<PAGE>
Pursuant to Rule 424(b)(5)
Registration No. 333-66127
PROSPECTUS SUPPLEMENT
(To prospectus dated March 16, 1999)
$270,000,000
Potomac Electric Power Company
FIRST MORTGAGE BONDS, 6% SERIES DUE 2004
----------------
The mortgage bonds bear interest at the rate of 6% per year. We will pay
interest on the mortgage bonds on the first day of each month, beginning May 1,
1999. The mortgage bonds mature on April 1, 2004. We may not redeem the
mortgage bonds before July 1, 2000. From and after July 1, 2000, we may redeem
some or all of the mortgage bonds from time to time before they mature. The
redemption price will be equal to the principal amount of the mortgage bonds
being redeemed plus interest accrued to the date of redemption.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or the accompanying prospectus is accurate or
complete. Any representation to the contrary is a criminal offense.
<TABLE>
<CAPTION>
Per Offered Bond Total
---------------- ------------
<S> <C> <C>
Public offering price....................... 100.00% $270,000,000
Underwriting discount....................... 1.25% $ 3,375,000
Proceeds to us (before expenses)............ 98.75% $266,625,000
</TABLE>
The initial public offering price set forth above does not include accrued
interest, if any. Interest on the mortgage bonds will accrue from their issue
date and must be paid by the purchasers if the mortgage bonds are delivered
after that date.
The mortgage bonds are offered by the several underwriters when, as and if
delivered to and accepted by them and subject to various prior conditions,
including their right to reject orders, in whole or in part. We expect that the
mortgage bonds will be ready for delivery in book-entry form only through The
Depository Trust Company on or about March 29, 1999.
----------------
Legg Mason Wood Walker
Incorporated
A.G. Edwards & Sons, Inc.
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
EVEREN Securities, Inc.
Wheat First Union
The date of this prospectus supplement is March 17, 1999.
<PAGE>
SUMMARY
The following is a brief summary of the terms of this offering and the
mortgage bonds offered by this prospectus supplement, which we refer to as the
"new mortgage bonds." For a more complete description of the new mortgage
bonds, you should refer to "Description of the New Mortgage Bonds" below and to
"Description of Mortgage Bonds and Mortgage" in the accompanying prospectus.
The Offering
<TABLE>
<S> <C>
Aggregate Principal Amount................. $270,000,000
Maturity Date.............................. April 1, 2004
Interest Rate.............................. 6% per year
Interest Payment Dates..................... The first day of each calendar month,
beginning May 1, 1999
Redemption................................. We may not redeem the new mortgage bonds
before July 1, 2000. From and after July 1,
2000, we may redeem some or all of the new
mortgage bonds from time to time before they
mature. The redemption price will be equal to
the principal amount of the new mortgage bonds
being redeemed plus interest accrued to the
date of redemption.
Use of Proceeds............................ See "Use of Proceeds"
Potomac Electric Power Company
Business and Service Area.................. We are engaged in the generation,
transmission, distribution and sale of
electric energy in the Washington, D.C.
metropolitan area.
1998 Sources of Energy..................... Coal 76%, oil and natural gas 11%, purchased
capacity 13%
</TABLE>
For selected financial information and our ratios of earnings to fixed
charges, you should refer to "Selected Financial Information" and "Ratios of
Earnings to Fixed Charges" in the accompanying prospectus.
S-2
<PAGE>
DESCRIPTION OF THE NEW MORTGAGE BONDS
The following description of certain terms of the new mortgage bonds
supplements the general description contained in the accompanying prospectus.
Maturity, Interest Rate and Interest Payment Dates.
The new mortgage bonds will mature on April 1, 2004, and will bear interest
at the rate of 6% per year. We will pay interest on the new mortgage bonds on
the first day of each month, beginning May 1, 1999.
We will compute the amount of interest payable for any full month on the
basis of a 360-day year of twelve 30-day months. We will compute the amount of
interest payable for any period shorter than a full month on the basis of the
actual number of days elapsed.
Redemption.
We may not redeem the new mortgage bonds before July 1, 2000. From and after
July 1, 2000, we may redeem some or all of the new mortgage bonds from time to
time before they mature. The redemption price will be equal to the principal
amount of the new mortgage bonds being redeemed plus interest accrued to the
date of redemption.
We are required to give notice of any redemption at least thirty days, but
not more than sixty days, prior to the redemption date by mailing notice to the
registered owners of the new mortgage bonds to be redeemed.
Form of New Mortgage Bonds.
The new mortgage bonds will be issued in the form of a single, fully
registered global bond without coupons that will be deposited with The
Depository Trust Company ("DTC") and registered in the name of its nominee,
Cede & Co. This means that we will not issue certificates to any purchaser of
new mortgage bonds. Instead, ownership of beneficial interests in the new
mortgage bonds will be shown on, and transfers of interests in the new mortgage
bonds will only be made through, records maintained by DTC and its
participants. Unless it is exchanged for certificated new mortgage bonds as
described below, the global bond may not be transferred, except that DTC, its
nominees and their successors may transfer the global bond as a whole to one
another.
So long as DTC or its nominee is the registered owner of the global bond, we
will consider DTC or its nominee, as the case may be, the sole owner of the new
mortgage bonds represented by the global bond for all purposes under the
mortgage. Except as described below, as an owner of a beneficial interest in
new mortgage bonds you will not be entitled to have any individual new mortgage
bonds registered in your name, you will not receive or be entitled to receive
physical delivery of any new mortgage bonds in certificated form and you will
not be considered the owner of new mortgage bonds for any purpose under the
mortgage.
DTC has advised us that it is a limited-purpose trust company organized
under the New York Banking Law, a "banking organization" within the meaning of
the New York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934. DTC holds securities deposited by its
participants and facilitates the clearance and settlement of transactions in
those securities between participants through electronic book-entry changes in
the accounts of the participants. This eliminates the need for physical
exchange of securities certificates. Participants in DTC include securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations. DTC's book-entry system also is available to other
entities, such as securities brokers and dealers, banks and trust companies
that clear transactions through, or maintain a custodial relationship with, a
DTC participant. These are known as "indirect participants." DTC is owned by a
number of its participants and by The New York Stock Exchange, Inc., the
American Stock Exchange, Inc., and the National Association of Securities
Dealers, Inc. The rules of DTC are on file with the SEC.
S-3
<PAGE>
Purchases of new mortgage bonds must be made by or through DTC participants,
which will receive a credit for the new mortgage bonds on DTC's records. The
ownership interest of each actual purchaser of a new mortgage bond, which is
known as a beneficial owner, will in turn be recorded on the records of direct
and indirect DTC participants. Beneficial owners will not receive written
confirmation from DTC of their purchases, but we expect that beneficial owners
will receive written confirmations providing details of the transactions, as
well as periodic statements of their holdings, from the participant or indirect
participant through which they purchased the new mortgage bonds. Transfers of
ownership interests in the new mortgage bonds will be accomplished by entries
made on the books of participants acting directly or indirectly on behalf of
beneficial owners.
Neither we nor the mortgage trustee will have any responsibility or
liability for any aspect of the records of DTC or for maintaining, supervising
or reviewing any records relating to beneficial ownership of interests in the
global bond.
We will pay principal and interest on the new mortgage bonds to DTC or its
nominee, as the case may be, as the registered owner of the related global
bond. We will make these payments to DTC or its nominee in immediately
available funds. Neither we nor the mortgage trustee will have any
responsibility or liability for the payment of principal and interest on the
new mortgage bonds to beneficial owners. However, we understand that it is
currently the policy of DTC to credit these payments to participants' accounts
on the relevant payment date in accordance with the participants' holdings as
shown on DTC's records. Payments by participants and indirect participants to
beneficial owners will be governed by standing instructions and customary
practices and will be the responsibility of the participants and indirect
participants and not of DTC. DTC has no knowledge of the actual beneficial
owners of the new mortgage bonds. DTC's records reflect only the identity of
the participants to whose accounts the new mortgage bonds are credited, which
may or may not be the beneficial owners. The participants and indirect
participants are responsible for keeping account of their holdings on behalf of
their customers.
Redemption notices for the new mortgage bonds will be sent to DTC or its
nominee. If we redeem less than all of the new mortgage bonds, DTC will
determine the amount of the interest of each participant to be redeemed in
accordance with DTC's procedures.
Neither DTC nor Cede & Co. will consent or vote with respect to the new
mortgage bonds. Under its usual procedures, DTC mails an omnibus proxy to us as
soon as possible after the record date. The omnibus proxy assigns Cede & Co.'s
consenting or voting rights to those participants to whose accounts the new
mortgage bonds are credited on the record date (identified in a listing
attached to the omnibus proxy).
The giving of notices and other communications by DTC to its participants,
by the participants to indirect participants, and by indirect participants to
beneficial owners is governed by arrangements made among them, which may be
subject to statutory or regulatory requirements.
The global bond will be exchangeable for new mortgage bonds in certificated
form only if:
. DTC is unwilling or unable to continue as depository or it ceases to be
a "clearing agency" registered under applicable law and we do not
appoint a successor depository within 90 days, or
. we determine that one or more new mortgage bonds represented by the
global bond will be exchangeable for certificated new mortgage bonds.
DTC has advised us that DTC's management is aware that some computer
applications, systems and the like for processing data that are dependent upon
calendar dates, including dates before, on and after January 1, 2000, may
encounter "Year 2000 problems." DTC has informed its participants and other
members of the financial community that it has developed and is implementing a
program so that its systems, as the same relate to the timely payment of
distributions (including principal and interest payments) to security holders,
book-entry deliveries, and settlement of trades within DTC, will continue to
function appropriately. This program includes a technical assessment and a
remediation plan, each of which is complete. Additionally, DTC's plan includes
a testing phase, which is expected to be completed within appropriate
timeframes.
S-4
<PAGE>
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third-party vendors from whom DTC licenses software and hardware, and
third-party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electric utility service providers,
among others. DTC has informed its participants and other members of the
financial community that it is contacting (and will continue to contact) third-
party vendors from whom DTC acquires services to: (1) impress upon them the
importance of such services being Year 2000 compliant and (2) determine the
extent of their efforts for Year 2000 remediation (and, as appropriate,
testing) of their services. In addition, DTC is in the process of developing
such contingency plans as it deems appropriate.
USE OF PROCEEDS
We will use the proceeds from the sale of the new mortgage bonds to:
. pay at maturity $45,000,000 in aggregate principal amount of our First
Mortgage Bonds, 4 1/2% Series due 1999, which mature May 15, 1999;
. redeem at par $100,000,000 in outstanding principal amount of our First
Mortgage Bonds, 9% Series due 2000, which we have called for redemption
on April 28, 1999;
. redeem at 101% of par the entire $62,617,000 in outstanding principal
amount of our 7% Convertible Debentures due 2018, which we have called
for redemption on April 19, 1999; and
. refund some of the short-term debt that we have incurred primarily to
finance, on a temporary basis, our ongoing utility construction program
and operations.
UNDERWRITING
We have entered into an underwriting agreement with the underwriters named
below, for whom Legg Mason Wood Walker, Incorporated is acting as
representative. Under the terms and subject to the conditions of the
underwriting agreement, we have agreed to sell to each of the underwriters, and
each of the underwriters has agreed to purchase, the principal amount of new
mortgage bonds shown opposite its name below:
<TABLE>
<CAPTION>
Underwriters Principal Amount
- ------------ ----------------
<S> <C>
Legg Mason Wood Walker, Incorporated........................... $150,000,000
A.G. Edwards & Sons, Inc....................................... 30,000,000
Dain Rauscher Wessels,
a division of Dain Rauscher Incorporated...................... 30,000,000
EVEREN Securities, Inc......................................... 30,000,000
Wheat First Union,
a division of First Union Capital Markets Corp................ 30,000,000
------------
Total....................................................... $270,000,000
============
</TABLE>
Under the terms of the underwriting agreement, the underwriters must
purchase all of the new mortgage bonds if they purchase any of them. The
underwriters will pay us the public offering price less the underwriting
discount specified on the cover of this prospectus supplement. We estimate that
we will incur approximately $1,690,000 of expenses, not including the
underwriting discount, in connection with the offering of the new mortgage
bonds.
The underwriters plan to offer the new mortgage bonds directly to retail
purchasers at the public offering price and to certain securities dealers at
the public offering price less a selling concession of 1% of the principal
amount of the new mortgage bonds. The underwriters may allow, and these
selected dealers may reallow, a concession that will not exceed .5% of the
principal amount of the new mortgage bonds on sales to other brokers and
dealers. After the initial offering of the new mortgage bonds to the public,
the underwriters may change the public offering price and other selling terms.
S-5
<PAGE>
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.
The underwriters have advised us that one or more of them currently intend
to make a market in the new mortgage bonds. However, they are not obligated to
do so and may discontinue making a market at any time without notice. We do not
intend to list the new mortgage bonds on any securities exchange or for
quotation through any national quotation system. Accordingly, we cannot assure
you that there will be adequate liquidity or an adequate trading market for the
new mortgage bonds.
In connection with the offering of the new mortgage bonds, the underwriters
may engage in certain transactions that stabilize the price of the new mortgage
bonds. These transactions may consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the new mortgage bonds. In general,
the purchase of a security for the purpose of stabilization could cause the
price of that security to be higher than it might otherwise be in the absence
of those purchases. Neither we nor the underwriters make any representation or
prediction as to the effect that transactions of the type described above may
have on the price of the new mortgage bonds. In addition, if the underwriters
do engage in these types of transactions, they may discontinue them at any time
without notice.
Our director Peter F. O'Malley is also a director of Legg Mason, Inc., which
is the parent company of Legg Mason Wood Walker, Incorporated.
S-6
<PAGE>
POTOMAC ELECTRIC POWER COMPANY
FIRST MORTGAGE BONDS
Potomac Electric Power Company is offering up to $270,000,000 in principal
amount of our first mortgage bonds. We will offer the mortgage bonds in
separate series. Each time we offer a series of mortgage bonds, this prospectus
will be accompanied by a prospectus supplement that will provide specific
details concerning the terms of the particular series of mortgage bonds that is
being offered. These terms will include:
. the total principal amount of mortgage bonds of the series;
. the interest rate and the interest payment dates;
. the maturity date;
. the offering price;
. the redemption terms; and
. any other specific terms applicable to the series.
Our obligation to pay the principal, any premium, and interest on each
series of mortgage bonds, as well as on all of our other outstanding series of
mortgage bonds, is secured by a first lien on substantially all of our assets.
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
----------------
This prospectus is dated March 16, 1999
<PAGE>
You should rely only on the information provided in, or incorporated by
reference in, this prospectus and the accompanying prospectus supplement. We
have not authorized anyone else to provide you with any information that is not
in or incorporated by reference in the prospectus or the prospectus supplement.
We are not offering the first mortgage bonds in any state where the offer is
not permitted. You should assume that the information in this prospectus and
the prospectus supplement is accurate only as of the date on the cover of those
documents.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement we have filed with the
SEC relating to the mortgage bonds we are offering. The registration statement
contains additional information.
This prospectus provides a general description of the mortgage bonds. Each
time we offer a series of mortgage bonds, this prospectus will be accompanied
by a prospectus supplement that will specify the terms of the mortgage bonds of
that series. The prospectus supplement also may add, update or change the
information in this prospectus, so you should read both this prospectus and the
prospectus supplement together.
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy these documents, as well as the
registration statement, at the SEC's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549. You may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
maintains an Internet site at which our SEC filings may be found. The address
of that site is http://www.sec.gov. You can also obtain information about us at
our website, the address of which is http://www.pepco.com.
INCORPORATION OF INFORMATION BY REFERENCE
The information in the prospectus is deemed to include the information
contained in the documents listed below that we have filed with the SEC and
which are incorporated in this prospectus by reference:
. our Annual Report on Form 10-K for the year ended December 31, 1997;
. our Quarterly Reports on Form 10-Q for the quarters ended March 31,
1998, June 30, 1998, and September 30, 1998; and
. our Current Reports on Form 8-K, dated January 26, 1998, July 1, 1998,
January 4, 1999, January 29, 1999, February 1, 1999, February 3, 1999
and March 16, 1999.
In addition, all documents that we file with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 after the date of
this prospectus will, upon filing, be deemed incorporated in this prospectus by
reference. The information contained in a later filing automatically will
update the information in this prospectus and the accompanying prospectus
supplement and in any earlier filing that is incorporated by reference.
We will send you, at no cost to you, a copy of any filing that is
incorporated by reference in this prospectus. However, we are not obligated to,
and will not provide, copies of the exhibits to any of these filings. You may
request a copy of any of these filings by writing or calling Ellen Sheriff
Rogers, Associate General Counsel, Secretary and Assistant Treasurer, Potomac
Electric Power Company, 1900 Pennsylvania Avenue, N.W., Washington, D.C. 20068
(202-872-3526).
THE COMPANY
We are incorporated under both District of Columbia and Virginia laws. Our
principal business is the generation, transmission, distribution and sale of
electric energy in the Washington, D.C. metropolitan area. Our service area
includes the District of Columbia and major portions of Montgomery and Prince
George's
2
<PAGE>
Counties in Maryland. We have a contract to supply electric energy at
wholesale, through at least December 31, 2000, to the Southern Maryland
Electric Cooperative, Inc., which distributes electricity in Calvert, Charles,
Prince George's and St. Mary's Counties in southern Maryland. We have a wholly
owned nonutility subsidiary, Potomac Capital Investment Corporation ("PCI"),
through which we conduct nonutility investment programs and operating
businesses. PCI is a provider of energy, telecommunications and related
products and services in the northern Virginia/Washington, D. C./Baltimore
metropolitan area. PCI also has financial investments in aircraft, leases and
securities. Our mailing address is 1900 Pennsylvania Avenue, N.W., Washington,
D.C. 20068, and our telephone number is 202-872-2000.
USE OF PROCEEDS
Unless we state otherwise in a prospectus supplement, we will use the
proceeds from the sale of the mortgage bonds for one or more of the following
purposes:
. to refund short-term debt we have incurred primarily to finance, on a
temporary basis, our utility construction program and operations
. to refund senior securities, including the retirement of long-term debt
and the satisfaction of contractual sinking fund requirements
SELECTED FINANCIAL INFORMATION
The following selected financial information was derived from, and is
qualified in its entirety by, the audited consolidated financial statements
contained in our Annual Report on Form 10-K for the year ended December 31,
1997, and the audited consolidated financial statements contained in our
Current Report on Form 8-K dated January 29, 1999. You can obtain a copy of
these documents as described in "Incorporation of Certain Information by
Reference."
<TABLE>
<CAPTION>
12 Months Ended
-------------------------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1998 1997 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(Thousands of Dollars Except Per Share
Data)
Income Statement Data:
Total Revenue.................... $2,063,928 $1,863,510 $2,010,311 $1,876,102
Operating Revenue................ 1,886,080 1,810,829 1,834,857 1,822,432
Net Income....................... 226,347 181,830 236,960 94,391
Earnings for Common Stock........ 208,267 165,251 220,356 77,540
Basic Earnings Per Share of
Common Stock.................... 1.76 1.39 1.86 .65
Diluted Earnings Per Share of
Common Stock.................... 1.73 1.38 1.82 .65
Balance Sheet Data at end of
period:
Property and Plant, net.......... $4,521,177 $4,486,334 $4,423,249 $4,400,311
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
As of Dec. 31,
1998
-----------------
Amount Ratio
----------- -----
<S> <C> <C>
(Thousands)
Capital Structure (excluding nonutility subsidiary debt and
current maturities):
Long-Term Debt........................................... $ 1,859,077 46.4%
Preferred Securities..................................... 125,000 3.1
Preferred Stock.......................................... 150,000 3.7
Common Equity............................................ 1,877,355 46.8
----------- -----
Total Capitalization................................... $ 4,011,432 100.0%
=========== =====
Parent Company Long-Term Debt and Preferred Stock
Redemption
Due in One Year and Short-Term Debt...................... $ 236,919
===========
</TABLE>
RATIOS OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
12 Months Ended
-----------------------------------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1998 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Parent company only..... 2.95 2.54 3.08 3.05 3.23 3.20
Fully consolidated...... 2.50 2.03 2.24 1.52 2.37 2.31
</TABLE>
For purposes of computing the ratio of earnings to fixed charges for rate-
regulated public utilities, earnings represent net income before cumulative
effect of accounting changes plus income taxes and fixed charges. Fixed charges
represent interest charges on debt (exclusive of credits arising from the
allowance for funds used during construction) and the portion of rentals deemed
representative of the interest factor.
DESCRIPTION OF MORTGAGE BONDS AND MORTGAGE
We will issue the mortgage bonds under the Mortgage and Deed of Trust, dated
July 1, 1936, between us and The Bank of New York, as mortgage trustee. The
Bank of New York is the successor to The Riggs National Bank of Washington,
D.C., as mortgage trustee. The original Mortgage and Deed of Trust has been
amended and supplemented in the past and will be further supplemented each time
a new series of mortgage bonds is issued by a separate supplemental indenture.
The supplemental indenture will state the terms of the new series of mortgage
bonds. We refer to the Mortgage and Deed of Trust, as previously amended and
supplemented and as it is to be further supplemented, as the "mortgage." Copies
of the documents currently constituting the mortgage and the form of
supplemental indenture are filed as exhibits to the registration statement.
Each of these documents is incorporated by reference in this prospectus.
The following summary of the terms of the mortgage bonds and the mortgage is
not complete, and you should refer to the mortgage and the prospectus
supplement for additional information. For your reference, we have noted the
sections and articles of the mortgage or the supplemental indenture that we
describe. When we refer to "mortgage bonds" below, the reference includes the
mortgage bonds that we are offering under this prospectus and all other
outstanding mortgage bonds that we have issued or may issue in the future under
the mortgage. The mortgage bonds offered by this prospectus are referred to as
the "new mortgage bonds."
No Event Risk Provisions.
The mortgage does not contain any provisions that are specifically intended
to give holders of mortgage bonds special protection in the event of a highly
leveraged transaction.
4
<PAGE>
Registration of Transfer and Exchange.
We will issue the new mortgage bonds only in fully registered form without
coupons. Unless the prospectus supplement states otherwise, we will issue the
new mortgage bonds in denominations of $1,000 or any integral multiple of
$1,000 (Part I, Section 3 of the supplemental indenture).
So long as any mortgage bonds remain outstanding, we must maintain an office
or agency where you can present or surrender the mortgage bonds for payment (if
the bonds are in certificated form) or for transfer or exchange and where you
can serve notices and demands to or upon us (Section 4 of Article II and
Section 4 of Article IV of the mortgage). We have designated the corporate
trust office of The Bank of New York in New York, New York, as our agent for
these purposes. See "Relationships with Mortgage Trustee." We will not impose
any charges for exchanges of the new mortgage bonds.
Payment of Principal and Interest.
We will pay principal, premium, if any, and interest on the new mortgage
bonds in immediately available funds at the corporate trust office of The Bank
of New York or at the office of any other paying agent that we may designate.
No Sinking Fund.
There will be no improvement and sinking fund or any maintenance and
replacement requirement or dividend restriction for the new mortgage bonds.
There are no provisions of this type for any outstanding mortgage bonds.
Issuance of Additional Bonds.
Subject to the restriction described in the next paragraph, we may issue
additional mortgage bonds under the mortgage with a total principal amount of
up to:
. 60% of the net bondable value of property additions that (1) are not
subject to a prior lien and (2) we have not already used as the basis
for issuing mortgage bonds.
. the amount of cash we deposit with the mortgage trustee for such
purpose.
. the aggregate principal amount of previously issued mortgage bonds that
we have paid at maturity, redeemed or repurchased other than with funds
from the trust estate and that we have not used as the basis for (1) the
issuance of additional mortgage bonds, (2) the withdrawal of cash from
the trust estate, or (3) the reduction of the amount of cash required to
be paid to the mortgage trustee upon the release of property. These are
called "refundable bonds" in the mortgage.
(Sections 4, 6 and 7 of Article III of the mortgage).
We may not issue additional mortgage bonds at any time unless, as generally
provided under the terms of the mortgage, our earnings before depreciation,
amortization, income taxes and interest charges for any 12 consecutive calendar
months during the immediately preceding 15 calendar months have been at least
two times the total annual interest charges on all outstanding mortgage bonds
and the additional mortgage bonds that we are issuing. However, this limitation
does not apply if we issue mortgage bonds on the basis of (1) mortgage bonds
paid at, redeemed or repurchased within two years prior to, maturity, or (2)
under limited circumstances, certain property additions (Section 3 of Article
III of the mortgage).
After giving effect to the issuance of the $270,000,000 in principal amount
of new mortgage bonds at an assumed rate of interest of 7%, the net earnings
described above for the twelve months ended December 31, 1998, would be
approximately 5.7 times the annual interest charges described above. This level
of coverage
5
<PAGE>
would permit us to issue approximately $3.1 billion of additional mortgage
bonds (in addition to the $270,000,000 in principal amount of new mortgage
bonds) at an assumed average interest rate of 7% per annum, against property
additions or cash deposits. However, after the issuance of the new mortgage
bonds against property additions, the current value of net bondable property
additions will be sufficient to allow only approximately $690 million of
additional mortgage bonds on the basis of property additions. In addition, $1.2
billion of refundable bonds will remain available for the purposes permitted by
the mortgage, including the issuance of additional mortgage bonds.
We may not make property additions constructed or acquired on or before
December 31, 1946 the basis for the issuance of mortgage bonds, the withdrawal
of cash or the reduction of cash required to be paid to the mortgage trustee
for the release of property (Part IV, Section 2 of the supplemental indenture).
We may issue bonds secured by a lien that is prior to the lien of the
mortgage under certain circumstances (Section 16 of Article IV of the
mortgage).
Security.
Mortgage Lien. The new mortgage bonds will be secured, together with all
other mortgage bonds issued under the mortgage, by a direct first lien on
substantially all of our properties and franchises. The lien of the mortgage is
subject to certain permitted leases, liens and other minor encumbrances. Our
principal properties are our generating stations and electric transmission and
distribution systems. The lien of the mortgage does not extend to:
. cash, accounts receivable and other liquid assets,
. securities (including securities evidencing our investment in
subsidiaries),
. leases under which we are the lessor,
. equipment and materials not installed as part of our fixed property,
. other materials, merchandise and supplies that we have acquired for the
purpose of resale or leasing to our customers in the ordinary course of
business, and
. all electric energy and other materials or products that we generate,
manufacture, produce or purchase for sale, distribution or use in the
ordinary course of business.
The lien of the mortgage also extends to all property we acquire in the
future, subject to rights of persons having superior equities attaching prior
to the recording or filing of an appropriate supplemental indenture.
Release of Property from Mortgage Lien. The mortgage permits property to be
released from the lien of the mortgage if we deposit with the mortgage trustee
cash, or purchase money obligations secured by the property released, in an
amount at least equal to the fair value of the property to be released.
However, the amount required to be deposited upon the release of property may
be reduced by reducing by an equal amount the principal amount of refundable
bonds against which we may issue additional mortgage bonds. Cash deposited to
obtain a release of property may be used by the mortgage trustee, at our
direction, to redeem or repurchase mortgage bonds (Articles VII and VIII of the
mortgage).
Mortgage Defaults.
If an event of default under the mortgage occurs, the mortgage trustee may,
and on the request of the holders of at least 25% of the principal amount of
all outstanding mortgage bonds the mortgage trustee must, declare all of the
outstanding mortgage bonds immediately due and payable. This declaration,
however, is subject to the condition that, if all interest in arrears has been
paid and all defaults have been cured, the holders
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of a majority of the outstanding principal amount of mortgage bonds may waive
the default and rescind the acceleration of payment (Section 1 of Article IX of
the mortgage).
If an event of default occurs, the mortgage trustee may, and on the request
of the holders of at least 25% of the principal amount of all outstanding
mortgage bonds the mortgage trustee must, enforce the lien of the mortgage by
foreclosing on the trust estate (Section 4 of Article IX of the mortgage). The
holders of a majority in principal amount of mortgage bonds may direct
proceedings for the sale of the trust estate, or for the appointment of a
receiver or any other proceedings under the mortgage but they may not involve
the mortgage trustee in any personal liability without indemnifying it to its
satisfaction (Section 11 of Article IX of the mortgage).
No holder of a mortgage bond has the right to institute proceedings for the
enforcement of the mortgage, unless:
. the holder previously has given the mortgage trustee written notice of
an existing default,
. the holders of at least 25% of the outstanding principal amount of the
mortgage bonds have requested in writing that the mortgage trustee take
action under the mortgage and provided the mortgage trustee with
indemnity satisfactory to it, and
. the mortgage trustee refuses or neglects to comply with such request
within a reasonable time.
(Section 12 of Article IX of the mortgage). However, this provision does not
impair the right of any holder of a mortgage bond to enforce our obligation to
pay the principal and interest on that mortgage bond when due.
Events of defaults under the mortgage include:
. our failure to pay principal when it becomes due, whether at the stated
maturity or otherwise,
. our failure to pay interest or to satisfy any sinking fund obligation
within 30 days after the date on which it becomes due,
. our failure to perform or observe any other covenant, agreement or
condition of the mortgage, which failure continues for at least 60 days
after the mortgage trustee or the holders of at least 15% in principal
amount of mortgage bonds have given us notice of the failure, and
. certain events of bankruptcy, insolvency or reorganization.
(Section 1 of Article IX of the mortgage).
The mortgage does not require us to furnish periodic evidence to the
mortgage trustee as to the absence of defaults or as to compliance with the
terms of the mortgage. However, the Trust Indenture Act of 1939 requires us to
provide to the mortgage trustee annually a certificate as to compliance with
the conditions and covenants under the mortgage.
Modification of Mortgage.
With the consent of the holders of 80% in principal amount of mortgage
bonds, and of 80% in principal amount of mortgage bonds of each series affected
if less than all are affected, the mortgage may be amended to alter our rights
and obligations and the holders' rights and obligations. However, no amendment
may change the terms of payment of the principal or interest on any mortgage
bonds or reduce the percentage of holders whose consent is required to effect
any change (Section 6 of Article XV of the mortgage).
The supplemental indenture provides that the foregoing percentages will be
reduced to 60% upon the consent or agreement to the change by the holders of
all outstanding mortgage bonds. Purchasers of the new mortgage bonds will be
deemed to have agreed to this reduction. This change will become effective as
to all of the outstanding mortgage bonds, including the new mortgage bonds, at
the time all of the supplemental
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indentures with respect to outstanding mortgage bonds include this provision.
After giving effect to the issuance of all of the new mortgage bonds, 92.2% of
the outstanding mortgage bonds will have been issued under a supplemental
indenture containing the modified provision.
Defeasance and Discharge.
If we deposit money for the payment or redemption of mortgage bonds,
including the payment of all interest due thereon, with the mortgage trustee
and we have observed all of our covenants under the mortgage, the mortgage
bonds will be deemed paid under the mortgage and, upon our request, the
mortgage trustee is obligated to cancel and discharge the lien of the mortgage,
even though the mortgage bonds remain outstanding (Article XVI of the
mortgage).
Consolidations, Mergers and Dispositions of Assets.
Nothing contained in the mortgage or any mortgage bonds prevents (1) another
corporation from consolidating with or merging into us, (2) us from merging
into another corporation, or (3) us from selling or leasing our property as an
entirety or substantially as an entirety, so long as:
. the transaction is permitted by law and is approved by all required
governmental entities,
. the terms of the transaction do not impair the lien and security of the
mortgage on any part of the trust estate or the rights and powers of the
mortgage trustee or the holders of mortgage bonds,
. if we are not the surviving corporation, or in the case of a sale of
assets, the surviving or acquiring corporation satisfies certain
financial requirements, and
. the successor corporation assumes by supplemental indenture our
obligations under the mortgage.
(Section 1 of Article XII of the mortgage).
Relationships with Mortgage Trustee.
The Bank of New York, the mortgage trustee, also is the trustee under our
other indentures relating to the following securities issued by us or
arrangements to which we are a party:
. medium-term notes,
. 5% Convertible Debentures due 2002,
. 7% Convertible Debentures due 2018,
. 7-3/8% Junior Subordinated Debentures due 2038, and
. the sale and leaseback of our Control Center.
As we do with various other banks, we maintain with The Bank of New York or its
affiliates a demand deposit account and conventional and revolving credit
arrangements. The Bank of New York also is the issuing and paying agent for
medium-term notes issued by PCI and is the institutional trustee of Potomac
Electric Power Company Trust I, our wholly owned financing subsidiary trust.
The mortgage provides that the mortgage trustee has a lien on the trust
estate and the proceeds from the trust estate to secure payment of its
compensation and expenses prior to the payment of any other amount secured by
the mortgage, including any payment on the mortgage bonds (Section 2 of Article
XIII of the mortgage).
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PLAN OF DISTRIBUTION
We may sell the new mortgage bonds in any of the following ways:
. through underwriters or dealers,
. directly to one or more purchasers,
. through agents, or
. through a combination of any such methods of sale.
The prospectus supplement for each series of new mortgage bonds will
describe that offering, including:
. the name or names of any underwriters,
. the purchase price and the proceeds to us from that sale,
. any underwriting discounts and other items constituting underwriters'
compensation,
. the initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers, and
. any securities exchanges on which we may elect to list the series of new
mortgage bonds.
Underwriters.
If underwriters are used in the sale, we will enter into an underwriting
agreement with those underwriters. Unless otherwise stated in the prospectus
supplement, the obligations of the underwriters to purchase the new mortgage
bonds will be subject to certain conditions. The underwriters also will be
obligated to purchase all of the mortgage bonds of a series if any are
purchased.
The underwriters will acquire the new mortgage bonds for their own account
and may resell the bonds from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale. The new mortgage bonds may be
offered to the public either through an underwriting syndicate that is
represented by one or more underwriters that we designate or directly by a
single underwriter.
Underwriters may sell the new mortgage bonds to or through dealers. These
dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they act as agents. Any initial public offering price and any discounts or
concessions allowed or reallowed or paid to dealers will be specified in the
prospectus supplement.
Agents.
We may sell new mortgage bonds through agents we designate from time to
time. We will provide the name of any agent involved in the offer or sale in
the prospectus supplement as well as any commission we will pay to that agent.
Unless we state otherwise in the prospectus supplement, the agent will be
acting on a best efforts basis for the period of its appointment.
Direct Sales.
We may sell any series of new mortgage bonds directly to purchasers. In this
case, we will not engage underwriters or agents.
Delayed Delivery Contracts.
We may authorize agents, underwriters or dealers to solicit offers by
certain specified institutions to purchase the new mortgage bonds of any series
from us at the public offering price stated in the prospectus
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supplement under delayed delivery contracts. These contracts provide for
payment and delivery on a specified date in the future. The prospectus
supplement for the series will state the conditions to which these delayed
delivery contracts will be subject and the commissions payable for the
solicitation of the contracts.
Indemnification.
We may agree to indemnify agents and underwriters who participate in the
distribution of the new mortgage bonds against certain civil liabilities,
including liabilities under the Securities Act of 1933. Agents and underwriters
may be customers of, engaged in transactions with, or perform services for us
in the ordinary course of business.
EXPERTS
The consolidated financial statements as of December 31, 1997 and 1996, and
for each of the three years in the period ended December 31, 1997, which are
incorporated in this prospectus by reference to our Annual Report on Form 10-K
for the year ended December 31, 1997, and the consolidated financial statements
as of December 31, 1998 and 1997, and for each of the three years in the period
ended December 31, 1998, which are incorporated in this prospectus by reference
to our Current Report on Form 8-K, dated January 29, 1999, have been so
incorporated in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
With respect to the unaudited consolidated financial information for the
three- and twelve-month periods ended March 31, 1998 and 1997, the three-, six-
and twelve-month periods ended June 30, 1998 and 1997 and the three-, nine- and
twelve-month periods ended September 30, 1998 and 1997, which are incorporated
by reference in this prospectus, PricewaterhouseCoopers LLP reported that they
have applied limited procedures in accordance with professional standards for a
review of such information. However, their separate reports dated May 13, 1998,
August 11, 1998 and November 12, 1998 incorporated by reference herein state
that they did not audit and they do not express opinions on that unaudited
consolidated financial information. PricewaterhouseCoopers LLP has not carried
out any significant or additional audit tests beyond those which would have
been necessary if their report had not been included. Accordingly, you should
restrict your degree of reliance on their reports on such information in light
of the limited nature of the review procedures applied. PricewaterhouseCoopers
LLP is not subject to the liability provisions of Section 11 of the Securities
Act of 1933 for their reports on the unaudited consolidated financial
information because each report is not a "report" or a "part" of the
registration statement prepared or certified by PricewaterhouseCoopers LLP
within the meaning of Sections 7 and 11 of that Act.
LEGAL OPINIONS
William T. Torgerson, Esq., who is our Senior Vice President and General
Counsel, has issued an opinion regarding the legality of the new mortgage
bonds. Mr. Torgerson and Covington & Burling, our outside legal counsel, will
pass upon other legal matters in connection with the offering of the new
mortgage bonds. Unless we indicate otherwise in the prospectus supplement,
Winthrop, Stimson, Putnam & Roberts, New York, N.Y., will issue an opinion on
the legality of the new mortgage bonds for the underwriters, dealers or agents.
However, Winthrop, Stimson, Putnam & Roberts will not give an opinion on our
incorporation.
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You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not authorized anyone to provide you with different information. We are
not making an offer of these securities in any jurisdiction where the offer is
not permitted. You should not assume that the information contained or
incorporated by reference in this prospectus supplement and the accompanying
prospectus is accurate as of any date other than the respective dates on the
front of this prospectus supplement and the accompanying prospectus.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
Page
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<S> <C>
Summary.................................................................... S-2
Description of the New Mortgage Bonds...................................... S-3
Use of Proceeds............................................................ S-5
Underwriting............................................................... S-5
</TABLE>
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PROSPECTUS
<TABLE>
<CAPTION>
<S> <C>
About this Prospectus....................................................... 2
Where You Can Find More Information About Us................................ 2
Incorporation of Information by Reference................................... 2
The Company................................................................. 2
Use of Proceeds............................................................. 3
Selected Financial Information.............................................. 3
Ratios of Earnings to Fixed Charges......................................... 4
Description of Mortgage Bonds and Mortgage.................................. 4
Plan of Distribution........................................................ 9
Experts..................................................................... 10
Legal Opinions.............................................................. 10
</TABLE>
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$270,000,000
[Pepco logo appears here]
Potomac Electric Power Company
First Mortgage Bonds
6% Series Due 2004
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PROSPECTUS SUPPLEMENT
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March 17, 1999
Legg Mason Wood Walker
Incorporated
A.G. Edwards & Sons, Inc.
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
EVEREN Securities, Inc.
Wheat First Union
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