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, 1997 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 )
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. X .
---
As of March 3, 1998, Potomac Electric Power Company had 118,527,028
shares of its $1 par value Common Stock outstanding, and the aggregate market
value of these common shares (based upon the closing price of these shares on
the New York Stock Exchange on that date) held by nonaffiliates was
approximately $3 billion.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's 1997 Annual Report to shareholders are
incorporated by reference into Parts II and IV of this Form 10-K.
Portions of the Notice of Annual Meeting of Shareholders and Proxy
Statement, dated March 4, 1998, are incorporated by reference into Part III of
this Form 10-K.
2
POTOMAC ELECTRIC POWER COMPANY
Form 10-K - 1997
TABLE OF CONTENTS
PART I Page
Item 1 - Business ----
Termination of Proposed Merger...................................... 5
General ............................................................ 5
Sales .............................................................. 7
Capacity Planning .................................................. 8
Construction Program ............................................... 9
Fuel ............................................................... 11
Regulation ......................................................... 15
Rates .............................................................. 15
Competition ........................................................ 18
Environmental Matters .............................................. 19
Labor .............................................................. 24
Nonutility Subsidiary .............................................. 24
Item 2 - Properties .................................................. 26
Item 3 - Legal Proceedings ........................................... 27
Item 4 - Submission of Matters to a Vote of Security Holders ......... 27
PART II
Item 5 - Market for the Registrant's Common Equity and Related
Stockholder Matters ....................................... 28
Item 6 - Selected Financial Data ..................................... 28
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................. 29
Item 8 - Financial Statements and Supplementary Data ................. 29
Item 9 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure .................................. 29
PART III
Item 10 - Directors and Executive Officers of the Registrant ......... 30
Item 11 - Executive Compensation ..................................... 32
Item 12 - Security Ownership of Certain Beneficial Owners and
Management................................................ 32
Item 13 - Certain Relationships and Related Transactions ............. 32
PART IV
Item 14 - Exhibits, Financial Statement Schedule and Reports on
Form 8-K ................................................. 33
Schedule II - Valuation and Qualifying Accounts .................... 42
Signatures ........................................................... 43
Exhibit 11 - Computations of Earnings Per Common Share .......... 45
Exhibit 12 - Computation of Ratios .............................. 46
Exhibit 21 - Subsidiaries of the Registrant ..................... 48
Exhibit 23 - Consent of Independent Accountants ................. 48
Report of Independent Accountants on Consolidated Financial
Statement Schedule ............................................... 49
3
PAGE LEFT BLANK
INTENTIONALLY
4
Part I
- ------
Item 1 BUSINESS
- ------ --------
TERMINATION OF PROPOSED MERGER
- ------------------------------
On December 22, 1997, Potomac Electric Power Company (the Company,
PEPCO) and Baltimore Gas and Electric Company announced the cancellation of
their proposed merger (the Merger) to create Constellation Energy Corporation.
As a result, the Company recorded a $52.5 million non-operating charge ($32.6
million net of income tax or 28 cents per share) to write off its cumulative
deferred Merger-related costs.
While all necessary regulatory approvals had been received, the orders
of both the Maryland and the District of Columbia public service commissions
contained financial conditions that made it impossible for the two companies'
investors to share in the benefits of the proposed Merger. The regulatory plan
proposed by the companies had called for an equal sharing of the savings
between customers and shareholders. Both commission orders returned more than
the estimated total Merger savings to the customers. The companies tried
unsuccessfully to obtain timely reconsideration of these conditions but
concluded that a favorable outcome could not be expected within a reasonable
period, if at all.
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, and in other businesses through a nonutility subsidiary.
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 1997 and 1996.
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
1997, approximately 59% of the Company's revenue was derived from Maryland
sales (including wholesale) and 41% from sales in the District of Columbia.
About 29% of the Company's revenue was derived from residential customers, 64%
from sales to commercial and government customers and 7% from sales at
wholesale. Approximately 14% and 3% of 1997 revenue were derived from sales
to the U.S. and D.C. governments, respectively.
The Company holds valid franchises, permits and other rights adequate
for its business in the territory it serves, and such franchises, permits and
other rights contain no unduly burdensome restrictions.
5
The Company is a transmission-owning member of the Pennsylvania-New
Jersey-Maryland Interconnection LLC (PJM) pursuant to an agreement under which
its generating and transmission facilities are operated on an integrated basis
with those of the other PJM members in Pennsylvania, New Jersey, Maryland,
Delaware and a small portion of Virginia. The purpose of PJM is to operate a
wholesale energy market, improve the operating economy and reliability of the
systems in the group, and provide capital economies by permitting lower
reserve requirements than would be required on an individual basis. The
Company also has direct high voltage connections with the Potomac Edison
Company, a subsidiary of Allegheny Energy, Inc. (AEI, formerly Allegheny Power
System, Inc.), and Virginia Power, neither of which is a transmission owner in
PJM.
On November 25, 1997, the Federal Energy Regulatory Commission (FERC)
conditionally approved a PJM restructuring plan which, among other things,
reconstitutes the PJM staff as an independent system operator (ISO) and
provides for open access transmission service on a pool-wide basis. The ISO
began operation on January 1, 1998. The PJM pool-wide transmission tariff was
implemented on April 1, 1997; a revised version incorporating locational
pricing will become effective April 1, 1998. Benefits and/or costs derived
from the PJM market are passed through to the Company's customers through fuel
adjustment clauses and, accordingly, will not have a material effect on the
operating results of the Company.
Additional information concerning the restructuring of the bulk power
market is presented in Management's Discussion and Analysis incorporated by
reference in Item 7.
The Company has implemented, through an internal Task Force, a 4-phase
approach to accommodate the year 2000. The phases being addressed are:
Corporate Application Compliance which includes all large core business
systems; Business Partners' Systems and Vendor System Verification which is
intended to ensure all suppliers are in compliance with year 2000 processing;
End-user Computing Systems which are all systems which are not considered core
business systems but contain date calculations; and Non-Information Technology
Processes that include all operating and control systems. The Task Force has
developed a database to identify and track the progress of work on each phase.
The preliminary target date for overall completion of these phases is mid-
1999. The Company is required to charge to expense, as incurred, internal and
external costs specifically associated with modifying internal-use computer
software for the year 2000, in accordance with a July 1996 pronouncement of
the Emerging Issues Task Force of the Financial Accounting Standards Board.
The costs of expected modifications to be made, principally in the next two
years, will be approximately $10 million. The cost or consequences of a
material incomplete or untimely resolution of the year 2000 problem could
adversely affect future operations, financial results or financial condition
of the Company.
6
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.
1997 1996 1995
---------- ---------- ----------
Electric Energy Sales (Thousands of Kilowatt-hours)
---------------------
Kilowatt-hours Sold - Total 25,708,085 25,899,889 25,910,047
========== ========== ==========
By Class of Service -
Residential service 6,564,396 6,882,313 6,720,267
General service 15,307,001 15,185,506 15,448,416
Large power service (a) 698,185 686,713 703,416
Street lighting 166,251 163,536 162,897
Rapid transit 411,634 411,577 409,837
Wholesale 2,560,618 2,570,244 2,465,214
By Type of Customer -
Residential 6,551,773 6,868,516 6,706,775
Commercial 11,811,045 11,711,865 11,861,248
U.S. Government 3,934,440 3,902,378 3,998,052
D.C. Government 850,209 846,886 878,758
Wholesale 2,560,618 2,570,244 2,465,214
Electric Revenue (Thousands of Dollars)
----------------
Sales of Electricity - Total (b) $1,799,800 $1,824,741 $1,813,790
========== ========== ==========
By Class of Service -
Residential service $ 525,652 $ 549,147 $ 544,517
General service 1,073,585 1,076,602 1,075,142
Large power service (a) 35,476 35,667 36,183
Street lighting 12,925 12,469 12,555
Rapid transit 28,862 28,707 28,276
Wholesale 123,300 122,149 117,117
By Type of Customer -
Residential $ 524,695 $ 548,108 $ 543,532
Commercial 851,375 852,497 848,892
U.S. Government 249,341 250,422 252,144
D.C. Government 51,089 51,565 52,105
Wholesale 123,300 122,149 117,117
(a) Large power service customers are served at a voltage of 66KV or
higher.
(b) Exclusive of Other Electric Revenue (000s omitted) of $11,029 in
1997, $10,116 in 1996 and $8,642 in 1995.
7
The Company's sales of electric energy are seasonal, and, accordingly,
rates have been designed to closely reflect the daily and seasonal variations
in the cost of producing electricity, in part by raising summer rates and
lowering winter rates. Mild weather during the summer billing months of June
through October, when base rates are high to encourage customer conservation
and peak load shifting, has an adverse effect on revenue and, conversely, hot
weather during these months has a favorable effect.
The Company includes in revenue the amounts received for sales to other
utilities related to pooling and interconnection agreements. Amounts received
for such interchange deliveries are a component of the Company's fuel rates.
CAPACITY PLANNING
- -----------------
General
- -------
During the period 1998 through 2007 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. Plans to construct or purchase
additional future capacity may be affected by the ongoing efforts to introduce
competition for the supply of electricity in the jurisdictions being served by
the Company.
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. See the information concerning these programs presented in
Management's Discussion and Analysis incorporated by reference in Item 7.
Purchase of Capacity and Energy
- -------------------------------
The Company continues to purchase energy from Ohio Edison under the
Company's 1987 long-term capacity purchase agreements with Ohio Edison and
AEI. Pursuant to this agreement, the Company is purchasing 450 megawatts of
capacity and associated energy through the year 2005. 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. Capacity
payments under this agreement commenced in January 1997. In October 1997, the
Company restructured its agreement with Panda to resolve certain disputes
regarding capacity and energy payment rates for the facility. In exchange for
8
an adjustment in capacity payment rates and a reduction in the present value
of capacity payments over the term of the agreement, the Company accrued a
one-time payment to Panda of approximately $3.9 million at December 31, 1997.
Other features of the settlement allow Panda to broker sales of certain
amounts of the Company's system capacity from January 1998 through May 2000,
and to broker or sell energy from the Panda facility. Panda will pay the
Company for the right to broker capacity sales, as well as a fee based on
actual energy sales.
The Company also purchases energy from the Northeast Maryland Waste
Disposal Authority under an avoided cost-based purchase agreement for a 32-
megawatt Montgomery County Resource Recovery Facility. In November 1997, the
Company agreed to purchase the 32-megawatt rated capacity of this facility for
the period November 1, 1997 to December 31, 1998. This purchase facilitated
the sale of 35 megawatts of capacity to Northeast Utilities Service Company
(NUSCO).
The Company has a purchase agreement with SMECO, through 2015, for 84
megawatts of capacity supplied by a combustion turbine installed and owned by
SMECO at the Company's Chalk Point Generating Station. The Company is
responsible for all costs associated with operating and maintaining the
facility.
The Company sold capacity to PECO Energy Company in the amount of 150
megawatts during January 1997 and 100 megawatts for the period February
through May 1997; and to GPU, Inc. in the amount of 130 megawatts for the
period August 1, 1997, through December 31, 1997. In addition, the Company is
currently selling capacity to Delmarva Power & Light Company in the amount of
100 megawatts for the period June 1, 1997, through May 31, 1998. As noted
above, the Company is also selling 35 megawatts of capacity to NUSCO during
the period November 1, 1997 through December 31, 1998.
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, 1995, to December 31, 1997, the Company made property
additions, net of an Allowance for Funds Used During Construction (AFUDC) and
Capital Cost Recovery Factor (CCRF), of $611 million (of which $217 million
were made in 1997) and had property retirements of $110 million (of which $37
million were made in 1997).
In 1997, the Company reduced its projected 1997-2001 construction
program by $313 million, a 26% decrease. The Company's current construction
program calls for estimated expenditures, excluding AFUDC and CCRF, of $175
million in 1998, $180 million in 1999, $160 million in 2000 and 2001, and $170
million in 2002, an aggregate of $845 million for the five-year period. AFUDC
and CCRF are estimated to be $7 million in 1998, $6 million in 1999 and 2000,
$8 million in 2001 and $11 million in 2002. The 1998-2002 construction
program includes approximately $265 million for generating facilities
9
(including approximately $75 million for Clean Air Act compliance), $2 million
for transmission facilities, $575 million for distribution, service and other
facilities, and $3 million associated with the Company's EUM programs. The
Company plans to finance its construction program primarily through funds
provided by operations.
The construction program includes amounts for the construction of
facilities that will not be completed until after 2002. Although the program
includes provision for escalation of construction costs, generally at an
annual rate of 3%, 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 approximately $75 million over the next five years. 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 new boiler
burner controls and equipment at the Company's Dickerson Generating Station.
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.
Further, the U.S. Environmental Protection Agency (EPA) has issued proposed
rules for reducing interstate transport of ozone. These provisions are likely
to result in further nitrogen oxides emissions reductions from the Company's
boilers; however, the extent of reductions and associated costs cannot be
predicted at this time.
The Company owns a 9.72% undivided interest in the Conemaugh Generating
Station located in western Pennsylvania. Nitrogen oxides emissions reduction
equipment and flue gas desulfurization equipment have been installed at the
station for compliance with Phases I and II of the CAA. The Company's share
of 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 is being used to reduce CAA compliance costs at its other plants.
10
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 25-29 Cycling
Buzzard Point 16 29 Peaking
Potomac River 2/3 40-48 Cycling/Base
Dickerson 3/3 4-38 Base/Peaking
Chalk Point 2/2/7(b) 6-33 Base/Cycling/Peaking
Morgantown 2/6 24-27 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.
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 1997, 1996 and 1995 and the contribution, on the basis of
Btus, of each fuel to energy generated.
1997 1996 1995
-------------- -------------- --------------
% of % of % of
Quantity Btu Quantity Btu Quantity Btu
-------- ----- -------- ----- -------- -----
Coal
(000s net tons) 6,318 89.1 6,224 89.7 6,312 85.4
Residual oil
(000s barrels) 1,350 4.6 1,365 4.8 1,348 4.4
Natural gas
(000s dekatherms) 8,318 4.5 6,111 3.4 16,387 8.5
No. 2 fuel oil
(000s barrels) 564 1.8 657 2.1 580 1.7
11
The following table sets forth the average cost of each type of fuel
burned, for the years shown.
1997 1996 1995
------ ------ ------
Coal: per ton $42.82 $42.17 $41.84
per million Btu 1.65 1.62 1.60
Residual oil: per barrel 20.95 20.04 18.01
per million Btu 3.49 3.19 2.88
Natural gas: per dekatherm 2.87 2.92 2.10
per million Btu 2.87 2.92 2.10
No. 2 fuel oil: per barrel 26.96 25.34 23.71
per million Btu 4.63 4.34 4.06
The system average cost of fuel burned per million Btu was $1.84 in 1997
compared with $1.80 in 1996 and $1.74 in 1995. The increase of approximately
2% in the 1997 system average unit fuel cost compared with the 1996 system
average is attributed primarily to the increased unit cost of coal resulting
principally from an increased cost of railroad transportation. The increase
of approximately 3% in the 1996 system average unit fuel cost compared with
the 1995 system average 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 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 increase in the percent of gas burned in 1997
reflects the decreased price of gas and the decreased usage of higher-cost
oil. The decrease in the percent of gas burned in 1996 reflects the increased
price of gas and the increased usage of lower-cost coal.
12
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 either 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
------------------ ------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
Steam generation
Dual fuel units, capable
of burning coal, residual
oil or a combination of
coal and residual oil.... 17% 17% 18% 31% 33% 29%
Units capable of burning
coal only................ 28% 28% 28% 45% 45% 46%
Units capable of burning
residual oil only........ 8% 8% 8% -% 1% 1%
Units capable of burning
residual oil or natural
gas...................... 18% 18% 19% 4% 4% 6%
Combustion turbines
Units capable of burning
No. 2 fuel oil only...... 8% 8% 9% )
Units capable of burning ) 2% 1% 3%
No. 2 fuel oil or natural )
gas...................... 11% 11% 11% )
Purchased capacity........... 10% 10% 7% 18%(a) 16%(a) 15%(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
13
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, primarily expiring in the
period ranging from late-1998 to mid-1999, for aggregate annual deliveries of
approximately 3.2 million tons. Deliveries under these contracts are expected
to provide approximately 48% of the estimated system coal requirements in
1998. The balance of the Company's coal requirements will be purchased under
shorter-term agreements and on a spot basis from a variety of suppliers. Each
of the Company's 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. The Company plans to replace the contracts when they
expire with either short-term or spot agreements at favorable 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. This is for an interruptible supply
of natural gas with provisions for price review and monthly adjustment. No
term agreement exists to purchase natural gas for the Dickerson Generating
Station. The Company actively pursues spot market purchases of natural gas on
a monthly basis for its Chalk Point and Dickerson stations. 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.
14
REGULATION
- ----------
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). 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 investment 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 7.6% in 1997, 7.4% in 1996 and 7.9% in 1995, 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 base rates. The CCRF rate
for Maryland is 9%. In the District of Columbia, the carrying costs of CAA
expenditures not in rate base are recovered through a base rate surcharge.
15
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, 1997, there were no base rate proceedings filed nor pending
approval before the Company's retail or wholesale regulatory commissions.
Rate
Increase
(Decrease) % Effective
Regulatory Jurisdiction ($000) Change Date
----------------------- ---------- --------- ---------------
Federal-Wholesale $(2,500) (1.8) January 1998
Maryland 24,000 2.6 November 1997
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
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.
The District of Columbia fuel rate includes a provision for the current
recovery of purchased capacity costs as well as a provision for the credit for
capacity sales. In Maryland, purchased capacity costs are recovered in base
rates. Accordingly, the Company will seek recovery of future changes in the
levels of these costs through base rate applications to the Maryland
Commission.
The Company reduced its Maryland fuel rate by 9.5% effective August 28,
1997. Included in the reduction was an adjustment for a deferred fuel
amortization credit to refund over a 12-month period approximately $20.7
million of previously overrecovered fuel costs incurred through June 30, 1997.
The Maryland Commission order approving the reduction became final on December
13, 1997. On February 19, 1998, the Company applied for a 10.5% increase in
the Maryland fuel rate, which became effective March 1, 1998 subject to
refund.
See Item 8 - Note 2 of "Notes to Consolidated Financial Statements" for
additional information.
Maryland
- --------
On November 25, 1997, pursuant to a settlement agreement, the Commission
authorized a $24 million, or 2.6%, increase in base rate revenues effective
with bills rendered on and after November 30, 1997. Of the $24 million
increase in base rates, approximately $12 million will replace CCRF accrued on
CAA expenditures and, therefore, will have no effect on future net income
16
levels. The increased rates afford the Company the opportunity to recover
capacity costs associated with the Panda agreement previously approved by the
Maryland Commission. Capacity payments to Panda commenced in January 1997 and
totaled $25.3 million in 1997, of which the Maryland portion was approximately
$13 million. In connection with the settlement agreement, no determination
was made with respect to rate of return for purposes of setting rates;
however, a rate of return of 9% will be used by the Company, beginning in
December 1997, for purposes of computing AFUDC and CCRF.
Effective June 6, 1997, the Maryland DSM surcharge tariff was lowered,
which will reduce annual revenues by approximately $17 million, reflecting the
Company's efforts to narrow conservation program offerings and limit
conservation spending. The surcharge includes provisions for the recovery of
lost revenue, amortization of pre-1997 actual program expenditures plus the
initial amortization of 1997 projected program costs, a CCRF on unamortized
program balances and an incentive of $1.6 million awarded for achieving
specified 1996 energy goals. Previously, incentives of $8.9 million and $8.7
million were awarded for achieving 1995 and 1994 energy goals, respectively.
Maryland energy goals for 1996 had been reduced to reflect lower DSM
expenditures; consequently, the performance bonus awarded in 1997 was lower
than those awarded in prior years.
District of Columbia
- --------------------
The District of Columbia Public Service Commission authorized a $27.9
million, or 3.8%, increase in base rate revenue effective in 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 on unamortized amounts by means of a
CCRF 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. In June 1997, the Company filed an Application for
Authority with the Commission to revise its ECRR. In the Application, which
superseded an Application filed in June 1996, the proposed rate seeks recovery
of actual costs expended during 1995 and 1996, and is expected to increase
annual revenue by approximately $9 million. No action has been taken by the
Commission on the revised ECRR, and the Company is unable to predict when the
Commission will act upon the proposed rate. Subsequent rate updates are
17
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 $10 million at December 31, 1997. Pre-July 1993 DSM costs receive
base rate treatment.
Wholesale
- ---------
The Company has a 10-year full service power supply contract with SMECO,
a wholesale customer. The contract period is to be extended for an additional
year on January 1 of each year, unless notice is given by either party of
termination of the contract at the end of the 10-year period. The full
service obligation can be reduced by SMECO by up to 20% of its annual
requirements with a five-year advance notice for each such reduction. SMECO
rates were increased by $2.3 million effective January 1, 1995. 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, and an
additional $2.5 million rate reduction became 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 transmission owners in the PJM power pool and other
utilities. Historically, the pricing of most PJM-dispatched internal economy
energy transactions was based upon "split savings" whereby such energy was
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. In April 1997, PJM implemented a "bid-based"
energy market, where companies offer energy at prices based on cost, and
transactions occur at the market's marginal clearing price. The Company's
application for permission to bid using "market based" pricing has been filed
with FERC and is awaiting approval.
See the discussion above and the discussion concerning PJM, PJM
restructuring, bilateral energy sales and capacity purchase and sale
transactions presented in Management's Discussion and Analysis incorporated by
reference in Item 7.
COMPETITION
- -----------
The Company is currently engaged in regulatory proceedings in Maryland
where the Public Service Commission has outlined steps and established dates
for the phased-in implementation of competition. In the District of Columbia,
the Public Service Commission is considering various issues regarding electric
18
industry structure and competition but has not rendered a decision. Detailed
information concerning competition is presented in Management's Discussion and
Analysis incorporated by reference in Item 7.
Additionally, in order to prepare for competition, the Company began to
make fundamental changes during 1997 in the shape and direction of its
organizational units and in the business culture of its work force. Utility
operations were reconfigured into three primary business units: generation,
distribution and transmission. These organizational units will offer the
focus and flexibility necessary to maneuver in whatever competitive form the
industry finally takes. Such reorganization allows the Company to make the
best use of its assets while concentrating the efforts of employees on making
each business unit profitable.
ENVIRONMENTAL MATTERS
- ---------------------
General
- -------
The Company is subject to federal, state and local legislation and
regulation with respect to environmental matters, including air and water
quality and the handling of solid and hazardous waste. Air quality
requirements relate to both ambient air quality and emissions from facilities,
including particulate matter, sulfur dioxide, nitrogen oxides, carbon
monoxide, volatile organic compounds and visible emissions. Water quality
requirements relate to intake and discharge of water from facilities,
including water used for cooling purposes in electric generating facilities.
Waste requirements relate to the generation, treatment, storage,
transportation and disposal of specified wastes. Compliance with such
requirements may limit or prevent certain operations or substantially increase
the cost of construction and operation of the Company's existing and future
generating installations. The Company has expended approximately $663 million
through December 31, 1997, for the construction of pollution control
facilities. The $265 million 1998-2002 construction program for generating
facilities includes estimated provisions for pollution control facilities,
including expenditures for CAA compliance, of $18 million in 1998, $22 million
in 1999, $19 million in 2000, $26 million in 2001, and $17 million in 2002.
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
- -----------
On December 11, 1997, U.S. representatives at the climate change
negotiations in Kyoto, Japan, agreed to the reduction of greenhouse gas
emissions in certain portions of the developed world. The Kyoto protocol is
subject to conditions which may not occur, and is also subject to ratification
by the United States Senate, which has indicated that it will not ratify an
agreement unless certain conditions, not currently provided for in the Kyoto
19
protocol, are met. At present, it is not possible to predict whether the
Kyoto protocol will attain the force of law in the United States or what its
impact would be on the Company. Further developments in connection with the
Kyoto process could adversely affect future operations, financial results or
financial condition of the Company.
Under authority of the Clean Air Act of 1970, as amended, the 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 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
approximately $75 million over the next five years. 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 new boiler burner controls and
equipment at the Company's Dickerson Generating Station.
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.
Further, the EPA has issued proposed rules for reducing interstate transport
of ozone. These provisions are likely to result in further nitrogen oxides
emissions reductions from the Company's boilers; however, the extent of
reductions and associated costs cannot be predicted at this time.
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.
20
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
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, 1997. The report included
a number of possible remedies, the estimated costs of which range from $2
million to $90 million. On December 31, 1997 the Acting Regional
Administrator for EPA Region III signed an ROD that sets forth EPA's selected
21
remedial action plan. Although the plan selected in the ROD differs from
EPA's July, 1995 proposal, the EPA continues to estimate implementation costs
to be approximately $17 million. 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 alleged 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 was 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 sought
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 could be
accomplished at or below, and that no regulatory authority would require a
remediation which exceeded, approximately $4 million. The Virginia Department
of Environmental Quality has required additional sampling of the site as part
of its voluntary remediation program.
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 paid one-
third, subject to possible reallocation) was expended on the removal action,
which the EPA has stated is in compliance with the AO. The Company and two
other PRPs have entered into settlements with third parties to recover
approximately $2.4 million of this cost. EPA oversight costs, which are not
expected to be material, have not yet been assessed. While compliance with
the AO has been completed, the Company cannot determine whether it will be
subject to any future liability with respect to the site.
During 1993, the Company was served with Amended Complaints filed in
three jurisdictions (Prince George's County, Baltimore City, and Baltimore
County), in separate ongoing, consolidated proceedings each denominated "In
re: Personal Injury Asbestos Case." The Company (and other defendants) were
brought into these cases on a theory of premises liability under which
plaintiffs argue that the Company was negligent in not providing a safe work
environment for employees of its contractors who allegedly were exposed to
asbestos while working on the Company's property. Initially, a total of
approximately 448 individual plaintiffs added the Company to their Complaints.
While the pleadings were not entirely clear, it appeared that each plaintiff
sought $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
22
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. Through December 31, 1997, 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 the 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.
On October 6, 1997, the Company received notice from the EPA that it,
along with 68 other parties, may be a PRP under the CERCLA at the Butler Mine
Tunnel Superfund site in Pittstown Township, Luzerne County, Pennsylvania.
The site is a mine drainage tunnel with an outfall on the Susquehanna River
where oil waste was disposed via a borehole in the tunnel. The letter
notifying the Company of its potential liability also contained a request for
a reimbursement of approximately $.8 million for response costs incurred by
23
EPA at the site. The letter requested that the Company submit a good faith
proposal to conduct or finance the remedial action contained in a July 1996
ROD. The EPA estimates the present cost of the remedial action to be $3.7
million. While the Company cannot predict its liability at this site, the
Company believes that it will not have a material adverse effect on its
financial position or results of operations.
Solid and Hazardous Waste
- -------------------------
The Resource Conservation and Recovery Act of 1976 (RCRA) provides
federal mandates and authority for dealing with the generation, treatment,
storage, transportation and disposal of solid or hazardous waste. The
principal utility wastes of fly ash, bottom ash and scrubber sludge are exempt
from EPA regulation as hazardous waste. The Company sends its wastes
designated as hazardous to appropriately licensed facilities for hazardous
waste treatment, storage and disposal. The current impact of regulations
under RCRA is not substantial. The only permit that 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
- -----
In January 1998, the Company's current 1993 Labor Agreement with Local
1900 of the International Brotherhood of Electrical Workers (IBEW) was
extended until June 1, 1999. The extension agreement was ratified by the
union membership in January 1998 and all members of Local 1900 received a 2.5%
lump-sum payment in February 1998. The lump-sum payment to the IBEW
membership totaled $2.9 million. All other provisions of the 1993 agreement
remain the same. The IBEW represents 2,534 of the Company's 4,067 employees.
NONUTILITY SUBSIDIARY
- ---------------------
Potomac Capital Investment Corporation (PCI), the Company's wholly owned
subsidiary, was formed in 1983 with the objective of supplementing utility
earnings and building long-term shareholder value. In April 1996, the Company
reorganized its nonutility subsidiaries whereby PEPCO Enterprises, Inc. (PEI),
an energy services and telecommunications products and services company,
became a subsidiary of PCI. Investments made by PEI contributed $1.7 million
in after-tax earnings to PCI during 1997.
PCI's assets totaled $1.2 billion at December 31, 1997, including
equipment leases of aircraft and power plants totaling $626.9 million,
marketable securities, primarily fixed rate preferred stocks totaling $302.5
million, and to a lesser extent, real estate and other investments. The
Company's equity investment in PCI was $227 million at December 31, 1997,
including $49.9 million in subsidiary retained earnings. Since its inception
in 1983, PCI has paid the parent Company $100 million in dividends.
24
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 1997 were $17.1 million compared with net earnings of
$16.9 million in 1996 and a net loss of $124.4 million in 1995. During 1997,
PCI sold its remaining aircraft held for disposal, resulting in a $2 million
pre-tax ($1.3 million after-tax) charge to earnings. As a result of joint
venture operations during 1997, PCI's obligation for previously accrued
deferred income taxes was reduced, resulting in after-tax earnings of $7.4
million after provision for transaction costs. PCI's earnings for 1997 also
include capital gains totaling $4.5 million, net of tax, related primarily to
tender offers accepted by PCI which reduced the cost basis of its preferred
stock portfolio by $83 million since year end 1996. Proceeds were used to pay
down debt, resulting in a decrease in interest expense from 1996.
On December 18, 1997, PCI and RCN Telecom Services, Inc. (RCN) of
Princeton, New Jersey, signed the definitive agreements forming a joint
venture known as Starpower Communications, L.L.C. to provide a package of
local and long distance telephone, cable television, high speed Internet and
other telecommunications services to residents and businesses in the
Washington, D.C./Baltimore/Northern Virginia metropolitan region. The joint
venture is equally owned and managed by PCI and RCN. PCI and RCN each will
invest up to $150 million over a three-year period to build out, market and
provide these services over an advanced fiber optic network. PCI's investment
in the joint venture will be funded through cash from operations and
borrowings under its Medium-Term Note facility. PCI expects that the joint
venture will incur operating losses initially, as it develops and expands its
network and customer base. Start-up costs incurred by PCI relating to the
telecommunications business have been expensed.
The $302.5 million securities portfolio, consisting primarily of fixed-
rate electric utility preferred stocks, provides PCI with liquidity and
investment flexibility. During 1997, PCI reduced the cost basis of its
marketable securities portfolio by $83 million primarily as the result of
calls and acceptance of tender offers (approximately $118.1 million) offset by
purchases of $35.1 million. The reduced size of the preferred stock portfolio
lessens the impact of future fluctuations in interest rates.
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 $45.3 million
at December 31, 1997.
Additional information concerning PCI's investment activities is
presented in Management's Discussion and Analysis incorporated by reference in
Item 7.
25
<TABLE>
Part I
- ------
Item 2 PROPERTIES
- ------ ----------
<CAPTION>
Megawatts of Net Capability
Steam --------------------------- Net Megawatt-
Generation Steam Combustion Hours Generated
Generating Station Location Primary Fuel Generation Turbine <F1> in 1997
- ------------------ --------------------------------------- -------------- ------------ ------------ ---------------
(Thousands)
<S> <C> <C> <C> <C> <C>
Benning Benning Road and Anacostia River, N.E. No. 4 Oil 550 - 53
Washington, D.C.
Buzzard Point 1st and V Streets, S.W. - - 256 17
Washington, D.C.
Potomac River Bashford Lane and Potomac River Coal 482 - 1,870
Alexandria, Virginia
Dickerson Potomac River, South of Little Monocacy Coal 546 291 3,434
River, Dickerson, Maryland
Chalk Point Patuxent River at Swanson Creek Coal/ 1,907 516 <F2> 4,815
Aquasco, Maryland Residual Oil/
Natural Gas
Morgantown Potomac River, South of Route 301 Coal/ 1,164 248 6,942
Newburg, Maryland Residual Oil
----------- ----------- -----------
Total - Wholly owned Units 4,649 1,311 17,131
Conemaugh Indiana County, Pennsylvania Coal 165 1 1,191
----------- ----------- -----------
Total - All Stations Operated 4,814 1,312 18,322
------------ ===========
Cogeneration - - 263
===========
Purchased Capacity
Ohio Edison <F3> 450 - 3,375
Panda-Brandywine <F4> 230 - 406
------------ -----------
680 - 3,781
------------ ===========
Total System, excluding Short-
term Capacity Transactions 5,494 1,312
------------ ------------
Short-term Capacity Transactions, net <F5> (233) -
------------ ------------
Total System 5,261 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 AEI.
<F4>Generating capacity under long-term agreement with Panda-Brandywine L.P.
<F5>Generating capacity purchases of 32 megawatts from Northeast Maryland Waste Disposal Authority
and generating capacity sales of 100 megawatts to Delmarva Power & Light Company, 130 megawatts
to GPU, Inc. and 35 megawatts to Northeast Utilities Service Company.
</FN>
26
</TABLE>
The five steam-electric generating stations, together with combustion
turbines, had an aggregate net capability at December 31, 1997, 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 AEI. 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 Panda facility achieved full commercial operation in
October 1996. The net 60-minute peak load in 1997 was 5,689 megawatts, which
occurred on June 25, 1997, and was 1.4% below the all-time summer peak demand
of 5,769 megawatts. To meet the 1997 summer peak demand, the Company also had
approximately 265 megawatts available from its dispatchable EUM 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.
27
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
--------------------- --------------- -------- ---------
1997:
First Quarter...... $.415 $26 $23-7/8
Second Quarter..... .415 24-7/8 21-1/8
Third Quarter...... .415 23-3/4 21
Fourth Quarter..... .415 $1.66 26 21
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
The number of holders of Common Stock was 79,626 at March 3, 1998, and
81,229 at December 31, 1997.
There were 118,527,028 and 118,500,891 shares of the Company's $1 par
value Common Stock outstanding at March 3, 1998, and December 31, 1997,
respectively. A total of 200 million shares is authorized.
In January 1998, a dividend of 41-1/2 cents per share was declared
payable March 31, 1998, to holders of record of the Company's common stock on
March 10, 1998. The Company's current annual dividend on common stock is
$1.66 per share. The dividend rate is determined by the Company's Board of
Directors and takes into consideration, among other factors, current and
possible future developments which may affect the Company's income and cash
flow levels. The Company has no current plans to change the dividend;
however, there can be no assurance that the $1.66 dividend rate will be in
effect in the future.
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 1997 Annual Report to shareholders.
28
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------ ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The information required by Item 7 is incorporated herein by reference
to the "Management's Discussion and Analysis of Consolidated Results of
Operations and Financial Condition" in the Financial Information section of
the Company's 1997 Annual Report to shareholders.
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
The consolidated financial statements, together with the report thereon
of Price Waterhouse LLP dated January 16, 1998, and supplementary data from
the Company's 1997 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 1997 Annual Report to
shareholders is not deemed filed as part of this Form 10-K Annual Report.
Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------ ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
29
Part III
- --------
Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
The information required by Item 10 consisting of information required
by Item 401 of Regulation S-K with regard to Directors of the registrant and
the information required by Item 405 of Regulation S-K is incorporated herein
by reference to the Company's Notice of Annual Meeting of Shareholders and
Proxy Statement dated March 4, 1998.
Information with regard to the executive officers of the registrant as
of March 3, 1998, is as follows:
Executive Officers
- ------------------
Served in
such position
Name Position Age since
- -------------------- -------------------------------- --- -------------
Edward F. Mitchell Chairman of the Board 66 1992 (1)
John M. Derrick, Jr. President and Chief Executive
Officer and Director 57 1997 (2)
Dennis R. Wraase Senior Vice President and
Chief Financial Officer 53 1997 (3)
William T. Torgerson Senior Vice President External
Affairs and General Counsel 53 1994 (4)
Earl K. Chism Vice President and Comptroller 62 1994 (5)
Kirk J. Emge Vice President - Regulatory
Law 48 1994 (6)
Susann D. Felton Vice President - Generation
Fuels and Business Planning 49 1992
William R. Gee, Jr. Vice President - Resource
Planning 57 1991
Robert C. Grantley Vice President - Customer
Service and Power Distribution 49 1989
Anthony J. Kamerick Vice President and Treasurer 50 1994 (7)
Anthony S. Macerollo Vice President - Corporate
Services 56 1989
30
Executive Officers (cont.)
- --------------------------
Served in
such position
Name Position Age since
- -------------------- -------------------------------- --- -------------
James S. Potts Vice President - Environment 52 1993 (8)
William J. Sim Vice President - Generation 53 1991
Andrew W. Williams Vice President - Transmission
and Marketing 48 1989
None of the above persons has a "family relationship" with any other officer
listed or with any director.
The term of office for each of the above persons is from October 23,
1997, until the next succeeding Annual Meeting and until their successors have
been elected and qualified.
(1) Mr. Mitchell was also Chief Executive Officer, prior to October 23,
1997.
(2) Mr. Derrick was elected to the position of Chief Executive Officer on
October 23, 1997 and President on December 21, 1992.
(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.
(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) 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.
(8) 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.
31
Item 11 EXECUTIVE COMPENSATION
- ------- ----------------------
The information required by Item 11 is incorporated herein by reference
to the Company's Notice of Annual Meeting of Shareholders and Proxy Statement
dated March 4, 1998.
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- --------------------------------------------------------------
The information required by Item 12 is incorporated herein by reference
to the Company's Notice of Annual Meeting of Shareholders and Proxy Statement
dated March 4, 1998. 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.
32
Part IV
- -------
Item 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
- ------- --------------------------------------------------------------
(a) Documents List
--------------
1. Financial Statements
The following documents are filed as part of this report as incorporated
herein by reference from the indicated pages of the Company's 1997 Annual
Report.
Reference (Page)
----------------
Form 10-K
Annual Report Annual Report
to Shareholders Exhibit 13
--------------- -------------
Consolidated Balance Sheets -
December 31, 1997 and 1996 16-17 30-31
Consolidated Statements of
Earnings - for the years
ended December 31, 1997,
1996 and 1995 18 32
Consolidated Statements of
Cash Flows - for the years
ended December 31, 1997,
1996 and 1995 19 33
Notes to Consolidated Financial
Statements 20-31 34-70
Report of Independent Accountants 32 29
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 II (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.
33
3. Exhibits required by Securities and Exchange Commission Regulation
S-K (summarized below).
Exhibit
No. Description of Exhibit Reference*
- ------- ---------------------- ----------
3.1 Charter of the Company.............. Filed herewith.
3.2 By-Laws of the Company.............. Filed herewith.
4 Mortgage and Deed of Trust dated
July 1, 1936, of the Company to
The Bank of New York as Successor
Trustee, securing First Mortgage
Bonds of the Company, and
Supplemental Indenture dated
July 1, 1936........................ Exh. B-4 to First Amendment,
6/19/36, to Registration
Statement No. 2-2232.
Supplemental Indentures, to the
aforesaid Mortgage and Deed of
Trust, dated -
December 1, 1939 and December
10, 1939.......................... Exhs. A & B to Form 8-K,
1/3/40.
August 1, 1940...................... Exh. A to Form 8-K, 9/25/40.
July 15, 1942 and August 10,
1942................................ Exh. B-1 to Amendment No. 2,
8/24/42, and B-3 to Post-
Effective Amendment,
8/31/42, to Registration
Statement No. 2-5032.
August 1, 1942...................... Exh. B-4 to Form 8-A,
10/8/42.
October 15, 1942.................... Exh. A to Form 8-K, 12/7/42.
October 15, 1947.................... Exh. A to Form 8-K, 12/8/47.
January 1, 1948..................... Exh.7-B to Post-Effective
Amendment No. 2, 1/28/48,
to Registration Statement
No. 2-7349.
December 31, 1948................... Exh. A-2 to Form 10-K,
4/13/49.
34
Exhibit
No. Description of Exhibit Reference*
- ------- ---------------------- ----------
4 May 1, 1949......................... Exh. 7-B to Post-Effective
(cont.) Amendment No. 1,
5/10/49, to Registration
Statement No. 2-7948.
December 31, 1949................... Exh. (a)-1 to Form 8-K,
2/8/50.
May 1, 1950......................... Exh. 7-B to Amendment No. 2,
5/8/50, to Registration
Statement No. 2-8430.
February 15, 1951................... Exh. (a) to Form 8-K, 3/9/51.
March 1, 1952....................... Exh. 4-C to Post-Effective
Amendment No. 1, 3/12/52,
to Registration Statement
No. 2-9435.
February 16, 1953................... Exh. (a)-1 to Form 8-K,
3/5/53.
May 15, 1953........................ Exh. 4-C to Post-Effective
Amendment No. 1, 5/26/53,
to Registration Statement
No. 2-10246.
March 15, 1954 and March 15,
1955................................ Exh. 4-B to Registration
Statement No. 2-11627,
5/2/55.
May 16, 1955........................ Exh. A to Form 8-K, 7/6/55.
March 15, 1956...................... Exh. C to Form 10-K, 4/4/56.
June 1, 1956........................ Exh. A to Form 8-K, 7/2/56.
April 1, 1957....................... Exh. 4-B to Registration
Statement No. 2-13884,
2/5/58.
May 1, 1958......................... Exh. 2-B to Registration
Statement No. 2-14518,
11/10/58.
December 1, 1958.................... Exh. A to Form 8-K, 1/2/59.
May 1, 1959......................... Exh. 4-B to Amendment No. 1,
5/13/59, to Registration
Statement No. 2-15027.
November 16, 1959................... Exh. A to Form 8-K, 1/4/60.
May 2, 1960......................... Exh. 2-B to Registration
Statement No. 2-17286,
11/9/60.
December 1, 1960 and April 3,
1961................................ Exh. A-1 to Form 10-K,
4/24/61.
35
Exhibit
No. Description of Exhibit Reference*
- ------- ---------------------- ----------
4 May 1, 1962......................... Exh. 2-B to Registration
(cont.) Statement No. 2-21037,
1/25/63.
February 15, 1963................... Exh. A to Form 8-K, 3/4/63.
May 1, 1963......................... Exh. 4-B to Registration
Statement No. 2-21961,
12/19/63.
April 23, 1964...................... Exh. 2-B to Registration
Statement No. 2-22344,
4/24/64.
May 15, 1964........................ Exh. A to Form 8-K, 6/2/64.
May 3, 1965......................... Exh. 2-B to Registration
Statement No. 2-24655,
3/16/66.
April 1, 1966....................... Exh. A to Form 10-K, 4/21/66.
June 1, 1966........................ Exh. 1 to Form 10-K, 4/11/67.
April 28, 1967...................... Exh. 2-B to Post-Effective
Amendment No. 1 to
Registration Statement No.
2-26356, 5/3/67.
May 1, 1967......................... Exh. A to Form 8-K, 6/1/67.
July 3, 1967........................ Exh. 2-B to Registration
Statement No. 2-28080,
1/25/68.
February 15, 1968................... Exh. II-I to Form 8-K, 3/7/68.
May 1, 1968......................... Exh. 2-B to Registration
Statement No. 2-31896,
2/28/69.
March 15, 1969...................... Exh. A-2 to Form 8-K, 4/8/69.
June 16, 1969....................... Exh. 2-B to Registration
Statement No. 2-36094,
1/27/70.
February 15, 1970................... Exh. A-2 to Form 8-K, 3/9/70.
May 15, 1970........................ Exh. 2-B to Registration
Statement No. 2-38038,
7/27/70.
August 15, 1970..................... Exh. 2-D to Registration
Statement No. 2-38038,
7/27/70.
September 1, 1971................... Exh. 2-C to Registration
Statement No. 2-45591, 9/1/72.
September 15, 1972.................. Exh. 2-E to Registration
36
Exhibit
No. Description of Exhibit Reference*
- ------- ---------------------- ----------
4 April 1, 1973....................... Exh. A to Form 8-K, 5/9/73.
(cont.) January 2, 1974..................... Exh. 2-D to Registration
Statement No. 2-49803,
12/5/73.
August 15, 1974..................... Exhs. 2-G and 2-H to
Amendment No. 1 to
Registration Statement
No. 2-51698, 8/14/74.
June 15, 1977....................... Exh. 4-A to Form 10-K,
3/19/81.
July 1, 1979........................ Exh. 4-B to Form 10-K,
3/19/81.
June 16, 1981....................... Exh. 4-A to Form 10-K,
3/19/82.
June 17, 1981....................... Exh. 2 to Amendment No. 1,
6/18/81, to Form 8-A.
December 1, 1981.................... Exh. 4-C to Form 10-K,
3/19/82.
August 1, 1982...................... Exh. 4-C to Amendment No. 1
to Registration Statement
No. 2-78731, 8/17/82.
October 1, 1982..................... Exh. 4 to Form 8-K, 11/8/82.
April 15, 1983...................... Exh. 4 to Form 10-K, 3/23/84.
November 1, 1985.................... Exh. 2-B to Form 8-A, 11/1/85.
March 1, 1986....................... Exh. 4 to Form 10-K, 3/28/86.
November 1, 1986.................... Exh. 2-B to Form 8-A, 11/5/86.
March 1, 1987....................... Exh. 2-B to Form 8-A, 3/2/87.
September 16, 1987.................. Exh. 4-B to Registration
Statement No. 33-18229,
10/30/87.
May 1, 1989......................... Exh. 4-C to Registration
Statement No. 33-29382,
6/16/89.
August 1, 1989...................... Exh. 4 to Form 10-K, 3/23/90.
April 5, 1990....................... Exh. 4 to Form 10-K, 3/29/91.
May 21, 1991........................ Exh. 4 to Form 10-K, 3/27/92.
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.
37
Exhibit
No. Description of Exhibit Reference*
- ------- ---------------------- ----------
4 March 2, 1993....................... Exh. 4 to Form 10-K, 3/26/93.
(cont.) 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.
October 2, 1997..................... Filed herewith.
4-A Indenture, dated as of January 15,
1988, between the Company and
The Bank of New York, Successor
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.
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.
38
Exhibit
No. Description of Exhibit Reference*
- ------- ---------------------- ----------
10 Employment Agreement**.............. Exh. 10.3 to Form 10-Q,
(cont.) 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.
Severance Agreement**............... Exh. 10.10 to Form 10-K,
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.
39
Exhibit
No. Description of Exhibit Reference*
- ------- ---------------------- ----------
10.1 Amendment to Employment Agreement... Filed herewith.
10.2 1998 General Memorandum of Under-
standing, dated January 8, 1998
between the Company and the
International Brotherhood of
Electrical Workers (Local Union
#1900).............................. Filed herewith.
11 Computation of Earnings Per
Common Share...................... Filed herewith.
12 Computation of Ratios............... Filed herewith.
13 Financial Information Section of
Annual Report..................... Filed herewith.
21 Subsidiaries of the Registrant...... Filed herewith.
23 Consent of Independent Accountants.. 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).
40
(b) Reports on Form 8-K
-------------------
A Current Report on Form 8-K was filed by the Company on October 30,
1997, providing details of the District of Columbia Public Service
Commission's approval of the proposed Merger with Baltimore Gas and
Electric Company (BGE) to create Constellation Energy Corporation.
The item reported on such Form 8-K was Item 5 (Other Events).
A Current Report on Form 8-K was filed by the Company on December 22,
1997, providing details of the termination of the proposed Merger with
BGE to create Constellation Energy Corporation. The item reported on
such Form 8-K was Item 5 (Other Events).
41
<TABLE>
Schedule II Valuation and Qualifying Accounts
----------- ---------------------------------
<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, 1997
Allowance for uncollectible accounts -
customer and other accounts receivable
Utility operations $ 1,598 $ 9,804 $ 1,003 $ (10,003) $ 2,402
Nonutility subsidiary $ 6,000 $ - $ - $ - $ 6,000
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
<FN>
<F1> Collection of accounts previously written off.
<F2> Uncollectible accounts written off.
</FN>
42
</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 26th day of March, 1998.
POTOMAC ELECTRIC POWER COMPANY
(Registrant)
/S/ JOHN M. DERRICK, JR.
By
--------------------------
(John M. Derrick, Jr.,
President, Chief Executive
Officer and Director)
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 Officer
/S/ JOHN M. DERRICK, JR.
--------------------------- President, Chief Executive
(John M. Derrick, Jr.) Officer and Director
(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/ EDWARD F. MITCHELL
--------------------------- Chairman of the Board
(Edward F. Mitchell)
/S/ ROGER R. BLUNT, SR.
--------------------------- Director
(Roger R. Blunt, Sr.)
March 26, 1998
43
Signature Title Date
--------- ----- ----
(iv) Directors (cont.):
/S/ A. JAMES CLARK
--------------------------- Director
(A. James Clark)
/S/ H. LOWELL DAVIS
--------------------------- Director
(H. Lowell Davis)
--------------------------- Director
(Richard E. Marriott)
/S/ DAVID O. MAXWELL
--------------------------- Director
(David O. Maxwell)
/S/ FLORETTA D. McKENZIE
--------------------------- Director
(Floretta D. McKenzie)
--------------------------- Director
(Ann D. McLaughlin)
/S/ PETER F. O'MALLEY
--------------------------- Director
(Peter F. O'Malley)
/S/ LOUIS A. SIMPSON
--------------------------- Director
(Louis A. Simpson)
/S/ A. THOMAS YOUNG
--------------------------- Director
(A. Thomas Young)
March 26, 1998
44
(c) Exhibit 11 Computations of Earnings Per Common Share
---------- ----------------------------------------
The information required by Exhibit 11 is incorporated herein by
reference to Note 7 of the "Notes to Consolidated Financial Statements" on
page 25 of the Company's Annual Report to shareholders.
45
<TABLE>
Exhibit 12 Computation of Ratios
- ---------- ---------------------
The computations of the coverage of fixed charges, before income taxes, and
the coverage of combined fixed charges and preferred dividends for each of the
years 1997 through 1993 on the basis of parent company operations only, are as
follows.
<CAPTION>
For The Year Ended December 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Net income $164,749 $220,066 $218,788 $208,074 $216,478
Taxes based on income 97,487 135,011 129,439 116,648 107,223
--------- --------- --------- --------- ---------
Income before taxes 262,236 355,077 348,227 324,722 323,701
--------- --------- --------- --------- ---------
Fixed charges:
Interest charges 146,703 146,939 146,558 139,210 141,393
Interest factor in rentals 23,616 23,560 23,431 6,300 5,859
--------- --------- --------- --------- ---------
Total fixed charges 170,319 170,499 169,989 145,510 147,252
--------- --------- --------- --------- ---------
Income before income taxes and fixed charges $432,555 $525,576 $518,216 $470,232 $470,953
========= ========= ========= ========= =========
Coverage of fixed charges 2.54 3.08 3.05 3.23 3.20
==== ==== ==== ==== ====
Preferred dividend requirements $16,579 $16,604 $16,851 $16,437 $16,255
--------- --------- --------- --------- ---------
Ratio of pre-tax income to net income 1.59 1.61 1.59 1.56 1.50
--------- --------- --------- --------- ---------
Preferred dividend factor $26,361 $26,732 $26,793 $25,642 $24,383
--------- --------- --------- --------- ---------
Total fixed charges and preferred dividends $196,680 $197,231 $196,782 $171,152 $171,635
========= ========= ========= ========= =========
Coverage of combined fixed charges
and preferred dividends 2.20 2.66 2.63 2.75 2.74
==== ==== ==== ==== ====
46
</TABLE>
<TABLE>
Exhibit 12 Computation of Ratios
- ---------- ---------------------
The computations of the coverage of fixed charges, before income taxes, and
the coverage of combined fixed charges and preferred dividends for each of the
years 1997 through 1993 on a fully consolidated basis are as follows.
<CAPTION>
For The Year Ended December 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Net income $181,830 $236,960 $94,391 $227,162 $241,579
Taxes based on income 65,669 80,386 43,731 93,953 62,145
--------- --------- --------- --------- ---------
Income before taxes 247,499 317,346 138,122 321,115 303,724
--------- --------- --------- --------- ---------
Fixed charges:
Interest charges 216,156 231,029 238,724 224,514 221,312
Interest factor in rentals 23,687 23,943 26,685 9,938 9,257
--------- --------- --------- --------- ---------
Total fixed charges 239,843 254,972 265,409 234,452 230,569
--------- --------- --------- --------- ---------
Nonutility subsidiary capitalized interest (493) (649) (529) (521) (2,059)
--------- --------- --------- --------- ---------
Income before income taxes and fixed charges $486,849 $571,669 $403,002 $555,046 $532,234
========= ========= ========= ========= =========
Coverage of fixed charges 2.03 2.24 1.52 2.37 2.31
==== ==== ==== ==== ====
Preferred dividend requirements $16,579 $16,604 $16,851 $16,437 $16,255
--------- --------- --------- --------- ---------
Ratio of pre-tax income to net income 1.36 1.34 1.46 1.41 1.26
--------- --------- --------- --------- ---------
Preferred dividend factor $22,547 $22,249 $24,602 $23,176 $20,481
--------- --------- --------- --------- ---------
Total fixed charges and preferred dividends $262,390 $277,221 $290,011 $257,628 $251,050
========= ========= ========= ========= =========
Coverage of combined fixed charges
and preferred dividends 1.86 2.06 1.39 2.15 2.12
==== ==== ==== ==== ====
47
</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.
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, 33-61379 and 333-
33495) of Potomac Electric Power Company of our report dated January 16, 1998
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.
March 26, 1998
48
Report of Independent Accountants on Consolidated
- -------------------------------------------------
Financial Statement Schedule
- ----------------------------
January 16, 1998
To the Board of Directors of
Potomac Electric Power Company
Our audits of the consolidated financial statements referred to in our report
dated January 16, 1998 appearing in the 1997 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.
49
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.......................... 29
Consolidated Balance Sheets................................ 30
Consolidated Statements of Earnings........................ 32
Consolidated Statements of Cash Flows...................... 33
Notes to Consolidated Financial Statements................. 34
Selected Consolidated Financial Data....................... 70
Explanation of Graphic Material..................... Appendix A
1
Management's Discussion and Analysis of Consolidated
Results of Operations and Financial Condition
- ----------------------------------------------------
TERMINATION OF PROPOSED MERGER
- ------------------------------
On December 22, 1997, Potomac Electric Power Company (the
Company, PEPCO) and Baltimore Gas and Electric Company announced
the cancellation of their proposed merger (the Merger) to create
Constellation Energy Corporation. As a result, the Company
recorded a $52.5 million non-operating charge ($32.6 million net
of income tax or 28 cents per share) to write off its cumulative
deferred Merger-related costs. At December 31, 1996, deferred
costs related to the Merger totaled $29 million and are included
in "Other Deferred Charges" on the Consolidated Balance Sheet.
While all necessary regulatory approvals had been received,
the orders of both the Maryland and the District of Columbia
public service commissions contained financial conditions that
made it impossible for the two companies' investors to share in
the benefits of the proposed Merger. The regulatory plan proposed
by the companies had called for an equal sharing of the savings
between customers and shareholders. Both commission orders
returned more than the estimated total Merger savings to the
customers. The companies tried unsuccessfully to obtain timely
reconsideration of these conditions but concluded that a
favorable outcome could not be expected within a reasonable
period, if at all.
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 1997. 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 and businesses with the objective of
supplementing current utility earnings and building long-term
shareholder value.
2
The information set forth below discusses the results of
operations, capital resources and liquidity during the period
1995 through 1997 for the Company and PCI.
The Company's earnings for common stock during 1997 totaled
$165.3 million, as compared to $220.4 million in 1996. As set
forth below, utility earnings per share from operations decreased
from $1.72 in 1996 to $1.53 in 1997, excluding the December 1997
write-off of Merger-related costs of 28 cents per share.
Consolidated earnings decreased from $1.86 in 1996 to $1.39 in
1997. The 1995 nonutility subsidiary results reflect noncash and
nonrecurring charges of $1.04 related to PCI's May 1995 plan with
respect to the aircraft equipment leasing business.
- -----------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------
Utility Operations $1.53 $1.72 $1.70
Merger Costs (.28) - -
Nonutility Subsidiary .14 .14 (1.05)
----- ----- -----
Consolidated $1.39 $1.86 $ .65
===== ===== =====
- -----------------------------------------------------------------
The average number of common shares outstanding at December 31,
1997, was relatively unchanged from December 31, 1996.
FORWARD LOOKING STATEMENTS
- --------------------------
This Management's Discussion and Analysis of Consolidated Results
of Operations and Financial Condition contains forward looking
statements, as defined by the Private Securities Litigation Act
of 1995, with regard to matters that could have an impact on the
future operations, financial results or financial condition of
the Company. These statements are based on the current
expectations, estimates or projections of management and are not
guarantees of future performance. Actual results may differ
materially from those anticipated by the forward looking
statements, depending on the occurrence or nonoccurrence of
future events or conditions that are difficult to predict and
generally are beyond the control of the Company. All such
forward looking statements relating to the following matters are
qualified by the cautionary statements below and contained
elsewhere herein.
3
Growth in Demand, Sales and Capacity to Fulfill Demand
------------------------------------------------------
The actual growth in demand for and sales of electricity
within the Company's service territory may vary from the
statements made concerning the anticipated growth in demand
and sales, depending upon a number of factors, including
weather conditions, the competitive environment, general
economic conditions and the demographics of the Company's
service territory. Future construction expenditures
(including the need to construct additional generation
capacity) may vary from the projections, depending on the
accuracy of management's expectations regarding growth in
demand for and sales of electricity, regulatory developments
and the evolution of the competitive marketplace for
electricity.
Competition
-----------
Increased competition will have an impact on future results
of operations, which may be adverse, and will depend, among
other factors, upon governmental policies and regulatory
actions, including those of the Federal Energy Regulatory
Commission (FERC) and the Maryland and District of Columbia
public service commissions, future economic conditions and
the influence exerted by emerging market forces over the
structure of the electric industry.
4
UTILITY
- -------
RESULTS OF OPERATIONS
- ---------------------
Total Revenue
- -------------
The changes in total revenue are shown in the following table.
- -----------------------------------------------------------------
Increase (Decrease)
from Prior Year
1997 1996 1995
- -----------------------------------------------------------------
(Millions of Dollars)
Change in kilowatt-hour sales $ (8.6) $(11.5) $ 27.2
Change in base rate revenue (7.2) 27.0 42.8
Change in fuel adjustment clause
billings to cover cost of
fuel and interchange and
capacity purchase payments (9.2) (4.5) (39.3)
Change in other revenue 1.0 1.4 1.1
------- ------ ------
Change in operating revenue (24.0) 12.4 31.8
------- ------ ------
Change in interchange deliveries (122.8) 121.8 21.2
------- ------ ------
Change in Total Revenue $(146.8) $134.2 $ 53.0
======= ====== ======
- -----------------------------------------------------------------
The decrease in 1997 base rate revenue compared to 1996
primarily reflects a decrease of $7.3 million in the conservation
incentive provision of the Company's Demand Side Management (DSM)
surcharge in Maryland. The conservation incentive, totaling $1.6
million, was awarded for achieving specified 1996 Maryland energy
goals. The Company recorded an $8.9 million bonus in 1996 for
achieving specified 1995 energy goals.
The increase in base rate revenue in 1996 as compared to
1995 reflects the continued effects of a District of Columbia
rate increase of $27.9 million (effective July 1995) and an
increase of $17.7 million associated with the Company's 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.
5
The increase in base rate revenue in 1995 as compared to
1994 reflects the effect of a District of Columbia rate increase
of $27.9 million (effective July 1995) 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.
The decrease in 1997 in revenue from interchange deliveries
reflects the change in the level of activity in purchase-for-
resale agreements under the Company's wholesale power sales
tariff, predominantly where the Company buys energy from one
party for the purpose of selling that energy to a third party.
Beginning in January 1997 through March 1997, and pursuant to
FERC's Order No. 888, the Company implemented an Open Access
Transmission Tariff (OATT) and terminated the purchase-for-resale
agreements. On April 1, 1997, the Pennsylvania-New Jersey-
Maryland Interconnection Association (PJM) implemented an OATT on
behalf of its transmission owners, replacing the Company's OATT.
The Company classifies revenue from service agreements under
these tariffs as "Other operating revenue". In addition,
interchange deliveries include revenue from bilateral energy
transactions and the sale of short-term generating capacity. The
increases in 1996 and 1995 in revenue from interchange deliveries
reflect the growth in the number of companies involved in power
sales tariff interchange transactions, and changes in levels and
pricing of energy delivered to PJM. The benefits derived from
interchange deliveries, the allocated amounts of capacity sales
in the District of Columbia (approximately 40%) and revenue under
the OATT are passed through to the Company's customers through a
fuel adjustment clause.
6
Kilowatt-hour Sales
- -------------------
- -----------------------------------------------------------------
1997 1996
vs. vs.
1997 1996 1995 1996 1995
- -----------------------------------------------------------------
(Millions of Kilowatt-hours)
By Customer Type
Residential 6,552 6,869 6,707 (4.6)% 2.4%
Commercial 11,811 11,712 11,861 .8 (1.3)
U.S. Government 3,934 3,902 3,998 .8 (2.4)
D.C. Government 850 847 879 .4 (3.6)
Wholesale 2,561 2,570 2,465 (.4) 4.3
------ ------ ------
Total energy sales 25,708 25,900 25,910 (.7) -
====== ====== ======
Interchange
Energy deliveries 822 7,063 1,784 (88.4) -
====== ====== ======
By Geographic Area
Maryland, including
wholesale 15,601 15,763 15,594 (1.0) 1.1
District of Columbia 10,107 10,137 10,316 (.3) (1.7)
------ ------ ------
Total energy sales 25,708 25,900 25,910 (.7) -
====== ====== ======
- -----------------------------------------------------------------
Kilowatt-hour sales decreased .7% in 1997 resulting from
decreases in cooling degree hours of 5% and 21% from the 1996 and
20-year average, respectively, partially offset by a .8% increase
in customers. 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, and were partially offset by decreased usage of
electricity during the cooler than average summer months of 1996.
Cooling degree hours in 1996 were 19% and 17% below the 1995 and
20-year average, respectively. Assuming future weather
conditions approximate historical averages, the Company expects
its compound annual growth in kilowatt-hour sales to range
between 1% and 2% over the next decade.
The 1997 summer peak demand of 5,689 megawatts occurred on
June 25, 1997. This compares with the 1996 summer peak demand of
5,288 megawatts, and the all-time summer peak demand of 5,769
megawatts which occurred in July 1991. The Company's present
7
generation capability, excluding short-term capacity
transactions, is 6,806 megawatts. In addition, the Company had
approximately 265 megawatts available from its dispatchable
Energy Use Management (EUM) programs to meet the 1997 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%, reflecting continuing success with
DSM and EUM programs and anticipated service area growth trends.
The 1996-1997 winter season peak demand of 4,632 megawatts was
7.5% below the all-time winter peak demand of 5,010 megawatts
which was established in January 1994.
Operating Expenses
- ------------------
Fuel, Purchased Energy and Capacity Purchase Payments
- -----------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------
(Millions of Dollars)
Fuel expense $319.6 $327.8 $355.4
------ ------ ------
Purchased energy
PJM 86.6 114.6 79.4
Other 114.0 221.4 114.2
------ ------ ------
Total purchased energy 200.6 336.0 193.6
------ ------ ------
Fuel and purchased energy $520.2 $663.8 $549.0
====== ====== ======
Capacity purchase payments $150.9 $125.8 $125.8
====== ====== ======
- -----------------------------------------------------------------
Net System Generation and Purchased Energy were as follows.
- -----------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------
(Millions of Kilowatt-hours)
Net system generation 18,322 18,041 19,234
====== ====== ======
Purchased energy 9,371 16,157 9,755
====== ====== ======
- -----------------------------------------------------------------
8
Although net generation increased by 1.6% during 1997, fuel
expense decreased due to the timing of fuel billed to customers
through the Company's fuel rates. 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 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)
1997 89.1 6.4 4.5 $1.65 $3.80 $2.87 $1.84
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
- -----------------------------------------------------------------
The increase of approximately 2% in the 1997 system average
unit fuel cost compared with the 1996 system average resulted
primarily from an increased unit cost of coal. 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 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 increase in the
percent of gas burned in 1997 reflects the decreased price of gas
and the decreased usage of higher-cost oil. 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 Company's generating and transmission facilities are
interconnected with those of other transmission owners in the PJM
power pool and other utilities. Historically, the pricing of
most PJM-dispatched internal economy energy transactions was
based upon "split savings" whereby such energy was 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. In April 1997, PJM
implemented a "bid-based" energy market, where companies offer
energy at prices based on cost, and transactions occur at the
market's marginal clearing price.
9
On November 25, 1997, the FERC conditionally approved a PJM
restructuring plan which, among other things, established an
independent system operator (ISO). The ISO began operation on
January 1, 1998, and is responsible for system operations and
regional transmission planning. PJM's revised transmission
tariff will become effective on April 1, 1998. The Commission
authorized the independent body that operates the ISO to also
operate the PJM power exchange. Transmission is now priced at a
single rate based on the cost of the transmission system where
the generating capacity is delivered, instead of the prior
practice of paying separate rates for each transmission system
used. The Commission also approved locational marginal pricing
for transmission congestion control. The Commission delineated
the principles necessary for forming ISO's in its Order No. 888
issued in April 1996. (See Restructuring of the Bulk Power
Market discussion below).
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
expand the opportunities for economic transactions.
The Company continues to purchase energy from Ohio Edison
under the Company's 1987 long-term capacity purchase agreements
with Ohio Edison and Allegheny Energy, Inc. (formerly Allegheny
Power System). Pursuant to this agreement, the Company is
purchasing 450 megawatts of capacity and associated energy
through the year 2005. 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. Capacity payments under this agreement commenced in
January 1997. The Company also purchases energy from the
Northeast Maryland Waste Disposal Authority under an avoided
cost-based purchase agreement. In November 1997, the Company
agreed to purchase the 32-megawatt rated capacity of this
facility for the period November 1, 1997 to December 31, 1998.
This purchase facilitated the sale of 35 megawatts of capacity to
Northeast Utilities Service Company (NUSCO). The capacity
expense under these agreements, including an allocation of a
portion of Ohio Edison's fixed operating and maintenance costs,
was $145.2 million in 1997 and is estimated at $143 million in
1998. Commitments under these agreements are estimated at $198
million in 1999, $201 million in 2000, and $207 million in 2001
and 2002. The District of Columbia fuel rate includes a
provision for the current recovery of purchased capacity costs as
well as a provision for the credit for capacity sales. In
10
Maryland, purchased capacity costs are recovered in base rates.
Accordingly, the Company will seek recovery of future changes in
the levels of these costs through a base rate application to the
Maryland Commission.
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. The
Company's power sales tariff also allows for the sale of
generating capacity on a short-term basis. The Company sold
capacity to PECO Energy Company in the amount of 150 megawatts
during January 1997 and 100 megawatts for the period February
through May 1997. In addition, the Company is selling capacity
to Delmarva Power & Light Company in the amount of 100 megawatts
for the period June 1, 1997, through May 31, 1998; and to GPU,
Inc. in the amount of 130 megawatts for the period August 1,
1997, through December 31, 1997. The Company is also selling 35
megawatts of capacity to NUSCO for the period November 1, 1997
through December 31, 1998. This sale was facilitated by the
purchase of 32 megawatts of capacity from the Northeast Maryland
Waste Disposal Authority. Revenues from capacity and energy
transactions totaled approximately $11.1 million, $151.4 million
and $22.9 million in 1997, 1996 and 1995, respectively, and are
included as components of interchange deliveries.
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 has approved a futures contract
with PJM delivery, and is preparing to submit the contract to the
Commodities Futures Trading Commission for approval. This
futures contract, anticipated to begin in 1998, will have a
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.
11
Other Operation and Maintenance Expenses
- ----------------------------------------
Other operation and maintenance expenses totaled $315.5 million
for 1997. These expenses increased by $.7 million (.2%) in 1997,
principally due to increases in electric plant maintenance
expense, partially offset by reduced labor and benefits costs.
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. The Company's budget and cost
control disciplines have resulted in a 16% decline in the number
of Company employees since 1994. In addition, utility operating
results for 1995 were affected by a nonrecurring charge of $7.4
million in January 1995 for one-time operating costs associated
with the Company's successful Voluntary Severance Program, which
has provided annual savings in operating and construction costs
of approximately $15 million.
The Company has implemented, through an internal Task Force,
a 4-phase approach to accommodate the year 2000. The phases
being addressed are: Corporate Application Compliance which
includes all large core business systems; Business Partners'
Systems and Vendor System Verification which is intended to
ensure all suppliers are in compliance with year 2000 processing;
End-user Computing Systems which are all systems which are not
considered core business systems but contain date calculations;
and Non-Information Technology Processes that include all
operating and control systems. The Task Force has developed a
database to identify and track the progress of work on each
phase. The preliminary target date for overall completion of
these phases is mid-1999. The Company is required to charge to
expense, as incurred, internal and external costs specifically
associated with modifying internal-use computer software for the
year 2000, in accordance with a July 1996 pronouncement of the
Emerging Issues Task Force of the Financial Accounting Standards
Board. The costs of expected modifications to be made,
principally in the next two years, will be approximately $10
million. The cost or consequences of a material incomplete or
untimely resolution of the year 2000 problem could adversely
affect future operations, financial results or financial
condition of the Company.
12
Depreciation and Amortization Expense, Income Taxes and
Other Taxes
- -------------------------------------------------------
Depreciation and amortization expense increased by $9 million
(4%) in 1997 due to additional investment in property and plant.
Depreciation and amortization expense increased by $17.5 million
(8.5%) and $25.5 million (14.2%) in 1996 and 1995, 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 decrease in
income taxes in 1997 reflects lower taxable operating income.
The increase in income taxes in 1996 and 1995, reflects higher
taxable operating income. Other taxes increased by $1.4 million
(.7%) in 1997, and decreased by $2.3 million (1.2%) and $3.4
million (1.6%) in 1996 and 1995, respectively. The increase in
1997 reflects increases and partially offsetting decreases in the
levels of plant investment and operating revenue, respectively,
upon which taxes are based. The decreases in 1996 and 1995
reflect the reduction in county fuel-energy tax rates.
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 $17.1
million in 1997, $16.9 million in 1996 and $(124.4) million in
1995. 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. As discussed above, in December 1997, the Company
wrote off cumulative deferred Merger-related costs totaling $52.5
million. Other income includes, in "Other, net", credits of
$19.9 million for income taxes associated with the Merger write-
off. 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 (CAA) compliance. AFUDC equity totaled
$1 million in 1997, $1.4 million in 1996 and $1.5 million in
1995; CCRF equity credits totaled $5.7 million in 1997, $5.2
million in 1996 and $4.7 million in 1995. CCRF accruals on
unamortized District of Columbia DSM costs not in rate base,
totaling $5.4 million in 1997, $4.1 million in 1996 and $4.8
million in 1995, are also reflected in "Other, net."
Utility interest charges were relatively stable during the
three-year period 1995 through 1997, notwithstanding changes in
the levels of borrowing. Short-term borrowing costs have
remained relatively low. The average cost of outstanding long-
term utility debt declined from 7.56% at the beginning of 1995 to
7.33% at the end of 1997. Utility interest charges were offset
13
by both the debt component of AFUDC which totaled $3.8 million in
1997, $3.9 million in 1996 and $7.5 million in 1995; and by the
debt component of Clean Air Act CCRF which totaled $4.1 million
in 1997, $3.6 million in 1996 and $3.3 million in 1995.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
The Company's total investment in property and plant, at original
cost, was $6.5 billion at year-end 1997. Investment in property
and plant construction, net of AFUDC and CCRF, was $610.8 million
for the period 1995 through 1997.
Internally generated cash from utility operations, after
dividends, totaled $503.7 million for the period 1995 through
1997. Sales of First Mortgage Bonds, Medium-Term Notes and
Common Stock during the period 1995 through 1997 provided a total
of $474.9 million. During the years 1995 through 1997, the
Company retired $296.8 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 1998 through
2000, capital resources of $201 million ($52 million in 1998)
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 $805 million is
expected to be available from depreciation and amortization
charges and income tax deferrals over the three-year period of
which approximately $270 million is the 1998 portion.
In October 1997, the Company sold $175 million principal
amount of First Mortgage Bonds. Proceeds were applied to refund
short-term debt incurred to finance ongoing construction and
operating activities and to pay at maturity, in July and August
1997, $50 million principal amount of Medium-Term Notes; and to
pay at maturity $50 million principal amount of First Mortgage
Bonds due February 15, 1998. 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 cost for all utility long-term
debt outstanding at December 31, 1997, was $132.6 million,
compared with $133 million and $127.9 million at December 31,
1996 and 1995, respectively.
The Company reduced its Maryland fuel rate by 9.5% effective
August 28, 1997. Included in the reduction was an adjustment for
a deferred fuel amortization credit to refund over a 12-month
period approximately $20.7 million of previously overrecovered
fuel costs incurred through June 30, 1997. The Maryland
14
Commission order approving the reduction became final on December
13, 1997. The Company expects to apply for an increase in the
Maryland fuel rate in early 1998.
Dividends on common stock were $196.6 million in 1997 and
1996 and $196.5 million in 1995. The Company's current annual
dividend on common stock is $1.66 per share. The dividend rate
is determined by the Company's Board of Directors and takes into
consideration, among other factors, current and possible future
developments which may affect the Company's income and cash flow
levels. Although the Company has no current plans to change the
dividend, there can be no assurance that the $1.66 dividend rate
will be in effect in the future.
Dividends on preferred stock were $16.6 million in 1997 and
1996 and $16.9 million in 1995. The embedded cost of preferred
stock was 6.44% at December 31, 1997, 6.41% at December 31, 1996
and 6.43% at December 31, 1995.
The Company's capitalization ratios (excluding nonutility
subsidiary debt), at December 31, 1997, are presented below.
- -----------------------------------------------------------------
Excluding Including
Amounts Due Amounts Due
In One Year In One Year
- -----------------------------------------------------------------
Long-term debt 47.2% 45.1%
Redeemable serial preferred stock 3.5 3.3
Serial preferred stock 3.1 3.0
Common equity 46.2 44.2
Short-term debt and amounts due in
one year - 4.4
----- -----
Total capitalization 100.0% 100.0%
===== =====
- -----------------------------------------------------------------
Year-end 1997 outstanding utility short-term indebtedness
totaled $131.4 million compared with $131.4 million and $258.5
million at the end of 1996 and 1995, respectively.
The Company maintains 100% line of credit back-up in the
amount of $180 million, for its outstanding commercial promissory
notes, which was unused during 1997, 1996 and 1995.
Conservation
- ------------
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
15
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 District of Columbia Public
Service Commission 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. Remaining
allowable expenditures under the DSM spending cap totaled $10
million at December 31, 1997.
Investment in District of Columbia DSM programs totaled
approximately $5 million in 1997. 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 CAA Amendments of
1990. The conservation component is scheduled to be updated
annually in the spring of each year, while the CAA component is
updated quarterly. In June 1997, the Company filed an
Application for Authority with the District of Columbia Public
Service Commission requesting approval for an updated
conservation component reflecting recoverable DSM costs expended
during 1995 and 1996. The Application, which superseded an
Application filed in June 1996, proposed a rate which would
increase annual revenue by approximately $9 million. No action
has been taken by the District of Columbia Public Service
Commission on the revised surcharge rate.
During 1997, the Company invested approximately $24 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 $1.6 million in 1997, based on 1996
performance, which followed bonuses of $8.9 million in 1996,
based on 1995 performance, and $8.7 million in 1995, based on
1994 performance. Maryland DSM program goals for 1996 were
reduced to reflect lower DSM expenditures; consequently, the
performance bonus in 1997 was significantly lower than amounts
awarded for performance in prior years.
16
In 1997, 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 usage 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 725
megawatts have been achieved to date from DSM and EUM programs
and that additional peak load reductions of approximately 300
megawatts will be achieved in the next five years. The Company
also estimates that, in 1997, energy reductions of approximately
1.7 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 $136 million ($36
million in 1998).
Construction and Generating Capacity
- ------------------------------------
Construction expenditures, excluding AFUDC and CCRF, totaled $217
million in 1997 and are projected to total $845 million for the
five-year period 1998 through 2002, which includes approximately
$75 million of CAA expenditures. In 1998, construction
expenditures are projected to total $175 million, which includes
$10 million of estimated CAA expenditures. The Company plans to
finance its construction program primarily through funds provided
by operations.
The Company has been purchasing energy from a 32-megawatt
municipally financed resource recovery facility in Montgomery
County, Maryland, which began commercial operation in August
1995. In November 1997, the Company agreed to purchase the 32-
megawatt rated capacity of the facility for the period November
1, 1997 to December 31, 1998. This purchase facilitated the sale
of 35 megawatts to NUSCO. 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. This
facility achieved full commercial operation in October 1996. In
October 1997, the Company restructured its agreement with Panda
to resolve certain disputes regarding capacity and energy payment
rates for the facility. In exchange for an adjustment in
capacity payment rates and a reduction in the present value of
capacity payments over the term of the agreement, the Company
accrued a one-time payment to Panda of approximately $3.9 million
at December 31, 1997. Other features of the settlement allow
Panda to broker sales of certain amounts of the Company's system
capacity from January 1998 through May 2000, and to broker or
sell energy from the Panda facility. Panda will pay the Company
17
for the right to broker capacity sales, as well as a fee based on
actual energy sales. 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.
CLEAN AIR ACT
- -------------
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 approximately $75 million over the next five years. 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 new boiler burner controls and
equipment at the Company's Dickerson Generating Station. 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. Further, the U.S. Environmental Protection
Agency has issued proposed rules for reducing interstate
transport of ozone. These provisions are likely to result in
further nitrogen oxides emissions reductions from the Company's
boilers; however, the extent of reductions and associated costs
cannot be predicted at this time.
The Company owns a 9.72% undivided interest in the Conemaugh
Generating Station located in western Pennsylvania. Nitrogen
oxides emissions reduction equipment and flue gas desulfurization
equipment have been installed at the station for compliance with
Phases I and II of the CAA. The Company's share of 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 is being 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
18
upon current costs of providing service. The regulatory
commissions have authorized fuel rates which provide for billing
customers on a timely basis for the actual cost of fuel and
interchange and for emission allowance costs and, in the District
of Columbia, for purchased capacity.
Annual base rate increases (decreases) which became
effective during the period 1995 through 1997 are shown below.
- -----------------------------------------------------------------
District
of
Year Total Maryland Columbia Wholesale
- -----------------------------------------------------------------
(Millions of Dollars)
1997 $24.0 $24.0 $ - $ -
1996 (2.0) - - (2.0)
1995 30.2 - 27.9 2.3
----- ----- ----- -----
$52.2 $24.0 $27.9 $ 0.3
===== ===== ===== =====
- -----------------------------------------------------------------
Maryland
- --------
On November 25, 1997, pursuant to a settlement agreement, the
Maryland Public Service Commission authorized a $24 million, or
2.6%, increase in base rate revenues effective with bills
rendered on and after November 30, 1997. Of the $24 million
increase in base rates, approximately $12 million will replace
CCRF accrued on CAA expenditures and, therefore, will have no
effect on future net income levels. The increased rates afford
the Company the opportunity to recover capacity costs associated
with the Panda agreement previously approved by the Maryland
Commission. Capacity payments to Panda commenced in January 1997
and totaled $25.3 million in 1997, of which the Maryland portion
was approximately $13 million. In connection with the settlement
agreement, no determination was made with respect to rate of
return for purposes of setting rates; however, a rate of return
of 9% will be used by the Company, beginning in December 1997,
for purposes of computing AFUDC and CCRF.
Effective June 6, 1997, the Maryland DSM surcharge tariff
was lowered, which will reduce annual revenues by approximately
$17 million, reflecting the Company's efforts to narrow
conservation program offerings and limit conservation spending.
The surcharge includes provisions for the recovery of lost
revenue, amortization of pre-1997 actual program expenditures
plus the initial amortization of 1997 projected program costs, a
CCRF on unamortized program balances and an incentive of $1.6
million awarded for achieving specified 1996 energy goals.
19
Previously, incentives of $8.9 million and $8.7 million were
awarded for achieving 1995 and 1994 energy goals, respectively.
Maryland energy goals for 1996 had been reduced to reflect lower
DSM expenditures; consequently, the performance bonus awarded in
1997 was lower than those awarded in prior years.
District of Columbia
- --------------------
The District of Columbia Public Service Commission authorized a
$27.9 million, or 3.8%, increase in base rate revenue effective
in 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
on unamortized amounts by means of a CCRF 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. In June 1997, the
Company filed an Application for Authority with the Commission to
revise its ECRR. In the Application, which superseded an
Application filed in June 1996, the proposed rate seeks recovery
of actual costs expended during 1995 and 1996, and is expected to
increase annual revenue by approximately $9 million. No action
has been taken by the 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 $10 million at
December 31, 1997. Pre-July 1993 DSM costs receive base rate
treatment.
20
Wholesale
- ---------
The Company has a 10-year full service power supply contract with
SMECO, a wholesale customer. The contract period is to be
extended for an additional year on January 1 of each year, unless
notice is given by either party of termination of the contract
at the end of the 10-year period. The full service obligation
can be reduced by SMECO by up to 20% of its annual requirements
with a five-year advance notice for each such reduction. SMECO
rates were increased by $2.3 million effective January 1, 1995.
Pursuant to an 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, and an additional $2.5 million
rate reduction became 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
flexibility through conservation and EUM 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 with difficult-
to-find solutions.
In October 1996, the Maryland Commission reopened the
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. The Commission also directed its
Staff to submit a report containing, among other things,
recommendations regarding regulatory and competitive issues
facing the electric industry in Maryland. In May 1997, the
Commission Staff issued a report proposing a three-step process
21
for implementing customer choice, affording all Maryland
customers the option of choosing their supplier of electricity by
April 2001.
On December 3, 1997, the Maryland Commission issued an Order
outlining steps toward a competitive electric generation market.
On December 31, 1997, the Commission issued a second Order that
established later dates for the phased-in implementation of
competition and also suspended all other dates in its December 3,
1997 Order, which scheduled various filings, hearings and
discussions concerning how competition would be implemented.
Pursuant to the revised order, competition will be phased in over
a two-year period beginning July 1, 2000. Customers representing
one-third of the electric load in a particular customer class
will be able to choose their electric generation supplier at that
time. On July 1, 2001, the eligible group increases to two-
thirds in any one customer class, and all customers will then
become eligible one year later.
Maryland utilities will be given the opportunity to recover
verifiable and prudently incurred stranded costs which cannot be
mitigated or reduced; utilities will be required to file a
breakdown of stranded costs including a proposed method for cost
recovery at a date to be set by the Commission. The Company has
not completed its analysis of possible stranded costs and
alternatives for mitigating or reducing such costs at the present
time. The Commission will consider proposals to establish a
competitive transition charge to address stranded costs. In
addition, the Commission recommended that the Maryland
legislature enact legislation to allow securitization of stranded
costs, where it can be shown that this financing procedure will
reduce costs for customers. Moreover, the Commission did not
order the divestiture or corporate unbundling of generating
assets; however, the Commission will consider these options as
part of its review of market power studies required to be filed
by Maryland electric utilities at a date to be set by the
Commission.
On January 2, 1998, the Company filed an application for
rehearing and clarification of the Commission's December 3, 1997
Order. It remains unclear whether the Commission has authority
to move forward without the explicit approval of the Maryland
legislature or whether full retail competition can occur without
Maryland legislative action concerning the many issues which are
integral to the Commission's plan. For example, the Commission
recognizes the need for tax reform to "level the playing field"
for Maryland utilities, and has requested the legislature to
enact the necessary legislation. Also, the Commission believes
that fuel adjustment clauses are incompatible with the workings
of a competitive generation market and has requested that
legislation be enacted to discontinue use of fuel adjustment
clauses in the future. Additionally, the Commission has
requested that the necessary legislation be enacted to permit
22
price cap regulation and to otherwise materially depart from cost
of service regulation with respect to the purchase and generation
of electricity. The Commission has not proposed any changes to
the form of regulation currently applicable to the recovery of
costs associated with the distribution of electricity.
Also, the Commission proposed the establishment of statewide
roundtables to address issues such as provision of metering and
billing services, consumer protection and DSM.
The Company reaffirms its full support for customer choice
for Maryland electric customers, and has provided key principles
to be used as guidelines for its introduction. These principles
include the concept that Maryland companies should not be put at
a competitive disadvantage by customer choice, that competition
should not be regulated, and that the benefits of customer choice
should not be oversold.
In late 1995 the District of Columbia Public Service
Commission initiated a proceeding to investigate issues regarding
electricity industry structure and competition. In September
1996, the Commission issued an order designating the issues to be
examined in the proceeding. Initial and reply comments regarding
the designated issues were filed with the Commission in early
1997. To date, no decisions have been rendered.
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. 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. In addition, electric
plant in service includes a regulatory asset related to capital
leases, which are treated as operating leases for ratemaking
purposes, of approximately $29 million and $21 million at
December 31, 1997 and 1996, respectively.
Under traditional regulation, utilities are provided an
opportunity to earn a fair return on invested capital in exchange
for a commitment to serve all customers within a designated
service territory. To further the goal of providing universal
access to safe and reliable electric service within this
23
regulated environment, regulatory decisions led to costs and
commitments by utilities that may not be entirely recovered
through market-based revenues in a competitive environment.
Recovery and measurement of above-market, or "stranded" costs in
a future competitive environment, will be subject to regulatory
proceedings. Potential above-market costs include, but are not
limited to, costs associated with generation facilities that are
fixed and unavoidable, including future costs related to plant
removal; above-market costs associated with purchase power
obligations; and regulatory assets and obligations incurred in
accordance with SFAS No. 71. The Company expects to be provided
an opportunity to recover its stranded costs.
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 through open access to
transmission on a comparable basis. The Commission required that
power pools such as PJM must also comply with these Orders.
Order No. 888 required utilities to file open access transmission
tariffs. Order No. 889 directed utilities to establish or
participate in an Open Access Same-time Information System
(OASIS) where transmission owners 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. Subsequently, on April
1, 1997, PJM implemented an OASIS on behalf of the PJM
transmission owners which replaced the Company's OASIS. Order
No. 889 also required the Company to establish a code of conduct
that complies with FERC's prescribed standards to separate
utilities' transmission system operations and wholesale marketing
functions. The Company's filed code of conduct became effective
on January 3, 1997.
On November 25, 1997, FERC conditionally approved a PJM
restructuring plan, establishing an independent system operator
(ISO) to administer transmission service under a PJM control area
poolwide transmission tariff and provide open access transmission
service on a poolwide basis. The ISO, which began operation on
January 1, 1998, is responsible for system operations and
regional transmission planning. In addition, the Commission
decided that the independent body that operates the ISO may also
operate the PJM power exchange. The Commission approved the
plan's use of single, non-pancaked transmission rates to access
the eight transmission systems which make up PJM. Each
transmission owner within PJM has its own transmission rate,
whereby the transmission customer will pay a single rate based on
the cost of the transmission system where the generating capacity
is delivered. This PJM rate design has been in effect since
April 1997. The Commission also approved, effective April 1,
1998, locational marginal pricing for allocating scarce
24
transmission capability. This method is based on price
differences in energy at the various locations on the
transmission system.
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. The PJM members have
transformed the previous coordinated cost-based pool dispatch
into a bid-based regional energy market operating under a
standard of transmission service comparability. Benefits and/or
costs derived from the PJM market are passed through to the
Company's customers through fuel adjustment clauses and,
accordingly, will not have a material effect on the operating
results of the Company.
NEW ACCOUNTING STANDARDS
- ------------------------
See the discussion included in Note (1) of the Notes to
Consolidated Financial Statements, Summary of Significant
Accounting Policies.
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 1997, the
Company participated in environmental assessments and cleanups
under these laws at four federal Superfund sites and a private
party site as a result of litigation. While the total cost of
remediation at these sites may be substantial, the Company shares
liability with other potentially responsible parties. Based on
the information known to the Company at this time, management is
of the opinion that resolution of these matters will not have a
material effect on the results of operations or financial
position of the Company.
See the discussion included in Note (13) of the Notes to
Consolidated Financial Statements, Commitments and Contingencies,
for additional information.
25
NONUTILITY SUBSIDIARY
- ---------------------
RESULTS OF OPERATIONS
- ---------------------
PCI's earnings in 1997 were $17.1 million ($.14 per share),
compared with net earnings of $16.9 million ($.14 per share) in
1996 and a net loss of $124.4 million ($1.05 per share) in 1995.
During 1997, PCI sold its remaining aircraft held for disposal,
resulting in a $2 million pre-tax ($1.3 million after-tax) charge
to earnings. As a result of joint venture operations during
1997, PCI's obligation for previously accrued deferred income
taxes was reduced, resulting in after-tax earnings of $7.4
million after provision for transaction costs. PCI's earnings in
1997 also include capital gains totaling $4.5 million, net of
tax, related primarily to tender offers accepted by PCI which
reduced the cost basis of its preferred stock portfolio by $83
million since year end 1996. Proceeds were used to pay down debt
which resulted in a decrease in interest expense from 1996.
On December 18, 1997, PCI and RCN Telecom Services, Inc.
(RCN) of Princeton, New Jersey, signed the definitive agreements
forming a joint venture known as Starpower Communications, L.L.C.
to provide a package of local and long distance telephone, cable
television, high speed Internet and other telecommunications
services to residents and businesses in the Washington, D.C./
Baltimore/Northern Virginia metropolitan region. The joint
venture is equally owned and managed by PCI and RCN. PCI and RCN
each will invest up to $150 million over a three-year period to
build out, market and provide these services over an advanced
fiber optic network. PCI's investment in the joint venture will
be funded through cash from operations and borrowings under its
Medium-Term Note facility. PCI expects that the joint venture
will incur operating losses initially, as it develops and expands
its network and customer base. Start-up costs incurred by PCI
relating to the telecommunications business have been expensed.
In 1997, PCI generated 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 $75.6 million in 1997, compared
to $91.7 million in 1996 and $100.6 million in 1995. The
decrease in income from leasing activity during 1997 was
primarily due to aircraft sales, resulting in lower rental
income. The decrease in 1996 compared to 1995 was primarily the
result of nonrecurring fee income earned in 1995. PCI's
marketable securities portfolio contributed pre-tax income of
$28.6 million in 1997, $33.7 million in 1996 and $36.1 million in
1995. The decreases in income from marketable securities were
primarily due to decreases in dividend income as a result of
26
reductions in the preferred stock portfolio since 1995. Income
from marketable securities included net realized gains of $6.9
million in 1997, $3.6 million in 1996 and $.4 million in 1995.
Other income totaled $20.9 million in 1997 compared with a
loss of $10.4 million in 1996 and a loss of $2.3 million in 1995.
The increase in other income for 1997 was primarily the result of
$22.5 million in revenue earned from investments made by PEPCO
Enterprises, Inc. (PEI), a wholly owned operating subsidiary,
which the Company contributed to PCI in the second quarter of
1996. Through PEI, PCI has business interests and investments in
the energy industry, including liquefied natural gas peak storage
and pipeline facilities, and an underground cable construction
and maintenance company. PCI's other principal operating
subsidiaries are Pepco Communications L.L.C., which targets the
telecommunications business sector and holds a 50% interest in
Starpower Communications, and Pepco Services, Inc., which is an
energy services company primarily targeting large commercial and
industrial energy users inside and outside PEPCO's retail service
territory. Other income also includes pre-tax writedowns of $29
million ($18.8 million after-tax) taken in 1996 related to PCI's
investments in solar energy projects, real estate and oil and
natural gas, and pre-tax writedowns taken in the fourth quarter
1997 related to real estate of $10 million ($6.5 million after-
tax).
Expenses before income taxes, which include interest,
depreciation and operating, and administrative and general
expenses totaled $139.9 million, $152.7 million and $344.6
million for years ended 1997, 1996 and 1995, respectively. The
decrease in expenses before income taxes in 1997 compared to 1996
and 1995 was primarily due to a $2 million pre-tax loss on assets
held for disposal in 1997 compared to a $12.7 million pre-tax
loss in 1996 and a $170.1 million pre-tax loss in 1995. Interest
expense also decreased over the three-year period due to a
decrease in debt outstanding as proceeds from the sales of
aircraft and marketable securities were used to pay down debt.
The decrease in expenses before income taxes in 1997 was
partially offset by operating expenses of $21.8 million for PEI
and other new business entities.
PCI had income tax credits of $31.9 million in 1997, $54.6
million in 1996 and $85.7 million in 1995. The decrease in
income tax credits was primarily due to the $170.1 million
aircraft writedown taken in May 1995 and deferred tax reversals
of $30.8 million in 1996 compared to $10.1 million of deferred
tax reversals in 1997.
27
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
PCI has a $302.5 million securities portfolio, consisting
primarily of fixed-rate electric utility preferred stocks.
During 1997, PCI reduced the cost basis of its marketable
securities portfolio by $83 million primarily as the result of
calls and acceptance of tender offers (approximately $118.1
million) offset by purchases of $35.1 million. The reduced size
of the preferred stock portfolio lessens the impact of future
fluctuations in interest rates. Proceeds from securities
activity during 1997 were used to pay down short-term debt.
During the first quarter of 1997, PCI received $25.8 million in
cash proceeds from the sale of notes receivable from World
Airways and recorded an after-tax charge to earnings of $.4
million. PCI also received $15.7 million in cash proceeds for
the early redemption of a note receivable related to the 1996
sale of an aircraft engine leasing subsidiary. During the third
quarter of 1997, PCI received $12.9 million for the sale of notes
receivable from Continental Airlines and recorded an after-tax
gain of $.9 million. The sale and early redemption of the notes
further reduce PCI's exposure to the ongoing credit risk
associated with the airline industry as well as the inherent
uncertainty regarding the future value of the aircraft which
secured the repayment of the notes.
PCI had short-term debt outstanding of $7.7 million at
December 31, 1997, compared to $51.7 million at December 31,
1996. During 1997, PCI issued $40 million in long-term debt,
including non-recourse debt, and debt repayments totaled $205.8
million. At December 31, 1997, PCI had $196 million available
under its Medium-Term Note Program and $400 million of unused
bank credit lines.
28
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 subsidiary at December
31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 1997, 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 16, 1998
29
<TABLE>
Consolidated Balance Sheets
Potomac Electric Power Company and Subsidiary
<CAPTION>
- ---------------------------------------------------------------------------------------------
December 31,
Assets 1997 1996
- ---------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C>
Property and Plant - at original cost (Notes 6 and 10)
Electric plant in service $ 6,392,750 $ 6,232,049
Construction work in progress 94,309 62,469
Electric plant held for future use 4,231 4,152
Nonoperating property 22,824 22,921
----------- -----------
6,514,114 6,321,591
Accumulated depreciation (2,027,780) (1,898,342)
----------- -----------
Net Property and Plant 4,486,334 4,423,249
----------- -----------
Current Assets
Cash and cash equivalents 5,630 2,174
Customer accounts receivable, less allowance for uncollectible
accounts of $2,102 and $1,298 116,554 128,600
Other accounts receivable, less allowance for uncollectible
accounts of $300 32,256 38,490
Accrued unbilled revenue (Note 1) 69,259 70,214
Prepaid taxes 33,740 34,202
Other prepaid expenses 7,599 4,613
Material and supplies - at average cost
Fuel 59,434 68,232
Construction and maintenance 68,128 69,541
----------- -----------
Total Current Assets 392,600 416,066
----------- -----------
Deferred Charges
Income taxes recoverable through future rates, net (Note 4) 238,125 238,467
Conservation costs, net 221,528 233,793
Unamortized debt reacquisition costs 52,745 55,552
Other 148,900 159,139
----------- -----------
Total Deferred Charges 661,298 686,951
----------- -----------
Nonutility Subsidiary Assets
Cash and cash equivalents 422 804
Marketable securities (Notes 11 and 15) 302,522 377,237
Investment in finance leases (Note 15) 463,592 484,972
Operating lease equipment, net of accumulated depreciation
of $153,541 and $117,705 (Note 15) 163,289 199,124
Assets held for disposal - 10,300
Receivables, less allowance for uncollectible
accounts of $6,000 64,243 87,745
Other investments 162,865 193,002
Other assets 10,392 12,436
----------- -----------
Total Nonutility Subsidiary Assets 1,167,325 1,365,620
----------- -----------
Total Assets $ 6,707,557 $ 6,891,886
=========== ===========
30
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
December 31,
Capitalization and Liabilities 1997 1996
- ---------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C>
Capitalization
Common equity (Note 7)
Common stock, $1 par value - authorized 200,000,000 shares,
issued 118,500,891 and 118,500,037 shares $ 118,501 $ 118,500
Premium on stock and other capital contributions 1,025,167 1,025,187
Capital stock expense (14,958) (14,780)
Retained income 734,318 760,285
----------- -----------
Total Common Equity 1,863,028 1,889,192
Preference stock, cumulative, $25 par value -
authorized 8,800,000 shares, no shares issued or outstanding - -
Serial preferred stock (Notes 8 and 11) 125,290 125,298
Redeemable serial preferred stock (Notes 9 and 11) 141,000 142,500
Long-term debt (Notes 10 and 11) 1,901,486 1,767,598
----------- -----------
Total Capitalization 4,030,804 3,924,588
----------- -----------
Other Non-Current Liabilities
Capital lease obligations (Note 13) 160,406 162,936
----------- -----------
Total Other Non-Current Liabilities 160,406 162,936
----------- -----------
Current Liabilities
Long-term debt and preferred stock redemption
due within one year 52,054 152,445
Short-term debt (Note 12) 131,375 131,390
Accounts payable and accrued payroll 118,428 117,810
Capital lease obligations due within one year 20,772 20,772
Taxes accrued 29,158 23,362
Interest accrued 38,307 38,117
Customer deposits 24,838 24,119
Other 67,455 59,016
----------- -----------
Total Current Liabilities 482,387 567,031
----------- -----------
Deferred Credits
Income taxes (Note 4) 1,029,318 973,642
Investment tax credits (Note 4) 57,308 60,958
Other 19,034 35,658
----------- -----------
Total Deferred Credits 1,105,660 1,070,258
----------- -----------
Nonutility Subsidiary Liabilities
Long-term debt (Notes 10 and 11) 830,458 996,232
Short-term notes payable (Note 12) 7,685 51,650
Deferred taxes and other (Note 4) 90,157 119,191
----------- -----------
Total Nonutility Subsidiary Liabilities 928,300 1,167,073
----------- -----------
Commitments and Contingencies (Note 13)
Total Capitalization and Liabilities $ 6,707,557 $ 6,891,886
=========== ===========
31
</TABLE>
<TABLE>
Consolidated Statements of Earnings
Potomac Electric Power Company and Subsidiary
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
For the year ended December 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Revenue (Note 2)
Operating revenue $ 1,810,829 $ 1,834,857 $ 1,822,432
Interchange deliveries 52,681 175,454 53,670
----------- ----------- -----------
Total Revenue 1,863,510 2,010,311 1,876,102
----------- ----------- -----------
Operating Expenses
Fuel 319,619 327,792 355,453
Purchased energy 200,562 335,978 193,592
----------- ----------- -----------
Fuel and purchased energy 520,181 663,770 549,045
Capacity purchase payments (Note 13) 150,912 125,786 125,769
Other operation 220,289 223,326 224,030
Maintenance 95,252 91,524 92,859
Depreciation and amortization 232,042 223,016 205,490
Income taxes (Note 4) 117,731 134,085 128,460
Other taxes (Note 5) 201,720 200,365 202,708
----------- ----------- -----------
Total Operating Expenses 1,538,127 1,661,872 1,528,361
----------- ----------- -----------
Operating Income 325,383 348,439 347,741
----------- ----------- -----------
Other (Loss) Income
Nonutility subsidiary (Note 15)
Income 125,140 114,966 134,493
Loss on assets held for disposal (2,022) (12,744) (170,078)
Expenses, including interest and income taxes (106,037) (85,328) (88,812)
----------- ----------- -----------
Net earnings (loss) from nonutility subsidiary 17,081 16,894 (124,397)
Allowance for other funds used during construction
and capital cost recovery factor 6,708 6,572 6,155
Write-off of merger costs (Note 13) (52,533) - -
Other, net 24,021 4,458 682
----------- ----------- -----------
Total Other (Loss) Income (4,723) 27,924 (117,560)
----------- ----------- -----------
Income Before Utility Interest Charges 320,660 376,363 230,181
----------- ----------- -----------
Utility Interest Charges
Interest on debt 146,703 146,939 146,558
Allowance for borrowed funds used during construction
and capital cost recovery factor (7,873) (7,536) (10,768)
----------- ----------- -----------
Net Utility Interest Charges 138,830 139,403 135,790
----------- ----------- -----------
Net Income 181,830 236,960 94,391
Dividends on Preferred Stock 16,579 16,604 16,851
----------- ----------- -----------
Earnings for Common Stock $ 165,251 $ 220,356 $ 77,540
=========== =========== ===========
Earnings Per Common Share (Note 7) $1.39 $1.86 $.65
Fully Diluted Earnings Per Common Share (Note 7) $1.38 $1.82 $.65
Cash Dividends Per Common Share $1.66 $1.66 $1.66
32
</TABLE>
<TABLE>
Consolidated Statements of Cash Flows
Potomac Electric Power Company and Subsidiary
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
For the year ended December 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Operating Activities
Income from utility operations $ 164,749 $ 220,066 $ 218,788
Adjustments to reconcile income to net cash
from operating activities:
Depreciation and amortization 232,042 223,016 205,490
Deferred income taxes and investment tax credits 60,544 81,496 51,774
Deferred conservation costs (34,543) (49,404) (104,796)
Allowance for funds used during construction
and capital cost recovery factor (14,581) (14,108) (16,923)
Changes in materials and supplies 10,211 (4,073) 12,418
Changes in accounts receivable and accrued unbilled revenue 19,235 10,539 (15,822)
Changes in accounts payable 6,388 13,624 (14,419)
Changes in other current assets and liabilities (2,459) 5,859 (1,484)
Changes in deferred merger costs 29,009 (24,213) (4,796)
Net other operating activities (54,836) (24,461) (40,868)
Nonutility subsidiary:
Net earnings (loss) 17,081 16,894 (124,397)
Deferred income taxes (63,759) (36,398) (49,697)
Loss on assets held for disposal 2,022 12,744 170,078
Changes in other assets and net other operating activities 63,716 36,258 83,509
----------- ----------- -----------
Net Cash From Operating Activities 434,819 467,839 368,855
----------- ----------- -----------
Investing Activities
Total investment in property and plant (231,744) (194,036) (230,675)
Allowance for funds used during construction
and capital cost recovery factor 14,581 14,108 16,923
----------- ----------- -----------
Net investment in property and plant (217,163) (179,928) (213,752)
Nonutility subsidiary:
Purchase of marketable securities (35,103) (19,680) (35,221)
Proceeds from sale or redemption of marketable securities 125,000 167,528 27,846
Investment in leased equipment (7,480) (3,056) (154,766)
Proceeds from sale or disposition of leased equipment 28,484 3,658 -
Proceeds from sale of assets 7,300 34,154 5,966
Purchase of other investments (20,603) (22,998) (3,818)
Proceeds from sale or distribution of other investments 18,730 33,867 15,614
Investment in promissory notes - (4,245) (7,955)
Proceeds from promissory notes 64,108 16,675 7,977
----------- ----------- -----------
Net Cash (Used by) From Investing Activities (36,727) 25,975 (358,109)
----------- ----------- -----------
Financing Activities
Dividends on common stock (196,615) (196,612) (196,469)
Dividends on preferred stock (16,579) (16,604) (16,851)
Issuance of common stock - - 4,580
Redemption of preferred stock (1,500) - (78)
Issuance of long-term debt 182,267 99,500 188,594
Reacquisition and retirement of long-term debt (151,462) (26,320) (117,465)
Short-term debt, net (15) (127,075) 68,865
Other financing activities (1,375) (5,358) (23,611)
Nonutility subsidiary:
Issuance of long-term debt 40,000 183,000 182,000
Repayment of long-term debt (205,774) (237,102) (275,021)
Short-term debt, net (43,965) (171,703) 174,950
----------- ----------- -----------
Net Cash Used by Financing Activities (395,018) (498,274) (10,506)
----------- ----------- -----------
Net Increase (Decrease) In Cash and Cash Equivalents 3,074 (4,460) 240
Cash and Cash Equivalents at Beginning of Year 2,978 7,438 7,198
----------- ----------- -----------
Cash and Cash Equivalents at End of Year (Note 14) $ 6,052 $ 2,978 $ 7,438
=========== =========== ===========
33
</TABLE>
Notes to Consolidated Financial Statements
- ------------------------------------------
(1) Summary of Significant Accounting Policies
------------------------------------------
Potomac Electric Power Company (the Company, PEPCO) 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 vehicle
to conduct the Company's ongoing nonutility investment programs
and businesses. Effective April 30, 1996, the Company
reorganized its nonutility subsidiaries whereby PEPCO
Enterprises, Inc. 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 its subsidiaries, which provide
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 capital leases and
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.
34
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) to enable the Company to
earn a return on 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,
35
incentives, applicable taxes and estimated lost revenue. The
Maryland surcharge is established annually in a collaborative
process with the recovery of lost revenue subject to a quarterly
earnings test.
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% in 1997, 1996 and 1995.
Conservation
- ------------
In general, the Company accounts for conservation expenditures in
connection with its DSM program as a deferred charge, and
amortizes the costs over five years in Maryland and 10 years in
the District of Columbia. Unamortized conservation costs totaled
36
$82 million in Maryland and $140 million in the District of
Columbia at December 31, 1997, and $96 million in Maryland and
$138 million in the District of Columbia at December 31, 1996.
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 7.6% in 1997, 7.4% in 1996 and 7.9% in 1995,
compounded semiannually.
In Maryland, the Company accrues a CCRF on the retail
jurisdictional portion of certain pollution control 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%.
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.
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.
37
New Accounting Standards
- ------------------------
Effective December 31, 1997, the Company adopted SFAS No. 128
entitled "Earnings per Share" which was issued by the Financial
Accounting Standards Board (FASB) in February 1997. Although
SFAS No. 128 replaces the presentation of primary earnings per
share (EPS) with a presentation of basic EPS, it had no impact on
the calculation of the Company's EPS. SFAS No. 128 also requires
dual presentation of basic and diluted EPS on the face of the
statement of earnings and requires a reconciliation of the
numerator and denominator used in the basic and fully diluted EPS
computations. See the Notes to Consolidated Financial
Statements, (7) Common Equity.
SFAS No. 129 entitled "Disclosure of Information about
Capital Structure", issued by the FASB in February 1997, is also
effective for calendar year 1997 financial statements. SFAS No.
129 consolidates disclosures required by several existing
pronouncements. The Company's disclosures are already in
compliance with such pronouncements and, accordingly, SFAS No.
129 does not require any change to existing disclosures.
In June 1997, the FASB issued SFAS No. 130 entitled
"Reporting Comprehensive Income", which became effective January
1, 1998. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components. All items
that are required to be recognized under accounting standards as
components of comprehensive income must be reported in a
financial statement that is displayed with the same prominence as
other financial statements. The Company's principal components
of comprehensive income are net income, and unrealized gains and
losses on marketable securities.
In June 1997, the FASB also issued SFAS No. 131 entitled
"Disclosures about Segments of an Enterprise and Related
Information" which will become effective for the Company's 1998
calendar year financial statements and will impact quarterly
reporting beginning in the first quarter of 1999. The Company
does not expect adoption of this pronouncement to have a
significant impact on its reporting and disclosure requirements.
38
(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 more
than 80 electric utilities, independent power producers, power
marketers, cooperatives and municipals which operate on a fully
integrated basis.
Total revenue for each year was comprised as shown below.
- -----------------------------------------------------------------
1997 1996 1995
--------------------------------------------------
Amount % Amount % Amount %
- -----------------------------------------------------------------
(Thousands of Dollars)
Sales of
Electricity
Residential $ 524,695 29.2 $ 548,108 30.1 $ 543,532 30.0
Commercial 851,375 47.3 852,497 46.7 848,892 46.8
U.S.
Government 249,341 13.9 250,422 13.7 252,144 13.9
D.C.
Government 51,089 2.8 51,565 2.8 52,105 2.9
Wholesale 123,300 6.8 122,149 6.7 117,117 6.4
---------- ----- --------- ----- ---------- -----
Total 1,799,800 100.0 1,824,741 100.0 1,813,790 100.0
===== ===== =====
Other electric
revenue 11,029 10,116 8,642
---------- ---------- ----------
Operating
revenue 1,810,829 1,834,857 1,822,432
Interchange
deliveries 52,681 175,454 53,670
---------- ---------- ----------
Total Revenue $1,863,510 $2,010,311 $1,876,102
========== ========== ==========
- -----------------------------------------------------------------
Sales of electricity include base rate revenue and fuel rate
revenue. Fuel rate revenue was $509.1 million in 1997, $521.9
million in 1996 and $526.6 million in 1995.
39
The Company's Maryland fuel rate is based on historical net
fuel, interchange and emission allowance costs and does not
include capacity costs associated with power purchases. The
zero-based rate may not be changed without prior approval of the
Maryland Public Service Commission. Application to the
Commission for an increase in the rate may only be made when the
currently calculated fuel rate, based on the most recent actual
net fuel, interchange and emission allowance costs, exceeds the
currently effective fuel rate by more than 5%. If the currently
calculated fuel rate is more than 5% below the currently
effective fuel rate, the Company must apply to the Commission for
a fuel rate reduction.
The Company reduced its Maryland fuel rate by 9.5% effective
August 28, 1997. Included in the reduction was an adjustment for
a deferred fuel amortization credit to refund over a 12-month
period approximately $20.7 million of previously overrecovered
fuel costs incurred through June 30, 1997. The Maryland
Commission order approving the reduction became final on
December 13, 1997.
The District of Columbia fuel rate is based upon an average
of historical and projected net fuel, net interchange, emission
allowance costs and purchased capacity net of capacity sales, 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 net
interchange costs for each billing month. The difference between
the estimated costs and the actual applicable fuel and net
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.
40
Pension expense included in net income was $11.6 million in
1997, $14.2 million in 1996 and $13.9 million in 1995. The net
periodic pension cost was computed as follows.
- -----------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------
(Thousands of Dollars)
Service cost-benefits earned $11,400 $11,400 $ 9,900
Interest cost on projected
benefit obligation 32,400 30,600 28,400
Actual return on Program assets (64,900) (38,200) (51,900)
Differences between actual
and expected return on
Program assets and net
amortization 32,700 10,400 27,500
------- ------- -------
Pension cost $11,600 $14,200 $13,900
======= ======= =======
- ----------------------------------------------------------------
41
Program assets are stated at fair value and were comprised
of approximately 47% and 53% of cash equivalents and fixed income
investments and the balance in equity investments at December 31,
1997 and 1996, respectively. The following table sets forth the
Program's funded status and amounts included in Other Deferred
Charges on the Consolidated Balance Sheets.
- -----------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------
(Thousands of Dollars)
Actuarial present value of benefit obligations:
Program benefits:
Vested benefits $(364,200) $(322,000)
Nonvested benefits (49,300) (49,400)
--------- ---------
Accumulated benefit obligation $(413,500) $(371,400)
========= =========
Actuarial present value of projected
benefit obligation $(495,600) $(438,100)
Program assets at fair value 468,800 402,500
--------- ---------
Projected benefit obligation
in excess of Program assets (26,800) (35,600)
Unrecognized actuarial loss 77,400 68,700
Unrecognized prior service cost 13,500 14,900
Unrecognized net obligation at
January 1, 1987, being recognized
over 18 years 300 300
--------- ---------
Prepaid pension expense $ 64,400 $ 48,300
========= =========
- -----------------------------------------------------------------
Measurement of the actuarial present value of the projected
benefit obligation was based on assumed weighted average discount
rates of 7% and 7.5%, in 1997 and 1996, respectively. The
weighted average rate of increase in future compensation levels
was 4% in 1997 and 1996. The assumed long-term rate of return on
Program assets was 9% in 1997 and 1996. The Company also
sponsors defined contribution savings plans covering all eligible
employees. Under these plans, the Company makes contributions on
behalf of participants. Company contributions to the plans
totaled $6 million in 1997, 1996 and 1995.
42
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. Health maintenance organization arrangements are
available, or a 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
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
$11.1 million, $10.9 million and $9 million in 1997, 1996 and
1995, respectively. The following table sets forth the
components of the postretirement expense.
- -----------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------
(Thousands of Dollars)
Service cost-benefits attributable
to service during the year $ 3,600 $ 2,800 $ 2,300
Interest cost on accumulated
postretirement benefit obligation 5,300 5,300 4,500
Actual return on plan assets (2,300) (1,300) (1,900)
Amortization of transition
obligation 2,100 2,100 2,100
Difference between actual and
expected return on plan assets
and net amortization 2,400 2,000 2,000
------- ------- -------
Net postretirement benefit cost $11,100 $10,900 $ 9,000
======= ======= =======
- -----------------------------------------------------------------
43
The following table sets forth the accumulated post-retirement
benefit obligation reconciled to the amounts recognized on the
Consolidated Balance Sheets.
- -----------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------
(Thousands of Dollars)
Accumulated postretirement
benefit obligation to
Retirees and dependents $(44,000) $(44,100)
Active employees fully eligible (8,800) (7,900)
Active employees not fully
eligible (29,200) (21,100)
-------- --------
Total accumulated postretirement
benefit obligation (82,000) (73,100)
Plan assets at fair value 13,600 9,800
-------- --------
Accumulated postretirement benefit
obligation in excess of plan assets (68,400) (63,300)
Unrecognized transition obligation 31,600 33,700
Unrecognized actuarial loss 36,700 30,800
-------- --------
(Accrued) Prepaid postretirement
benefit cost $ (100) $ 1,200
======== ========
- -----------------------------------------------------------------
The Company's obligation at December 31, 1997 and 1996, was
based on discount rates of 7% and 7.5%, respectively, and a
weighted average rate of increase in future compensation levels
of 4%. The assumed health-care cost trend rate is 7% which
declines to 5.5% after a three-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 $86 million and the sum of the service cost and
interest cost for 1997 by approximately $.7 million.
In January 1997 and 1996, the Company funded the 1997 and
1996 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 1998, the 1998 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 1997 and 1996.
44
<TABLE>
(4) Income Taxes
------------
The provisions 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
- ---------------------------
- -----------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Utility current tax expense
Federal $ 32,252 $ 47,235 $ 68,492
State and local 4,691 6,281 9,173
----------- --------- ---------
Total utility current tax expense 36,943 53,516 77,665
----------- --------- ---------
Utility deferred tax expense
Federal 56,278 74,762 48,339
State and local 7,916 10,383 7,084
Investment tax credits (3,650) (3,649) (3,649)
----------- --------- ---------
Total utility deferred tax expense 60,544 81,496 51,774
----------- --------- ---------
Total utility income tax expense 97,487 135,012 129,439
----------- --------- ---------
Nonutility subsidiary current tax expense
Federal 30,421 (18,252) (35,592)
Nonutility subsidiary deferred tax expense
Federal (62,271) (36,373) (50,116)
----------- --------- ---------
Total nonutility subsidiary income tax expense (31,850) (54,625) (85,708)
----------- --------- ---------
Total consolidated income tax expense 65,637 80,387 43,731
Income taxes included in other income (52,094) (53,698) (84,729)
----------- --------- ---------
Income taxes included in utility operating expenses $ 117,731 $ 134,085 $ 128,460
=========== ========= =========
45
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Consolidated Income Tax Expense
- -------------------------------------------------
- -----------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Income before income taxes $ 247,500 $ 317,347 $ 138,122
=========== ========= =========
Utility income tax at federal statutory rate $ 91,783 $ 124,277 $ 121,879
Increases (decreases) resulting from
Depreciation 10,853 9,867 9,173
Removal costs (5,902) (3,574) (7,204)
Allowance for funds used during construction 859 691 595
Other (4,432) (3,117) (1,613)
State income taxes, net of federal effect 8,194 10,749 10,648
Tax credits (3,868) (3,881) (4,039)
----------- --------- ---------
Total utility income tax expense 97,487 135,012 129,439
----------- --------- ---------
Nonutility subsidiary income tax at federal statutory rate (5,169) (13,206) (73,537)
Increases (decreases) resulting from
Dividends received deduction (5,419) (7,114) (8,524)
Reversal of previously accrued deferred taxes (10,125) (30,804) -
Other (11,137) (3,501) (3,647)
----------- --------- ---------
Total nonutility subsidiary income tax expense (31,850) (54,625) (85,708)
----------- --------- ---------
Total consolidated income tax expense 65,637 80,387 43,731
Income taxes included in other income (52,094) (53,698) (84,729)
----------- --------- ---------
Income taxes included in utility operating expenses $ 117,731 $ 134,085 $ 128,460
=========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
Components of Consolidated Deferred Tax Liabilities (Assets)
- ------------------------------------------------------------
At December 31,
------------------------
1997 1996
------------------------
(Thousands of Dollars)
<S> <C> <C>
Utility deferred tax liabilities (assets)
Depreciation and other book to tax basis differences $ 869,343 $ 821,656
Rapid amortization of certified pollution control
facilities 25,445 24,816
Deferred taxes on amounts to be collected through
future rates 90,154 90,284
Property taxes 13,525 12,664
Deferred fuel (7,369) (14,663)
Prepayment premium on debt retirement 19,962 21,025
Deferred investment tax credit (21,697) (23,079)
Contributions in aid of construction (30,054) (28,719)
Contributions to pension plan 18,157 16,170
Conservation costs (demand side management) 48,041 41,106
Other 21,683 21,653
----------- ---------
Total utility deferred tax liabilities (net) 1,047,190 982,913
Current portion of utility deferred tax liabilities
(included in Other Current Liabilities) 17,872 9,271
----------- ---------
Total utility deferred tax liabilities (net) non-current $ 1,029,318 $ 973,642
=========== =========
Nonutility subsidiary deferred tax liabilities (assets)
Finance leases $ 119,448 $ 144,667
Operating leases 28,823 57,006
Reversal of previously accrued taxes related
to partnerships (5,215) (7,455)
Alternative minimum tax (97,109) (97,109)
Other (45,732) (36,041)
----------- ---------
Total nonutility subsidiary deferred tax liabilities (net),
(included in Deferred taxes and other) $ 215 $ 61,068
=========== =========
46
</TABLE>
The utility net deferred tax liability represents the tax
effect, at presently enacted tax rates, of temporary differences
between the financial statement and tax bases of assets and
liabilities. The portion of the utility net deferred tax
liability applicable to utility operations, which has not been
reflected in current service rates, represents income taxes
recoverable through future rates, net and is recorded as a
Deferred Charge on the balance sheet. No valuation allowance for
deferred tax assets was required or recorded at December 31, 1997
and 1996.
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 1993 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.
(5) Other Taxes
-----------
Taxes, other than income taxes, charged to utility operating
expenses for each period are shown below.
- -----------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------
(Thousands of Dollars)
Gross receipts $ 95,753 $ 96,147 $ 95,158
Property 71,438 69,234 64,991
Payroll 10,469 10,673 11,269
County fuel-energy 15,448 15,448 21,887
Environmental, use and
other 8,612 8,863 9,403
-------- -------- --------
$201,720 $200,365 $202,708
======== ======== ========
- -----------------------------------------------------------------
47
(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 1997, the owners collectively
arranged for long-term tax-exempt financing, pursuant to an
agreement with the Indiana County Industrial Development
Authority relating to certain pollution control facilities
constructed at the Conemaugh Station. The Company's share of
this financing totaled $8.1 million. 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 $89.9 million at December 31, 1997, and
$88.7 million at December 31, 1996, includes $.3 million and $.7
million of Construction Work in Progress, respectively.
48
<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, 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
Net income before net earnings
from nonutility subsidiary - - - 164,749
Nonutility subsidiary:
Net earnings - - - 17,081
Marketable securities net
unrealized gain, net of tax - - - 5,397
Dividends:
Preferred stock - - - (16,579)
Common stock - - - (196,615)
Conversion of preferred stock 854 1 6 -
Other capital contributions - - (26) -
----------- ---------- ----------- ----------
Balance, December 31, 1997 118,500,891 $ 118,501 $ 1,025,167 $ 734,318
=========== ========== =========== ==========
49
</TABLE>
<TABLE>
Reconciliations of the numerator and denominator for earnings per common
share and fully diluted earnings per common share are shown below.
<CAPTION>
-------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ -------------- ---------
(Thousands except Per Share Data)
<S> <C> <C> <C>
1995 Earnings Per Share Reconciliation:
Net income $94,391
Preferred dividends (16,851)
------------ -------------- ---------
Earnings per common share 77,540 118,412 $0.65
Convertible debentures - <F1> - <F1>
Convertible preferred stock 16 38
------------ -------------- ---------
Fully diluted earnings per common share $77,556 118,450 $0.65
============ ============== =========
1996 Earnings Per Share Reconciliation:
Net income $236,960
Preferred dividends (16,604)
------------ -------------- ---------
Earnings per common share 220,356 118,497 $1.86
Convertible debentures 6,416 5,811
Convertible preferred stock 15 35
------------ -------------- ---------
Fully diluted earnings per common share $226,787 124,343 $1.82
============ ============== =========
1997 Earnings Per Share Reconciliation:
Net income $181,830
Preferred dividends (16,579)
------------ -------------- ---------
Earnings per common share 165,251 118,500 $1.39
Convertible debentures 6,353 5,757
Convertible preferred stock 14 34
------------ -------------- ---------
Fully diluted earnings per common share $171,618 124,291 $1.38
============ ============== =========
<FN>
<F1>These amounts are not reflected in the computation of diluted EPS
because the effects are antidilutive and would increase diluted
EPS.
</FN>
50
</TABLE>
The Company's Shareholder Dividend Reinvestment Plan (DRP)
provides that shares of common stock purchased through the plan
may be original issue shares or, at the option of the Company,
shares purchased in the open market. The DRP permits additional
cash investments by plan participants limited to one investment
per month of not less than $25 and not more than $5,000.
As of December 31, 1997, 35,046 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.
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, 1997.
51
(8) Serial Preferred Stock
----------------------
The Company has authorized 11,095,501 shares of cumulative $50
par value Serial Preferred Stock. At December 31, 1997 and 1996,
there were outstanding 5,345,499 shares and 5,375,646 shares,
respectively. The various series of Serial Preferred Stock
outstanding [excluding 2,839,696 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 1997 1996
- -----------------------------------------------------------------
(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,
5,803 and 5,950 shares,
respectively $50.00 290 298
Auction Series A, 1,000,000 shares $50.00 50,000 50,000
-------- --------
$125,290 $125,298
======== ========
- -----------------------------------------------------------------
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,
1997, 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 147 shares in 1997, 556 shares in 1996 and 1,676 shares
in 1995.
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 4.374% ($2.187) for the period December
1, 1997 through February 28, 1998. The average annual dividend
rates were 4.221% ($2.1105) in 1997 and 4.153% ($2.0765) in 1996.
52
(9) Redeemable Serial Preferred Stock
---------------------------------
The outstanding series of $50 par value Redeemable Serial
Preferred Stock are shown below.
- -----------------------------------------------------------------
December 31,
1997 1996
- -----------------------------------------------------------------
(Thousands of Dollars)
$3.37 Series of 1987, 839,696 and
869,696 shares, respectively $ 41,985 $ 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
-------- --------
141,985 143,485
Redemption Requirement due within one
year (985) (985)
-------- --------
$141,000 $142,500
======== ========
- ----------------------------------------------------------------
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 $51.13, which is reduced to 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.
53
The shares of the $3.40 (6.80%) Series are subject to
mandatory redemption, at par, through the operation of a sinking
fund which will redeem 50,000 shares annually, beginning
September 1, 2002, with the remaining shares redeemed on
September 1, 2007. The shares are not redeemable prior to
September 1, 2002; thereafter, the shares are redeemable at par.
In the event of default with respect to dividends, or
sinking fund or other redemption requirements relating to the
serial preferred stock, no dividends may be paid, nor any other
distribution made, on common stock. Payments of dividends on all
series of serial preferred or preference stock, including series
which are redeemable, must be made concurrently.
The sinking fund requirements through 2002 with respect to
the Redeemable Serial Preferred Stock are $1 million in 1998,
$1.5 million annually in 1999 and 2000, $9.8 million in 2001 and
$12.3 million in 2002.
54
<TABLE>
(10) Long-Term Debt
<CAPTION>
Details of long-term debt are shown below.
- ------------------------------------------------------------------------------------------------------
Interest December 31,
Rate Maturity 1997 1996
- ------------------------------------------------------------------------------------------------------
(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
6-1/4% October 15, 2007;
PUT date October 15, 2004 175,000 -
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 1,516,800 1,341,800
Convertible Debentures
5% September 1, 2002 115,000 115,000
7% January 15, 2018 63,905 65,367
Medium-Term Notes
Fixed Rate Series:
6.66% to 6.73% May 1997 - 100,000
9.08% July and August 1997 - 50,000
6.53% December 17, 2001 100,000 100,000
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
Variable Rate Series:
Adjustable rate June 1, 2027 8,090 -
---------- ----------
Total Utility Long-Term Debt 1,978,795 1,947,167
Net unamortized discount (26,240) (28,109)
Current portion (51,069) (151,460)
---------- ----------
Net Utility Long-Term Debt $1,901,486 $1,767,598
========== ==========
Nonutility Subsidiary Long-Term Debt
Varying rates through 2011 $ 830,458 $ 996,232
========== ==========
55
</TABLE>
Utility Long-Term Debt
- ----------------------
The outstanding First Mortgage 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 October 1997, the Company issued $175 million principal
amount of 6-1/4% 10 PUT 7-Year First Mortgage Bonds maturing in
2007. Each new bond will be repayable on October 15, 2004, at
the option of the holder, at 100% of its principal amount,
together with accrued and unpaid interest. The proceeds were
used to refund short-term debt incurred to finance ongoing
construction and operating activities and to pay at maturity, in
July and August 1997, $50 million principal amount of Medium-Term
Notes; and to pay at maturity $50 million principal amount of
First Mortgage Bonds due February 15, 1998.
The interest rate on the $50 million Adjustable Rate series
First Mortgage Bonds is adjusted annually on December 1, based
upon the 10-year "constant maturity" United States Treasury bond
rate for the preceding three-month period ended October 31, plus
a market based adjustment factor. Effective December 1, 1997,
the applicable interest rate is 7.38%. The applicable interest
rate was 7.867% at December 1, 1996, and 7.443% at December 1,
1995.
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, 1997, are $51 million in
1998, $45 million in 1999, $100 million in 2000, $165 million in
2001 and $190 million in 2002.
Nonutility Subsidiary Long-Term Debt
- ------------------------------------
Long-term debt at December 31, 1997, consisted of $778.3 million
of recourse debt from institutional lenders maturing at various
dates between 1998 and 2003. The interest rates of such
borrowings ranged from 5% to 10.1%. The weighted average
interest rate was 7.48% at December 31, 1997, 7.44% at December
31, 1996, and 7.66% at December 31, 1995. Annual aggregate
principal repayments are $300.8 million in 1998, $170 million in
1999, $122.5 million in 2000, $71.5 million in 2001 and $93
million in 2002.
56
Long-term debt also includes $52.2 million of non-recourse
debt, $29.4 million of which is 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 $22.8 million is related to PCI's
majority-owned real estate partnerships of which $15.1 million is
due in consecutive monthly installments with maturity on May 11,
2001, based on a 30-year amortization period at a fixed rate of
interest of 9.05%. The remaining non-recourse real estate debt
consists of $7.7 million payable in monthly installments at a
fixed rate of interest of 9.66% with final maturity on October 1,
2011.
57
<TABLE>
(11) Fair Value of Financial Instruments
- ----------------------------------------
The estimated fair values of the Company's financial instruments at December 31, 1997,
and 1996 are shown below.
<CAPTION>
- ------------------------------------------------------------------------------------------------
December 31,
1997 1996
- ------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Utility
Capitalization and Liabilities
Serial preferred stock $ 125,290 127,251 125,298 113,285
Redeemable serial
preferred stock $ 141,000 142,612 142,500 146,491
Long-term debt
First mortgage bonds $1,452,420 1,507,515 1,327,389 1,319,976
Medium-term notes $ 281,155 289,950 272,788 274,242
Convertible debentures $ 167,911 172,400 167,421 171,880
Nonutility Subsidiary
Assets
Marketable securities $ 302,522 302,522 377,237 377,237
Notes receivable $ 23,125 19,549 72,251 71,593
Liabilities
Long-term debt $ 830,458 840,974 996,232 1,011,814
- ------------------------------------------------------------------------------------------------
58
</TABLE>
The methods and assumptions below were used to estimate, at
December 31, 1997 and 1996, 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 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 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 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 6.3%.
The Company maintains a minimum 100% line of credit back-up,
in the amount of $180 million, for its outstanding commercial
promissory notes, which was unused during 1997, 1996 and 1995.
59
Nonutility Subsidiary Short-Term Notes Payable
- ----------------------------------------------
The nonutility subsidiary's short-term financing requirements
have been satisfied principally through the sale of commercial
promissory notes.
The nonutility subsidiary maintains a minimum 100% line of
credit back-up, in the amount of $400 million, for its
outstanding commercial promissory notes, which was unused during
1997, 1996 and 1995.
(13) Commitments and Contingencies
-----------------------------
Termination of Proposed Merger
- ------------------------------
On December 22, 1997, the Company and Baltimore Gas and Electric
Company announced the cancellation of their proposed merger (the
Merger) to create Constellation Energy Corporation. As a result,
the Company recorded a $52.5 million non-operating charge ($32.6
million net of income tax or 28 cents per share) to write off its
cumulative deferred Merger-related costs. At December 31, 1996,
deferred costs related to the Merger totaled $29 million and are
included in "Other Deferred Charges" on the Consolidated Balance
Sheet.
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 $17.1 million in
1997, $16.2 million in 1996 and $15.6 million in 1995. The
approximate annual commitments under all operating leases,
reduced by rentals to be received under subleases are $13.3
million in 1998, $7.7 million in 1999, $5.7 million in 2000, $4.3
million in 2001, $1.1 million in 2002 and a total of $5.1 million
in the years thereafter.
The Company leases its consolidated control center, an
integrated energy management system used by the Company's power
dispatchers to centrally control the operation of the Company's
generating units, transmission system and distribution system.
60
The lease 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 rental expense allowed for
ratemaking purposes. This lease has been treated as an operating
lease for ratemaking purposes. Accordingly, electric plant in
service includes a regulatory asset of approximately $21 million
and $14 million at December 31, 1997 and 1996, respectively.
Fuel Contracts
- --------------
The Company has numerous longer-term coal contracts, expiring
primarily in the period ranging from late-1998 to mid-1999, for
aggregate annual deliveries of approximately 3.2 million tons.
Deliveries under these contracts are expected to provide
approximately 48% of the estimated system coal requirements in
1998. The Company will purchase the balance of its coal
requirements 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 Allegheny Energy, Inc. (AEI, formerly Allegheny Power
System) 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 AEI, 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 commenced in January 1997.
In November 1997, the Company agreed to purchase 32 megawatts of
capacity from the Montgomery County Resource Recovery Facility
for the period November 1, 1997 to December 31, 1998. This
purchase facilitated the sale of 35 megawatts of capacity to
Northeast Utilities Service Company. The capacity commitments
under these agreements, including a share of Ohio Edison's fixed
61
operating and maintenance cost, are estimated at $143 million in
1998, $198 million in 1999, $201 million in 2000, $207 million in
2001 and 2002 and $1.4 billion in the years thereafter.
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 completed. 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. Accordingly, electric plant in service includes a
regulatory asset of approximately $8 million and $7 million at
December 31, 1997 and 1996, respectively.
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.
On October 6, 1997, the Company received notice from the
U.S. Environmental Protection Agency (EPA) that it, along with 68
other parties, may be a Potentially Responsible Party (PRP) under
the Comprehensive Environmental Response Compensation and
Liability Act (CERCLA or Superfund) at the Butler Mine Tunnel
Superfund site in Pittstown Township, Luzerne County,
Pennsylvania. The site is a mine drainage tunnel with an outfall
on the Susquehanna River where oil waste was disposed via a
borehole in the tunnel. The letter notifying the Company of its
potential liability also contained a request for a reimbursement
of approximately $.8 million for response costs incurred by EPA
at the site. The letter requested that the Company submit a good
faith proposal to conduct or finance the remedial action
contained in a July 1996 Record of Decision (ROD). The EPA
estimates the present cost of the remedial action to be $3.7
million. 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.
62
In December 1995, the Company received notice from the EPA
that it is a PRP 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.
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 October 1994, a Remedial Investigation/Feasibility Study
(RI/FS) report was submitted to the EPA with respect to a site in
Philadelphia, Pennsylvania. Pursuant to an agreement among the
PRPs, the Company is responsible for 12% of the costs of the
RI/FS. Total costs of the RI/FS and associated activities prior
to the issuance of a 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, 1997. 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.
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
63
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. 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. Through December 31, 1997, 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
Labor Agreement
- ---------------
In January 1998, the Company's current 1993 Labor Agreement with
Local 1900 of the International Brotherhood of Electrical Workers
was extended until June 1, 1999. This extension provides for a
2.5% lump-sum payment to all members of Local 1900 upon
ratification of the agreement by the union. All other provisions
of the 1993 agreement remain the same.
(14) Supplemental Disclosure of Cash Flow Information
------------------------------------------------
Listed below is supplemental disclosure of cash flow information.
- -----------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------
(Thousands of Dollars)
Cash paid for:
Interest, net of capitalized
interest (including nonutility
subsidiary interest of $71,492,
$83,389 and $93,672) $202,754 $216,967 $223,789
Income taxes $ 12,475 $ 28,555 $ 44,725
- -----------------------------------------------------------------
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, 1997, and December 31,
1996, was $227 million and $196.3 million, respectively. These
amounts include $6.5 million and $1.1 million of unrealized
appreciation, at December 31, 1997 and 1996, respectively,
relating to the marketable securities portfolio on an after-tax
basis.
- -----------------------------------------------------------------
For the year ended
December 31,
1997 1996 1995
- -----------------------------------------------------------------
(Thousands of Dollars)
Income
Leasing activities $ 75,584 $ 91,661 $ 100,640
Marketable securities 28,641 33,690 36,121
Other 20,915 (10,385) (2,268)
-------- --------- --------
125,140 114,966 134,493
-------- --------- --------
Expenses
Interest 68,959 83,442 91,637
Administrative and general 13,489 15,529 10,479
Depreciation and operating 55,439 40,982 72,404
Loss on assets held for
disposal 2,022 12,744 170,078
Income tax credit (31,850) (54,625) (85,708)
-------- --------- ---------
108,059 98,072 258,890
-------- --------- ---------
Net earnings (loss) from
nonutility subsidiary $ 17,081 $ 16,894 $(124,397)
======== ========= =========
66
Marketable Securities
- ---------------------
PCI's marketable securities, primarily preferred stocks with
mandatory redemption features, are classified as available-for-
sale for financial reporting purposes. Net unrealized gains or
losses on such securities are reflected, net of tax, in
stockholder's equity. The net unrealized gains on marketable
securities, which relate primarily to mandatory redeemable
preferred stock, are shown below:
December 31, December 31,
1997 1996
------------ ------------
(Thousands of Dollars)
Market value $302,522 $ 377,237
Cost 292,580 375,598
--------- ---------
Net unrealized gain $ 9,942 $ 1,639
========= =========
Included in net unrealized gains and losses are gross
unrealized gains of $13.9 million and gross unrealized losses of
$4 million at December 31, 1997, and gross unrealized gains of
$9.9 million and gross unrealized losses of $8.3 million at
December 31, 1996.
In determining gross realized gains and losses on sales or
maturities of securities, specific identification is used. Gross
realized gains were $7.5 million and $4.7 million in 1997 and
1996, respectively. Gross realized losses were $.6 million and
$1.1 million in 1997 and 1996, respectively.
At December 31, 1997, the contractual maturities for
mandatory redeemable preferred stock are $4.7 million within one
year, $118.8 million from one to five years, $81.4 million from
five to 10 years and $87.7 million for over 10 years.
67
Leasing Activities
- ------------------
PCI's net investment in finance leases is summarized below.
- -----------------------------------------------------------------
December 31,
1997 1996
- -----------------------------------------------------------------
(Thousands of Dollars)
Rents receivable $664,211 $711,961
Estimated residual values 87,965 102,590
Less: Unearned and deferred income (288,584) (329,579)
-------- --------
Investment in finance leases 463,592 484,972
Less: Deferred taxes arising from
finance leases (119,448) (144,667)
-------- --------
Net investment in finance leases $344,144 $340,305
======== ========
- -----------------------------------------------------------------
Minimum lease payments receivable from finance leases of
aircraft and generating facilities for each of the years 1998
through 2002 are $33 million, $34.5 million, $37.3 million, $36.7
million, and $34.9 million, respectively. Net income from
leveraged leases was $16.4 million in 1997, $22.5 million in 1996
and $11 million in 1995.
Rent payments receivable from aircraft equipment operating
leases for each of the years 1998 through 2002 are $37 million in
1998, $35.5 million in 1999, $30 million in 2000, $22.5 million
in 2001 and $3.5 million in 2002.
68
<TABLE>
(16) Quarterly Financial Summary (Unaudited)
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
- ---------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars except Per Share Data)
<S> <C> <C> <C> <C> <C>
1997
Operating Revenue $ 374,486 439,555 618,218 378,570 1,810,829
Total Revenue $ 389,060 450,971 633,042 390,437 1,863,510
Operating Expenses $ 346,838 370,351 466,542 354,396 1,538,127
Operating Income $ 42,222 80,620 166,500 36,041 325,383
Net Income (Loss) $ 22,982 50,124 135,985 (27,261) 181,830
Earnings (Loss) for Common Stock $ 18,837 45,987 131,828 (31,401) 165,251
Earnings (Loss) per Common Share $ .16 .39 1.11 (.27) 1.39
Fully Diluted Earnings (Loss) per Common Share $ .16 .38 1.07 (.27) 1.38
Dividends per Share $ .415 .415 .415 .415 1.66
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
Fully Diluted Earnings per Common Share $ .09 .56 1.09 .06 1.82
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
Fully Diluted (Loss) Earnings per Common Share $ (.07) (.52) 1.15 .04 .65
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 totals of the four quarterly earnings per share and fully diluted
earnings per share may not equal the earnings per share and fully
diluted earnings per share for the year due to changes in the number of
common shares outstanding during the year and, with respect to the
fully diluted earnings per share, changes in the amount of dilutive
securities.
69
</TABLE>
<TABLE>
Stock Market Information
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997 High Low 1996 High Low
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1st Quarter $26 $23-7/8 1st Quarter $27-3/8 $24-1/2
2nd Quarter $24-7/8 $21-1/8 2nd Quarter $26-5/8 $24-3/8
3rd Quarter $23-3/4 $21 3rd Quarter $26-3/4 $24
4th Quarter $26 $21 4th Quarter $27-3/8 $23-5/8
(Close $25-13/16) (Close $25-3/4)
Shareholders at December 31, 1997: 81,229
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Selected Consolidated Financial Data
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1987
- ------------------------------------------------------------------------------------------------------------------------------------
(Thousands except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Revenue $1,810,829 1,834,857 1,822,432 1,790,600 1,702,442 1,562,167 1,332,109
Total Revenue $1,863,510 2,010,311 1,876,102 1,823,074 1,725,205 1,601,558 1,384,239
Operating Expenses $1,538,127 1,661,872 1,528,361 1,498,581 1,400,543 1,322,105 1,122,083
Net Earnings (Loss) from
Nonutility Subsidiary $ 17,081 16,894 (124,397) 19,088 25,101 28,161 32,150
Net Income $ 181,830 236,960 94,391 227,162 241,579 216,782 <F2> 208,222
Earnings for Common Stock $ 165,251 220,356 77,540 210,725 225,324 202,390 199,175
Average Common Shares Outstanding 118,500 118,497 118,412 118,006 115,640 112,390 94,438
Earnings (Loss) Per Common Share
Utility Operations $ 1.25 <F1> 1.72 1.70 1.63 1.73 1.55 <F2> 1.77
Nonutility Subsidiary $ .14 .14 (1.05) .16 .22 .25 .34
Consolidated $ 1.39 <F1> 1.86 .65 1.79 1.95 1.80 <F2> 2.11
Fully Diluted Earnings (Loss)
Per Common Share
Utility Operations $ 1.24 <F1> 1.69 1.70 1.60 1.70 1.54 <F2> 1.77
Nonutility Subsidiary $ .14 .13 (1.05) .15 .21 .24 .34
Consolidated $ 1.38 <F1> 1.82 .65 1.75 1.91 1.78 <F2> 2.11
Cash Dividends Per Common Share $ 1.66 1.66 1.66 1.66 1.64 1.60 1.30
Investment in Property and Plant $6,514,114 6,321,591 6,161,103 5,974,170 5,701,550 5,404,265 3,699,957
Net Investment in Property
and Plant $4,486,334 4,423,249 4,400,311 4,334,399 4,167,551 3,967,898 2,678,921
Utility Assets $5,540,232 5,526,266 5,503,087 5,327,606 5,036,737 4,515,403 3,111,280
Nonutility Subsidiary Assets $1,167,325 1,365,620 1,615,063 1,674,289 1,665,132 1,663,508 598,688
Total Assets $6,707,557 6,891,886 7,118,150 7,001,895 6,701,869 6,178,911 3,709,968
Long-Term Utility Obligations
(including redeemable preferred
stock) $2,042,486 1,910,098 1,960,562 1,866,962 1,736,621 1,727,609 1,171,925
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1>Includes ($.28) as the net effect of the write-off of Merger-related costs.
<F2>Includes $16,022, or $.14 per share, as the cumulative
effect of an accounting change for unbilled revenue.
</FN>
70
</TABLE>
Appendix A
1. The Use of Revenue pie chart presents the following
information.
(Thousands of Dollars)
1997 Use of Revenue
-------------------
Fuel and Purchased Energy $ 520,181 28%
Wages and Benefits 165,992 9
Materials and Services 142,770 8
Capacity Purchase Payments 150,912 8
Taxes 299,589 16*
Depreciation and Amortization 232,042 12*
Interest 138,830 7*
Common Stock Dividends 196,615 11*
Preferred Stock Dividends 16,579 1*
---------- ---
$1,863,510 100%
========== ===
*Plant-Related Costs
Appendix A
2. The Cooling Degree Hours bar chart presents the following
information.
% of
20-Year
Year Average
---- -------
1993 119%
1994 103%
1995 103%
1996 83%
1997 79%
Appendix A
3. The System Fuel Costs line chart presents the following
information.
Year Coal Oil Gas System
---- ---- --- --- ------
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
1997 1.65 3.80 2.87 1.84
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: 1993 $232 $63 $295
1994 234 58 292
1995 187 27 214
1996 176 4 180
1997 203 14 217
Forecast: 1998 165 10 175
1999 164 16 180
2000 150 10 160
2001 138 22 160
2002 153 17 170
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
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, 1996, and prior to the close
of business on December 11, 1997, 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, 1996, and prior to the close of business on December 11, 1997
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 219,925,649 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 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
THIRD: The number of shares of the corporation so cancelled is
30,148 itemized as follows:
CLASS SERIES NUMBER OF SHARES
Serial Preferred
Stock $2.44 Convertible Series of 1966 148
$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 219,895,501,
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 5,805
$3.82 Series of 1969 500,000
$3.37 Series of 1987 839,696
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 123,846,381 itemized as
follows:
CLASS SERIES NUMBER OF SHARES
Common Stock - 118,500,880
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 5,805
$3.82 Series of 1969 500,000
$3.37 Series of 1987 839,696
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 $385,775,930 and
$1,010,219,386.21, respectively.
DATED: December 17, 1997
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, Loretta S. Thompson, a Notary Public, do hereby certify
that on this 17th day of December, 1997, 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/ LORETTA S. THOMPSON
Notary Public, D. C.
[Notarial Seal] My commission expires: 12/31/2002
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 30,148, itemized as follows:
CLASS SERIES NUMBER OF SHARES
Serial Preferred
Stock $2.44 Convertible Series of 1966 148
$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 219,895,501,
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 5,805
$3.82 Series of 1969 500,000
$3.37 Series of 1987 839,696
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 15, 1997.
DATED: December 17, 1997
[Corporate Seal] POTOMAC ELECTRIC POWER
COMPANY
Attest:
/S/ ELLEN SHERIFF ROGERS /S/ D. R. WRAASE
Ellen Sheriff Rogers Dennis R. Wraase
Secretary Senior Vice President and
Chief Financial Officer
=================================================================
By-Laws
of
POTOMAC ELECTRIC POWER COMPANY
WASHINGTON, D. C.
As amended through
October 23, 1997
=================================================================
<PAGE>
POTOMAC ELECTRIC POWER COMPANY
BY-LAWS
______
ARTICLE I
SECTION 1. The annual meeting of the stockholders of the
Company shall be held on such day, at such time and place within
or without the District of Columbia as the Board of Directors or
the Executive Committee shall designate for the purpose of
electing directors and of transacting such other business as may
properly be brought before the meeting.
At an annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual meeting,
business must be specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board,
otherwise properly brought before the meeting by or at the
direction of the Board, or otherwise properly brought before the
meeting by a stockholder. In addition to any other applicable
requirements, for business to be properly brought before an
annual meeting by a stockholder, the stockholder must have given
timely notice thereof in writing to the Secretary of Potomac
Electric Power Company. To be timely, a stockholder's notice
must be received at the principal executive offices of the
Company not less than 50 days nor more than 75 days prior to the
meeting; provided, however, that in the event that less than 65
days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the
stockholder to be timely must be so received not later than the
close of business on the fifteenth day following the day on which
such notice of the date of the annual meeting was mailed or such
public disclosure was made, whichever first occurs. A
stockholder's notice to the Secretary shall set forth (i) a brief
description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at
the annual meeting, (ii) the name and record address of the
stockholder proposing such business, (iii) the class and number
of shares of the Company that are beneficially owned by the
stockholder, and (iv) any material interest of the stockholder in
such business.
Notwithstanding anything in the By-Laws to the contrary, no
business shall be conducted at the annual meeting except in
accordance with the procedures set forth in this Article I,
Section 1; provided, however, that nothing in this Article I,
Section 1 shall be deemed to preclude discussion by any
stockholder of any business properly brought before the annual
meeting in accordance with such procedures.
<PAGE>
2
The Chairman of an annual meeting shall, if the facts
warrant, determine that business was not properly brought before
the meeting in accordance with the provisions of this Article I,
Section 1, and if he should so determine, he shall so declare to
the meeting and any such business not properly brought before the
meeting shall not be transacted.
SECTION 2. Special meetings of the stockholders, when
called, shall be held at such time and place within or without
the District of Columbia and may be called by the Board of
Directors, or the Executive Committee, or the holders of record
of not less than one-fifth of all the outstanding shares entitled
to vote at the meeting, or, if the meeting is for the purpose of
enabling the holders of the Serial Preferred Stock of the Company
to elect directors upon the conditions set forth in the Articles
of Incorporation of the Company, such meeting shall be called as
therein provided.
SECTION 3. Written notice stating the place, day and hour
of each meeting of the stockholders and the purpose or purposes
for which the meeting is called shall be given not less than ten
days (or such longer period as may be prescribed by law) and not
more than fifty days before the date of the meeting to each
stockholder of record entitled to vote at the meeting, by
depositing such notice in the United States mail addressed to the
respective stockholders at their addresses as they appear on the
records of the Company, with postage thereon prepaid.
In connection with the first election of a portion of the
members of the Board of Directors by the holders of the Serial
Preferred Stock upon accrual of such right, as provided in the
Articles of Incorporation of the Company, the Company shall
prepare and mail to the holders of the Serial Preferred Stock
entitled to vote thereon such proxy forms, communications and
documents as may be deemed appropriate for the purpose of
soliciting proxies for the election of directors by the holders
of the Serial Preferred Stock.
The Secretary or an Assistant Secretary of the Company shall
cause to be made, at least ten days before each meeting of
stockholders, a complete list of the stockholders entitled to
vote at such meeting or any adjournment thereof, with the address
of and the number of shares held by each. Such list, for a
period of ten days prior to such meeting, shall be kept on file
at the principal place of business of the Company and shall be
subject to inspection for any proper purpose by any stockholder
at any time during usual business hours. Such list shall also be
produced and kept open at the time and place of the meeting and
shall be subject to the inspection for any proper purpose of any
stockholder during the whole time of the meeting.
SECTION 4. At each meeting of stockholders the holders
of record of a majority of the outstanding shares entitled
to vote at such meeting, represented in person or by proxy,
shall constitute a quorum, except as otherwise provided by
law or by the Articles of Incorporation of the Company.
The affirmative vote of the holders of a majority of the
<PAGE>
3
shares represented at a duly organized meeting at which a quorum
was present at the time of organization, and entitled to vote on
the subject matter, shall be the act of the stockholders, unless
the vote of the holders of a greater number, or voting by
classes, is required by law or by the Articles of Incorporation
of the Company and except that in elections of directors those
receiving the greatest numbers of votes shall be deemed elected
even though not receiving a majority. If a meeting cannot be
organized because a quorum has not attended, the holders of a
majority of the shares represented at the meeting may adjourn the
meeting from time to time, without notice other than announcement
at the meeting, until a quorum shall have been obtained, when any
business may be transacted which might have been transacted at
the meeting as first convened had there been a quorum.
SECTION 5. Meetings of the stockholders shall be presided
over by the Chairman of the Board or, if he is not present, by
the President or, if neither is present, by a Vice Chairman or,
if no such officer is present, by a chairman to be chosen at the
meeting. The Secretary of the Company or, if he is not present,
an Assistant Secretary of the Company or, if neither is present,
a secretary to be chosen at the meeting, shall act as Secretary
of the meeting.
SECTION 6. Each stockholder entitled to vote at any meeting
may so vote either in person or by proxy executed in writing by
the stockholder or by his duly authorized attorney-in-fact and
shall be entitled to one vote on each matter submitted to a vote
for each share of stock of the Company having voting power
thereon registered in his name at the date fixed for the
determination of the stockholders entitled to vote at the
meeting.
SECTION 7. At all elections of directors the voting shall
be by ballot. At all such elections, the Chairman of the meeting
shall appoint two inspectors of election, unless such appointment
shall be unanimously waived by the stockholders present in person
or represented by proxy at the meeting and entitled to vote for
the election of directors. No director or candidate for the
office of director shall be appointed as such inspector. The
inspectors, before entering upon the discharge of their duties,
shall take and subscribe an oath or affirmation faithfully to
execute the duties of inspector at such meeting with strict
impartiality and according to the best of their ability, and
shall take charge of the polls and after the balloting shall make
a certificate of the result of the vote taken.
SECTION 8. In order to determine who are stockholders of
the Company for any proper purpose, the Board of Directors either
may close the stock transfer books or, in lieu thereof, may fix
in advance a date as the record date for such determination, such
date in any case to be not more than fifty days (and, in the case
of a meeting of stockholders, not less than ten days or such
longer period as may be required by law) prior to the date on
which the particular action, requiring such determination, is to
be taken. When such a record date has been so fixed for the
determination of stockholders entitled to vote at a meeting, such
determination shall apply to any adjournment thereof.
<PAGE>
4
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. The Board of Directors of the Company shall
consist of twelve persons, each of whom shall be a stockholder of
the Company. The directors shall be divided into three classes,
designated Class I, Class II, and Class III. Each of the classes
shall have four directors. At the 1987 annual meeting of
stockholders, Class I directors shall be elected for a one-year
term, Class II directors for a two-year term, and Class III
directors for a three-year term. At each succeeding annual
meeting of stockholders beginning in 1988, successors to the
class of directors whose term expires at that annual meeting
shall be elected for a three-year term. Except as otherwise
provided in the Articles of Incorporation of the Company and in
these By-Laws, the directors shall hold office until the annual
meeting of the stockholders for the year in which their
respective terms expire and until their respective successors
shall have been elected and qualified. No person shall be
eligible for election as a director after he shall have attained
his seventieth birthday, and no person shall be eligible to serve
as a director beyond the next annual meeting after he shall have
attained his seventieth birthday. No director who is a full time
employee of the Company shall be eligible to serve as a director
beyond the next annual meeting after termination of his
employment with the Company, provided, that (a) this provision
shall not apply to a director who is serving or has served as
Chief Executive Officer and (b) a director serving at the time of
termination of employment as Vice Chairman shall be permitted to
continue as director until the expiration of his three-year term.
Seven members of the Board shall constitute a quorum for the
transaction of business, but if any meeting of the Board cannot
be organized because a quorum has not attended, a majority of
those present may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum
shall have been obtained, when any business may be transacted
which might have been transacted at the meeting as first convened
had there been a quorum. The acts of a majority of the directors
present at a meeting at which a quorum is present shall, except
as otherwise provided by law, by the Articles of Incorporation of
the Company, or by these By-Laws, be the acts of the Board of
Directors.
Only persons who are nominated in accordance with the
following procedures shall be eligible for election as Directors.
Nominations of persons for election to the Board of the Company
may be made at the annual meeting of stockholders by or at
the direction of the Board of Directors, by any nominating
committee or person appointed by the Board, or by any
stockholder of the Company entitled to vote for the election
of Directors at the meeting who complies with the notice
procedures set forth in this Article II, Section 1. Such
nominations, other than those made by or at the direction
of the Board, shall be made pursuant to timely notice in
writing to the Secretary of Potomac Electric Power Company.
To be timely, a stockholder's notice shall be received at
the principal executive offices of the Company not less than
50 days nor more than 75 days prior to the meeting; provided,
<PAGE>
5
however, that in the event that less than 65 days' notice or
prior public disclosure of the date of the meeting is given or
made to stockholders, notice by the stockholder to be timely must
be so received not later than the close of business on the
fifteenth day following the day on which such notice of the date
of the meeting was mailed or such public disclosure was made,
whichever first occurs. Such stockholder's notice to the
Secretary shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or reelection as a
Director, (i) the name, age, business address and residence
address of the person, (ii) the principal occupation or
employment of the person, (iii) the class and number of shares of
capital stock of the Company that are beneficially owned by the
person and (iv) any other information relating to the person that
is required to be disclosed in solicitations for proxies for
election of Directors pursuant to Section 14(a) of the Securities
Exchange Act of 1934, as amended; and (b) as to the stockholder
giving the notice (i) the name and record address of the
stockholder and (ii) the class and number of shares of capital
stock of the Company that are beneficially owned by the
stockholder. The Company may require any proposed nominee to
furnish such other information as may reasonably be required by
the Company to determine the eligibility of such proposed nominee
to serve as Director of the Company. No person shall be eligible
for election as a Director of the Company unless nominated in
accordance with the procedures set forth herein.
The Chairman of the meeting shall, if the facts warrant,
determine that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so
declare to the meeting and the defective nomination shall be
disregarded.
The Board of Directors, as soon as is reasonably practicable
after the initial election of Directors by the stockholders in
each year, shall elect one of its number Chairman of the Board,
who may be, but is not required to be, an officer and employee of
the Company.
SECTION 2. Any vacancy, from any cause other than an
increase in the number of Directors, occurring among the
directors shall be filled without undue delay by a majority of
the remaining directors who were elected, or whose predecessors
in office were elected, by the same class of stockholders as that
which elected the last incumbent of the vacant directorship. The
term of any director elected by the remaining directors to fill a
vacancy (other than one caused by an increase in the number of
directors) shall expire at the next stockholders' meeting at
which directors are elected.
SECTION 3. Regular meetings of the Board of Directors
shall be held at the office of the Company in the District
of Columbia (unless otherwise fixed by resolution of the
Board) at such time as may from time to time be fixed by
resolution of the Board. Special meetings of the Board
may be held upon call of the Executive Committee, or the
Chairman of the Board, or the President, or a Vice Chairman,
by oral, telegraphic or written notice, setting forth the
time and place (either within or without the District of
Columbia) of the meeting, duly served on or sent or
mailed to each director not less than two days before the
<PAGE>
6
meeting. A meeting of the Board may be held without notice,
immediately after, and at the same place as, the annual meeting
of the stockholders. A waiver in writing of any notice, signed
by a director, whether before or after the time stated therein,
shall be deemed equivalent to the giving of such notice to such
director. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the Board need be
specified in any notice, or waiver of notice, of such meeting.
SECTION 4. Meetings of the Board of Directors shall be
presided over by the Chairman of the Board or, if he is not
present, by the President or, if neither is present, by a Vice
Chairman or, if no such officer is present, by a chairman to be
chosen at the meeting. The Secretary of the Company or, if he is
not present, an Assistant Secretary of the Company or, if neither
is present, a secretary to be chosen at the meeting, shall act as
secretary of the meeting.
SECTION 5. The Board of Directors may, by resolution or
resolutions adopted by not less than the number of directors
necessary to constitute a quorum of the Board, designate an
Executive Committee consisting of not less than three nor more
than seven directors. Except as otherwise provided by law, the
Executive Committee shall have and may exercise, when the Board
is not in session, all of the powers of the Board in the
management of the property, business and affairs of the Company;
but the Executive Committee shall not have power to fill
vacancies in the Board, or to change the membership of, or to
fill vacancies in, the Executive Committee, or to adopt, alter,
amend, or repeal by-laws of the Company. The Board shall have
the power at any time to fill vacancies in, to change the
membership of, or to dissolve, the Executive Committee. The
Executive Committee may make rules for the conduct of its
business and fix the time and place of its meetings, and may
appoint such committees and assistants as it shall from time to
time deem necessary. A majority of the members of the Executive
Committee shall constitute a quorum, and the acts of a majority
of the members of the Committee present at a meeting at which a
quorum is present shall be the acts of said Committee. All
action taken by the Executive Committee shall be reported to the
Board at its regular meeting next succeeding the taking of such
action.
SECTION 6. The Board of Directors may also, by
resolution or resolutions adopted by not less than the number
of directors necessary to constitute a quorum of the Board,
designate one or more other committees, each such committee to
consist of such number of directors as the Board may from time
to time determine, which, to the extent provided in said
resolution or resolutions, shall have and may exercise such
limited authority as the Board may authorize. Such committee
or committees shall have such name or names as the Board may
from time to time determine. The Board shall have the power
at any time to fill vacancies in, to change the membership of,
or to dissolve, any such committee. A majority, or such other
number as the Board may designate, of the members of any such
committee shall constitute a quorum. Each such committee may
make rules for the conduct of its business and fix the time and
place of its meetings unless the Board shall otherwise provide.
<PAGE>
7
All action taken by any such committee shall be reported to the
Board at its regular meeting next succeeding the taking of such
action, unless otherwise directed.
SECTION 7. The Board of Directors shall fix the
compensation to be paid to each director who is not a salaried
employee of the Company for serving as a director and for
attendance at meetings of the Board and committees thereof, and
may authorize the payment to directors of expenses incurred in
attending any such meeting or otherwise incurred in connection
with the business of the Company. This By-Law shall not be
construed to preclude any Director from serving the Company in
any other capacity and receiving compensation therefor.
SECTION 8. At a special meeting called expressly for such
purpose (i) any director elected by the holders of the Serial
Preferred Stock, or elected by directors to fill a vacancy among
the directors elected by the holders of such stock, may be
removed, only for cause, by a vote of the holders of a majority
of the shares of Serial Preferred Stock, and the resulting
vacancy may be filled, for the unexpired term of the director so
removed, by a vote of the holders of such Stock; and (ii) any
director elected by the holders of the Common Stock, or elected
by directors to fill a vacancy among the directors elected by the
holders of such stock, may be removed, only for cause, by a vote
of the holders of a majority of the shares of Common Stock, and
the resulting vacancy may be filled, for the unexpired term of
the director so removed, by a vote of the holders of such Stock.
SECTION 9. With respect to a Company officer, director, or
employee, the Company shall indemnify, and with respect to any
other individual the Company may indemnify, any person who was or
is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding (an "Action"),
whether civil, criminal, administrative, arbitrative or
investigative (including an Action by or in the right of the
Company) by reason of the fact that he is or was a director,
officer, employee or agent of the Company, or is or was serving
at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust
or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by him in connection with such Action;
except in relation to matters as to which he shall be finally
adjudged in such Action to have knowingly violated the criminal
law or be liable for willful misconduct in the performance of his
duty to the Company. The termination of any Action by judgment,
order, settlement, conviction, or upon a plea of nolo contendere
or its equivalent, shall not of itself create a presumption that
the person was guilty of willful misconduct.
Any indemnification (unless ordered by a court) shall be
made by the Company only as authorized in the specific case
upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth
above. In the case of any director, such determination shall be
<PAGE>
8
made: (1) by the Board of Directors by a majority vote of a
quorum consisting of directors who were not parties to such
Action; or (2) if such a quorum is not obtainable, by majority
vote of a committee duly designated by the Board of Directors (in
which designation directors who are parties may participate)
consisting solely of two or more directors not at the time
parties to the proceeding; or (3) by special legal counsel
selected by the Board of Directors or its committee in the manner
prescribed by clause (1) or (2) of this paragraph, or if such a
quorum is not obtainable and such a committee cannot be
designated, by majority vote of the Board of Directors, in which
selection directors who are parties may participate; or (4) by
vote of the shareholders, in which vote shares owned by or voted
under the control of directors, officers and employees who are at
the time parties to the Action may not be voted. In the case of
any officer, employee, or agent other than a director, such
determination may be made (i) by the Board of Directors or a
committee thereof; (ii) by the Chairman of the Board of the
Company or, if the Chairman is a party to such Action, the
President of the Company, or (iii) such other officer of the
Company, not a party to such Action, as such person specified in
clause (i) or (ii) of this paragraph may designate.
Authorization of indemnification and evaluation as to
reasonableness of expenses shall be made in the same manner as
the determination that indemnification is permissible, except
that if the determination is made by special legal counsel,
authorization of indemnification and evaluation as to
reasonableness of expenses shall be made by those entitled
hereunder to select such legal counsel.
Expenses incurred in defending an Action for which
indemnification may be available hereunder shall be paid by the
Company in advance of the final disposition of such Action as
authorized in the manner provided in the preceding paragraph,
subject to execution by the person being indemnified of a written
undertaking to repay such amount if and to the extent that it
shall ultimately be determined by a court that such
indemnification by the Company is not permitted under applicable
law.
It is the intention of the Company that the indemnification
set forth in this Section 9 of Article II, shall be applied to no
less extent than the maximum indemnification permitted by law.
In the event that any right to indemnification or other right
hereunder may be deemed to be unenforceable or invalid, in whole
or in part, such unenforceability or invalidity shall not affect
any other right hereunder, or any right to the extent that it is
not deemed to be unenforceable. The indemnification provided
herein shall be in addition to, and not exclusive of, any other
rights to which those indemnified may be entitled under any by-
law, agreement, vote of stockholders, or otherwise, and shall
continue as to a person who has ceased to be a director, officer,
employee, or agent and inure to the benefit of such person's
heirs, executors, and administrators.
SECTION 10. The Board of Directors may, in its
discretion, at any time elect one or more persons to the
position of Advisory Director, to serve as such during
the pleasure of the Board, but, except for a director
who has served as Chief Executive Officer, no person
<PAGE>
9
shall be eligible to serve as an Advisory Director beyond the
next annual meeting after he shall have attained his seventy-
second birthday. Advisory Directors so elected by the Board
shall be entitled to attend, and take part in discussions at,
meetings of the Board of Directors, but shall not be considered
members of the Board for quorum or voting purposes. Advisory
Directors shall receive the same compensation as members of the
Board.
SECTION 11. In any proceeding brought by a stockholder in
the right of the Company or brought by or on behalf of the
stockholders of the Company, no monetary damages shall be
assessed against an officer or director. The liability of an
officer or director shall not be limited as provided in this
section if the officer or director engaged in willful misconduct
or a knowing violation of the criminal law.
ARTICLE III
OFFICERS
SECTION 1. The Board of Directors, as soon as reasonably
practicable after the initial election of directors by
stockholders in each year, may elect a Chairman of the Board as
an officer of the Company, shall elect a President, may elect one
or more Vice Chairmen and shall elect one or more Vice Presidents
(who may be given such other descriptive titles as the Board may
specify), a Secretary, a Treasurer and a Comptroller, and from
time to time may elect such Assistant Secretaries, Assistant
Treasurers, Assistant Comptrollers and other officers, and
appoint such other agents, as it may deem desirable. Any two or
more offices may be held by the same person, except the offices
of President and Secretary. The Board of Directors shall elect
the Chairman of the Board or one of the above officers Chief
Executive Officer of the Company.
SECTION 2. The term of office of all officers shall be
until the next succeeding annual election of officers and until
their respective successors shall have been elected and
qualified; but any officer or agent elected or appointed by the
Board of Directors may be removed, with or without cause, by the
affirmative vote of a majority of the members of the Board
whenever in their judgment the best interests of the Company will
be served thereby. Such removal shall be without prejudice to
contract rights, if any, of the person so removed. Election or
appointment of an officer or agent shall not of itself create
contract rights. Unless specifically authorized by resolution of
the Board of Directors, no agreement for the employment of any
officer for a period longer than one year shall be made.
SECTION 3. Subject to such limitations as the Board of
Directors or the Executive Committee may from time to time
prescribe, the officers of the Company shall each have such
authority and perform such duties in the management of the
property, business and affairs of the Company as by custom
generally pertain to their respective offices, as well as
<PAGE>
10
such authority and duties as from time to time may be conferred
by the Board of Directors, the Executive Committee or the Chief
Executive Officer.
SECTION 4. The salaries of all officers, employees and
agents of the Company shall be determined and fixed by the Board
of Directors, or pursuant to such authority as the Board may from
time to time prescribe.
ARTICLE IV
CERTIFICATES OF STOCK
SECTION 1. The shares of the capital stock of the Company
shall be represented by certificates, provided that the Board of
Directors of the Company may provide by resolution that some or
all of the shares of any or all of its classes or series of
capital stock may be uncertificated shares. Except as otherwise
expressly provided by law, the rights and obligations of the
holders of uncertificated shares and the rights and obligations
of the holders of certificates representing shares of the same
class and series shall be identical. Shares of the capital stock
of the Company that are evidenced by certificates shall be in
such form as the Board of Directors may from time to time
prescribe. Such certificates shall be signed by the President or
a Vice President and by the Secretary or an Assistant Secretary,
shall be sealed with the seal of the Company, or a facsimile
thereof, shall be countersigned and registered in such manner, if
any, as the Board may by resolution prescribe. Where such a
certificate is countersigned by a transfer agent (other than the
Company or an employee of the Company), or by a transfer clerk
and registered by a registrar, the signatures thereon of the
President or Vice President and the Secretary or Assistant
Secretary may be facsimiles. In case any officer who has signed
or whose facsimile signature has been placed upon any such
certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the Company with the
same effect as if such officer had not ceased to hold such office
at the date of its issue.
SECTION 2. The shares of the capital stock of the Company
shall be transferable on the books of the Company by the holders
thereof in person or by duly authorized attorney, and, if
represented by certificates, upon surrender and cancellation of
the certificates evidencing such shares, with duly executed
assignment and power of transfer endorsed thereon or attached
thereto, and with such proof of the authenticity of the
signatures as the Company or its agents may reasonably require
and, if uncertificated, upon receipt of appropriate instructions.
SECTION 3. No certificate evidencing shares of the
capital stock of the Company shall be issued in place of
any certificate alleged to have been lost, stolen, or
destroyed, except upon production of such evidence of
the loss, theft or destruction, and upon such
<PAGE>
11
indemnification of the Company and its agents by such person or
persons and in such manner, as the Board of Directors may from
time to time prescribe.
ARTICLE V
CHECKS, NOTES, CONTRACTS, ETC.
All checks and drafts on the Company's bank accounts, bills
of exchange, promissory notes, acceptances, obligations, other
instruments for the payment of money, and endorsements other than
for deposit in a bank account of the Company shall be signed by
the Treasurer or an Assistant Treasurer and shall be
countersigned by the Chief Executive Officer, the President, a
Vice Chairman or a Vice President, unless otherwise authorized by
the Board of Directors; provided that checks drawn on the
Company's dividend and/or special accounts may bear the manual
signature, or the facsimile signature, affixed thereto by a
mechanical device, of such officer or agent as the Board of
Directors shall authorize.
All contracts, bonds and other agreements and undertakings
of the Company shall be executed by the Chief Executive Officer,
the President, a Vice Chairman or a Vice President and by such
other officer or officers, if any, as may be designated, from
time to time, by the Board of Directors and, in the case of any
such document required to be under seal, the corporate seal shall
be affixed thereto and attested by the Secretary or an Assistant
Secretary.
Whenever any instrument is required by this Article to be
signed by more than one officer of the Company, no person shall
so sign in more than one capacity.
ARTICLE VI
FISCAL YEAR
The fiscal year of the Company shall begin on the first day
of January in each year and shall end on the thirty-first day of
December following.
ARTICLE VII
OFFICES
The principal office of the Company shall be situated
in the District of Columbia. The registered office of
the Company in Virginia shall be situated in the County
of Fairfax. The Company may have such other offices
at such places, within the District of Columbia, the
<PAGE>
12
Commonwealth of Virginia, or elsewhere, as shall be determined
from time to time by the Board of Directors or by the Chief
Executive Officer.
ARTICLE VIII
AMENDMENTS
Except as otherwise provided by law, the Board of Directors
may alter, amend, or repeal the By-Laws of the Company, or adopt
new By-Laws, at any meeting of the Board, by the affirmative vote
of not less than the number of directors necessary to constitute
a quorum of the Board.
=================================================================
POTOMAC ELECTRIC POWER COMPANY
1900 Pennsylvania Avenue, N.W., Washington, D.C.
TO
THE BANK OF NEW YORK
101 Barclay Street, New York, NY
AS TRUSTEE
________________
Supplemental Indenture
Dated as of October 2, 1997
________________
Supplemental to Mortgage and Deed of Trust
Dated July 1, 1936
_________________
First Mortgage Bonds, 6-1/4% Series due 2007
=================================================================
<PAGE>
POTOMAC ELECTRIC POWER COMPANY
Supplemental Indenture Dated As of October 2, 1997
TABLE OF CONTENTS*
____________________
PAGE
PARTIES .................................................... 1
RECITALS ................................................... 1
GRANTING CLAUSES ........................................... 5
CERTAIN EXCEPTIONS ......................................... 11
GRANT IN TRUST ............................................. 12
PART I
DESCRIPTION OF BONDS
SECTION 1. General description of Bonds of 2007 Series ... 13
SECTION 2. Form of face of Bond of 2007 Series ........... 14
Form of Trustee's certificate ................ 16
Text appearing on reverse side of Bond of
2007 Series ................................. 16
SECTION 3. Denominations of Bonds of 2007 Series ......... 19
SECTION 4. Execution and form of temporary Bonds ......... 19
PART II
ISSUE OF BONDS
SECTION 1. Limitation as to principal amount .............. 20
SECTION 2. Issue of Bonds ................................. 20
PART III
REDEMPTION AT OPTION OF COMPANY
The Bonds of 2007 Series are not redeemable at the option
of the Company ................................. 21
_________________
* The Table of Contents is not part of the Supplemental
Indenture and should not be considered as such. It is included
herein only for purposes of convenient reference.
<PAGE>
ii
PART IV
SECTION 1. Bonds of 2007 Series repayable at option
of holders ..................................... 21
SECTION 2. Cancellation of redeemed bonds .................. 21
PART V
ADDITIONAL PARTICULAR COVENANTS OF THE COMPANY
SECTION 1. Company not to withdraw moneys pursuant to
Section 2 of Article VIII in excess of an
amount equal to principal amount of issued
refundable bonds ............................... 21
SECTION 2. No property additions made on or prior to
December 31, 1946 to be used for any purpose
under the Indenture ............................ 21
PART VI
Amendment of Indenture to Permit Qualification Under Trust
Indenture Act of 1939 .......................... 22
PART VII
Amendment of Original Indenture ............................. 22
PART VIII
THE TRUSTEE
Acceptance of trusts by the Trustee ......................... 23
Trustee not responsible for validity of the Supplemental
Indenture ...................................... 23
PART IX
MISCELLANEOUS PROVISIONS
Execution of Supplemental Indenture in counterparts ......... 23
Appointment of attorneys-in-fact by parties ................. 23
TESTIMONIUM ................................................. 24
EXECUTION.................................................... 24
COMPANY'S ACKNOWLEDGMENTS ................................... 26
TRUSTEE'S ACKNOWLEDGMENTS ................................... 28
<PAGE>
SUPPLEMENTAL INDENTURE, dated as of the 2nd day of October,
nineteen hundred and ninety-seven (1997), made by and between
Potomac Electric Power Company, a corporation organized and
existing under the laws of the District of Columbia and a domestic
corporation of the Commonwealth of Virginia (hereinafter sometimes
called the "Company"), party of the first part, and The Bank of New
York, a New York banking corporation organized and existing under
the laws of the State of New York (hereinafter sometimes called the
"Trustee"), as Trustee under the Mortgage and Deed of Trust dated
July 1, 1936, hereinafter mentioned, party of the second part;
WHEREAS, The Company has heretofore executed and delivered
its Mortgage and Deed of Trust, dated July 1, 1936 (hereinafter
sometimes referred to as the "Original Indenture"), to The Riggs
National Bank of Washington, D.C., as trustee, to secure an issue
of First Mortgage Bonds of the Company, issuable in series; and
WHEREAS, the Trustee has succeeded The Riggs National Bank of
Washington, D.C. as trustee under the Original Indenture pursuant
to Article XIII, Section 3 thereof.
WHEREAS, pursuant to the terms and provisions of the Original
Indenture, indentures supplemental thereto dated as of July 1,
1936, December 1, 1939, August 1, 1940, August 1, 1942, January 1,
1948, May 1, 1949, May 1, 1950, March 1, 1952, May 15, 1953, May
16, 1955, June 1, 1956, December 1, 1958, November 16, 1959,
December 1, 1960, February 15, 1963, May 15, 1964, April 1, 1966,
May 1, 1967, February 15, 1968, March 15, 1969, February 15, 1970,
August 15, 1970, September 15, 1972, April 1, 1973, January 2,
1974, August 15, 1974, August 15, 1974, June 15, 1977, July 1,
1979, June 16, 1981, June 17, 1981, December 1, 1981, August 1,
1982, October 1, 1982, April 15, 1983, November 1, 1985, March 1,
1986, November 1, 1986, March 1, 1987, September 16, 1987, May 1,
1989, August 1, 1989, April 5, 1990, May 21, 1991, May 7, 1992,
September 1, 1992, November 1, 1992, March 1, 1993, March 2, 1993,
July 1, 1993, August 20, 1993, September 29, 1993, September 30,
1993, October 1, 1993, February 10, 1994, February 11, 1994, March
10, 1995, September 6, 1995 and September 7, 1995 have been
heretofore entered into between the Company and the Trustee to
provide, respectively, for the creation of the first through the
sixty-first series of Bonds thereunder and, in the case of the
supplemental indentures dated January 1, 1948, March 1, 1952, May
15, 1953, May 16, 1955, June 1, 1956, September 15, 1972, July 1,
1979, June 17, 1981, November 1, 1985, September 16, 1987, May 1,
1989, May 21, 1991, May 7, 1992, July 1, 1993 and one of the
supplemental indentures dated August 15, 1974, to convey additional
property; and
<PAGE>
2
WHEREAS, $20,000,000 principal amount of Bonds of the 3 1/4%
Series due 1966 (the first series), $5,000,000 principal amount of
Bonds of the 3 1/4% Series due 1974 (the second series),
$10,000,000 principal amount of Bonds of the 31/4% Series due 1975
(the third series), $5,000,000 principal amount of Bonds of the 3
1/4% Series due 1977 (the fourth series), $15,000,000 principal
amount of Bonds of the 3% Series due 1983 (the fifth series),
$10,000,000 principal amount of Bonds of the 2 7/8% Series due 1984
(the sixth series), $30,000,000 principal amount of Bonds of the 2
3/4% Series due 1985 (the seventh series), $15,000,000 principal
amount of Bonds of the 3 1/4% Series due 1987 (the eighth series),
$10,000,000 principal amount of Bonds of the 3 7/8% Series due 1988
(the ninth series), $10,000,000 principal amount of Bonds of the 3
3/8% Series due 1990 (the tenth series), $10,000,000 principal
amount of Bonds of the 3 5/8% Series due 1991 (the eleventh
series), $25,000,000 principal amount of Bonds of the 4 5/8% Series
due 1993 (the twelfth series), $15,000,000 principal amount of
Bonds of the 5 1/4% Series due 1994 (the thirteenth series),
$40,000,000 principal amount of Bonds of the 5% Series due 1995
(the fourteenth series), $45,000,000 principal amount of Bonds of
the 7 3/4% Series due 2004 (the twentieth series), $35,000,000
principal amount of Bonds of the 8.85% Series due 2005 (the
twenty-first series), $70,000,000 principal amount of Bonds of the
9 1/2% Series due August 15, 2005 (the twenty-second series),
$50,000,000 principal amount of Bonds of the 7 3/4% Series due 2007
(the twenty-third series), $25,000,000 principal amount of Bonds of
the 5 5/8% Series due 1997 (the twenty-fourth series), $100,000,000
principal amount of Bonds of the 8 3/8% Series due 2009 (the
twenty-fifth series), $50,000,000 principal amount of Bonds of the
10 1/4% Series due 1981 (the twenty-sixth series), $50,000,000
principal amount of Bonds of the 10 3/4% Series due 2004 (the
twenty-seventh series), $38,300,000 principal amount of Bonds of
the 6 1/8% Series due 2007 (the twenty-eighth series), $15,000,000
principal amount of Bonds of the 6 1/2% Series due 2004 (the
twenty-ninth series), $20,000,000 principal amount of Bonds of the
6 1/2% Series due 2007 (the thirtieth series), $7,500,000 principal
amount of Bonds of the 6 5/8% Series due 2009 (the thirty-first
series), $30,000,000 principal amount of Bonds of the Floating Rate
Series due 2010 (the thirty-second series), $50,000,000 principal
amount of Bonds of the 14 1/2% Series due 1991 (the thirty-third
series), $60,000,000 principal amount of Bonds of the 14 1/4%
Series due 1992 (the thirty-fifth series), $50,000,000 principal
amount of Bonds of the 11 7/8% Series due 1989 (the thirty-sixth
series), $37,000,000 principal amount of Bonds of the 8 3/4% Series
due 2010 (the thirty-seventh series), $75,000,000 principal amount
of Bonds of the 11 1/4% Series due 2015 (the thirty-eighth series),
$75,000,000 principal amount of Bonds of the 9 1/4% Series due 2016
(the thirty-ninth series), $75,000,000 principal amount of Bonds of
the 8 3/4% Series due 2016 (the
<PAGE>
3
fortieth series), $75,000,000 principal amount of Bonds of the
8 1/4% Series due 2017 (the forty-first series), $75,000,000
principal amount of Bonds of the 9% Series due 1990 (the
forty-second series), $75,000,000 principal amount of Bonds of the
9 3/4% Series due 2019 (the forty-third series) and $75,000,000
principal amount of Bonds of the 8 5/8% Series due 2019 (the
forty-fourth series), have been heretofore redeemed and retired and
there are now issued and outstanding under the Original Indenture
and under the supplemental indentures referred to above:
$50,000,000 principal amount of Bonds of the 4 3/8% Series due 1998
(the fifteenth series); $45,000,000 principal amount of Bonds of
the 4 1/2% Series due 1999 (the sixteenth series); $15,000,000
principal amount of Bonds of the 5 1/8% Series due 2001 (the
seventeenth series); $35,000,000 principal amount of Bonds of the
5 7/8% Series due 2002 (the eighteenth series); $40,000,000
principal amount of Bonds of the 6 5/8% Series due 2003 (the
nineteenth series); $50,000,000 principal amount of Bonds of the
Adjustable Rate Series due 2001 (the thirty-fourth series);
$100,000,000 principal amount of Bonds of the 9% Series due 2000
(the forty-fifth series); $100,000,000 principal amount of Bonds of
the 9% Series due 2021 (the forty-sixth series); $75,000,000
principal amount of Bonds of the 8 1/2% Series due 2027 (the
forty-seventh series); $30,000,000 principal amount of Bonds of the
6% Series due 2022 (the forty-eighth series); $37,000,000 principal
amount of Bonds of the 6 3/8% Series due 2023 (the forty-ninth
series); $78,000,000 principal amount of Bonds of the 6 1/2% Series
due 2008 (the fiftieth series); $40,000,000 principal amount of
Bonds of the 7 1/2% Series due 2028 (the fifty-first series);
$100,000,000 principal amount of Bonds of the 7 1/4% Series due
2023 (the fifty-second series); $100,000,000 principal amount of
Bonds of the 6 7/8% Series due 2023 (the fifty-third series);
$50,000,000 principal amount of Bonds of the 5 5/8% Series due 2003
(the fifty-fourth series); $50,000,000 principal amount of Bonds of
the 5 7/8% Series due 2008 (the fifty-fifth series); $75,000,000
principal amount of Bonds of the 6 7/8% Series due 2024 (the
fifty-sixth series); $42,500,000 principal amount of Bonds of the
5 3/8% Series due 2024 (the fifty-seventh series); $38,300,000
principal amount of Bonds of the 5 3/8% Series due 2024 (the
fifty-eighth series); $16,000,000 principal amount of Bonds of the
5 3/4% Series due 2010 (the fifty-ninth series); $100,000,000
principal amount of Bonds of the 6 1/2% series due 2005 (the
sixtieth series); and $75,000,000 principal amount of Bonds of the
7 3/8% Series due 2025 (the sixty-first series); and
WHEREAS, for the purpose of conforming the Original Indenture
to the standards prescribed by the Trust Indenture Act of 1939 or
otherwise modifying certain of the provisions of the Original
Indenture, indentures supplemental thereto dated December 10, 1939,
August 10, 1942, October 15, 1942, April 1, 1966, June 16, 1981,
June 17, 1981, December 1, 1981, August 1, 1982,
<PAGE>
4
October 1, 1982, April 15, 1983, November 1, 1985, March 1, 1986,
November 1, 1986, March 1, 1987, September 16, 1987, May 1, 1989,
August 1, 1989, April 5, 1990, May 21, 1991, May 7, 1992, September
1, 1992, November 1, 1992, March 1, 1993, March 2, 1993, July 1,
1993, August 20, 1993, September 29, 1993, September 30, 1993,
October 1, 1993, February 10, 1994, February 11, 1994, March 10,
1995, September 6, 1995 and September 7, 1995 have been heretofore
entered into between the Company and the Trustee, and for the
purpose of conveying additional property, indentures supplemental
thereto dated July 15, 1942, October 15, 1947, December 31, 1948,
December 31, 1949, February 15, 1951, February 16, 1953, March 15,
1954, March 15, 1955, March 15, 1956, April 1, 1957, May 1, 1958,
May 1, 1959, May 2, 1960, April 3, 1961, May 1, 1962, May 1, 1963,
April 23, 1964, May 3, 1965, June 1, 1966, April 28, 1967, July 3,
1967, May 1, 1968, June 16, 1969, May 15, 1970, September 1, 1971,
June 17, 1981, November 1, 1985, September 16, 1987, May 1, 1989,
May 21, 1991, May 7, 1992 and July 1, 1993 have been heretofore
entered into between the Company and the Trustee, and for the
purpose of better securing and protecting the Bonds then or
thereafter issued and confirming the lien of the Original
Indenture, an indenture dated October 15, 1942 supplemental thereto
has been heretofore entered into between the Company and the
Trustee; the Original Indenture as heretofore amended and
supplemented being hereinafter referred to as the "Original
Indenture as amended"; and
WHEREAS, the Company is entitled to have authenticated and
delivered additional Bonds on the basis of the net bondable value
of property additions, upon compliance with the provisions of
Section 4 of Article III of the Original Indenture as amended; and
WHEREAS, the Company has determined to issue a sixty-second
series of Bonds under the Original Indenture as amended in the
principal amount of $175,000,000, to be known as First Mortgage
Bonds, 6-1/4% Series due 2007 (hereinafter called "Bonds of 2007
Series"); and
WHEREAS, the Original Indenture as amended provides that
certain terms and provisions, as determined by the Board of
Directors of the Company, of the Bonds of any particular series may
be expressed in and provided by the execution of an appropriate
supplemental indenture; and
WHEREAS, the Original Indenture as amended provides that the
Company and the Trustee may enter into indentures supplemental
thereto to add to the covenants and agreements of the Company
contained therein other covenants and agreements thereafter to be
observed; and to surrender
<PAGE>
5
any right or power reserved to or conferred upon the Company in the
Original Indenture as amended; and
WHEREAS, the Company, in the exercise of the powers and
authority conferred upon and reserved to it under the provisions of
the Original Indenture as amended and pursuant to appropriate
resolutions of its Board of Directors, has duly resolved and
determined to make, execute and deliver to the Trustee a
Supplemental Indenture in the form hereof for the purposes herein
provided; and
WHEREAS, all conditions and requirements necessary to make
this Supplemental Indenture a valid, binding and legal instrument
have been done, performed and fulfilled, and the execution and
delivery hereof have been in all respects duly authorized;
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
THAT POTOMAC ELECTRIC POWER COMPANY, in consideration of the
premises and of One Dollar to it duly paid by the Trustee at or
before the ensealing and delivery of these presents, and for other
valuable considerations, the receipt whereof is hereby
acknowledged, and in order further to secure the payment of the
principal of, and premium (if any) and interest on all Bonds at any
time issued and outstanding under the Indenture according to their
tenor, purport and effect, and for the purpose of ratifying and
confirming the lien of the Indenture and the performance and
observance by the Company of all of the covenants and conditions
contained in the Indenture, has executed and delivered this
Supplemental Indenture, and has granted, bargained, sold,
warranted, aliened, remised, released, conveyed, assigned,
transferred, mortgaged, pledged, set over, ratified and confirmed
and by these presents does grant, bargain, sell, warrant, alien,
remise, release, convey, assign, transfer, mortgage, pledge, set
over, ratify and confirm unto The Bank of New York, as Trustee
under the Indenture and to its successors in the trust created
thereby and to its and their assigns forever, all and singular the
following described properties (in addition to all other properties
heretofore subject to the lien of the Original Indenture as amended
and not heretofore released from the lien thereof), that is to say:
<PAGE>
6
FIRST.
All and singular the lands, real estate, chattels real,
easements, servitudes and leasehold and other interests in real
estate which the Company now owns or, subject to the provisions of
Article XII of the Original Indenture as amended, may hereafter
acquire, including, among other things, the following (but
reference to, or enumeration of, any particular kinds, classes or
items of property shall not be deemed to exclude from the operation
and effect of this Indenture any kind, class or item not so
referred to or enumerated, except as hereinafter expressly
provided):
I. DISTRICT OF COLUMBIA
The following parcel of land in the District of Columbia:
Alabama Avenue Substation
Land acquired from the District of Columbia, Department of
Housing and Community Development by deed dated December 4, 1996
and recorded December 9, 1996 as Instrument No. 9600080488.
II. CHARLES COUNTY, MARYLAND
Morgantown Fly Ash Site
Land acquired from Brinsfield Farms, Inc. by deed dated June
27, 1995 and recorded June 28, 1995 in Liber 2102, Folio 263.
III. MONTGOMERY COUNTY, MARYLAND
Derwood Substation No. 209
Land acquired from Potomac Capital Investment Corporation by
quitclaim deed dated March 22, 1995 and recorded April 7, 1995 in
Liber 13338, Folio 479.
<PAGE>
7
Brighton/High Ridge Transmission Line Right-of-Way
The following parcels of land, being part of an 88-foot wide
right-of-way extending from Brighton Substation No. 66 in
Montgomery County, Maryland to Baltimore Gas and Electric Company's
High Ridge Substation in Howard County, Maryland:
Property Name of Company's Deed by which Acquired
No. Grantor by the Company
- -------- ----------------- ----------------------
1906 State of Maryland, Deed of Easement Date--March 3, 1995
to the use of the Record Date--March 22, 1995
Department of Liber 13309, Folio 345
Natural Resources
1913 Harold T. Meryman Deed of Easement Date--May 2, 1994
and Mary Lane Record Date--May 10, 1994
Meryman Liber 12602, Folio 415
<PAGE>
8
IV. HOWARD COUNTY, MARYLAND
Brighton/High Ridge Transmission Line Right-of-Way
The following parcels of land, being part of a 150-foot wide
right-of-way extending from Brighton Substation No. 66 in
Montgomery County, Maryland to Baltimore Gas and Electric Company's
High Ridge Substation in Howard County, Maryland:
Property Name of Company's Deed by which Acquired
No. Grantor by the Company
- -------- ----------------- ----------------------
1920.1 Guy J. Carson and Deed of Exchange Date--August 3, 1993
Kathryn D. Carson Record Date--October 29, 1993
Liber 3034, Folio 106
1932 Marie T. Spencer Deed of Easement Date--March 30, 1994
Record Date--March 30, 1994
Liber 3206, Folio 0027
1943 Samuel F. Lyons Deed of Easement Date--March 26, 1993
Elsie K. Lyons Record Date--March 31, 1993
(Lot 1) Liber 2815, Folio 468
1943 Samuel F. Lyons Deed of Easement Date--March 26, 1993
Elsie K. Lyons Record Date--March 31, 1993
(Lot 2) Liber 2815, Folio 473
1943 Samuel F. Lyons Deed of Easement Date--March 26, 1993
Elsie K. Lyons Record Date--March 31, 1993
(Lot 3) Liber 2815, Folio 478
1943 Samuel F. Lyons Deed of Easement Date--March 26, 1993
Elsie K. Lyons Record Date--March 31, 1993
(Lot 4) Liber 2815, Folio 483
1943 Samuel F. Lyons Deed of Easement Date--March 26, 1993
Elsie K. Lyons Record Date--March 31, 1993
(Lot 5) Liber 2815, Folio 488
<PAGE>
9
V. INDIANA COUNTY, PENNSYLVANIA
The Company's undivided 9.72% interest as tenant in common in the
following property located in Indiana County, Pennsylvania.
Name of Company's Deed by which Acquired
Grantor by the Company
----------------- ----------------------
American Trustee & Transfer Deed Date--February 11, 1994
Corporation, Trustee Record Date--July 27, 1994
Deed Book 1048, Page 425
SECOND.
Also all power houses, plants, buildings and other
structures, dams, dam sites and substations, together with all and
singular the electric and mechanical appliances appurtenant thereto
of every nature whatsoever, now owned by the Company or, subject to
the provisions of Article XII of the Original Indenture as amended,
which it may hereafter acquire, including all and singular the
machinery, engines, boilers, furnaces, generators, dynamos,
turbines and motors, and all and every character of mechanical
appliance for generating or producing electricity for light, heat,
cold, power or other purposes.
THIRD.
Also all transmission and distribution systems used for the
transmission and distribution of electricity for light, heat, cold
or power or any other purpose whatsoever, whether underground or
overhead, surface or otherwise, now owned by the Company or,
subject to the provisions of Article XII of the Original Indenture
as amended, which it may hereafter acquire, including all poles,
towers, posts, wires, cables, conduits, manholes, pipes, tubes,
drains, furnaces, switchboards, transformers, conductors,
insulators, supports, meters, lamps, fuses, junction boxes and
other electric fixtures and apparatus.
Also all inventions, patent rights and licenses used or
useful in connection with the generation, production, transmission
or distribution of electricity for light, heat, cold, power or
other purposes, now owned by the Company or, subject to the
provisions of Article XII of the Original Indenture as amended,
which it may hereafter acquire.
<PAGE>
10
FOURTH.
Also all franchises and all permits, ordinances, easements,
privileges, immunities and licenses, all rights to construct,
maintain and operate overhead, surface and underground systems for
the distribution and transmission of electricity for the supply to
itself or others of light, heat, cold or power, all rights-of-way,
all waters, water rights and flowage rights and all grants and
consents, now owned or, subject to the provisions of Article XII of
the Original Indenture as amended, which it may hereafter acquire.
FIFTH.
Also all improvements, extensions or additions purchased,
constructed or otherwise acquired by the Company to or about all
other property, real, personal and mixed (except as herein and in
the Original Indenture as amended expressly provided), of every
nature and kind wheresoever situated, as such property is described
in the Original Indenture as amended and indentures supplemental
thereto.
Also, subject to the provisions of Article XII of the
Original Indenture as amended, all other property, real, personal
and mixed (except as herein expressly excepted) of every nature and
kind and wheresoever situated now or hereafter possessed by or
belonging to the Company, or to which it is now, or may at any time
hereafter be, in any manner entitled in law or in equity.
SIXTH.
Also any and all property of any kind or description which
may from time to time after the date of this Supplemental Indenture
by delivery or by writing of any kind be conveyed, mortgaged,
pledged, assigned or transferred to the Trustee by the Company or
by any person, copartnership or corporation, with the consent of
the Company or otherwise as expressly permitted by the terms of the
Original Indenture as amended, and accepted by the Trustee, to be
held as part of the mortgaged property; and the Trustee is hereby
authorized to accept and receive any such property and any such
conveyance, mortgage, pledge, assignment and transfer, as and for
additional security hereunder, and to hold and apply any and all
such property subject to and in accordance with the terms and
provisions upon which such conveyance, mortgage, pledge, assignment
or transfer shall be made.
<PAGE>
11
SEVENTH.
Together with all and singular the tenements, hereditaments
and appurtenances belonging or in anywise appertaining to the
aforesaid property or any part thereof; with the reversion and
reversions, remainder and remainders, tolls, rents, revenues,
issues, income, product and profits thereof, and all the estate,
right, title, interest and claim whatsoever, at law as well as in
equity, which the Company now has or hereafter acquires in and to
the aforesaid property and franchises and every part and parcel
thereof.
EXPRESSLY EXCEPTING AND EXCLUDING, HOWEVER, from this
Supplemental Indenture and from the lien and operation hereof:
(a) All bills, notes and accounts receivable, cash on hand
or in bank, contracts, operating agreements, existing leases in
which the Company is lessor and leases hereafter made of portions
of the mortgaged property in which the Company is lessor;
(b) All shares of stock and other certificates or evidences
of interest therein, and all bonds, notes and other evidences of
indebtedness or certificates of interest therein and other
securities now owned or hereafter acquired or possessed by the
Company (except securities or obligations required to be pledged by
the terms of the Original Indenture as amended);
(c) All equipment and materials not installed as a part of
the fixed property of the Company and merchandise and supplies
acquired by the Company for the purpose of resale or leasing to its
customers in the ordinary course and conduct of its business ; and
(d) All electric energy and other materials or products
generated, manufactured, produced or purchased by the Company for
sale, distribution or use in the ordinary course and conduct of its
business.
<PAGE>
12
AND FURTHER EXPRESSLY EXCEPTING AND EXCLUDING from this
Supplemental Indenture and from the lien and operation hereof, all
property, permits and franchises of any other corporation of
whatever character, shares of stock or securities whereof, or
obligations secured by lien upon the properties and franchises
whereof, which may be now owned or hereafter acquired or possessed
by the Company, notwithstanding the fact that the Company may own
or hereafter acquire all or substantially all of the shares of
stock or other securities issued by, or secured by lien upon
property of, any such corporation, or that any such corporation may
be incorporated or organized at the instance of or for the account
of the Company, or that all or any part of the shares of stock or
other securities of such corporation may be subjected to the lien
hereof by the Company.
TO HAVE AND TO HOLD all said properties, real, personal and
mixed, mortgaged, pledged and conveyed by the Company as aforesaid,
or intended so to be, unto the Trustee, its successors in the Trust
created by the Indenture and its and their assigns forever;
SUBJECT, HOWEVER, to the exceptions and reservations and
matters hereinabove recited, to existing leases, to existing
mortgages or other liens upon easements or rights-of-way for
transmission or distribution line purposes, as defined in Article
I of the Original Indenture as amended, and any extensions thereof,
and subject to existing easements for streets, alleys, highways,
rights-of-way and railroad purposes over, upon, and across any of
the Property hereinbefore described, and subject also to all terms,
conditions, agreements, covenants, exceptions and reservations
expressed or provided in the deeds or other instruments
respectively under and by virtue of which the Company now owns or
may hereafter acquire any property subject to the lien hereof, and
to undetermined liens and charges, if any, incidental to
construction or other existing permitted liens as defined in
Article I of the Original Indenture as amended;
IN TRUST NEVERTHELESS, upon the terms and trusts in the
Original Indenture and the indentures supplemental thereto,
including this Supplemental Indenture, set forth, for the further,
equal and proportionate benefit, security, and protection of all
present and future holders of the Bonds and coupons issued and to
be issued thereunder, or any of them, without preference of any of
said Bonds and coupons of any particular series over the Bonds and
coupons of any other series, by reason of priority in the time of
issue, sale or negotiation thereof, or by reason of the purpose of
issue or otherwise howsoever, except as otherwise provided in
Section 2 of Article IV of the
<PAGE>
13
Original Indenture as amended;
And Potomac Electric Power Company hereby covenants, declares
and agrees with the Trustee and its successors in the trust under
the Original Indenture as amended, for the benefit of those who
hold the Bonds and coupons, or any of them, issued or to be issued
hereunder or under the Original Indenture as amended, as follows:
PART I.
DESCRIPTION OF BONDS.
SECTION 1. The Bonds of 2007 Series shall, subject to the
provisions of Section 1 of Article II of the Original Indenture as
amended, be designated as "First Mortgage Bonds, 6-1/4% Series due
2007" of the Company. The Bonds of 2007 Series shall be executed,
authenticated and delivered in accordance with the provisions of,
and shall in all respects be subject to, all of the terms,
conditions and covenants of the Original Indenture as amended,
except in so far as the terms and provisions of the Original
Indenture as amended are amended or modified by this Supplemental
Indenture.
The Bonds of 2007 Series shall mature October 15, 2007, and
shall bear interest from the date of initial issuance at the rate
of six and one-quarter percent (6-1/4%) per annum, payable
semiannually, commencing April 15, 1998, on the fifteenth day of
April and the fifteenth day of October in each year (each such
April 15th and October 15th being hereinafter called an "interest
payment date"). The Bonds of 2007 Series shall be payable as to
principal and interest in lawful money of the United States of
America, and shall be payable (as well the interest as the
principal thereof) at the agency of the Company in the Borough of
Manhattan, The City of New York.
The interest so payable on any interest payment date shall be
paid to the persons in whose names the Bonds of 2007 Series are
registered at the close of business on the last business day
(hereinafter called the "record date") which is more than ten days
prior to such interest payment date, a "business day" being any
day that is not a day on which banks in the City of New York are
authorized by law to close; except that if the Company shall
default in the payment of any interest due on such interest payment
date, such defaulted interest shall be paid to the persons in whose
names the Bonds of 2007 Series are registered on the date of
payment of such defaulted interest, or in
<PAGE>
14
accordance with the regulations of any securities exchange on which
the Bonds of 2007 Series are listed.
Except as provided hereinafter, every Bond of 2007 Series
shall be dated as of the date of its authentication and delivery,
or if that is an interest payment date, the next day, and shall
bear interest from the interest payment date next preceding its
date or the date of delivery of the initial Bonds of 2007 Series,
whichever is later. Notwithstanding Section 6 of Article II of the
Original Indenture, any Bond of 2007 Series authenticated and
delivered by the Trustee after the close of business on the record
date with respect to any interest payment date and prior to such
interest payment date shall be dated as of the date next following
such interest payment date and shall bear interest from such
interest payment date; except that if the Company shall default in
the payment of any interest due on such interest payment date, such
Bond shall bear interest from the next preceding interest payment
date or the date of delivery of the initial Bonds of 2007 Series,
whichever is later.
SECTION 2. The Bonds of 2007 Series, and the Trustee's
certificate to be endorsed on the Bonds of 2007 Series, shall be
substantially in the following forms, respectively:
[FORM OF FACE OF BOND OF 2007 SERIES]
POTOMAC ELECTRIC POWER COMPANY
(A District of Columbia and Virginia corporation)
First Mortgage Bond, 6-1/4% Series Due 2007
No. $
POTOMAC ELECTRIC POWER COMPANY, a corporation organized and
existing under the laws of the District of Columbia and a domestic
corporation of the Commonwealth of Virginia (hereinafter called the
"Company", which term shall include any successor corporation as
defined in the Amended Indenture hereinafter referred to), for
value received, hereby promises to pay to ................... or
registered assigns, the sum of ..................dollars, on the
Fifteenth day of October 2007 , in lawful money of the United
States of America, and to pay interest thereon in like money from
the later of the date of delivery of the initial Bonds of 2007
Series or the interest payment date April 15 or October 15 next
preceding the date of this Bond, or if the Company shall default in
the
<PAGE>
15
payment of interest due on such interest payment date, then from
the next preceding interest payment date or the date of delivery of
the initial Bonds of 2007 Series, whichever is later, at the rate
of six and one-quarter percent (61/4) per annum, payable
semiannually, commencing April 15, 1998, on the fifteenth day of
April and October in each year until maturity, or, if the Company
shall default in the payment of the principal hereof, until the
Company's obligation with respect to the payment of such principal
shall be discharged as provided in the Amended Indenture. The
interest so payable on any April 15 or October 15 will, subject to
certain exceptions provided in the indenture dated as of October 2,
1997 supplemental to the Amended Indenture, be paid to the person
in whose name this Bond is registered at the close of business on
the last business day which is more than ten days prior to such
April 15 or October 15. Both principal of, and interest on, this
Bond are payable at the agency of the Company in the Borough of
Manhattan, The City of New York.
Reference is made to the further provisions of this Bond set
forth on the reverse hereof, and such further provisions shall for
all purposes have the same effect as though fully set forth at this
place.
This Bond shall not be entitled to any benefit under the
Amended Indenture or any indenture supplemental thereto, or become
valid or obligatory for any purpose, until The Bank of New York,
the Trustee under the Amended Indenture, or a successor trustee
thereto under the Amended Indenture, shall have signed the form of
certificate endorsed hereon.
IN WITNESS WHEREOF, Potomac Electric Power Company has caused
this Bond to be signed in its name by the signature (or a facsimile
thereof) of its President or a Vice President, and its corporate
seal (or a facsimile thereof) to be hereto affixed and attested by
the facsimile signature of its Secretary or an Assistant Secretary.
Dated,
POTOMAC ELECTRIC POWER COMPANY
By .........................
Vice President
Attest:
.......................
Secretary
<PAGE>
16
[FORM OF TRUSTEE'S CERTIFICATE]
This Bond is one of the Bonds, of the series designated
therein, described in the within-mentioned Amended Indenture and
the Supplemental Indenture dated as of October 2, 1997.
THE BANK OF NEW YORK
Trustee.
By ......................
Authorized Signatory
[TEXT APPEARING ON REVERSE SIDE OF BOND OF 2007 SERIES]
This Bond is one of a duly authorized issue of Bonds of the
Company (herein after called the "Bonds") in unlimited aggregate
principal amount, of the series hereinafter specified, all issued
and to be issued under and equally secured (except in so far as any
purchase or sinking fund or analogous provisions for any particular
series of Bonds, established by any indenture supplemental to the
Amended Indenture hereinafter mentioned, may afford additional
security for such Bonds) by a mortgage and deed of trust, dated
July 1, 1936, executed by the Company to The Bank of New York as
successor to The Riggs National Bank of Washington, D.C. (herein
called the "Trustee"), as trustee, as amended by indentures
supplemental thereto dated December 10, 1939, August 10, 1942,
October 15, 1942, April 1, 1966, June 16, 1981, June 17, 1981,
December 1, 1981, August 1, 1982, October 1, 1982, April 15, 1983,
November 1, 1985, March 1, 1986, November 1, 1986, March 1, 1987,
September 16, 1987, May 1, 1989, August 1, 1989, April 5, 1990, May
21, 1991, May 7, 1992, September 1, 1992, November 1, 1992, March
1, 1993, March 2, 1993, July 1, 1993, August 20, 1993, September
29, 1993, September 30, 1993, October 1, 1993, February 10, 1994,
February 11, 1994, March 10, 1995, September 6, 1995 and September
7, 1995 (said mortgage and deed of trust, as so amended, being
herein called the "Amended Indenture") and all indentures
supplemental thereto, to which Amended Indenture and supplemental
indentures reference is hereby made for a description of the
properties mortgaged and pledged, the nature and extent of the
security, the rights of the owners of the Bonds and of the Trustee
in respect thereto, and the terms and conditions upon which the
Bonds are, and are to be, secured. To the extent permitted by, and
as provided in, the Amended Indenture,
<PAGE>
17
modifications or alterations of the Amended Indenture, or of any
indenture supplemental thereto, and of the rights and obligations
of the Company and of the holders of the Bonds may be made with the
consent of the Company by an affirmative vote of not less than 80%
in amount of the Bonds entitled to vote then outstanding, at a
meeting of Bondholders called and held as provided in the Amended
Indenture, and by an affirmative vote of not less than 80% in
amount of the Bonds of any series entitled to vote then outstanding
and affected by such modification or alteration, in case one or
more but less than all of the series of Bonds then outstanding
under the Amended Indenture are so affected; provided, however,
that no such modification or alteration shall be made which will
affect the terms of payment of the principal of, or interest on,
this Bond, which are unconditional, or which reduces the percentage
of Bonds the affirmative vote of which is required for the making
of such modifications or alterations. The Company is proposing an
amendment to the Amended Indenture which would replace "80%" with
"60%" in the preceding sentence, which amendment will become
effective upon the consent or agreement thereto of the holders of
all the outstanding Bonds. The holder of this Bond will be deemed
to have approved such amendment. The Bonds may be issued in series,
for various principal sums, may mature at different times, may bear
interest at different rates and may otherwise vary as in the
Amended Indenture provided.
This Bond is one of a series designated as the "First
Mortgage Bonds, 6-1/4% Series due 2007" (herein called the "Bonds of
2007 Series") of the Company, issued under and secured by the
Amended Indenture and all indentures supplemental thereto and
described in the indenture (herein called the "New Supplemental
Indenture"), dated as of October 2, 1997, between the Company and
the Trustee, supplemental to the Amended Indenture.
The Bonds of 2007 Series are not subject to redemption at the
option of the Company prior to maturity.
The Bonds of 2007 Series will be repayable on October 15,
2004, at the option of the holders thereof, at 100% of their
principal amount, together with accrued and unpaid interest to
October 15, 2004. In order for a Bond of 2007 Series to be repaid,
the Company must receive at the corporate trust office of the
Trustee during the period from and including August 16, 2004 to and
including the close of business on September 15, 2004 (or if
August 16, 2004 or September 15, 2004 is not a business day, the
next succeeding business day): (i) the Bond of 2007 Series (the
"Redeemable Bond") with the form entitled "Option to Elect
Repayment" on, or otherwise accompanying, the
<PAGE>
18
Redeemable Bond duly completed or (ii) a telegram, telex, facsimile
transmission or letter from a member of a national securities
exchange or the National Association of Securities Dealers, Inc. or
a commercial bank or trust company in the United States of America
setting forth the name of the holder of the Redeemable Bond, the
principal amount of the Redeemable Bond, the principal amount of
the Redeemable Bond to be repaid, a statement that the option to
elect repayment is being exercised thereby and a guarantee that the
Redeemable Bond to be repaid (with the form entitled "Option to
Elect Repayment" on, or otherwise accompanying, the Redeemable Bond
duly completed) will be received at the Trustee's corporate trust
office not later than five business days after the date of such
telegram, telex, facsimile transmission or letter, and such
Redeemable Bond and form duly completed are received at the
Trustee's office by such fifth business day. Effective exercise of
the repayment option by the holder of any Redeemable Bond shall be
irrevocable. No transfer or exchange of any Redeemable Bond (or,
in the event that any Redeemable Bond is to be repaid in part, such
portion of the Redeemable Bond to be repaid) will be permitted
after exercise of the repayment option. The repayment option may
be exercised by the holder of a Redeemable Bond for less than the
entire principal amount of the Redeemable Bond, provided the
principal amount which is to be repaid is set forth on the form
entitled "Option to Elect Repayment" and is equal to $1,000 or any
integral multiple thereof. All questions as to the validity,
eligibility (including time of receipt) and acceptance of any
Redeemable Bond for repayment will be determined by the Company,
whose determination will be final, binding and non-appealable.
Upon timely delivery of a Redeemable Bond to the Trustee with the
"Option to Elect Repayment" form completed in accordance with the
foregoing, the outstanding principal amount of such Redeemable Bond
(or portion thereof indicated on the "Option to Elect Repayment")
shall become due and payable on October 15, 2004, at the price
equal to 100% of the principal amount to be repaid, plus accrued
and unpaid interest to October 15, 2004. For purposes of this
provision, "business day" means any day that is not a day on which
banks in the City of New York are authorized by law to close.
In case an event of default, as defined in the Amended
Indenture, shall occur, the principal of all the Bonds at any such
time outstanding under the Amended Indenture may be declared or may
become due and payable, upon the conditions and in the manner and
with the effect provided in the Amended Indenture. The Amended
Indenture provides that such declaration may in certain events be
waived by the holders of a majority in principal amount of the
Bonds entitled to vote then outstanding.
<PAGE>
19
This Bond is transferable by the registered owner hereof, in
person or by duly authorized attorney, on the books of the Company
to be kept for that purpose at the agency of the Company in the
Borough of Manhattan, The City of New York, upon surrender and
cancellation of this Bond and on presentation of a duly executed
written instrument of transfer, and thereupon a new Bond or Bonds
of the same series, of the same aggregate principal amount and in
authorized denominations will be issued to the transferee or
transferees in exchange therefor; and this Bond, with or without
others of the same series, may in like manner be exchanged for one
or more new Bonds of the same series of other authorized
denominations but of the same aggregate principal amount; all
subject to the terms and conditions set forth in the Amended
Indenture.
No recourse shall be had for the payment of the principal of,
or the interest on, this Bond, or for any claim based hereon or
otherwise in respect hereof or of the Amended Indenture or any
indenture supplemental thereto, against any incorporator, or
against any stockholder, director or officer, past, present or
future, of the Company or of any predecessor or successor
corporation, either directly or through the Company or any such
predecessor or successor corporation, whether for amounts unpaid on
stock subscriptions or by virtue of any constitution, statute or
rule of law, or by the enforcement of any assessment or penalty or
otherwise, all such liability, whether at common law, in equity, by
any constitution, statute or otherwise, of incorporators,
stockholders, directors or officers being released by every owner
hereof by the acceptance of this Bond and as part of the
consideration for the issue hereof, and being likewise released by
the terms of the Amended Indenture.
SECTION 3. The Bonds of 2007 Series shall be registered
Bonds without coupons in denominations of any multiple of $1,000,
numbered consecutively upwards from R1.
SECTION 4. Until Bonds of 2007 Series in definitive form
are ready for delivery, the Company may execute, and upon its
request in writing the Trustee shall authenticate and deliver, in
lieu thereof, Bonds for such series in temporary form, as provided
in Section 9 of Article II of the Original Indenture as amended.
<PAGE>
20
PART II.
ISSUE OF BONDS.
SECTION 1. Except for Bonds of 2007 Series issued pursuant
to Section 13 of Article II of the Original Indenture as amended,
the principal amount of Bonds of 2007 Series which may be
authenticated and delivered hereunder is limited to $175,000,000
aggregate principal amount.
SECTION 2. Bonds of 2007 Series in the aggregate principal
amount permitted in Section 1 of this Part II, may at any time
subsequent to the execution hereof be executed by the Company and
delivered to the Trustee and shall be authenticated by the Trustee
and delivered (either before or after the recording hereof) to or
upon the order of the Company evidenced by a writing or writings,
signed by its President or one of its Vice Presidents and its
Treasurer or one of its Assistant Treasurers, at such time or times
as may be requested by the Company subsequent to the receipt by the
Trustee of
(1) the certified resolution and the officers' certificate
required by Section 3(a) and Section 3(b) of Article III of the
Original Indenture as amended;
(2) the opinion of counsel required by Section 3(c) of
Article III of the Original Indenture as amended;
(3) cash, if any, in the amount required to be deposited
by Section 3(d) of Article III of the Original Indenture as
amended, which shall be held and applied by the Trustee as provided
in said Section 3(d);
(4) the certificates, instruments, opinions of counsel,
prior lien bonds and cash, if any, required by Section 4 of Article
III of the Original Indenture as amended, except that, as required
by Part V of this Supplemental Indenture, property additions
purchased, constructed or otherwise acquired on or before December
31, 1946 shall not be made the basis for the authentication and
delivery of Bonds of 2007 Series; and
(5) the certificates and opinions required by Article
XVIII of the Original Indenture as amended.
<PAGE>
21
PART III.
REDEMPTION AT OPTION OF COMPANY.
The Bonds of 2007 Series are not redeemable at the option of
the Company prior to maturity.
PART IV.
REPAYMENT AT OPTION OF HOLDERS
SECTION 1. The Bonds of 2007 Series shall be repayable on
October 15, 2004, at the option of the respective holders thereof,
at 100% of their principal amount, together with accrued and unpaid
interest to October 15, 2004, in accordance with the procedures set
forth in the form of Bond of 2007 Series contained in Section 2 of
Part I hereof.
SECTION 2. All Bonds of 2007 Series repaid pursuant to the
provisions of this Part IV shall forthwith be canceled.
PART V.
ADDITIONAL PARTICULAR COVENANTS OF THE COMPANY.
The Company hereby covenants, warrants and agrees that so
long as any Bonds of 2007 Series are outstanding:
SECTION 1. The Company will not withdraw, pursuant to the
provisions of Section 2 of Article VIII of the Original Indenture
as amended, any moneys held by the Trustee as part of the trust
estate in excess of an amount equal to the aggregate principal
amount of such of the refundable Bonds as were theretofore issued
by the Company; and that upon any such withdrawal by the Company
refundable Bonds equal in aggregate principal amount to the amount
so withdrawn shall be deemed to have been made the basis of such
withdrawal.
SECTION 2. Property additions purchased, constructed or
otherwise
<PAGE>
22
acquired on or before December 31, 1946 shall not be made the basis
for the authentication and delivery of Bonds, or the withdrawal of
cash, or the reduction of the amount of cash required to be paid to
the Trustee under any provision of the Indenture.
PART VI.
AMENDMENT OF INDENTURE TO PERMIT QUALIFICATION
UNDER TRUST INDENTURE ACT OF 1939.
The Company and the Trustee, from time to time and at any
time, without any vote or consent of the holders of the Bonds of
2007 Series, may enter into such indentures supplemental to the
Original Indenture as may or shall by them be deemed necessary or
desirable to add to or modify or amend any of the provisions of the
Original Indenture so as to permit the qualification of the
Original Indenture under the Trust Indenture Act of 1939.
Except to the extent specifically provided herein, no
provision of this Supplemental Indenture is intended to modify, and
the parties hereto do hereby adopt and confirm, the provisions of
Section 318(c) of the Trust Indenture Act of 1939 which amend and
supersede provisions of the Original Indenture, as supplemented, in
effect prior to November 15, 1990.
PART VII.
AMENDMENT OF ORIGINAL INDENTURE.
Notwithstanding any other provisions of the Original Indenture as
amended, the holders of the Bonds of 2007 Series, by their holding
of such Bonds, are deemed to have approved the following amendment
to the Original Indenture as amended and to have authorized the
Trustee to take any action necessary to evidence or effectuate such
approval:
Sections 5 and 6 of Article XV of the Original Indenture as
amended are hereby amended by changing the words and figures
"eighty percent. (80%)" to the words and figures "sixty
percent. (60%)" wherever in such Sections such words and
figures occur.
<PAGE>
23
PART VIII.
THE TRUSTEE.
The Trustee hereby accepts the trusts hereby declared and
provided and agrees to perform the same upon the terms and
conditions in the Original Indenture as amended set forth and upon
the following terms and conditions:
The Trustee shall not be responsible in any manner whatsoever
for or in respect of the validity or sufficiency of this
Supplemental Indenture or the due execution hereof by the Company
or for or in respect of the recitals contained herein, all of which
recitals are made by the Company solely. In general, each and
every term and condition contained in Article XIII of the Original
Indenture as amended shall apply to this Supplemental Indenture
with the same force and effect as if the same were herein set forth
in full, with such omissions, variations and modifications thereof
as may be appropriate to make the same conform to this Supplemental
Indenture.
PART IX.
MISCELLANEOUS PROVISIONS.
This Supplemental Indenture may be simultaneously executed in
any number of counterparts, each of which when so executed shall be
deemed to be an original; but such counterparts shall together
constitute but one and the same instrument.
Potomac Electric Power Company hereby constitutes and
appoints Dennis R. Wraase, one of its Senior Vice Presidents, to be
its true and lawful attorney-in-fact, for it and in its name to
appear before any officer authorized by law to take and certify
acknowledgments of deeds to be recorded in the District of
Columbia, in the State of Maryland, in the Commonwealth of
Virginia, and in the Commonwealth of Pennsylvania and to
acknowledge and deliver these presents as the act and deed of said
Potomac Electric Power Company.
The Bank of New York, hereby constitutes and appoints
Frederick W. Clark, one of its Vice Presidents, to be its true and
lawful attorney-in-fact, for it and in its name to appear before
any officer authorized by law to take and certify acknowledgments
of deeds to be recorded in the District of Columbia,
<PAGE>
24
in the State of Maryland, in the Commonwealth of Virginia, and in
the Commonwealth of Pennsylvania and to acknowledge and deliver
these presents as the act and deed of said The Bank of New York.
IN WITNESS WHEREOF, said Potomac Electric Power Company has
caused this Supplemental Indenture to be executed on its behalf by
its President or one of its Vice Presidents and its corporate seal
to be hereto affixed and said seal and this Supplemental Indenture
to be attested by its Secretary or one of its Assistant
Secretaries; and said The Bank of New York, in evidence of its
acceptance of the trust hereby created, has caused this
Supplemental Indenture to be executed on its behalf by its
President or one of its Vice Presidents, and its corporate seal to
be hereto affixed and said seal and this Supplemental Indenture to
be attested by one of its Assistant Vice Presidents, all as of the
2nd day of October, One thousand nine hundred and ninety-seven.
POTOMAC ELECTRIC POWER COMPANY
(CORPORATE SEAL)
/S/ D. R. WRAASE
By ..........................
DENNIS R. WRAASE,
Senior Vice President
Attested:
/S/ ELLEN SHERIFF ROGERS
..........................
ELLEN SHERIFF ROGERS,
Secretary
Signed, sealed and delivered by
Potomac Electric Power Company in
the presence of:
/S/ D. GARDNER
...........................
/S/ MARK J. JEWELL
...........................
As Witnesses
<PAGE>
25
THE BANK OF NEW YORK
/S/ F. CLARK
(Corporate Seal) By .....................
FREDERICK W. CLARK
Vice President
Attested:
/S/ ROBERT F. McINTYRE
...........................
ROBERT F. McINTYRE
Vice President
Signed, sealed and delivered by The
Bank of New York in the presence of:
/S/ MARK J. JEWELL
...........................
/S/ D. GARDNER
...........................
As Witnesses
<PAGE>
26
CITY OF WASHINGTON,
DISTRICT OF COLUMBIA, SS.:
I, LISA A. POOLE, a Notary Public in and for the District of
Columbia, United States of America, whose commission as such will
expire July 31, 2002, do hereby certify that DENNIS R. WRAASE and
ELLEN SHERIFF ROGERS, whose names as Senior Vice President and
Secretary, respectively, of POTOMAC ELECTRIC POWER COMPANY, a
corporation, are signed to the foregoing and hereto attached deed,
bearing date as of the 2nd day of October, personally appeared this
day before me in my District aforesaid and acknowledged themselves
to be, respectively, a Senior Vice President and the Secretary of
Potomac Electric Power Company, and that they as such, being
authorized so to do, executed the said deed by signing the name of
Potomac Electric Power Company by Dennis R. Wraase, as Senior Vice
President, and attested by Ellen Sheriff Rogers, as Secretary, and
acknowledged the same before me in my District aforesaid and
acknowledged the foregoing instrument to be the act and deed of
Potomac Electric Power Company.
Given under my hand and official seal this 2nd day of
October, 1997.
(NOTARIAL SEAL)
/S/ LISA A. POOLE
.........................
Notary Public
District of Columbia
<PAGE>
27
CITY OF WASHINGTON,
DISTRICT OF COLUMBIA, SS.:
I, LISA A. POOLE, a Notary Public in and for the District of
Columbia, United States of America, do hereby certify that DENNIS
R. WRAASE, a Senior Vice President of POTOMAC ELECTRIC POWER
COMPANY, a corporation, one of the parties to the foregoing
instrument bearing date as of the 2nd day of October, and hereto
annexed, this day personally appeared before me in the City of
Washington, the said Dennis R. Wraase being personally well known
to me as the person who executed the said instrument as a Senior
Vice President of and on behalf of said Potomac Electric Power
Company and known to me to be the attorney-in-fact duly appointed
therein to acknowledge and deliver said instrument on behalf of
said corporation, and, as such attorney-in-fact, he acknowledged
said instrument to be the act and deed of said Potomac Electric
Power Company, and delivered the same as such. I further certify
that the said Dennis R. Wraase, being by me duly sworn, did depose
and say that he knows the seal of said corporation; that the seal
affixed to said instrument is such corporate seal and was so
affixed by order of the Board of Directors of said corporation; and
that he signed his name thereto by like order. My commission
expires July 31, 2002.
Given under my hand and official seal this 2nd day of
October, 1997.
(NOTARIAL SEAL)
/S/ LISA A. POOLE
.........................
Notary Public
District of Columbia
<PAGE>
28
CITY OF WASHINGTON,
DISTRICT OF COLUMBIA, SS.:
I, LISA A. POOLE, a Notary Public in and for the District of
Columbia, United States of America, do hereby certify that
FREDERICK W. CLARK and ROBERT F. McINTYRE, whose names as Vice
Presidents, of THE BANK OF NEW YORK, a corporation, are signed to
the foregoing and hereto attached deed, bearing date as of the 2nd
day of October, 1997, personally appeared before me this day in my
District aforesaid and acknowledged themselves to be, respectively,
Vice Presidents of The Bank of New York, and that they as such,
being authorized so to do, executed the said deed by signing the
name of The Bank of New York, by FREDERICK W. CLARK as Vice
President, and attested by ROBERT F. McINTYRE as Vice President,
and acknowledged the same before me in my District aforesaid and
acknowledged the foregoing instrument to be the act and deed of The
Bank of New York, as therein set forth.
Given under my hand and notarial seal this 2nd day of
October, 1997.
(NOTARIAL SEAL)
/S/ LISA A. POOLE
.........................
Notary Public
District of Columbia
My Commission Expires July 31, 2002.
<PAGE>
29
CITY OF WASHINGTON,
DISTRICT OF COLUMBIA, SS.:
FREDERICK W. CLARK, of full age, being sworn according to
law, on his oath deposes and says that he is a Vice President of
THE BANK OF NEW YORK, the Trustee named in the foregoing
Supplemental Indenture, dated as of the 2nd day of October, 1997,
that he is the agent of said Trustee for the purpose of perfecting
such Supplemental Indenture and that the consideration in the
Original Indenture referred to therein and in all indentures
supplemental to said Original Indenture, including the foregoing
Supplemental Indenture, is true and bona fide as therein set forth.
/S/ F. CLARK
............................
FREDERICK W. CLARK
Subscribed and sworn to before me
this 2nd day of October, 1997.
/S/ LISA A. POOLE
.................................
Notary Public
My Commission Expires July 31, 2002.
(NOTARIAL SEAL)
<PAGE>
30
CITY OF WASHINGTON,
DISTRICT OF COLUMBIA, SS.:
I, LISA A. POOLE, a Notary Public in and for the District of
Columbia, United States of America, do hereby certify that
FREDERICK W. CLARK, a Vice President of THE BANK OF NEW YORK, a
corporation, one of the parties to the foregoing instrument bearing
date as of the 2nd day of October, 1997, and hereto annexed, this
day personally appeared before me in the City of Washington, the
said FREDERICK W. CLARK , being personally well known to me as the
person who executed the said instrument as a Vice President of and
on behalf of said The Bank of New York, and known to me to be the
attorney-in-fact duly appointed therein to acknowledge and deliver
said instrument on behalf of said corporation, and, as such
attorney-in-fact, he acknowledged said instrument to be the act and
deed of said The Bank of New York, and delivered the same as such.
I further certify that the said FREDERICK W. CLARK , being by me
duly sworn, did depose and say that he knows the seal of said
corporation; that the seal affixed to said instrument is such
corporate seal and was so affixed by order of the Board of
Directors of said corporation; and that he signed his name thereto
by like order.
Given under my hand and official seal this 2nd day of
October, 1997.
(NOTARIAL SEAL)
/S/ LISA A. POOLE
.........................
Notary Public
District of Columbia
My Commission Expires July 31, 2002.
<PAGE>
31
CERTIFICATE OF RESIDENCE
The Bank of New York, Mortgagee and Trustee within named, hereby
certifies that its precise residence is 101 Barclay Street, New
York, NY 10286.
THE BANK OF NEW YORK
/S/ F. CLARK
By .........................
FREDERICK W. CLARK,
Vice President
SECOND AGREEMENT TO EXTEND DATE
WHEREAS, an Agreement (the "Agreement") dated April 26, 1995
between Potomac Electric Power Company (the "Company") and Edward
F. Mitchell ("Mitchell") provides for the continuance of Mitchell's
service as an officer of the Company; and
WHEREAS, Mitchell and the Company executed an Agreement to
Extend Date on September 22, 1995 wherein the parties agreed,
pursuant to Sections 1, 3 and 4 of the Agreement, to a date
subsequent to the January 1, 1997 date set forth in said Sections
1, 3 and 4; and
WHEREAS, Mitchell and the Company executed Amendment #1 to
Agreement on October 23, 1997 to provide for the continuation of
Mitchell's employment as Chairman of the Board; and
WHEREAS, Mitchell and the Company wish to further extend the
date set forth in Sections 1, 3 and 4 of the Agreement.
NOW, THEREFORE, it is agreed as follows:
1. Pursuant to the provisions of Sections 1, 3 and 4 of the
Agreement, the Company and Mitchell hereby mutually agree that the
date set forth in Sections 1, 3 and 4 of the Agreement shall be
changed to May 1, 1998.
2. Except as amended herein, the provisions of the Agreement
dated April 26, 1995 and Amendment #1 to Agreement dated October
23, 1997 shall remain in full force in effect.
Agreed effective the 19th day of December, 1997.
Edward F. Mitchell Potomac Electric Power
Company
______________________ By: _______________________
John M. Derrick, Jr.
Attest:
______________________
Secretary
1998 GENERAL MEMORANDUM OF UNDERSTANDING
Whereas, the Potomac Electric Power Company (the "Company") and
Local 1900 of the International Brotherhood of Electrical Workers
(the "Union") by mutual agreement conducted early negotiations to
extend the 1995 Collective Bargaining Agreement;
Whereas, the Company and the Union have agreed to a successor
Collective Bargaining Agreement (hereinafter referred to as the
"1998 Agreement'), whose terms are set forth below; and
Whereas, the Company and Union have agreed that the 1998 Agreement
shall be subject to ratification by the bargaining unit and shall
be effective upon ratification except as provided elsewhere in the
Agreement;
It is, therefore, further agreed and understood between the Company
and Union that:
I. The 1998 Agreement shall extend the 1995 Collective
Bargaining Agreement for one (1) year (until 6/1/99).
II. Within thirty (30) days of ratification, each employee
who is a member of the bargaining-unit on the date this
1998 Agreement is ratified shall be paid a lump-sum,
ratification incentive of 2.5% (less applicable taxes) of
their annual base earnings for 1997.
III. In addition to the days set forth in Section 11.01 of the
1993 Collective Bargaining Agreement, December 24, 1998
shall be observed as a uniform and fixed holiday during
the 1998 Agreement.
IN WITNESS WHEREOF, on this 8th day of January 1988, the parties
have caused their appropriate and duly authorized representatives
to sign this General Memorandum of Understanding, signifying
thereby their agreement hereon.
For the Union For the Company
/S/ JAMES L. HUNTER /S/ A. S. MACEROLLO
James L. Hunter Anthony S. Macerollo,
President/Financial Secretary/ Group Vice-President
Business Manager Corporate Services
/S/ WILLIAM J. WOLVERTON
Manager, Industrial Relations
& Employee Benefits
<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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,464,272
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 392,600
<TOTAL-DEFERRED-CHARGES> 661,298
<OTHER-ASSETS> 1,189,387
<TOTAL-ASSETS> 6,707,557
<COMMON> 118,501
<CAPITAL-SURPLUS-PAID-IN> 1,010,209
<RETAINED-EARNINGS> 734,318
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,863,028
141,000
125,290
<LONG-TERM-DEBT-NET> 1,901,486
<SHORT-TERM-NOTES> 0<F1>
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 131,375<F1>
<LONG-TERM-DEBT-CURRENT-PORT> 51,069
985
<CAPITAL-LEASE-OBLIGATIONS> 160,406
<LEASES-CURRENT> 20,772
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,312,146
<TOT-CAPITALIZATION-AND-LIAB> 6,707,557
<GROSS-OPERATING-REVENUE> 1,863,510
<INCOME-TAX-EXPENSE> 117,731
<OTHER-OPERATING-EXPENSES> 1,420,396
<TOTAL-OPERATING-EXPENSES> 1,538,127
<OPERATING-INCOME-LOSS> 325,383
<OTHER-INCOME-NET> (4,723)
<INCOME-BEFORE-INTEREST-EXPEN> 320,660
<TOTAL-INTEREST-EXPENSE> 138,830
<NET-INCOME> 181,830
16,579
<EARNINGS-AVAILABLE-FOR-COMM> 165,251
<COMMON-STOCK-DIVIDENDS> 196,615
<TOTAL-INTEREST-ON-BONDS> 132,600<F2>
<CASH-FLOW-OPERATIONS> 434,819
<EPS-PRIMARY> $1.39<F3>
<EPS-DILUTED> $1.38
<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, 1997.
<F3>Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 entitled "Earnings per Share." Accordingly,
the Company's Earnings per Share are as follows: Basic $1.39; Diluted $1.38.
</FN>
</TABLE>
