids for new contracts to supply
its residual oil requirements. The Company also purchases No. 2 fuel oil
under three 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 Eastern Energy Marketing for the
Dickerson combustion turbine units through March 31, 1997. 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.
16
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
legislation has fostered nonutility generation (cogeneration and solid waste
fired generation) supplying the Company with approximately 270 megawatts.
RATES
- -----
General
- -------
The Company's retail rates for electric service in Maryland and the
District of Columbia are based on allowed rates of return on 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. The jurisdictional
AFUDC capitalization rates are determined on a gross basis pursuant to
formulas prescribed by the FERC. The effective capitalization rates were
approximately 7.4% in 1996, 7.9% in 1995 and 7.6% in 1994, compounded
semiannually. In Maryland, the Company accrues a capital cost recovery factor
(CCRF) on the retail jurisdictional portion of certain pollution control
expenditures related to compliance with the CAA. The base for calculating
this return is the amount by which the Maryland jurisdictional CAA expenditure
balance exceeds the CAA balance being recovered in rate base in the Company's
most recently completed base rate proceeding. The CCRF rate for Maryland is
9.46%. In the District of Columbia, the carrying costs of CAA expenditures
not in rate base are recovered through a base rate surcharge.
17
Rate orders received by the Company during the past three years provided
for changes in annual base rate revenue as shown in the table below. At
December 31, 1996, there were no base rate proceedings filed nor pending
approval by any of the Company's retail or wholesale regulatory commissions.
Rate
(Decrease)
Increase % Effective
Regulatory Jurisdiction ($000) Change Date
----------------------- ---------- --------- ---------------
Federal-Wholesale $(2,000) (1.7) January 1996
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
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. In connection with the
settlement agreement, no determination was made with respect to rate of
return. The rate of return on common stock equity most recently determined
for the Company in a fully litigated rate case was 12.75% established by the
Commission in a June 1991 rate increase order.
Effective August 27, 1996, the Maryland DSM surcharge tariff was
increased, providing approximately $18 million annually in increased revenue.
The surcharge includes provisions for the recovery of lost revenue,
amortization of pre-1996 actual program expenditures plus the initial
amortization of 1996 projected program costs, a capital cost recovery factor
of 9.46% on unamortized balances and an incentive of $8.9 million awarded for
exceeding 1995 energy saving goals. Previously, incentives of $8.7 million
and $5 million were awarded for exceeding 1994 and 1993 energy saving goals,
respectively. Maryland DSM program goals for 1996 have been reduced to
reflect lower DSM expenditures. Consequently, the performance bonus in 1997
is expected to be significantly lower than amounts awarded for performance in
prior years.
18
On November 8, 1996, the Company filed a request with the Maryland
Public Service Commission for approval of a purchased capacity surcharge,
which is designed to recover changes in the level of purchased capacity costs
from levels included in base rates. The filing was made to recover capacity
payments under the Panda contract, which commenced January 1, 1997. The
estimated 1997 Maryland portion of these payments is $10.5 million. On
January 8, 1997, the Maryland Public Service Commission suspended the
Company's request for a period of 90 days from January 8, 1997, or until the
date of a Commission Order in the Joint Application for Authorization and
Approval of the Merger with BGE, whichever comes first. The District of
Columbia portion of the Panda capacity costs will be recovered through the
existing fuel adjustment clause.
District of Columbia
- --------------------
In Formal Case No. 939, the Commission, in June 1995, 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 DSM 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
DSM 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 actual costs expended from July 1993 through
December 1994, resulted in additional annual revenue of approximately $15
million. 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. On June 3, 1996, the
Company filed an Application for Authority with the Commission to revise its
ECRR. The proposed rate, which reflects actual costs expended during 1995, is
expected to increase annual revenue by approximately $8 million. No action
has been taken by the District of Columbia Public Service Commission on the
revised ECRR. Subsequent rate updates are scheduled to 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. 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.
19
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 and $2.6 million effective January 1,
1995 and 1994, respectively. Pursuant to a new agreement with SMECO for the
years 1996 through 1998, a rate reduction of $2 million from the 1995 rate
level became effective January 1, 1996, with an additional $2.5 million rate
reduction scheduled to become effective January 1, 1998. 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 those of other members of the PJM power pool and other utilities. The
pricing of most PJM-dispatched internal economy energy transactions is based
upon "split savings" whereby such energy is priced 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 July 24, 1996, nine of the 10 PJM member companies (the Supporting
Companies), excluding PECO, filed, with the FERC, a comprehensive proposal
including the contracts and tariff that would establish an Independent System
Operator (ISO) to administer transmission service under a PJM control area
transmission tariff and operate the energy market in a manner that assures
comparable treatment for all participants. Under the Supporting Companies'
proposal, reliability of the pool will be maintained under an installed
capacity obligation. The ISO will administer a bid-priced energy spot market
that will also accommodate bilateral transactions, and the ISO will provide
transmission service on a poolwide basis. In early August 1996, PECO filed a
competing plan opposing certain key features of the Supporting Companies'
proposal.
On November 13, 1996, the FERC found that it could not accept either the
Supporting Companies' proposal or PECO's opposing proposal. Consequently,
FERC ordered the PJM members to amend its proposals to comport with Order No.
888 on ISOs and to attempt to reach a consensus with other stakeholders. If
PJM members could not comply with this order by December 31, 1996, FERC
required, at a minimum, that PJM file a poolwide pro forma open access
transmission tariff by December 31, 1996, and amend existing PJM pooling
agreements for compatibility with the Order. On December 31, 1996, the PJM
member companies filed a joint response to FERC's Order. This compliance
filing, if accepted, establishes a single poolwide transmission tariff and
modifies the membership and governance provisions of the PJM agreement. The
PJM members noted areas of disagreement in the filing and indicated that the
20
compliance filing was an interim solution until a more comprehensive proposal
could be developed. These changes are not expected to have a material effect
on the operating results of the Company.
In addition to interchange with PJM, the Company is actively
participating in the emerging bilateral energy sales marketplace. The
Company's wholesale power sales tariff allows both sales from Company-owned
generation and sales of energy purchased by the Company from other market
participants. Over 40 utilities and marketers have executed service
agreements allowing them to arrange purchases under this tariff. The Company
has also executed service agreements allowing it to purchase energy under
other market participants' power sales tariffs. These agreements greatly
expand the opportunities for economic transactions. During 1996, the Company
entered into purchases, sales, and purchase-for-resale agreements producing
approximately $11 million in savings that are passed along to customers.
Throughout 1996, the Company purchased energy from Ohio Edison under the
Company's 1987 long-term capacity purchase agreements with Ohio Edison and
APS, and from the Northeast Maryland Waste Disposal Authority under an avoided
cost-based purchase agreement for a 32-megawatt Montgomery County Resource
Recovery Facility. 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. Capacity payments
for the Montgomery County Resource Recovery facility are not expected to
commence until after the year 2000. In August 1996, the Company began
purchasing energy from the Panda Brandywine L.P. (Panda) facility, pursuant to
a 25-year power purchase agreement for 230 megawatts of capacity supplied by a
gas-fueled combined-cycle cogenerator. The Panda facility achieved full
commercial operation in October 1996. Capacity payments under this agreement
commence in January 1997. The capacity expense under these agreements,
including an allocation of a portion of Ohio Edison's fixed operating and
maintenance costs, totaled $120 million in 1996. Commitments under these
agreements are estimated at $141 million in 1997, $139 million in 1998, $200
million in 1999 and 2000 and $211 million in 2001.
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
approximately $5.5 million per year.
COMPETITION
- -----------
The electric utility industry is subject to increasing competitive
pressures, stemming from a combination of increasing independent power
production 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
21
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.
Pursuant to an August 1995 order in a generic proceeding dealing with
electric industry structure and the advent of competition, the Maryland Public
Service 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. In October 1996, the Maryland Commission
reopened a generic proceeding to review regulatory and competitive issues
affecting the electricity industry. The Commission cited the evolving nature
of the electric industry as the basis for continuing its investigation. As
part of this investigation, the Commission directed its Staff to submit a
report on or before May 31, 1997, containing, among other things,
recommendations regarding regulatory and competitive issues facing the
electric industry in Maryland. The Commission also directed the four major
electric utilities in Maryland to prepare unbundled cost studies and model
unbundled retail service tariffs prior to August 1, 1997. The District of
Columbia Public Service Commission initiated a proceeding to investigate
issues regarding electricity industry structure and competition in late 1995.
In September 1996, the Commission issued an order designating the issues to be
examined in the proceeding. Initial comments regarding the designated issues
were filed with the Commission in January 1997, with reply comments due in
March 1997.
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
22
generating installations. The Company has expended approximately $621 million
through December 31, 1996, for the construction of pollution control
facilities. The $590 million 1997-2001 construction program for generating
facilities includes estimated provisions for pollution control facilities,
including expenditures for CAA compliance, of $21 million for 1997, $36
million for 1998, $35 million for 1999, $20 million for 2000 and $29 million
for 2001. The Company is unable to predict the future course of environmental
regulations generally, the manner in which compliance with such regulations
will be required, the availability of technology to meet such regulations and
any budget amendments which may be required to recognize the costs which may
ultimately be associated with such compliance.
Air Quality
- -----------
Under authority of the Clean Air Act of 1970, as amended, the U.S.
Environmental Protection Agency (EPA) has issued national primary and
secondary standards for the following air pollutants: sulfur dioxide,
nitrogen dioxide, particulate matter, carbon monoxide, ozone and lead. The
EPA has also enacted regulations designed to prevent significant deterioration
of air quality in areas where air quality levels are better than the secondary
ambient air quality standards. The appropriate agencies in Maryland, the
District of Columbia and Virginia have issued regulations designed to
implement EPA's standards and regulations.
In 1990, Congress enacted amendments to the CAA that require the
reduction of sulfur dioxide and nitrogen oxides emissions from electric
generating units. The Company cannot fully predict the financial and
operating effects of this new legislation until all of the related
implementing regulations are adopted by EPA and by appropriate agencies in
each of the jurisdictions where the Company's generating facilities are
located. However, the Company has implemented cost-effective plans for
complying with Phase I of the Acid Rain portion of the 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 installed 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 $18 million over the next five years. Plans for
complying with the second phase of the CAA are being reviewed in anticipation
of the pending Merger with BGE. If economical, continued use of lower-sulfur
coal, cofiring with natural gas and the purchase of sulfur dioxide (SO2)
emission allowances is expected. Nitrogen oxides emissions reductions will be
achieved by installing control equipment in the most cost-effective manner
after considering the characteristics of each of the merged company's boilers.
In addition to the Acid Rain portion of the CAA, the State of Maryland
and District of Columbia are required, by Title I of the CAA, to achieve
compliance with ambient air quality standards for ground-level ozone. This
provision is likely to result in further nitrogen oxides emissions reductions
from the Company's boilers; however, the extent of reductions and associated
cost cannot be estimated at this time.
23
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. 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. A NPDES renewal application
submitted in July 1993 for the Benning station is pending. NPDES permits were
issued for the Potomac River station in February 1994, the Morgantown station
in February 1995, the Dickerson station in August 1996 and the Chalk Point
station in September 1996.
The Maryland Department of the Environment promulgated regulations
effective April 16, 1990, that, among other things, set numeric criteria for
toxic substances in surface waters. These criteria, if incorporated into the
NPDES permits for the Company's Chalk Point, Morgantown and Dickerson
generating stations, had the potential to cause the Company to incur
significant costs to achieve compliance. The Company, in conjunction with
other utilities, industrial companies and the Maryland Chamber of Commerce,
filed a suit in May 1990 that challenged the validity of the regulations. The
parties entered into a settlement agreement and revised regulations were
adopted on May 6, 1993, in accordance with the settlement agreement. These
revised regulations received EPA approval and the suit 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.
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
24
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 $.9 million as of December 31, 1996. The report included
a number of possible remedies, the estimated costs of which range from $2
million to $90 million. In July 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 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
25
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 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 initial filings in 1993,
approximately 50 individual suits have been filed against 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. In 1995 and 1996, approximately 400 of the individual plaintiffs
have dismissed their claims against the Company. No payments were made by the
Company in connection with the dismissals. While the aggregate amount
specified in the remaining suits would exceed $400 million, 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.
In October 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.
In December 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.
26
Solid and Hazardous Waste
- -------------------------
The Resource Conservation and Recovery Act of 1976 (RCRA) provides
federal mandates and authority for dealing with the generation, treatment,
storage, transportation and disposal of solid or hazardous waste. The
principal utility wastes of fly ash, bottom ash and scrubber sludge are exempt
from EPA regulation as hazardous waste. The Company sends its wastes
designated as hazardous to appropriately licensed facilities for hazardous
waste treatment, storage and disposal. The current impact of regulations
under RCRA is not substantial. The only permit which will be required at this
time is for the Morgantown Generating Station, where the Company burns certain
amounts of PCB-contaminated mineral oil. Maryland regulations provide for a
special "limited facility permit" for this activity and the Company's
application for such permit is pending.
LABOR
- -----
The Company has approved, in conjunction with the Merger with BGE, a
severance plan for all exempt and non-bargaining unit employees who are not
offered a position in Constellation Energy. Such employees 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; employees will also not be obligated to reimburse the
Company for tuition payments made by the Company on their behalf within two
years of termination.
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 in December 1995. 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 provided 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 to be paid
on June 6, 1997, or the effective date of the Merger, whichever occurs first.
NONUTILITY SUBSIDIARY
- ---------------------
Potomac Capital Investment Corporation (PCI), the Company's wholly owned
subsidiary, was organized in late 1983 with the objective of supplementing
utility earnings and building long-term shareholder value. In April 1996, the
Company contributed its investment in PEPCO Enterprises, Inc. (PEI), an energy
services and telecommunications products and services company, to PCI.
Investments made by PEI contributed $1.1 million in after-tax earnings to PCI
during 1996.
27
PCI's assets totaled $1.4 billion at December 31, 1996, including
equipment leases of aircraft and power plants totaling $684.1 million at
December 31, 1996, marketable securities, primarily fixed rate preferred
stocks totaling $377.2 million at December 31, 1996 and to a lesser extent,
real estate and other investments. The Company's equity investment in PCI was
$196.3 million at December 31, 1996, including $32.8 million in subsidiary
retained earnings. Since its inception in 1983, PCI has paid the parent
Company $100 million in dividends.
PCI's leasing activities include operating and finance lease
investments, asset management and marketing of aircraft and aircraft engines
and investments in power generation equipment and real estate.
PCI's earnings for 1996 were $16.9 million compared to a net loss of
$124.4 million in 1995 and net earnings of $19.1 million in 1994. During
1996, PCI continued the execution of the plan adopted in May 1995 with respect
to the aircraft equipment leasing business. PCI's losses in 1995 reflect the
implementation of the plan which resulted in noncash, after-tax charges of
$122.2 million during 1995. Under the plan, PCI is not making new investments
to increase the size of the aircraft portfolio and 13 aircraft were designated
for sale over 18 to 24 months from the date the plan was announced. The book
values of these aircraft were reduced to their estimated net realizable values
of approximately $104 million and no depreciation or routine accrual for
repair and maintenance expenditures for these aircraft has been recorded since
the plan was adopted. During 1996, eight of these aircraft were sold and one
was placed on a long-term lease. Additional losses on assets held for
disposal, recorded primarily in the first quarter of 1996, totaled $12.7
million ($8.3 million after-tax). PCI reduced its portfolio of assets held
for disposal from $104 million (13 aircraft) at December 31, 1995, to $10.3
million (four aircraft). PCI also sold an aircraft engine leasing subsidiary
during 1996 for its approximate book value which reduced the investment in
operating lease equipment by $32.7 million. In addition, PCI wrote down
certain energy-related investments and real estate totaling $29.1 million
($18.8 million after-tax). PCI sold its $2.8 million (20% interest) in a
Florida-based technology company in the fourth quarter of 1996 and recorded an
after-tax gain of $6.7 million. As a result of joint venture operations in
1996, PCI was able to reduce previously accrued deferred income taxes and
record after-tax earnings of $27.7 million after provision for transaction
costs.
The $377.2 million securities portfolio, consisting primarily of
investment grade preferred stocks, provides PCI with liquidity and investment
flexibility. During 1996, PCI has reduced its marketable securities portfolio
by $153.1 million primarily as the result of calls (approximately $82 million)
and sales of fixed rate preferred stocks, generating net pretax gains of $3.6
million. PCI's fixed rate portfolio is sensitive to fluctuations in interest
rates. The decision to reduce the size of the preferred stock portfolio was
made to lessen the impact of future fluctuations in interest rates, while
still maintaining a substantial portfolio for liquidity purposes.
28
PCI's investments in real estate include commercial buildings built for
and leased principally to the tenant, an apartment project, residential land
under development and commercial, industrial and residential land held for
long-term development. PCI's net investment in real estate was $54.4 million
at December 31, 1996.
Additional information concerning PCI's investment activities is
presented in Management's Discussion and Analysis incorporated by reference in
Item 7.
29
<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 1996
- ------------------ --------------------------------------- --------------
- ------------ ------------ ---------------
(Thousands)
<S> <C> <C>
<C> <C> <C>
Benning Benning Road and Anacostia River, N.E. No. 4 Oil
550 - 102
Washington, D.C.
Buzzard Point 1st and V Streets, S.W. -
- 256 7
Washington, D.C.
Potomac River Bashford Lane and Potomac River Coal
482 - 1,665
Alexandria, Virginia
Dickerson Potomac River, South of Little Monocacy Coal
546 291 3,360
River, Dickerson, Maryland
Chalk Point Patuxent River at Swanson Creek Coal/
1,907 516 <F2> 4,584
Aquasco, Maryland Residual Oil/
Natural Gas
Morgantown Potomac River, South of Route 301 Coal/
1,164 248 7,216
Newburg, Maryland Residual Oil
- ----------- ----------- -----------
Total - Wholly owned Units
4,649 1,311 16,934
Conemaugh Indiana County, Pennsylvania Coal
165 1 1,107
- ----------- ----------- -----------
Total - All Stations Operated
4,814 1,312 18,041
- ------------ ===========
Cogeneration
- - 252
===========
Purchased Capacity
Ohio Edison <F3>
450 - 3,086
Panda Brandywine <F4>
230 - 165
- ------------ -----------
680 - 3,251
- ------------ ===========
Capacity Sale
GPU, Inc. <F5>
(90) -
- ------------ ------------
Total System
5,404 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.
<F4>Generating capacity under long-term agreement with Panda Brandywine L.P.
<F5>Generating capacity under short-term agreement with GPU, Inc.
</FN> 30
</TABLE>
The five steam-electric generating stations, together with combustion
turbines, had an aggregate net capability at December 31, 1996, 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. In addition, the Company has a 25-year agreement with Panda for a 230-
megawatt gas-fueled combined-cycle cogeneration project in Prince George's
County, Maryland. The project has been completed and the Panda facility
achieved full commercial operation in October 1996. The net 60-minute peak
load in 1996 was 5,288 megawatts, which occurred on June 17, 1996, and was
8.3% below the all-time summer peak demand of 5,769 megawatts. To meet the
1996 summer peak demand, the Company also had approximately 265 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.
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
None.
31
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
--------------------- --------------- -------- ---------
1996:
First Quarter...... $.415 $27-3/8 $24-1/2
Second Quarter..... .415 26-5/8 24-3/8
Third Quarter...... .415 26-3/4 24
Fourth Quarter..... .415 $1.66 27-3/8 23-5/8
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
The number of holders of Common Stock was 88,783 at January 31, 1997,
and 89,620 at December 31, 1996.
There were 118,496,828 and 118,500,037 shares of the Company's $1 par
value Common Stock outstanding at January 31, 1997, and December 31, 1996,
respectively. A total of 200 million shares is authorized.
In January 1997, a dividend of 41-1/2 cents per share was declared
payable March 31, 1997, to holders of record of the Company's common stock on
March 10, 1997.
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 $1.60 per share. However, no assurance can be given that
the $1.67 dividend rate will be in effect and Constellation Energy Corporation
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.
32
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 1996 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 1996 Annual Report to shareholders.
The lenders to SEGS III and IV filed suit against the SEGS III and IV
partnerships to restrain them from making distributions of 1996 partnership
profits. The trial in this case was concluded in November 1996 and a decision
was reached by the Court in late January 1997 in favor of the project owners.
Management believes that there is a substantial likelihood that the lenders
will appeal the court's decision. An appeal is expected to take more than a
year to be concluded.
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
The consolidated financial statements, together with the report thereon
of Price Waterhouse LLP dated January 17, 1997, and supplementary data from
the Company's 1996 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 1996 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.
33
Part III
- --------
Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
Information with regard to the directors and executive officers of the
registrant as of January 31, 1997, is as follows:
Directors
- ---------
Principal Occupation and Business Director
Name and Age Experience for Past Five Years Since
- ------------ --------------------------------- --------
Roger R. Blunt, Sr. Chairman of the Board, President 1984
Age 66 (j)(k)(n) and Chief Executive Officer of
Blunt Enterprises, Inc. (general
contracting and construction
management), a Washington-based
holding company, that includes
Essex Construction Corporation and
Tyroc Construction Corporation,
both of which he is Chairman of
the Board and Chief Executive
Officer.
A. James Clark Chairman of the Board and President 1977
Age 69 (a)(l)(m)(o) of Clark Enterprises, Inc., a
holding company based in Bethesda,
Maryland that includes The Clark
Construction Group, Inc. (formerly
The George Hyman Construction
Company and OMNI Construction
Group, Inc.). He serves as
Chairman of the Executive Committee
for The Clark Construction Group.
H. Lowell Davis See Executive Officers Below. 1973
(b)(k)
John M. Derrick, Jr. See Executive Officers Below. 1994
(k)
Richard E. Marriott Chairman of the Board of Host 1993
Age 58 (c)(m)(n) Marriott Corporation, a company
based in Bethesda, Maryland, which
owns lodging properties throughout
the world. From 1986 to October
1993 he served as Vice Chairman
and Executive Vice President of
the Marriott Corporation, a hotel
and hospitality company.
34
Principal Occupation and Business Director
Name and Age Experience for Past Five Years Since
- ------------ --------------------------------- --------
David O. Maxwell Retired Chairman of the Board and 1993
Age 66 (d)(j)(m) Chief Executive Officer of the
Federal National Mortgage
Association, a position he held
from 1981 to 1991.
Floretta D. McKenzie President of The McKenzie Group, 1988
Age 61 (e)(j)(k) Inc., an educational consulting
firm which she founded in 1987.
Ann D. McLaughlin Chairman of The Aspen Institute. 1991
Age 55 (f)(m)(n) She served as Vice Chairman of
The Aspen Institute from 1993 to
1996 and was President of the
Federal City Council from 1990
until 1995. Ms. McLaughlin was
President and Chief Executive
Officer of the New American
Schools Development Corporation
from July 1992 to 1993. She is
a member of the Board of Trustees
of The Urban Institute, Washington,
D.C.
Edward F. Mitchell See Executive Officers Below. 1980
(k)(o)
Peter F. O'Malley Of Counsel to O'Malley, Miles, 1982
Age 57 (g)(l)(m)(o) Nylen & Gilmore, P.A., a law firm
in Calverton, Maryland. He has
served as Of Counsel since 1989.
Louis A. Simpson President and Chief Executive 1990
Age 60 (h)(j)(l)(o) Officer of Capital Operations
(investments), GEICO Corporation,
Washington, D.C. since May 1993.
From 1985 to May 1993, he served
as Vice Chairman of GEICO
Corporation.
A. Thomas Young Retired Executive Vice President of 1995
Age 58 (i)(j)(l)(o) Lockheed Martin Corporation. From
1990 to 1995, he was President and
Chief Operating Officer of Martin
Marietta Corporation.
35
(a) Mr. Clark is also a director of CarrAmerica Realty Corporation.
(b) Mr. Davis is also a director of AVEMCO Corporation.
(c) Mr. Marriott is also a director of Marriott International, Inc. and
Host Marriott Services Corporation.
(d) Mr. Maxwell is also a director of Financial Security Assurance Holdings
Ltd., Salomon Inc, and SunAmerica Inc.
(e) Dr. McKenzie is also a director of Marriott International, Inc.
(f) Ms. McLaughlin, a former U.S. Secretary of Labor, is also a director of
AMR Corporation/American Airlines, Inc., Donna Karan International,
Inc., General Motors Corporation, Harman International Industries, Inc.,
Host Marriott Corporation, Kellogg Company, Nordstrom, Inc., Sedgwick
Group plc, Union Camp Corporation and Vulcan Materials Company.
(g) Mr. O'Malley is also a director of Giant Food Inc. and Legg Mason, Inc.
(h) Mr. Simpson is also a director of Cohr, Inc., Pacific American Income
Shares, Inc., Salomon Inc. and Thompson PBE, Inc.
(i) Mr. Young is also a director of The B.F. Goodrich Company, Cooper
Industries, Inc., The Dial Corp., Memotec Communications, Inc. and
Science Applications International Corporation.
(j) Mr. Blunt is Chairman of the Audit Committee. Messrs. Maxwell, Simpson
and Young and Dr. McKenzie are members of the Committee.
(k) Mr. Mitchell is Chairman of the Executive Committee. Messrs. Blunt,
Davis and Derrick and Dr. McKenzie are members of the Committee.
(l) Mr. O'Malley is Chairman of the Finance Committee. Messrs. Clark,
Simpson and Young are members of the Committee.
(m) Mr. Clark is Chairman of the Human Resources Committee.
Messrs. Marriott, Maxwell and O'Malley and Ms. McLaughlin are members of
the Committee.
(n) Ms. McLaughlin is Chairman of the Nominating Committee. Messrs. Blunt
and Marriott are members of the Committee.
(o) Mr. Mitchell is Chairman of the Chairman's Advisory Committee.
Messrs. Clark, O'Malley, Simpson and Young are members of the Committee.
36
Executive Officers
- ------------------
Served in
such position
Name Position Age since
- -------------------- -------------------------------- --- -------------
Edward F. Mitchell Chairman of the Board and Chief
Executive Officer 65 1992 (1)
John M. Derrick, Jr. President and Chief Operating
Officer and Director 56 1992 (2)
H. Lowell Davis Vice Chairman and Director 64 1983
Dennis R. Wraase Senior Vice President and
Chief Financial Officer 52 1992 (3)
William T. Torgerson Senior Vice President and
General Counsel 52 1994 (4)
Iraline G. Barnes Vice President - Corporate 49 1990
Relations
Earl K. Chism Vice President and Comptroller 61 1994 (5)
Kirk J. Emge Vice President - Regulatory
Law 47 1994 (6)
Susann D. Felton Vice President - Materials 48 1992 (7)
William R. Gee, Jr. Vice President - Energy Planning
and Economy 56 1991
Robert C. Grantley Vice President - Customers
and Community Relations 48 1989
Anthony J. Kamerick Vice President and Treasurer 49 1994 (8)
Anthony S. Macerollo Vice President - Corporate
Administration and Services 55 1989
James S. Potts Vice President - Environment 51 1993 (9)
William J. Sim Vice President - Power Supply
and Delivery 52 1991
Andrew W. Williams Vice President - Energy and
Market Policy and Development 47 1989
None of the above persons has a "family relationship" with any other officer
listed or with any director.
37
The term of office for each of the above persons is from April 24, 1996,
until the next succeeding Annual Meeting and until their successors have been
elected and qualified.
(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. Wraase was elected to his present position on April 24, 1996. Prior
to that time, from April 22, 1992, he served as Senior Vice President,
Finance and Accounting. He was elected Senior Vice President and
Comptroller on July 27, 1989.
(4) Mr. Torgerson was elected Senior Vice President and General Counsel on
April 27, 1994. He served as Secretary from August 22, 1994 to April
24, 1996. Prior to 1994 he held the position of Vice President and
General Counsel.
(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. 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.
(9) 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.
Section 16(a) Beneficial Ownership Reporting Compliance
- -------------------------------------------------------
Anthony S. Macerollo, Vice President, Corporate Administration and
Services, purchased 152 shares of Common Stock of the Company in March 1996
and inadvertently failed to file a Form 4 by the April 10, 1996, deadline. He
filed the Form 4 on May 9, 1996.
38
Item 11 EXECUTIVE COMPENSATION
- ------- ----------------------
Each of the Company's directors, except directors who are employees of
the Company, is paid an annual retainer of $26,000, plus a fee of $1,000 for
each Board and committee meeting attended. The Company has a Retirement Plan
for Directors under which directors retiring at or after age 65 will receive,
for life, or for lesser periods depending on the length of the director's
non-employee board service, annual benefits equal to the retainer fee for
directors in effect at the time of retirement, with limited death benefits to
a surviving spouse; provided, however, in the event of a change in control of
the Company, if a director's service is terminated after completing 10 years
of Board service, the director would receive a lump sum payment of the
actuarial present value of a life annuity commencing at age 65, in an amount
equal to the retainer in effect at the time of change in control. The
actuarial present value of a reduced annuity benefit would be paid in a lump
sum in the case of a director whose service is terminated in the event of a
change in control, but prior to completing 10 years of Board service. The
Company also has a Stock Compensation Plan for the Board of Directors under
which directors of the Company may elect to receive up to 100% of their
retainers in shares of the Company's Common Stock and deferred compensation
plans which permit directors to defer annual retainer and meeting fee
payments.
39
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation
------------------------------------
Long-term
Other Annual Incentive
Plan All Other
Name and Principal Position Year Salary Bonus Compensation
Payouts Compensation
- --------------------------- ----- --------- --------- ------------
- -------------- ------------
<F1> <F2>
<F3,4>
<S> <C> <C> <C> <C> <C>
<C>
Edward F. Mitchell 1996 $600,000 $263,340 $115,861
$79,670 $55,513
Chairman of the Board and 1995 560,000 206,599 96,100
136,201 56,479
Chief Executive Officer 1994 553,333 0 79,716
95,568 58,800
H. Lowell Davis 1996 $418,667 $183,752 $72,718
$59,015 $38,702
Vice Chairman 1995 412,000 151,998 62,248
103,650 40,388
1994 408,000 0 56,192
72,710 44,354
John M. Derrick, Jr. 1996 $373,333 $152,152 $11,672
$44,261 $36,867
President 1995 350,000 190,612 10,423
59,236 37,111
1994 333,333 0 9,970
41,546 37,674
Dennis R. Wraase 1996 $222,667 $84,350 $3,054
$21,953 $24,568
Senior Vice President and 1995 203,000 130,642 2,972
38,627 24,455
Chief Financial Officer 1994 190,667 26,693 3,004
27,085 24,609
William T. Torgerson 1996 $210,667 $74,300 $2,565
$0 $23,030
Senior Vice President and 1995 197,667 123,263 2,572
0 22,703
General Counsel 1994 187,000 23,375 2,536
0 22,464
40
<FN>
<F1> Other Annual Compensation
Amounts in this column represent above-market earnings on deferred
compensation funded by Company-owned life insurance policies held in trust,
assuming the expected retirement at age 65. The amounts are reduced if the
executive terminates employment prior to age 62 for any reason other than
death, total or permanent disability or a change in control of the Company.
In the event of a change in control and termination of the participant's
employment, a lump sum payment will be made equal to the net present value of
the expected payments at age 65 discounted using the Pension Guaranty
Corporation immediate payment interest rate plus one-half of one percent. The
Company has purchased such policies on participating individuals under a
program designed so that if assumptions as to mortality experience, policy
return and other factors are realized, the compensation deferred and the death
benefits payable to the Company under such insurance policies will cover all
premium payments and benefit payments projected under this program, plus a
factor for the use of Company funds.
<F2> Long-Term Incentive Plan Payouts
Amounts in this column represent the value of the vested long-term
restricted stock granted under the terms of the Company's Executive Restricted
Stock Performance Award Program for the three-year performance cycle ended
December 31, 1995. Under the terms of the plan, restricted stock awards made
in 1996 for the performance cycle ended December 31, 1995, vested in two equal
installments, January 1, 1996, and January 1, 1997. Amounts shown above
reflect the value of the shares which vested January 1, 1997, based on the
average of the high and low stock price on the New York Stock Exchange on
December 31, 1996.
<F3> Restricted Stock
The number and market value of the non-vested restricted shareholdings
at December 31, 1996, for the five executives presented above are: 3,131
shares or $79,645 for Mr. Mitchell, 2,319 shares or $58,990 for Mr. Davis,
1,739 shares or $44,236 for Mr. Derrick, and 863 shares or $21,953 for Mr.
Wraase. In the event of change of control and subsequent termination
diminution of duties, the balance of the restricted shareholdings becomes
vested immediately.
<F4> All Other Compensation
Amounts in this column consist of (i) Company contributions to the
Savings Plan for Exempt Employees of $7,000 for Messrs. Mitchell, Derrick,
Wraase and Torgerson, respectively, and $7,225 for Mr. Davis for 1996, (ii)
Company contributions to the Executive Deferred Compensation Plan due to
Internal Revenue Service limitations on maximum contributions to the Savings
Plan for Exempt Employees of $16,200, $5,496, $7,386, $2,769 and $2,730 for
Messrs. Mitchell, Davis, Derrick, Wraase and Torgerson, respectively, for
1996, (iii) the term life insurance portion of life insurance written on a
split-dollar basis of $8,394, $4,979, $1,731, $947 and $963 for Messrs.
Mitchell, Davis, Derrick, Wraase and Torgerson, respectively, for 1996, and
41
(iv) the interest on employer paid premiums for split-dollar life insurance of
$23,919, $21,002, $20,750, $13,852 and $12,337 for Messrs. Mitchell, Davis,
Derrick, Wraase and Torgerson, respectively, for 1996. The split-dollar life
insurance contract provides death benefits to the executive's beneficiaries of
approximately three times the executive's annual salary. The split-dollar
program is designed so that, if the assumptions made as to mortality
experience, policy return and other factors are realized, the Company will
recover all plan costs, including a factor for the use of Company funds. The
split-dollar policy provides a cash surrender value to each participant in
excess of any premiums paid.
</FN>
42
</TABLE>
<TABLE>
LONG-TERM INCENTIVE PLAN -- AWARDS IN LAST FISCAL YEAR
<CAPTION>
Performance or
Other Period Minimum Threshold Maximum
Until Maturation Number Number Number
Name or Payout of Shares of Shares of Shares
- -------------------- ------------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Edward F. Mitchell January 1, 2000 0 1,072 8,042
January 1, 2001 0 1,072 8,041
H. Lowell Davis January 1, 2000 0 786 5,900
January 1, 2001 0 786 5,900
John M. Derrick, Jr. January 1, 2000 0 668 5,012
January 1, 2001 0 668 5,012
Dennis R. Wraase January 1, 2000 0 428 3,208
January 1, 2001 0 427 3,207
William T. Torgerson January 1, 2000 0 386 2,893
January 1, 2001 0 386 2,892
43
</TABLE>
The above table reflects the share awards available under the Company's
Executive Restricted Stock Performance Award Program for the three-year
performance cycle beginning January 1, 1996. The Plan provides for the award
of restricted stock based on comparisons of Company performance to the Salomon
Brothers Electric Utilities index. The awards are based on total return to
shareholders over the three-year performance cycle and market-to-book ratios
for the same periods. Each of these two performance measures is given equal
weight. For a participant to receive the maximum award, the Company must have
the highest total return to shareholders and market-to-book ratio as compared
to the companies contained in the Salomon Brothers Electric Utilities index.
Generally, the Company results must be above the median of the companies
contained in the index for a participant to receive any award. Actual grants,
if any, will not be determined until the end of the performance cycle and the
shares earned based on performance will vest in two equal installments on
January 1 of each of the two years commencing one year after the end of the
performance cycle. No dividends are paid on awards until actual grants are
made. Total shares granted will reflect reinvested dividends during the
performance cycle.
44
<TABLE>
PENSION PLAN TABLE
<CAPTION>
Annual Retirement Benefits
Average Annual
- ---------------------------------------------------------------------
Salary in Final Years in Plan
Three Years
- ---------------------------------------------------------------------
of Employment 15 20 25 30 35
40
- --------------- --------- --------- --------- --------- ---------
- ---------
<S> <C> <C> <C> <C> <C> <C>
$150,000 $39,000 $53,000 $66,000 $79,000 $92,000
$105,000
$250,000 $66,000 $88,000 $109,000 $131,000 $153,000
$175,000
$350,000 $92,000 $123,000 $153,000 $184,000 $214,000
$245,000
$450,000 $118,000 $158,000 $197,000 $236,000 $276,000
$315,000
$550,000 $144,000 $193,000 $241,000 $289,000 $337,000
$385,000
$650,000 $171,000 $228,000 $284,000 $341,000 $398,000
$455,000
$750,000 $197,000 $263,000 $328,000 $394,000 $459,000
$525,000
45
</TABLE>
The Company's General Retirement Plan provides participants benefits
after five years of service based on the average salary (the term salary being
equal to the amounts contained in the Salary column of the Summary
Compensation Table) for the final three years of employment and years in the
Plan at time of retirement. Normal retirement under the Plan is at age 65.
Plan benefits are subject to an offset for any Social Security benefits.
Benefits under the Plan may be reduced under certain provisions of the
Internal Revenue Code, as amended, and by salary deferrals under the Company's
deferred compensation plans (other than CODA contributions made under the
Savings Plan). Where any such limitations occur, the Company will pay (as an
operating expense) a retirement supplement to eligible executives designed to
maintain total retirement benefits at a formula level of the Plan. In order
to attract and retain executives, the Company provides supplemental retirement
benefits for executives who retire under the terms of the General Retirement
Plan and are at least 59 years of age, which increases the average salary by
the average of the highest three annual incentive awards out of the last five
consecutive years. The annual incentive amounts are equal to the amounts
shown in the Bonus column of the Summary Compensation Table. The current
age, years of credited service and compensation used to determine retirement
benefits for the above-named officers are as follows: Mr. Mitchell, 65 and 40
years of credit, $600,657; Mr. Davis, 64 and 39 years of credit, $439,250; Mr.
Derrick, 56 and 35 years of credit, $382,532; Mr. Wraase, 52 and 27 years of
credit, $312,949; and Mr. Torgerson, 52 and 27 years of credit, $200,710.
Annual benefits at age 65 (including the effect of the Social Security offset)
are illustrated in the table above.
Employment Agreements
- ---------------------
An employment agreement dated April 26, 1995 and amended September 22,
1995, between the Company and Mr. Mitchell provides for his continued
employment as Chief Executive Officer of the Company until the later of
January 1, 1997, or the effective date of the proposed merger with Baltimore
Gas and Electric Company at an annual salary determined by the Board of
Directors. The agreement provides for a supplemental retirement benefit
payable to Mr. Mitchell (or his surviving spouse) for a period of not less
than ten years in an amount equal to the excess of 65% of his final average
annual compensation (based upon salary paid or deferred during his final 12
months of employment and the target annual award during his last year of
employment) over the benefits to which he is entitled under the Company's
General Retirement Plan. The employment agreement also provides for certain
additional spouse benefits, and for the provision by the Company of
supplemental life insurance for Mr. Mitchell following his retirement. If the
proposed merger with Baltimore Gas and Electric Company is completed, Mr.
Mitchell's employment agreement will be superseded by an employment agreement
that he has entered into with Constellation Energy Corporation.
Effective August 1, 1995, the Company entered into an agreement with Mr.
Davis pursuant to which he will continue to be employed as Vice Chairman of
the Company through March 31, 1997. During the term of the agreement, Mr.
Davis will be paid at an annual rate which will be no less than his base
salary in effect on August 1, 1995. Upon termination for any reason, either
46
on or before April 1, 1997, Mr. Davis will be entitled to amounts due him
under the Company's General Retirement Plan, the Supplemental Benefit Plan,
the Executive Performance Supplemental Retirement Plan, and the Supplemental
Executive Retirement Plan.
Effective August 1, 1995, the Company entered into employment agreements
with Messrs. Derrick, Torgerson and Wraase which provide for each executive's
employment through August 1, 2000, and automatically extend for successive
periods of five years thereafter unless the Company or the executive has given
one year's prior notice that it shall not be so extended. Each of the
employment agreements provides that the executive (i) will receive an annual
base salary in an amount not less than his salary in effect as of August 1,
1995, and incentive compensation as determined by the Company's Board and (ii)
will be entitled to participate in retirement and other benefit plans, and
receive fringe benefits, on the same basis as other senior executives of the
Company.
Under each of the employment agreements with Messrs. Derrick, Torgerson
and Wraase, the executive is entitled to certain benefits if his employment is
terminated prior to the expiration of the initial term of the agreement (or as
extended) either (i) by the Company other than for cause, death or disability
or (ii) by the executive if his salary is reduced, he is not in good faith
considered for incentive awards, the Company fails to provide him with
retirement, other benefit plans and fringe benefits provided to other
similarly situated executives, he is required to relocate by more than 50
miles from Washington, D.C., or he is demoted from a senior management
position. These benefits include a lump sum payment in cash equal to the sum
of (i) the greater of (A) the present value of the executive's annual base
salary (the highest base salary in effect during the three-year period
preceding termination) and annual cash incentive awards (calculated based on
the highest annual incentive target award during the three-year period
preceding termination) through the remainder of the agreement (not to exceed
three years) and (B) two times the executive's annual salary and target annual
incentive award as in effect at the time of termination, (ii) the executive's
annual cash incentive award for the year preceding termination of employment,
if not yet paid, and (iii) a pro rata portion of the executive's annual cash
incentive award for the year in which the executive's employment terminates.
In addition, the executive will be entitled to receive certain supplemental
retirement benefits under existing plans of the Company, the same benefits
that a retiree who has attained age 55 and has completed 30 years of service
would be entitled, and a continuation of premium payment under the Company's
split dollar life insurance policy.
If the proposed merger with Baltimore Gas and Electric Company is
completed, Mr. Derrick's employment agreement will be superseded by an
employment agreement that he has entered into with Constellation Energy
Corporation, and Messrs. Torgerson and Wraase's employment agreements will be
assumed by Constellation.
47
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- --------------------------------------------------------------
The following table sets forth the beneficial ownership of common stock
of the Company for each director, the five executive officers shown in the
Summary Compensation Table on page 40, and all directors and executive
officers as a group as of January 31, 1997. None of such persons beneficially
owns shares of any other class of equity securities of the Company.
Number of
Common Shares
Name of Beneficial Owner Owned (1)
------------------------ -------------
Roger R. Blunt, Sr. 336
A. James Clark 98,482 (2)
H. Lowell Davis 64,491 (3)
John M. Derrick, Jr. 21,592 (3)
Richard E. Marriott 100
David O. Maxwell 500
Floretta D. McKenzie 812
Ann D. McLaughlin 509
Edward F. Mitchell 59,068 (3)
Peter F. O'Malley 1,828
Louis A. Simpson 2,000
William T. Torgerson 7,954 (3)
Dennis R. Wraase 16,189 (3)
A. Thomas Young 1,000
-------
All Directors and Executive Officers
as a Group (25 Individuals) 383,460
=======
(1) Each of the individuals listed, as well as all directors and
executive officers as a group, beneficially owned less than 1%
of the Company's outstanding common stock. Participants'
shares in the Company's Dividend Reinvestment and Employee
Savings Plan are included.
(2) Mr. Clark owns 8,874 shares of the Common Stock of the Company.
Clark Enterprises, Inc., of which he is the major owner, owns
89,608 shares of the Common Stock of the Company. Mr. Clark
has sole voting and investment power with respect to the shares
held by that company.
(3) Includes shares awarded under the Company's Long-Term Incentive
Plan which have not yet vested.
48
On September 22, 1995, the Company and Baltimore Gas and Electric
Company (BGE) signed reciprocal stock option agreements in connection with the
proposed merger of PEPCO and BGE with and into Constellation Energy
Corporation. Pursuant to the stock option agreements, PEPCO granted BGE an
irrevocable option to purchase up to 23,579,900 shares of PEPCO common stock
under certain circumstances if the Agreement and Plan of Merger dated as of
September 22, 1995, becomes terminable.
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.
49
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 1996 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, 1996,
1995 and 1994 15 29
Consolidated Balance Sheets -
December 31, 1996 and 1995 16-17 30-31
Consolidated Statements of
Cash Flows - for the years
ended December 31, 1996,
1995 and 1994 18 32
Notes to Consolidated Financial
Statements 19-31 33-72
Report of Independent Accountants 32 28
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).
All other schedules are omitted because they are not applicable, or the
required information is presented in the financial statements.
50
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.............. Exh. 3.2 to Form 10-K,
4/1/96.
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.
51
Exhibit
No. Description of Exhibit Reference*
- ------- ---------------------- ----------
4 July 15, 1942 and August 10,
(cont.) 1942................................ Exh. B-1 to Amendment No. 2,
8/24/42, and B-3 to Post-
Effective Amendment,
8/31/42, to Registration
Statement No. 2-5032.
August 1, 1942...................... Exh. B-4 to Form 8-A,
10/8/42.
October 15, 1942.................... Exh. A to Form 8-K, 12/7/42.
October 15, 1947.................... Exh. A to Form 8-K, 12/8/47.
January 1, 1948..................... Exh.7-B to Post-Effective
Amendment No. 2, 1/28/48,
to Registration Statement
No. 2-7349.
December 31, 1948................... Exh. A-2 to Form 10-K,
4/13/49.
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.
52
Exhibit
No. Description of Exhibit Reference*
- ------- ---------------------- ----------
4 April 1, 1957....................... Exh. 4-B to Registration
(cont.) Statement No. 2-13884,
2/5/58.
May 1, 1958......................... Exh. 2-B to Registration
Statement No. 2-14518,
11/10/58.
December 1, 1958.................... Exh. A to Form 8-K, 1/2/59.
May 1, 1959......................... Exh. 4-B to Amendment No. 1,
5/13/59, to Registration
Statement No. 2-15027.
November 16, 1959................... Exh. A to Form 8-K, 1/4/60.
May 2, 1960......................... Exh. 2-B to Registration
Statement No. 2-17286,
11/9/60.
December 1, 1960 and April 3,
1961................................ Exh. A-1 to Form 10-K,
4/24/61.
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.
53
Exhibit
No. Description of Exhibit Reference*
- ------- ---------------------- ----------
4 June 16, 1969....................... Exh. 2-B to Registration
(cont.) Statement No. 2-36094,
1/27/70.
February 15, 1970................... Exh. A-2 to Form 8-K, 3/9/70.
May 15, 1970........................ Exh. 2-B to Registration
Statement No. 2-38038,
7/27/70.
August 15, 1970..................... Exh. 2-D to Registration
Statement No. 2-38038,
7/27/70.
September 1, 1971................... Exh. 2-C to Registration
Statement No. 2-45591, 9/1/72.
September 15, 1972.................. Exh. 2-E to Registration
Statement No. 2-45591, 9/1/72.
April 1, 1973....................... Exh. A to Form 8-K, 5/9/73.
January 2, 1974..................... Exh. 2-D to Registration
Statement No. 2-49803,
12/5/73.
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.
54
Exhibit
No. Description of Exhibit Reference*
- ------- ---------------------- ----------
4 May 1, 1989......................... Exh. 4-C to Registration
(cont.) Statement No. 33-29382,
6/16/89.
August 1, 1989...................... Exh. 4 to Form 10-K, 3/23/90.
April 5, 1990....................... Exh. 4 to Form 10-K, 3/29/91.
May 21, 1991........................ Exh. 4 to Form 10-K, 3/27/92.
May 7, 1992......................... Exh. 4 to Form 10-K, 3/26/93.
September 1, 1992................... Exh. 4 to Form 10-K, 3/26/93.
November 1, 1992.................... Exh. 4 to Form 10-K, 3/26/93.
March 1, 1993....................... Exh. 4 to Form 10-K, 3/26/93.
March 2, 1993....................... Exh. 4 to Form 10-K, 3/26/93.
July 1, 1993........................ Exh. 4.4 to Registration
Statement No. 33-49973,
8/11/93.
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................... Exh. 4 to Form 10-K, 4/1/96.
September 7, 1995................... Exh. 4 to Form 10-K, 4/1/96.
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.
55
Exhibit
No. Description of Exhibit Reference*
- ------- ---------------------- ----------
4-C 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.
Employment Agreement**.............. Exh. 10.1 to Form 10-Q,
10/30/95.
Employment Agreement**.............. Exh. 10.2 to Form 10-Q,
10/30/95.
Employment Agreement**.............. Exh. 10.3 to Form 10-Q,
10/30/95.
Employment Agreement**.............. Exh. 10.4 to Form 10-Q,
10/30/95.
Amendment to Employment Agreement**. Exh. 10.5 to Form 10-Q,
10/30/95.
Severance Agreement**............... Exh. 10.6 to Form 10-Q,
10/30/95.
Severance Agreement**............... Exh. 10.7 to Form 10-Q,
10/30/95.
Severance Agreement**............... Exh. 10.8 to Form 10-Q,
10/30/95.
Severance Agreement**............... Exh. 10.9 to Form 10-Q,
10/30/95.
Amendment to Employment Agreement**. Exh. 10.1 to Form 10-K,
4/1/96.
Amendment to Employment Agreement**. Exh. 10.2 to Form 10-K,
4/1/96.
Amendment to Employment Agreement**. Exh. 10.3 to Form 10-K,
4/1/96.
Severance Agreement**............... Exh. 10.4 to Form 10-K,
4/1/96.
Severance Agreement**............... Exh. 10.5 to Form 10-K,
4/1/96.
Severance Agreement**............... Exh. 10.6 to Form 10-K,
4/1/96.
Severance Agreement**............... Exh. 10.7 to Form 10-K,
4/1/96.
Severance Agreement**............... Exh. 10.8 to Form 10-K,
4/1/96.
Severance Agreement**............... Exh. 10.9 to Form 10-K,
4/1/96.
56
Exhibit
No. Description of Exhibit Reference*
- ------- ---------------------- ----------
10 Severance Agreement**............... Exh. 10.10 to Form 10-K,
(cont.) 4/1/96.
Severance Agreement**............... Exh. 10.11 to Form 10-K,
4/1/96.
Severance Agreement**............... Exh. 10.12 to Form 10-K,
4/1/96.
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**................. Exh. 10.13 to Form 10-K,
4/1/96.
11 Computation of Earnings Per
Common Share...................... Filed herewith.
12 Computation of Ratios............... Filed herewith.
13 Financial Information Section of
Annual Report..................... Filed herewith.
21 Subsidiaries of the Registrant...... Filed herewith.
23 Consent of Independent Accountants.. Filed herewith.
24 Power of Attorney................... Filed herewith.
27 Financial Data Schedule............. Filed herewith.
*The exhibits referred to in this column by specific designations and
date have heretofore been filed with the Securities and Exchange
Commission under such designations and are hereby incorporated herein
by reference. The Forms 8-A, 8-K and 10-K referred to were filed by
the Company under the Commission's File No. 1-1072 and the
Registration Statements referred to are registration statements of
the Company.
**These exhibits are submitted pursuant to Item 14(c).
(b) Reports on Form 8-K
-------------------
None.
57
<TABLE>
POTOMAC ELECTRIC POWER COMPANY
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<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, 1996
Allowance for uncollectible accounts -
customer and other accounts receivable
Utility operations $ 1,969 $ 8,517 $
1,225 $ (10,113) $ 1,598
Nonutility subsidiary $ 6,000 $ - $
- $ - $ 6,000
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
<FN>
<F1>Collection of accounts previously written off.
<F2>Uncollectible accounts written off.
</FN>
58
</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 28th day of February, 1997.
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
(iii) Principal Accounting Officer
/s/ D. R. Wraase
--------------------------- Senior Vice President and
(Dennis R. Wraase) Chief Financial Officer
(iv) Directors:
/s/ Roger R. Blunt
------------------------- Director
(Roger R. Blunt Sr.)
February 28, 1997
59
Signature Title Date
--------- ----- ----
(iv) Directors (cont.):
A. J. Clark*
------------------------- Director
(A. James Clark)
/s/ H. L. Davis
------------------------- Director
(H. Lowell Davis)
R. E. Marriott*
------------------------- Director
(Richard E. Marriott)
/s/ David O. Maxwell
------------------------ Director
(David O. Maxwell)
/s/ Floretta D. McKenzie
------------------------- Director
(Floretta D. McKenzie)
Ann D. McLaughlin*
------------------------- Director
(Ann D. McLaughlin)
Peter F. O'Malley*
------------------------- Director
(Peter F. O'Malley)
Louis A. Simpson*
------------------------- Director
(Louis A. Simpson)
------------------------- Director
(A. Thomas Young)
* By: /s/ Ellen Sheriff Rogers
-----------------------
(Ellen Sheriff Rogers,
Attorney-in-Fact)
February 28, 1997
60
<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 1996, 1995 and 1994:
<CAPTION>
1996 1995
1994
------------ ------------
------------
<S> <C> <C>
<C>
Average shares outstanding for
computation of primary earnings
per common share 118,496,683 118,412,478
118,005,847
============ ============
============
Average shares outstanding for
fully diluted computation:
Average shares outstanding 118,496,683 118,412,478
118,005,847
Additional shares resulting from:
Conversion of Serial Preferred
Stock, $2.44 Convertible Series
of 1966 (the "Convertible
Preferred Stock") 34,986 38,255
48,110
Conversion of 7% Convertible
Debentures 2,418,579 2,469,639
2,531,244
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 124,342,748 124,312,872
123,977,701
============ ============
============
Earnings applicable to common stock $220,356,000 $77,540,000
$210,725,000
Add: Dividends paid or accrued on
Convertible Preferred Stock 15,000 16,000
20,000
Interest paid or accrued on
Convertible Debentures,
net of related taxes 6,416,000 6,475,000
6,537,000
------------ ------------
------------
Earnings applicable to common stock,
assuming conversion of convertible
securities $226,787,000 $84,031,000
$217,282,000
============ ============
============
Primary earnings per common share $1.86 $0.65
$1.79
Fully diluted earnings per common share $1.82 $0.68
$1.75
<FN>
<F1>This calculation is submitted in accordance with Regulation S-K, item 601 (b)
(11) although not required by footnote 2 to paragraph 14 of APB No. 15 for
1996
and 1994 because it results in dilution of less than 3%. In addition, the
valuation is contrary to paragraph 40 of APB No. 15 because it produces an
antidilutive result for 1995.
</FN>
61
</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 1996
through 1992 on the basis of parent company operations only, are as follows.
<CAPTION>
For The Year Ended
December 31,
- ---------------------------------------------------------
1996 1995 1994
1993 1992
--------- --------- ---------
--------- ---------
(Thousands of
Dollars)
<S> <C> <C> <C>
<C> <C>
Net income before cumulative effect
of accounting change $220,066 $218,788 $208,074
$216,478 $172,599
Taxes based on income 135,011 129,439 116,648
107,223 76,965
--------- --------- ---------
--------- ---------
Income before taxes and cumulative effect
of accounting change 355,077 348,227 324,722
323,701 249,564
--------- --------- ---------
--------- ---------
Fixed charges:
Interest charges 146,939 146,558 139,210
141,393 138,097
Interest factor in rentals 23,560 23,431 6,300
5,859 6,140
--------- --------- ---------
--------- ---------
Total fixed charges 170,499 169,989 145,510
147,252 144,237
--------- --------- ---------
--------- ---------
Income before income taxes, cumulative
effect of accounting change and
fixed charges $525,576 $518,216 $470,232
$470,953 $393,801
========= ========= =========
========= =========
Coverage of fixed charges 3.08 3.05 3.23
3.20 2.73
==== ==== ====
==== ====
Preferred dividend requirements $16,604 $16,851 $16,437
$16,255 $14,392
--------- --------- ---------
--------- ---------
Ratio of pre-tax income to net income 1.61 1.59 1.56
1.50 1.45
--------- --------- ---------
--------- ---------
Preferred dividend factor $26,732 $26,793 $25,642
$24,383 $20,868
--------- --------- ---------
--------- ---------
Total fixed charges and preferred dividends $197,231 $196,782 $171,152
$171,635 $165,105
========= ========= =========
========= =========
Coverage of combined fixed charges
and preferred dividends 2.66 2.63 2.75
2.74 2.39
==== ==== ====
==== ====
62
</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 1996
through 1992 on a fully consolidated basis are as follows.
<CAPTION>
For The Year Ended
December 31,
- ---------------------------------------------------------
1996 1995 1994
1993 1992
--------- --------- ---------
--------- ---------
(Thousands of
Dollars)
<S> <C> <C> <C>
<C> <C>
Net income before cumulative effect
of accounting change $236,960 $94,391 $227,162
$241,579 $200,760
Taxes based on income 80,386 43,731 93,953
62,145 79,481
--------- --------- ---------
--------- ---------
Income before taxes and cumulative effect
of accounting change 317,346 138,122 321,115
303,724 280,241
--------- --------- ---------
--------- ---------
Fixed charges:
Interest charges 231,029 238,724 224,514
221,312 226,453
Interest factor in rentals 23,943 26,685 9,938
9,257 6,599
--------- --------- ---------
--------- ---------
Total fixed charges 254,972 265,409 234,452
230,569 233,052
--------- --------- ---------
--------- ---------
Nonutility subsidiary capitalized interest (649) (529) (521)
(2,059) (2,200)
--------- --------- ---------
--------- ---------
Income before income taxes, cumulative
effect of accounting change and
fixed charges $571,669 $403,002 $555,046
$532,234 $511,093
======== ======== ========
======== ========
Coverage of fixed charges 2.24 1.52 2.37
2.31 2.19
==== ==== ====
==== ====
Preferred dividend requirements $16,604 $16,851 $16,437
$16,255 $14,392
--------- --------- ---------
--------- ---------
Ratio of pre-tax income to net income 1.34 1.46 1.41
1.26 1.40
--------- --------- ---------
--------- ---------
Preferred dividend factor $22,249 $24,602 $23,176
$20,481 $20,149
--------- --------- ---------
--------- ---------
Total fixed charges and preferred dividends $277,221 $290,011 $257,628
$251,050 $253,201
======== ======== ========
======== ========
Coverage of combined fixed charges
and preferred dividends 2.06 1.39 2.15
2.12 2.02
==== ==== ====
==== ====
63
</TABLE>
Exhibit 21 Subsidiaries of the Registrant
- ---------- ------------------------------
The Company has one wholly owned nonutility subsidiary company, Potomac
Capital Investment Corporation (PCI), which was incorporated in Delaware in
1983. Effective April 30, 1996, the Company reorganized its nonutility
subsidiaries and contributed its investment in PEPCO Enterprises, Inc. (PEI)
to PCI.
64
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 17, 1997 appearing in the Annual Report to
shareholders which is incorporated 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.
February 28, 1997
65
Report of Independent Accountants on Consolidated
- -------------------------------------------------
Financial Statement Schedule
- ----------------------------
January 17, 1997
To the Board of Directors of
Potomac Electric Power Company
Our audits of the consolidated financial statements referred to in our report
dated January 17, 1997 appearing in the 1996 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.
66
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
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
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 14, 1995, and prior to the close
of business on December 12, 1996, through their conversion, in
accordance with their terms, into shares of its common stock:
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 219,926,222 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 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
THIRD: The number of shares of the corporation so cancelled is
573 itemized as follows:
CLASS SERIES NUMBER OF SHARES
Serial Preferred
Stock $2.44 Convertible
Series of 1966 573
FOURTH: The number of shares which the corporation has
authority to issue after giving effect to such cancellation is
219,925,649, 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 5,953
$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 123,875,670
itemized as follows:
CLASS SERIES NUMBER OF SHARES
Common Stock - 118,500,021
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 5,953
$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 $387,282,471
and $1,010,424,927.80, respectively.
DATED: December 17, 1996
POTOMAC ELECTRIC POWER COMPANY
By /s/ D. R. WRAASE
Dennis R. Wraase
Senior Vice President and
Chief Financial Officer
[Corporate Seal]
Attest:
/s/ ELLEN SHERIFF ROGERS
Ellen Sheriff Rogers
Secretary
DISTRICT OF COLUMBIA, ss.:
I, Lisa A. Poole, a Notary Public, do hereby certify that on
this 17th day of December, 1996, personally appeared before me
Dennis R. Wraase, who, being by me first duly sworn, declared that
he is Senior Vice President and Chief Financial Officer of Potomac
Electric Power Company, that he signed the foregoing document as
Senior Vice President 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] My commission expires: 7-31-97
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 573, itemized as follows:
CLASS SERIES NUMBER OF SHARES
Serial Preferred
Stock $2.44 Convertible
Series of 1966 573
THIRD: The total number of authorized shares of the
corporation remaining after giving effect to such reduction
is 219,925,649, 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 5,953
$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 16, 1996.
DATED: December 17, 1996
POTOMAC ELECTRIC POWER COMPANY
By /s/ D. R. WRAASE
Dennis R. Wraase
Senior Vice President and
Chief Financial Officer
[Corporate Seal]
Attest:
/s/ ELLEN SHERIFF ROGERS
Ellen Sheriff Rogers
Secretary
Exhibit 13
Financial Information
- ---------------------
Potomac Electric Power Company and Subsidiary
Contents
- --------
Management's Discussion and Analysis of
Consolidated Results of Operations and
Financial Condition...................................... 2
Report of Independent Accountants.......................... 28
Consolidated Statements of Earnings........................ 29
Consolidated Balance Sheets................................ 30
Consolidated Statements of Cash Flows...................... 32
Notes to Consolidated Financial Statements................. 33
Selected Consolidated Financial Data....................... 72
Explanation of Graphic Material..................... Appendix A
1
Management's Discussion and Analysis of Consolidated
Results of Operations and Financial Condition
- ----------------------------------------------------
PROPOSED MERGER UPDATE
- ----------------------
Shareholders of Potomac Electric Power Company (the Company,
PEPCO) and Baltimore Gas and Electric Company (BGE), at separate
special meetings during March 1996, approved a proposed merger
(the Merger) to form Constellation Energy Corporation
(Constellation Energy). The Company and BGE filed a joint
Application for Authorization and Approval of the Merger with the
Federal Energy Regulatory Commission (FERC) on January 11, 1996,
and with the Maryland and District of Columbia Public Service
Commissions on April 8, 1996. On July 31, 1996, FERC set the
application for hearing on the issue of whether the Merger would
impact competition. Hearings began on October 21, 1996, and the
Administrative Law Judge certified the record to the Commission
on October 25, 1996. The case was placed before FERC for
decision in December 1996. The Maryland Commission conducted
hearings during June, September and December 1996. The case was
placed before the Maryland Commission for decision in January
1997. A prehearing conference was conducted by the District of
Columbia Commission in May 1996 and a procedural schedule was
published in July 1996. The hearings, which were originally
scheduled to take place in December 1996, have been rescheduled
for February 1997. The case is expected to be before the
District of Columbia Commission for decision in March 1997. The
Nuclear Regulatory Commission has approved the transfer of BGE's
ownership interest in the operating licenses for the two
generating units at the Calvert Cliffs Nuclear Power Plant to
Constellation Energy at the effective time of the Merger. In
addition, the State Corporation Commission of Virginia has
approved the Merger. The Merger also requires approval from the
Pennsylvania Public Utility Commission. Completion of the
approval process is expected to take until the end of the first
quarter of 1997.
The combination of the Company and BGE will create a larger,
stronger company better able to maintain the low costs which will
be essential to compete effectively in the future, and better
able to contribute to economic and job development in the area.
The Merger will result in lower operating costs than either
company could produce alone. Over the first 10 years following
the Merger, Constellation Energy expects to achieve net merger-
related savings of $1.3 billion. The allocation of the net
savings between customers and shareholders of Constellation
Energy will be determined in regulatory proceedings. The
applications set forth the proposed plans for Constellation
Energy to share the benefits of the Merger with customers in the
District of Columbia and Maryland. The proposal includes: 1) a
freeze on base electric rates until at least January 1, 2000, 2)
2
a unique bill credit for all customers if Constellation Energy
achieves certain financial targets, 3) an array of economic
development incentives and 4) programs to address the energy
needs of low-income customers. At December 31, 1996, the Company
has deferred $29 million in costs related to the Merger.
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 1996. Fuel and purchased energy,
capacity purchase payments and other operating expenses were 53%
of total revenue. The Company's 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
1994 through 1996 for the Company and PCI.
The Company's earnings for common stock during 1996 totaled
$220.4 million, as compared to $77.5 million in 1995. As set
forth below, utility earnings per share increased from $1.70 in
1995 to $1.72 in 1996 and consolidated earnings increased from
$.65 to $1.86 in 1996. The 1995 nonutility subsidiary results
reflect noncash, nonrecurring charges of $1.04 related to PCI's
May 1995 plan with respect to the aircraft leasing business.
- -----------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------
Utility Operations $1.72 $1.70 $1.63
Nonutility Subsidiary .14 (1.05) .16
----- ----- -----
Consolidated $1.86 $ .65 $1.79
===== ===== =====
- -----------------------------------------------------------------
The average number of common shares outstanding at December 31,
1996, was relatively unchanged from December 31, 1995.
3
UTILITY
- -------
RESULTS OF OPERATIONS
- ---------------------
Total Revenue
- -------------
The changes in total revenue are shown in the following table.
- -----------------------------------------------------------------
Increase (Decrease)
from Prior Year
1996 1995 1994
- -----------------------------------------------------------------
(Millions of Dollars)
Change in kilowatt-hour sales $(11.5) $ 27.2 $(18.7)
Change in base rate revenue 27.0 42.8 32.2
Change in fuel adjustment clause
billings to cover cost of
fuel and interchange and
capacity purchase payments (4.5) (39.3) 73.2
Change in other revenue 1.4 1.1 1.5
------ ------ ------
Change in Operating Revenue 12.4 31.8 88.2
------ ------ ------
Change in interchange deliveries 121.8 21.2 9.7
------ ------ ------
Change in Total Revenue $134.2 $ 53.0 $ 97.9
====== ====== ======
- -----------------------------------------------------------------
The $27 million change in 1996 base rate revenue compared to
1995 reflects the continued effects of a 1995 $27.9 million rate
increase in the District of Columbia (effective in July 1995) and
an increase of $17.7 million associated with the Company's Demand
Side Management (DSM) surcharge in Maryland, which includes a $.2
million increase in the conservation incentive provision of the
tariff for achieving specified 1995 Maryland energy goals.
The increase in base rate revenue in 1995 as compared to
1994 reflects the effects of a District of Columbia rate increase
of $27.9 million and the continued effect of a 1994 rate increase
in the District of Columbia. In addition, 1995 base rate revenue
reflects an increase of $28 million associated with the Company's
DSM surcharge in Maryland, which includes a $3.7 million increase
in the conservation incentive provision of the tariff for
achieving specified 1994 Maryland energy goals.
4
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. In
addition, 1994 base rate revenue reflects $5 million associated
with the conservation incentive provision of the DSM surcharge
tariff for achieving specified 1993 Maryland energy goals.
Increases in 1996 and 1995 revenue from interchange
deliveries reflect the growth in the number of companies involved
in power sales tariff interchange transactions, predominantly
where the Company buys energy from one party for the purpose of
selling that energy to a third party. Interchange deliveries in
1996, 1995 and 1994 also reflect changes in levels and pricing of
energy delivered to the Pennsylvania-New Jersey-Maryland
Interconnection Association (PJM). The benefits derived from
interchange deliveries are passed through to the Company's
customers through a fuel adjustment clause.
5
Kilowatt-hour Sales
- -------------------
- -----------------------------------------------------------------
1996 1995
vs. vs.
1996 1995 1994 1995 1994
- -----------------------------------------------------------------
(Millions of Kilowatt-hours)
By Customer Type
Residential 6,869 6,707 6,574 2.4% 2.0%
Commercial 11,712 11,861 11,685 (1.3) 1.5
U.S. Government 3,902 3,998 4,010 (2.4) (.3)
D.C. Government 847 879 914 (3.6) (3.8)
Wholesale 2,570 2,465 2,363 4.3 4.3
------ ------ ------
Total energy sales 25,900 25,910 25,546 - 1.4
====== ====== ======
Interchange
Energy deliveries 7,063 1,784 800 - -
====== ====== ======
By Geographic Area
Maryland, including
wholesale 15,763 15,594 15,251 1.1 2.2
District of Columbia 10,137 10,316 10,295 (1.7) .2
------ ------ ------
Total energy sales 25,900 25,910 25,546 - 1.4
====== ====== ======
- -----------------------------------------------------------------
Kilowatt-hour sales in 1996 remained relatively unchanged
from 1995. Kilowatt-hour sales were affected by a .6% increase
in the average number of customers and increased usage of
electricity during the blizzard-like conditions in the first
quarter of 1996, which brought a record amount of snowfall to the
Washington, D.C. area, and were partially offset by decreased
usage of electricity during the summer months due to the cooler
than average summer weather of 1996. Cooling degree hours were
19% and 17% below the 1995 and 20-year average, respectively.
Kilowatt-hour sales increased 1.4% in 1995 resulting in part from
a 1% increase in customers. Cooling degree hours in 1995
remained relatively stable as compared to 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 1996 summer peak demand of 5,288 megawatts occurred on
June 17, 1996. This compares with the 1995 summer peak demand of
5,732 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
6,716 megawatts. In addition, the Company had approximately 265
megawatts available from its dispatchable energy use management
programs to meet the 1996 summer peak demand. Based on average
weather conditions, the Company estimates that its peak demand
will grow at a compound annual rate of approximately 1.5%. The
1995-1996 winter season peak demand of 4,831 megawatts was 3.6%
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
- -----------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------
(Millions of Dollars)
Fuel expense $327.8 $355.4 $392.7
------ ------ ------
Purchased energy
PJM receipts 114.6 79.4 108.8
Other purchases 221.4 114.2 64.6
------ ------ ------
Total purchased energy 336.0 193.6 173.4
------ ------ ------
Fuel and purchased energy $663.8 $549.0 $566.1
====== ====== ======
Capacity purchase payments $125.8 $125.8 $127.8
====== ====== ======
- -----------------------------------------------------------------
Net System Generation and Purchased Energy were as follows.
- -----------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------
(Millions of Kilowatt-hours)
Net system generation 18,041 19,234 19,320
====== ====== ======
Purchased energy 16,157 9,755 8,356
====== ====== ======
- -----------------------------------------------------------------
7
The 1996 decrease in fuel expense reflects a decrease of
6.2% in net generation, partially offset by an increase in the
system average fuel cost summarized below. 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
relatively high 1994 fuel expense reflects increased generation
and use of major cycling and peaking generation units which burn
higher cost fuels, especially during January 1994 when severe
cold weather sent demand for electricity to a new winter peak.
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)
1996 89.7 6.9 3.4 $1.62 $3.55 $2.92 $1.80
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
- -----------------------------------------------------------------
The 1996 system average unit fuel cost increased by
approximately 3% which was primarily the result of the increase
in the cost of residual oil and an increase in the percent of
residual oil contribution to the fuel mix. The decrease of
approximately 11% in the 1995 system average unit fuel cost
compared with the 1994 system average resulted from increased use
of lower-cost coal and gas and decreased net generation. The
Company's major cycling and certain peaking units can burn either
natural gas or oil, adding flexibility in selecting the most
cost-effective fuel mix. The decrease in the percent of gas
burned in 1996 reflects the increased price of gas and the
increased usage of lower-cost coal. The increase in the percent
of gas burned in 1995 reflects the decreased price of gas and the
increased price of oil.
The Company's generating and transmission facilities are
interconnected with those of other members of the PJM power pool
and other utilities. The pricing of PJM-dispatched internal
economy energy transactions is currently based upon "split
savings" whereby such energy is priced 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 (See Restructuring of the Bulk Power Market
discussion below).
8
In addition to interchange with PJM, the Company is actively
participating in the emerging bilateral energy sales marketplace.
The Company's wholesale power sales tariff allows both sales from
Company-owned generation and sales of energy purchased by the
Company from other market participants. Over 40 utilities and
marketers have executed service agreements allowing them to
arrange purchases under this tariff. The Company has also
executed service agreements allowing it to purchase energy under
other market participants' power sales tariffs. These agreements
greatly expand the opportunities for economic transactions.
During 1996, the Company entered into purchases, sales and
purchase-for-resale agreements producing approximately $11
million in savings that are passed along to customers.
Throughout 1996, the Company purchased energy from Ohio
Edison under the Company's 1987 long-term capacity purchase
agreements with Ohio Edison and Allegheny Power System (APS), and
from the Northeast Maryland Waste Disposal Authority under an
avoided cost-based purchase agreement for a 32-megawatt
Montgomery County Resource Recovery Facility. 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. Capacity payments for
the Montgomery County Resource Recovery facility are not expected
to commence until after the year 2000. In August 1996, the
Company began purchasing energy from the Panda Brandywine L.P.
(Panda) facility, pursuant to a 25-year power purchase agreement
for 230 megawatts of capacity supplied by a gas-fueled combined-
cycle cogenerator. The Panda facility achieved full commercial
operation in October 1996. Capacity payments under this
agreement commence in January 1997. The capacity expense under
these agreements, including an allocation of a portion of Ohio
Edison's fixed operating and maintenance costs, totaled $120
million in 1996. Commitments under these agreements are
estimated at $141 million in 1997, $139 million in 1998, $200
million in 1999 and 2000 and $211 million in 2001.
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 approximately $5.5 million per year.
9
In January 1996, the Company filed an open access
transmission tariff with the FERC, which was amended in July
1996, in compliance with FERC's Order No. 888. The service
agreement under this tariff has been signed by a number of
utilities and power marketers throughout the country, and these
entities are now eligible to purchase transmission service from
the Company. This tariff would be suspended by the proposed PJM
poolwide transmission tariff.
The Company began selling capacity to GPU, Inc. in October
1996 in the amount of 100 megawatts during both October and
November 1996 and 90 megawatts for December 1996. Capacity sales
are expected to continue during 1997.
As electricity becomes more actively traded as a commodity,
the bulk power market is developing methods for traders to hedge
against price volatility. New York Mercantile Exchange (NYMEX)
futures contracts for electricity began trading in 1996 for
delivery at the California-Oregon border and at Palo Verde
Substation in Arizona. The NYMEX predicts that an east coast
contract will be introduced in 1997 which will have greater
relevance to transactions in the mid-Atlantic marketplace. In
addition, some market participants are using customized
instruments to hedge prices for both capacity and energy. Such
instruments include forward contracts to fix prices, options to
set ceilings or floors on prices and contracts-for-differences to
exchange variable prices for a fixed price. The proposed mid-
Atlantic energy market is expected to feature a secondary market
in transmission congestion hedging. In the future, the Company
expects to participate in the hedging markets as part of its
strategy to control costs and avoid unreasonable risks. In some
instances, as part of its overall bulk power marketing activity,
the Company may offer to sell hedging instruments.
Other Operation and Maintenance Expenses
- ----------------------------------------
Other operation and maintenance expenses totaled $314.9 million
for 1996. These expenses decreased by $2 million (.6%) in 1996,
including the $1.8 million and $.9 million paid on January 5,
1996, and June 7, 1996, respectively, to union members as part of
the 1995 Labor Agreement between the Company and Local 1900 of
the International Brotherhood of Electrical Workers. These
expenses increased by $18.2 million (6.1%) in 1995, including
$15.2 million related to the December 1994 sale and leaseback of
the Company's control center system, and decreased by $2.8
million (.9%) in 1994. The Company's budget and cost control
disciplines have resulted in a 13% decline in the number of
Company employees since 1993. In addition, utility operating
results were affected by a nonrecurring charge of $7.4 million in
January 1995 for one-time operating costs associated with the
10
Company's successful Voluntary Severance Program, which has
provided annual savings in operating and construction costs of
approximately $15 million. Bad debt expense, as a percent of
revenue was .4% in 1996, 1995 and 1994. At December 31, 1996,
accounts receivable included $12.4 million, or 5.2% of
outstanding receivables, due from agencies of the District of
Columbia for electric service and maintenance, of which $7
million, or 2.9% of outstanding receivables, was in arrears. As
of January 29, 1997, the District of Columbia accounts receivable
balance had been reduced to $8.2 million due to receipt of
additional payments. The Company believes that amounts owed 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 $17.5 million
(8.5%), $25.5 million (14.2%) and $16.4 million (10%) in 1996,
1995 and 1994, 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 1996, 1995 and 1994, reflects
higher taxable operating income. Other taxes decreased by $2.3
million (1.2%) and $3.4 million (1.6%) in 1996 and 1995,
respectively, and increased by $4.8 million (2.4%) in 1994. The
decreases in 1996 and 1995 reflect the reduction in county fuel-
energy tax rates. The increase in 1994 reflects changes in the
levels of operating revenue and plant investment upon which taxes
are based.
Other Income, Allowance for Funds Used During Construction and
Capital Cost Recovery Factor, and Utility Interest Charges
- --------------------------------------------------------------
Other income reflects net earnings (loss) from PCI of $16.9
million in 1996, $(124.4) million in 1995 and $19.1 million in
1994. 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. Other income also reflects credits for the equity
components of the Allowance for Funds Used During Construction
(AFUDC) accrued on the Company's Construction Work In Progress
expenditures not in rate base and the Capital Cost Recovery
Factor (CCRF) accrued on certain pollution control expenditures
related to Clean Air Act compliance. AFUDC equity totaled $1.4
million in 1996, $1.5 million in 1995 and $9.1 million in 1994;
CCRF equity credits totaled $5.2 million in 1996, $4.7 million in
1995 and $3.5 million in 1994. In addition, other income
includes, in "Other, net", CCRF accruals on unamortized District
of Columbia DSM costs not in rate base, totaling $8.8 million in
11
1996, $4.8 million in 1995 and $4.1 million in 1994. "Other,
net" in 1994 also reflects a total after-tax reduction of
approximately $4.1 million associated with District of Columbia
Public Service Commission decisions. These include 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.
Utility interest charges were relatively stable during the
three-year period 1994 through 1996, notwithstanding changes in
the 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 7.68% at the beginning of 1994 to 7.48% at the end
of 1996. Utility interest charges were offset by both the debt
component of AFUDC which totaled $3.9 million in 1996, $7.5
million in 1995 and $9.6 million in 1994; and by the debt
component of Clean Air Act CCRF which totaled $3.6 million in
1996, $3.3 million in 1995 and $2.5 million in 1994. Total AFUDC
decreased by $9.7 million in 1995, primarily due to the control
center system which came on-line in December 1994.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
The Company's total investment in property and plant, at original
cost, was $6.3 billion at year-end 1996. Investment in property
and plant construction, net of AFUDC and CCRF, was $685.9 million
for the period 1994 through 1996.
Internally generated cash from utility operations, after
dividends, totaled $386.4 million for the period 1994 through
1996. Sales of First Mortgage Bonds, Medium-Term Notes and
Common Stock during the period 1994 through 1996 provided a total
of $605 million. During the years 1994 through 1996, the Company
retired $292.3 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 1997 through 1999, capital resources
of $250.4 million ($152.4 million in 1997) 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 $825 million is expected to be available
from depreciation and amortization charges and income tax
deferrals over the three-year period of which approximately $275
million is the 1997 portion.
12
In December 1996, the Company sold $100 million principal
amount of Medium-Term Notes. Proceeds were applied to reduce
short-term debt and to fund ongoing construction and operating
activities. 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.
Total annualized interest costs for all utility long-term
debt outstanding at December 31, 1996, was $133 million, compared
with $127.9 million and $123.7 million at December 31, 1995 and
1994, respectively.
The Company entered into a sale (at cost) and leaseback
agreement for its new control center system (system) in December
1994. 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 $16.6 million in 1996,
$16.9 million in 1995 and $16.4 million in 1994. The embedded
cost of preferred stock was 6.41% at December 31, 1996, 6.43% at
December 31, 1995, and 6.53% at December 31, 1994.
The Company's capitalization ratios (excluding nonutility
subsidiary debt), at December 31, 1996, are presented below.
- -----------------------------------------------------------------
Excluding Including
Amounts Due Amounts Due
In One Year In One Year
- -----------------------------------------------------------------
Long-term debt 45.1% 42.0%
Redeemable serial preferred stock 3.6 3.4
Serial preferred stock 3.2 3.0
Common equity 48.1 44.9
Short-term debt and amounts due in
one year - 6.7
----- -----
Total capitalization 100.0% 100.0%
===== =====
- -----------------------------------------------------------------
13
Year-end 1996 outstanding utility short-term indebtedness
totaled $131.4 million compared with $258.5 million and $189.6
million at the end of 1995 and 1994, respectively.
The Company maintains 100% line of credit back-up for its
outstanding commercial promissory notes, which was unused during
1996, 1995 and 1994.
Conservation
- ------------
The Company's demand side management (DSM) and energy use
management (EUM) programs are designed to curb growth in demand
in order to defer the need for construction of additional
generating capacity and to cost-effectively increase the
efficiency of energy use. To reduce the near-term upward
pressure on customer rates and bills, the Company has, since
1994, phased out several conservation programs and reduced rebate
levels for others. 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. In a June 1995
order, the Public Service Commission of the District of Columbia
adopted a DSM spending cap for the four-year period 1995 through
1998. The Company continues to manage its existing portfolio of
DSM programs to ensure that the costs of these programs do not
exceed the spending limit. In December 1996, the Company
announced the suspension of the New Building Design Program in
the District of Columbia because current commitments for rebates
are projected to reach the spending limit for commercial
programs. In addition, the Company has not accepted new
applications in the Custom Rebate Program since its suspension in
November 1994. Remaining allowable expenditures under the DSM
spending cap totaled $15 million at December 31, 1996. The
Company expects to realize approximately 80% of the previously
estimated benefits from its demand side management programs for
approximately 45% of the previously estimated costs.
During 1996, the Company invested approximately $27 million
in Maryland DSM programs. The Company recovers the costs of
Maryland DSM programs through a base rate surcharge which
amortizes costs over a five-year period and permits the Company
to earn a return on its DSM investment while receiving
compensation for lost revenue. In addition, when energy savings
exceed annual goals, the Company earns a bonus. The Company was
awarded a bonus of $8.9 million in 1996, based on 1995
performance, which followed bonuses of $8.7 million in 1995,
based on 1994 performance and $5 million in 1994, based on 1993
performance. Maryland DSM program goals for 1996 have been
reduced to reflect lower DSM expenditures. Consequently, the
performance bonus in 1997 is expected to be significantly lower
than amounts awarded for performance in prior years.
14
Investment in District of Columbia DSM programs totaled
approximately $18 million in 1996. These DSM 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 DSM costs prudently incurred since June 30,
1993; prior to this decision, DSM 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 updated
annually in the spring of each year, while the Clean Air Act
component is updated quarterly. On June 3, 1996, the Company
filed an application with the District of Columbia Public Service
Commission requesting approval for an updated conservation
component to reflect the recoverable DSM costs expended during
1995. The proposed rate is expected to increase annual revenue
by approximately $8 million. No action has been taken by the
District of Columbia Public Service Commission on the proposed
surcharge rate.
In 1996, approximately 160,000 customers participated in
continuing EUM 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 derived from time-
of-use rates.
It is estimated that peak load reductions of nearly 700
megawatts have been achieved to date from DSM and EUM programs
and that additional peak load reductions of approximately 400
megawatts will be achieved in the next five years. The Company
also estimates that, in 1996, energy savings of more than 1.6
billion kilowatt-hours have been realized through operation of
its DSM and EUM programs. During the next five years, the
Company's projected costs for conservation programs that
encourage the efficient use of electric energy and reduce the
need to build new generating facilities total $330 million ($55
million in 1997).
Construction and Generating Capacity
- ------------------------------------
Construction expenditures, excluding AFUDC and CCRF, are
projected to total $1.2 billion for the five-year period 1997
through 2001, which includes $18 million of estimated Clean Air
Act expenditures. In 1997, construction expenditures are
projected to total $215 million, which includes $4 million of
estimated Clean Air Act expenditures. The Company plans to
finance its construction program primarily through funds provided
by operations. Actual construction expenditures during the
15
period 1997 through 2001 may vary from projections once the
Merger with BGE becomes effective.
A 32-megawatt municipally financed resource recovery
facility in Montgomery County, Maryland, began commercial
operation in August 1995. The Company has been purchasing energy
under the agreement covering this project without capacity
payment obligations, which are not expected to commence until
after the year 2000. In addition, the Company has a 25-year
agreement with Panda for a 230-megawatt gas-fueled combined-cycle
cogeneration project in Prince George's County, Maryland. The
project has been completed and the Panda facility achieved full
commercial operation in October 1996. 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 Acid Rain portion 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
installed 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 $18 million over the next five
years. Plans for complying with the second phase of the CAA are
being reviewed in anticipation of the pending Merger with BGE.
If economical, continued use of lower-sulfur coal, cofiring with
natural gas and the purchase of sulfur dioxide (SO2) emission
allowances is expected. Nitrogen oxides emissions reductions
will be achieved by installing control equipment in the most
cost-effective manner after considering the characteristics of
each of the merged company's boilers. In addition to the Acid
Rain portion of the CAA, the State of Maryland and District of
Columbia are required, by Title I of the CAA, to achieve
compliance with ambient air quality standards for ground-level
ozone. This provision is likely to result in further nitrogen
oxides emissions reductions from the Company's boilers; however,
the extent of reductions and associated cost cannot be estimated
at this time.
16
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. As of December 31, 1996,
there are no base rate proceedings filed nor pending approval by
any of the Company's retail or wholesale regulatory commissions.
Annual base rate increases (decreases) which became
effective during the period 1994 through 1996 are shown below.
- -----------------------------------------------------------------
District
of
Year Total Maryland Columbia Wholesale
- -----------------------------------------------------------------
(Millions of Dollars)
1996 $(2.0) $ - $ - $(2.0)
1995 30.2 - 27.9 2.3
1994 29.3 - 26.7 2.6
----- ----- ----- -----
$57.5 $ - $54.6 $ 2.9
===== ===== ===== =====
- -----------------------------------------------------------------
Maryland
- --------
Pursuant to a settlement agreement, base rate revenue was
increased by $27 million, or 3%, effective November 1, 1993. In
connection with the settlement agreement, no determination was
made with respect to rate of return. The rate of return on
17
common stock equity most recently determined for the Company in a
fully litigated rate case was 12.75% established by the
Commission in a June 1991 rate increase order.
Effective August 27, 1996, the Maryland DSM surcharge tariff
was increased, providing approximately $18 million annually in
increased revenue. The surcharge includes provisions for the
recovery of lost revenue, amortization of pre-1996 actual program
expenditures plus the initial amortization of 1996 projected
program costs, a capital cost recovery factor of 9.46% on
unamortized balances and an incentive of $8.9 million awarded for
exceeding 1995 energy saving goals. Previously, incentives of
$8.7 million and $5 million were awarded for exceeding 1994 and
1993 energy saving goals, respectively. Maryland DSM program
goals for 1996 have been reduced to reflect lower DSM
expenditures. Consequently, the performance bonus in 1997 is
expected to be significantly lower than amounts awarded for
performance in prior years.
On November 8, 1996, the Company filed a request with the
Maryland Public Service Commission for approval of a purchased
capacity surcharge, which is designed to recover changes in the
level of purchased capacity costs from levels included in base
rates. The filing was made to recover capacity payments under
the Panda contract, which commenced January 1, 1997. The
estimated 1997 Maryland portion of these payments is $10.5
million. On January 8, 1997, the Maryland Public Service
Commission suspended the Company's request for a period of 90
days from January 8, 1997, or until the date of a Commission
Order in the Joint Application for Authorization and Approval of
the Merger with BGE, whichever comes first. The District of
Columbia portion of the Panda capacity costs will be recovered
through the existing fuel adjustment clause.
District of Columbia
- --------------------
In Formal Case No. 939, the Commission, in June 1995, authorized
a $27.9 million, or 3.8%, increase in base rate revenue effective
July 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 DSM 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 DSM program expenditures, through a billing
surcharge. Costs will be amortized over 10 years, with a return
18
on unamortized amounts by means of a capital cost recovery factor
computed at the authorized rate of return. The initial rate,
which reflects actual costs expended from July 1993 through
December 1994, resulted in additional annual revenue of
approximately $15 million. 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. On
June 3, 1996, the Company filed an Application for Authority with
the Commission to revise its ECRR. The proposed rate, which
reflects actual costs expended during 1995, is expected to
increase annual revenue by approximately $8 million. No action
has been taken by the District of Columbia Public Service
Commission on the revised ECRR. Subsequent rate updates are
scheduled to 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). Remaining allowable expenditures under the spending
cap totaled $15 million at December 31, 1996. Pre-July 1993 DSM
costs receive base rate treatment.
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. Pursuant to
a new agreement with SMECO for the years 1996 through 1998, a
rate reduction of $2 million from the 1995 rate level became
effective January 1, 1996, with an additional $2.5 million rate
reduction scheduled to become effective January 1, 1998. SMECO
has agreed not to give the Company a notice of reduction or
termination of service 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 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
19
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.
Pursuant to an August 1995 order in a generic proceeding
dealing with electric industry structure and the advent of
competition, the Maryland Public Service 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. In October 1996, the
Maryland Commission reopened a generic proceeding to review
regulatory and competitive issues affecting the electricity
industry. The Commission cited the evolving nature of the
electric industry as the basis for continuing its investigation.
As part of this investigation, the Commission directed its Staff
to submit a report on or before May 31, 1997, containing, among
other things, recommendations regarding regulatory and
competitive issues facing the electric industry in Maryland. The
Commission also directed the four major electric utilities in
Maryland to prepare unbundled cost studies and model unbundled
retail service tariffs prior to August 1, 1997. The District of
Columbia Public Service Commission initiated a proceeding to
investigate issues regarding electricity industry structure and
competition in late 1995. In September 1996, the Commission
issued an order designating the issues to be examined in the
proceeding. Initial comments regarding the designated issues
were filed with the Commission in January 1997, with reply
comments due in February 1997.
Based on the regulatory framework in which it operates, the
Company currently applies the provisions of Statement of
Financial Accounting Standards (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.
20
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 April 1996, the FERC issued its Final Rulemaking Orders No.
888 and No. 889. Both rulemakings address achieving greater
competition in the wholesale energy market. Order No. 888
required utilities to file open access transmission tariffs by
July 9, 1996. Such filing was made by the Company and was
accepted by the FERC. Order No. 889 requires utilities to
establish or participate in an Open Access Same-Time Information
System (OASIS) which requires transmission owners to post certain
transmission availability, pricing and service information on an
open-access communications medium such as the Internet. On
January 3, 1997, the Company's OASIS became operational and is
accessible through the PJM OASIS on the Internet. Order No. 889
also required the Company to establish a code of conduct that
complies with FERC's prescribed standards in order to separate
utilities' transmission system operations and wholesale marketing
functions. The Company's filed code of conduct became effective
on January 3, 1997.
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 member companies plan to implement significant
market-oriented changes in 1997, 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. On July 24, 1996, nine of the 10 PJM member
companies (the Supporting Companies), excluding PECO Energy
Company (PECO), filed, with the FERC, a comprehensive proposal
including the contracts and tariff that would establish an
Independent System Operator (ISO) to administer transmission
service under a PJM control area transmission tariff and operate
the energy market in a manner that assures comparable treatment
for all participants. Under the Supporting Companies' proposal,
reliability of the pool will be maintained under an installed
capacity obligation. The ISO will administer a bid-priced energy
spot market that will also accommodate bilateral transactions,
and the ISO will provide transmission service on a poolwide
21
basis. In early August 1996, PECO filed a competing plan
opposing certain key features of the Supporting Companies'
proposal.
On November 13, 1996, the FERC found that it could not
accept either the Supporting Companies' proposal or PECO's
opposing proposal. Consequently, FERC ordered the PJM members to
amend its proposals to comport with Order No. 888 on ISOs and to
attempt to reach a consensus with other stakeholders. If PJM
members could not comply with this order by December 31, 1996,
FERC required, at a minimum, that PJM file a poolwide pro forma
open access transmission tariff by December 31, 1996, and amend
existing PJM pooling agreements for compatibility with the Order.
On December 31, 1996, the PJM member companies filed a joint
response to FERC's Order. This compliance filing, if accepted,
establishes a single poolwide transmission tariff and modifies
the membership and governance provisions of the PJM agreement.
The PJM members noted areas of disagreement in the filing and
indicated that the compliance filing was an interim solution
until a more comprehensive proposal could be developed. These
changes are not expected to have a material effect on the
operating results of the Company.
NEW ACCOUNTING STANDARDS
- ------------------------
Effective January 1, 1996, the Company adopted SFAS No. 121
entitled "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." 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. Adoption of this pronouncement
did not have a material impact on the Company's consolidated
financial statements.
SFAS No. 123 entitled "Accounting for Stock-Based
Compensation" also became effective as of January 1, 1996. This
pronouncement encourages companies to recognize compensation
expense for the fair value of stock-based compensation but
permits accounting under Accounting Principles Board Opinion No.
25 entitled "Accounting for Stock Issued to Employees" so long as
the pro forma effects, as if the new standard had been applied,
are disclosed in the notes to financial statements. The
Company's use of stock-based compensation is limited and adoption
of this pronouncement did not have a material impact on the
consolidated financial statements.
22
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 1996, the
Company was participating in environmental assessments and
cleanups under these laws at three federal Superfund sites and a
private party site as a result of litigation. While the total
cost of remediation at these sites may be substantial, the
Company shares liability with other potentially responsible
parties. Based on the information known to the Company at this
time, management is of the opinion that resolution of these
matters will not have a material effect on the results of
operations or financial position of the Company.
See the discussion included in Note (13) of the Notes to
Consolidated Financial Statements, Commitments and Contingencies,
for additional information.
NONUTILITY SUBSIDIARY
- ---------------------
RESULTS OF OPERATIONS
- ---------------------
PCI's earnings for 1996 were $16.9 million ($.14 per share),
compared with a net loss of $124.4 million ($1.05 per share) in
1995 and net earnings of $19.1 million ($.16 per share) in 1994.
During 1996, PCI continued the execution of the plan adopted in
May 1995 with respect to the aircraft equipment leasing business.
PCI's losses in 1995 reflect the implementation of the plan which
resulted in noncash, after-tax charges of $122.2 million ($1.04
per share) during 1995. Under the plan, PCI is not making new
investments to increase the size of the aircraft portfolio and 13
aircraft were designated for sale over 18 to 24 months from the
date the plan was announced. The book values of these aircraft
were reduced to their estimated net realizable values of
approximately $104 million and no depreciation or routine accrual
for repair and maintenance expenditures for these aircraft have
been recorded since the plan was adopted. During 1996, eight of
these aircraft were sold and one was placed on a long-term lease.
Additional losses on assets held for disposal, recorded primarily
in the first quarter of 1996, totaled $12.7 million ($8.3 million
after-tax). The remaining portfolio of assets held for disposal
was $10.3 million as of December 31, 1996.
23
During the fourth quarter of 1995, PCI formed a joint
venture with an affiliate of a major institutional investor to
assist with the disposition and management of 19 portfolio
aircraft. PCI contributed 11 aircraft from its portfolio of
aircraft held for disposal, eight additional aircraft under long-
term leases and a portfolio of preferred stocks to the joint
venture. All of the assets of the venture are fully consolidated
in PCI's financial statements with the outside investor's portion
reflected as a minority interest. During 1996, two aircraft were
sold from the joint venture during the first quarter, four
aircraft were sold during the second quarter and one aircraft was
sold during the third quarter. As a result of joint venture
operations in 1996, PCI's obligation for previously accrued
deferred income taxes was reduced, resulting in after-tax
earnings of $27.7 million, after provision for transaction costs.
The excess deferred income taxes were recognized as a reduction
of income tax expense. Future operations of the joint venture
may result in additional reversal of deferred income taxes.
PCI continues to hold and closely monitor its aircraft
leasing portfolio, with the objective of identifying future
opportunities for disposition of these investments on favorable
terms. Equipment values and sales opportunities may be affected
by future market conditions and events, including the
creditworthiness of PCI's lessees.
On December 1, 1996, Canadian Airlines (Canadian)
unilaterally announced a three-month suspension of lease payments
to its operating lessors. PCI has two aircraft on operating
lease to Canadian with a book value of $44 million at December
31, 1996. Canadian cites an anticipated temporary cash
deficiency in early 1997 as the reason for the suspension of
payments. Canadian intends to resume payment of rent beginning
in March 1997 and has requested no changes in the terms of its
leases with PCI. Canadian has proposed to repay PCI the total
deferred rent amount of $1.3 million in 10 equal quarterly
installments beginning October 1, 1998, with interest accrued at
a market rate. PCI expects to negotiate repayment terms with
Canadian.
As a result of the first quarter 1996 implementation of SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of", a pre-tax charge of
$9.6 million ($6.2 million after-tax) was recorded in the first
quarter of 1996 related to PCI's investment in solar electric
generating systems (SEGS) projects, reflecting revised first
quarter assumptions relating to the recoverability of the
investment. In addition, PCI recorded a pre-tax charge of $9
million ($5.9 million after-tax) in the first quarter of 1996 and
$1.9 million ($1.2 million after-tax) in the fourth quarter of
1996, reflecting current assessments of the net realizable values
of real estate and oil and natural gas investments.
24
PCI has limited partnership interests in five 30-megawatt
SEGS projects in the Mojave Desert in California. The Company
owns 22%, 10%, 19%, 31%, and 25% of SEGS projects III through
VII, respectively. The five SEGS power generation 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 agreements 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 avoided cost of generation.
The SEGS projects are scheduled to begin supplying electricity at
avoided cost energy rates at various times beginning in early
1997 through the end of 1998. 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, with respect to SEGS III and IV,
restructuring the associated non-recourse debt.
The lenders to SEGS III and IV filed suit against the SEGS
III and IV partnerships to restrain them from making
distributions of 1996 partnership profits. The trial in this
case was concluded in November 1996 and the parties are waiting
for a decision by the Court. The outcome is uncertain, and PCI
now expects that the losing party will appeal the court's
decision. An appeal is expected to take more than a year to be
concluded. Discussions with the SEGS III and IV lenders during
December 1996 have not resulted in any progress toward settlement
of the lawsuit or restructuring of the project loans. In light
of the continuing uncertainty associated with the SEGS III and IV
litigation and the recent lack of success in reaching a
negotiated settlement with the project lenders, PCI recorded an
additional $8.5 million pre-tax ($5.5 million after-tax) charge
in the fourth quarter, representing a write-off of its remaining
investment in SEGS III and IV. PCI's current projections of
future distributions from SEGS V, VI and VII indicate a recovery
of its remaining December 31, 1996, investment balance of $26.8
million.
PCI generates income primarily from its leasing activities
and securities investments. Income from leasing activity, which
includes rental income, gains on asset sales, interest income and
fees totaled $91.7 million in 1996, compared to $100.6 million in
1995 and $111.3 million in 1994. The decrease in 1996 income
from leasing activities over 1995 was primarily due to
nonrecurring fee income earned during 1995. PCI's marketable
securities portfolio contributed pre-tax income of $33.7 million
in 1996, compared with $36.1 million in 1995 and $35.1 million in
1994. The reductions since 1994 are primarily the result of the
decreasing size of the portfolio. Income from securities
included net realized gains from the sale or call of securities
of $3.6 million in 1996, $.4 million in 1995 and $.8 million in
1994.
25
Other income decreased in 1996 as compared to 1995 by $8.1
million primarily due to the previously discussed 1996 writedowns
of PCI's investments in SEGS, real estate and oil and natural
gas. On December 31, 1996, PCI sold its $2.8 million (20%
interest) in Advanced Separation Technologies, Inc. for an after-
tax gain of $6.7 million. Also included in other income during
1996 is $1.1 million in net income from PCI's investment in PEPCO
Enterprises, Inc. (PEI), a wholly owned subsidiary, which was
contributed to PCI by PEPCO during 1996. PEI has business
interests which include telecommunications, liquefied natural gas
storage facilities, underground cable construction and
maintenance services and an energy management services company.
Expenses, before income taxes, which include interest,
depreciation and operating, and administrative and general
expenses totaled $152.7 million in 1996, compared to $344.6
million in 1995 and $150.6 million in 1994. The decrease is
primarily the result of the second quarter 1995 pre-tax writedown
of $170.1 million related to the May 1995 plan with respect to
the aircraft equipment leasing business. In addition, expenses
before income taxes decreased during 1996, due to lower interest
expense resulting from less debt outstanding. Also, during the
second quarter of 1996, responsibility for certain repair and
maintenance expenses was assumed by a lessee. Accordingly, PCI
reversed $6.5 million of expenses accrued in prior periods.
PCI had income tax credits of $54.6 million in 1996,
compared to $85.7 million in 1995 and $22.7 million in 1994. The
decrease in income tax credits in 1996 from 1995 was due to lower
pre-tax income in 1995, primarily the result of the pre-tax
charge to earnings in May 1995.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
The $377.2 million securities portfolio, consisting
primarily of investment grade preferred stocks, provides PCI with
liquidity and investment flexibility. During 1996, PCI has
reduced its marketable securities portfolio by $153.1 million
primarily as the result of calls (approximately $82 million) and
sales of fixed rate preferred stocks, generating net pre-tax
gains of $3.6 million. PCI's fixed rate portfolio is sensitive
to fluctuations in interest rates. The decision to reduce the
size of the preferred stock portfolio was made to lessen the
impact of future fluctuations in interest rates, while still
maintaining a substantial portfolio for liquidity purposes. The
proceeds from the securities activity during 1996 were used to
pay down short-term debt. In addition, proceeds from aircraft
sales were also used to pay down short-term debt.
26
During the third quarter of 1996, PCI sold its investment in
an aircraft engine leasing subsidiary for its approximate book
value. As a result of the sale, PCI's investment in operating
lease equipment decreased by $32.7 million.
PCI's outstanding short-term debt totaled $51.7 million at
December 31, 1996, a decrease of $171.7 million from the $223.4
million outstanding at December 31, 1995, and an increase of $3.3
million from the $48.4 million outstanding at December 31, 1994.
During 1996, PCI issued $183 million in long-term debt, including
non-recourse debt, and debt repayments totaled $237.1 million.
At December 31, 1996, PCI had $236.3 million available under its
Medium-Term Note Program and $400 million available under its
committed bank credit facility.
27
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, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period
ended December 31, 1996, 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 17, 1997
28
<TABLE>
Consolidated Statements of Earnings
Potomac Electric Power Company and Subsidiary
<CAPTION>
- ------------------------------------------------------------------------------
- ---------------------------
For the
year ended December 31,
1996
1995 1994
- ------------------------------------------------------------------------------
- ---------------------------
(Thousands of Dollars)
<S> <C>
<C> <C>
Revenue (Note 2)
Operating revenue $ 1,834,857
$ 1,822,432 $ 1,790,600
Interchange deliveries 175,454
53,670 32,474
-----------
- ----------- -----------
Total Revenue 2,010,311
1,876,102 1,823,074
-----------
- ----------- -----------
Operating Expenses
Fuel 327,792
355,453 392,730
Purchased energy 335,978
193,592 173,384
-----------
- ----------- -----------
Fuel and purchased energy 663,770
549,045 566,114
Capacity purchase payments (Note 13) 125,786
125,769 127,822
Other operation 223,326
224,030 206,106
Maintenance 91,524
92,859 92,614
Depreciation and amortization 223,016
205,490 179,986
Income taxes (Note 4) 134,085
128,460 119,859
Other taxes (Note 5) 200,365
202,708 206,080
-----------
- ----------- -----------
Total Operating Expenses 1,661,872
1,528,361 1,498,581
-----------
- ----------- -----------
Operating Income 348,439
347,741 324,493
-----------
- ----------- -----------
Other Income (Loss)
Nonutility subsidiary (Note 15)
Income 114,966
134,493 147,006
Loss on assets held for disposal (12,744)
(170,078) -
Expenses, including interest and income taxes (85,328)
(88,812) (127,918)
-----------
- ----------- -----------
Net earnings (loss) from nonutility subsidiary 16,894
(124,397) 19,088
Allowance for other funds used during construction
and capital cost recovery factor 6,572
6,155 12,610
Other, net 4,458
682 (1,902)
-----------
- ----------- -----------
Total Other Income (Loss) 27,924
(117,560) 29,796
-----------
- ----------- -----------
Income Before Utility Interest Charges 376,363
230,181 354,289
-----------
- ----------- -----------
Utility Interest Charges
Interest on debt 146,939
146,558 139,210
Allowance for borrowed funds used during construction
and capital cost recovery factor (7,536)
(10,768) (12,083)
-----------
- ----------- -----------
Net Utility Interest Charges 139,403
135,790 127,127
-----------
- ----------- -----------
Net Income 236,960
94,391 227,162
Dividends on Preferred Stock 16,604
16,851 16,437
-----------
- ----------- -----------
Earnings for Common Stock $ 220,356
$ 77,540 $ 210,725
===========
=========== ===========
Average Common Shares Outstanding (000s) 118,497
118,412 118,006
Earnings Per Common Share <F1> $1.86
$.65 $1.79
Cash Dividends Per Common Share $1.66
$1.66 $1.66
<FN>
<F1>No material dilution would occur if all of the convertible preferred stock
and debentures were converted into common stock.
</FN>
29
</TABLE>
<TABLE>
Consolidated Balance Sheets
Potomac Electric Power Company and Subsidiary
<CAPTION>
- ------------------------------------------------------------------------------
- ---------------
December 31,
Assets 1996
1995
- ------------------------------------------------------------------------------
- ---------------
(Thousands
of Dollars)
<S> <C>
<C>
Property and Plant - at original cost (Notes 6 and 10)
Electric plant in service $ 6,232,049
$ 6,041,203
Construction work in progress 62,469
93,047
Electric plant held for future use 4,152
4,082
Nonoperating property 22,921
22,771
-----------
-----------
6,321,591
6,161,103
Accumulated depreciation (1,898,342)
(1,760,792)
-----------
-----------
Net Property and Plant 4,423,249
4,400,311
-----------
-----------
Current Assets
Cash and cash equivalents 2,174
5,844
Customer accounts receivable, less allowance for uncollectible
accounts of $1,298 and $1,669 128,600
137,456
Other accounts receivable, less allowance for uncollectible
accounts of $300 38,490
36,765
Accrued unbilled revenue (Note 1) 70,214
73,622
Prepaid taxes 34,202
36,255
Other prepaid expenses 4,613
7,562
Material and supplies - at average cost
Fuel 68,232
63,203
Construction and maintenance 69,541
70,497
-----------
-----------
Total Current Assets 416,066
431,204
-----------
-----------
Deferred Charges
Income taxes recoverable through future rates, net (Note 4) 238,467
244,181
Conservation costs, net 233,793
230,412
Unamortized debt reacquisition costs 55,552
58,360
Other 159,139
138,619
-----------
-----------
Total Deferred Charges 686,951
671,572
-----------
-----------
Nonutility Subsidiary Assets
Cash and cash equivalents 804
1,594
Marketable securities (Notes 11 and 15) 377,237
530,323
Investment in finance leases (Note 15) 484,972
438,795
Operating lease equipment, net of accumulated depreciation
of $117,705 and $79,275 (Note 15) 199,124
272,947
Assets held for disposal 10,300
104,370
Receivables, less allowance for uncollectible
accounts of $6,000 87,745
74,957
Other investments 193,002
176,418
Other assets 12,436
15,659
-----------
-----------
Total Nonutility Subsidiary Assets 1,365,620
1,615,063
-----------
-----------
Total Assets $ 6,891,886
$ 7,118,150
===========
===========
30
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
- ---------------
December 31,
Capitalization and Liabilities 1996
1995
- ------------------------------------------------------------------------------
- ---------------
(Thousands
of Dollars)
<S> <C>
<C>
Capitalization
Common equity (Note 7)
Common stock, $1 par value - authorized 200,000,000 shares,
issued 118,500,037 and 118,494,577 shares $ 118,500
$ 118,495
Premium on stock and other capital contributions 1,025,187
1,025,088
Capital stock expense (14,780)
(14,567)
Retained income 760,285
742,296
-----------
-----------
Total Common Equity 1,889,192
1,871,312
Preference stock, cumulative, $25 par value -
authorized 8,800,000 shares, no shares issued or outstanding -
-
Serial preferred stock (Notes 8 and 11) 125,298
125,325
Redeemable serial preferred stock (Notes 9 and 11) 142,500
143,485
Long-term debt (Notes 10 and 11) 1,767,598
1,817,077
-----------
-----------
Total Capitalization 3,924,588
3,957,199
-----------
-----------
Other Non-Current Liabilities
Capital lease obligations (Note 13) 162,936
165,235
-----------
-----------
Total Other Non-Current Liabilities 162,936
165,235
-----------
-----------
Current Liabilities
Long-term debt and preferred stock redemption
due within one year 152,445
26,280
Short-term debt (Note 12) 131,390
258,465
Accounts payable and accrued payroll 117,810
104,396
Capital lease obligations due within one year 20,772
20,772
Taxes accrued 23,362
19,111
Interest accrued 38,117
38,532
Customer deposits 24,119
23,372
Other 59,016
62,662
-----------
-----------
Total Current Liabilities 567,031
553,590
-----------
-----------
Deferred Credits
Income taxes (Note 4) 973,642
892,544
Investment tax credits (Note 4) 60,958
64,607
Other 35,658
35,089
-----------
-----------
Total Deferred Credits 1,070,258
992,240
-----------
-----------
Nonutility Subsidiary Liabilities
Long-term debt (Notes 10 and 11) 996,232
1,047,484
Short-term notes payable (Note 12) 51,650
223,350
Deferred taxes and other (Note 4) 119,191
179,052
-----------
-----------
Total Nonutility Subsidiary Liabilities 1,167,073
1,449,886
-----------
-----------
Commitments and Contingencies (Note 13)
Total Capitalization and Liabilities $ 6,891,886
$ 7,118,150
===========
===========
31
</TABLE>
<TABLE>
Consolidated Statements of Cash Flows
Potomac Electric Power Company and Subsidiary
<CAPTION>
- ------------------------------------------------------------------------------
- -----------------------------
For
the year ended December 31,
1996
1995 1994
- ------------------------------------------------------------------------------
- -----------------------------
(Thousands of Dollars)
<S> <C>
<C> <C>
Operating Activities
Income from utility operations $ 220,066
$ 218,788 $ 208,074
Adjustments to reconcile income to net cash
from operating activities:
Depreciation and amortization 223,016
205,490 179,986
Deferred income taxes and investment tax credits 81,496
51,774 44,641
Allowance for funds used during construction
and capital cost recovery factor (14,108)
(16,923) (24,693)
Changes in materials and supplies (4,073)
12,418 (13,883)
Changes in accounts receivable and accrued unbilled revenue 10,539
(15,822) (6,098)
Changes in accounts payable 13,624
(14,419) 8,257
Changes in other current assets and liabilities 5,859
(1,484) (6,760)
Changes in deferred conservation costs (49,404)
(104,796) (92,504)
Net other operating activities (48,674)
(45,664) 360
Nonutility subsidiary:
Net earnings (loss) 16,894
(124,397) 19,088
Deferred income taxes (36,398)
(49,697) 6,386
Loss on assets held for disposal 12,744
170,078 -
Changes in other assets and net other operating activities 36,258
83,509 47,648
-----------
----------- -----------
Net Cash From Operating Activities 467,839
368,855 370,502
-----------
----------- -----------
Investing Activities
Total investment in property and plant (194,036)
(230,675) (316,890)
Allowance for funds used during construction
and capital cost recovery factor 14,108
16,923 24,693
-----------
----------- -----------
Net investment in property and plant (179,928)
(213,752) (292,197)
Nonutility subsidiary:
Purchase of marketable securities (19,680)
(35,221) (127,335)
Proceeds from sale or redemption of marketable securities 167,528
27,846 82,444
Investment in leased equipment (3,056)
(154,766) (72,134)
Proceeds from sale or disposition of leased equipment 3,658
- 1,150
Proceeds from sale of assets 34,154
5,966 -
Purchase of other investments (22,998)
(3,818) (7,191)
Proceeds from sale or distribution of other investments 33,867
15,614 18,429
Investment in promissory notes (4,245)
(7,955) (542)
Proceeds from promissory notes 16,675
7,977 4,902
-----------
----------- -----------
Net Cash From (Used by) Investing Activities 25,975
(358,109) (392,474)
-----------
----------- -----------
Financing Activities
Dividends on common stock (196,612)
(196,469) (195,755)
Dividends on preferred stock (16,604)
(16,851) (16,437)
Issuance of common stock -
4,580 9,285
Redemption of preferred stock -
(78) (4,047)
Issuance of long-term debt 99,500
188,594 302,999
Reacquisition and retirement of long-term debt (26,320)
(117,465) (144,422)
Proceeds from sale and leaseback of control center system -
- 152,000
Short-term debt, net (127,075)
68,865 (105,015)
Other financing activities (5,358)
(23,611) (14,452)
Nonutility subsidiary:
Issuance of long-term debt 183,000
182,000 286,750
Repayment of long-term debt (237,102)
(275,021) (173,950)
Short-term debt, net (171,703)
174,950 (77,850)
-----------
----------- -----------
Net Cash (Used by) From Financing Activities (498,274)
(10,506) 19,106
-----------
----------- -----------
Net (Decrease) Increase In Cash and Cash Equivalents (4,460)
240 (2,866)
Cash and Cash Equivalents at Beginning of Year 7,438
7,198 10,064
-----------
----------- -----------
Cash and Cash Equivalents at End of Year (Note 14) $ 2,978
$ 7,438 $ 7,198
===========
=========== ===========
32
</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), the Company's
wholly owned subsidiary, was formed in 1983 to provide a
permanent vehicle for the conduct of the Company's ongoing
nonutility investment programs. Effective April 30, 1996, the
Company reorganized its nonutility subsidiaries whereby PEPCO
Enterprises, Inc. (PEI) became a subsidiary of PCI. 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, through PEI, which provide utility-
related telecommunication and energy services. In addition, PCI
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 the 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, principally 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.
33
Certain prior year amounts have been reclassified to conform
to the current year presentation.
A description of significant accounting policies follows.
Principles of Consolidation
- ---------------------------
The consolidated financial statements combine the financial
results of the Company and 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 of energy, and resales of purchased energy, to
other utilities and to power marketers. 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 is scheduled to be updated annually on June 1 to
recover 1995 and subsequent conservation expenditures, including
a capital cost recovery factor (CCRF), 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 CCRF, incentives,
34
applicable taxes and estimated lost revenue. The surcharge is
established annually in a collaborative process with the recovery
of lost revenue subject to an earnings test performed on a
quarterly basis.
Leasing Transactions
- --------------------
Income from PCI investments in direct finance and leveraged lease
transactions, in which PCI is an equity participant, is reported
using the financing method. In accordance with the financing
method, investments in leased property are recorded as a
receivable from the lessee to be recovered through the collection
of future rentals. For direct finance leases, unearned income is
amortized to income over the lease term at a constant rate of
return on the net investment. Income, including investment tax
credits on leveraged equipment leases, is recognized over the
life of the lease at a level rate of return on the positive net
investment.
PCI investments in equipment under operating leases are
stated at cost less accumulated depreciation, except that 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 1996, 1995 and 1994.
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
35
the District of Columbia. At December 31, 1996, unamortized
conservation costs totaled $96 million in Maryland and $138
million in the District of Columbia.
Allowance for Funds Used During Construction and Capital
Cost Recovery Factor
- --------------------------------------------------------
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
jurisdictional AFUDC capitalization rates are determined as
prescribed by the FERC. The effective capitalization rates were
approximately 7.4% in 1996, 7.9% in 1995 and 7.6% in 1994,
compounded semiannually.
In Maryland, the Company accrues a CCRF on the retail
jurisdictional portion of certain pollution expenditures related
to compliance with the Clean Air Act (CAA). The base for
calculating this return is the amount by which the Maryland
jurisdictional CAA expenditure balance exceeds the CAA balance
being recovered in base rates. The CCRF rate for Maryland is
9.46%. In the District of Columbia, the carrying costs of CAA
expenditures not in rate base are recovered through a base rate
surcharge.
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 Standards
- ------------------------
Effective January 1, 1996, the Company adopted SFAS No. 121
entitled "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." 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. Adoption of this pronouncement
did not have a material impact on the Company's consolidated
financial statements.
36
SFAS No. 123 entitled "Accounting for Stock-Based
Compensation" also became effective as of January 1, 1996. This
pronouncement encourages companies to recognize compensation
expense for the fair value of stock-based compensation but
permits accounting under Accounting Principles Board Opinion No.
25 entitled "Accounting for Stock Issued to Employees" as long as
the pro forma effects, as if the new standard had been applied,
are disclosed in the notes to financial statements. The
Company's use of stock-based compensation is limited and adoption
of this pronouncement did not have a material impact on the
consolidated financial statements.
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.
37
Total revenue for each year was comprised as shown below.
- -----------------------------------------------------------------
1996 1995 1994
--------------------------------------------------
Amount % Amount % Amount %
- -----------------------------------------------------------------
(Thousands of Dollars)
Sales of
Electricity
Residential $ 548,108 30.1 $ 543,532 30.0 $ 524,738 29.5
Commercial 852,497 46.7 848,892 46.8 834,323 46.8
U.S.
Government 250,422 13.7 252,144 13.9 254,030 14.2
D.C.
Government 51,565 2.8 52,105 2.9 56,655 3.2
Wholesale 122,149 6.7 117,117 6.4 113,318 6.3
---------- ----- --------- ----- ---------- -----
Total 1,824,741 100.0 1,813,790 100.0 1,783,064 100.0
===== ===== =====
Other electric
revenue 10,116 8,642 7,536
---------- ---------- ----------
Operating
revenue 1,834,857 1,822,432 1,790,600
Interchange
deliveries 175,454 53,670 32,474
---------- ---------- ----------
Total Revenue $2,010,311 $1,876,102 $1,823,074
========== ========== ==========
- -----------------------------------------------------------------
Sales of electricity include base rate revenue and fuel rate
revenue. Fuel rate revenue was $521.9 million in 1996, $526.6
million in 1995 and $557.4 million in 1994.
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.
38
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.
Interchange deliveries include power sales tariff
transactions, predominantly those where the Company buys energy
from one party for the purpose of selling that energy to a third
party. The benefits derived from 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 subsidiary. The
Program provides for benefits to be paid to eligible employees at
retirement based primarily upon years of service with the Company
and their compensation rates for the three years preceding
retirement. Annual provisions for accrued pension cost are based
upon independent actuarial valuations. The Company's policy is
to fund accrued pension costs.
Pension expense included in net income was $14.2 million in
1996, $13.9 million in 1995 and $14.3 million in 1994. The net
periodic pension cost was computed as follows.
- -----------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------
(Thousands of Dollars)
Service cost-benefits earned $11,400 $ 9,900 $10,800
Interest cost on projected
benefit obligation 30,600 28,400 26,800
Actual return on Program assets (38,200) (51,900) (4,600)
Differences between actual
and expected return on
Program assets and net
amortization 10,400 27,500 (18,700)
------- ------- -------
Pension cost $14,200 $13,900 $14,300
======= ======= =======
- ----------------------------------------------------------------
39
Program assets are stated at fair value and were comprised
of approximately 53% and 60% of cash equivalents and fixed income
investments and the balance in equity investments at December 31,
1996 and 1995, respectively. The following table sets forth the
Program's funded status and amounts recognized on the
Consolidated Balance Sheets.
- -----------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------
(Thousands of Dollars)
Actuarial present value of benefit obligations:
Program benefits:
Vested benefits $(322,000) $(295,700)
Nonvested benefits (49,400) (44,000)
--------- ---------
Accumulated benefit obligation $(371,400) $(339,700)
========= =========
Actuarial present value of projected
benefit obligation $(438,100) $(399,400)
Program assets at fair value 402,500 360,500
--------- ---------
Projected benefit obligation in excess of
Program assets (35,600) (38,900)
Unrecognized actuarial loss 68,700 55,600
Unrecognized prior service cost 14,900 16,300
Unrecognized net obligation at
January 1, 1987, being recognized
over 18 years 300 300
--------- ---------
Prepaid pension expense $ 48,300 $ 33,300
========= =========
- -----------------------------------------------------------------
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 1996 and 1995. The assumed long-
term rate of return on Program assets was 9% in 1996 and 1995.
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
40
benefits of these plans if they retire under the provisions of
the Company's 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
$10.9 million, $9 million and $8.7 million in 1996, 1995 and
1994, respectively. The following table sets forth the
components of the postretirement expense.
- -----------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------
(Thousands of Dollars)
Service cost-benefits attributable
to service during the year $ 2,800 $ 2,300 $ 2,600
Interest cost on accumulated
postretirement benefit obligation 5,300 4,500 4,200
Actual loss (return) on plan assets (1,300) (1,900) 200
Amortization of transition
obligation 2,100 2,100 2,500
Difference between actual and
expected return on plan assets
and net amortization 2,000 2,000 (800)
------- ------- -------
Net postretirement benefit cost $10,900 $ 9,000 $ 8,700
======= ======= =======
- -----------------------------------------------------------------
41
The following table sets forth the accumulated post-
retirement benefit obligation reconciled to the amounts
recognized on the Consolidated Balance Sheets.
- -----------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------
(Thousands of Dollars)
Accumulated postretirement
benefit obligation to
Retirees and dependents $(50,600) $(40,100)
Active employees fully eligible (5,600) (9,300)
Active employees not fully
eligible (19,500) (15,200)
-------- --------
Total accumulated postretirement
benefit obligation (75,700) (64,600)
Plan assets at fair value 9,800 7,800
-------- --------
Accumulated postretirement benefit
obligation in excess of plan assets (65,900) (56,800)
Unrecognized transition obligation 33,700 35,800
Unrecognized actuarial loss 33,400 23,100
-------- --------
Prepaid postretirement benefit
cost $ 1,200 $ 2,100
======== ========
- -----------------------------------------------------------------
The Company's obligation at December 31, 1996 and 1995, was
based on a discount rate of 7.5%, and a weighted average rate of
increase in future compensation levels of 4%. 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 $4 million to approximately
$79.7 million and the sum of the service cost and interest cost
for 1996 by approximately $.6 million.
In January 1996 and 1995, the Company funded the 1996 and
1995 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 1997, the 1997 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 1996 and 1995.
42
<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
- ---------------------------
- ------------------------------------------------------------------------------
- ---------------------
1996
1995 1994
- ------------------------------------------------------------------------------
- ---------------------
(Thousands of Dollars)
<S> <C> <C>
<C>
Utility current tax expense
Federal $ 47,235 $
68,492 $ 63,395
State and local 6,281
9,173 8,612
---------
- --------- ---------
Total utility current tax expense 53,516
77,665 72,007
---------
- --------- ---------
Utility deferred tax expense
Federal 74,762
48,339 42,070
State and local 10,383
7,084 6,221
Investment tax credits (3,649)
(3,649) (3,650)
---------
- --------- ---------
Total utility deferred tax expense 81,496
51,774 44,641
---------
- --------- ---------
Total utility income tax expense 135,012
129,439 116,648
---------
- --------- ---------
Nonutility subsidiary current tax expense
Federal (18,252)
(35,592) (29,315)
---------
- --------- ---------
Nonutility subsidiary deferred tax expense
Federal (36,373)
(50,116) 6,758
State and local -
- (138)
---------
- --------- ---------
Total nonutility subsidiary deferred tax expense (36,373)
(50,116) 6,620
---------
- --------- ---------
Total nonutility subsidiary income tax expense (54,625)
(85,708) (22,695)
---------
- --------- ---------
Total consolidated income tax expense 80,387
43,731 93,953
Income taxes included in other income (53,698)
(84,729) (25,906)
---------
- --------- ---------
Income taxes included in utility operating expenses $ 134,085 $
128,460 $ 119,859
=========
========= =========
43
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Consolidated Income Tax Expense
- -------------------------------------------------
- ------------------------------------------------------------------------------
- ---------------------
1996
1995 1994
- ------------------------------------------------------------------------------
- ---------------------
(Thousands of Dollars)
<S> <C> <C>
<C>
Income before income taxes $ 317,347 $
138,122 $ 321,115
=========
========= =========
Utility income tax at federal statutory rate $ 124,277 $
121,879 $ 113,653
Increases (decreases) resulting from
Depreciation 9,867
9,173 8,022
Removal costs (3,574)
(7,204) (4,086)
Allowance for funds used during construction 691
595 (2,411)
Other (3,117)
(1,613) (4,175)
State income taxes, net of federal effect 10,749
10,648 9,683
Tax credits (3,881)
(4,039) (4,038)
---------
- --------- ---------
Total utility income tax expense 135,012
129,439 116,648
---------
- --------- ---------
Nonutility subsidiary income tax at federal statutory rate (13,206)
(73,537) (1,262)
Increases (decreases) resulting from
Dividends received deduction (7,114)
(8,524) (8,487)
Reversal of previously accrued deferred taxes (30,804)
- (8,206)
Other (3,501)
(3,647) (4,602)
State income taxes, net of federal effect -
- (138)
---------
- --------- ---------
Total nonutility subsidiary income tax expense (54,625)
(85,708) (22,695)
---------
- --------- ---------
Total consolidated income tax expense 80,387
43,731 93,953
Income taxes included in other income (53,698)
(84,729) (25,906)
---------
- --------- ---------
Income taxes included in utility operating expenses $ 134,085 $
128,460 $ 119,859
=========
========= =========
</TABLE>
<TABLE>
<CAPTION>
Components of Consolidated Deferred Tax Liabilities (Assets)
- ------------------------------------------------------------
At December
31,
- ----------------------
1996
1995
- ----------------------
(Thousands of
Dollars)
<S> <C> <C>
Utility deferred tax liabilities (assets)
Depreciation and other book to tax basis differences $ 821,656 $
773,323
Rapid amortization of certified pollution control
facilities 24,816
26,640
Deferred taxes on amounts to be collected through
future rates 90,284
92,472
Property taxes 12,664
11,808
Deferred fuel (14,663)
(7,154)
Prepayment premium on debt retirement 21,025
22,080
Deferred investment tax credit (23,079)
(24,464)
Contributions in aid of construction (28,719)
(27,206)
Contributions to pension plan 16,170
10,859
Conservation costs (demand side management) 41,106
-
Other 21,653
25,124
---------
- ---------
Total utility deferred tax liabilities (net) 982,913
903,482
Current portion of utility deferred tax liabilities
(included in Other Current Liabilities) 9,271
10,938
---------
- ---------
Total utility deferred tax liabilities (net) - noncurrent $ 973,642 $
892,544
=========
=========
Nonutility subsidiary deferred tax liabilities (assets)
Finance leases $ 144,290 $
149,103
Operating leases 57,383
66,802
Reversal of previously accrued taxes related
to partnerships (7,455)
(11,593)
Alternative minimum tax (97,109)
(84,512)
Other (36,041)
(16,840)
---------
- ---------
Total nonutility subsidiary deferred tax liabilities (net),
(included in Deferred taxes and other) $ 61,068 $
102,960
=========
=========
44
</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, 1996
and 1995.
The Tax Reform Act of 1986 repealed the Investment Tax
Credit (ITC) for property placed in service after December 31,
1985, except for certain transition property. ITC previously
earned on utility property continues to be normalized over the
remaining service lives of the related assets.
The Company and its subsidiary file a consolidated federal
income tax return. The Company's federal income tax liabilities
for all years through 1992 have been finally determined. The
Company is of the opinion that the final settlement of its
federal income tax liabilities for subsequent years will not have
a material adverse effect on its financial position.
45
(5) Other Taxes
-----------
Taxes, other than income taxes, charged to utility operating
expenses for each period are shown below.
- -----------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------
(Thousands of Dollars)
Gross receipts $ 96,147 $ 95,158 $ 93,549
Property 69,234 64,991 60,443
Payroll 10,673 11,269 11,063
County fuel-energy 15,448 21,887 30,842
Environmental, use and
other 8,863 9,403 10,183
-------- -------- --------
$200,365 $202,708 $206,080
======== ======== ========
- -----------------------------------------------------------------
46
(6) Jointly Owned Generating Facilities
-----------------------------------
The Company owns a 9.72% undivided interest in the Conemaugh
Generating Station located near Johnstown, Pennsylvania,
consisting of two baseload units totaling 1,700 megawatts. The
Company and other utilities own the station as tenants in common
and share costs and output in proportion to their ownership
shares. Each owner has arranged its own financing relating to
its share of the facility. In 1996, the owners collectively
arranged for interim tax-exempt financing, pending completion of
long-term tax-exempt financing arrangements, pursuant to approval
by the Indiana County Industrial Development Authority relating
to certain pollution control facilities constructed at the
Conemaugh Station. Each owner separately entered into a loan
agreement for its share of the financing. 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 $88.7 million at December 31, 1996, and
$85.7 million at December 31, 1995, includes $.7 million and $1.3
million of Construction Work in Progress, respectively.
47
<TABLE>
(7) Common Equity
Changes in common stock, premium on stock and retained income are summarized
below.
<CAPTION>
- ------------------------------------------------------------------------------
- ---------
Common Stock Premium
Retained
Shares Par Value on Stock
Income
- ------------------------------------------------------------------------------
- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Balance, December 31, 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
Net income before net earnings
from nonutility subsidiary - - -
220,066
Nonutility subsidiary:
Net earnings - - -
16,894
Marketable securities net
unrealized loss, net of tax - - -
(5,755)
Dividends:
Preferred stock - - -
(16,604)
Common stock - - -
(196,612)
Conversion of preferred stock 3,239 3 25
-
Conversion of debentures 2,221 2 58
-
Other capital contributions - - 16
-
----------- ---------- -----------
- ----------
Balance, December 31, 1996 118,500,037 $ 118,500 $ 1,025,187 $
760,285
=========== ========== ===========
==========
48
</TABLE>
The Company's Shareholder Dividend Reinvestment Plan (DRP)
provides that shares of common stock purchased through the plan
may be original issue shares or, at the option of the Company,
shares purchased in the open market. The DRP permits additional
cash investments by plan participants limited to one investment
per month of not less than $25 and not more than $5,000.
As of December 31, 1996, 35,900 shares of common stock were
reserved for issuance upon the conversion of convertible
preferred stock, 2,769,412 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, 1996.
49
(8) Serial Preferred Stock
----------------------
The Company has authorized 11,125,649 shares of cumulative $50
par value Serial Preferred Stock. At December 31, 1996 and 1995,
there were outstanding 5,375,646 shares and 5,376,202 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 1996 1995
- -----------------------------------------------------------------
(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,
5,950 and 6,506 shares,
respectively $50.00 298 325
Auction Series A, 1,000,000 shares $50.00 50,000 50,000
-------- --------
$125,298 $125,325
======== ========
- -----------------------------------------------------------------
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,
1996, 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 556 shares in 1996, 1,676 shares in 1995 and 656 shares
in 1994.
Dividends on the Serial Preferred Stock, Auction Series A,
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 4.2% ($2.10) for the period December 1,
1996 through February 28, 1997. The average annual dividend
rates were 4.153% ($2.0765) in 1996 and 4.638% ($2.319) in 1995.
50
(9) Redeemable Serial Preferred Stock
---------------------------------
The outstanding series of $50 par value Redeemable Serial
Preferred Stock are shown below.
- -----------------------------------------------------------------
December 31,
1996 1995
- -----------------------------------------------------------------
(Thousands of Dollars)
$3.37 Series of 1987, 869,696 shares $ 43,485 $ 43,485
$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
-------- --------
143,485 143,485
Redemption Requirement due within one
year (985) -
-------- --------
$142,500 $143,485
======== ========
- ----------------------------------------------------------------
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,
which is reduced in succeeding years, equaling $50.98 beginning
June 1, 2003.
51
The shares of the $3.40 (6.80%) Series are subject to
mandatory redemption, at par, through the operation of a sinking
fund which will redeem 50,000 shares annually, beginning
September 1, 2002, with the remaining shares redeemed on
September 1, 2007. The shares are not redeemable prior to
September 1, 2002; thereafter, the shares are redeemable at par.
In the event of default with respect to dividends, or
sinking fund or other redemption requirements relating to the
serial preferred stock, no dividends may be paid, nor any other
distribution made, on common stock. Payments of dividends on all
series of serial preferred or preference stock, including series
which are redeemable, must be made concurrently.
The sinking fund requirements through 2001 with respect to
the Redeemable Serial Preferred Stock are $1 million in 1997,
$1.5 million annually in 1998 through 2000, and $9.8 million in
2001.
52
<TABLE>
(10) Long-Term Debt
<CAPTION>
Details of long-term debt are shown below.
- ------------------------------------------------------------------------------
- ------------------------
Interest
December 31,
Rate Maturity
1996 1995
- ------------------------------------------------------------------------------
- ------------------------
(Thousands of Dollars)
<S> <C> <C>
<C>
First Mortgage Bonds
Fixed Rate Series:
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
100,000 100,000
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 16,000
9% June 1, 2021
100,000 100,000
6% September 1, 2022
30,000 30,000
6-3/8% January 15, 2023
37,000 37,000
7-1/4% July 1, 2023
100,000 100,000
6-7/8% September 1, 2023
100,000 100,000
5-3/8% February 15, 2024
42,500 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 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 1,341,800
Convertible Debentures
5% September 1, 2002
115,000 115,000
7% January 15, 2018
65,367 66,747
Medium-Term Notes
6.25% May 28, 1996
- 25,000
6.66% to 6.73% May 1997
100,000 100,000
9.08% July and August 1997
50,000 50,000
6.53% December 17, 2001
100,000 -
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
1,947,167 1,873,547
Net unamortized discount
(28,109) (30,190)
Current portion
(151,460) (26,280)
- ---------- ----------
Net Utility Long-Term Debt
$1,767,598 $1,817,077
========== ==========
Nonutility Subsidiary Long-Term Debt
Varying rates through 2011 $
996,232 $1,047,484
========== ==========
53
</TABLE>
Utility Long-Term Debt
- ----------------------
The outstanding First Mortgage Bonds (bonds) are secured by a
lien on substantially all of the Company's property and plant.
Additional bonds may be issued under the mortgage as amended and
supplemented in compliance with the provisions of the indenture.
In December 1996, the Company issued $100 million of 6.53%
Medium-Term Notes. The proceeds were used to reduce short-term
debt and to fund ongoing construction and operating activities.
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, 1996, the applicable interest
rate is 7.867%. The applicable interest rate was 7.443% at
December 1, 1995, and 8.68% at December 1, 1994.
The 7% Convertible Debentures are convertible into shares of
common stock at a conversion price of $27 per share.
The 5% Convertible Debentures are convertible into shares of
common stock at a conversion rate of 29-1/2 shares for each
$1,000 principal amount.
The aggregate amounts of maturities for the Company's long-
term debt outstanding at December 31, 1996, are $151.5 million in
1997, $50 million in 1998, $45 million in 1999, $100 million in
2000 and $165 million in 2001.
Nonutility Subsidiary Long-Term Debt
- ------------------------------------
Long-term debt at December 31, 1996, consisted of $932.2 million
of recourse debt from institutional lenders maturing at various
dates between 1997 and 2003. The interest rates of such
borrowings ranged from 5% to 10.1%. The weighted average
interest rate was 7.44% at December 31, 1996, 7.66% at December
31, 1995, and 7.47% at December 31, 1994. Annual aggregate
principal repayments are $194 million in 1997, $300.7 million in
1998, $170 million in 1999, $115 million in 2000, $54 million in
2001 and $98.5 million thereafter.
54
Long-term debt also includes $64 million of non-recourse
debt, $36.1 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 $27.9 million is related to PCI's
majority-owned real estate partnerships of which $15.2 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%. An additional $4.7 million is payable in
quarterly installments, at a fixed interest rate of 7%, with
final maturity on December 31, 1999. The remaining non-recourse
real estate debt consists of $8 million payable in monthly
installments at a fixed rate of interest of 9.66% with final
maturity on October 1, 2011.
55
<TABLE>
(11) Fair Value of Financial Instruments
- ----------------------------------------
The estimated fair values of the Company's financial instruments at December 31,
1996,
and 1995 are shown below.
<CAPTION>
- ------------------------------------------------------------------------------
- ------------------
December 31,
1996
1995
- ------------------------------------------------------------------------------
- ------------------
Carrying Fair Carrying
Fair
Amount Value Amount
Value
----------- ----------- -----------
-----------
(Thousands of Dollars)
<S> <C> <C> <C>
<C>
Utility
Capitalization and Liabilities
Serial preferred stock $ 125,298 113,285 125,325
114,590
Redeemable serial
preferred stock $ 142,500 146,491 143,485
145,046
Long-term debt
First mortgage bonds $1,327,389 1,319,976 1,326,560
1,385,609
Medium-term notes $ 272,788 274,242 323,007
336,351
Convertible debentures $ 167,421 171,880 167,510
174,054
Nonutility Subsidiary
Assets
Marketable securities $ 377,237 377,237 530,323
530,323
Notes receivable $ 72,251 71,593 62,175
63,184
Liabilities
Long-term debt $ 996,232 1,011,814 1,047,484
1,071,354
- ------------------------------------------------------------------------------
- ------------------
56
</TABLE>
The methods and assumptions below were used to estimate, at
December 31, 1996 and 1995, 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, excluding amounts
due within one year, was based on quoted market prices or
discounted cash flows using current rates of preferred stock with
similar terms.
The fair value of PCI's Marketable Securities was based on
quoted market prices.
The fair value of PCI's Notes Receivable was based on
discounted future cash flows using current rates and similar
terms.
The fair value of PCI's long-term debt, including non-
recourse debt, was based on current rates offered to similar
companies for debt with similar remaining maturities.
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 5.3% to 6.0%.
The Company maintains a minimum 100% line of credit back-up
for its outstanding commercial promissory notes, which was unused
during 1996, 1995 and 1994.
57
Nonutility Subsidiary Short-Term Notes Payable
- ----------------------------------------------
The nonutility subsidiary's short-term financing requirements
have been satisfied principally through the sale of commercial
promissory notes.
The nonutility subsidiary maintains a minimum 100% line of
credit back-up for its outstanding commercial promissory notes,
which was unused during 1996, 1995 and 1994.
(13) Commitments and Contingencies
-----------------------------
Proposed Merger
- ---------------
The Company entered into an Agreement and Plan of Merger with
Baltimore Gas and Electric Company (BGE) in September 1995. 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. Preliminary estimates indicate that
savings from the combined utility systems will approximate $1.3
billion over 10 years following the Merger. These savings are
net of costs to achieve presently estimated to be approximately
$150 million. Approximately two-thirds of the projected savings
are expected to result from reduced labor costs, with the
remaining savings split between nonfuel purchasing and corporate
and administrative programs. The allocation of the net savings
between customers and shareholders of Constellation Energy will
be determined in regulatory proceedings. The applications for
approval of the Merger, filed with the various regulatory
commissions, set forth the proposed plans for Constellation
Energy to share the benefits of the Merger with customers in the
District of Columbia and Maryland. The proposal includes: 1) a
freeze on base electric rates until at least January 1, 2000, 2)
a unique bill credit for all customers if Constellation Energy
achieves certain financial targets, 3) an array of economic
development incentives, and 4) programs to address the energy
needs of low-income customers. The development of estimated
savings resulting from the Merger was based upon assumptions
58
which involve judgments with respect to, among other things,
future national and regional economic and competitive conditions,
inflation rates, regulatory treatment, weather conditions,
financial market conditions, interest rates, future business
decisions and other uncertainties, all of which are difficult to
predict and many of which are beyond the control of the Company
and BGE. Accordingly, while the Company believes that such
assumptions are reasonable for purposes of the development of
estimates of potential savings, there can be no assurance that
such assumptions will approximate actual experience or that all
such savings will be realized. At December 31, 1996, the Company
has deferred $29 million in costs related to the Merger.
Shareholders of the Company and BGE, at separate special
meetings on March 29, 1996, approved the Merger Agreement. The
Company and BGE filed a joint Application for Authorization and
Approval of the Merger with the FERC on January 11, 1996, and on
April 8, 1996, with the Maryland and District of Columbia Public
Service Commissions. On July 31, 1996, FERC set the application
for hearing on the issue of whether the Merger would impact
competition. Hearings began on October 21, 1996, and the
Administrative Law Judge certified the record to the Commission
on October 25, 1996. The case was placed before FERC for
decision in December 1996. The Maryland Commission conducted
hearings during June, September and December 1996. The case was
placed before the Maryland Commission for decision in January
1997. A prehearing conference was conducted by the District of
Columbia Commission in May 1996 and a procedural schedule was
published on July 19, 1996. The hearings, which were originally
scheduled to take place in December 1996, have been rescheduled
for February 1997. The case is expected to be before the
District of Columbia Commission for decision in March 1997. The
Nuclear Regulatory Commission has approved the transfer of BGE's
ownership interest in the operating licenses for the two
generating units at the Calvert Cliffs Nuclear Power Plant to
Constellation Energy at the effective time of the Merger. In
addition, the State Corporation Commission of Virginia has
approved the Merger. The Merger also requires approval from the
Pennsylvania Public Utility Commission. Completion of the
approval process is expected to take until the end of the first
quarter of 1997.
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
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
59
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, 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 for each year of
service, with a minimum of eight weeks of insurance coverage.
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 in December
1995. 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 provided 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 to be
paid 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 $16.2 million in
1996, $15.6 million in 1995 and $14.9 million in 1994. The
approximate annual commitments under all operating leases,
reduced by rentals to be received under subleases are $14.6
million in 1997, $7.8 million in 1998, $6.6 million in 1999, $5.4
million in 2000, $4.3 million in 2001 and a total of $6.2 million
in the years thereafter.
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
60
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 54% of the estimated system
coal requirements in 1997. Approximately 46% of the estimated
system coal requirements in 1997 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 agreements with Ohio Edison and APS, 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 Company also has a 25-year
agreement with Panda Brandywine L.P. (Panda) for 230 megawatts of
capacity supplied by a gas-fueled combined-cycle cogenerator,
which achieved full commercial operation in October 1996. The
Company began purchasing energy from the Panda facility in August
1996 and capacity payments under this agreement commence in
January 1997. The capacity commitment under these agreements,
including a share of Ohio Edison's fixed operating and
maintenance cost, are estimated at $141 million in 1997, $139
million in 1998, $200 million in 1999 and 2000, $211 million in
2001 and $1.7 billion in the years thereafter.
61
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
approximately $5.5 million per year. 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.
In November 1996, the Company filed a request with the
Maryland Public Service Commission for approval of a purchased
capacity surcharge designed to recover capacity payments under
the Panda contract, which commenced January 1, 1997, as well as
other changes in the level of purchased capacity costs from
levels included in base rates. The estimated 1997 Maryland
portion of these payments is $10.5 million. On January 8, 1997,
the Maryland Public Service Commission suspended the Company's
request for a period of 90 days from January 8, 1997, or until
the date of a Commission Order in the Joint Application for
Authorization and Approval for the Merger with BGE, whichever
comes first. The District of Columbia portion of the Panda
capacity costs will be recovered through the existing fuel
adjustment clause.
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.
In October 1994, a Remedial Investigation/Feasibility Study
(RI/FS) report was submitted to the U.S. Environmental Protection
Agency (EPA) with respect to a site in Philadelphia,
Pennsylvania. Pursuant to an agreement among the potentially
responsible parties (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 $.9 million as of December 31,
1996. The report included a number of possible remedies, the
estimated costs of which range from $2 million to $90 million.
In July 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
62
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.
In October 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.
In December 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. 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.
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
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 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.
63
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 initial filings in 1993, approximately 50
individual suits have been filed against 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. In 1995 and 1996, approximately 400
of the individual plaintiffs have dismissed their claims against
the Company. No payments were made by the Company in connection
with the dismissals. While the aggregate amount specified in the
remaining suits would exceed $400 million, 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.
64
(14) Supplemental Disclosure of Cash Flow Information
------------------------------------------------
Listed below is supplemental disclosure of cash flow information.
- -----------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------
(Thousands of Dollars)
Cash paid for:
Interest, net of capitalized
interest (including nonutility
subsidiary interest of $83,389,
$93,672 and $83,724) $216,967 $223,789 $203,013
Income taxes $ 28,555 $ 44,725 $ 51,368
- -----------------------------------------------------------------
For purposes of the consolidated financial statements, cash
and cash equivalents include cash on hand, money market funds and
commercial paper with original maturities of three months or
less.
65
(15) Selected Nonutility Subsidiary Financial Information
----------------------------------------------------
Selected financial information of the Company's consolidated,
wholly owned nonutility investment subsidiary, Potomac Capital
Investment Corporation (PCI) and its subsidiaries, is presented
below. Subsidiary equity at December 31, 1996, and December 31,
1995, was $196.3 million and $168.4 million, respectively. These
amounts include $1.1 million and $6.8 million of unrealized
appreciation, at December 31, 1996 and 1995, respectively,
relating to the marketable securities portfolio on an after-tax
basis. PCI paid a $9 million dividend to the parent Company in
1995.
- -----------------------------------------------------------------
For the year ended
December 31,
1996 1995 1994
- ----------------------------------------------------------------
(Thousands of Dollars)
Income
Leasing activities $ 91,661 $ 100,640 $111,262
Marketable securities 33,690 36,121 35,148
Other (10,385) (2,268) 596
-------- --------- --------
114,966 134,493 147,006
-------- --------- --------
Expenses
Interest 83,442 91,637 84,783
Administrative and general 15,529 10,479 10,259
Depreciation and operating 40,982 72,404 55,571
Loss on assets held for
disposal 12,744 170,078 -
Income tax credit (54,625) (85,708) (22,695)
-------- --------- --------
98,072 258,890 127,918
-------- --------- --------
Net earnings (loss) from
nonutility subsidiary $ 16,894 $(124,397) $ 19,088
========= ========= ========
66
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 95% of the
portfolio at December 31, 1996. Net unrealized gains and losses
on such securities are reflected, net of tax, in stockholder's
equity.
67
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
- -------------
December 31,
1996
1995
- -----------------------------------------------------------------
Net
Market Unrealized
Market
Cost Value Gain (Loss) Cost
Value
- ------------------------------------------------------------------------------
- -------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
<C>
Mandatory redeemable
preferred stock $ 375,595 $ 377,237 $ 1,642 $ 519,488
$ 530,115
Equity securities 3 - (3) 341
208
---------- ---------- ----------- ----------
- ----------
Total $ 375,598 $ 377,237 $ 1,639 $ 519,829
$ 530,323
========== ========== =========== ==========
==========
- ------------------------------------------------------------------------------
- -------------
68
</TABLE>
Included in net unrealized gains and losses are gross
unrealized gains of $9.9 million and gross unrealized losses of
$8.3 million at December 31, 1996, and gross unrealized gains of
$17.1 million and gross unrealized losses of $6.6 million at
December 31, 1995.
In determining gross realized gains and losses on sales or
maturities of securities, specific identification is used. Gross
realized gains were $4.7 million and $.8 million for 1996 and
1995, respectively. Gross realized losses were $1.1 million and
$.4 million for 1996 and 1995, respectively.
At December 31, 1996, the contractual maturities for
mandatory redeemable preferred stock are $7.1 million within one
year, $72.8 million from one to five years, $100.2 million from
five to 10 years and $195.6 million for over 10 years.
69
Leasing Activities
- ------------------
PCI's net investment in finance leases is summarized below.
- -----------------------------------------------------------------
December 31,
1996 1995
- -----------------------------------------------------------------
(Thousands of Dollars)
Rents receivable $711,961 $680,135
Estimated residual values 102,590 100,590
Less: Unearned and deferred income (329,579) (341,930)
-------- --------
Investment in finance leases 484,972 438,795
Less: Deferred taxes arising from
finance leases (144,667) (115,582)
-------- --------
Net investment in finance leases $340,305 $323,213
======== ========
- -----------------------------------------------------------------
Minimum lease payments receivable from finance leases,
primarily aircraft, for each of the years 1997 through 2001 are
$27.9 million, $33 million, $34.5 million, $37.3 million and
$36.7 million, respectively. Net income from leveraged leases
was $22.5 million in 1996, $11 million in 1995 and $5.6 million
in 1994.
Rent payments receivable from aircraft equipment operating
leases for each of the years 1997 through 2001 are $41 million in
1997, $33.6 million in 1998, $29.5 million in 1999, $26 million
in 2000 and $22 million in 2001.
During 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.
70
<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>
1996
Operating Revenue $ 385,272 462,705
614,357 372,523 1,834,857
Total Revenue $ 436,593 501,780
658,225 413,713 2,010,311
Operating Expenses $ 392,566 406,437
491,963 370,906 1,661,872
Operating Income $ 44,027 95,343
166,262 42,807 348,439
Net Income $ 14,734 72,253
138,687 11,286 236,960
Earnings for Common Stock $ 10,574 68,116
134,536 7,130 220,356
Earnings Per Common Share $ .09 .57
1.14 .06 1.86
Dividends Per Share $ .415 .415
.415 .415 1.66
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
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.
71
</TABLE>
<TABLE>
Stock Market Information
<CAPTION>
- ------------------------------------------------------------------------------
- ------------------------------------------------------
1996 High Low 1995
High Low
- ------------------------------------------------------------------------------
- ------------------------------------------------------
<S> <C> <C> <C>
<C> <C>
1st Quarter $27-3/8 $24-1/2 1st Quarter
$20-1/8 $18-3/8
2nd Quarter $26-5/8 $24-3/8 2nd Quarter
$22-1/2 $18-1/2
3rd Quarter $26-3/4 $24 3rd Quarter
$24-5/8 $20-1/2
4th Quarter $27-3/8 $23-5/8 4th Quarter
$26-1/4 $24
(Close $25-3/4) (Close
$26-1/4)
Shareholders at December 31, 1996: 89,620
- ------------------------------------------------------------------------------
- ------------------------------------------------------
</TABLE>
<TABLE>
Selected Consolidated Financial Data
<CAPTION>
- ------------------------------------------------------------------------------
- ------------------------------------------------------
1996 1995 1994
1993 1992 1991 1986
- ------------------------------------------------------------------------------
- ------------------------------------------------------
(Thousands
except Per Share Data)
<S> <C> <C> <C>
<C> <C> <C> <C>
Operating Revenue $1,834,857 1,822,432 1,790,600
1,702,442 1,562,167 1,552,066 1,370,542
Total Revenue $2,010,311 1,876,102 1,823,074
1,725,205 1,601,558 1,619,315 1,398,902
Operating Expenses $1,661,872 1,528,361 1,498,581
1,400,543 1,322,105 1,329,084 1,128,801
Net Earnings (Loss) from
Nonutility Subsidiary $ 16,894 (124,397) 19,088
25,101 28,161 23,351 26,729
Income Before Extraordinary Gain
and Cumulative Effect of Accounting
Change $ 236,960 94,391 227,162
241,579 200,760 210,164 206,053
Extraordinary Gain, Net of Income
Taxes $ - - -
- - - 21,680
Cumulative Effect of Accounting
Change, Net of Income Taxes $ - - -
- 16,022 - -
Net Income $ 236,960 94,391 227,162
241,579 216,782 210,164 227,733
Earnings for Common Stock $ 220,356 77,540 210,725
225,324 202,390 197,866 215,900
Average Common Shares Outstanding 118,497 118,412 118,006
115,640 112,390 105,911 94,255
Earnings (Loss) Per Common Share
Utility Operations $ 1.72 1.70 1.63
1.73 1.55 <F1> 1.65 2.01 <F2>
Nonutility Subsidiary $ 0.14 (1.05) .16
.22 .25 .22 .28
Consolidated $ 1.86 .65 1.79
1.95 1.80 <F1> 1.87 2.29 <F2>
Cash Dividends Per Common Share $ 1.66 1.66 1.66
1.64 1.60 1.56 1.18
Investment in Property and Plant $6,321,591 6,161,103 5,974,170
5,701,550 5,404,265 5,084,964 3,497,471
Net Investment in Property
and Plant $4,423,249 4,400,311 4,334,399
4,167,551 3,967,898 3,743,709 2,543,162
Utility Assets $5,526,266 5,503,087 5,327,606
5,036,737 4,515,403 4,211,556 2,961,261
Nonutility Subsidiary Assets $1,365,620 1,615,063 1,674,289
1,665,132 1,663,508 1,679,079 460,189
Total Assets $6,891,886 7,118,150 7,001,895
6,701,869 6,178,911 5,890,635 3,421,450
Long-Term Utility Obligations
(including redeemable preferred
stock) $1,910,098 1,960,562 1,866,962
1,736,621 1,727,609 1,662,157 1,071,942
- ------------------------------------------------------------------------------
- ------------------------------------------------------
<FN>
<F1>Includes $.14 as the cumulative effect of an accounting change for unbilled
revenue.
<F2>Includes $.23 as the effect of an extraordinary gain on sale of Virginia
service territory.
</FN>
72
</TABLE>
Appendix A
1. The Use of Revenue pie chart presents the following
information.
(Thousands of Dollars)
1996 Use of Revenue
-------------------
Fuel and Purchased Energy $ 663,770 33%
Wages and Benefits 174,210 9
Materials and Services 111,253 5
Capacity Purchase Payments 125,786 6
Taxes 335,913 17*
Depreciation and Amortization 223,016 11*
Interest 139,403 7*
Common Stock Dividends 196,612 10*
Preferred Stock Dividends 16,604 1*
Retained Income 23,744 1*
---------- ---
$2,010,311 100%
========== ===
*Plant-Related Costs
Appendix A
2. The Cooling Degree Hours bar chart presents the following
information.
% of
20-Year
Year Average
---- -------
1992 61%
1993 119%
1994 103%
1995 103%
1996 83%
Appendix A
3. The System Fuel Costs line chart presents the following
information.
Year Coal Oil Gas System
---- ---- --- --- ------
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
1996 1.62 3.55 2.92 1.80
Appendix A
4. The Construction Expenditures bar chart presents the
following information.
Construction Total
Expenditures Construction
(excluding Clean Air Expenditures
AFUDC, CCRF & Act (excluding
Year Clean Air Act) Expenditures AFUDC & CCRF)
---- --------------- ------------ -------------
Actual: 1992 $297 $30 $327
1993 232 63 295
1994 234 58 292
1995 187 27 214
1996 176 4 180
Forecast: 1997 211 4 215
1998 223 7 230
1999 235 - 235
2000 243 2 245
2001 275 5 280
P O T O M A C E L E C T R I C P O W E R C O M P A N Y
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned directors of
POTOMAC ELECTRIC POWER COMPANY (the "Company") hereby constitute and appoint
Edward F. Mitchell, John M. Derrick, Jr., William T. Torgerson, Dennis R.
Wraase, and Ellen Sheriff Rogers, and each of them, their true and lawful
attorneys and agents with full power and authority, in their names and on
their behalf, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or any of them, may deem
necessary or advisable to enable Potomac Electric Power Company to comply
with the Securities Exchange Act of 1934, as amended (the "Act"), and any
rules, regulations and requirements of the Securities and Exchange Commission
in respect thereof, in connection with the Company's Annual Report on Form
10-K for the year ended December 31, 1996, including the power and authority
to sign the names of the undersigned directors to said Annual Report on Form
10-K; and each of the undersigned hereby ratifies and confirms all that said
attorneys and agents, or any of them, shall do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, each of the undersigned has subscribed, or caused to
be subscribed, these presents this 27th day of February, 1997.
Signature
/s/ Roger R. Blunt
Director ___________________________________
ROGER R. BLUNT, SR.
/s/ A. J. Clark
Director ___________________________________
A. JAMES CLARK
/s/ H. L. Davis
Director ___________________________________
H. LOWELL DAVIS
/s/ Richard E. Marriott
Director ___________________________________
RICHARD E. MARRIOTT
/s/ David O. Maxwell
Director ___________________________________
DAVID O. MAXWELL
/s/ Floretta D. McKenzie
Director ___________________________________
FLORETTA D. McKENZIE
/s/ Ann D. McLaughlin
Director ___________________________________
ANN D. McLAUGHLIN
/s/ Peter F. O'Malley
Director ___________________________________
PETER F. O'MALLEY
/s/ Louis A. Simpson
Director ___________________________________
LOUIS A. SIMPSON
/s/ A. T. Young
Director ___________________________________
A. THOMAS YOUNG
<TABLE> <S> <C>
<ARTICLE> UT
<SUBSIDIARY>
<NUMBER> 1
<NAME> POTOMAC CAPITAL INVESTMENT CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,401,171
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 416,066
<TOTAL-DEFERRED-CHARGES> 686,951
<OTHER-ASSETS> 1,387,698
<TOTAL-ASSETS> 6,891,886
<COMMON> 118,500
<CAPITAL-SURPLUS-PAID-IN> 1,010,407
<RETAINED-EARNINGS> 760,285
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,889,192
142,500
125,298
<LONG-TERM-DEBT-NET> 1,767,598
<SHORT-TERM-NOTES> 8,090<F1>
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 123,300<F1>
<LONG-TERM-DEBT-CURRENT-PORT> 151,460
985
<CAPITAL-LEASE-OBLIGATIONS> 162,936
<LEASES-CURRENT> 20,772
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,499,755
<TOT-CAPITALIZATION-AND-LIAB> 6,891,886
<GROSS-OPERATING-REVENUE> 2,010,311
<INCOME-TAX-EXPENSE> 134,085
<OTHER-OPERATING-EXPENSES> 1,527,787
<TOTAL-OPERATING-EXPENSES> 1,661,872
<OPERATING-INCOME-LOSS> 348,439
<OTHER-INCOME-NET> 27,924
<INCOME-BEFORE-INTEREST-EXPEN> 376,363
<TOTAL-INTEREST-EXPENSE> 139,403
<NET-INCOME> 236,960
16,604
<EARNINGS-AVAILABLE-FOR-COMM> 220,356
<COMMON-STOCK-DIVIDENDS> 196,612
<TOTAL-INTEREST-ON-BONDS> 133,000<F2>
<CASH-FLOW-OPERATIONS> 467,839
<EPS-PRIMARY> $1.86
<EPS-DILUTED> 0<F3>
<FN>
<F1>Included on the Balance Sheet in the caption "Short-term debt."
<F2>Total annualized interest costs for all utility long-term debt outstanding
at December 31, 1996.
<F3>No material dilution would occur if all the convertible preferred stock and
debentures were converted into common stock.
</FN>
</TABLE>
