PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED AUGUST 18, 1997)
$100,000,000
THE POTOMAC EDISON COMPANY
5% NOTES DUE NOVEMBER 1, 2006
The 5% Notes Due November 1, 2006 will mature on November 1, 2006. We
will pay interest on the notes on May 1 and November 1 of each year, commencing
May 1, 2002. We may redeem the notes, at our option, in whole or in part, at any
time at the optional redemption price set forth in this prospectus supplement.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PER NOTE TOTAL
-------- -----
Public offering price.......................... 99.739% $99,739,000
Underwriting discount.......................... 0.600% $ 600,000
Proceeds, before expenses, to Potomac Edison... 99.139% $99,139,000
Interest on the notes will accrue from November 6, 2001 in the amount
of 5% per note, and must be paid by the purchasers if the notes are delivered
after that date.
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The underwriters expect to deliver the notes in book-entry form only
through the facilities of The Depository Trust Company against payment in New
York, New York on or about November 6, 2001.
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BANC ONE CAPITAL MARKETS, INC.
--------------
THE WILLIAMS CAPITAL GROUP, L.P.
The date of this Prospectus Supplement is November 1, 2001.
TABLE OF CONTENTS
Prospectus Supplement
PAGE
-----
About The Potomac Edison Company ......................................... S-3
Selected Financial Data .................................................. S-3
Construction and Financing ............................................... S-5
Use of Proceeds .......................................................... S-5
Capitalization ........................................................... S-6
Recent Developments ...................................................... S-6
Ratios of Earnings to Fixed Charges ...................................... S-6
Description of the Notes ................................................. S-7
Underwriting ............................................................. S-11
Validity of the Notes .................................................... S-12
Experts .................................................................. S-12
Prospectus
Available Information .................................................... 2
Incorporation of Certain Documents by Reference .......................... 2
The Company .............................................................. 3
Ratios of Earnings to Fixed Charges ...................................... 3
Use of Proceeds .......................................................... 3
Construction and Financing ............................................... 4
Description of the New Bonds ............................................. 5
Description of New Debt Securities ....................................... 7
Plan of Distribution ..................................................... 16
Validity of the Securities ............................................... 16
Experts .................................................................. 16
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained or incorporated by reference
in this prospectus supplement or the accompanying prospectus. You must not rely
on any unauthorized information or representations. This prospectus supplement
and the accompanying prospectus are an offer to sell only the notes offered
hereby, but only under the circumstances and in jurisdictions where it is lawful
to do so. The information contained or incorporated by reference in this
prospectus supplement and the accompanying prospectus is current only as of its
date.
Some statements in this prospectus supplement and the accompanying
prospectus constitute forward-looking statements with respect to our company.
These forward-looking statements involve known and unknown risks, uncertainties,
and other factors that may cause the actual results, performance, or
achievements of our company to be materially different from any future results,
performance, or achievements expressed or implied by those forward-looking
statements. These factors may affect our operations, markets, products,
services, and prices. These factors include, among others, general and economic
and business conditions; industry capacity; changes in technology; changes in
political, social and economic conditions; regulatory matters; litigation
involving our company; regulatory conditions applicable to our company; the loss
of any significant customers; and changes in business strategy or development
plans.
S-2
ABOUT THE POTOMAC EDISON COMPANY
The Potomac Edison Company is a regulated electric distribution and
transmission company operating in portions of Maryland, Virginia and West
Virginia. We are a wholly-owned subsidiary of Allegheny Energy, Inc. and,
together with West Penn Power Company and Monongahela Power Company, comprise
the Allegheny Power integrated electric utility system. In August 2000, we
transferred our generation assets to Allegheny Energy Supply Company, LLC,
another subsidiary of Allegheny Energy, Inc.
SELECTED FINANCIAL DATA
You should read the following selected financial data for the twelve
months ended June 30, 2001, the six months ended June 30, 2001, the six months
ended June 30, 2000 and the year ended December 31, 2000 in conjunction with the
audited Financial Statements contained in our Annual Report on Form 10-K for the
year ended December 31, 2000 and unaudited Financial Statements contained in our
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. The unaudited
selected financial data for the twelve months ended June 30, 2001, the six
months ended June 30, 2001 and the six months ended June 30, 2000 reflect all
adjustments (which consist only of normal recurring adjustments) which in our
opinion are necessary for a fair presentation of results for those periods.
12 MONTHS SIX MONTHS SIX MONTHS YEAR ENDED
ENDED ENDED ENDED DECEMBER 31,
JUNE 30, 2001(4) JUNE 30, 2001(4) JUNE 30, 2000 2000(3)
---------------- ---------------- ------------- -------------
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
---------------------
Total Operating Revenues.................... $ 857,560 $ 433,079 $ 403,338 $ 827,819
Operating Income............................ 96,334 46,048 70,504 120,790
Income Before Interest Charges and
Extraordinary Charge, Net................ 98,415 45,775 74,274 126,914
Interest Charges(1)......................... 36,888 17,475 23,116 42,529
Income Before Extraordinary Charge, Net..... 61,527 28,300 51,158 84,385
Extraordinary Charge, Net(2)................ (1,621) -- (12,278) (13,899)
Net Income.................................. 59,906 28,300 38,880 70,486
AT
AT AT DECEMBER 31,
JUNE 30, 2001(4) JUNE 30, 2000 2000(3)
---------------- ------------- -------------
BALANCE SHEET DATA:
------------------
Total Assets................................ $ 1,092,598 $ 1,611,959 $ 1,098,963
Long-Term Obligations....................... 410,137 583,534 410,010
-----------
(1) Interest charges include allowance for borrowed funds used during
construction.
(2) Income Statement Data includes extraordinary charges recorded in year 2000
of $22.6 million ($13.9 million after tax) to recognize $20.0 million
($12.3 million after tax) for the write-off of unrecoverable regulatory
assets and the recognition of rate stabilization obligations due to West
Virginia deregulation, and an additional $2.6 million ($1.6 million after
tax) due to write-offs associated with deregulation in Virginia.
(3) In August 2000, we transferred approximately 2,100 megawatts of our
Maryland, Virginia and West Virginia jurisdictional assets to Allegheny
Energy Supply Company, LLC at a net book value of $227.5 million.
(4) In August 2000, we filed an application with the Virginia State Corporation
Commission to transfer at net book value the five megawatts of
hydroelectric assets located within the state of Virginia to a wholly-owned
subsidiary, Green Valley Hydro, LLC ("Green Valley"). On December 14, 2000,
the Virginia State Corporation Commission approved the transfer. On June 1,
2001, we transferred these assets at a net book value of $2.3 million to
Green Valley and distributed its ownership to Allegheny Energy, Inc.
S-3
RATIOS OF EARNINGS TO FIXED CHARGES
12 MONTHS SIX MONTHS SIX MONTHS YEAR ENDED
ENDED ENDED ENDED DECEMBER 31,
JUNE 30, 2001(3) JUNE 30, 2001(3) JUNE 30, 2000 2000(2)
---------------- ---------------- ------------- --------------
(DOLLARS IN THOUSANDS)
Earnings:
Net Income(1)........................... $ 61,526 $ 28,299 $ 51,158 $ 84,385
Plus: Fixed Charges (see below)......... 39,044 18,812 25,102 45,334
Income Taxes(1)................ 22,517 11,177 25,832 37,172
Amortization of capitalized
interest................... 1 -- 1 2
Income distributions of equity
investees................... -- -- 4,480 4,480
Less: Capitalized Interest (64) -- (262) (326)
Income from unconsolidated
equity investees............ (481) -- (3,044) (3,525)
Total Earnings............................ 122,543 58,288 103,267 167,522
Fixed Charges:
Interest on long-term debt.............. 34,523 16,332 22,009 40,201
Other interest.......................... 2,718 1,291 1,643 3,069
Estimated interest component of
rentals.............................. 1,803 1,189 1,450 2,064
Total Fixed Charges....................... 39,044 18,812 25,102 45,334
Ratio of Earnings to Fixed Charges........ 3.14 3.10 4.11 3.70
-----------
(1) Net income and income taxes exclude extraordinary charges.
(2) In August 2000, we transferred approximately 2,100 megawatts of our
Maryland, Virginia and West Virginia jurisdictional assets to Allegheny
Energy Supply Company, LLC at a net book value of $227.5 million.
(3) In August 2000, we filed an application with the Virginia State
Corporation Commission to transfer at net book value the five megawatts
of hydroelectric assets located within the state of Virginia to a
wholly-owned subsidiary, Green Valley Hydro, LLC (Green Valley). On
December 14, 2000, the Virginia State Corporation Commission approved
the transfer. On June 1, 2001, we transferred these assets at a net book
value of $2.3 million to Green Valley and distributed its ownership to
Allegheny Energy, Inc.
S-4
CONSTRUCTION AND FINANCING
Our construction expenditures in 2000 amounted to $72.3 million and for
2001 and 2002 are expected to aggregate $49.9 million and $48.5 million,
respectively. Allowance for funds used during construction (AFUDC) (shown
below), which means allowances for the carrying cost of funds during
construction, has been reduced for carrying charges on Clean Air Act Amendments
of 1990 expenditures that are being collected through currently approved base
rates.
2000 2001 2002
---- ---- ----
(DOLLARS IN MILLIONS)
Generation.......................................$16.8 $ -- $ --
Transmission and Distribution.................... 55.5 49.9 48.5
---- ---- ----
Total........................................ 72.3 49.9 48.5
==== ==== ====
Allowance for Funds Used During Construction
included above ..................................$ 0.6 $ -- $ --
USE OF PROCEEDS
We will use the net proceeds from the sale of the notes, together with
other corporate funds, for the following purposes:
o to redeem $50 million principal amount of our First Mortgage Bonds, 8%
Series Due June 1, 2006 at the optional redemption price of 100% of their
principal amount plus accrued interest to the redemption date,
o to redeem $45,456,500 principal amount of our 8% Quarterly Income Debt
Securities (QUIDS(SM)) (Junior Subordinated Deferrable Interest Debentures
Series A) due September 30, 2025 at a redemption price of 100% of their
principal amount plus accrued interest to the redemption date,
o to pay issuance expenses relating to the notes, and
o to add to our general funds which, together with other funds available to
us, will be used for other corporate purposes, including financing our
construction program.
S-5
CAPITALIZATION
The following table sets forth our capitalization at June 30, 2001, and
as adjusted to give effect to the sale of the notes and the application of
proceeds described above under "Use of Proceeds."
AT JUNE 30, 2001
----------------
ACTUAL AS ADJUSTED
------ -----------
(DOLLARS IN THOUSANDS)
Common stock, other paid-in capital, and retained earnings $402,525 $402,525
Long term debt and QUIDS:
First mortgage bonds.................................. 370,000 320,000
Quarterly income debt securities...................... 45,457 --
Unsecured notes....................................... -- 100,000
Unamortized debt discount and premium................. (5,320) (4,034)
--------- --------
Total capitalization................................. 812,662 818,491
Short-term debt........................................... 49,601 49,601
--------- --------
Total capitalization and short-term debt.............. $862,263 $868,092
========= ========
RECENT DEVELOPMENTS
On an unaudited basis, our net income for the three months ended
September 30, 2001 was $14.6 million compared to $16.0 million for the three
months ended September 30, 2000. Operating revenues were $221.7 million and
operating income was $24.1 million for the three months ended September 30, 2001
compared to $206.7 million and $24.5 million, respectively, for the three months
ended September 30, 2000.
RATIOS OF EARNINGS TO FIXED CHARGES
Our consolidated ratios of earnings to fixed charges for each of the
fiscal years ended December 31, 1996 through 2000 are as follows:
YEARS ENDED DECEMBER 31,
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
3.25 3.76 4.09 4.05 3.70
Our consolidated ratio of earnings to fixed charges for the six months
ended June 30, 2001 was 3.10.
The ratio of earnings to fixed charges is calculated by dividing
earnings by fixed charges. For this purpose, earnings means net income (loss)
before income taxes and before adjustment for minority interests in consolidated
subsidiaries or income (loss) from equity investees, plus fixed charges, plus
amortization of capitalized interest, plus distributed income of equity
investees, less interest capitalized. Fixed charges means interest expense, plus
interest capitalized, plus amoritization of debt issuance costs, plus the
estimated interest component of rent expense.
S-6
DESCRIPTION OF THE NOTES
The following description is a summary of the material provisions of
the notes. Because it is only a summary, the description may not contain all of
the information that is important to you as a potential investor in the notes.
Therefore, we urge you to read the Indenture and the form of note in making your
decision on whether to invest in the notes. We have filed copies of these
documents with the Securities and Exchange Commission and will also file copies
of these documents at the office of the trustee in New York City.
The following description of the particular terms of the notes offered
by this prospectus supplement supplements and replaces any inconsistent
information in the description of the general terms and provisions of the debt
securities, referred to as "New Debt Securities", in the attached prospectus.
GENERAL TERMS OF THE NOTES
The notes will:
o be issued in an aggregate principal amount of $100,000,000;
o mature at par on November 1, 2006;
o bear interest at 5% from November 6, 2001;
o pay interest semi-annually May 1 and November 1 of each year, starting
on May 1, 2002, to the person in whose name the global note is
registered at the close of business on the preceding April 15 or
October 15;
o be our direct, unconditional and general obligations and rank equal in
right of payment with all of our payment obligations relating to our
existing and future unsecured and unsubordinated indebtedness;
o be issued in the form of one or more global notes held by The
Depository Trust Company ("DTC"); and
o not be entitled to the benefit of any sinking fund.
We may, without the consent of the holders of the notes, create and
issue additional notes ranking equally with the notes and otherwise similar in
all respects so that such further notes would be consolidated and form a single
series of notes.
REDEMPTION AT OUR OPTION
We may, at our option, redeem the notes, in whole or in part, at any
time at a redemption price equal to the greater of:
o 100% of the principal amount of the notes to be redeemed, plus accrued
interest to the redemption date, or
S-7
o as determined by the Quotation Agent, the sum of the present values of
the remaining scheduled payments of principal and interest on the
notes to be redeemed (not including any portion of payments of
interest accrued as of the redemption date) discounted to the
redemption date on a semi-annual basis at the Adjusted Treasury Rate
plus 20 basis points, plus accrued interest to the redemption date.
The redemption price will be calculated assuming a 360-day year
consisting of twelve 30-day months.
"Adjusted Treasury Rate" means, with respect to any redemption date,
the rate per year equal to the semi-annual equivalent yield to maturity of the
Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for that redemption date.
"Comparable Treasury Issue" means the United States Treasury security
selected by the Quotation Agent as having a maturity comparable to the remaining
term of the notes that would be used, at the time of selection and in accordance
with customary financial practice, in pricing new issues of corporate debt
securities of comparable maturity to the remaining term of the notes.
"Comparable Treasury Price" means, with respect to any redemption date:
o the average of the Reference Treasury Dealer Quotations for that
redemption date, after excluding the highest and lowest of the
Reference Treasury Dealer Quotations, or
o if the trustee obtains fewer than three Reference Treasury Dealer
Quotations, the average of all Reference Treasury Dealer Quotations so
received.
"Quotation Agent" means the Reference Treasury Dealer appointed by us.
"Reference Treasury Dealer" means (1) each of Banc One Capital Markets,
Inc., Banc of America Securities LLC and Salomon Smith Barney Inc., and their
respective successors, unless any of them ceases to be a primary U.S. Government
securities dealer in New York City (a "Primary Treasury Dealer"), in which case
we will substitute another Primary Treasury Dealer; and (2) any other Primary
Treasury Dealer selected by us.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as determined by
the trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the trustee by that Reference Treasury Dealer at 5:00 p.m., New York
City time, on the third business day preceding that redemption date.
We will mail notice of any redemption at least 30 days but not more
than 60 days before the redemption date to each holder of the notes to be
redeemed.
Unless we default in payment of the redemption price, on and after the
redemption date, interest will cease to accrue on the notes or portions of the
notes called for redemption.
S-8
PAYMENT OF PRINCIPAL AND INTEREST
We will make payments of principal and interest on the notes to DTC, as
depositary, which will receive the funds for distribution to the beneficial
holders of the notes. We expect that holders of the notes will be paid in
accordance with the procedures of DTC and its direct and indirect participants.
Neither we nor any paying agent will have any responsibility or liability for
any aspect of the records of, or payments made by, DTC or any failure on the
part of DTC in making payments to holders of the notes in global form from the
funds it receives. The corporate trust office of Bank One Trust Company, N.A.
will be designated as the paying agent for payments with respect to the Notes.
THE TRUSTEE
We will issue the notes under a supplemental indenture, to be dated
November 5, 2001, among us, The Bank of New York and Bank One Trust Company,
N.A., as series trustee, to the Indenture, dated as of May 31, 1995, between us
and The Bank of New York, as original trustee, which is more fully described in
the attached prospectus.
Bank One Trust Company, N.A. will serve as the trustee for the notes.
Pursuant to the Trust Indenture Act of 1939, as amended, if a default occurred
on the notes, Bank One Trust Company, N.A. would be required to resign as
trustee within 90 days of default unless the default were cured, duly waived, or
otherwise eliminated.
GLOBAL CLEARANCE AND SETTLEMENT
We have obtained the information in this section from sources we
believe to be reliable, including from DTC, and we take responsibility for the
accurate reproduction of this information. We take no responsibility, however,
for the accuracy of this information. DTC is under no obligation to perform or
continue to perform the procedures described below, and it may modify or
discontinue them at any time. Neither we nor the trustee will be responsible for
DTC's performance of its obligations under its rules and procedures. Nor will we
or any registrar be responsible for the performance by direct or indirect
participants of their obligations under their rules and procedures.
GENERAL
DTC is:
o a limited-purpose trust company organized within the meaning of
the New York Banking Law;
o a "banking organization" under the New York Banking Law;
o a member of the Federal Reserve System;
o a "clearing corporation" within the meaning of the New York
Uniform Commercial Code; and
o a "clearing agency" registered under Section 17A of the
Securities Exchange Act of 1934.
S-9
DTC was created to hold securities for its participants and facilitate
the clearance and settlement of securities transactions between its
participants. It does this through electronic book-entry changes in the accounts
of its direct participants, eliminating the need for physical movement of
securities certificates. DTC is owned by a number of its direct participants and
by the New York Stock Exchange, Inc., the American Stock Exchange and the
National Association of Securities Dealers, Inc.
OWNERSHIP OF THE NOTES THROUGH DTC
We will issue the notes in the form of one or more fully registered
book-entry securities, registered in the name of Cede & Co., a nominee of DTC.
Financial institutions, acting as direct and indirect participants in DTC, will
represent your beneficial interests in the book-entry securities. These
financial institutions will record the ownership and transfer of your beneficial
interests through book-entry accounts.
We and the trustee will treat the registered holder of the notes,
initially Cede & Co., as the absolute owner of the notes for all purposes. Once
we and the trustee make payments to the registered holders, we and the trustee
will no longer be liable on the notes for the amounts so paid. Accordingly, if
you own a beneficial interest in the book-entry securities, you must rely on the
procedures of the institutions through which you hold your interests in the
book-entry securities (including DTC and its participants) to exercise any of
the rights granted to the holder of the book-entry securities. Under existing
industry practice, if you desire to take any action that Cede & Co., as the
holder of these book-entry securities, is entitled to take, then Cede & Co.
would authorize the DTC participant through which you own your beneficial
interest to take the action, and that DTC participant would then either
authorize you to take the action or act for you on your instructions.
DTC may grant proxies or authorize its participants (or persons holding
beneficial interests in the notes in global form through these participants) to
exercise any rights of a holder or take any other actions that a holder is
entitled to take under the Indenture or the notes.
TRADING BETWEEN DTC PURCHASERS AND SELLERS
DTC participants will transfer interests in the notes among themselves
in the ordinary way according to DTC rules. DTC participants will pay for these
transfers by wire transfer. The laws of some states require certain purchasers
of securities to take physical delivery of the securities in definitive form.
These laws may impair your ability to transfer beneficial interests in the notes
to these purchasers. DTC can act only on behalf of its direct participants, who
in turn act on behalf of indirect participants and certain banks. Thus, your
ability to pledge beneficial interests in the notes to persons that do not
participate in the DTC system, and to take other actions, may be limited because
you will not possess a physical certificate that represents your interest.
S-10
UNDERWRITING
We have entered into a purchase agreement with respect to the notes
with the underwriters named below. Subject to certain conditions, we have agreed
to sell, and each underwriter has severally agreed to purchase, the principal
amount of notes indicated in the following table.
UNDERWRITER PRINCIPAL AMOUNT OF NOTES
----------- -------------------------
Banc One Capital Markets, Inc................................. $ 80,000,000
The Williams Capital Group, L.P............................... 20,000,000
--------------
Total................................................ $ 100,000,000
Notes sold by the underwriters to the public will initially be offered
at the public offering price set forth on the cover of this prospectus
supplement. Any notes sold by the underwriters to securities dealers may be sold
at a discount from the public offering price of up to 0.350% of the principal
amount of notes. Any of the securities dealers may resell any notes purchased
from the underwriters to certain brokers or dealers at a discount from the
public offering price of up to 0.250% of the principal amount of notes. If all
the notes are not sold at the public offering price, the underwriters may change
the offering price and the other selling terms.
There is presently no established trading market for the notes, and we
do not intend to apply for listing of the notes on a national securities
exchange. The underwriters have advised us that they intend to make a market in
the notes but they are not obligated to do so and may discontinue market making
at any time without notice. No assurance can be given as to the liquidity of the
trading market for the notes.
In connection with the offering, the underwriters may purchase and sell
the notes in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater number of
notes than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the notes while the
offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased notes sold
by or for the account of the underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or
otherwise affect the market price of the notes. As a result, the price of the
notes may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, the underwriters may discontinue them
at any time. These transactions may be effected in the over-the-counter market
or otherwise.
We have agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
The underwriters or their affiliates may engage in transactions with,
or perform services for, us or our affiliates in the ordinary course of
business. In addition, Bank One Trust Company, N.A., an affiliate of Banc One
Capital Markets, Inc. serves as trustee under the Indenture.
S-11
VALIDITY OF THE NOTES
Sullivan & Cromwell, New York, New York, will pass upon the validity of
the notes for us. Simpson Thacher & Bartlett, New York, New York, will pass upon
the validity of the notes for the underwriters. On matters of local law, these
firms will rely on Robert R. Winter, Esq., Vice President and Deputy General
Counsel of The Potomac Edison Company.
EXPERTS
The financial statements incorporated in this prospectus supplement by
reference to the Annual Report on Form 10-K for the year ended December 31, 2000
have been so incorporated in reliance on the report of PricewaterhouseCoopers
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
S-12
THE POTOMAC EDISON COMPANY
FIRST MORTGAGE BONDS
UNSECURED DEBT SECURITIES
The Potomac Edison Company (the "Company") may offer and sell, at one
time or from time to time in one or more series, its First Mortgage Bonds (the
"New Bonds") and its unsecured debt securities (the "New Debt Securities" and
together with the New Bonds, the "Securities") with an aggregate principal
amount (or if issued at a discount, the aggregate initial offering price) not to
exceed $200,000,000, at prices and on terms to be determined at the time of
sale. This Prospectus will be supplemented by one or more supplements hereto
(each, a "Prospectus Supplement") which will set forth: (i) in the case of an
offering of New Bonds, the aggregate principal amount, maturity, interest rate
(or method of calculating the interest rate), any redemption provisions, any
initial offering price, proceeds to the Company, and any other specific terms of
the particular series of New Bonds; and (ii) in the case of an offering of the
New Debt Securities, the aggregate principal amount, maturity, interest rate (or
method of calculating the interest rate), any redemption or repayment
provisions, any subordination provisions, any initial offering price, any
listing on a securities exchange, proceeds to the Company, and any other
specific terms of the particular series of the New Debt Securities. Unless
otherwise provided in a Prospectus Supplement, the sale of one series of
Securities will not be contingent upon the sale of any other series of
Securities.
The Company may sell the Securities to underwriters, through agents
and/or directly to other purchasers. The applicable Prospectus Supplement will
set forth the names of any underwriters or agents involved in the sale of the
Securities in respect of which this Prospectus is being delivered, the purchase
prices, if any, to be paid by underwriters and the compensation, if any, to be
paid to such underwriters or agents. See "Plan of Distribution".
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is August 18, 1997.
AVAILABLE INFORMATION
The Potomac Edison Company, 10435 Downsville Pike, Hagerstown, MD
21740-1766 (tel. 301-790-3400), is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Securities and
Exchange Commission (the "Commission"). Such reports and other information filed
by the Company can be inspected at the public reference facilities of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, 500 West Madison
Street, Chicago, Illinois 60661, and 7 World Trade Center, New York, New York
10048. Copies of such material can be obtained from the Public Reference Section
of the Commission at prescribed rates. Requests should be directed to the
Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549. Such material may also be accessed electronically by means of the
Commission's "home" page on the Internet at http://www.sec.gov. Certain
securities of the Company are listed on the New York Stock Exchange and the
Philadelphia Stock Exchange, and reports and other information concerning the
Company can be inspected at the offices of such Exchanges.
The Company filed with the Commission a registration statement on Form
S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Securities. This Prospectus does not contain all the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
For further information with respect to the Company and the Securities,
reference is made to the Registration Statement and the exhibits and the
financial statements, notes and schedules filed as a part thereof or
incorporated by reference therein, which may be inspected at the public
reference facilities of the Commission at the addresses set forth above or
through the Commission's home page on the Internet. Statements made in this
Prospectus concerning the contents of any documents referred to herein are not
necessarily complete, and in each instance are qualified in all respects by
reference to the copy of such document filed as an exhibit to the Registration
Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Commission pursuant to the Exchange Act, are hereby incorporated by reference in
this Prospectus:
(i) The Annual Report of the Company on Form 10-K for the year ended
December 31, 1996 (the "Annual Report");
(ii) The Current Report of the Company on Form 8-K dated April 5,
1997; and
(iii) The Quarterly Reports of the Company on Form 10-Q for the
quarters ended March 31, 1997 and June 30, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to
the termination of the offering of the applicable Securities shall be deemed to
be incorporated in this Prospectus by reference and to be a part hereof from the
date of filing of such documents. Any statement contained herein, in the
applicable Prospectus Supplement or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein,
in such Prospectus Supplement or in any subsequently filed document which also
is or is deemed to be incorporated by reference herein modifies or supersedes
such statement. Any statement so modified or superseded shall not be deemed,
except as modified or superseded, to constitute a part of the Registration
Statement and/or this Prospectus.
2
The Company hereby undertakes to provide without charge to each person
to whom a copy of this Prospectus and the applicable Prospectus Supplement has
been delivered, on the written or oral request of any such person, a copy of any
or all of the documents referred to above which have been or may be incorporated
by reference in this Prospectus, other than exhibits to such documents. Requests
for such copies should be directed to: The Potomac Edison Company, 10435
Downsville Pike, Hagerstown, MD 21740-1766, Attention: Eileen M. Beck, Secretary
(tel. 301-665-2704).
THE COMPANY
The Company, incorporated in Maryland in 1923 and in Virginia in 1974,
is an electric utility operating in portions of Maryland, Virginia and West
Virginia. It also owns generating capacity in Pennsylvania. The Company is a
wholly-owned subsidiary of Allegheny Power System, Inc. and, together with
Monongahela Power Company ("Monongahela"), West Penn Power Company ("West Penn")
and Allegheny Generating Company ("AGC") (collectively, the "affiliates"), makes
up the Allegheny Power integrated electric utility system (the "System"). The
Company owns 28% of the common stock of AGC, and Monongahela and West Penn own
the remainder of AGC's common stock. AGC owns an undivided 40% interest (840 MW)
in a pumped-storage hydroelectric station in Bath County, Virginia, which is
operated by a nonaffiliated company.
RATIOS OF EARNINGS TO FIXED CHARGES
For purposes of calculating the following ratios, (i) "earnings"
represent pretax income from continuing operations plus fixed charges, and (ii)
"fixed charges" represent interest expenses, amortization of debt expense and
discount or premium relating to any indebtedness, portion of rental expense as
can be demonstrated to be representative of the interest factor, and preferred
stock dividend requirements of majority-owned subsidiaries and 50-percent-owned
persons.
FISCAL YEAR ENDED 12-MONTH PERIOD
DECEMBER 31 ENDED JUNE 30
--------------------------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
Ratio of Earnings
to Fixed Charges........... 3.40 3.34 3.46 3.27 3.25 3.47 3.34
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement, the
net proceeds from the sale of the Securities will be added to the Company's
general funds and, together with other funds available to the Company, will be
used to pay or prepay, to the extent desirable, debt and for other corporate
purposes, including the financing of the Company's construction program.
3
CONSTRUCTION AND FINANCING
Construction expenditures by the Company in 1996 amounted to $86.3
million and for 1997 and 1998 are expected to aggregate $97.8 million and $109.4
million, respectively. In 1996, these expenditures included $13.5 million for
environmental control technology, of which $.5 million was for compliance with
the Clean Air Act Amendments of 1990 (the "CAAA"). The 1997 and 1998 estimated
expenditures include $7.2 million and $11.3 million, respectively, for
environmental control technology of which $1.6 million and $5.7 million,
respectively, are to cover costs of compliance with the CAAA. Allowance for
funds used during construction (AFUDC) (shown below) has been reduced for
carrying charges on CAAA expenditures that are being collected through currently
approved base rates.
1996 1997 1998
---- ---- ----
(MILLIONS OF DOLLARS)
Generation.............................................................. $ 27.7 $ 24.0 $ 30.8
Transmission............................................................ 15.9 25.0 33.8
Distribution............................................................ 42.7 48.8 44.8
------- ------- --------
Total.............................................................. $ 86.3 $ 97.8 $109.4
====== ====== ======
Allowance for Funds used During Construction
Included Above..................................................... $ 2.5 $ 2.2 $ 2.7
In connection with its construction and demand-side management
programs, the Company must make estimates of the availability and cost of
capital as well as the future demands of its customers that are necessarily
subject to regional, national, and international developments, changing business
conditions, and other factors. The construction of facilities and their cost are
affected by laws and regulations, lead times in manufacturing, availability of
labor, materials and supplies, inflation, interest rates, and licensing, rate,
environmental, and other proceedings before regulatory authorities. Decisions
regarding construction of facilities must now also take into account retail
competition. As a result, the Company's future plans are subject to continuing
review and substantial change.
The Company has financed its construction program through internally
generated funds, first mortgage bonds, debentures, subordinated debt and
preferred stock issues, pollution control and solid waste disposal notes,
instalment loans, long-term lease arrangements, equity investments by its
parent, and, where necessary, interim short-term debt. The future ability of the
Company to finance its construction program by these means depends on many
factors, including creditworthiness, rate levels sufficient to provide
internally generated funds and adequate revenues to produce a satisfactory
return on the common equity portion of the Company's capital structure and to
support the issuance of senior and other securities.
4
DESCRIPTION OF THE NEW BONDS
GENERAL
The New Bonds are to be issued as First Mortgage Bonds (the "Bonds")
under an Indenture, dated as of October 1, 1944, between the Company and The
Chase Manhattan Bank and Thomas J. Foley, as Bond Trustees, as supplemented and
as to be supplemented as is necessary to create any series of New Bonds
(collectively, the "Bond Indenture"). The Chase Manhattan Bank is a depositary
of funds of and a lender to the Company and its affiliates.
The statements under this caption relating to the New Bonds and the
Bond Indenture are summaries and do not purport to be complete. They make use of
terms defined in the Bond Indenture and are qualified in their entirety by
express reference to the Bond Indenture, the form of which is filed as an
exhibit to the Registration Statement.
Reference is made to the Prospectus Supplement relating to the
particular New Bonds offered thereby (the "Offered New Bonds") for the terms of
the Offered New Bonds, including the date of maturity, the rate of interest (or
manner of calculation thereof), and the price at which, the period(s) within
which, and the terms and conditions upon which, the Offered New Bonds may,
pursuant to any optional or mandatory redemption provisions, be redeemed by the
Company.
Unless otherwise indicated in the Prospectus Supplement relating
thereto, the Offered New Bonds are to be issued as registered securities without
coupons in denominations of $1,000 and any integral multiple thereof. They will
be transferable and exchangeable without charge except for governmental charges,
if any.
The Bond Indenture does not contain any covenants or other provisions
that are specifically intended to afford holders of the New Bonds special
protection in the event of a highly leveraged or similar transaction involving
the Company.
RENEWAL AND REPLACEMENT FUND
So long as any series of Bonds issued before January 31, 1993 ("Prior
Bonds") are outstanding, the Company will, on or before April 30 in each year,
pay to the Bond Trustee in cash or Bonds an amount equal to 2-1/4% of the
average amount of Depreciable Property of the Company during the preceding year
less certain property additions and Bonds retired or to be retired. Cash
deposited may be used to acquire Prior Bonds or be withdrawn against Prior Bonds
or gross property additions. Excess credits may be used in any subsequent year.
The Company has reserved the right to change the 2-1/4% with the approval of the
Commission.
SECURITY
The New Bonds will be equally and ratably secured, together with all
other Bonds now or hereafter issued, by a direct first lien on all the fixed
properties and franchises now or hereafter owned by the Company. The lien is
subject to statutory liens and equitable priorities for taxes and other
permitted liens and encumbrances and, as to certain after-acquired property, to
preexisting liens and encumbrances, and to rights of others which may attach
prior to recordation of a supplemental indenture specifically mortgaging the
property. There are excepted from the lien all bills, notes, accounts
receivable, cash, agreements, unpledged securities, materials and supplies and
certain other assets.
5
ISSUANCE OF ADDITIONAL BONDS
Additional Bonds of any series may be issued in an amount equal to (1)
60% of the net bondable value (such value estimated to be in excess of
$717,000,000 as of June 30, 1997) of property additions not subject to an
unfunded prior lien, (2) certain Bonds retired or to be retired and (3) cash
deposited with the Trustee; provided, however, that, notwithstanding the
foregoing (except as to additional Bonds which are issued to refund Bonds within
two years of their maturity), additional Bonds may not be issued unless net
earnings of the Company available for interest (in 12 out of the 15 preceding
months), after a provision for depreciation (at the higher of (i) 2-1/4% of
Depreciable Property or (ii) book depreciation) but before income taxes, are at
least twice the annual interest charges on all Bonds and prior lien bonds then
outstanding or applied for. Cash deposited for an issue of Bonds may be
withdrawn in an amount equal to either 60% of net bondable value of property
additions not subject to a prior lien or the aggregate principal amount of
certain Bonds retired or to be retired and such property additions or Bonds may
not thereafter be used as a basis to issue additional Bonds.
Additional prior lien bonds (indebtedness secured by a prior lien on
after-acquired property) may be issued with the same limits as those applicable
to the issuance of the additional Bonds, on the basis of property subject to
such prior lien, the retirement of prior lien bonds or the deposit of cash.
The Company expects that the New Bonds will be issued on the basis of
property additions, cash deposited or Bonds retired or to be retired.
MODIFICATION
With the consent of the Company and the holders of 75% in aggregate
principal amount of the Bonds outstanding and (if less than all series are
affected) 75% in amount of each affected series, the Bond Indenture and the
rights of the Bondholders may be changed in any way except to affect the terms
of payment of principal or interest or to reduce said percentage.
DEFAULTS
Failure to pay principal or, for specified periods, to pay interest or
meet other Bond Indenture requirements constitutes an event of default. A
majority of the Bondholders may direct the time, method and place of exercising
any power conferred upon the Bond Trustee, but the Bond Trustee, subject during
default to the required standard of care, is first entitled to security or
indemnity satisfactory to it. Periodic evidence as to general compliance with
the Bond Indenture is not required to be furnished unless prescribed by the
Commission under the Trust Indenture Act of 1939, but certificates as to
compliance with certain provisions are required to be furnished annually and in
connection with action to be taken by the Bond Trustee at the Company's request.
REGARDING THE TRUSTEE
A Trustee under the Bond Indenture is The Chase Manhattan Bank. The
Company maintains normal banking arrangements with The Chase Manhattan Bank.
6
DESCRIPTION OF NEW DEBT SECURITIES
GENERAL
The New Debt Securities may be issued in one or more series under an
Indenture dated as of May 31, 1995, between the Company and The Bank of New
York, as Trustee (the "Trustee"). The following summary does not purport to be
complete and is subject in all respects to the provisions of, and is qualified
in its entirety by reference to, the Indenture and the New Debt Securities, the
forms of which are filed, or will be filed, as exhibits to the Registration
Statement of which this Prospectus forms a part, or as an exhibit to a Current
Report on Form 8-K to be incorporated by reference in such Prospectus. Whenever
particular provisions or defined terms in such documents are referred to herein
or in a Prospectus Supplement, such provisions or terms are incorporated by
reference herein or therein, as the case may be.
The New Debt Securities will be unsecured obligations of the Company
and, unless otherwise provided in a Prospectus Supplement relating to a
particular series of New Debt Securities, will be subordinated obligations of
the Company.
Reference is made to the Prospectus Supplement relating to any
particular issue of New Debt Securities for the following terms: (1) the title
of such New Debt Securities; (2) any limit on the aggregate principal amount of
such New Debt Securities or the series of which they are a part; (3) the date or
dates on which the principal of any of such New Debt Securities will be payable;
(4) the rate or rates at which any of such New Debt Securities will bear
interest, if any, the date or dates from which any such interest will accrue,
the Interest Payment Dates on which any such interest will be payable, including
the right to defer the payment of interest, and the Regular Record Date for any
such interest payable on any Interest Payment Date; (5) the place or places
where the principal of and any premium and interest on any of such New Debt
Securities will be payable; (6) the period or periods within which, the price or
prices at which and the terms and conditions on which any of such New Debt
Securities may be redeemed, in whole or in part, at the option of the Company;
(7) the obligation, if any, of the Company to redeem or purchase any of such New
Debt Securities pursuant to any sinking fund or analogous provision or at the
option of the Holder thereof, and the period or periods within which, the price
or prices at which and the terms and conditions on which any of such New Debt
Securities will be redeemed or purchased, in whole or in part, pursuant to any
such obligation; (8) the denominations in which any of such New Debt Securities
will be issuable, if other than denominations of $1,000 and any integral
multiple thereof; (9) if the amount of principal of or any premium or interest
on any of such New Debt Securities may be determined with reference to an index
or pursuant to a formula, the manner in which such amounts will be determined;
(10) if other than the currency of the United States of America, the currency,
currencies, or currency units in which the principal of or any premium or
interest on any of such New Debt Securities will be payable and the manner of
determining the equivalent thereof in the currency of the United States of
America for any purpose, including for purposes of determining the principal
amount deemed to be Outstanding at any time; (11) if the principal of or any
premium or interest on any of such New Debt Securities is to be payable, at the
election of the Company or the Holder thereof, in one or more currencies or
currency units other than those in which such New Debt Securities are stated to
be payable, the currency, currencies or currency units in which payment of any
such amount as to which such election is made will be payable, the periods
within which and the terms and conditions upon which such election is to be made
and the amount so payable (or the manner in which such amount is to be
determined); (12) if other than the entire principal amount thereof, the portion
of the principal amount of any of such New Debt Securities which will be payable
upon declaration of acceleration of the Maturity thereof; (13) if the principal
amount payable at the Stated Maturity of any of such New Debt Securities will
not be determinable as of any one or more dates prior to the Stated Maturity,
the amount which will be deemed to be such principal amount as of any such date
for any purpose, including the principal amount thereof
7
which will be due and payable upon any Maturity other than the Stated Maturity
or which will be deemed to be Outstanding as of any such date (or, in any such
case, the manner in which such deemed principal amount is to be determined);
(14) if applicable, that such New Debt Securities, in whole or any specified
part, are defeasible pursuant to the provisions of the Indenture described under
"--Defeasance and Covenant Defeasance--Defeasance and Discharge" or "Defeasance
and Covenant Defeasance--Defeasance of Certain Covenants," or under both such
captions; (15) whether any of such New Debt Securities will be issuable in whole
or in part in the form of one or more Global Securities and, if so, the identity
of the Depositary for such Global Securities and disclosure of the form of any
legend or legends to be borne by any such Global Security in addition to or in
lieu of the legend referred to under "--Global Securities" and whether any
transfer of such Global Security in whole or in part may be registered in the
names of Persons other than such Depositary or its nominee; (16) any addition to
or change in the Events of Default applicable to any of such New Debt Securities
and any change in the right of the Trustee or the Holders to declare the
principal amount of any of such New Debt Securities due and payable; (17) any
addition to or change in the covenants in the Indenture; and (18) any other
terms of such New Debt Securities not inconsistent with the provisions of the
Indenture. (Section 301).
New Debt Securities, including Original Issue Discount Securities, may
be sold at a substantial discount below their principal amount. Certain special
United States federal income tax considerations (if any) applicable to New Debt
Securities sold at an original issue discount may be described in the applicable
Prospectus Supplement. In addition, certain special United States federal income
tax or other considerations (if any) applicable to any New Debt Securities which
are denominated in a currency or currency unit other than United States dollars
may be described in the applicable Prospectus Supplement.
The Indenture does not contain any covenants or other provisions that
are specifically intended to afford holders of the New Debt Securities special
protection in the event of a highly leveraged or similar transaction involving
the Company.
SUBORDINATION
The Indenture provides that, unless otherwise provided in a
supplemental indenture or a Board Resolution and described in the applicable
Prospectus Supplement, the New Debt Securities will be subordinate and subject
in right of payment to the prior payment in full of all Senior Debt (as defined
below) of the Company, whether outstanding as of the date of the Indenture or
thereafter incurred. (Section 1401). If the relevant supplemental indenture or
Board Resolution results in the corresponding series of New Debt Securities
being subordinated obligations of the Company, the following provisions will
apply:
(i) No payment of principal (including redemption and sinking fund
payments) of, or premium, if any, or interest on, the New Debt
Securities may be made if any Senior Debt is not paid when
due, any applicable grace period with respect to such default
has ended and such default has not been cured or waived, or if
the maturity of any Senior Debt has been accelerated because
of a default. (Section 1402).
(ii) Upon any distribution of assets of the Company to creditors
upon any dissolution, winding-up, liquidation or
reorganization, whether voluntary or involuntary or in
bankruptcy, insolvency, receivership or other proceedings, all
principal of, and premium, if any, and interest due or to
become due on, all Senior Debt must be paid in full before the
holders of the New Debt Securities are entitled to receive or
retain any payment. (Section 1403).
8
(iii) Subject to the payment in full of all Senior Debt, the rights
of the holders of the New Debt Securities will be subrogated
to the rights of the holders of Senior Debt to receive
payments or distributions applicable to Senior Debt until all
amounts owing on the New Debt Securities are paid in full.
(Section 1404).
The term "Senior Debt" means the principal of, and premium, if any,
interest on, and any other payment due pursuant to, any of the following items
of indebtedness, whether outstanding at the date of execution of the Indenture
or thereafter incurred, created or assumed:
(a) all indebtedness of the Company evidenced by notes,
debentures, bonds, or other securities sold by the Company for
money, including all Bonds of the Company outstanding from
time to time;
(b) all indebtedness of others of the kinds described in the
preceding clause (a) assumed by or guaranteed in any manner by
the Company, including through an agreement to purchase,
contingent or otherwise; and
(c) all renewals, extensions, or refundings of indebtedness of the
kinds described in any of the preceding clauses (a) and (b);
unless, in the case of any particular indebtedness, renewal, extension or
refunding, the instrument creating or evidencing the same or the assumption or
guarantee of the same expressly provides that such indebtedness, renewal,
extension or refunding is not superior in right of payment to or is pari passu
with the New Debt Securities. (Section 101).
The Indenture does not limit the aggregate amount of Senior Debt that
the Company may issue. As of June 30, 1997, outstanding Senior Debt of the
Company aggregated approximately $590,700,000.
FORM, EXCHANGE, AND TRANSFER
The New Debt Securities of each series will be issuable only in fully
registered form without coupons and, unless otherwise specified in the
applicable Prospectus Supplement, in denominations of $1,000 and any integral
multiple thereof. (Section 302).
At the option of the Holder, subject to the terms of the Indenture and
the limitations applicable to Global Securities, New Debt Securities of any
series will be exchangeable for other New Debt Securities of the same series, of
any authorized denomination and of like tenor and aggregate principal amount.
(Section 305).
Subject to the terms of the Indenture and the limitations applicable to
Global Securities, New Debt Securities may be presented for exchange as provided
above or for registration of transfer (duly endorsed or with the form of
transfer endorsed thereon duly executed) at the office of the Security Registrar
or at the office of any transfer agent designated by the Company for such
purpose. No service charge will be made for any registration of transfer or
exchange of New Debt Securities, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith. Such transfer or exchange will be effected upon the Security
Registrar or such transfer agent, as the case may be, being satisfied with the
documents of title and identity of the person making the request. The Company
has appointed the Trustee as Security Registrar. Any transfer agent (in addition
to the Security Registrar) initially designated by the Company for any New Debt
Securities will be named in the applicable Prospectus Supplement. (Section 305).
The Company may at any time designate additional transfer agents or rescind the
designation of any transfer agent or approve a change in the office through
which any transfer agent acts, except that the Company will be required to
maintain a transfer agent in each Place of Payment for the New Debt Securities
of each series. (Section 1002).
9
If the New Debt Securities of any series (or of any series and
specified tenor) are to be redeemed in part, the Company will not be required to
(i) issue, register the transfer of, or exchange any Debt Security of that
series (or of that series and specified tenor, as the case may be) during a
period beginning at the opening of business 15 days before the day of mailing of
a notice of redemption of any such Debt Security that may be selected for
redemption and ending at the close of business on the day of such mailing or
(ii) register the transfer of or exchange any Debt Security so selected for
redemption, in whole or in part, except the unredeemed portion of any such Debt
Security being redeemed in part. (Section 305).
GLOBAL SECURITIES
Some or all of the New Debt Securities of any series may be
represented, in whole or in part, by one or more Global Securities which will
have an aggregate principal amount equal to that of the New Debt Securities
represented thereby. Each Global Security will be registered in the name of a
Depositary or a nominee thereof identified in the applicable Prospectus
Supplement, will be deposited with such Depositary or nominee or a custodian
therefor and will bear a legend regarding the restrictions on exchanges and
registration of transfer thereof referred to below and any such other matters as
may be provided for pursuant to the Indenture.
Notwithstanding any provision of the Indenture or any Debt Security
described herein, no Global Security may be exchanged in whole or in part for
New Debt Securities registered, and no transfer of a Global Security in whole or
in part may be registered, in the name of any Person other than the Depositary
for such Global Security or any nominee of such Depositary unless (i) the
Depositary has notified the Company that it is unwilling or unable to continue
as Depositary for such Global Security or has ceased to be qualified to act as
such as required by the Indenture, (ii) there shall have occurred and be
continuing an Event of Default with respect to the New Debt Securities
represented by such Global Security or (iii) there shall exist such
circumstances, if any, in addition to or in lieu of those described above as may
be described in the applicable Prospectus Supplement. All securities issued in
exchange for a Global Security or any portion thereof will be registered in such
names as the Depositary may direct. (Sections 204 and 305).
As long as the Depositary, or its nominee, is the registered Holder of
a Global Security, the Depositary or such nominee, as the case may be, will be
considered the sole owner and Holder of such Global Security and the New Debt
Securities represented thereby for all purposes under the New Debt Securities
and the Indenture. Except in the limited circumstances referred to above, owners
of beneficial interests in a Global Security will not be entitled to have such
Global Security or any New Debt Securities represented thereby registered in
their names, will not receive or be entitled to receive physical delivery of
certificated New Debt Securities in exchange therefor and will not be considered
to be the owners or Holders of such Global Security or any New Debt Securities
represented thereby for any purpose under the New Debt Securities or the
Indenture. All payments of principal of and any premium and interest on a Global
Security will be made in immediately available funds to the Depositary or its
nominee, as the case may be, as the Holder thereof. The laws of some
jurisdictions require that certain purchasers of securities take physical
delivery of such securities in certificated form. These laws may impair the
ability to transfer beneficial interests in a Global Security. Ownership of
beneficial interests in a Global Security will be limited to institutions that
have accounts with the Depositary or its nominee ("participants") and to persons
that may hold beneficial interests through participants. In connection with the
issuance of any Global Security, the Depositary will credit, on its book-entry
registration and transfer system, the respective principal amounts of New Debt
Securities represented by the Global Security to the accounts of its
participants. Ownership of beneficial interests in a Global Security will be
shown only on, and the transfer of those ownership interests will be effected
only through, records maintained by the Depositary (with respect to
participants' interests) or such participants (with respect to interests of
persons held by
10
such participants on their behalf). Payments, transfers, exchanges, and other
matters relating to beneficial interests in a Global Security may be subject to
various policies and procedures adopted by the Depositary from time to time.
None of the Company, the Trustee or any agent of the Company or the Trustee will
have any responsibility or liability for any aspect of the Depositary's or any
participant's records relating to, or for payments made on account of,
beneficial interests in a Global Security, or for maintaining, supervising, or
reviewing any records relating to such beneficial interests.
Beneficial interests in a Global Security will trade in the
Depositary's same-day funds settlement system, and secondary market trading
activity in such beneficial interests will settle in immediately available
funds, subject in all cases to the rules and procedures of the Depositary and
its participants.
PAYMENT AND PAYING AGENTS
Unless otherwise indicated in the applicable Prospectus Supplement,
payment of interest on a New Debt Security on any Interest Payment Date will be
made to the Person in whose name such New Debt Security (or one or more
Predecessor New Debt Securities) is registered at the close of business on the
Regular Record Date for such interest. (Section 307).
Unless otherwise indicated in the applicable Prospectus Supplement,
principal of and any premium and interest on the New Debt Securities of a
particular series will be payable at the office of such Paying Agent or Paying
Agents as the Company may designate for such purpose from time to time, except
that at the option of the Company payment of any interest may be made by check
mailed to the address of the Person entitled thereto as such address appears in
the Security Register. Unless otherwise indicated in the applicable Prospectus
Supplement, the principal corporate trust office of The Bank of New York will be
designated as the Company's sole Paying Agent for payments with respect to New
Debt Securities of each series. Any other Paying Agents initially designated by
the Company for the New Debt Securities of a particular series will be named in
the applicable Prospectus Supplement. The Company may at any time designate
additional Paying Agents or rescind the designation of any Paying Agent or
approve a change in the office through which any Paying Agent acts, except that
the Company will be required to maintain a Paying Agent in each Place of Payment
for the New Debt Securities of a particular series. (Section 1002).
All moneys paid by the Company to a Paying Agent for the payment of the
principal of or any premium or interest on any New Debt Security which remain
unclaimed at the end of two years after such principal, premium or interest has
become due and payable will be repaid to the Company, and the Holder of such New
Debt Security thereafter may look only to the Company for payment thereof.
(Section 1003).
CONSOLIDATION, MERGER, AND SALE OF ASSETS
The Company may not consolidate with or merge into any other Person or
convey, transfer or lease its properties and assets substantially as an entirety
to any Person, and may not permit any Person to consolidate with or merge into
the Company or convey, transfer, or lease its properties and assets
substantially as an entirety to the Company, unless (i) the successor Person (if
any) is a corporation, partnership, trust or other entity organized and validly
existing under the laws of any domestic jurisdiction and expressly assumes the
Company's obligations on the New Debt Securities and under the Indenture, (ii)
immediately after giving effect to the transaction, no Event of Default, and no
event which, after notice or lapse of time or both, would become an Event of
Default, shall have occurred and be continuing and (iii) certain other
conditions are met. (Section 801).
11
EVENTS OF DEFAULT
Each of the following will constitute an Event of Default under the
Indenture with respect to New Debt Securities of any series: (a) failure to pay
principal of or any premium on any Debt Security of that series when due; (b)
failure to pay any interest on any New Debt Securities of that series when due,
continued for 30 days; (c) failure to deposit any sinking fund payment, when
due, in respect of any Debt Security of that series; (d) failure to perform any
other covenant of the Company in the Indenture (other than a covenant included
in the Indenture solely for the benefit of a series other than that series),
continued for 60 days after written notice has been given by the Trustee, or the
Holders of at least 10% in principal amount of the Outstanding New Debt
Securities of that series, as provided in the Indenture; provided, however, that
no notice by the Trustee to the Holders of such an occurrence shall be given
until at least 30 days after the occurrence of such failure to perform; and (e)
certain events in bankruptcy, insolvency or reorganization. (Section 501).
If an Event of Default (other than an Event of Default described in
clause (e) above) with respect to the New Debt Securities of any series at the
time Outstanding shall occur and be continuing, either the Trustee or the
Holders of at least 25% in aggregate principal amount of the Outstanding New
Debt Securities of that series by notice as provided in the Indenture may
declare the principal amount of the New Debt Securities of that series (or, in
the case of any Debt Security that is an Original Issue Discount Security or the
principal amount of which is not then determinable, such portion of the
principal amount of such Debt Security, or such other amount in lieu of such
principal amount, as may be specified in the terms of such Debt Security) to be
due and payable immediately. If an Event of Default described in clause (e)
above with respect to the New Debt Securities of any series at the time
Outstanding shall occur, the principal amount of all the New Debt Securities of
that series (or, in the case of any such Original Issue Discount Debt Security
or other Debt Security, such specified amount) will automatically, and without
any action by the Trustee or any Holder, become immediately due and payable.
After any such acceleration, but before a judgment or decree based on
acceleration, the Holders of a majority in aggregate principal amount of the
Outstanding New Debt Securities of that series may, under certain circumstances,
rescind and annul such acceleration if all Events of Default, other than the
non-payment of accelerated principal (or other specified amount), have been
cured or waived as provided in the Indenture. (Section 502). For information as
to waiver of defaults, see "Modification and Waiver".
Subject to the provisions of the Indenture relating to the duties of
the Trustee in case an Event of Default shall occur and be continuing, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request or direction of any of the Holders, unless
such Holders shall have offered to the Trustee reasonable indemnity. (Section
603). Subject to such provisions for the indemnification of the Trustee, the
Holders of a majority in principal amount of the Outstanding New Debt Securities
of any series will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred on the Trustee, with respect to the New Debt
Securities of that series. (Section 512).
No Holder of a Debt Security of any series will have any right to
institute any proceeding with respect to the Indenture, or for the appointment
of a receiver or a trustee, or for any other remedy thereunder, unless (i) such
Holder has previously given to the Trustee written notice of a continuing Event
of Default with respect to the New Debt Securities of that series, (ii) the
Holders of at least 25% in aggregate principal amount of the Outstanding New
Debt Securities of that series have made written request, and such Holder or
Holders have offered reasonable indemnity, to the Trustee to institute such
proceeding as trustee and (iii) the Trustee has failed to institute such
proceeding, and has not received from the Holders of a majority in aggregate
principal amount of the Outstanding New Debt Securities of that series a
direction inconsistent with such request, within 60 days after such notice,
request and offer. (Section 507). However, such limitations do not apply to a
suit instituted by a Holder of a Debt Security
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for the enforcement of payment of the principal of or any premium or interest on
such Debt Security on or after the applicable due date specified in such Debt
Security. (Section 508).
The Company will be required to furnish to the Trustee annually a
statement by certain of its officers as to whether or not the Company, to their
knowledge, is in default in the performance or observance of any of the terms,
provisions and conditions of the Indenture and, if so, specifying all such known
defaults. (Section 1004).
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the
Company and the Trustee with the consent of the Holders of a majority in
aggregate principal amount of the Outstanding New Debt Securities of each series
affected by such modification or amendment; provided, however, that no such
modification or amendment may, without the consent of the Holder of each
Outstanding Debt Security affected thereby, (a) change the Stated Maturity of
the principal of, or any instalment of principal of or interest on, any Debt
Security, (b) reduce the principal amount of, or any premium or interest on, any
Debt Security, (c) reduce the amount of principal of an Original Issue Discount
Security or any other Debt Security payable upon acceleration of the Maturity
thereof, (d) change the place or currency of payment of principal of, or any
premium or interest on, any Debt Security, (e) impair the right to institute
suit for the enforcement of any payment on or with respect to any Debt Security,
(f) modify the subordination provisions in a manner adverse to the Holders of
the New Debt Securities, (g) reduce the percentage in principal amount of
Outstanding New Debt Securities of any series, the consent of whose Holders is
required for modification or amendment of the Indenture, (h) reduce the
percentage in principal amount of Outstanding New Debt Securities of any series
necessary for waiver of compliance with certain provisions of the Indenture or
for waiver of certain defaults or (i) modify such provisions with respect to
modification and waiver. (Section 902). The Holders of a majority in principal
amount of the Outstanding New Debt Securities of any series may waive compliance
by the Company with certain restrictive provisions of the Indenture with respect
to such series. (Section 1008). The Holders of a majority in aggregate principal
amount of the Outstanding New Debt Securities of any series may waive any past
default under the Indenture with respect to such series, except a default in the
payment of principal, premium, or interest and certain covenants and provisions
of the Indenture which cannot be amended without the consent of the Holder of
each Outstanding Debt Security of such series affected. (Section 513).
The Indenture provides that in determining whether the Holders of the
requisite principal amount of the Outstanding New Debt Securities have given or
taken any direction, notice, consent, waiver, or other action under the
Indenture as of any date, (i) the principal amount of an Original Issue Discount
Security that will be deemed to be Outstanding will be the amount of the
principal thereof that would be due and payable as of such date upon
acceleration of the Maturity thereof to such date, (ii) if, as of such date, the
principal amount payable at the Stated Maturity of a Debt Security is not
determinable (for example, because it is based on an index), the principal
amount of such Debt Security deemed to be Outstanding as of such date will be an
amount determined in the manner prescribed for such Debt Security and (iii) the
principal amount of a Debt Security denominated in one or more foreign
currencies or currency units that will be deemed to be Outstanding will be the
U.S. dollar equivalent, determined as of such date in the manner prescribed for
such Debt Security, of the principal amount of such Debt Security (or, in the
case of a Debt Security described in clause (i) or (ii) above, of the amount
described in such clause). Certain New Debt Securities, including those for
whose payment or redemption money has been deposited or set aside in trust for
the Holders and those that have been fully defeased, as described under
"Defeasance and Covenant Defeasance--Defeasance and Discharge" below, will not
be deemed to be Outstanding. (Section 101).
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Except in certain limited circumstances, the Company will be entitled
to set any day as a record date for the purpose of determining the Holders of
Outstanding New Debt Securities of any series entitled to give or take any
direction, notice, consent, waiver, or other action under the Indenture, in the
manner and subject to the limitations provided in the Indenture. In certain
limited circumstances, the Trustee will be entitled to set a record date for
action by Holders. If a record date is set for any action to be taken by Holders
of a particular series, such action may be taken only by persons who are Holders
of Outstanding New Debt Securities of that series on the record date. To be
effective, such action must be taken by Holders of the requisite principal
amount of such New Debt Securities within a specified period following the
record date. For any particular record date, this period will be 180 days or
such shorter period as may be specified by the Company (or the Trustee, if it
set the record date), and may be shortened or lengthened (but not beyond 180
days) from time to time. (Section 104).
DEFEASANCE AND COVENANT DEFEASANCE
If and to the extent indicated in the applicable Prospectus Supplement,
the Company may elect, at its option at any time, to have the provisions of
Section 1302, relating to defeasance and discharge of indebtedness, or Section
1303, relating to defeasance of certain restrictive covenants in the Indenture,
applied to the New Debt Securities of any series, or to any specified part of a
series. (Section 1301).
DEFEASANCE AND DISCHARGE. The Indenture will provide that, upon the
Company's exercise of its option (if any) to have Section 1302 applied to any
New Debt Securities, the Company will be discharged from all its obligations
with respect to such New Debt Securities (except for certain obligations to
exchange or register the transfer of New Debt Securities, to replace stolen,
lost or mutilated New Debt Securities, to maintain paying agencies and to hold
moneys for payment in trust) upon the deposit in trust for the benefit of the
Holders of such New Debt Securities of money or U.S. Government Obligations, or
both, which, through the payment of principal and interest in respect thereof in
accordance with their terms, will provide money in an amount sufficient to pay
the principal of and any premium and interest of such New Debt Securities on the
respective Stated Maturities in accordance with the terms of the Indenture and
such New Debt Securities. Such defeasance or discharge may occur only if, among
other things, the Company has delivered to the Trustee an Opinion of Counsel to
the effect that the Company has received from, or there has been published by,
the United States Internal Revenue Service a ruling, or there has been a change
in tax law, in either case to the effect that Holders of such New Debt
Securities will not recognize gain or loss for federal income tax purposes as a
result of such deposit, defeasance, and discharge and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such deposit, defeasance and discharge were not to
occur. (Sections 1302 and 1304).
DEFEASANCE OF CERTAIN COVENANTS. The Indenture provides that, upon the
Company's exercise of its option (if any) to have Section 1303 applied to any
New Debt Securities, the Company may omit to comply with certain restrictive
covenants that may be described in the applicable Prospectus Supplement, and the
occurrence of certain Events of Default, which are described above in clause (d)
(with respect to such restrictive covenants) in the first paragraph under
"Events of Default" and any that may be described in the applicable Prospectus
Supplement, will be deemed not to be or result in an Event of Default and the
provisions of the Indenture relating to subordination (if otherwise applicable)
will cease to be effective, in each case with respect to such New Debt
Securities. The Company, in order to exercise such option, will be required to
deposit, in trust for the benefit of the Holders of such New Debt Securities,
money or U.S. Government Obligations, or both, which, through the payment of
principal and interest in respect thereof in accordance with their terms, will
provide money in an amount sufficient to pay the principal of and any premium
and interest on such New Debt Securities on the respective Stated Maturities in
accordance with the terms of the Indenture and such New Debt Securities. The
Company will also be required, among other things, to deliver to the Trustee an
Opinion of Counsel to the effect that Holders of such New Debt
14
Securities will not recognize gain or loss for federal income tax purposes as a
result of such deposit and defeasance of certain obligations and will be subject
to federal income tax on the same amount, in the same manner and at the same
times as would have been the case if such deposit and defeasance were not to
occur. In the event the Company were to exercise this option with respect to any
New Debt Securities and such New Debt Securities were declared due and payable
because of the occurrence of an Event of Default, other than one relating to the
applicable restrictive covenant, the amount of money and U.S. Government
Obligations so deposited in trust would be sufficient to pay amounts due on such
New Debt Securities at the time of their respective Stated Maturities but may
not (and generally will not) be sufficient to pay amounts due on such New Debt
Securities upon any acceleration resulting from such Event of Default. In such
case, the Company would remain liable for such payments. (Sections 1303 and
1304).
NOTICES
Notices to Holders of New Debt Securities will be given by mail to the
addresses of such Holders as they may appear in the Security Register. (Sections
101 and 106).
TITLE
The Company, the Trustee, and any agent of the Company or the Trustee
may treat the Person in whose name a Debt Security is registered as the absolute
owner thereof (whether or not such Debt Security may be overdue) for the purpose
of making payment and for all other purposes. (Section 308).
GOVERNING LAW
The Indenture and the New Debt Securities will be governed by, and
construed in accordance with, the law of the State of New York. (Section 112).
REGARDING THE TRUSTEE
The Trustee under the Indenture is The Bank of New York. The Company
maintains normal banking arrangements with The Bank of New York. The Trustee is
also trustee for Junior Subordinated Deferrable Interest Debentures, Series A,
of the Company under the Indenture. Upon the occurrence of an Event of Default
or an event which, after notice or lapse of time or both, would become an Event
of Default, the Trustee may be deemed to have a conflicting interest, for the
purposes of the Trust Indenture Act of 1939 with respect to the New Debt
Securities of any series that rank senior to such Series A Debentures. In such
case, the Trustee may be required to resign as Trustee under the Indenture. In
that event, the Company would be required to appoint a successor Trustee.
15
PLAN OF DISTRIBUTION
The Company will sell the Securities from time to time through
underwriters, dealers or agents and/or directly to other purchasers in either
negotiated or competitively bid transactions. Any Securities acquired by any
underwriters will be acquired by such underwriters for their own account and may
be resold from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price, at market prices prevailing at
the time of sale or at varying prices determined at the time of sale. The
underwriter or underwriters with respect to a particular underwritten offering
of Securities will be named in the Prospectus Supplement relating to such
offering and, if an underwriting syndicate is used, the managing underwriter or
underwriters will be set forth on the cover page of such Prospectus Supplement.
The applicable Prospectus Supplement will also set forth the purchase price of
the Securities offered and the proceeds to the Company from such sale, any
underwriting discounts and other items constituting underwriters' compensation,
any initial public offering price and any discounts or concessions allowed or
reallowed or paid to dealers and other specific terms of the particular
Securities.
Unless otherwise set forth in a Prospectus Supplement, the obligations
of the underwriters to purchase any Securities will be subject to certain
conditions precedent, and the underwriters will be obligated to purchase all of
the particular Securities offered thereby if any are purchased.
The Securities may be offered and sold by the Company directly or
through agents designated by the Company from time to time. Any agent involved
in the offer or sale of the Securities in respect of which this Prospectus is
delivered will be named in, and any commissions payable by the Company to such
agent will be set forth in, the applicable Prospectus Supplement. Unless
otherwise indicted in the applicable Prospectus Supplement, each such agent will
be acting on a reasonable-efforts basis for the period of its appointment.
Underwriters, dealers and agents that participate in the distribution
of Securities may be deemed to be underwriters and any discounts or commissions
received by them from the Company and any profit on the resale of Securities by
them may be deemed to be underwriting discounts and commissions under the
Securities Act.
Underwriters, dealers and agents may be entitled, under agreements to
be entered into with the Company, to indemnification against certain civil
liabilities, including liabilities under the Securities Act.
VALIDITY OF THE SECURITIES
The validity of the Securities offered hereby will be passed upon for
the Company by Sullivan & Cromwell, New York, New York, and for the
underwriters, agents or dealers by Brown & Wood LLP, New York, New York. On
matters of local law, those firms will rely on Robert R. Winter, Esq., Vice
President, Legal Services of the Company.
EXPERTS
The financial statements incorporated in this Prospectus by reference
to the Annual Report have been so incorporated in reliance on the reports of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
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$100,000,000
THE POTOMAC EDISON COMPANY
5% NOTES DUE NOVEMBER 1, 2006
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PROSPECTUS SUPPLEMENT
---------------------------
BANC ONE CAPITAL MARKETS, INC.
THE WILLIAMS CAPITAL GROUP, L.P.
NOVEMBER 1, 2001
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