-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MTydET2KohZkRCu0dLsKtBStr2Pf5s4JkZ8We2fuPWbIOba1KwYN7gp6B7QRtZR/ JdvZQgaFonHsR9mlt616oA== 0000950109-98-003027.txt : 19980508 0000950109-98-003027.hdr.sgml : 19980508 ACCESSION NUMBER: 0000950109-98-003027 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19980507 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: POTOMAC ELECTRIC POWER CO CENTRAL INDEX KEY: 0000079732 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 530127880 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-51241 FILM NUMBER: 98613028 BUSINESS ADDRESS: STREET 1: 1900 PENNSYLVANIA AVE NW STREET 2: C/O M T HOWARD RM 841 CITY: WASHINGTON STATE: DC ZIP: 20068 BUSINESS PHONE: 2028722456 S-3/A 1 AMENDMENT #1 TO FORM 2-3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 1998 REGISTRATION NO. 333-51241 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- POTOMAC ELECTRIC POWER DISTRICT OF COLUMBIA AND 53-0127880 COMPANY VIRGINIA NOT APPLICABLE POTOMAC ELECTRIC POWER DELAWARE (I.R.S. EMPLOYER COMPANY TRUST I (STATE OR OTHER IDENTIFICATION NO.) (EXACT NAME OF ISSUER AS JURISDICTION OF SPECIFIED IN ITS CHARTER) INCORPORATION OR ORGANIZATION) -------------- 1900 PENNSYLVANIA AVENUE, N.W. WASHINGTON, D.C. 20068 (202) 872-2000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF PRINCIPAL EXECUTIVE OFFICES) -------------- 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 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) -------------- COPIES TO: D. MICHAEL LEFEVER, ESQ. VINCENT J. PISANO, ESQ. COVINGTON & BURLING SKADDEN, ARPS, SLATE, 1201 PENNSYLVANIA AVENUE, N.W. MEAGHER & FLOM LLP WASHINGTON, D.C. 20004 919 THIRD AVENUE (202) 662-6000 NEW YORK, NY 10022 (212) 735-3000 -------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to time after the effective date of this Registration Statement. -------------- If the only securities being registered on this Form are to be offered pursuant to dividend or interest reinvestment plans, please check the following box. [_] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, please check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] -------------- THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED IN THIS PRELIMINARY PROSPECTUS SUPPLEMENT IS SUBJECT TO + +COMPLETION OR AMENDMENT. THIS PRELIMINARY PROSPECTUS SUPPLEMENT AND THE + +ACCOMPANYING PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE + +SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS SUPPLEMENT DATED MAY 7, 1998 PROSPECTUS SUPPLEMENT (TO PROSPECTUS DATED , 1998) 5,000,000 PREFERRED SECURITIES POTOMAC ELECTRIC POWER COMPANY TRUST I % TRUST ORIGINATED PREFERRED SECURITIESSM ("TOPRSSM") (LIQUIDATION AMOUNT $25 PER PREFERRED SECURITY) FULLY AND UNCONDITIONALLY GUARANTEED BY POTOMAC ELECTRIC POWER COMPANY -------------- The % Trust Originated Preferred SecuritiesSM (the "TOPrSSM" or the "Preferred Securities") offered hereby constitute preferred securities of, and represent undivided preferred beneficial interests in the assets of, Potomac Electric Power Company Trust I, a statutory business trust formed under the laws of the State of Delaware (the "Trust"). Potomac Electric Power Company, a District of Columbia and Virginia corporation ("PEPCO"), will own all of the common securities representing undivided beneficial interests in the assets of the Trust (the "Common Securities" and, together with the Preferred Securities, the "Trust Securities"). The Trust exists for the sole purpose of issuing the Trust Securities and investing the proceeds thereof in an equivalent amount of % Junior Subordinated Deferrable Interest Debentures due 2038 (the "Junior Subordinated Debentures") of PEPCO. The Junior Subordinated Debentures will mature on , 2038 (the "Stated Maturity"). (continued on next page) -------------- SEE "RISK FACTORS" BEGINNING ON PAGE S-4 OF THIS PROSPECTUS SUPPLEMENT FOR CERTAIN INFORMATION RELEVANT TO AN INVESTMENT IN THE PREFERRED SECURITIES, INCLUDING THE PERIOD AND CIRCUMSTANCES DURING AND UNDER WHICH PAYMENTS OF DISTRIBUTIONS ON THE PREFERRED SECURITIES MAY BE DEFERRED AND THE RELATED UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF SUCH DEFERRAL. Application will be made to list the Preferred Securities on the New York Stock Exchange (the "NYSE"). Trading of the Preferred Securities on the NYSE is expected to commence within a 30-day period after the initial delivery of the Preferred Securities. See "Underwriting." -------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO THE PRICE TO PUBLIC(1) COMMISSION(2) TRUST(3)(4) - ------------------------------------------------------------------------------- Per Preferred Security....... $25 (3) $25 - ------------------------------------------------------------------------------- Total........................ $125,000,000 (3) $125,000,000
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Plus accrued distributions, if any, from , 1998. (2) The Trust and PEPCO have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (3) In view of the fact that the proceeds of the sale of the Preferred Securities will be invested in the Junior Subordinated Debentures, PEPCO has agreed to pay to the Underwriters as compensation (the "Underwriters' Compensation") for their arranging the investment therein of such proceeds $ per Preferred Security ($ in the aggregate). See "Underwriting." (4) Before deducting expenses of the offering which are payable by PEPCO estimated at $350,000. -------------- The Preferred Securities offered hereby are offered severally by the Underwriters, as specified herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of the Preferred Securities, which will be made only in book-entry form through the facilities of The Depository Trust Company, will occur on or about , 1998. -------------- MERRILL LYNCH & CO. A.G. EDWARDS & SONS, INC. PAINEWEBBER INCORPORATED PRUDENTIAL SECURITIES INCORPORATED SALOMON SMITH BARNEY -------------- The date of this Prospectus Supplement is , 1998. (SM)"Trust Originated Preferred Securities" and "TOPrS" are service marks of Merrill Lynch & Co. (Continued from previous page) The Junior Subordinated Debentures will be unsecured obligations of PEPCO and will be subordinate and junior in right of payment to certain other indebtedness of PEPCO, as described herein. Upon an event of default under the Declaration (as defined herein), the holders of Preferred Securities will have a preference over the holders of the Common Securities with respect to distributions and payments upon redemption, liquidation and otherwise. The Preferred Securities will be represented by one or more Global Certificates (as defined herein) registered in the name of the nominee of The Depository Trust Company ("DTC"), and interests in the Preferred Securities will be shown on, and transfers thereof will be effected only through, records maintained by DTC and its participants. Except as otherwise described herein, Preferred Securities in certificated form will not be issued. Settlement for the Preferred Securities will be made in immediately available funds. The Preferred Securities will trade in DTC's Same-Day Funds Settlement System, and secondary market trading activity for the Preferred Securities will therefore settle in immediately available funds. See "Description of the Preferred Securities--Book-Entry Only Issuance--The Depository Trust Company." Holders of the Preferred Securities are entitled to receive cumulative cash distributions at an annual rate of % of the liquidation amount of $25 per Preferred Security, accruing from the date of original issuance and payable quarterly in arrears on March 1, June 1, September 1 and December 1 of each year, commencing September 1, 1998. The payment of distributions out of moneys held by the Trust and payments on liquidation of the Trust or the redemption of Preferred Securities are guaranteed by PEPCO to the extent described herein and under "Description of the Preferred Securities Guarantee" in the accompanying Prospectus (the "Guarantee"). The Guarantee covers payments of distributions and other payments on the Preferred Securities only if and to the extent that the Trust has funds available therefor, which will not be the case unless PEPCO has made a payment of principal or interest on the Junior Subordinated Debentures held by the Trust as its sole asset. The Guarantee, when taken together with PEPCO's obligations under the Junior Subordinated Debentures and the Indenture (as defined herein) and its obligations under the Declaration, including its obligation to pay costs, expenses, debts and liabilities of the Trust (other than with respect to the Trust Securities), provides a full and unconditional guarantee on a subordinated basis of amounts payable on the Preferred Securities. See "Risk Factors--Rights Under the Guarantee" herein. The obligations of PEPCO under the Guarantee are subordinate and junior in right of payment to all other liabilities of PEPCO (except those made pari passu or subordinate by their terms) and rank pari passu with the most senior preferred or preference stock, if any, issued from time to time by PEPCO. The obligations of PEPCO under the Junior Subordinated Debentures are subordinate and junior in right of payment to all present and future Senior Indebtedness and Other Financial Obligations (each as defined herein) of PEPCO, which aggregated approximately $2.3 billion at December 31, 1997, and rank pari passu with PEPCO's obligations to its other general unsecured creditors. The Junior Subordinated Debentures purchased by the Trust may be subsequently distributed pro rata to holders of the Preferred Securities and Common Securities in connection with the liquidation of the Trust. The distribution rate and the distribution payment date and other payment dates for the Preferred Securities will correspond to the interest rate and interest payment date and other payment dates on the Junior Subordinated Debentures, which will be the sole assets of the Trust. As a result, if principal or interest is not paid on the Junior Subordinated Debentures, no amounts will be paid on the Preferred Securities. If PEPCO does not make principal or interest payments and other payments on the Junior Subordinated Debentures, the Trust will not have sufficient funds to make distributions and other payments on the Preferred Securities. In such event, the Guarantee will not apply to such distributions and other payments until the Trust has sufficient funds available therefor. So long as PEPCO shall not be in default in the payment of interest on the Junior Subordinated Debentures, PEPCO has the right to defer payments of interest on the Junior Subordinated Debentures by extending from time to time the interest payment period on the Junior Subordinated Debentures for up to 20 consecutive quarters (each, an "Extension Period"), provided that an Extension Period may not extend beyond the Stated Maturity of the Junior Subordinated Debentures. If interest payments are so deferred, distributions on the Preferred Securities S-2 correspondingly will be deferred. During such Extension Period, interest on the Junior Subordinated Debentures will continue to accrue, together with interest thereon (to the extent permitted by applicable law) at an annual rate of % per annum, compounded quarterly, and holders of Preferred Securities will be required to include such accrued amounts in their gross income for United States federal income tax purposes in advance of receipt of the cash distributions with respect to such deferred interest. See "United States Federal Income Taxation--Interest Income and Original Issue Discount." There can be multiple Extension Periods of varying lengths throughout the term of the Junior Subordinated Debentures. See "Description of the Junior Subordinated Debentures--Option to Extend Interest Payment Period" and "Risk Factors--Option to Extend Interest Payment Period." The Trust Securities will be subject to mandatory redemption (i) in whole but not in part, on repayment of the Junior Subordinated Debentures at Stated Maturity, (ii) in whole or in part, on or after , 2003, contemporaneously with the optional prepayment by PEPCO of an equivalent amount of the Junior Subordinated Debentures and (iii) in whole but not in part, at any time prior to , 2003, contemporaneously with the optional prepayment of the Junior Subordinated Debentures within 90 days after the occurrence of a Tax Event (as defined herein), in each case at a redemption price of $25 per Trust Security, plus accrued and unpaid distributions thereon to the date of payment. The Junior Subordinated Debentures will be prepayable prior to the Stated Maturity at the option of PEPCO (i) in whole or in part, from time to time, on or after , 2003, or (ii) in whole but not in part, at any time prior to , 2003, within 90 days after the occurrence of a Tax Event, in either case at a prepayment price equal to 100% of the principal amount thereof (the "Prepayment Price"), plus accrued and unpaid interest thereon to the date of prepayment. See "Description of the Junior Subordinated Debentures--Optional Prepayment." PEPCO will have the right at any time to liquidate the Trust and cause the Junior Subordinated Debentures to be distributed to the holders of the Trust Securities. PEPCO has no present intention to take such action. If the Junior Subordinated Debentures are distributed to the holders of the Preferred Securities, PEPCO will use its best efforts to have the Junior Subordinated Debentures listed on the NYSE or on such other exchange as the Preferred Securities are then listed. See "Description of the Preferred Securities-- Distribution of the Junior Subordinated Debentures" and "Description of the Junior Subordinated Debentures." In the event of the involuntary or voluntary dissolution, winding-up or termination of the Trust, the holders of the Preferred Securities will be entitled to receive for each Preferred Security a liquidation amount of $25, plus accrued and unpaid distributions thereon to the date of payment, unless, in connection therewith, the Junior Subordinated Debentures are distributed to the holders of the Preferred Securities. See "Description of the Preferred Securities--Liquidation Distribution Upon Dissolution." CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE PREFERRED SECURITIES. SUCH TRANSACTIONS MAY INCLUDE STABILIZING TRANSACTIONS, THE PURCHASE OF PREFERRED SECURITIES TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." The information contained in this Prospectus Supplement supplements, and should be read in conjunction with, the information contained in the accompanying Prospectus. S-3 RISK FACTORS Prospective purchasers of Preferred Securities should carefully review the information contained elsewhere in this Prospectus Supplement and in the accompanying Prospectus and should particularly consider the following matters. RANKING OF SUBORDINATE OBLIGATIONS UNDER THE GUARANTEE AND JUNIOR SUBORDINATED DEBENTURES PEPCO's obligations under the Guarantee are unsecured and rank subordinate and junior in right of payment to all other liabilities of PEPCO (except those made pari passu or subordinate by their terms) and rank pari passu with the most senior preferred or preference stock, if any, issued from time to time by PEPCO. The obligations of PEPCO under the Junior Subordinated Debentures are subordinate and junior in right of payment to all present and future Senior Indebtedness and Other Financial Obligations of PEPCO and rank pari passu with PEPCO's obligations to its other general unsecured creditors. No payment may be made of the principal or interest on the Junior Subordinated Debentures, or in respect of any redemption, retirement, purchase or other acquisition of any of the Junior Subordinated Debentures, at any time when (i) there is a default in the payment of the principal of, premium, if any, interest on or otherwise in respect of any Senior Indebtedness, whether at maturity or at a date fixed for prepayment or by declaration or otherwise, or (ii) any event of default with respect to any Senior Indebtedness has occurred and is continuing, or would occur as a result of such payment on the Junior Subordinated Debentures or any redemption, retirement, purchase or other acquisition of any of the Junior Subordinated Debentures, permitting the holders of such Senior Indebtedness (or a trustee on behalf of the holders thereof) to accelerate the maturity thereof. As of December 31, 1997, Senior Indebtedness and Other Financial Obligations of PEPCO aggregated approximately $2.3 billion. There are no terms in the Preferred Securities, the Junior Subordinated Debentures or the Guarantee that limit PEPCO's ability to incur additional indebtedness, including indebtedness which ranks senior to the Junior Subordinated Debentures and the Guarantee. See "Description of the Preferred Securities Guarantee--Status of the Preferred Securities Guarantee" and "Description of the Junior Subordinated Debentures" in the accompanying Prospectus, and "Description of the Junior Subordinated Debentures--Subordination" herein. RIGHTS UNDER THE GUARANTEE The Guarantee will be qualified as an indenture under the Trust Indenture Act (as defined herein). The Bank of New York will act as indenture trustee under the Guarantee for the purposes of compliance with the provisions of the Trust Indenture Act (the "Guarantee Trustee"). The Guarantee Trustee will hold the Guarantee for the benefit of the holders of the Preferred Securities. The Guarantee guarantees to the holders of the Preferred Securities the payment by PEPCO of (i) any accrued and unpaid distributions that are required to be paid on the Preferred Securities, to the extent the Trust has funds available therefor, (ii) the redemption price and all accrued and unpaid distributions to the date of payment with respect to Preferred Securities called for redemption by the Trust, to the extent the Trust has funds available therefor, and (iii) upon a voluntary or involuntary dissolution, winding-up or termination of the Trust (other than in connection with the distribution of Junior Subordinated Debentures to the holders of Preferred Securities or the redemption of all the Preferred Securities), the lesser of (a) the aggregate liquidation amount and all accrued and unpaid distributions on the Preferred Securities to the date of the payment, to the extent the Trust has funds available therefor and (b) the amount of assets of the Trust remaining available for distribution to holders of the Preferred Securities in liquidation of the Trust. The holders of a majority in liquidation amount of the Preferred Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee or to direct the exercise of any trust or power conferred upon the Guarantee Trustee under the Guarantee. Notwithstanding the foregoing, any holder of Preferred Securities may institute a legal proceeding directly against PEPCO to enforce the Guarantee Trustee's rights and the obligations of PEPCO under the Guarantee without first instituting a legal proceeding against the Trust, the Guarantee Trustee or any other person or entity. If PEPCO were to default on its obligation to pay amounts payable on the Junior Subordinated Debentures, the Trust would lack available funds for the payment of distributions or S-4 amounts payable on redemption of the Preferred Securities and, in such event, holders of the Preferred Securities would not be able to rely upon the Guarantee for payment of such amounts. Instead, each holder of the Preferred Securities would rely on the enforcement (1) by the Institutional Trustee (as defined herein) of its rights as registered holder of the Junior Subordinated Debentures against PEPCO pursuant to the terms of the Indenture and the Junior Subordinated Debentures or (2) by such holder of its right against PEPCO to enforce payments on the Junior Subordinated Debentures. See "Description of the Preferred Securities Guarantee" and "Description of the Junior Subordinated Debentures" in the accompanying Prospectus. The Declaration provides that each holder of Preferred Securities, by acceptance thereof, agrees to the provisions of the Guarantee, including the subordination provisions thereof, and of the Indenture. ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF PREFERRED SECURITIES If a Declaration Event of Default (as defined herein) occurs and is continuing, then the holders of Preferred Securities would rely on the enforcement by the Institutional Trustee, as a holder of the Junior Subordinated Debentures, of its rights against PEPCO. In addition, the holders of a majority in liquidation amount of the Preferred Securities will have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Institutional Trustee or to direct the exercise of any trust or power conferred upon the Institutional Trustee under the Declaration, including the right to direct the Institutional Trustee to exercise the remedies available to it as a holder of the Junior Subordinated Debentures. If the Institutional Trustee fails to enforce its rights under the Junior Subordinated Debentures, after a holder of Preferred Securities has made a written request, such holder of Preferred Securities may institute a legal proceeding directly against PEPCO to enforce the Institutional Trustee's rights under the Junior Subordinated Debentures without first instituting any legal proceeding against the Institutional Trustee or any other person or entity. Notwithstanding the foregoing, if a Declaration Event of Default has occurred and is continuing, and such event is attributable to the failure of PEPCO to pay interest or principal on the Junior Subordinated Debentures on the date such interest or principal is otherwise payable (or in the case of redemption, on the redemption date), then a holder of Preferred Securities may directly institute a proceeding for enforcement of payment to such holder of the principal of or interest on the Junior Subordinated Debentures having a principal amount equal to the aggregate liquidation amount of the Preferred Securities of such holder (a "Direct Action"). Except as provided in the Guarantee, the holders of Preferred Securities will not be able to exercise directly any other remedy available to the holders of the Junior Subordinated Debentures. See "Description of the Preferred Securities--Declaration Events of Default." OPTION TO EXTEND INTEREST PAYMENT PERIOD So long as PEPCO shall not be in default in the payment of interest on the Junior Subordinated Debentures, PEPCO has the right under the Indenture to defer payments of interest on the Junior Subordinated Debentures by extending from time to time the interest payment period on the Junior Subordinated Debentures. As a consequence of such an extension, quarterly distributions on the Preferred Securities would be deferred during any such Extension Period (but would continue to accrue, despite such deferral, with interest thereon at an annual rate of % per annum, compounded quarterly). Any such extension of the interest payment period for the Junior Subordinated Debentures may continue for up to 20 consecutive quarters, but may not extend beyond the Stated Maturity of the Junior Subordinated Debentures. During any Extension Period, (i) PEPCO shall not declare or pay any dividend on, make any distribution with respect to, or redeem, purchase or acquire or make a liquidation payment with respect to, any of its capital stock (other than (a) purchases or acquisitions of shares of the common stock, par value $1.00 per share, of PEPCO (the "PEPCO Common Stock"), in connection with the satisfaction by PEPCO of its obligations under any employee benefit plans or any other contractual obligation of PEPCO (other than a contractual obligation ranking pari passu with or junior to the Junior Subordinated Debentures) or (b) the purchase of fractional interests in shares of PEPCO's capital stock pursuant to the conversion or exchange provisions of such PEPCO capital stock or the security being converted or exchanged), (ii) PEPCO shall not make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by PEPCO that rank pari passu with or junior to the Junior Subordinated Debentures and (iii) PEPCO shall not make any guarantee payments with respect to the foregoing (other than pursuant to the Guarantee). Prior to the termination of any such Extension Period, PEPCO may further defer payments by extending the interest payment S-5 period; provided that such Extension Period, including all such previous and further extensions thereof, may not exceed 20 consecutive quarters or extend beyond the Stated Maturity of the Junior Subordinated Debentures. Upon the termination of any Extension Period and the payment of all amounts then due, PEPCO may commence a new Extension Period. See "Description of the Preferred Securities--Distributions" and "Description of the Junior Subordinated Debentures--Option to Extend Interest Payment Period." Should PEPCO exercise its right to defer payments of interest by extending the interest payment period, each holder of Preferred Securities will be required to accrue income (as original issue discount ("OID")) in respect of the deferred stated interest allocable to its Preferred Securities for United States federal income tax purposes, which will be allocated but not distributed to holders of record of Preferred Securities. As a result, each such holder of Preferred Securities will recognize income for United States federal income tax purposes in advance of the receipt of cash and will not receive the cash from the Trust related to such income if such holder disposes of its Preferred Securities prior to the record date for the date on which distributions of such amounts are made. PEPCO has no current intention of exercising its right to defer payments of interest by extending the interest payment period on the Junior Subordinated Debentures. However, should PEPCO determine to exercise such right in the future, the market price of the Preferred Securities is likely to be affected. A holder that disposes of its Preferred Securities during an Extension Period, therefore, might not receive the same return on its investment as a holder that continues to hold its Preferred Securities. In addition, as a result of the existence of PEPCO's right to defer interest payments, the market price of the Preferred Securities (which represent an undivided beneficial interest in the Junior Subordinated Debentures) may be more volatile than other securities on which OID accrues. See "United States Federal Income Taxation--Sales of Preferred Securities." DISTRIBUTION OR REDEMPTION OF THE JUNIOR SUBORDINATED DEBENTURES PEPCO will have the right at any time to terminate the Trust and, after satisfaction of claims of creditors as provided by applicable law, to cause the Junior Subordinated Debentures to be distributed to the holders of the Trust Securities. In certain circumstances, PEPCO also will have the right to redeem the Junior Subordinated Debentures, in whole or in part, in which event the Trust is obligated redeem the Trust Securities on a pro rata basis to the same extent as the Junior Subordinated Debentures are redeemed by PEPCO. Under current United States federal income tax law, a distribution of Junior Subordinated Debentures upon the liquidation of the Trust would not be a taxable event to holders of the Preferred Securities. If, however, the Trust is characterized for United States federal income tax purposes as an association taxable as a corporation at the time of dissolution of the Trust, the distribution of the Junior Subordinated Debentures may constitute a taxable event to holders of Preferred Securities. A liquidation of the Trust in which holders of the Preferred Securities receive cash would be a taxable event to such holders. See "United States Federal Income Taxation--Receipt of Junior Subordinated Debentures or Cash Upon Liquidation of the Trust." There can be no assurance as to the market prices of the Junior Subordinated Debentures that may be distributed in exchange for Preferred Securities if a liquidation of the Trust were to occur. Accordingly, the Junior Subordinated Debentures may trade at a discount to the price that the investor paid to purchase the Preferred Securities offered hereby. Because holders of Preferred Securities may receive Junior Subordinated Debentures, prospective purchasers of Preferred Securities are also making an investment decision with regard to the Junior Subordinated Debentures and should carefully review all the information regarding the Junior Subordinated Debentures contained herein and in the accompanying Prospectus. See "Description of the Preferred Securities-- Distribution of the Junior Subordinated Debentures" herein and "Description of the Junior Subordinated Debentures" herein and in the accompanying Prospectus. S-6 LIMITED VOTING RIGHTS Holders of Preferred Securities will have only limited voting rights and will not be entitled to vote to appoint, remove or replace, or to increase or decrease the number of, Trustees (as defined herein) of the Trust, which voting rights are vested exclusively in PEPCO, as the holder of the Common Securities. See "Description of the Preferred Securities--Voting Rights." TRADING PRICE The Preferred Securities may trade at a price that does not fully reflect the value of accrued but unpaid interest with respect to the underlying Junior Subordinated Debentures. A holder who uses the accrual method of accounting for tax purposes (and a cash method holder, if the Junior Subordinated Debentures are treated as issued with OID) and who disposes of his Preferred Securities between record dates for payments of distributions thereon will be required to include accrued but unpaid interest on the Junior Subordinated Debentures through the date of disposition in income as ordinary income (i.e., interest or, possibly, OID), and to add such amount to his adjusted tax basis in his pro rata share of the underlying Junior Subordinated Debentures deemed disposed of. To the extent the selling price is less than the holder's adjusted tax basis (which will include all accrued but unpaid interest), a holder will recognize a capital loss. Subject to certain limited exceptions, capital losses cannot be applied to offset ordinary income for United States federal income tax purposes. See "United States Federal Income Taxation-- Interest Income and Original Issue Discount" and "--Sales of Preferred Securities." LACK OF ESTABLISHED TRADING MARKET FOR PREFERRED SECURITIES The Preferred Securities constitute a new issue of securities with no established trading market. Application will be made to list the Preferred Securities on the NYSE. Trading of the Preferred Securities on the NYSE is expected to commence within a 30-day period after the initial delivery of the Preferred Securities. There can be no assurance that an active market for the Preferred Securities will develop or be sustained in the future on such exchange. Although the Underwriters have indicated to PEPCO and the Trust that they intend to make a market in the Preferred Securities, as permitted by applicable laws and regulations prior to the commencement of trading on the NYSE, they are not obligated to do so and may discontinue any such marketmaking at any time without notice. Accordingly, no assurance can be given as to the liquidity of, or trading markets for, the Preferred Securities. CONSEQUENCES OF HIGHLY LEVERAGED TRANSACTION The Indenture does not contain provisions that afford holders of the Junior Subordinated Debentures protection in the event of a highly leveraged transaction, including a change of control, or other similar transactions involving PEPCO that may adversely affect such holders. S-7 POTOMAC ELECTRIC POWER COMPANY GENERAL Potomac Electric Power Company, a District of Columbia and Virginia corporation, is engaged in the generation, transmission, distribution and sale of electric energy in the Washington, D.C. metropolitan area, including the District of Columbia and major portions of Montgomery and Prince George's Counties in Maryland. It also supplies, at wholesale, electric energy to the Southern Maryland Electric Cooperative, Inc., which distributes electricity in Calvert, Charles, Prince George's and St. Mary's Counties in southern Maryland. PEPCO's wholly-owned nonutility subsidiary, Potomac Capital Investment Corporation ("PCI"), was organized in late 1983 to provide a vehicle to conduct PEPCO's ongoing nonutility business and investment programs. PCI's principal investments consist of equipment leases and marketable securities, primarily preferred stock with mandatory redemption features, and real estate. PCI is also involved with activities which provide telecommunication and energy services. The mailing address of PEPCO's executive offices is 1900 Pennsylvania Avenue, N.W., Washington, D.C. 20068, and its telephone number is (202) 872-2000. THE TRUST The Trust is a statutory business trust formed under the Delaware Business Trust Act (the "Business Trust Act") pursuant to (i) a declaration of trust, dated as of April 24, 1998, executed by PEPCO, as sponsor (the "Sponsor"), and the trustees of the Trust (the "Trustees") and (ii) the filing of a certificate of trust with the Secretary of State of the State of Delaware on April 24, 1998. Such declaration will be amended and restated in its entirety (as so amended and restated, the "Declaration"), substantially in the form filed as an exhibit to the Registration Statement of which this Prospectus Supplement and the accompanying Prospectus form a part. The Declaration will be qualified as an indenture under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). Upon issuance of the Preferred Securities, the purchasers thereof will own all of the outstanding Preferred Securities. See "Description of the Preferred Securities--Book-Entry Only Issuance--The Depository Trust Company." PEPCO will directly or indirectly acquire Common Securities in an aggregate liquidation amount equal to at least three percent of the total capital of the Trust. The Trust exists for the exclusive purposes of (i) issuing the Trust Securities representing undivided beneficial interests in the assets of the Trust, (ii) investing the gross proceeds from the sale of the Trust Securities in the Junior Subordinated Debentures and (iii) engaging in only those other activities necessary or incidental thereto. Pursuant to the Declaration, the number of Trustees will initially be five. Three of the Trustees (the "Regular Trustees") will be persons who are employees or officers of PEPCO. The fourth trustee will be a financial institution that is unaffiliated with PEPCO, which will serve as the institutional trustee under the Declaration and as indenture trustee for the purposes of compliance with the provisions of the Trust Indenture Act (the "Institutional Trustee"). Initially, The Bank of New York will be the Institutional Trustee. For purposes of compliance with the provisions of the Trust Indenture Act, The Bank of New York also will act as the Guarantee Trustee and as Debt Trustee (as defined herein) under the Indenture. The fifth trustee will be an entity that maintains its principal place of business in the state of Delaware (the "Delaware Trustee"). Initially, The Bank of New York (Delaware), an affiliate of the Institutional Trustee, will act as Delaware Trustee. See "Description of the Preferred Securities Guarantee" in the accompanying Prospectus and "Description of the Preferred Securities-- Voting Rights" herein. The Institutional Trustee will hold title to the Junior Subordinated Debentures for the benefit of the holders of the Trust Securities and will have the power to exercise all rights, powers and privileges under the Indenture of the holder of the Junior Subordinated Debentures. In addition, the Institutional Trustee will maintain exclusive control of a segregated, non-interest bearing bank account (the "Institutional Account") that will hold, for the S-8 benefit of the holders of the Trust Securities, all payments made by PEPCO in respect of the Junior Subordinated Debentures. The Institutional Trustee will make payments of distributions and payments on liquidation, redemption and otherwise to the holders of the Trust Securities out of funds from the Institutional Account. The Guarantee Trustee will hold the Guarantee for the benefit of the holders of the Preferred Securities. PEPCO, as the holder of all the Common Securities, will have the right to appoint, remove or replace any Trustee and to increase or decrease the number of Trustees. PEPCO will pay all fees and expenses related to the Trust and of the offering of the Trust Securities. The rights of the holders of the Preferred Securities, including economic rights, rights to information and voting rights, are set forth in the Declaration, the Business Trust Act and the Trust Indenture Act. See "Description of the Preferred Securities." S-9 SELECTED FINANCIAL INFORMATION The following is a selection of certain consolidated financial information of the Company which was derived from, and is qualified in its entirety by, the audited consolidated financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1997, which is available as described herein under "Incorporation of Certain Documents by Reference."
12 MONTHS ENDED -------------------------------------------- DEC. 31, DEC. 31, DEC. 31, 1997 1996 1995 -------------- -------------- -------------- (THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA) Income Statement Data: Total Revenue.................... $ 1,863,510 $ 2,010,311 $ 1,876,102 Operating Revenue................ 1,810,829 1,834,857 1,822,432 Net Income....................... 181,830 236,960 94,391 Earnings for Common Stock........ 165,251 220,356 77,540 Basic Earnings Per Share of Common Stock.................... 1.39 1.86 .65 Diluted Earnings Per Share of Common Stock.................... 1.38 1.82 .65 Balance Sheet Data at end of period: Property and Plant, net.......... $ 4,486,334 $ 4,423,249 $ 4,400,311
DEC. 31, 1997 ----------------- AMOUNT RATIO ----------- ----- (THOUSANDS) Capital Structure (excluding nonutility subsidiary debt and current maturities): Long-Term Debt............................................ $1,901,486 47.2% Preferred Stock........................................... 266,290 6.6 Common Equity............................................. 1,863,028 46.2 ---------- ----- Total Capitalization..................................... $4,030,804 100.0% ========== Parent Company Long-Term Debt and Preferred Stock Redemption Due in One Year and Short-Term Debt............ $ 183,429 ==========
RATIOS OF EARNINGS TO FIXED CHARGES
12 MONTHS ENDED -------------------------------------------- DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Parent company only................ 2.54 3.08 3.05 3.23 3.20 Fully consolidated................. 2.03 2.24 1.52 2.37 2.31
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. S-10 ACCOUNTING TREATMENT The financial statements of the Trust will be consolidated into PEPCO's consolidated financial statements. The Preferred Securities will be presented as a separate line item in the consolidated balance sheets of PEPCO entitled "Company obligated mandatorily redeemable preferred securities of subsidiary holding solely parent debentures". PEPCO will record distributions payable on the Preferred Securities as an expense in the consolidated statements of income. The financial statement footnotes of PEPCO will reflect that the sole asset of the Trust will be $128,865,980 principal amount of the Junior Subordinated Debentures, bearing interest at % and maturing on , 2038. All future reports filed by PEPCO under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), will present information regarding the Trust in the manner described above. In addition, a footnote to PEPCO's audited financial statements will be added to reflect that (i) all of the Common Securities of the Trust are owned by PEPCO, (ii) the sole assets of the Trust are the Junior Subordinated Debentures and (iii) the Guarantee, when taken together with PEPCO's obligations under the Junior Subordinated Debentures and the Indenture and its obligations under the Declaration, including its obligations to pay costs, expenses, debts and liabilities of the Trust (other than with respect to the Trust Securities), provide a full and unconditional guarantee on a subordinated basis of amounts payable on the Preferred Securities. USE OF PROCEEDS The Trust will use the proceeds of the sale of the Trust Securities to acquire Junior Subordinated Debentures from PEPCO. PEPCO intends to apply the net proceeds from the sale of the Junior Subordinated Debentures to redeem the following series of its Serial Preferred Stock: (i) the $3.82 Series of 1969, having an aggregate redemption amount of $25,500,000, (ii) the $3.37 Series of 1987, having an aggregate redemption amount of $42,865,856 and (iii) the $3.89 Series of 1991, having an aggregate redemption amount of $53,890,000. The remaining proceeds will be used to refund short-term debt incurred primarily to finance, on a temporary basis, PEPCO's utility construction program and operations. Proceeds may be temporarily placed in short-term investments pending the application of the proceeds as stated above. S-11 DESCRIPTION OF THE PREFERRED SECURITIES The Preferred Securities will be issued pursuant to the terms of the Declaration. The Declaration will be qualified as an indenture under the Trust Indenture Act. The Bank of New York, as the Institutional Trustee, will act as indenture trustee for the Preferred Securities under the Declaration for purposes of compliance with the provisions of the Trust Indenture Act. The terms of the Preferred Securities will include those stated in the Declaration and those made part of the Declaration by the Trust Indenture Act. The following summary of the material terms and provisions of the Preferred Securities supplements and, to the extent inconsistent, replaces the description set forth under the caption "Description of the Preferred Securities" in the accompanying Prospectus. This summary, which describes the material provisions of the Preferred Securities, does not purport to be complete and is subject to, and qualified in its entirety by reference to, the Declaration, a copy of which is filed as an exhibit to the Registration Statement of which this Prospectus Supplement is a part, the Business Trust Act and the Trust Indenture Act. GENERAL The Declaration authorizes the Regular Trustees to issue Trust Securities on behalf of the Trust. All Trust Securities will represent undivided beneficial interests in the assets of the Trust. All of the Common Securities will be owned, directly or indirectly, by PEPCO. The Common Securities rank pari passu, and payments will be made thereon on a pro rata basis, with the Preferred Securities, except that upon the occurrence and during the continuance of a Declaration Event of Default, the rights of the holders of the Common Securities to receive distributions and payments upon liquidation, redemption and otherwise will be subordinated to the rights of the holders of the Preferred Securities. The Declaration does not permit the issuance by the Trust of any securities other than the Trust Securities or the incurrence by the Trust of any indebtedness. Pursuant to the Declaration, the Institutional Trustee will own the Junior Subordinated Debentures purchased by the Trust for the benefit of the holders of the Trust Securities. The payment of distributions out of money held by the Trust, and payments upon redemption of the Preferred Securities or liquidation of the Trust, are guaranteed by PEPCO to the extent described under "Description of the Preferred Securities Guarantee" in the accompanying Prospectus. The Guarantee will be held by The Bank of New York, as Guarantee Trustee, for the benefit of the holders of the Preferred Securities. The Guarantee does not cover payment of distributions or other payments when the Trust does not have sufficient funds available to pay such distributions or other payments. In such event, the remedy of a holder of Preferred Securities is to vote to direct the Institutional Trustee to enforce the Institutional Trustee's rights under the Junior Subordinated Debentures, except that, in the circumstances in which there is a default in the payment of distributions or other payments, including when the Trust does not have sufficient available funds to pay such distributions or other payments a holder may take Direct Action. See "Declaration Events of Default" and "Voting Rights" below. DISTRIBUTIONS Distributions on the Preferred Securities will be fixed at a rate per annum of % (the "Coupon Rate") of the stated liquidation amount of $25 per Preferred Security (equivalent to $ per annum). Distributions in arrears for more than one quarter will bear interest thereon (to the extent permitted by applicable law), compounded quarterly, at a rate equal to the Coupon Rate. The amount of distributions payable for any full quarterly period will be computed on the basis of a 360-day year of twelve 30-day months and for any shorter period will be computed on the basis of the actual number of days elapsed. Distributions on the Preferred Securities will be cumulative, will accrue from , 1998, and, except during an Extension Period, will be payable quarterly in arrears on March 1, June 1, September 1 and December 1 of each year, commencing September 1, 1998, when, as and if available for payment. The initial distribution will be $ per Preferred Security and will be payable on September 1, 1998. So long as PEPCO shall not be in default in the payment of interest on the Junior Subordinated Debentures, PEPCO has the right under the Indenture to defer payments of interest on the Junior Subordinated Debentures by extending from time to time the interest payment period on the Junior Subordinated Debentures, which, if S-12 exercised, will correspondingly defer quarterly distributions on the Preferred Securities. Any such extension of the interest payment period for the Junior Subordinated Debentures may continue for up to 20 consecutive quarters, but may not extend beyond the Stated Maturity of the Junior Subordinated Debentures. See "Description of Junior Subordinated Debentures--Option to Extend Interest Payment Period." During any such Extension Period, interest will continue to accrue on the Junior Subordinated Debentures. At the end of the Extension Period, PEPCO will be required to pay all interest then accrued, together with interest on such deferred interest (to the extent permitted by applicable law) at the same rate as the rate of interest on the Junior Subordinated Debentures, compounded quarterly. Correspondingly, the quarterly distributions on the Preferred Securities will continue to accrue, together with interest on the deferred distributions (to the extent permitted by applicable law) at a rate equal to the Coupon Rate, compounded quarterly. In the event that PEPCO exercises this deferral right, then during the Extension Period (i) PEPCO shall not declare or pay any dividend on, make any distribution with respect to, or redeem, purchase or acquire, or make a liquidation payment with respect to, any of its capital stock (other than (a) purchases or acquisitions of shares of PEPCO Common Stock in connection with the satisfaction by PEPCO of its obligations under any employee benefit plans or any other contractual obligation of PEPCO (other than a contractual obligation ranking pari passu with or junior to the Junior Subordinated Debentures) or (b) the purchase of fractional interests in shares of PEPCO's capital stock pursuant to the conversion or exchange provisions of such PEPCO capital stock or the security being converted or exchanged), (ii) PEPCO shall not make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by PEPCO that rank pari passu with or junior to such Junior Subordinated Debentures and (iii) PEPCO shall not make any guarantee payments with respect to the foregoing (other than pursuant to the Guarantee). Prior to the termination of any such Extension Period, PEPCO may further defer interest payments on the Junior Subordinated Debentures by extending the interest payment period; provided that such Extension Period, including all such previous and further extensions thereof, may not exceed 20 consecutive quarters or extend beyond the Stated Maturity of the Junior Subordinated Debentures. Upon the termination of any Extension Period and the payment of all amounts then due, PEPCO may commence a new Extension Period. See "Description of the Junior Subordinated Debentures-- Interest" and "--Option to Extend Interest Payment Period." If distributions are deferred, the deferred distributions, and accrued but unpaid interest thereon, will be paid on the first distribution payment date after the Extension Period to holders of record of the Preferred Securities as they appear on the books and records of the Trust on the record date for such payment. Distributions on the Preferred Securities must be paid on the dates payable to the extent that the Trust has funds available for the payment of such distributions in the Institutional Account. The funds available to the Trust for distribution to the holders of the Preferred Securities will be limited to payments received from PEPCO on the Junior Subordinated Debentures. See "Description of the Junior Subordinated Debentures--Interest." The payment of distributions out of moneys held by the Trust is guaranteed by PEPCO to the extent set forth under "Description of the Preferred Securities Guarantees" in the accompanying Prospectus. Distributions on the Preferred Securities will be payable to the holders thereof as they appear on the books and records of the Trust on the relevant record dates, which will be, as long as the Preferred Securities remain in book-entry form, one Business Day prior to the relevant payment date and, in the event the Preferred Securities are not in book-entry form, the tenth day of the month prior to the month in which the relevant payment date occurs. Distributions payable on any Preferred Securities that are not punctually paid on the applicable distribution date, as a result of PEPCO having failed to make the corresponding interest payment on the Junior Subordinated Debentures, will cease to be payable to the persons in whose names such Preferred Securities are registered on the relevant record date, and such defaulted distribution will instead be payable to the persons in whose names such Preferred Securities are registered on the special record date established by the Regular Trustees, which record date shall be the same date as the special record date or other specified date established for the payment of defaulted interest in accordance with the Indenture. Distributions on the Preferred Securities will be paid through the Institutional Trustee, who will hold amounts received in respect of the Junior Subordinated Debentures in the Institutional Account for the benefit of the holders of the Trust Securities. Subject to any applicable laws and regulations and the provisions of the Declaration, each such payment will be made as described under "Book-Entry Only Issuance--The Depository Trust Company" below. In the event that any S-13 date on which a distribution is to be made on the Preferred Securities is not a Business Day, then payment of the distribution payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on the date such distribution otherwise would have been payable. A "Business Day" shall mean any day other than Saturday, Sunday or any other day on which banking institutions in New York, New York, are authorized or obligated by any law, executive order or regulation to close. REDEMPTION The Stated Maturity of the Junior Subordinated Debentures is , 2038. Upon the repayment of the Junior Subordinated Debentures at maturity, the proceeds from such repayment will simultaneously be applied to redeem Trust Securities having an aggregate liquidation amount equal to the aggregate principal amount of the Junior Subordinated Debentures so repaid at a redemption price of $25 per Trust Security, plus accrued and unpaid distributions thereon to the date of payment (the "Redemption Price"). The Junior Subordinated Debentures will be prepayable prior to the Stated Maturity at the option of PEPCO (i) in whole or in part, from time to time, on or after , 2003, or (ii) in whole but not in part, at any time prior to , 2003, within 90 days after the occurrence of a Tax Event, in either case at the Prepayment Price equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon to the date of prepayment. See "Description of the Junior Subordinated Debentures--Optional Prepayment." Upon such prepayment of the Junior Subordinated Debentures, the proceeds shall simultaneously be applied to redeem Trust Securities having an aggregate liquidation amount equal to the aggregate principal amount of the Junior Subordinated Debentures so repaid at the Redemption Price. Not less than 30 nor more than 60 days' notice is required to be given for any redemption of Preferred Securities. See "Description of the Junior Subordinated Debentures-- Optional Prepayment." In the event that fewer than all of the outstanding Preferred Securities are to be redeemed, the Preferred Securities will be redeemed pro rata as described under "Book-Entry Only Issuance--The Depository Trust Company" below. REDEMPTION PROCEDURES The Trust may not redeem fewer than all of the outstanding Preferred Securities unless all accrued and unpaid distributions have been paid on all Trust Securities for all quarterly distribution periods terminating on or prior to the date of redemption. If the Trust gives a notice of redemption in respect of Preferred Securities (which notice will be irrevocable), then on and after the redemption date, provided that PEPCO has deposited with the Trust a sufficient amount of cash in connection with the related maturity or redemption of the Junior Subordinated Debentures, distributions will cease to accrue on the Preferred Securities called for redemption, such Preferred Securities shall no longer be deemed to be outstanding and all rights of holders of such Preferred Securities so called for redemption will cease, except the right of the holders of such Preferred Securities to receive the Redemption Price. If any date fixed for redemption of Preferred Securities is not a Business Day, then payment of the Redemption Price payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day, in each case with the same force and effect as if made on the date fixed for redemption. If PEPCO fails to repay Junior Subordinated Debentures at Stated Maturity or on the date fixed for prepayment thereof, or if payment of the Redemption Price in respect of Preferred Securities is improperly withheld or refused and not paid either by the Trust or by PEPCO pursuant to the Guarantee, the distributions on such Preferred Securities will continue to accrue to the date of actual payment. The Trust is not required to (i) register the transfer or exchange of any Trust Securities during a period beginning at the opening of business 15 days before the mailing of a notice of redemption of Trust Securities and ending at the close of business on the day of the mailing of a notice of redemption or (ii) register the transfer S-14 or exchange of any Trust Securities so selected for redemption, in whole or in part, except for the unredeemed portion of any Trust Securities being redeemed in part. Subject to applicable law, PEPCO or its subsidiaries may at any time, and from time to time, purchase outstanding Preferred Securities by tender, in the open market or by private agreement. DISTRIBUTION OF THE JUNIOR SUBORDINATED DEBENTURES PEPCO will have the right at any time to direct the Trustees to liquidate the Trust and distribute the Junior Subordinated Debentures to the holders of the Trust Securities. In such case, PEPCO will use its best efforts to cause the Junior Subordinated Debentures to be listed on the NYSE or on such other exchanges as the Preferred Securities are then listed. On the date for any distribution of Junior Subordinated Debentures, (i) the Trust Securities will no longer be deemed to be outstanding, (ii) PEPCO will issue to the Depositary (as defined herein) or its nominee, as a recordholder of the Trust Securities, a registered global certificate or certificates representing the Junior Subordinated Debentures to be delivered to the Depository or its nominee upon such distribution and (iii) any certificates representing Trust Securities not held by the Depositary or its nominee will be deemed to represent Junior Subordinated Debentures having an aggregate principal amount equal to the aggregate stated liquidation amount of such Trust Securities until such certificates are presented to PEPCO or its agent for transfer or in exchange for Junior Subordinated Debentures. There can be no assurance as to the market prices for either the Preferred Securities or the Junior Subordinated Debentures that may be distributed in exchange for the Preferred Securities if a dissolution and liquidation of the Trust were to occur. Accordingly, the Preferred Securities or the Junior Subordinated Debentures may trade at a discount to the price that the investor paid to purchase the Preferred Securities. LIQUIDATION DISTRIBUTION UPON DISSOLUTION In the event of any voluntary or involuntary liquidation, dissolution, winding-up or termination of the Trust (each a "Liquidation"), the then holders of the Preferred Securities will be entitled to receive out of the assets of the Trust, after satisfaction of liabilities to creditors, if any, distributions in an amount equal to the aggregate of the stated liquidation amount of $25 per Preferred Security, plus accrued and unpaid distributions thereon to the date of payment (the "Liquidation Distribution"), unless, in connection with such Liquidation, Junior Subordinated Debentures in an aggregate stated principal amount equal to the aggregate stated liquidation amount of, and accrued and unpaid interest equal to accrued and unpaid distributions on, the Preferred Securities shall be distributed on a pro rata basis to the holders of the Preferred Securities. If, upon any such Liquidation, the Liquidation Distribution can be paid only in part because the Trust has insufficient assets available to pay in full the aggregate Liquidation Distribution, then the amounts payable directly by the Trust on the Preferred Securities shall be paid on a pro rata basis. The holders of the Common Securities will be entitled to receive distributions upon a Liquidation pro rata with the holders of the Preferred Securities, except that if a Declaration Event of Default has occurred and is continuing, the Preferred Securities will have a preference over the Common Securities with regard to Liquidation Distributions. Pursuant to the Declaration, the Trust shall terminate (i) on , 2043, the expiration of the term of the Trust, (ii) upon the bankruptcy of PEPCO or the Trust, (iii) upon the filing of a certificate of dissolution or its equivalent with respect to PEPCO, the filing of a certificate of cancellation with respect to the Trust after obtaining the consent of the holders of at least a majority in liquidation amount of the Trust Securities, voting S-15 together as a single class to file such certificate of cancellation, or the revocation of the charter of PEPCO and the expiration of 90 days after the date of revocation without a reinstatement thereof, (iv) upon the distribution of Junior Subordinated Debentures to the holders of the Trust Securities, (v) upon the entry of a decree of a judicial dissolution of PEPCO or the Trust, or (vi) upon the redemption of all the Trust Securities. DECLARATION EVENTS OF DEFAULT An Indenture Event of Default (as defined in the accompanying Prospectus) also constitutes an event of default under the Declaration with respect to the Trust Securities (a "Declaration Event of Default"); provided, that pursuant to the Declaration, the holder of the Common Securities will be deemed to have waived any Declaration Event of Default with respect to the Common Securities until all Declaration Events of Default with respect to the Preferred Securities have been cured, waived or otherwise eliminated. Until a Declaration Event of Default with respect to the Preferred Securities has been cured, waived or otherwise eliminated, the Institutional Trustee will be deemed to be acting solely on behalf of the holders of the Preferred Securities and only the holders of the Preferred Securities will have the right to direct the Institutional Trustee with respect to matters in connection therewith as provided in the Declaration. If a Declaration Event of Default with respect to the Preferred Securities is waived by holders of Preferred Securities, such waiver will also constitute the waiver of such Declaration Event of Default with respect to the Common Securities for all purposes under the Declaration, without any further act, vote or consent of the holders of the Common Securities. If the Institutional Trustee fails to enforce its rights under the Junior Subordinated Debentures after a holder of Preferred Securities has made a written request, such holder of Preferred Securities may institute a legal proceeding directly against PEPCO to enforce the Institutional Trustee's rights under the Junior Subordinated Debentures without first instituting any legal proceeding against the Institutional Trustee or any other person or entity. Notwithstanding the foregoing, if a Declaration Event of Default has occurred and is continuing and such event is attributable to the failure of PEPCO to pay interest or principal on the Junior Subordinated Debentures on the date such interest or principal is otherwise payable (or in the case of redemption, the redemption date), then a holder of Preferred Securities may institute a Direct Action for enforcement of payment to such holder of the principal of or interest on Junior Subordinated Debentures having a principal amount equal to the aggregate liquidation amount of the Preferred Securities of such holder on or after the respective due dates specified in the Junior Subordinated Debentures. PEPCO will be subrogated to the rights of such holder of Preferred Securities under the Declaration to the extent of any payment made by PEPCO to such holder of Preferred Securities in a Direct Action. The holders of Preferred Securities will not be able under the Declaration to exercise directly any other remedy available to the holders of the Junior Subordinated Debentures. Upon the occurrence of a Declaration Event of Default, the Institutional Trustee as the sole holder of the Junior Subordinated Debentures will have the right under the Indenture to declare the principal of and interest on the Junior Subordinated Debentures to be immediately due and payable. PEPCO and the Trust are each required to file annually with the Institutional Trustee an officer's certificate as to its compliance with all conditions and covenants under the Declaration. VOTING RIGHTS Except as described herein and under "Description of the Preferred Securities Guarantee--Modification of the Preferred Securities Guarantee; Assignment" in the accompanying Prospectus, and as otherwise required by law (including the Business Trust Act and the Trust Indenture Act) and the Declaration, the holders of the Preferred Securities will have no voting rights. Subject to the requirement that the Institutional Trustee obtain a tax opinion in certain circumstances as described in the last sentence of this paragraph, the holders of a majority in aggregate liquidation amount of the Preferred Securities, voting separately as a class, have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Institutional Trustee, or to direct the exercise of any trust or power conferred upon the Institutional Trustee under the Declaration, including the right to direct the S-16 Institutional Trustee, as holder of the Junior Subordinated Debentures, to (i) exercise the remedies available to it under the Indenture as a holder of the Junior Subordinated Debentures, (ii) waive any Indenture Event of Default that is waivable under the Indenture, (iii) exercise any right to rescind or annul a declaration that the principal of all the Junior Subordinated Debentures shall be due and payable or (iv) consent to any amendment, modification or termination of the Indenture or the Junior Subordinated Debentures where such consent shall be required; provided, however, that, where a consent or action under the Indenture would require the consent or act of holders of more than a majority in principal amount of the Junior Subordinated Debentures (a "Super- Majority"), only the holders of at least such Super-Majority in aggregate liquidation amount of the Preferred Securities may direct the Institutional Trustee to give such consent or take such action; and provided further, that where a consent or action under the Indenture is only effective against each holder of Junior Subordinated Debentures who has consented thereto, such consent or action will only be effective against a holder of Preferred Securities who directs the Institutional Trustee to give such consent or take such action. If the Institutional Trustee fails to enforce its rights under the Junior Subordinated Debentures after a holder of Preferred Securities has made a written request, such holder of Preferred Securities may institute a legal proceeding directly against PEPCO to enforce the Institutional Trustee's rights under the Junior Subordinated Debentures without first instituting any legal proceeding against the Institutional Trustee or any other person or entity. Notwithstanding the foregoing, if a Declaration Event of Default has occurred and is continuing and such event is attributable to the failure of PEPCO to pay interest or principal on the Junior Subordinated Debentures on the date such interest or principal is otherwise payable (or in the case of redemption, on the redemption date), then a holder of Preferred Securities may institute a Direct Action for enforcement of payment to such holder of the principal of or interest on the Junior Subordinated Debentures having a principal amount equal to the aggregate liquidation amount of the Preferred Securities of such holder on or after the respective due dates specified in the Junior Subordinated Debentures. The Institutional Trustee is required to notify all holders of the Preferred Securities of any notice of default received from the Debt Trustee with respect to the Junior Subordinated Debentures. Such notice shall state that such Indenture Event of Default also constitutes a Declaration Event of Default. Except with respect to directing the time, method and place of conducting a proceeding for a remedy, the Institutional Trustee shall not take any of the actions described in clauses (i), (ii) or (iii) above unless the Institutional Trustee has obtained an opinion of a nationally recognized tax counsel experienced in such matters to the effect that, as a result of such action, the Trust will not fail to be classified as a grantor trust for United States federal income tax purposes. A waiver of an Indenture Event of Default will constitute a waiver of the corresponding Declaration Event of Default. In the event the consent of the Institutional Trustee, as the holder of the Junior Subordinated Debentures, is required under the Indenture with respect to any amendment, modification or termination of the Indenture, the Institutional Trustee is required to request the written direction of the holders of the Trust Securities with respect to such amendment, modification or termination and shall vote with respect to such amendment, modification or termination as directed by a majority in liquidation amount of the Trust Securities voting together as a single class; provided, however, that where a consent under the Indenture would require the consent of a Super-Majority, the Institutional Trustee may only give such consent at the direction of the holders of at least the proportion in liquidation amount of the Trust Securities which the relevant Super-Majority represents of the aggregate principal amount of the Junior Subordinated Debentures outstanding; and provided, further, that where a consent or action under the Indenture is only effective against each holder of Junior Subordinated Debentures who has consented thereto, such consent or action will only be effective against a holder of Trust Securities who directs the Institutional Trustee to give such consent or take such action. The Institutional Trustee shall not take any such action in accordance with the directions of the holders of the Trust Securities unless the Institutional Trustee has obtained an opinion of a nationally recognized tax counsel experienced in such matters to the effect that for the purposes of United States federal income tax the Trust will not be classified as other than a grantor trust on account of such action. Any required approval or direction of holders of Preferred Securities may be given at a separate meeting of holders of Preferred Securities convened for such purpose, at a meeting of all of the holders of Trust Securities or pursuant to written consent. The Regular Trustees are required to cause a notice of any meeting at which S-17 holders of Preferred Securities are entitled to vote, or of any matter upon which action by written consent of such holders is to be taken, to be mailed to each holder of record of Preferred Securities. Each such notice will include a statement setting forth the following information: (i) the date of such meeting or the date by which such action is to be taken, (ii) a description of any resolution proposed for adoption at such meeting on which such holders are entitled to vote or of such matter upon which written consent is sought and (iii) instructions for the delivery of proxies or consents. No vote or consent of the holders of Preferred Securities will be required for the Trust to redeem and cancel Preferred Securities or to distribute Junior Subordinated Debentures in accordance with the Declaration and the terms of the Trust Securities. Notwithstanding that holders of Preferred Securities are entitled to vote or consent under any of the circumstances described above, any Preferred Securities that are owned at such time by PEPCO or any entity directly or indirectly controlling or controlled by, or under direct or indirect common control with, PEPCO shall not be entitled to vote or consent and shall, for purposes of such vote or consent, be treated as if such Preferred Securities were not outstanding. The procedures by which holders of Preferred Securities may exercise their voting rights are described below. See "Book-Entry Only Issuance--The Depository Trust Company" below. Holders of the Preferred Securities will have no rights to appoint, remove or replace the Trustees, who may be appointed, removed or replaced solely by PEPCO as the holder of the Common Securities. MODIFICATION OF THE DECLARATION The Declaration may be modified and amended if approved by the Regular Trustees (and in certain circumstances the Institutional Trustee or the Delaware Trustee), provided that, if any proposed amendment provides for, or the Regular Trustees otherwise propose to effect, (i) any action that would adversely affect the powers, preferences or special rights of the Trust Securities, whether by way of amendment to the Declaration or otherwise or (ii) the dissolution, winding-up or termination of the Trust, other than pursuant to the terms of the Declaration, then the holders of the Trust Securities voting together as a single class will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of at least a majority in liquidation amount of the Trust Securities affected thereby; provided that, if any amendment or proposal referred to in clause (i) above would adversely affect only the Preferred Securities or the Common Securities, then only the affected class will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of a majority in liquidation amount of such class of Trust Securities. Notwithstanding the foregoing, no amendment or modification may be made to the Declaration if such amendment or modification would (i) cause the Trust to be classified for purposes of United States federal income taxation as other than a grantor trust, (ii) reduce or otherwise adversely affect the powers of the Institutional Trustee in contravention of the Trust Indenture Act or (iii) cause the Trust to be deemed an "investment company" that is required to be registered under the Investment Company Act of 1940, as amended (the "1940 Act"). MERGERS, CONSOLIDATIONS OR AMALGAMATIONS The Trust may not consolidate, amalgamate, merge with or into, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to, any corporation or other body, except as described below. The Trust may, with the consent of the Regular Trustees and without the consent of the holders of the Trust Securities, the Institutional Trustee or the Delaware Trustee, consolidate, amalgamate, merge with or into, or be replaced by a trust organized as such under the laws of any State of the United States; provided, that (i) if the Trust is not the survivor, such successor entity either (a) expressly assumes all of the obligations of the Trust under the Trust Securities or (b) substitutes for the Trust Securities other securities having substantially the same terms as the Trust Securities (the "Successor Securities"), so long as the Successor Securities rank the same as S-18 the Trust Securities rank with respect to distributions and payments upon liquidation, redemption and otherwise, (ii) PEPCO expressly acknowledges a trustee of such successor entity possessing the same powers and duties as the Institutional Trustee as the holder of the Junior Subordinated Debentures, (iii) the Preferred Securities or any Successor Securities are listed, or any Successor Securities will be listed upon notification of issuance, on any national securities exchange or with another organization on which the Preferred Securities are then listed or quoted, (iv) such merger, consolidation, amalgamation or replacement does not cause the Preferred Securities (or any Successor Securities) to be downgraded by any nationally recognized statistical rating organization, (v) such merger, consolidation, amalgamation or replacement does not adversely affect the rights, preferences and privileges of the holders of the Trust Securities (or any Successor Securities) in any material respect (other than with respect to any dilution of the holders' interest in the successor entity), (vi) such successor entity has a purpose identical to that of the Trust, (vii) prior to such merger, consolidation, amalgamation or replacement, PEPCO has received an opinion of a nationally recognized independent counsel to the Trust experienced in such matters to the effect that, (a) such merger, consolidation, amalgamation or replacement does not adversely affect the rights, preferences and privileges of the holders of the Trust Securities (including any Successor Securities) in any material respect (other than with respect to any dilution of the holders' interest in the new entity), (b) following such merger, consolidation, amalgamation or replacement, neither the Trust nor such successor entity will be required to register as an "investment company" under the 1940 Act and (c) following such merger, consolidation, amalgamation or replacement, the Trust or such successor entity will be treated as a grantor trust for United States federal income tax purposes, and (viii) PEPCO guarantees the obligations of such successor entity under the Successor Securities at least to the extent provided by the Guarantee and the Common Securities Guarantee (as described in the accompanying Prospectus). Notwithstanding the foregoing, the Trust shall not, except with the consent of holders of 100 percent in liquidation amount of the Trust Securities, consolidate, amalgamate, merge with or into, or be replaced by any other entity or permit any other entity to consolidate, amalgamate, merge with or into, or replace it, if such consolidation, amalgamation, merger or replacement would cause the Trust or the successor entity to be classified as other than a grantor trust for United States federal income tax purposes. BOOK-ENTRY ONLY ISSUANCE--THE DEPOSITORY TRUST COMPANY DTC will act as securities depositary for the Preferred Securities. The Preferred Securities will be issued only as fully-registered securities registered in the name of Cede & Co. (DTC's nominee). One or more fully- registered global Preferred Securities certificates (each a "Global Certificate"), representing the total aggregate number of Preferred Securities, will be issued and will be deposited with DTC. The following description of DTC and its procedures have been furnished to PEPCO by DTC and have not been independently verified by PEPCO. DTC 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 Exchange Act. DTC holds securities that its participants ("Participants") deposit with DTC. DTC also facilitates the settlement among Participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in Participants' accounts, thereby eliminating the need for physical movement of securities certificates. Participants in DTC include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. DTC is owned by a number of its Participants and by the NYSE, the American Stock Exchange, Inc., and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others, such as securities brokers and dealers, banks and trust companies that clear transactions through, or maintain a direct or indirect custodial relationship with, a Participant either directly or indirectly ("Indirect Participants"). The rules of DTC are on file with the Securities and Exchange Commission (the "Commission"). Purchases of Preferred Securities within the DTC system must be made by or through Participants, which will receive a credit for the Preferred Securities on DTC's records. The ownership interest of each actual S-19 purchaser of each Preferred Security (a "Beneficial Owner") will in turn to be recorded on the Participants' and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchases, but Beneficial Owners are expected to receive written confirmations providing details of the transactions, as well as periodic statements of their holdings, from the Participants or Indirect Participants through which the Beneficial Owners purchased Preferred Securities. Transfers of ownership interests in the Preferred Securities are to be accomplished by entries made on the books of Participants acting directly or indirectly on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Preferred Securities, except in the event that use of the book-entry system for the Preferred Securities is discontinued. DTC has no knowledge of the actual Beneficial Owners of the Preferred Securities. DTC's records reflect only the identity of the Participants to whose accounts such Preferred Securities are credited, which may or may not be the Beneficial Owners. The Participants and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. So long as DTC, or its nominee, is the registered owner of a Global Certificate, DTC or such nominee, as the case may be, will be considered the sole owner of the Preferred Securities represented thereby for all purposes under the Declaration and the Preferred Securities. No Beneficial Owner of an interest in a Global Certificate will be able to transfer that interest except in accordance with DTC's procedures, in addition to those provided for under the Declaration. DTC has advised PEPCO that it will take any action permitted to be taken by a holder of Preferred Securities (including the presentation of Preferred Securities for exchange as described below) only at the direction of one or more Participants to whose accounts interests in Global Certificates are credited and only in respect of such portion of the aggregate liquidation amount of Preferred Securities as to which such Participant or Participants has or have given such direction. However, if there is a Declaration Event of Default, DTC will exchange the Global Certificates for certificated Preferred Securities, which it will distribute to its Participants and which will be legended to give notice of such Declaration Event of Default. Conveyance of notices and other communications by DTC to Participants, by Participants to Indirect Participants, and by Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Redemption notices in respect of the Preferred Securities held in book-entry form will be sent to Cede & Co. If less than all of the Preferred Securities are being redeemed, DTC will determine the pro rata amount of the interest of each Participant to be redeemed in accordance with its procedures. Although voting with respect to the Preferred Securities is limited, in those cases where a vote is required, neither DTC nor Cede & Co. will itself consent or vote with respect to Preferred Securities. Under its usual procedures, DTC would mail an omnibus proxy to the Trust 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 Preferred Securities are credited on the record date (identified in a listing attached to the omnibus proxy). Distributions on the Preferred Securities held in book-entry form will be made to DTC in immediately available funds. DTC's practice is to credit Participants' accounts on the relevant payment date in accordance with their respective holdings shown on DTC's records unless DTC has reason to believe that it will not receive payments on such payment date. Payments by Participants and Indirect Participants to Beneficial Owners will be governed by standing instructions and customary practices and will be the responsibility of such Participants and Indirect Participants and not of DTC, the Trust or PEPCO, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of distributions to DTC is the responsibility of the Trust, disbursement of such payments to Participants is the responsibility of DTC, and disbursement of such payments to the Beneficial Owners is the responsibility of Participants and Indirect Participants. S-20 Except as provided herein, a Beneficial Owner of an interest in a Global Certificate will not be entitled to receive physical delivery of Preferred Securities. Accordingly, each Beneficial Owner must rely on the procedures of DTC to exercise any rights under the Preferred Securities. Although DTC has agreed to the foregoing procedures in order to facilitate transfers of interests in the Global Certificates among Participants of DTC, DTC is under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. None of PEPCO, the Trust or the Trustees will have any responsibility for the performance by DTC or its Participants or Indirect Participants under the rules and procedures governing DTC. DTC may discontinue providing its services as securities depositary with respect to the Preferred Securities at any time by giving notice to the Trust. Under such circumstances, in the event that a successor securities depositary is not obtained, certificated Preferred Securities are required to be delivered. Additionally, the Trust (with the consent of PEPCO) may decide to discontinue use of the system of book-entry transfers through DTC (or a successor depositary). In that event, certificated Preferred Securities will be delivered. The laws of some jurisdictions require that certain purchasers of securities take physical delivery of securities in certificated form. Such laws may impair the ability to transfer beneficial interests in Preferred Securities represented by a Global Certificate. DISTRIBUTION PAYMENTS All distribution payments in respect of the Preferred Securities represented by Global Certificates will be made to DTC, which will credit the accounts of its Participants on the payment date. Distribution payments on Preferred Securities not evidenced by a Global Certificate will be made by check mailed to the address of the holder entitled thereto as such address shall appear on the records of the registrar and transfer agent. REGISTRAR, TRANSFER AGENT AND PAYING AGENT The Bank of New York will act as registrar, transfer agent and, if the Preferred Securities are not in book-entry form, paying agent (the "Paying Agent") for the Preferred Securities. The Paying Agent is permitted to resign as Paying Agent upon 30 days' written notice to the Regular Trustees, in which event the Regular Trustees are required to appoint a successor bank or trust company to act as Paying Agent. Registration of transfers of Preferred Securities that are not in book-entry form will be effected without charge, but only upon payment (with such indemnity as the Regular Trustees may require) by the holder of any tax or other government charges which may be imposed in relation thereto. INFORMATION CONCERNING THE INSTITUTIONAL TRUSTEE The Institutional Trustee, prior to the occurrence of a Declaration Event of Default and after the curing of any Declaration Event of Default that may have occurred, undertakes to perform only such duties as are specifically set forth in the Declaration. After a Declaration Event of Default has occurred (of which a responsible officer of the Institutional Trustee has actual knowledge) and while it is continuing, the Institutional Trustee is required to exercise the rights and powers vested in it by the Declaration using the same degree of care and skill as a prudent person would exercise or use under the circumstances in the conduct of his own affairs. Subject to such provisions, the Institutional Trustee is under no obligation to exercise any of the powers vested in it by the Declaration at the request of any holder of Preferred Securities unless offered indemnity by such holder against the costs, expenses and liabilities that might be incurred thereby. S-21 The Institutional Trustee also serves as Guarantee Trustee, Debt Trustee and as trustee under other indentures of PEPCO. PEPCO and certain of its subsidiaries conduct certain banking transactions with the Institutional Trustee in the ordinary course of their respective businesses. GOVERNING LAW The Declaration and the Preferred Securities will be governed by, and construed in accordance with, the internal laws of the State of Delaware. MISCELLANEOUS The Regular Trustees are required to operate the Trust in such a way so that the Trust will not be required to register as an "investment company" under the 1940 Act or be characterized as other than a grantor trust for United States federal income tax purposes. In this connection, the Regular Trustees are authorized to take any action, not inconsistent with applicable law, that the Regular Trustees determine in their discretion to be necessary or desirable to achieve these ends, as long as such action does not adversely affect the interests of the holders of the Trust Securities. Holders of the Preferred Securities have no preemptive rights. DESCRIPTION OF THE GUARANTEE Pursuant to the Guarantee, PEPCO will agree, to the extent set forth therein, to pay in full to the holders of the Preferred Securities issued by the Trust, the Guarantee Payments (as defined in the accompanying Prospectus), as and when due, regardless of any defense, right of setoff or counterclaim which the Trust may have or assert. PEPCO may satisfy its obligation to make a Guarantee Payments either by paying the required amounts directly to the holders of Preferred Securities or by causing the Trust to pay such amounts to the holders. The Guarantee, when taken together with PEPCO's obligations under the Junior Subordinated Debentures and the Indenture and its obligations under the Declaration, including its obligation to pay costs, expenses, debts and liabilities of the Trust (other than with respect to the Trust Securities) provides a full and unconditional guarantee on a subordinated basis by PEPCO of amounts payable on the Preferred Securities. The Guarantee will be qualified as an indenture under the Trust Indenture Act. The Bank of New York will act as Guarantee Trustee. The terms of the Guarantee will be those set forth in a Preferred Securities Guarantee Agreement executed and delivered by PEPCO and those made part of such Guarantee by the Trust Indenture Act. The Guarantee will be held by the Guarantee Trustee for the benefit of the holders of the Preferred Securities. A summary description of the Guarantee appears in the accompanying Prospectus under the caption "Description of the Preferred Securities Guarantee." DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES Set forth below is a description of the specific terms of the Junior Subordinated Debentures in which the Trust will invest the proceeds from the issuance and sale of the Trust Securities. This description supplements the description of the general terms and provisions of the Junior Subordinated Debentures set forth in the accompanying Prospectus under the caption "Description of the Junior Subordinated Debentures." While the following description does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the description in the accompanying Prospectus and to the terms of the Indenture, dated as of , 1998 (the "Base Indenture"), between PEPCO and The Bank of New York, as trustee (the "Debt Trustee"), as supplemented by a First Supplemental Indenture, dated as of , 1998 (the Base Indenture, as so supplemented, is hereinafter referred to as the "Indenture"), the forms of which are filed as exhibits to the Registration Statement of which this Prospectus Supplement and the accompanying Prospectus form a part, all material terms of the Junior Subordinated Debentures are set forth herein and in the accompanying Prospectus. S-22 GENERAL The Junior Subordinated Debentures will be issued as unsecured indebtedness of PEPCO under the Indenture. The Junior Subordinated Debentures will be limited in aggregate principal amount to $128,865,980, such amount being the sum of the aggregate stated liquidation value of the Trust Securities. The Junior Subordinated Debentures are not subject to any sinking fund provision. The entire principal amount of the Junior Subordinated Debentures will mature and become due and payable, together with any accrued and unpaid interest thereon, including Compound Interest (as defined herein) and Additional Interest (as defined herein), if any, on , 2038. If Junior Subordinated Debentures are distributed to holders of Preferred Securities in liquidation of such holders' interests in the Trust, such Junior Subordinated Debentures will initially be issued as Global Debentures (as defined herein). As described herein, Junior Subordinated Debentures may be issued in certificated form in exchange for a Global Debenture. See "Book- Entry and Settlement" below. In the event that Junior Subordinated Debentures are issued in certificated form, such Junior Subordinated Debentures will be in denominations of $25 and integral multiples thereof and may be transferred or exchanged at the offices described below. Payments on Junior Subordinated Debentures issued as Global Debentures will be made to DTC or a successor depositary. In the event Junior Subordinated Debentures are issued in certificated form, principal and interest will be payable, the transfer of the Junior Subordinated Debentures will be registrable and Junior Subordinated Debentures will be exchangeable for Junior Subordinated Debentures of other denominations of a like aggregate principal amount, at the corporate trust office of the Debt Trustee, as paying and authenticating agent, in New York, New York; provided that payment of interest may be made at the option of PEPCO by check mailed to the address of the holder entitled thereto as it appears on the security register. The Indenture does not contain provisions that afford holders of the Junior Subordinated Debentures protection in the event of a highly leveraged transaction or other similar transaction involving PEPCO that may adversely affect such holders. SUBORDINATION The Indenture provides that the Junior Subordinated Debentures are subordinated and junior in right of payment to all present and future Senior Indebtedness and Other Financial Obligations of PEPCO and rank pari passu with and equivalent to all other general unsecured claims of creditors against PEPCO that are not entitled to statutory priority under the United States Bankruptcy Code or otherwise. No payment may be made of the principal or interest on the Junior Subordinated Debentures, or in respect of any redemption, retirement, purchase or other acquisition of any of the Junior Subordinated Debentures, at any time when (i) there is a default in the payment of the principal of, premium, if any, interest on or otherwise in respect of any Senior Indebtedness, whether at maturity or at a date fixed for prepayment or by declaration or otherwise, or (ii) any event of default with respect to any Senior Indebtedness has occurred and is continuing, or would occur as a result of such payment on the Junior Subordinated Debentures or any redemption, retirement, purchase or other acquisition of any of the Junior Subordinated Debentures, permitting the holders of such Senior Indebtedness (or a trustee on behalf of the holders thereof) to accelerate the maturity thereof. Upon any distribution of assets of PEPCO to creditors upon any dissolution, winding-up, liquidation or reorganization, whether voluntary or involuntary, or in bankruptcy, insolvency, receivership or other proceedings, the holders of all Senior Indebtedness and the holders of Other Financial Obligations will first be entitled to receive payment in full of all amounts due thereon before the holders of the Junior Subordinated Debentures will be entitled to receive any payment in respect of the principal of or interest on the Junior Subordinated Debentures. The term "Senior Indebtedness" means (i) the principal, premium, if any, and interest in respect of (a) indebtedness of PEPCO for money borrowed and (b) indebtedness evidenced by securities, debentures, bonds or other similar instruments issued by PEPCO, (ii) all capital lease obligations of PEPCO, (iii) all obligations of PEPCO issued or assumed as the deferred purchased price of property, all conditional sale obligations of PEPCO S-23 and all obligations of PEPCO under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business), (iv) all obligations of PEPCO for the reimbursement of any letter of credit, banker's acceptance, security purchase facility or similar credit transaction, (v) all obligations of the type referred to in clauses (i) through (iv) above of other persons for the payment of which PEPCO is responsible or liable as obligor, guarantor or otherwise and (vi) all obligations of the type referred to in clauses (i) through (v) above of other persons secured by any lien on any property or asset of PEPCO (whether or not such obligation is assumed by PEPCO), except that Senior Indebtedness does not include (i) any such indebtedness that is by its terms subordinated to or ranks pari passu with the Junior Subordinated Debentures and (ii) any indebtedness between and among PEPCO or its affiliates, including all other debt securities, and guarantees in respect to those debt securities, issued to any trust, or a trustee of such trust, partnership or other entity affiliated with PEPCO that is a financing vehicle of PEPCO (a "financing entity") in connection with the issuance by such financing entity of preferred securities or other securities that rank pari passu with or junior to the Preferred Securities. The term "Other Financial Obligations" means all obligations of PEPCO to make payment pursuant to the terms of financial instruments, such as (i) securities contracts and foreign currency exchange contracts, (ii) derivative instruments, such as swap agreements (including interest rate and foreign exchange rate swap agreements), cap agreements, floor agreements, collar agreements, interest rate agreements, foreign exchange rate agreements, options, commodity futures contracts, commodity option contracts and (iii) in the case of both (i) and (ii) above, similar financial instruments, other than (a) obligations on account of Senior Indebtedness and (b) obligations on account of indebtedness for money borrowed ranking pari passu with or subordinate to the Junior Subordinated Debentures. Subject to the payment in full of all Senior Indebtedness and Other Financial Obligations, the rights of the holders of the Junior Subordinated Debentures will be subrogated to the rights of the holders of such Senior Indebtedness and Other Financial Obligations of PEPCO to receive payments or distributions applicable to such Senior Indebtedness and Other Financial Obligations until all amounts owing on the Junior Subordinated Debentures are paid in full. The Indenture does not limit the aggregate amount of Senior Indebtedness or Other Financial Obligations that may be issued or entered into by PEPCO. As of December 31, 1997, Senior Indebtedness and Other Financial Obligations of PEPCO aggregated approximately $2.3 billion. OPTIONAL PREPAYMENT The Junior Subordinated Debentures will be prepayable prior to the Stated Maturity at the option of PEPCO (i) in whole or in part, from time to time, on or after , 2003 or (ii) in whole but not in part, at any time prior to , 2003, within 90 days after the occurrence of a Tax Event (as defined herein), in either case, upon not less than 30 nor more than 60 days' notice, at the Prepayment Price equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon to the date of prepayment. Following such prepayment, Trust Securities having an aggregate liquidation amount equal to the aggregate principal amount of the Junior Subordinated Debentures so repaid will be redeemed by the Trust. A "Tax Event" means that the Regular Trustees shall have received an opinion of nationally recognized independent tax counsel experienced in such matters to the effect that, as a result of (a) any amendment to, or change (including any announced prospective change) in, the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein, or (b) any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or such pronouncement or decision is announced on or after the date of original issuance of the Trust Securities, there is more than an insubstantial risk that (i) the Trust is, or will be within 90 days of the S-24 date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Junior Subordinated Debentures, (ii) interest payable by PEPCO on the Junior Subordinated Debentures is not, or within 90 days of the date of such opinion will not be, deductible by PEPCO, in whole or in part, for United States federal income tax purposes or (iii) the Trust is, or will be within 90 days of the date of such opinion, subject to more than a de minimis amount of other taxes, duties or other governmental charges. INTEREST The Junior Subordinated Debenture will bear interest at the rate of % per annum from the date of original issuance, payable quarterly in arrears on March 1, June 1, September 1 and December 1 of each year (each an "Interest Payment Date"), commencing September 1, 1998, to the persons in whose names such Junior Subordinated Debentures are registered on the relevant record date. The record dates for the Junior Subordinated Debentures will be, for so long as the Junior Subordinated Debentures remain in book-entry form, one Business Day prior to the relevant Interest Payment Date and, in the event the Junior Subordinated Debentures are not in book-entry form, the tenth day of the month prior to the month in which the relevant Interest Payment Date occurs. The amount of interest payable for any full quarterly period will be computed on the basis of a 360-day year of twelve 30-day months. The amount of interest payable for any period shorter than a full quarterly period will be computed on the basis of the actual number of days elapsed. In the event that any date on which interest is payable on the Junior Subordinated Debentures is not a Business Day, then payment of the interest payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, then such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on the date that such interest otherwise would have been payable. OPTION TO EXTEND INTEREST PAYMENT PERIOD So long as PEPCO shall not be in default in the payment of interest on the Junior Subordinated Debentures, PEPCO has the right, at any time and from time to time during the term of the Junior Subordinated Debentures, to defer payments of interest by extending the interest payment period for a period that does not exceed 20 consecutive quarterly periods or extend beyond the Stated Maturity. During the Extension Period, no interest will be due and payable on the Junior Subordinated Debentures. At the end of the Extension Period, PEPCO will be required to pay all interest then accrued and unpaid (including any Additional Interest), together with interest on such deferred interest (to the extent permitted by applicable law) at the same rate as the rate of interest on the Junior Subordinated Debentures, compounded quarterly ("Compound Interest"). During any such Extension Period, (i) PEPCO shall not declare or pay any dividend on, make any distribution with respect to, or redeem, purchase, acquire or make a liquidation payment with respect to, any of its capital stock (other than (a) purchases or acquisitions of shares of PEPCO Common Stock in connection with the satisfaction by PEPCO of its obligations under any employee benefit plans or any other contractual obligation of PEPCO (other than a contractual obligation ranking pari passu with or junior to the Junior Subordinated Debentures) or (b) the purchase of fractional interests in shares of PEPCO's capital stock pursuant to the conversion or exchange provisions of such PEPCO capital stock or the security being converted or exchanged), (ii) PEPCO shall not make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by PEPCO that rank pari passu with or junior to the Junior Subordinated Debentures, and (iii) PEPCO shall not make any guarantee payments with respect to the foregoing (other than pursuant to the Guarantee). Prior to the termination of any such Extension Period, PEPCO may further defer payments of interest by extending the interest payment period; provided that such Extension Period, including all such previous and further extensions thereof, may not exceed 20 consecutive quarterly periods or extend beyond the Stated Maturity of the Junior Subordinated Debentures. Upon the termination of any Extension Period and the payment of all amounts then due, PEPCO may commence a new Extension Period. S-25 PEPCO has no present intention of exercising its right to defer payments of interest by extending the interest payment period on the Junior Subordinated Debentures. If the Institutional Trustee is the sole holder of the Junior Subordinated Debentures, PEPCO is required to give the Regular Trustees, the Institutional Trustee and the Debt Trustee notice of its selection of an Extension Period one Business Day prior to the earlier of (i) the next succeeding date on which a date distribution on the Preferred Securities is payable or (ii) if the Junior Subordinated Debentures are then listed, the date the Regular Trustees are required to give notice to the NYSE (or other applicable self-regulatory organization) or to holders of the Preferred Securities of the record date or distribution date. The Institutional Trustee is required to give notice of PEPCO's selection of such Extension Period to the holders of the Preferred Securities. If the Institutional Trustee is not the sole holder of the Junior Subordinated Debentures, PEPCO is required to give the holders of the Junior Subordinated Debentures notice of its selection of an Extension Period at least ten Business Days prior to the earlier of (i) the next succeeding Interest Payment Date or (ii) if the Junior Subordinated Debentures are then listed, the date PEPCO is required to give notice to the NYSE (or other applicable self-regulatory organization) or to holders of the Junior Subordinated Debentures of the record or interest payment date. ADDITIONAL INTEREST If, at any time while the Institutional Trustee is the holder of any Junior Subordinated Debentures, the Trust or the Institutional Trustee shall be required to pay any taxes, duties, assessments or governmental charges of whatever nature (other than withholding taxes) imposed by the United States, or any other taxing authority, then, in any such case, PEPCO will pay as additional interest ("Additional Interest") on the Junior Subordinated Debentures held by the Institutional Trustee, such additional amounts as shall be required so that the net amounts received and retained by the Trust and by the Institutional Trustee, after paying any such taxes, duties, assessments or other governmental charges, will be equal to the amounts the Trust and the Institutional Trustee would have received had no such taxes, duties, assessments or other governmental charges been imposed. INDENTURE EVENTS OF DEFAULT If any Indenture Event of Default shall occur and be continuing, the Institutional Trustee, as the holder of the Junior Subordinated Debentures, will have the right to declare the principal of and the interest on the Junior Subordinated Debentures (including any Compound Interest and Additional Interest, if any) and any other amounts payable under the Indenture to be forthwith due and payable and to enforce its rights as a creditor with respect to the Junior Subordinated Debentures. See "Description of the Junior Subordinated Debentures--Events of Default, Waiver and Notice" in the accompanying Prospectus for a description of Indenture Events of Default. An Indenture Event of Default also constitutes a Declaration Event of Default. The holders of Preferred Securities in certain circumstances have the right to direct the Institutional Trustee to exercise its rights as the holder of the Junior Subordinated Debentures. See "Description of the Preferred Securities-- Declaration Events of Default" and "--Voting Rights." If the Institutional Trustee fails to enforce its rights under the Junior Subordinated Debentures after a holder of Preferred Securities has made a written request, such holder of Preferred Securities may institute a legal proceeding directly against PEPCO to enforce the Institutional Trustee's rights under the Junior Subordinated Debentures without first instituting any legal proceeding against the Institutional Trustee or any other person or entity. Notwithstanding the foregoing, if a Declaration Event of Default has occurred and is continuing, and such event is attributable to the failure of PEPCO to pay interest or principal on the Junior Subordinated Debentures on the date such interest or principal is otherwise payable (or in the case of redemption, on the redemption date), then a holder of Preferred Securities may institute a Direct Action for enforcement of payment to such holder of the principal of or interest on the Junior Subordinated Debentures having a principal amount equal to the aggregate liquidation amount of the Preferred Securities of such holder on or after the respective due dates specified in the Junior Subordinated Debentures. Notwithstanding any payments made to such holder of Preferred Securities by PEPCO in connection with a Direct Action, PEPCO will remain obligated to pay the principal of or interest on the Junior Subordinated Debentures held by the Institutional Trustee, and PEPCO will be subrogated to the rights of the holder of such Preferred Securities with respect to payments on the Preferred Securities to the extent of any payments made by PEPCO to such holder in any Direct Action. Except as provided in the Guarantee, the holders of Preferred Securities will not be able to exercise directly any other remedy available to the holders of the Junior Subordinated Debentures. S-26 BOOK-ENTRY AND SETTLEMENT If distributed to holders of Preferred Securities in connection with the involuntary or voluntary dissolution, winding-up or liquidation of the Trust, the Junior Subordinated Debentures will be issued in book-entry form evidenced by one or more global certificates (each a "Global Debenture") registered in the name of a securities depositary or its nominee (the "Depositary"). Except under the limited circumstances described below, Junior Subordinated Debentures represented by the Global Debenture will not be exchangeable for, and will not otherwise be issuable as, Junior Subordinated Debentures in certificated form. Global Debentures may not be transferred, except by the Depositary to another Depositary or to a successor Depositary. The laws of some jurisdictions require that certain purchasers of securities take physical delivery of such securities in certificated form. Such laws may impair the ability to transfer beneficial interests in Junior Subordinated Debentures represented by a Global Debenture. Except as provided below, owners of beneficial interests in a Global Debenture will not be entitled to receive physical delivery of Junior Subordinated Debentures in certificated form and will not be considered the holders thereof for any purpose under the Indenture. Accordingly, each beneficial owner of Junior Subordinated Debentures must rely on the procedures of the Depositary, or, if such person is not a participant in the Depositary, on the procedures of the participant through which such person owns its interest, to exercise any rights of a holder of Junior Subordinated Debentures under the Indenture. THE DEPOSITARY If Junior Subordinated Debentures are distributed to holders of Preferred Securities in connection with the involuntary or voluntary dissolution, winding up or liquidation of the Trust, DTC will act as the Depositary for the Junior Subordinated Debentures. For a description of DTC and the specific terms of its depositary arrangements, see "Description of the Preferred Securities--Book-Entry Only Issuance--The Depository Trust Company." As of the date of this Prospectus Supplement, the description therein of DTC's book- entry system and DTC's practices as they relate to purchases, transfers, notices and payments with respect to the Preferred Securities would apply in all material respects to any debt obligations represented by one or more Global Debentures held by DTC. PEPCO may appoint a successor to DTC or any successor Depositary in the event DTC or such successor Depositary is unable or unwilling to continue as a depositary for the Global Debentures. None of PEPCO, the Trust, the Institutional Trustee, any paying agent and any other agent of PEPCO, or the Debt Trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in a Global Debenture or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. DISCONTINUANCE OF THE DEPOSITARY'S SERVICES Each Global Debenture will be exchangeable for Junior Subordinated Debentures registered in the names of persons other than the Depositary or its nominee only if (i) the Depositary notifies PEPCO that it is unwilling or unable to continue as a depositary for such Global Debentures and no successor depositary shall have been appointed, (ii) the Depositary, at any time, ceases to be a clearing agency registered under the Exchange Act at which time the Depositary is required to be so registered to act as a depositary and no successor depositary shall have been appointed, (iii) PEPCO, in its sole discretion, determines that a Global Debentures shall be so exchangeable or (iv) there shall have occurred an Indenture Event of Default with respect to such Junior Subordinated Debentures. Any Global Debenture that is exchangeable pursuant to the preceding sentence will be exchangeable for Junior Subordinated Debentures registered in such names as the Depositary shall direct. It is expected that such instructions will be based upon directions received by the Depositary from its participants with respect to ownership of beneficial interests in such Global Debentures. GOVERNING LAW The Indenture and the Junior Subordinated Debentures will be governed by, and construed in accordance with, the internal laws of the State of New York. S-27 MISCELLANEOUS The Indenture provides that PEPCO will pay all costs and expenses related to (i) the offering of the Trust Securities and the Junior Subordinated Debentures, (ii) the organization, maintenance and dissolution of the Trust and (iii) the fees and expenses of the Institutional Trustee, the Delaware Trustee and the Regular Trustees. The Indenture provides that it may not be assigned by the parties thereto, except that PEPCO will have the right at all times to assign any of its rights or obligations under the Indenture to a direct or indirect wholly-owned subsidiary of PEPCO; provided that, in the event of any such assignment, PEPCO will remain liable for all of such obligations. Subject to the foregoing, the Indenture will be binding upon and inure to the benefit of the parties thereto and their respective successors and assigns. EFFECT OF OBLIGATIONS UNDER THE JUNIOR SUBORDINATED DEBENTURES AND THE GUARANTEE As set forth in the Declaration, the sole purpose of the Trust is to issue the Trust Securities evidencing undivided beneficial interests in the assets of the Trust, and to invest the proceeds from the sale in the Junior Subordinated Debentures. As long as payments of principal and interest are made when due on the Junior Subordinated Debentures, such payments will be sufficient to cover distributions and other payments due on the Trust Securities because of the following factors: (i) the aggregate principal amount of Junior Subordinated Debentures will be equal to the sum of the aggregate stated liquidation amount of the Trust Securities; (ii) the interest rate and the interest and other payment dates on the Junior Subordinated Debentures will match the distribution rate and distribution and other payment dates for the Trust Securities; (iii) PEPCO shall pay, and the Trust shall not be obligated to pay, directly or indirectly, all costs, expenses, debts, and obligations of the Trust (other than with respect to the Trust Securities); and (iv) the Declaration provides that the Regular Trustees shall not take any action, or cause or permit the Trust, among other things, to engage in any activity, that is not consistent with the purposes of the Trust. Payments of distributions (to the extent funds therefor are available) and other payments that become due on the Preferred Securities (to the extent funds therefor are available) are guaranteed by PEPCO as and to the extent set forth under "Description of the Preferred Securities Guarantee" in the accompanying Prospectus. If PEPCO does not make interest payments on the Junior Subordinated Debentures purchased by the Trust, the Trust will not have sufficient funds to pay distributions on the Preferred Securities. The Guarantee does not apply to any payment of distributions unless and until the Trust has sufficient funds for the payment of such distributions. The Guarantee covers the payment of distributions and other payments on the Preferred Securities if and to the extent that PEPCO has made a payment of interest or principal on the Junior Subordinated Debentures held by the Trust as its sole asset. The Guarantee, when taken together with PEPCO's obligations under the Junior Subordinated Debentures and the Indenture and its obligations under the Declaration, including its obligation to pay costs, expenses, debts and liabilities of the Trust (other than with respect to the Trust Securities), provides a full and unconditional guarantee on a subordinated basis of amounts payable on the Preferred Securities. If PEPCO fails to make interest or other payments on the Junior Subordinated Debentures when due (taking account of any Extension Period), the Declaration provides a mechanism whereby the holders of the Preferred Securities, using the procedures described in "Description of the Preferred Securities--Voting Rights" and "--Book-Entry Only Issuance--The Depository Trust Company," may direct the Institutional Trustee to enforce its rights under the Junior Subordinated Debentures. If the Institutional Trustee fails to enforce its rights under the Junior Subordinated Debentures, a holder of Preferred Securities may institute a legal proceeding against PEPCO to enforce the Institutional Trustee's rights under the Junior Subordinated Debentures without first S-28 instituting any legal proceeding against the Institutional Trustee or any other person or entity. Notwithstanding the foregoing, if a Declaration Event of Default has occurred and is continuing, and such event is attributable to the failure of PEPCO to pay interest or principal on the Junior Subordinated Debentures on the date such interest or principal is otherwise payable (or in the case of redemption, on the redemption date), then a holder of Preferred Securities may institute a Direct Action for enforcement of payment to such holder of the principal or interest on the Junior Subordinated Debenture having a principal amount equal to the aggregate liquidation amount of the Preferred Securities of such holder on or after the respective due dates specified in the Junior Subordinated Debentures. In connection with such Direct Action, PEPCO will be subrogated to the rights of such holder of Preferred Securities under the Declaration to the extent of any payment made by PEPCO to such holder of Preferred Securities in such Direct Action. PEPCO, under the Guarantee, acknowledges that the Guarantee Trustee shall enforce the Guarantee on behalf of the holders of the Preferred Securities. If PEPCO fails to make payments under the Guarantee, any holder of Preferred Securities may institute a Direct Action against PEPCO to enforce the Guarantee Trustee's rights under the Guarantee without first instituting a legal proceeding against the Trust, the Guarantee Trustee, or any other person or entity. UNITED STATES FEDERAL INCOME TAXATION GENERAL In the opinion of Covington & Burling, special tax counsel to PEPCO and the Trust ("Tax Counsel"), the following is a summary of certain of the material United States federal income tax consequences of the purchase, ownership and disposition of Preferred Securities held as capital assets by a holder who purchases such Preferred Securities upon initial issuance. It does not deal with special classes of holders such as banks, thrifts, real estate investment trusts, regulated investment companies, insurance companies, dealers in securities or currencies, tax-exempt investors, or persons that will hold the Preferred Securities as a position in a "straddle," as part of a "synthetic security" or "hedge," as part of a "conversion transaction" or other integrated investment, or as other than a capital asset. This summary also does not address the tax consequences to persons that have a functional currency other than the U.S. Dollar or the tax consequences to shareholders, partners or beneficiaries of a holder of Preferred Securities. Further, it does not include any description of any alternative minimum tax consequences or the tax laws of any state or local government or of any foreign government that may be applicable to the Preferred Securities. This summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations thereunder and administrative and judicial interpretations thereof, as of the date hereof, all of which are subject to change, possibly on a retroactive basis. CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES In connection with the issuance of the Junior Subordinated Debentures, Tax Counsel will render its opinion generally to the effect that under then current law and assuming full compliance with the terms of the Indenture (and certain other documents), and based on certain facts and assumptions contained in such opinion, the Junior Subordinated Debentures will be classified for United States federal income tax purposes as indebtedness of PEPCO. CLASSIFICATION OF THE TRUST In connection with the issuance of the Preferred Securities, Tax Counsel will render its opinion generally to the effect that, under then current law and assuming full compliance with the terms of the Declaration and the Indenture (and certain other documents), and based on certain facts and assumptions contained in such opinion, the Trust will be classified for United States federal income tax purposes as a grantor trust and not as an association taxable as a corporation. Accordingly, for United States federal income tax purposes, each holder of Preferred Securities generally will be considered the owner of an undivided interest in the Junior Subordinated Debentures, and each holder will be required to include in its gross income any interest (or OID accrued) with respect to its allocable share of those Junior Subordinated Debentures. S-29 INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT Under Treasury regulations promulgated under the OID provisions of the Code (the "Regulations"), a "remote" contingency that stated interest will not be timely paid will be ignored in determining whether a debt instrument is issued with OID. PEPCO believes that the likelihood of its exercising its option to defer payments of interest is "remote" since exercising that option would prevent PEPCO from declaring dividends on any class of its equity securities. Accordingly, PEPCO intends to take the position, based on the advice of Tax Counsel, that the Junior Subordinated Debentures will not be considered to be issued with OID and, accordingly, stated interest on the Junior Subordinated Debentures generally will be taxable to a holder as ordinary income at the time it is paid or accrued in accordance with such holder's method of accounting. Under the Regulations, if PEPCO were to exercise its option to defer payments of interest, the Junior Subordinated Debentures would at that time be treated as issued with OID, and all stated interest on the Junior Subordinated Debentures would thereafter be treated as OID as long as the Junior Subordinated Debentures remain outstanding. In such event, all of a holder's taxable interest income with respect to the Junior Subordinated Debentures would thereafter be accounted for on an economic accrual basis regardless of such holder's method of tax accounting, and actual distributions of stated interest would not be reported as taxable income. Consequently, a holder of Preferred Securities would be required to include in gross income OID even though PEPCO would not make actual cash payments during an Extension Period. The Regulations as they pertain to the issues addressed in this section have not yet been addressed in any rulings or other interpretations by the Internal Revenue Service (the "IRS"), and it is possible that the IRS could take a position contrary to Tax Counsel's interpretation herein. Because income on the Preferred Securities will constitute interest or OID, corporate holders of the Preferred Securities will not be entitled to a dividends-received deduction with respect to any income recognized with respect to the Preferred Securities. RECEIPT OF JUNIOR SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST PEPCO will have the right at any time to liquidate the Trust and cause the Junior Subordinated Debentures to be distributed to the holders of the Trust Securities. Under current law, such a distribution, for United States federal income tax purposes, would be treated as a nontaxable event to each holder, and each holder would receive an aggregate tax basis in the Junior Subordinated Debentures equal to such holder's aggregate tax basis in its Preferred Securities. A holder's holding period in the Junior Subordinated Debentures so received in liquidation of the Trust would include the period during which the Preferred Securities were held by such holder. If, however, the Trust is characterized for United States federal income tax purposes as an association taxable as a corporation at the time of its dissolution, the distribution of the Junior Subordinate Debentures may constitute a taxable event to holders of Preferred Securities. Under certain circumstances described herein (see "Description of the Preferred Securities"), the Junior Subordinated Debentures may be redeemed for cash and the proceeds of such redemption distributed to holders in redemption of their Preferred Securities. Under current law, such a redemption would, for United States federal income tax purposes, constitute a taxable disposition of the redeemed Preferred Securities, and a holder could recognize gain or loss as if it sold such redeemed Preferred Securities for cash. See "Sales of Preferred Securities" below. SALES OF PREFERRED SECURITIES A holder that sells Preferred Securities (including a redemption of Preferred Securities) will recognize gain or loss equal to the difference between its adjusted tax basis in the Preferred Securities and the amount realized on the sale of such Preferred Securities (other than with respect to accrued and unpaid interest which has not yet been included in income, which will be treated as ordinary income). A holder's adjusted tax basis in the Preferred Securities generally will be its initial purchase price increased by OID (if any) previously includable in such S-30 holder's gross income to the date of disposition and decreased by payments received on the Preferred Securities in respect of OID (if any). Such gain or loss generally will be a capital gain or loss and generally will be a long- term capital gain or loss if the Preferred Securities have been held for more than one year. In the case of individuals, long-term capital gains are taxed at a lower rate if the holder held the Preferred Securities for more than 18 months. The Preferred Securities may trade at a price that does not accurately reflect the value of accrued but unpaid interest with respect to the underlying Junior Subordinated Debentures. A holder who uses the accrual method of accounting for tax purposes (and a cash method holder, if the Junior Subordinated Debentures are deemed to have been issued with OID) and who disposes of his Preferred Securities between record dates for payments of distributions thereon will be required to include accrued but unpaid interest on the Junior Subordinated Debentures through the date of disposition in income as ordinary income (i.e., interest or, possibly, OID), and to add such amount to his adjusted tax basis in his pro rata share of the underlying Junior Subordinated Debentures deemed disposed of. To the extent the selling price is less than the holder's adjusted tax basis (which will include all accrued but unpaid interest) a holder will recognize a capital loss. Subject to certain limited exceptions, capital losses cannot be applied to offset ordinary income for United States federal income tax purposes. UNITED STATES ALIEN HOLDERS For purposes of this discussion, a "United States Alien Holder" is any corporation, individual, partnership, estate or trust that is not a U.S. Holder for United States federal income tax purposes. A "U.S. Holder" is a beneficial owner of Preferred Securities who or which is (i) a citizen or individual resident (or is treated as a citizen or individual resident) of the United States for federal income tax purposes, (ii) a corporation or partnership created or organized in or under the laws of the United States or any political subdivision thereof, (iii) an estate the income of which is includable in its gross income for federal income tax purposes without regard to its source or (iv) a trust if, and only if, (x) a court within the United States is able to exercise primary supervision over the administration of the trust and (y) one or more United States trustees have the authority to control all substantial decisions of the trust. Under current United States federal income tax law: (i) payments by the Trust or any of its paying agents to any holder of a Preferred Security who or which is a United States Alien Holder will not be subject to United States federal withholding tax; provided that, (a) the beneficial owner of the Preferred Security does not actually or constructively own 10 percent or more of the total combined voting power of all classes of stock of PEPCO entitled to vote, (b) the beneficial owner of the Preferred Security is not a controlled foreign corporation that is related to PEPCO through stock ownership, and (c) either (A) the beneficial owner of the Preferred Security certifies to the Trust or its agent, under penalties of perjury, that it is not a U.S. Holder and provides its name and address or (B) a securities clearing organization, bank or other financial institution that holds customers' securities in the ordinary course of its trade or business (a "Financial Institution"), and holds the Preferred Security in such capacity, certifies to the Trust or its agent, under penalties of perjury, that such statement has been received from the beneficial owner by it or by a Financial Institution between it and the beneficial owner and furnishes the Trust or its agent with a copy thereof; and (ii) a United States Alien Holder of a Preferred Security will not be subject to United States federal withholding tax on any gain realized upon the sale or other disposition of a Preferred Security. INFORMATION REPORTING TO HOLDERS Generally, income on the Preferred Securities will be reported to holders on Forms 1099, which forms should be mailed to holders of Preferred Securities by January 31 following each calendar year. BACKUP WITHHOLDING Payments made on, and proceeds from the sale of, the Preferred Securities may be subject to a "backup" withholding tax of 31 percent unless the holder complies with certain identification requirements. Any withheld amounts will be allowed as a credit against the holder's United States federal income tax, provided the required information is provided to the IRS. S-31 THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER TAX LAWS. ERISA CONSIDERATIONS Each fiduciary of a pension, profit-sharing or other employee benefit plan subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (a "Plan"), should consider the fiduciary standards of ERISA in the context of the Plan's particular circumstances before authorizing an investment in the Preferred Securities. Accordingly, among other factors, the fiduciary should consider whether the investment would satisfy the prudence and diversification requirements of ERISA and would be consistent with the documents and instruments governing the Plan, and whether such investment would involve a prohibited transaction under Section 406 of ERISA or Section 4975 of the Code. Each of PEPCO, the obligor with respect to the Junior Subordinated Debentures held by the Trust, and its affiliates and the Institutional Trustee may be considered a "party in interest" (within the meaning of ERISA) or a "disqualified person" (within the meaning of Section 4975 of the Code) with respect to many Plans that are subject to ERISA. The purchase and/or holding of Preferred Securities by a Plan that is subject to the fiduciary responsibility provisions of ERISA or the prohibited transaction provisions of Section 4975 of the Code (including individual retirement arrangements and other plans described in Section 4975(e)(1) of the Code) and with respect to which PEPCO, the Institutional Trustee or any affiliate is a service provider (or otherwise is a party in interest or a disqualified person) may constitute or result in a prohibited transaction under ERISA or Section 4975 of the Code, unless such Preferred Securities are acquired pursuant to and in accordance with an applicable exemption, such as Prohibited Transaction Class Exemption ("PTCE") 84-14 (an exemption for certain transactions determined by an independent qualified professional asset manager), PTCE 91-38 (an exemption for certain transactions involving bank collective investment funds), PTCE 90-1 (an exemption for certain transactions involving insurance company pooled separate accounts), PTCE 95-60 (an exemption for transactions involving certain insurance company general accounts) or PTE 96-23 (an exemption for plan asset transactions managed by in-house asset managers). Any purchaser proposing to acquire Preferred Securities with assets of any Plan should consult with its ERISA counsel. S-32 UNDERWRITING Subject to the terms and conditions set forth in a purchase agreement (the "Underwriting Agreement"), the Trust has agreed to sell to each of the Underwriters named below, and each of the Underwriters, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated, A.G. Edwards & Sons, Inc., PaineWebber Incorporated, Prudential Securities Incorporated and Smith Barney, Inc. are acting as Representatives (the "Representatives"), has severally agreed to purchase the number of Preferred Securities set forth opposite its name below. In the Underwriting Agreement, the several Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all the Preferred Securities offered hereby if any of the Preferred Securities are purchased. In the event of default by an Underwriter, the Underwriting Agreement provides that, in certain circumstances, the purchase commitments of the non-defaulting Underwriters may be increased or the Underwriting Agreement may be terminated.
NUMBER OF PREFERRED UNDERWRITERS SECURITIES ------------ ---------- Merrill Lynch, Pierce, Fenner & Smith Incorporated............................................. A.G. Edwards & Sons, Inc.......................................... PaineWebber Incorporated.......................................... Prudential Securities Incorporated................................ Smith Barney, Inc. ............................................... ---- Total............................................................. ====
The Underwriters propose to offer the Preferred Securities, in part, directly to the public at the initial public offering price set forth on the cover page of this Prospectus Supplement, and, in part, to certain securities dealers at such price less a concession of $ per Preferred Security. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per Preferred Security to certain brokers and dealers. After the Preferred Securities are released for sale to the public, the offering price and other selling terms may be changed. In view of the fact that the proceeds of the sale of the Preferred Securities will be used to purchase the Junior Subordinated Debentures of PEPCO, the Underwriting Agreement provides that PEPCO will pay as compensation ("Underwriters' Compensation") to the Underwriters arranging the investment therein of such proceeds, an amount in immediately available funds of $ per Preferred Security (or $ in the aggregate) for the accounts of the several Underwriters. During a period of 30 days from the date of the Prospectus Supplement, neither the Trust nor PEPCO will, without the prior written consent of the Underwriters, directly or indirectly, sell, offer to sell, grant any option for sale of, or otherwise dispose of, any Preferred Securities, any security convertible into or exchangeable into or exercisable for Preferred Securities or Junior Subordinated Debentures or any debt securities substantially similar to the Junior Subordinated Debentures or equity securities substantially similar to the Preferred Securities (except for the Junior Subordinated Debentures and the Preferred Securities offered hereby). The Preferred Securities constitute a new issue of securities of the Trust with no established trading market. Application will be made to list the Preferred Securities on the NYSE. Trading of the Preferred Securities on the NYSE is expected to commence within a 30-day period after the initial delivery of the Preferred Securities. There can be no assurance that an active market for the Preferred Securities will develop or be sustained in the future on such exchange. Although the Underwriters have indicated to PEPCO and the Trust that they intend to make a market in the Preferred Securities, as permitted by applicable laws and regulations prior to the commencement of trading on the NYSE, they are not obligated to do so and may discontinue any such marketmaking at any time without notice. Accordingly, no assurance can be given as to the liquidity of, or trading markets for, the Preferred Securities. S-33 The Trust and PEPCO have agreed to indemnify the Underwriters against, or contribute to payments that the Underwriters may be required to make in respect of, certain liabilities, including liabilities under the Securities Act of 1933, as amended. Until the distribution of the Preferred Securities is completed, rules of the Commission may limit the ability of the Underwriters and any selling group members to bid for and purchase the Preferred Securities. As an exception to these rules, the Representatives are permitted to engage in certain transactions that stabilize the price of the Preferred Securities. Such transactions consist of bids or purchases for the purposes of pegging, fixing or maintaining the price of the Preferred Securities. If the Underwriters create a short position in the Preferred Securities in connection with the offering (i.e., if they sell more Preferred Securities than are set forth on the cover page of this Prospectus Supplement), the Underwriters may reduce the short position by purchasing Preferred Securities in the open market. The Representatives may also impose a penalty bid on certain Underwriters and selling group members. This means that if the Representatives purchase Preferred Securities in the open market to reduce the Underwriters' short position or to stabilize the price of the Preferred Securities, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those Preferred Securities as part of the offering. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resales of the security. None of PEPCO, the Trust nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Preferred Securities. In addition, none of PEPCO, the Trust nor any of the Underwriters makes any representation that the Representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. Certain of the Underwriters engage in transactions with, and, from time to time, have performed services for, PEPCO and its subsidiaries in the ordinary course of business. S-34 ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION PROSPECTUS PRELIMINARY PROSPECTUS DATED MAY 7, 1998 POTOMAC ELECTRIC POWER COMPANY TRUST I PREFERRED SECURITIES FULLY AND UNCONDITIONALLY GUARANTEED BY POTOMAC ELECTRIC POWER COMPANY Potomac Electric Power Company Trust I (the "Trust"), a statutory business trust formed under the laws of the State of Delaware by Potomac Electric Power Company, a District of Columbia and Virginia corporation ("PEPCO" or the "Company"), is offering preferred securities representing undivided beneficial interests in the assets of the Trust ("Preferred Securities"). The payment of periodic cash distributions ("distributions") with respect to Preferred Securities out of moneys held by the Trust, and payments on liquidation, redemption or otherwise with respect to such Preferred Securities, will be guaranteed by PEPCO to the extent described herein (the "Preferred Securities Guarantee"). See "Description of the Preferred Securities Guarantee." PEPCO's obligations under the Preferred Securities Guarantee will be subordinate and junior in right of payment to all other liabilities of PEPCO and will rank pari passu with the most senior preferred or preference stock, if any, issued from time to time by PEPCO. The Trust will invest the proceeds from the offering of Preferred Securities and Common Securities (as defined herein) in subordinated debt securities ("Junior Subordinated Debentures") issued by PEPCO. The Junior Subordinated Debentures purchased by the Trust may be subsequently distributed pro rata to holders of Preferred Securities and Common Securities in connection with the dissolution of the Trust upon the occurrence of certain events as described in an accompanying Prospectus Supplement (the "Prospectus Supplement"). The Preferred Securities, the Preferred Securities Guarantee and the Junior Subordinated Debentures are sometimes collectively referred to hereafter as the "Offered Securities." The form in which the Offered Securities are to be issued, their specific designation, aggregate principal amount or liquidation value or aggregate initial offering price, maturity, if any, rate and times of payment of interest or dividends, if any, redemption, conversion, and sinking fund terms, if any, voting or other rights, if any, exercise price and detachability, if any, and other specific terms will be set forth in the Prospectus Supplement, together with the terms of offering of such Offered Securities. Any such Prospectus Supplement will also contain information, as applicable, about certain material United States federal income tax considerations relating to the particular Offered Securities offered thereby. PEPCO and/or the Trust may sell the Offered Securities directly, through agents designated from time to time, or through underwriters or dealers. See "Plan of Distribution." If any agents of PEPCO and/or the Trust or any underwriters or dealers are involved in the sale of the Offered Securities, the names of such agents, underwriters or dealers and any applicable commissions and discounts will be set forth in any related Prospectus Supplement. This Prospectus may not be used to consummate sales of securities unless accompanied by a Prospectus Supplement. 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 , 1998 AVAILABLE INFORMATION This Prospectus constitutes a part of a combined Registration Statement on Form S-3 (together with all amendments and exhibits thereto, the "Registration Statement") filed by PEPCO and the Trust with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Offered Securities. This Prospectus does not contain all of the information set forth in such Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission, although it does include a summary of the material terms of the Indenture and the Declaration (each as defined herein). Reference is made to such Registration Statement and to the exhibits thereto for further information with respect to the Company, the Trust and the Offered Securities. Any statements contained herein concerning the provisions of any document filed as an exhibit to the Registration Statement or otherwise filed with the Commission or incorporated by reference herein are not necessarily complete, and, in each instance, reference is made to the copy of such document so filed for a more complete description of the matter involved. Each such statement is qualified in its entirety by such reference. PEPCO is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Commission. Proxy statements, reports and other information concerning PEPCO can be inspected and copied at the Commission's office at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and the Commission's Regional Offices in New York (Suite 1300, Seven World Trade Center, New York, New York 10048) and Chicago (Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661), and copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates, or by accessing the Commission's World Wide Web site at http://www.sec.gov. The common stock, $1.00 par value, of PEPCO (the "Common Stock") and other securities of PEPCO are listed on the New York Stock Exchange ("NYSE"). Reports, proxy material and other information concerning PEPCO also may be inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005. No separate financial statements of the Trust have been included herein. PEPCO does not consider that such financial statements would be material to holders of the Preferred Securities because (i) all of the voting securities of the Trust will be owned, directly or indirectly, by PEPCO, a reporting company under the Exchange Act, (ii) the Trust has no independent operations but exists for the sole purpose of issuing securities representing undivided beneficial interests in the assets of the Trust and investing the proceeds thereof in Junior Subordinated Debentures issued by PEPCO, and (iii) PEPCO's obligations described herein and in any accompanying Prospectus Supplement to provide certain indemnities in respect of, and be responsible for, certain costs, expenses, debts and liabilities of the Trust under the Indenture and any supplemental indenture thereto and pursuant to the Declaration, the Preferred Securities Guarantee issued with respect to Preferred Securities, the Junior Subordinated Debentures purchased by the Trust and the Indenture, taken together, constitute a full and unconditional guarantee of payments due on the Preferred Securities. See "Description of the Junior Subordinated Debentures" and "Description of the Preferred Securities Guarantee." The Trust is not currently subject to the informational requirements of the Exchange Act. The Trust will become subject to such requirements upon the effectiveness of the Registration Statement, although it intends to seek and expects to receive an exemption therefrom. 2 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following document filed with the Commission by PEPCO is incorporated by reference in this Prospectus: Annual Report on Form 10-K for the year ended December 31, 1997. All documents filed with the Commission by PEPCO pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering of the Offered Securities shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the date of filing of such documents. Any statement contained in this Prospectus or in a document incorporated or deemed to be incorporated by reference herein or in any Prospectus Supplement shall be deemed to be modified or superseded for purposes of this Prospectus or any Prospectus Supplement to the extent that a statement contained herein or therein (or in any subsequently filed document that also is or is deemed to be incorporated by reference herein or therein) modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus or any Prospectus Supplement. The Company hereby undertakes to furnish, without charge, to each person, including any beneficial owner, to whom a copy of this Prospectus has been delivered, on the written or oral request of any such person, a copy of any or all of the documents referred to above which have been or may be incorporated by reference in this Prospectus, other than exhibits to such documents. Requests for such documents should be directed to Ellen Sheriff Rogers, Associate General Counsel, Secretary and Assistant Treasurer, Potomac Electric Power Company, 1900 Pennsylvania Avenue, N.W., Washington, D.C. 20068, (202) 872-3526. POTOMAC ELECTRIC POWER COMPANY Potomac Electric Power Company, a District of Columbia and Virginia corporation, is engaged in the generation, transmission, distribution and sale of electric energy in the Washington, D.C. metropolitan area, including the District of Columbia and major portions of Montgomery and Prince George's Counties in Maryland. It also supplies, at wholesale, electric energy to the Southern Maryland Electric Cooperative, Inc., which distributes electricity in Calvert, Charles, Prince George's and St. Mary's Counties in southern Maryland. PEPCO's wholly owned nonutility subsidiary, Potomac Capital Investment Corporation ("PCI"), was organized in late 1983 to provide a vehicle to conduct PEPCO's ongoing nonutility business and investment programs. PCI's principal investments consist of equipment leases and marketable securities, primarily preferred stock with mandatory redemption features, and real estate. PCI is also involved with activities which provide telecommunication and energy services. The mailing address of PEPCO's executive offices is 1900 Pennsylvania Avenue, N.W., Washington, D.C. 20068, and its telephone number is (202) 872-2000. 3 THE TRUST The Trust is a statutory business trust formed under Delaware law pursuant to (i) a declaration of trust executed by PEPCO, as sponsor for the Trust (the "Sponsor"), and the Trustees (as defined herein) of the Trust, as amended and restated from time to time (the "Declaration"), and (ii) the filing of a certificate of trust with the Delaware Secretary of State. The Trust exists for the exclusive purposes of (i) issuing the Preferred Securities and common securities representing undivided beneficial interests in the assets of the Trust (the "Common Securities" and, together with the Preferred Securities, the "Trust Securities"), (ii) investing the gross proceeds from the sale of the Trust Securities in Junior Subordinated Debentures, and (iii) engaging in only those other activities necessary or incidental thereto. All of the Common Securities will be directly or indirectly owned by PEPCO. The Common Securities will rank pari passu, and payments will be made thereon pro rata, with the Preferred Securities, except that upon an event of default under the Declaration with respect thereto, the rights of the holders of the Common Securities to payment in respect of distributions and to payments upon liquidation, redemption and otherwise will be subordinated to the rights of the holders of the Preferred Securities. PEPCO will, directly or indirectly, acquire Common Securities in an aggregate liquidation amount equal to at least 3 percent of the total capital of the Trust. The Trust has a term of approximately 50 years, but may terminate earlier as provided in the Declaration. The Trust's business and affairs will be conducted by the trustees (the "Trustees") appointed by PEPCO, as the direct or indirect holder of all the Common Securities. The holder of the Common Securities will be entitled to appoint, remove or replace any of, or increase or reduce the number of, the Trustees. The duties and obligations of the Trustees shall be governed by the Declaration. One or more of the Trustees will be persons who are employees or officers of PEPCO (the "Regular Trustees"). One Trustee will be a financial institution which will be unaffiliated with PEPCO and which shall act as institutional trustee under the Declaration and as indenture trustee for purposes of the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), pursuant to the terms set forth in a Prospectus Supplement (the "Institutional Trustee"). In addition, unless the Institutional Trustee maintains a principal place of business in the State of Delaware, and otherwise meets the requirements of applicable law, one Trustee will have its principal place of business or reside in the State of Delaware (the "Delaware Trustee"). PEPCO will pay all fees and expenses related to the Trust and the offering of Trust Securities. DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES The Junior Subordinated Debentures will be issued under an indenture, as it may be supplemented from time to time (the "Indenture"), between the Company and The Bank of New York, as trustee (the "Debt Trustee"). The form of the Indenture has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. The terms of the Junior Subordinated Debentures will include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act. While the following summary of the material terms 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 Trust Indenture Act, all material terms of the Junior Subordinated Debentures are set forth herein and in any Prospectus Supplement relating to the particular Junior Subordinated Debentures being offered thereby. GENERAL The Junior Subordinated Debentures will be unsecured obligations of the Company. The Indenture does not limit the aggregate principal amount of Junior Subordinated Debentures which may be issued thereunder and provides that the Junior Subordinated Debentures may be issued from time to time in one or more series. The Junior Subordinated Debentures may be distributed pro rata to the holders of the Trust Securities in connection with the liquidation of the Trust upon the occurrence of certain events described in the Prospectus Supplement. 4 Reference is made to the Prospectus Supplement relating to the particular Junior Subordinated Debentures being offered thereby for the following terms: (1) the designation of such Junior Subordinated Debentures; (2) the aggregate principal amount of such Junior Subordinated Debentures; (3) the percentage of their principal amount at which such Junior Subordinated Debentures will be issued; (4) the date or dates on which such Junior Subordinated Debentures will mature and the right, if any, to shorten or extend such date or dates; (5) the rate or rates, if any, per annum, at which such Junior Subordinated Debentures will bear interest, or the method of determination of such rate or rates; (6) the date or dates from which such interest shall accrue, the interest payment dates on which such interest will be payable or the manner of determination of such interest payment dates and the record dates for the determination of holders to whom interest is payable on any such interest payment dates; (7) the right, if any, to extend the interest payment periods and the duration of such extension; (8) provisions, if any, for a sinking purchase or other analogous fund; (9) the period or periods, if any, within which, the price or prices of which, and the terms and conditions upon which such Junior Subordinated Debentures may be redeemed, in whole or in part, at the option of PEPCO or the holder; (10) the form of such Junior Subordinated Debentures; and (11) any other specific terms of the Junior Subordinated Debentures. The covenants contained in the Indenture would not necessarily afford protection to holders of the Junior Subordinated Debentures in the event of a decline in credit quality resulting from takeovers, recapitalizations or similar restructurings. FORM, EXCHANGE, REGISTRATION, TRANSFER AND PAYMENT Unless otherwise specified in the Prospectus Supplement, the Junior Subordinated Debentures will be issued in fully registered form without coupons and in denominations of $1,000 and multiples of $1,000. No service charge will be made for any transfer or exchange of the Junior Subordinated Debentures, but the Company or the Debt Trustee may require payment of a sum sufficient to cover any tax or other government charge payable in connection therewith. Unless otherwise provided in the Prospectus Supplement, principal and premium, if any, or interest, if any, will be payable and the Junior Subordinated Debentures may be surrendered for payment or transferred at the offices of the Debt Trustee as paying and authenticating agent, provided that payment of interest on Junior Subordinated Debentures that are not held by the Trust may be made at the option of PEPCO by check mailed to the address of the person entitled thereto as it appears in the security register. BOOK-ENTRY JUNIOR SUBORDINATED DEBENTURES The Junior Subordinated Debentures of a series may be issued, in whole or in part, in the form of one or more instruments that will be deposited with, or on behalf of, a depositary (the "Global Depositary"), or its nominee, identified in the Prospectus Supplement relating to such series (a "Global Debenture"). In such a case, one or more Global Debentures will be issued in a denomination or aggregate denomination equal to the portion of the aggregate principal amount of outstanding Junior Subordinated Debentures of the series to be represented by such Global Security. Unless and until it is exchanged in whole or in part for Junior Subordinated Debentures in definitive registered form, a Global Debenture may not be registered for transfer or exchange, except as a whole by the Global Depositary to a nominee for such Global Depositary and except in the circumstances described in the Prospectus Supplement. The specific terms of the depositary arrangement with respect to any portion of the Junior Subordinated Debentures to be represented by a Global Debenture and a description of the Global Depositary will be provided in the Prospectus Supplement. SUBORDINATION The Junior Subordinated Debentures will be subordinated and junior in right of payment to certain other indebtedness of PEPCO to the extent set forth in the Prospectus Supplement. 5 CERTAIN COVENANTS OF PEPCO If (i) there shall have occurred any event that would constitute an Indenture Event of Default (as defined herein), (ii) PEPCO shall be in default with respect to its payment of any obligations under the related Preferred Securities Guarantee or Common Securities Guarantee (as defined herein), or (iii) PEPCO shall have given notice of its election to defer payments of interest on such Junior Subordinated Debentures by extending the interest payment period as provided in the Supplemental Indenture and such period, or any extension thereof, shall be continuing, then (a) PEPCO shall not declare or pay any dividend on, make any distributions with respect to, or redeem, purchase, acquire or make a liquidation payment with respect to, any of its capital stock (other than (y) purchases or acquisitions of shares of Common Stock in connection with the satisfaction by PEPCO of its obligations under any employee benefit plans or any other contractual obligation of PEPCO (other than a contractual obligation ranking pari passu with or junior to the Junior Subordinated Debentures) or (z) the purchase of fractional interests in shares of PEPCO capital stock pursuant to the conversion or exchange provisions of such PEPCO capital stock or the security being converted or exchanged), (b) PEPCO shall not make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by PEPCO which rank pari passu with or junior to such Junior Subordinated Debentures and (c) PEPCO shall not make any guarantee payments with respect to the foregoing (other than pursuant to the Preferred Securities Guarantee). For so long as the Trust Securities remain outstanding, PEPCO will covenant (i) directly or indirectly to maintain 100 percent ownership of the Common Securities; provided, however, that any permitted successor of PEPCO under the Indenture may succeed to PEPCO's ownership of such Common Securities, (ii) to use its reasonable efforts to cause the Trust (a) to remain a statutory business trust, except in connection with the distribution of Junior Subordinated Debentures to the holders of Trust Securities in liquidation of the Trust, the redemption of all of the Trust Securities, or certain mergers, consolidations or amalgamations, each as permitted by the Declaration, and (b) otherwise to continue not to be treated as an association taxable as a corporation or a partnership for United States federal income tax purposes and (iii) to use its reasonable efforts to cause each holder of Trust Securities to be treated as owning an undivided beneficial interest in the Junior Subordinated Debentures. LIMITATION ON MERGERS AND SALES OF ASSETS PEPCO shall not consolidate with, or merge into, any corporation or convey or transfer its properties and assets substantially as an entirety to any person or entity unless (a) the successor shall be a corporation organized under the laws of any domestic jurisdiction and shall expressly assume the obligations of PEPCO under the Indenture and (b) after giving effect thereto, no default under the Indenture shall have occurred and be continuing under the Indenture. EVENTS OF DEFAULT, WAIVER AND NOTICE The Indenture provides that any one or more of the following described events which has occurred and is continuing constitutes an event of default with respect to each series of Junior Subordinated Debentures (an "Indenture Event of Default"): (a) default for 30 days in payment of any interest on the Junior Subordinated Debentures of that series, when due; provided, however, that a valid extension of the interest payment period by the Company shall not constitute a default in the payment of interest for this purpose; or (b) default in payment of principal of, or premium, if any, on, the Junior Subordinated Debentures of that series when due either at maturity, upon redemption, by declaration or otherwise; provided, however, that a valid extension of the maturity of such Junior Subordinated Debentures shall not constitute a default for this purpose; or (c) default by the Company in the performance of any other of the covenants or agreements in the Indenture which shall not have been remedied for a period of 90 days after notice to PEPCO; or (d) certain events of bankruptcy, insolvency or reorganization of PEPCO; or 6 (e) after Junior Subordinated Debentures are issued to the Trust in connection with the issuance of Trust Securities by the Trust, the voluntary or involuntary dissolution, winding-up or termination of the Trust, except in connection with the distribution of Junior Subordinated Debentures to the holders of Trust Securities in liquidation of the Trust, the redemption of all of the Trust Securities, or certain mergers, consolidations or amalgamations, each as permitted by the Declaration. The Indenture provides that, if an Indenture Event of Default on any series of Junior Subordinated Debentures shall have occurred and be continuing, either the Debt Trustee or the holders of not less than 25 percent in aggregate principal amount of the Junior Subordinated Debentures of such series then outstanding may declare the principal of all such Junior Subordinated Debentures of such series to be due and payable immediately. The holders of a majority in aggregate outstanding principal amount of such series of Junior Subordinated Debentures may annul such declaration and waive the default if the default (other than the non-payment of the principal of such series of Junior Subordinated Debentures which has become due solely by such acceleration) has been cured and a sum sufficient to pay all matured installments of interest and principal due otherwise than by acceleration has been deposited with the Debt Trustee. The holders of a majority in principal amount of the Junior Subordinated Debentures of any or all series affected and then outstanding shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Debt Trustee under the Indenture, provided that the holders of the Junior Subordinated Debentures shall have offered to the Debt Trustee reasonable indemnity against expenses and liabilities. Notwithstanding the foregoing, the right of any holder of Junior Subordinated Debentures to receive payment of the principal of and interest on such Junior Subordinated Debentures on or after the due dates therefor, as the same may be extended in accordance with the terms of such Junior Subordinated Debentures, or to institute suit for the enforcement of any such payment provisions, shall not be impaired or affected without the consent of such holder. The Indenture requires the annual filing by PEPCO with the Debt Trustee of a certificate as to the absence of defaults under the Indenture. The Indenture provides that the Debt Trustee may withhold notice to the holders of a series of Junior Subordinated Debentures of an Indenture Event of Default (except a default in payment of principal of, or of interest or premium on, the Junior Subordinated Debentures) if the Debt Trustee in good faith determines that the withholding of such notice is in the interest of the holders. MODIFICATION OF THE INDENTURE The Indenture contains provisions permitting the Company and the Debt Trustee, with the consent of the holders of not less than a majority in principal amount of the Junior Subordinated Debentures of all series affected by such modification at the time outstanding, and the holders of a majority in aggregate liquidation amount of the related Preferred Securities, to modify the Indenture or any supplemental indenture or the rights of the holders of the Junior Subordinated Debentures; provided that no such modification shall, without the consent of the holders of each Junior Subordinated Debenture (and each Preferred Security, if applicable) affected thereby, (i) extend the fixed maturity of any Junior Subordinated Debenture, or reduce the principal amount thereof or any premium thereon, or reduce any amount payable on redemption thereof, or reduce the rate or extend the time of payment of interest thereon, or make the principal of, or interest or premium on, the Junior Subordinated Debentures payable in any coin or currency other than that provided in the Junior Subordinated Debentures, or impair or affect the right of any holder of Junior Subordinated Debentures to institute suit for the payment thereof or the right of repayment, if any, at the option of the holder, (ii) reduce the aforesaid percentage of Junior Subordinated Debentures the consent of the holders of which is required for any such modification or (iii) otherwise materially adversely affect the interest of the holders of any series of Junior Subordinated Debentures. DEFEASANCE AND DISCHARGE The Indenture provides that PEPCO, at PEPCO's option, will be discharged from any and all obligations in respect of the Junior Subordinated Debentures of a series (except for certain obligations to register the transfer 7 or exchange of Junior Subordinated Debentures, replace destroyed, lost, stolen or mutilated Junior Subordinated Debentures, maintain paying agencies and hold moneys for payment in trust) if PEPCO deposits, in trust with the Debt Trustee or a defeasance agent, money or U.S. government obligations which through the payment of interest thereon and principal thereof in accordance with their terms will provide money, in an amount sufficient to pay all the principal (including any mandatory sinking fund payments) of, and interest and premium, if any, on, the Junior Subordinated Debentures of such series on the dates such payments are due in accordance with the terms of such Junior Subordinated Debentures. To exercise any such option, PEPCO is required to deliver to the Debt Trustee and the defeasance agent, if any, an opinion of counsel to the effect that (i) the deposit and related defeasance would not cause the holders of the Junior Subordinated Debentures of such series to recognize income, gain or loss for U.S. federal income tax purposes, accompanied by a private letter ruling to that effect received by PEPCO from the United States Internal Revenue Service or a revenue ruling pertaining to a comparable form of transaction to that effect published by the United States Internal Revenue Service, and (ii) if listed on any national securities exchange, such Junior Subordinated Debentures would not be delisted from such exchange as a result of the exercise of such option. GOVERNING LAW The Indenture and the Junior Subordinated Debentures will be governed by, and construed in accordance with, the internal laws of the State of New York. THE DEBT TRUSTEE PEPCO and its affiliates maintain certain accounts and other banking relationships with the Debt Trustee and its affiliates in the ordinary course of business. The Debt Trustee also serves as the Preferred Guarantee Trustee and as trustee under other indentures of PEPCO. DESCRIPTION OF THE PREFERRED SECURITIES The Trust may issue only one series of Preferred Securities. The Preferred Securities will have the terms described in the Prospectus Supplement. The Declaration will be qualified as an indenture under the Trust Indenture Act. The Preferred Securities will have such terms, including distributions, redemption, voting, liquidation rights and such other preferred, deferred or other special rights or such restrictions as shall be set forth in the Declaration or made part of the Declaration by the Trust Indenture Act and which will mirror the terms of the Junior Subordinated Debentures held by the Trust and described in the Prospectus Supplement. Reference is made to the Prospectus Supplement for specific terms, including (i) the distinctive designation of such Preferred Securities; (ii) the number of Preferred Securities issuable by the Trust; (iii) the distribution rate (or method of determining such rate) and the date or dates upon which such distributions shall be payable; (iv) whether distributions shall be cumulative, and, in the case of Preferred Securities having such cumulative distribution rights, the date or dates or method of determining the date or dates from which distributions shall be cumulative; (v) the amount or amounts which shall be paid out of the assets of the Trust to the holders of Preferred Securities upon voluntary or involuntary dissolution, winding-up or termination of the Trust; (vi) the obligation, if any, of the Trust to purchase or redeem Preferred Securities and the price or prices at which, the period or periods within which, and the terms and conditions upon which, Preferred Securities shall be purchased or redeemed, in whole or in part, pursuant to such obligation; (vii) the voting rights, if any, of holders of Preferred Securities in addition to those required by law, including the number of votes per Preferred Security and any requirement for the approval by the holders of Preferred Securities as a condition to specified action or amendments to the Declaration; (viii) the terms and conditions, if any, upon which the Junior Subordinated Debentures owned by the Trust may be distributed to holders of Preferred Securities; (ix) if applicable, any securities exchange upon which the Preferred Securities shall be listed; and (x) any other relevant rights, preferences, privileges, limitations or restrictions of Preferred Securities not inconsistent with the Declaration or 8 with applicable law. All Preferred Securities offered hereby will be guaranteed by PEPCO to the extent set forth below under "Description of the Preferred Securities Guarantee." Certain United States federal income tax considerations applicable to any offering of Preferred Securities will be described in the Prospectus Supplement. In connection with the issuance of Preferred Securities, the Trust will issue one series of Common Securities. The Declaration authorizes the Regular Trustees of the Trust to issue on behalf of the Trust one series of Common Securities having such terms including distributions, redemption, voting, liquidation rights or such restrictions as shall be set forth therein. Except for voting rights, the terms of the Common Securities will be substantially identical to the terms of the Preferred Securities and the Common Securities will rank pari passu, and payments will be made thereon pro rata, with the Preferred Securities, except that, upon an event of default under the Declaration, the rights of the holders of the Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise will be subordinated to the rights of the holders of the Preferred Securities. Except in certain limited circumstances, the Common Securities will also carry the right to vote to appoint, remove or replace any of the Trustees of the Trust. All of the Common Securities of the Trust will be owned directly or indirectly by PEPCO. DESCRIPTION OF THE PREFERRED SECURITIES GUARANTEE PEPCO will execute and deliver the Preferred Securities Guarantee for the benefit of the holders from time to time of Preferred Securities. The Preferred Securities Guarantee will be qualified as an indenture under the Trust Indenture Act. The Bank of New York will act as indenture trustee under the Preferred Securities Guarantee for purposes of the Trust Indenture Act (the "Preferred Guarantee Trustee"). The terms of the Preferred Securities Guarantee will be those set forth in the Preferred Securities Guarantee and those made part of such Preferred Securities Guarantee by the Trust Indenture Act. While the following summary of the material terms of the Preferred Securities Guarantee 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 form of Preferred Securities Guarantee, which is filed as an exhibit to the Registration Statement of which this Prospectus forms a part, and the Trust Indenture Act, all material terms of the Preferred Securities Guarantee are set forth herein and in the Prospectus Supplement relating to the particular Preferred Securities being offered thereby. The Preferred Securities Guarantee will be held by the Preferred Guarantee Trustee for the benefit of the holders of the Preferred Securities. GENERAL Pursuant to the Preferred Securities Guarantee, PEPCO will agree, to the extent set forth therein, to pay in full, to the holders of the Preferred Securities, the Guarantee Payments (as defined herein), as and when due, regardless of any defense, right of set-off or counterclaim which the Trust may have or assert. The following payments with respect to Preferred Securities to the extent not paid by the Trust (the "Guarantee Payments"), will be covered by the Preferred Securities Guarantee (without duplication): (i) any accrued and unpaid distributions which are required to be paid on such Preferred Securities, to the extent the Trust shall have funds available therefor; (ii) the redemption price, including all accrued and unpaid distributions to the date of payment (the "Redemption Price"), to the extent the Trust has funds available therefor, with respect to any Preferred Securities called for redemption by the Trust; and (iii) upon a voluntary or involuntary dissolution, winding-up or termination of the Trust (other than in connection with the distribution of Junior Subordinated Debentures to the holders of Preferred Securities or the redemption of all of the Preferred Securities), the lesser of (a) the aggregate of the liquidation amount and all accrued and unpaid distributions on such Preferred Securities to the date of payment, to the extent the Trust has funds available therefor, and (b) the amount of assets of the Trust remaining available for distribution to holders of such Preferred Securities in liquidation of the Trust. The redemption price and liquidation amount will be fixed at the time the Preferred Securities are issued. PEPCO's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by PEPCO to the holders of Preferred Securities or by causing the Trust to pay such amounts to such holders. 9 The Preferred Securities Guarantee will not apply to any Guarantee Payment, except to the extent the Trust shall have funds available therefor. If PEPCO does not make interest payments on the Junior Subordinated Debentures purchased by the Trust, the Trust will not pay distributions on the Preferred Securities issued by the Trust and will not have funds available therefor. The Preferred Securities Guarantee, when taken together with PEPCO's obligations under the Junior Subordinated Debentures, the Indenture, and the Declaration, including its obligations to pay costs, expenses, debts and liabilities of the Trust (other than with respect to the Trust Securities), will provide a full and unconditional guarantee on a subordinated basis by PEPCO of payments due on the Preferred Securities. PEPCO has also agreed separately to guarantee irrevocably and unconditionally the obligations of the Trust with respect to the Common Securities (the "Common Securities Guarantee") to the same extent as the Preferred Securities Guarantee, except that upon an event of default under the Declaration, holders of Preferred Securities shall have priority over holders of Common Securities with respect to distributions and payments on liquidation, redemption or otherwise. CERTAIN COVENANTS OF PEPCO In the Preferred Securities Guarantee, PEPCO will covenant that, so long as any Preferred Securities issued remain outstanding, if there shall have occurred any event that would constitute an event of default under the Preferred Securities Guarantee or the Declaration, or if PEPCO has exercised its option to defer interest payments on the Junior Subordinated Debentures by extending the interest payment period and such period or extension thereof shall be continuing, then (a) PEPCO shall not declare or pay any dividend on, make any distributions with respect to, or redeem, purchase, acquire or make a liquidation payment with respect to, any of its capital stock (other than (i) purchases or acquisitions of shares of Common Stock in connection with the satisfaction by PEPCO of its obligations under any employee benefit plans or any other contractual obligation of PEPCO (other than a contractual obligation ranking pari passu with or junior to the Junior Subordinated Debentures) or (ii) the purchase of fractional interests in shares of PEPCO capital stock pursuant to the conversion or exchange provisions of such PEPCO capital stock or the security being converted or exchanged), (b) PEPCO shall not make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by PEPCO which rank pari passu with or junior to such Junior Subordinated Debentures and (c) PEPCO shall not make any guarantee payments with respect to the foregoing (other than pursuant to such Preferred Securities Guarantee). MODIFICATION OF THE PREFERRED SECURITIES GUARANTEE; ASSIGNMENT Except with respect to any changes which do not adversely affect the rights of holders of Preferred Securities (in which case no consent will be required), the Preferred Securities Guarantee may be amended only with the prior approval of the holders of at least a majority in liquidation amount of the outstanding Preferred Securities. The manner of obtaining any such approval of holders of such Preferred Securities will be as set forth in an accompanying Prospectus Supplement. All guarantees and agreements contained in the Preferred Securities Guarantee shall bind the successors, assigns, receivers, trustees and representatives of PEPCO and shall inure to the benefit of the holders of the Preferred Securities then outstanding. Except in connection with any merger or consolidation of PEPCO with or into another entity or any sale, transfer or lease of PEPCO's assets to another entity, each as permitted by the Indenture, PEPCO may not assign its rights or delegate its obligations under such Preferred Securities Guarantee without the prior approval of the holders of at least a majority in liquidation amount of the outstanding Preferred Securities. TERMINATION The Preferred Securities Guarantee will terminate as to the Preferred Securities (a) upon full payment of the Redemption Price of all Preferred Securities, (b) upon distribution of the Junior Subordinated Debentures held by the Trust to the holders of the Trust Securities or (c) upon full payment of the amounts payable in accordance with the Declaration upon liquidation of the Trust. Notwithstanding the foregoing, the Preferred Securities 10 Guarantee will continue to be effective or will be reinstated, as the case may be, if at any time any holder of Preferred Securities issued by the Trust must restore payment of any sums paid under such Preferred Securities or such Preferred Securities Guarantee. EVENTS OF DEFAULT An event of default under a Preferred Securities Guarantee will occur upon the failure of the Company to perform any of its payment or other obligations thereunder. The holders of a majority in liquidation amount of the Preferred Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Preferred Guarantee Trustee in respect of the Preferred Securities Guarantee or to direct the exercise of any trust or power conferred upon the Preferred Guarantee Trustee under the Preferred Securities Guarantee. Any holder of Preferred Securities may institute a legal proceeding directly against PEPCO to enforce the Preferred Guarantee Trustee's rights and the obligations of PEPCO under the Preferred Securities Guarantee, without first instituting a legal proceeding against the Trust, the Preferred Guarantee Trustee or any other person or entity. STATUS OF THE PREFERRED SECURITIES GUARANTEE The Preferred Securities Guarantee will constitute an unsecured obligation of PEPCO and will rank (i) subordinate and junior in right of payment to all other liabilities of PEPCO, except those made pari passu or subordinate by their terms, (ii) pari passu with the most senior preferred or preference stock now or hereafter issued by PEPCO and with any guarantee now or hereafter entered into by PEPCO in respect of any preferred or preference stock of any affiliate of PEPCO, and (iii) senior to the Common Stock. The terms of the Preferred Securities provide that each holder of Preferred Securities by acceptance thereof agrees to the subordination provisions and other terms of the Preferred Securities Guarantee relating thereto. The Preferred Securities Guarantee will constitute a guarantee of payment and not of collection (that is, the guaranteed party may institute a legal proceeding directly against PEPCO to enforce its rights under the Preferred Securities Guarantee without instituting a legal proceeding against any other person or entity). INFORMATION CONCERNING THE PREFERRED GUARANTEE TRUSTEE The Preferred Guarantee Trustee, prior to the occurrence of a default with respect to the Preferred Securities Guarantee and after the curing of any such defaults that may have occurred, undertakes to perform only such duties as are specifically set forth in such Preferred Securities Guarantee. After such a default has occurred (of which a responsible officer of the Preferred Guarantee Trustee has actual knowledge) and is continuing, the Preferred Guarantee Trustee is required to exercise the rights and powers vested in it by the Preferred Securities Guarantee using the same degree of care and skill as a prudent person would exercise or use under the circumstances in the conduct of his own affairs. Subject to such provisions, the Preferred Guarantee Trustee is under no obligation to exercise any of the powers vested in it by the Preferred Securities Guarantee at the request of any holder of Preferred Securities, unless offered reasonable indemnity against the costs, expenses and liabilities that might be incurred thereby. PEPCO and its affiliates maintain certain accounts and other banking relationships with the Preferred Guarantee Trustee and its affiliates in the ordinary course of business. The Preferred Guarantee Trustee also serves as the Debt Trustee and as trustee under other indentures of PEPCO. GOVERNING LAW The Preferred Securities Guarantee will be governed by and construed in accordance with the internal laws of the State of New York. 11 PLAN OF DISTRIBUTION PEPCO and the Trust may sell the Offered Securities in any of, or any combination of, the following ways: (i) directly to purchasers, (ii) through agents and (iii) through underwriters or dealers. Offers to purchase Offered Securities may be solicited directly by PEPCO and/or the Trust, as the case may be, or by agents designated by PEPCO and/or the Trust, as the case may be, from time to time. Any such agent, who may be deemed to be an underwriter as that term is defined in the Securities Act, involved in the offer or sale of the Offered Securities in respect of which this Prospectus is delivered will be named, and any commissions payable by PEPCO to such agent will be set forth, in the Prospectus Supplement. Unless otherwise indicated in the Prospectus Supplement, any such agent will be acting on a best efforts basis for the period of its appointment (ordinarily five business days or less). Agents, dealers and underwriters may be customers of, engage in transactions with, or perform services for PEPCO in the ordinary course of business. If an underwriter or underwriters are utilized in the sale, PEPCO will execute an underwriting agreement with such underwriters at the time of sale to them and the names of the underwriters and the terms of the transaction will be set forth in the Prospectus Supplement, which will be used by the underwriters to make releases of the Offered Securities in respect of which this Prospectus is delivered to the public. If a dealer is utilized in the sale of the Offered Securities in respect of which this Prospectus is delivered, PEPCO and/or the Trust, as the case may be, will sell such Offered Securities to the dealer, as principal. The dealer may then resell such Offered Securities to the public at varying prices to be determined by such dealer at the time of resale. The name of the dealer and the terms of the transaction will be set forth in the Prospectus Supplement. Agents, underwriters, and dealers may be entitled under the relevant agreements to indemnification by PEPCO and/or the Trust, as the case may be, against certain liabilities, including liabilities under the Securities Act. Underwriters, agents or their controlling persons may engage in transactions with and perform services for PEPCO in the ordinary course of business. LEGAL MATTERS Certain matters of Delaware law relating to the validity of the Preferred Securities will be passed upon on behalf of the Trust by Skadden, Arps, Slate, Meagher & Flom LLP, Wilmington, Delaware, special Delaware counsel to the Trust. The validity of the Junior Subordinated Debentures and the Preferred Securities Guarantee and certain legal matters relating thereto will be passed upon for the Company by Covington & Burling, Washington, D.C.. Certain legal matters will be passed upon for the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. EXPERTS The consolidated financial statements incorporated in this Prospectus by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 have been so incorporated in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. 12 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE PROSPEC- TUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RE- LIED UPON AS HAVING BEEN AUTHORIZED BY POTOMAC ELECTRIC POWER COMPANY, THE TRUST OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER AND THEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AF- FAIRS OF POTOMAC ELECTRIC POWER COMPANY OR THE TRUST SINCE THE DATE THEREOF. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. --------- TABLE OF CONTENTS
PAGES PROSPECTUS SUPPLEMENT ----- Risk Factors............................................................ S-4 Potomac Electric Power Company.......................................... S-8 The Trust............................................................... S-8 Selected Financial Information.......................................... S-10 Ratios of Earnings to Fixed Charges .................................... S-10 Accounting Treatment.................................................... S-11 Use of Proceeds......................................................... S-11 Description of the Preferred Securities................................. S-12 Description of the Guarantee............................................ S-22 Description of the Junior Subordinated Debentures....................... S-22 Effect of Obligations Under the Junior Subordinated Debentures and the Guarantee.............................................................. S-28 United States Federal Income Taxation................................... S-29 ERISA Considerations.................................................... S-32 Underwriting............................................................ S-33 PROSPECTUS Available Information................................................... 2 Incorporation of Certain Documents by Reference......................... 3 Potomac Electric Power Company.......................................... 3 The Trust............................................................... 4 Description of the Junior Subordinated Debentures....................... 4 Description of the Preferred Securities................................. 8 Description of the Preferred Securities Guarantee....................... 9 Plan of Distribution.................................................... 12 Legal Matters........................................................... 12 Experts................................................................. 12
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 5,000,000 PREFERRED SECURITIES POTOMAC ELECTRIC POWER COMPANY TRUST I % TRUST ORIGINATED PREFERRED SECURITIESSM ("TOPRSSM") FULLY AND UNCONDITIONALLY GUARANTEED BY POTOMAC ELECTRIC POWER COMPANY ------------- PROSPECTUS SUPPLEMENT ------------- MERRILL LYNCH & CO. A.G. EDWARDS & SONS, INC. PAINEWEBBER INCORPORATED PRUDENTIAL SECURITIES INCORPORATED SALOMON SMITH BARNEY , 1998 SM"TRUST ORIGINATED PREFERRED SECURITIES" AND "TOPRS" ARE SERVICE MARKS OF MERRILL LYNCH & CO. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. Estimated expenses relating to the Offered Securities (assuming an aggregate issuance of $125,000,000) are as follows: Registration fee................................................... $ 36,875 Rating Agency fees................................................. 44,250 Printing........................................................... 90,000 Trustee's fees and expenses........................................ 20,000 Fee of independent accountants..................................... 22,500 Fees of counsel.................................................... 100,000 Expenses incidental to qualification under Blue Sky Laws........... 10,000 Miscellaneous...................................................... 26,375 -------- Total............................................................ $350,000 ========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Under Section 29-304(1b) of the District of Columbia Business Corporation Act, a corporation may indemnify against expenses any directors or officers made party to a proceeding by reason of his service as such, except in relation to matters as to which any such director or officer shall be adjudged to be liable for negligence or misconduct in the performance of duty. Such indemnification is not exclusive of any other rights to which those indemnified may be entitled under any by-law, agreement, vote of shareholders or otherwise. Under Section 13.1-697 of the Virginia Stock Corporation Act ("VSCA"), a Virginia corporation may indemnify a director who was, is or is threatened to be made a party to any proceeding if the director acted in good faith and (i) he believed, in the case of conduct in his official capacity with the corporation, that his conduct was in the best interests of the corporation or, in the case of other conduct, that his conduct was at least not opposed to the best interests of the corporation, or (ii) in the case of a criminal proceeding, he had no reasonable cause to believe his conduct was unlawful. A corporation may not indemnify a director in connection with (i) a proceeding by or in the right of the corporation in which the director was found liable to the corporation or (ii) any other proceeding charging improper personal benefit to him, whether or not involving action in his official capacity, in which he was adjudged liable on the basis that personal benefit was improperly received. Indemnification permitted under this section of the VSCA in connection with a proceeding by or in the right of the corporation is limited to reasonable expenses incurred in connection with the proceeding. Under Section 13.1-698, unless limited by its Articles of Incorporation, a corporation must indemnify against reasonable expenses a director who entirely prevails in the defense of any proceeding to which he was a party because he is or was a director of the corporation. Under Section 13.1-700.1, a court of appropriate jurisdiction, upon the application of a director, may order a corporation to advance or reimburse expenses or provide indemnification if the court determines that the director is so entitled. With respect to a proceeding by or in the right of the corporation, a court may order indemnification of the director to the extent of his reasonable expenses even though he was adjudged liable to the corporation. Under Section 13.1-699, a corporation may advance reasonable expenses to a director made a party to a proceeding under certain circumstances, including the furnishing by the director of (i) a written statement of his good faith belief that he has met the standard of conduct necessary to obtain indemnification and (ii) a written undertaking to repay the advance if it is ultimately determined that he did not meet that standard. Under Section II-1 13.1-702, a corporation may indemnify an officer, employee or agent of a corporation to the same extent as a director. Under Section 13.1-704, a corporation may provide indemnification in addition to that provided by statute if authorized by its Articles of Incorporation, a bylaw made by the shareholders, or any resolution adopted by the shareholders, except indemnification against willful misconduct or a knowing violation of the criminal law. The By-Laws of the Company provide that the Company shall indemnify each director or officer and each former director and officer of the Company against expenses actually and reasonably incurred in connection with the defense of any action, suit or proceeding by reason of his or her being or having been such director or officer, including liabilities incurred under the Securities Act of 1933, as amended, except in relation to matters as to which such director or officer shall be finally adjudged in such action, suit or proceeding to have knowingly violated the criminal law or to be liable for willful misconduct in the performance of his or her duty to the Company; and that such indemnification shall be in addition to, and not exclusive of, any other rights to which those indemnified may be entitled under any by-law, agreement, vote of stockholders, or otherwise. In the Underwriting Agreement, the underwriters and agents will agree to indemnify the Company, its directors, officers and controlling persons against certain civil liabilities that may arise under the Securities Act of 1933 in connection with this offering. The Company also has policies of insurance which insure officers and directors against certain liabilities and expenses incurred by them in such capacities. ITEM 16. EXHIBITS. 1 --Form of Purchase Agreement (1) 4.1 --Certificate of Trust of Potomac Electric Power Company Trust I (2) 4.2 --Declaration of Trust of Potomac Electric Power Company Trust I (2) 4.3 --Form of Amended and Restated Declaration of Trust to be used in connection with the issuance of the Preferred Securities (1) 4.4 --Form of Indenture between PEPCO and The Bank of New York, as Trustee (1) 4.5 --Form of Supplemental Indenture to be used in connection with the issuance of the Junior Subordinated Debentures (1) 4.6 --Form of Preferred Security (included in Exhibit 4.3) 4.7 --Form of Junior Subordinated Debenture (included in Exhibit 4.5) 4.8 --Form of Preferred Securities Guarantee Agreement (1) 5.1 --Opinion of Covington & Burling (1) 5.2 --Opinion of Skadden, Arps, Slate, Meagher & Flom LLP (1) 8 --Tax Opinion of Covington & Burling (1) 12 --Computation of Ratio of Earnings to Fixed Charges (1) 23.1 --Consent of Price Waterhouse LLP (1) 23.2 --Consent of Covington & Burling (included in Exhibit 5.1) 23.3 --Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.2) 23.4 --Consent of Covington & Burling (included as Exhibit 8) 24 --Powers of Attorney for PEPCO (2) 25.1 --Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939, of The Bank of New York (Delaware), as Institutional Trustee (1) 25.2 --Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939, of The Bank of New York, as Debt Trustee (1) 25.3 --Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939, of The Bank of New York, as Preferred Guarantee Trustee (1)
- -------- (1) Filed herewith. (2) Previously filed. ITEM 17. UNDERTAKINGS. The undersigned Registrants hereby undertake: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: II-2 (i) To include any prospectus required in section 10(a)(3) of the Securities Act of 1933 (the "1933 Act"); (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the Company pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in this Registration Statement; (2) That, for the purpose of determining any liability under the 1933 Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) The undersigned Registrants hereby undertake that for purposes of determining any liability under the 1933 Act, each filing of the Company's annual report pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in this Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) Insofar as indemnification for liabilities arising under the 1933 Act may be permitted to directors, officers and controlling persons of the Registrants pursuant to the provisions described under Item 15 above, or otherwise, the Registrants have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrants of expenses incurred or paid by a director, officer or controlling person of the Registrants in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrants will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue. (d) The undersigned Registrants hereby undertake that: (1) For purposes of determining any liability under the 1933 Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrants pursuant to Rule 424(b)(1) or (4) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the 1933 Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to Form S-3 Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Washington, the District of Columbia, on May 7, 1998. Potomac Electric Power Company By: /s/ A.J. Kamerick ----------------------------------- ANTHONY J. KAMERICK VICE PRESIDENT AND TREASURER Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to Form S-3 Registration Statement has been signed by the following persons in the capacities indicated on May 7, 1998.
SIGNATURE TITLE DATE * President, Chief Executive May 7, 1998 - ------------------------------- Officer and Director JOHN M. DERRICK, JR. (principal executive officer) * Senior Vice President, Chief May 7, 1998 - ------------------------------- Financial Officer and DENNIS R. WRAASE Director (principal financial officer and principal accounting officer) * Director May 7, 1998 - ------------------------------- ROGER R. BLUNT, SR. * Director May 7, 1998 - ------------------------------- EDMUND B. CRONIN, JR. * Director May 7, 1998 - ------------------------------- RICHARD E. MARRIOTT * Director May 7, 1998 - ------------------------------- DAVID O. MAXWELL * Director May 7, 1998 - ------------------------------- FLORETTA D. MCKENZIE
II-4
SIGNATURE TITLE DATE * Director May 7, 1998 - ------------------------------- ANN D. MCLAUGHLIN * Director May 7, 1998 - ------------------------------- EDWARD F. MITCHELL * Director May 7, 1998 - ------------------------------- PETER F. O'MALLEY Director May 7, 1998 - ------------------------------- LOUIS A. SIMPSON * Director May 7, 1998 - ------------------------------- A. THOMAS YOUNG *By: /s/ Ellen Sheriff Rogers --------------------------- ELLEN SHERIFF ROGERS, ATTORNEY-IN-FACT
II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Trust has duly caused this Amendment No. 1 to Form S-3 Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Washington, the District of Columbia, on May 7, 1998. Potomac Electric Power Company Trust I By: /s/Anthony J. Kamerick ----------------------------------- Anthony J. Kamerick Trustee II-6 EX-1 2 PURCHASE AGREEMENT ================================================================================ POTOMAC ELECTRIC POWER COMPANY (a District of Columbia and Virginia corporation) and POTOMAC ELECTRIC POWER COMPANY TRUST I (a Delaware statutory business trust) 5,000,000 Preferred Securities [_]% Trust Originated Preferred Securities(SM) (Liquidation Amount $25 Per Preferred Security) PURCHASE AGREEMENT Dated: ___________, 1998 ================================================================================ (SM) "Trust Originated Preferred Securities" is a service mark of Merrill Lynch & Co. Table of Contents PURCHASE AGREEMENT.............................................................1 SECTION 1. Representations and Warranties.....................................4 (a) Representations and Warranties by the Company and the Trust........4 (i) Compliance with Registration Requirements..............4 (ii) Incorporated Documents.................................5 (iii) Independent Accountants................................5 (iv) Financial Statements...................................5 (v) No Material Adverse Change in Business.................5 (vi) Good Standing of the Company...........................6 (vii) Existence of Trust.....................................6 (viii) Common Securities......................................6 (ix) Authorization of Declaration...........................6 (x) Guarantee Agreement....................................7 (xi) Preferred Securities...................................7 (xii) Authorization of Indenture.............................7 (xiii) Authorization of Debentures............................7 (xiv) Authorization of Agreement.............................8 (xv) Absence of Defaults and Conflicts......................8 (xvi) Absence of Proceedings.................................8 (xvii) Possession of Licenses and Permits.....................9 (xviii) Compliance with Cuba Act...............................9 (xix) Investment Company Act.................................9 (xx) Contracts..............................................9 (xxi) Environmental Laws.....................................9 (b) Officer's Certificates.............................................9 SECTION 2. Sale and Delivery to Underwriters; Closing.........................9 (a) Preferred Securities...............................................9 (b) Payment...........................................................10 (c) Denominations; Registration.......................................10 SECTION 3. Covenants of the Company and the Trust............................10 (a) Compliance with Securities Regulations and Commission Requests....10 (b) Filing of Amendments..............................................11 (c) Delivery of Registration Statement................................11 (d) Delivery of Prospectuses..........................................11 (e) Continued Compliance with Securities Laws.........................12 (f) Blue Sky Qualifications...........................................12 (g) Rule 158..........................................................13 i (h) Restriction on Sale of Securities.................................13 (i) Reporting Requirements............................................13 (j) Listing...........................................................13 SECTION 4. Payment of Expenses...............................................13 (a) Expenses..........................................................13 (b) Termination of Agreement..........................................14 SECTION 5. Conditions of Underwriters' Obligations...........................14 (a) Effectiveness of Registration Statement...........................14 (b) Opinions of Counsel for Company...................................14 (c) Opinion of Special Delaware Counsel for the Trust.................14 (d) Opinion of Counsel for Underwriters...............................15 (e) Officers' Certificates............................................15 (f) Accountant's Comfort Letter.......................................16 (g) Regulatory Approval...............................................16 (h) Maintenance of Rating.............................................16 (i) Additional Documents..............................................16 (j) Termination of Agreement..........................................16 SECTION 6. Indemnification...................................................17 (a) Indemnification of Underwriters...................................17 (b) Indemnification of Trust by Company...............................18 (c) Indemnification of Trust, Company, Directors and Officers.........18 (d) Actions against Parties; Notification.............................18 SECTION 7. Contribution......................................................19 SECTION 8. Representations, Warranties and Agreements to Survive Delivery....20 SECTION 9. Termination of Agreement..........................................20 (a) Termination; General..............................................20 (b) Liabilities.......................................................21 SECTION 10. Default by One or More of the Underwriters........................21 SECTION 11. Notices...........................................................22 SECTION 12. Parties...........................................................22 SECTION 13. GOVERNING LAW AND TIME............................................22 ii SECTION 14. Effect of Headings................................................22 SCHEDULES Schedule A - List of Underwriters.................................Sch A-1 EXHIBITS Exhibit A - Form of Opinion of Company's Counsel........................A-1 Exhibit B - Form of Opinion of General Counsel of the Company...........B-1 Exhibit C - Form of Opinion of Trust's Special Delaware Counsel.........C-1 iii POTOMAC ELECTRIC POWER COMPANY (a District of Columbia and Virginia corporation) POTOMAC ELECTRIC POWER COMPANY TRUST I (a Delaware statutory business trust) 5,000,000 Preferred Securities [_]% Trust Originated Preferred Securities (Liquidation Amount $25 Per Preferred Security) PURCHASE AGREEMENT ------------------ ____________, 1998 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated A.G. Edwards & Sons, Inc. Paine Webber Incorporated Prudential Securities Incorporated Salomon Smith Barney as Representatives of the several Underwriters c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, New York 10281-1209 Ladies and Gentlemen: Potomac Electric Power Company Trust I (the "Trust"), a statutory business trust organized under the Business Trust Act of the State of Delaware (Chapter 38, Title 12 of the Delaware Code, 12 Del. C. (S) (S) 3801 et seq.) (the -- --- "Delaware Act"), confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), and each of the Underwriters named in Schedule A hereto (collectively the "Underwriters," which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof), for whom Merrill Lynch and A.G. Edwards & Sons, Inc., Paine Webber Incorporated, Prudential Securities Incorporated and Salomon Smith Barney are acting as Representatives (in such capacity, the "Representatives") with respect to the issue and sale by the Trust and the purchase by the Underwriters, acting severally and not jointly, of the respective numbers of [_]% Trust Originated Preferred Securities (liquidation amount $25 per Preferred Security) ("Preferred Securities") set forth in said Schedule A hereto. The Preferred Securities are more fully described in the Prospectus (as defined below). The Preferred Securities will be guaranteed by Potomac Electric Power Company, a District of Columbia and Virginia corporation (the "Company"), with respect to distributions and amounts payable upon liquidation or redemption (the "Preferred Securities Guarantee"), pursuant to the Preferred Securities Guarantee Agreement (the "Preferred Securities Guarantee Agreement") to be dated as of Closing Time (as defined below), executed and delivered by the Company and The Bank of New York (the "Guarantee Trustee"), a New York banking corporation, not in its individual capacity but solely as trustee, for the benefit of the holders from time to time of the Preferred Securities. The Company and the Trust each understand that the Underwriters propose to make a public offering of the Preferred Securities as soon as the Representatives deem advisable after this Agreement has been executed and delivered, and the Declaration (as defined herein), the Indenture (as defined herein), and the Preferred Securities Guarantee Agreement have been qualified under the Trust Indenture Act of 1939, as amended (the "1939 Act"). The entire proceeds from the sale of the Preferred Securities will be combined with the entire proceeds from the sale by the Trust to the Company of its common securities (the "Common Securities") guaranteed by the Company, with respect to distributions and amounts payable upon liquidation or redemption (the "Common Securities Guarantee" and, together with the Preferred Securities Guarantee, the "Guarantees") pursuant to the Common Securities Guarantee Agreement (the "Common Securities Guarantee Agreement" and, together with the Preferred Securities Agreement, the "Guarantee Agreements"), to be dated as of Closing Time, executed and delivered by the Company for the benefit of the holders from time to time of the Common Securities, and will be used by the Trust to purchase the [_]% Junior Subordinated Deferrable Interest Debentures due 2038 (the "Debentures") issued by the Company. The Preferred Securities and the Common Securities will be issued pursuant to the Amended and Restated Declaration of Trust of the Trust, to be dated as of Closing Time (the "Declaration"), among the Company, as Sponsor, The Bank of New York, as institutional trustee (the "Institutional Trustee"), The Bank of New York (Delaware), as Delaware trustee (the "Delaware Trustee"), and Dennis R. Wraase, Anthony J. Kamerick and Ellen Sheriff Rogers, as regular trustees (the "Regular Trustees" and together with the Institutional Trustee and the Delaware Trustee, the "Trustees"), and the holders from time to time of undivided beneficial interests in the assets of the Trust. The Debentures will be issued pursuant to an Indenture, dated as of ________, 1998 (the "Indenture"), between the Company and The Bank of New York, as trustee (the "Indenture Trustee"), as supplemented by a Supplemental Indenture to be dated as of Closing Time (the "Supplemental Indenture"), between the Company and the Indenture Trustee. The Preferred Securities, the Preferred Securities Guarantee and the Debentures are collectively referred to herein as the "Securities." Capitalized terms used herein without definition have the respective meanings specified in the Prospectus. The Company and the Trust have filed with the Securities and Exchange Commission (the "Commission") a shelf registration statement on Form S-3 (No. 333-____), including the preliminary prospectus, covering the registration of the Securities under the Securities Act of 1933, as amended 2 (the "1933 Act"), which permits the delayed or continuous offering of securities pursuant to Rule 415 of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations"). Promptly after execution and delivery of this Agreement, the Company will either (i) prepare and file a prospectus (including a prospectus supplement relating to the Securities) in accordance with the provisions of paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The information included in such prospectus or in such Term Sheet, as the case may be, that was omitted from such registration statement at the time it became effective but that is deemed to be part of such registration statement at the time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434 Information." Such registration statement, including all amendments thereto, the exhibits thereto, schedules thereto, if any, and the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the 1933 Act, at the time it became effective and including the Rule 430A Information and the Rule 434 Information, as applicable, is herein called the "Registration Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement," and after such filing the term "Registration Statement" shall include the Rule 462(b) Registration Statement. The final prospectus, including the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the 1933 Act, in the form first furnished to the Underwriters for use in connection with the offering of the Preferred Securities is herein called the "Prospectus." For purposes of this Agreement, all references to the Registration Statement, the Prospectus or any Term Sheet or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR"). All references in this Agreement to financial statements and schedules and other information which is "contained," "included" or "stated" in the Registration Statement or the Prospectus (or other references of like import) shall be deemed to mean and include all such financial statements and schedules and other information which is incorporated by reference in the Registration Statement or the Prospectus, as the case may be; and all references in this Agreement to amendments or supplements to the Registration Statement or the Prospectus shall be deemed to mean and include the filing of any document under the Securities Exchange Act of 1934, as amended (the "1934 Act") which is incorporated by reference in the Registration Statement or the Prospectus, as the case may be. SECTION 1. Representations and Warranties. (a) Representations and Warranties by the Company and the Trust. The Company and the Trust jointly and severally represent and warrant to each Underwriter as of the date hereof, as applicable, and as of the Closing Time referred to in Section 2(b) hereof, and agrees with each Underwriter, as follows: 3 (i) Compliance with Registration Requirements. The Company meets the ----------------------------------------- requirements for use of Form S-3 under the 1933 Act. The Company and the Trust have filed with the Commission a shelf registration statement on Form S-3 (No. 333-_____), including a prospectus, for the registration of the Securities under the 1933 Act and the qualification of the Indenture under the 1939 Act. The Registration Statement and any Rule 462(b) Registration Statement has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company and the Trust, are contemplated by the Commission, and any request made to the Company or the Trust by the Commission for additional information has been complied with. At the respective times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendments thereto became effective, at the date hereof, and at the Closing Time, the Registration Statement, any Rule 462(b) Registration Statement and any amendments and supplements thereto complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and the 1939 Act and the rules and regulations of the Commission under the 1939 Act (the "1939 Act Regulations") and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. Neither the Prospectus nor any amendments or supplements thereto, at the time the Prospectus or any such amendment or supplement was issued and at the Closing Time, included or will include an untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If Rule 434 is used, the Company and the Trust will comply with the requirements of Rule 434. The representations and warranties in this subsection shall not apply (A) to statements in or omissions from the Registration Statement, any Rule 462(b) Registration Statement and any supplements or amendments thereto or the Prospectus and any supplements or amendments thereto made in reliance upon and in conformity with information furnished to the Trust or the Company in writing by any Underwriter through Merrill Lynch expressly for use therein or (B) to that part of the Registration Statement that constitutes the Statements of Eligibility and Qualification on Form T-1 (the "Forms T-1") under the 1939 Act of the Indenture Trustee, the Institutional Trustee and the Guarantee Trustee. Each preliminary prospectus and the prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all material respects with the 1933 Act Regulations and the Prospectus delivered to the Underwriters for use in connection with this offering was identical to the electronically transmitted copy thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. 4 (ii) Incorporated Documents. The documents incorporated or deemed ---------------------- to be incorporated by reference in the Registration Statement and the Prospectus, at the time they were or hereafter are filed with the Commission, complied and will comply in all material respects with the requirements of the 1934 Act and the rules and regulations of the Commission thereunder (the "1934 Act Regulations") and, when read together with the other information in the Prospectus, at the time the Registration Statement became effective, at the date hereof, at the time the Prospectus was issued and at the Closing Time, did not and will not contain an untrue statement of a material fact or omitted or will omit to state a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made, not misleading. (iii) Independent Accountants. The accountants who certified the ----------------------- financial statements and supporting schedules included in the Registration Statement, are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (iv) Financial Statements. The financial statements included in the -------------------- Registration Statement and the Prospectus, together with the related schedules and notes, present fairly the financial position of the Company and its consolidated subsidiaries at the respective dates to which they apply and the statement of operations, stockholders' equity and cash flows of the Company and its consolidated subsidiaries for the periods specified; said financial statements have been prepared in each case in accordance with generally accepted accounting principles ("GAAP") consistently applied throughout the periods involved, except as set forth therein. The supporting schedules, if any, incorporated by reference in the Registration Statement and the Prospectus present fairly in accordance with GAAP the information required to be stated therein. The selected financial data and the summary financial information included in the Prospectus present fairly the information shown therein. (v) No Material Adverse Change in Business. Since the respective -------------------------------------- dates as of which information is given in the Registration Statement and the Prospectus, and prior to the Closing Time, except as otherwise stated therein, (A) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business (a "Material Adverse Effect"), (B) there have been no transactions entered into by the Company or any of its subsidiaries, other than those in the ordinary course of business, which are material with respect to the Company and its subsidiaries considered as one enterprise, and (C) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock, except for dividends paid by the Company in the ordinary course of business consistent with past practice. The Company has no material contingent obligation which is not disclosed in or contemplated by the Registration Statement and the Prospectus. 5 (vi) Good Standing of the Company. The Company has been duly ---------------------------- incorporated and is now validly existing as a corporation in good standing under the laws of the District of Columbia; is also now validly existing and in good standing as a domestic corporation of the Commonwealth of Virginia; has corporate power to carry on the business in which it is now engaged as described in the Prospectus; is legally qualified to carry on in the State of Maryland the business in which it is now engaged in said State; and is legally qualified to carry on business within the Commonwealth of Pennsylvania, limited, however, to its participation in the construction, ownership and operation of the Conemaugh generating station and certain related transmission lines. (vii) Existence of Trust. The Trust has been duly created and is ------------------ validly existing in good standing as a business trust under the Delaware Act, is and under current law will be treated as a "grantor trust" for federal income tax purposes under existing law, has the business trust power and authority to own property and conduct its business as presently conducted and as described in the Prospectus and to enter into and perform its obligations under this Agreement, the Preferred Securities, the Common Securities and the Declaration, and is not required to be authorized to do business in any other jurisdiction. The Trust is not a party to or otherwise bound by any agreement other than those described in the Prospectus as agreements to which the Trust is or will become a party. (viii) Common Securities. The Common Securities have been duly ----------------- authorized by the Declaration and, when issued and delivered by the Trust to the Company in accordance with the terms of the Declaration and against payment therefor as described in the Prospectus, will be validly issued and (subject to the terms of the Declaration) fully paid and nonassessable undivided beneficial interests in the assets of the Trust; the issuance of the Common Securities is not subject to preemptive or other similar rights; no holder thereof will be subject to personal liability by reason of being such a holder; and at the Closing Time, all of the issued and outstanding Common Securities of the Trust will be directly owned by the Company free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity. (ix) Authorization of Declaration. The Declaration has been duly ---------------------------- authorized by the Company and duly qualified under the 1939 Act and, when validly executed and delivered by the Company and the Regular Trustees, and assuming the due authorization, execution and delivery of the Declaration by the Delaware Trustee and the Institutional Trustee, the Declaration will constitute a valid and binding obligation of the Company and the Regular Trustees, enforceable against the Company and the Regular Trustees in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting enforcement of creditors' rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). 6 (x) Guarantee Agreement. The Preferred Securities Guarantee ------------------- Agreement has been duly authorized by the Company and duly qualified under the 1939 Act and, when validly executed and delivered by the Company, and assuming due authorization, execution and delivery of the Preferred Securities Guarantee Agreement by the Guarantee Trustee, will constitute a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting enforcement of creditors' rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (xi) Preferred Securities. The Preferred Securities have been duly -------------------- authorized by the Declaration and, when authenticated in the manner provided for in the Declaration and issued and delivered pursuant to this Agreement against payment of the consideration set forth herein, will be validly issued and (subject to the terms of the Declaration) fully paid and nonassessable undivided beneficial interests in the assets of the Trust; the issuance of the Preferred Securities is not subject to preemptive or other similar rights; and holders of Preferred Securities will be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit incorporated under the General Corporation Law of the State of Delaware. (xii) Authorization of Indenture. The Indenture has been duly -------------------------- authorized by the Company and duly qualified under the 1939 Act and, when duly executed and delivered by the Company, and assuming the due authorization, execution and delivery of the Indenture by the Indenture Trustee, will constitute a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting enforcement of creditors' rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (xiii) Authorization of Debentures. The Debentures have been duly --------------------------- authorized by the Company, and when executed, authenticated, issued and delivered in the manner provided for in the Indenture and sold and paid for as provided in this Agreement, the Debentures will constitute valid and binding obligations of the Company entitled to the benefits of the Indenture and enforceable against the Company in accordance with their terms, except as enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting enforcement of creditors' rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). 7 (xiv) Authorization of Agreement. This Agreement has been duly -------------------------- authorized, executed and delivered by the Company and the Trust. (xv) Absence of Defaults and Conflicts. The Company is not in --------------------------------- violation of its Articles of Incorporation or by-laws and the Trust is not in violation of the Declaration. The execution and delivery by the Company and the Trust of, and the performance by the Company and the Trust of their respective obligations under, this Agreement, the execution and delivery by the Company of, and the performance by the Company of its obligations under, the Declaration, the Preferred Securities Guarantee Agreement and the Indenture, the issuance and delivery by the Trust of the Common Securities and Preferred Securities and the consummation of the sale of the Preferred Securities and the fulfillment of the terms herein contemplated will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under (in each case material to the Company and its subsidiaries (including the Trust) considered as a whole or as to the Trust separately), any indenture, mortgage, deed of trust, loan agreement, guarantee, lease, financing agreement or other similar agreement or instrument to which the Company or the Trust is a party or by which the Company or the Trust is bound or to which any of the property or assets of the Company or the Trust is subject, nor will such actions result in any violation of the provisions of the certificate of incorporation or by-laws of the Company or the Declaration, nor will such actions result in any violation (in each case material to the Company and its subsidiaries (including the Trust) considered as a whole or as to the Trust separately) of any statute or any order, rule or regulation of any court or regulatory authority or other governmental body having jurisdiction over the Trust or the Company or any of its properties; and no consent, approval, authorization or order of, or qualification with, any governmental body or agency that has not been obtained is required for, and the absence of which would materially affect, the performance by the Company and the Trust of their obligations under this Agreement and the issuance and delivery of the Preferred Securities, except such approvals as will be obtained under the 1933 Act, the 1934 Act or the 1939 Act and as may be required by the securities or Blue Sky laws of the various states or the securities laws of non-U.S. jurisdictions in connection with the sale of the Preferred Securities. (xvi) Absence of Proceedings. There is no action, suit, proceeding, ---------------------- inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company or the Trust, threatened, against or affecting the Company or any subsidiary, which is required to be disclosed in the Registration Statement (other than as disclosed therein), or which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the consummation of the transactions contemplated in this Agreement or the performance by the Company or the Trust of its obligations hereunder; the aggregate of all pending legal or governmental proceedings to which the Company or any subsidiary 8 is a party or of which any of their respective property or assets is the subject and which are not described in the Registration Statement, including ordinary routine litigation incidental to the business, could not reasonably be expected to result in a Material Adverse Effect. (xvii) Possession of Licenses and Permits. The Company holds valid ---------------------------------- franchises, permits and other rights adequate for the business of the Company in the territory which it serves, and such franchises, permits and other rights contain no unduly burdensome restrictions. (xviii) Compliance with Cuba Act. The Company and the Trust have ------------------------ complied with, and is and will be in compliance with, the provisions of that certain Florida act relating to disclosure of doing business with Cuba, codified as Section 517.075 of the Florida statutes, and the rules and regulations thereunder (collectively, the "Cuba Act") or is exempt therefrom. (xix) Investment Company Act. Neither the Company nor the Trust ---------------------- is, and upon the issuance and sale of the Preferred Securities as herein contemplated and the application of the net proceeds therefrom as described in the Prospectus neither will be, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended (the "1940 Act"). (xx) Contracts. There are no contracts or documents of the --------- Company or any of its subsidiaries that are required to be filed as exhibits to the Registration Statement by the 1933 Act or by the 1933 Act Regulations which have not been so filed. (xxi) Environmental Laws. Except as described in the Registration ------------------ Statement and except as would not, singly or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor the Trust is in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, "Hazardous Materials") or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, "Environmental Laws"), (B) the Company and the Trust have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company or the Trust and (D) there are no events or circumstances that might reasonably be expected to form 9 the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of its subsidiaries relating to Hazardous Materials or any Environmental Laws. (b) Officer's Certificates. Any certificate signed by any officer of the Company or the Trust delivered to Underwriters or to counsel for the Underwriters shall be deemed a representation and warranty by the Company or the Trust, respectively, to each Underwriter as to the matters covered thereby. SECTION 2. Sale and Delivery to Underwriters; Closing. ------------------------------------------ (a) Preferred Securities. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Trust agrees to sell to each Underwriter, severally and not jointly, and each Underwriter, severally and not jointly, agrees to purchase from the Company, at the purchase price of $25 per Preferred Security, the number of Preferred Securities set forth in Schedule A opposite the name of such Underwriter, plus any additional number of Preferred Securities which such Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof, subject, in each case, to such adjustments among the Underwriters as they in their sole discretion shall make to eliminate any sales or purchases of fractional securities. As compensation to the Underwriters for their commitments hereunder and in view of the fact that the proceeds of the sale of the Preferred Securities will be used to purchase the Debentures, the Company hereby agrees to pay at the Closing Time to the Underwriters a commission of $[ ] per Preferred Security purchased by the Underwriters. (b) Payment. Payment of the purchase price for, and delivery of certificates for, the Preferred Securities shall be made at the offices of Potomac Electric Power Company, 1900 Pennsylvania Avenue, N.W., Washington, D.C. 20068, or at such other place as shall be agreed upon by the Underwriters, the Company and the Trust, at 9:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs after 4:30 p.m. (Eastern time) on any given day) business day after the date hereof (unless postponed in accordance with the provisions of Section 10), or such other time not later than ten business days after such date as shall be agreed upon by the Underwriters, the Company and the Trust (such time and date of payment and delivery being herein called "Closing Time"). Payment shall be made to the Trust by wire transfer of immediately available funds to the order of the Trust, against delivery to the Underwriters of certificates for the Preferred Securities to be purchased by them. It is understood that each Underwriter has authorized the Representatives, for its account, to accept delivery of, receipt for, and make payment of the purchase price for the Preferred Securities which it has agreed to purchase. Merrill Lynch, individually and not as representative of the Underwriters, may (but shall not be obligated to) make payment of the purchase price for the Preferred Securities to be purchased by any Underwriter whose funds have not been received by the Closing Time, but such payment shall not relieve such Underwriter from its obligations hereunder. 10 At Closing Time the Company will pay, or cause to be paid, the commission payable at such time under this Section 2 to Merrill Lynch on behalf of the Underwriters by wire transfer of immediately available funds. (c) Denominations; Registration. Certificates for the Preferred Securities shall be in such denominations and registered in such names as the Representatives may request in writing at least two full business days before the Closing Time. The certificates for the Preferred Securities will be made available for examination and packaging by the Representatives in The City of New York not later than 10:00 A.M. (Eastern time) on the business day prior to the Closing Time. SECTION 3. Covenants of the Company and the Trust. The Company and the -------------------------------------- Trust jointly and severally covenant with each Underwriter as follows: (a) Compliance with Securities Regulations and Commission Requests. The Company and the Trust, subject to Section 3(b), will comply with the requirements of Rule 424 or Rule 434, as applicable, and will notify the Representatives immediately, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective, or any supplement to the Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any prospectus, or of the suspension of the qualification of the Preferred Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes. The Company and the Trust will promptly effect the filings necessary pursuant to Rule 424(b) and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company and the Trust will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment. (b) Filing of Amendments. The Company and the Trust will give the Representatives notice of their intention to file or prepare any amendment to the Registration Statement (including any filing under Rule 462(b), any Term Sheet or any amendment, supplement or revision to either the prospectus included in the Registration Statement at the time it became effective or to the Prospectus, whether pursuant to the 1933 Act, the 1934 Act or otherwise, will furnish the Representatives with copies of any such documents to, and consult with, the Representatives and their counsel within a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file or use any such document to which the Representatives or counsel for the Representatives shall reasonably object in writing; provided, however, that the foregoing shall not apply to any of -------- ------- the Company's filings with the Commission required to be filed pursuant to Section 13(a), 13(c), 14 or 15(d) 11 of the Exchange Act, copies of which such filings the Company will cause to be delivered to the Representatives promptly after being transmitted for filing with the Commission. (c) Delivery of Registration Statement. The Company has furnished or will deliver to the Representatives and counsel for the Representatives, without charge, signed copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith or incorporated by reference therein and, upon request, documents incorporated or deemed to be incorporated by reference therein), and will also deliver to the Representatives, without charge, a conformed copy of the Registration Statement as originally filed and of each amendment thereto (without exhibits) for each of the Representatives. The copies of the Registration Statement and each amendment thereto furnished to the Underwriters will be identical to the electronically transmitted copy thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (d) Delivery of Prospectuses. The Company will deliver to each Underwriter, without charge, as many copies of the Prospectus as such Underwriter reasonably requests, and the Company and the Trust hereby consent to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to each Underwriter, without charge, during the period when the Prospectus is required to be delivered under the 1933 Act or the 1934 Act, such number of copies of the Prospectus (as amended or supplemented) as such Underwriter may reasonably request. The Prospectus and any amendments or supplements thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (e) Continued Compliance with Securities Laws. The Company and the Trust will comply with the 1933 Act and the 1933 Act Regulations and the 1934 Act and the 1934 Act Regulations so as to permit the completion of the distribution of the Securities as contemplated in this Agreement and in the Prospectus. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Preferred Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Underwriters and for the Company or Trust, to amend the Registration Statement or amend or supplement the Prospectus in order that the Prospectus will not include any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of such counsel, at any such time to amend the Registration Statement or amend or supplement the Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company and the Trust will promptly prepare and file with the Commission, subject to Section 3(b), such amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement or the Prospectus comply with such requirements, and the Company will furnish to the 12 Underwriters such number of copies of such amendment or supplement as the Underwriters may reasonably request. (f) Blue Sky Qualifications. The Company and the Trust will each use its best efforts, in cooperation with the Underwriters, to qualify the Preferred Securities for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Underwriters may designate and to maintain such qualifications in effect for a period of not less than one year from the date hereof; provided, however, that neither the Company nor the Trust shall be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. In each jurisdiction in which the Preferred Securities have been so qualified, the Company and the Trust will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for so long as is necessary to complete the offering of the Securities contemplated hereby. The Company and the Trust will also supply the Underwriters with such information as is necessary for the determination of the legality of the Preferred Securities for investment under the laws of such jurisdictions as the Underwriters may request. (g) Rule 158. The Company will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its securityholders as soon as practicable an earnings statement for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act. (h) Restriction on Sale of Securities. During a period of 30 days from the date of the Prospectus, neither the Company nor the Trust will, without the prior written consent of Merrill Lynch, directly or indirectly, issue, sell, offer or contract to sell, grant any option entitling the holder thereof to purchase or otherwise transfer or dispose of, any Preferred Securities or Debentures (or any equity or debt securities substantially similar to the Preferred Securities or Debentures, respectively) of the Company or Trust. The foregoing sentence shall not apply to the Preferred Securities or Debentures to be sold hereunder. (i) Reporting Requirements. The Company and the Trust, during the period when the Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and the 1934 Act Regulations. (j) Listing. The Company will use its best efforts to effect the listing of the Preferred Securities on the New York Stock Exchange. SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay ------------------- all expenses incident to the performance of its and the Trust's obligations under this Agreement, including (i) the 13 preparation, printing and filing of the Registration Statement (including financial statements and exhibits) as originally filed and of each amendment thereto, (ii) the preparation, printing and delivery to the Underwriters of this Agreement, any Agreement among Underwriters and such other documents as may be required in connection with the offering, purchase, sale, issuance or delivery of the Preferred Securities, (iii) the preparation, issuance and delivery of the certificates for the Preferred Securities to the Underwriters, including any stock or other transfer taxes and any stamp or other duties payable upon the sale, issuance or delivery of the Preferred Securities to the Underwriters, (iv) the fees and disbursements of the Company's and the Trust's counsel, accountants and other advisors, (v) the qualification of the Preferred Securities under securities laws in accordance with the provisions of Section 3(f) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters (not to exceed $5,000) in connection therewith and in connection with the preparation of the Blue Sky Survey and any supplement thereto, if any, (vi) the printing and delivery to the Underwriters of copies of each preliminary prospectus, any Term Sheets and of the Prospectus and any amendments or supplements thereto, (vii) the printing and delivery to the Underwriters of copies of the Blue Sky Survey and any supplement thereto, if any, (viii) the fees and expenses of any transfer agent or registrar for the Preferred Securities, (ix) the fees and expenses of the Indenture Trustee, including the fees and disbursements of counsel for the Indenture Trustee in connection with the Indenture and the Debentures, (x) the fees and expenses of the Delaware Trustee, the Institutional Trustee and the Guarantee Trustee, including the fees and disbursements of counsel for the Delaware Trustee, the Institutional Trustee and the Guarantee Trustee, (xi) any fees payable in connection with the rating of the Preferred Securities and the Debentures, (xii) the cost and charges associated with the approval of the Preferred Securities by the Depositary Trust Company for "book-entry" transfer and (xiii) the fees and expenses incurred in connection with the listing of the Preferred Securities on the New York Stock Exchange. (b) Termination of Agreement. If this Agreement is terminated by the Underwriters in accordance with the provisions of Section 5(j) or Section 9(a)(i) hereof, the Company shall reimburse the Underwriters for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the Underwriters. SECTION 5. Conditions of Underwriters' Obligations. The obligations of --------------------------------------- the several Underwriters hereunder are subject to the accuracy of the representations and warranties of the Company and the Trust contained in Section 1 hereof or in certificates of any officer of the Company or any Trustee delivered pursuant to the provisions hereof, to the performance by the Company and the Trust of their respective covenants and other obligations hereunder, and to the following further conditions: (a) Effectiveness of Registration Statement. The Registration Statement, including any Rule 462(b) Registration Statement, has become effective and at Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the Underwriters. A prospectus 14 shall have been filed with the Commission in accordance with Rule 424(b) (or a post-effective amendment providing such information shall have been filed and declared effective) or, if the Company has elected to rely upon Rule 434, a Term Sheet shall have been filed with the Commission in accordance with Rule 424(b). (b) Opinions of Counsel for Company. At Closing Time, the Representatives shall have received the favorable opinion, dated as of Closing Time, of each of Covington & Burling, counsel for the Company, and William T. Torgerson, Senior Vice President and General Counsel of the Company, in form and substance satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such letters for each of the other Underwriters substantially to the effect set forth in Exhibits A and B, respectively, hereto and to such further effect as counsel to the Underwriters may reasonably request. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and its subsidiaries and certificates of public officials. (c) Opinion of Special Delaware Counsel for the Trust. At Closing Time, the Representatives shall have received the favorable opinion, dated as of the Closing Time, of Skadden, Arps, Slate, Meagher & Flom LLP, special Delaware counsel to the Trust, together with signed or reproduced copies of such letter for each of the Underwriters to the effect set forth in Exhibit C hereto and to such further effect as counsel to the Underwriters may reasonably request. (d) Opinion of Counsel for Underwriters. At Closing Time, the Representatives shall have received the favorable opinion, dated as of Closing Time, of Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters with respect to the validity of the Preferred Securities, the Registration Statement, the Prospectus and other related matters as the Underwriters may reasonably request. In giving such opinion such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York, the federal law of the United States, the Delaware Act and the General Corporation Law of the State of Delaware, upon the opinions of counsel satisfactory to the Underwriters. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and its subsidiaries and certificates of public officials. (e) Officers' Certificates. At Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Prospectus, (A) any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, and the Representatives shall have received a certificate of the Chairman, the President, a Vice Chairman or a Vice President of the Company and of the chief financial or chief accounting officer or the 15 Treasurer of the Company, dated as of Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 1(a) hereof are true and correct with the same force and effect as though expressly made at and as of Closing Time (except for representations or warranties of the Company which by their terms speak as of a different date or dates), (iii) the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or are, to the best of the Company's knowledge, threatened by the Commission; or (B) any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Trust, and the Representatives shall have received a certificate of a Regular Trustee of the Trust, dated as of Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties of the Trust in Section 1(a) hereof are true and correct with the same force and effect as though expressly made at and as of Closing Time (except for representations or warranties which by their terms speak as of a different date or dates), (iii) the Trust has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or are, to the best of the Trust's knowledge, threatened by the Commission. (f) Accountant's Comfort Letter. At the Closing Time, the Representatives shall have received from Price Waterhouse LLP a letter dated such date, in form and substance satisfactory to the Representatives, together with signed or reproduced copies of such letter for each of the Underwriters containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus. (g) Regulatory Approval. At Closing Time, the Company shall have received all consents, approvals, authorizations or orders of, or qualifications with, any governmental body or agency, required for the performance by the Company and the Trust of their obligations under this Agreement and the issuance and delivery of the Preferred Securities (except such approvals that may be required under the securities or "blue sky" laws of any jurisdiction). (h) Maintenance of Rating. At Closing Time, the Preferred Securities shall be rated at least a1 by Moody's Investors Service, Inc. and A- by Standard & Poor's Ratings Group, a division of McGraw-Hill, Inc., and the Company shall have delivered to the Underwriters a letter dated the Closing Time, from each such rating agency, or other evidence satisfactory to the Representatives, confirming that the Preferred Securities have such ratings; and since the date of this Agreement, there shall not have occurred a downgrading in the rating assigned to the Preferred Securities or any of the Company's 16 securities by any "nationally recognized statistical rating agency," as that term is defined by the Commission for purposes of Rule 436(g)(2) under the 1933 Act, and no such organization shall have publicly announced that it has under surveillance or review its rating of the Securities or any of the Company's securities. (i) Additional Documents. At Closing Time counsel for the Underwriters shall have been furnished with such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Preferred Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company and Trust in connection with the issuance and sale of the Preferred Securities as herein contemplated shall be reasonably satisfactory in form and substance to the Representatives and counsel for the Underwriters. (j) Termination of Agreement. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement may be terminated by the Underwriters by notice to the Company at any time at or prior to Closing Time, and if any condition specified in Section 5(h) shall not have been fulfilled when and as required to be fulfilled, this Agreement may be terminated by the Company by notice to the Representatives at any time prior to the Closing Time, and in either case such termination shall be without liability of any party to any other party, except as provided in Section 4 and except that Sections 1, 6, 7 and 8 shall survive any such termination and remain in full force and effect. SECTION 6. Indemnification. --------------- (a) Indemnification of Underwriters. Each of the Company and the Trust jointly and severally agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; 17 (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, provided that any such settlement is effected with the written consent of the Company; and (iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; provided, however, that this indemnity agreement shall not apply to any loss, - -------- ------- liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any Underwriter through Merrill Lynch expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto). (b) Indemnification of Trust by Company. The Company agrees to indemnify the Trust against all loss, liability, claim, damage and expense whatsoever incurred by the Trust under Section 6(a) hereunder. (c) Indemnification of Trust, Company, Directors and Officers. Each Underwriter severally agrees to indemnify and hold harmless the Company and the Trust, the Company's directors, each of the Company's officers and the Trustee of the Trust who signed the Registration Statement, and each person, if any, who controls the Company and the Trust within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such Underwriter through Merrill Lynch expressly for use in such Registration Statement (or any amendment thereto) or such preliminary prospectus or the Prospectus (or any amendment or supplement thereto). (d) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying 18 party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 6(a) above, counsel to the indemnified parties shall be selected by Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(c) above, counsel to the indemnified parties shall be selected by the Company, in each case reasonably acceptable to the indemnifying party. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. SECTION 7. Contribution. If the indemnification provided for in ------------ Section 6 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein; then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Trust on the one hand and the Underwriters on the other hand from the offering of the Preferred Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Trust on the one hand and of the Underwriters on the other hand in connection 19 with the statements or omissions, which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Trust on the one hand and the Underwriters on the other hand in connection with the offering of the Preferred Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Preferred Securities pursuant to this Agreement (before deducting expenses) received by the Company and the total underwriting commission received by the Underwriters, in each case as set forth on the cover of the Prospectus, or, if Rule 434 is used, the corresponding location on the Term Sheet, bear to the aggregate price to the public price of the Securities as set forth on such cover. The relative fault of the Company and the Trust on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Trust and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls an Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company 20 and the Trustee of the Trust who signed the Registration Statement, and each person, if any, who controls the Company or the Trust within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company. The Underwriters' respective obligations to contribute pursuant to this Section 7 are several in proportion to the number of Preferred Securities set forth opposite their respective names in Schedule A hereto and not joint. SECTION 8. Representations, Warranties and Agreements to Survive ----------------------------------------------------- Delivery. All representations, warranties and agreements contained in this - -------- Agreement or in certificates of officers of the Company or the Trustees of the Trust or any of its other subsidiaries submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or controlling person, or by or on behalf of the Company, the Trust or controlling person, and shall survive delivery of the Preferred Securities to the Underwriters. SECTION 9. Termination of Agreement. ------------------------ (a) Termination; General. The Representatives may terminate this Agreement, by notice to the Company and the Trust, at any time at or prior to Closing Time (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business which renders it impracticable to consummate the sale of the securities, or (ii) if there has occurred, since the time of execution of this Agreement, any material adverse change in the financial markets in the United States, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the Representatives, impracticable to market the Preferred Securities or to enforce contracts for the sale of the Preferred Securities, or (iii) if, since the time of execution of this Agreement, trading in any securities of the Company has been suspended or materially limited by the Commission or the New York Stock Exchange, or if trading generally on the American Stock Exchange or the New York Stock Exchange or in the Nasdaq National Market has been suspended or materially limited and such suspension or limitation is continuing, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system or by order of the Commission, the National Association of Securities Dealers, Inc. or any other governmental authority, or (iv) if a banking moratorium has been declared by either Federal or New York authorities. (b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 6, 7 and 8 shall survive such termination and remain in full force and effect. SECTION 10. Default by One or More of the Underwriters. If one or more ------------------------------------------ of the Underwriters shall fail at Closing Time to purchase the Preferred Securities which it or they are 21 obligated to purchase under this Agreement (the "Defaulted Securities"), the Representatives shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Representatives shall not have completed such arrangements within such 24-hour period, then: (a) if the number of Defaulted Securities does not exceed 10% of the number of Preferred Securities to be purchased on such date, each of the non-defaulting Underwriters shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting Underwriters, or (b) if the number of Defaulted Securities exceeds 10% of the number of Preferred Securities to be purchased on such date, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter. No action taken pursuant to this Section shall relieve any defaulting Underwriter from liability in respect of its default. In the event of any such default which does not result in a termination of this Agreement either the Representatives or the Company shall have the right to postpone Closing Time, for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. As used herein, the term "Underwriter" includes any person substituted for an Underwriter under this Section 10. SECTION 11. Notices. All notices and other communications hereunder ------- shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Representatives shall be directed to Merrill Lynch at North Tower, World Financial Center, New York, New York 10281-1201, Attention of Syndicate Operations; notices to the Company and to the Trust shall be directed to Potomac Electric Power Company, 1900 Pennsylvania Avenue, N.W., Washington, D.C. 20068, Attention: Treasurer. SECTION 12. Parties. This Agreement shall inure to the benefit of and ------- be binding upon the Underwriters, the Company and the Trust and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the Underwriters, the Company and the Trust and their respective successors and the controlling persons and officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the Underwriters, the Company and the Trust and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No 22 purchaser of Securities from any Underwriter shall be deemed to be a successor by reason merely of such purchase. SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY ---------------------- AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME. SECTION 14. Effect of Headings. The Article and Section headings herein ------------------ and the Table of Contents are for convenience only and shall not affect the construction hereof. 23 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company and the Trust a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the Underwriters, the Company and the Trust in accordance with its terms. Very truly yours, POTOMAC ELECTRIC POWER COMPANY By: -------------------------------------------- Name: Title: POTOMAC ELECTRIC POWER COMPANY TRUST I By: -------------------------------------------- Name: Title: Regular Trustee CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED A.G. EDWARDS & SONS, INC. PAINE WEBBER INCORPORATED PRUDENTIAL SECURITIES INCORPORATED SALOMON SMITH BARNEY By: MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By ---------------------------------------- Authorized Signatory SCHEDULE A Number of Name of Underwriter Preferred Securities - ------------------- -------------------- Merrill Lynch, Pierce, Fenner & Smith Incorporated...................... [ ] A.G. Edwards & Sons, Inc.......................... [ ] Paine Webber Incorporated......................... [ ] Prudential Securities Incorporated................ [ ] Salomon Smith Barney.............................. [ ] Total............................................. [ ] === Sch A-1 Exhibit A Form of opinion, dated as of Closing Time, of Covington & Burling, counsel for the Company and the Trust, substantially to the effect that: (1) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the District of Columbia and under the laws of the Commonwealth of Virginia, and has the corporate power and authority to execute the Purchase Agreement and the Indenture and to issue and sell the Debentures. (2) The Purchase Agreement has been duly authorized, executed and delivered by each of the Company and the Trust. (3) The Indenture and the Supplemental Indenture have been duly and validly authorized by all necessary corporate action of the Company, have been duly and validly executed and delivered by the Company, and, as amended by the Supplemental Indenture, the Indenture, and assuming the due authorization, execution and delivery of the Indenture and the Supplemental Indenture by The Bank of New York, constitutes a valid and legally binding instrument of the Company enforceable against the Company in accordance with its terms, except as limited by bankruptcy, insolvency, reorganization or other laws affecting the enforcement of creditors' rights or by general principles of equity. (4) The Debentures have been duly and validly authorized by all necessary corporate action of the Company, have been duly and validly issued in accordance with the provisions of the Indenture and the Supplemental Indenture, and constitute the valid and legally binding obligations of the Company enforceable against the Company in accordance with their terms, except as limited by bankruptcy, insolvency, reorganization or other laws affecting enforcement of creditors' rights or by general principles of equity, and are entitled to the benefit afforded by the Indenture. (5) The Declaration has been duly authorized, executed and delivered by the Company; and, assuming the due authorization, execution and delivery of the Declaration by Bank of New York and Bank of New York (Delaware), the Declaration constitutes a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as limited by bankruptcy, insolvency, reorganization or other laws affecting the enforcement of creditors' rights or by general principles of equity. (6) The Preferred Securities Guarantee Agreement has been duly authorized, executed and delivered by the Company; and, assuming the due authorization, execution and delivery of the Preferred Securities Guarantee Agreement by The Bank of New York, constitutes a valid and binding agreement of the Company enforceable against the Company A-1 in accordance with its terms, except as limited by bankruptcy, insolvency, reorganization or other laws affecting the enforcement of creditors' rights or by general principles of equity. (7) Each of the Indenture, Preferred Securities Guarantee Agreement and the Declaration has been duly qualified under the Trust Indenture Act of 1939, as amended (the "1939 Act"). (8) The Registration Statement, including any Rule 462(b) Registration Statement, is effective under the Securities Act of 1933, as amended (the "1933 Act"); any required filing or the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and to the best of our knowledge no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose are pending or threatened under Section 8(d) of the 1933 Act. The Registration Statement, including any Rule 462(b) Registration Statement, the Rule 430A Information and the Rule 434 Information, as applicable, the Prospectus, excluding the documents incorporated by reference therein, and each amendment or supplement to the Registration Statement and Prospectus, excluding the documents incorporated by reference therein, as of their respective effective or issue dates (except for the financial statements and other financial data constituting a part thereof, as to which we express no opinion), complied as to form in all material respects with the applicable requirements of the 1933 Act and the 1939 Act, and the applicable rules and regulations of the Securities and Exchange Commission (the "Commission") thereunder, except that we express no opinion on the Forms T-1 filed as exhibits to the Registration Statement. The documents or portions thereof filed with the Commission pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"), and incorporated by reference in the Registration Statement and the Prospectus, at the times they were filed with the Commission, complied as to form in all material respects with the 1934 Act, and the rules and regulations of the Commission thereunder. (9) The approval of the Public Service Commission of the District of Columbia which is required for the valid authorization, issuance and sale of the Preferred Securities and the Debentures in accordance with the Purchase Agreement has been obtained; to the best of our knowledge, such approval is in full force and effect; no approval by the State Corporation Commission of the Commonwealth of Virginia is necessary for the valid authorization, issuance and sale of the Preferred Securities and the Debentures in accordance with the Purchase Agreement; and we do not know of any other approvals, consents or orders of any governmental body that are legally required as a condition to valid authorization, issuance and sale of the Preferred Securities and the Debentures in accordance with the Purchase Agreement (other than in connection or in compliance with the provisions of the securities or "blue sky" laws of any jurisdiction, as to which we express no opinion). (10) The summary of the terms of the Preferred Securities, the Common Securities, the Debentures, the Preferred Securities Guarantee, the Indenture, the Declaration and the Preferred Securities Guarantee Agreement contained in the Registration Statement and the Prospectus fairly describes the provisions thereof required to be described by the registration statement form. The opinion of such counsel set forth under "United States Federal Income Taxation" in the Registration Statement and the Prospectus is confirmed. (11) The holders of outstanding shares of capital stock of the Company are not entitled to any preemptive rights under the Articles of Incorporation or By-Laws of the Company or the laws of the District of Columbia or the Commonwealth of Virginia to subscribe for the Preferred Securities or the Debentures. (12) Neither the Company nor the Trust is, and upon the issuance and sale of the Preferred Securities as contemplated by the Purchase Agreement and the application of the net proceeds therefrom as described in the Prospectus, will be, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended. Additionally, in giving its opinion, such counsel shall state that in passing upon the form of the Registration Statement and the form of the Prospectus, such counsel necessarily assumes the correctness and completeness of the statements made and information included therein by the Company and takes no responsibility therefor, except insofar as such statements relate to such counsel, and as set forth in paragraph 10 above. Such counsel shall state that in connection with the Company's preparation of the Registration Statement and the Prospectus, such counsel had discussions with certain of its officers and representatives and that such counsel's examination of the Registration Statement and the Prospectus and discussions did not disclose to them any information which gave such counsel reason to believe that the Registration Statement or any amendment thereto, including the Rule 430A Information and Rule 434 Information, if applicable, (except for financial statements and schedules and other financial data included or incorporated by reference therein or omitted therefrom and the Form T-1, as to which such counsel need make no statement), at the time such Registration Statement or any such amendment became effective, it contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus or any amendment or supplement thereto (except for financial statements and schedules and other financial data included or incorporated by reference therein or omitted therefrom and the Form T-1, as to which such counsel need make no statement), at the time it was filed with the Commission pursuant to Rule A-3 424(b) or at the date hereof, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. A-4 Exhibit B Form of opinion, dated as of Closing Time, of William T. Torgerson, Senior Vice President and General Counsel of the Company and the Trust, substantially to the effect that: (1) The Company has been duly incorporated and is now validly existing as a corporation in good standing under the laws of the District of Columbia; is also now validly existing and in good standing as a domestic corporation of the Commonwealth of Virginia; has the corporate power to carry on the business in which it is now engaged as described in the Prospectus; is legally qualified to carry on in the State of Maryland the business in which it is now engaged in said State; and is legally qualified to carry on business within the Commonwealth of Pennsylvania, limited, however, to its participation in the construction, ownership and operation of the Conemaugh generating station and certain related transmission lines. (2) The Purchase Agreement has been duly authorized, executed and delivered by the Company. (3) The Indenture has been duly and validly authorized, executed and delivered by the Company, assuming the due authorization, execution and delivery of the Indenture by The Bank of New York, and is a valid and legally binding instrument of the Company enforceable against the Company in accordance with its terms, except as the same may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, or other laws of general application relating to the enforcement of creditors' rights. (4) The Debentures have been duly and validly authorized by all necessary corporate action of the Company, have been duly and validly issued in accordance with the provisions of the Indenture and the Supplemental Indenture, and constitute the valid and legally binding obligations of the Company enforceable against the Company in accordance with their terms, except as the same may be limited as set forth in paragraph (3) above, and are entitled to the benefit afforded by the Indenture. (5) The Registration Statement, including any Rule 462(b) Registration Statement, is effective under the Securities Act of 1933, as amended (the "1933 Act"); any required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); no stop order suspending the effectiveness of the Registration Statement has been issued and to the best of my knowledge no proceedings for that purpose are pending or threatened under Section 8(d) of the 1933 Act; the approval of the Public Service Commission of the District of Columbia which is required for the valid authorization, issuance and sale of the Preferred Securities and the Debentures in accordance with the Purchase Agreement, has been obtained and is in full force and effect; no approval by the State Corporation Commission of Virginia is necessary for the valid authorization, issuance and sale of the Preferred Securities and the Debentures in accordance with the Purchase Agreement; and such counsel does not know of any other approvals of any governmental body required in that connection (other than in connection or in compliance with the securities or B-1 "blue sky" laws of any jurisdiction, as to which I express no opinion herein). No approval, consent or order of the Maryland Public Service Commission or any other regulatory authority of the State of Maryland is required for the valid authorization, issuance and sale of the Preferred Securities and the Debentures in accordance with the Purchase Agreement (other than any applicable requirements of the Maryland Securities Law, as to which I am not required to express an opinion). (6) The summary of the terms of the Preferred Securities, the Common Securities, the Debentures, the Preferred Securities Guarantee, the Indenture, the Declaration and the Preferred Securities Guarantee Agreement contained in the Registration Statement and the Prospectus fairly describes the provisions thereof required to be described by the registration statement form. (7) The Company holds valid franchises, permits and other rights adequate for the business of the Company in the territory which it serves, and such franchises, permits and other rights contain no unduly burdensome restrictions. (8) To the best of such counsel's knowledge, there is not pending or threatened any action, suit, proceeding, inquiry or investigation, to which the Company or the Trust, or to which the property of the Company or the Trust is subject, before or brought by any court or governmental agency or body, domestic or foreign, not described in the Registration Statement which might reasonably be expected to result in a Material Adverse Effect, or that questions the validity of the transactions contemplated in the Purchase Agreement. (9) There is no pending or, to the best knowledge of such counsel, threatened action, suit or proceeding before any court or governmental agency, authority or body or any arbitrator involving the Trust, the Company or any of its subsidiaries, of a character required to be disclosed in the Registration Statement which is not adequately disclosed in the Prospectus, and there is no franchise, contract or other document of a character required to be described in the Registration Statement or Prospectus, or to be filed as an exhibit, which is not described or filed as required. (10) No holders of securities of the Company have rights to the registration of such securities under the Registration Statement. Such counsel shall also state that, in such counsel's opinion, the Registration Statement and the prospectus contained therein, as of the effective date of such Registration Statement, appeared on its face to be appropriately responsive in all material respects to the requirements of the 1933 Act, and to the extent applicable, the Securities Exchange Act of 1934, as amended, and the applicable rules and regulations of the Securities and Exchange Commission thereunder and that the Supplemental Indenture appears on its face to be appropriately responsive in all material respects to the requirements of the 1939 Act and the applicable rules and regulations of the Securities and Exchange Commission thereunder. B-2 Except as specifically noted in the preceding sentence, such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and Prospectus and make no representations that he has independently verified the accuracy, completeness or fairness of such statements, except insofar as such statements relate to such counsel. However, based on such counsel's examination of the Registration Statement and Prospectus and of the documents specifically referred to therein and on his general familiarity with the affairs of the Company and on his participation in conferences with officials and other representatives of, and other counsel for, the Company, with Price Waterhouse LLP, the independent accountants of the Company, and with Underwriters' representatives and Underwriters' counsel, such counsel does not believe that the Registration Statement at the time of its effectiveness, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus at the time it was filed with, or transmitted for filing to, the Commission pursuant to Rule 424 or at the date hereof contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Such counsel need not express an opinion or belief, however, as to the financial statements or other financial data constituting a part of the Registration Statement or the Prospectus. Such counsel may assume, with Underwriters' approval, but not independently verified, that the signatures on all documents examined by such counsel are genuine. Such counsel's opinion may state that it is given to the Underwriters solely for their use in connection with the Purchase Agreement and the transactions contemplated thereunder and may not be relied upon for any manner by any other person or for any other purpose, without his prior written consent. B-3 Exhibit C Form of opinion, dated as of Closing Time, of Skadden, Arps, Slate, Meagher & Flom LLP, special Delaware counsel for the Trust, substantially to the effect that: (i) the Trust has been duly created and is validly existing in good standing as a business trust under the Delaware Act; all filings required under the laws of the State of Delaware with respect to the creation and valid existence of the Trust as a business trust have been made; and the Trust has the trust power and authority to conduct its business, as described in the Prospectus. (ii) the Amended and Restated Declaration is a valid and binding obligation of the Company and the Trustees, enforceable against the Company and the Trustees in accordance with its terms, except to the extent that enforcement thereof may be limited by (i) bankruptcy, insolvency (including without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (ii) general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law) and except to the extent that the rights to indemnity and contribution contained therein may be limited by state or securities laws or the public policy underlying such laws. (iii) the Preferred Securities have been duly authorized for issuance in accordance with the Amended and Restated Declaration and, subject to the qualifications set forth below, when certificates therefor in the form examined by us are issued, executed and authenticated in accordance with the Amended and Restated Declaration and delivered and paid for in accordance with the Purchase Agreement, will be validly issued, fully paid and non-assessable undivided beneficial interests in the assets of the Trust and will entitle the holders of the Preferred Securities to the benefits of the Amended and Restated Declaration except to the extent that enforcement of the Amended and Restated Declaration may be limited by (i) bankruptcy, insolvency (including without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (ii) general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law) and except to the extent that the rights to indemnity and contribution contained therein may be limited by state or securities laws or the public policy underlying such laws; and the holders of the Preferred Securities will be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. We bring to your attention, however, that the holders of Preferred Securities may be obligated, pursuant to the Amended and Restated Declaration, to make payments, including (i) to provide indemnity and/or security in connection with and pay taxes or governmental charges arising from transfers of Preferred Securities and the issuance of replacement Preferred Securities, and (ii) to provide security and indemnity in connection with requests of or directions to the Institutional Trustee to exercise its rights and powers under the Amended and Restated Declaration. C-1 (iv) the issuance of the Preferred Securities is not subject to preemptive or other similar rights under the Delaware Act or the Amended and Restated Declaration. (v) under the Amended and Restated Declaration and the Delaware Act, the Trust has the requisite trust power and authority to execute and deliver the Purchase Agreement, and to perform its obligations under the Purchase Agreement and to consummate the transactions contemplated thereby. The Purchase Agreement has been duly authorized, executed and delivered by the Trust. (vi) the statements made in the Prospectus under the caption "Description of the Preferred Securities" insofar as such statements constitute summaries of Delaware law are accurate in all material respects. C-2 EX-4.3 3 AMENDED AND RESTATED DECLARATION OF TRUST AMENDED AND RESTATED DECLARATION OF TRUST OF POTOMAC ELECTRIC POWER COMPANY TRUST I Dated as of ________, 1998 TABLE OF CONTENTS Page ---- ARTICLE I INTERPRETATION AND DEFINITIONS SECTION 1.1 Definitions 1 ARTICLE II TRUST INDENTURE ACT SECTION 2.1 Trust Indenture Act; Application 6 SECTION 2.2 Lists of Holders of Securities 7 SECTION 2.3 Reports by the Institutional Trustee 7 SECTION 2.4 Periodic Reports to Institutional Trustee 7 SECTION 2.5 Evidence of Compliance with Conditions Precedent 7 SECTION 2.6 Events of Default; Waiver 7 SECTION 2.7 Event of Default; Notice 9 ARTICLE III ORGANIZATION SECTION 3.1 Name 9 SECTION 3.2 Office 10 SECTION 3.3 Purpose 10 SECTION 3.4 Authority 10 SECTION 3.5 Title to Property of the Trust 10 SECTION 3.6 Powers and Duties of the Regular Trustees 10 SECTION 3.7 Prohibition of Actions by the Trust and the Trustees 12 SECTION 3.8 Powers and Duties of the Institutional Trustee 13 SECTION 3.9 Certain Duties and Responsibilities of the Institutional Trustee 15 SECTION 3.10 Certain Rights of the Institutional Trustee 16 SECTION 3.11 Delaware Trustee 17 SECTION 3.12 Execution of Documents 18 SECTION 3.13 Not Responsible for Recitals or Issuance of Securities 18 SECTION 3.14 Duration of Trust 18 SECTION 3.15 Mergers 18 ARTICLE IV SPONSOR SECTION 4.1 Sponsor's Purchase of Common Securities 19 SECTION 4.2 Responsibilities of the Sponsor 19 SECTION 4.3 Right to Proceed 20 SECTION 4.4 Expenses 20 ARTICLE V TRUSTEES SECTION 5.1 Number of Trustees 21 SECTION 5.2 Delaware Trustee 21 SECTION 5.3 Institutional Trustee; Eligibility 21 SECTION 5.4 Certain Qualifications of the Regular Trustees and the Delaware Trustee Generally 22 SECTION 5.5 Regular Trustees 22 SECTION 5.6 Appointment, Removal and Resignation of Trustees 22 SECTION 5.7 Vacancies among Trustees 23 SECTION 5.8 Effect of Vacancies 23 SECTION 5.9 Meetings 24 SECTION 5.10 Delegation of Power 24 SECTION 5.11 Merger, Conversion, Consolidation or Succession to Business 24 ARTICLE VI DISTRIBUTIONS SECTION 6.1 Distributions 25 ARTICLE VII ISSUANCE OF SECURITIES SECTION 7.1 General Provisions Regarding Securities 25 SECTION 7.2 Paying Agent 26 ARTICLE VIII TERMINATION OF TRUST SECTION 8.1 Termination of Trust 26 ARTICLE IX TRANSFER OF INTERESTS SECTION 9.1 Transfer of Securities 27 SECTION 9.2 Transfer of Certificates 27 SECTION 9.3 Deemed Security Holders 28 SECTION 9.4 Book-Entry Interests 29 SECTION 9.5 Notices to Depository Institution 28 SECTION 9.6 Appointment of Successor Depository Institution 29 SECTION 9.7 Issuance of Preferred Security Certificates 29 SECTION 9.8 Mutilated, Destroyed, Lost or Stolen Certificates 30 SECTION 9.9 CUSIP Numbers 30 ARTICLE X LIMITATION OF LIABILITY OF HOLDERS OF SECURITIES, TRUSTEES OR OTHERS SECTION 10.1 Liability 30 SECTION 10.2 Exculpation 31 SECTION 10.3 Fiduciary Duty 31 SECTION 10.4 Indemnification 32 SECTION 10.5 Outside Businesses 34 ARTICLE XI ACCOUNTING SECTION 11.1 Fiscal Year 34 SECTION 11.2 Certain Accounting Matters 34 SECTION 11.3 Banking 35 SECTION 11.4 Withholding 35 ARTICLE XII AMENDMENTS AND MEETINGS SECTION 12.1 Amendments 35 SECTION 12.2 Meetings of the Holders of Securities; Action by Written Consent 37 ARTICLE XIII REPRESENTATIONS OF INSTITUTIONAL TRUSTEE AND DELAWARE TRUSTEE SECTION 13.1 Representations and Warranties of Institutional Trustee and Successor Institutional Trustee 38 SECTION 13.2 Representations and Warranties of Delaware Trustee and Successor Delaware Trustee 38 ARTICLE XIV MISCELLANEOUS SECTION 14.1 Notices 39 SECTION 14.2 Governing Law 40 SECTION 14.3 Intention of the Parties 40 SECTION 14.4 Headings 40 SECTION 14.5 Successors and Assigns 40 SECTION 14.6 Partial Enforceability 40 SECTION 14.7 Counterparts 40 Signatures 41 ANNEX I TERMS OF SECURITIES A-1 EXHIBIT A-1 FORM OF PREFERRED SECURITY CERTIFICATE A1-1 EXHIBIT A-2 FORM OF COMMON SECURITY CERTIFICATE A2-1 EXHIBIT B SPECIMEN OF DEBENTURE B-1 EXHIBIT C PURCHASE AGREEMENT C-1 CROSS-REFERENCE TABLE* Section of Trust Indenture Act Section of of 1939, as amended Declaration -- ----- -- ------- ----------- 310(a) 5.3(a) 310(b) 5.3(c) 310(c) Inapplicable 311(a) and (b) 5.3(c) 311(c) Inapplicable 312(a) 2.2(a) 312(b) 2.2(b) 313 2.3 314(a) 2.4 314(b) Inapplicable 314(c) 2.5 314(d) Inapplicable 314(e) 310(a) 314(f) Inapplicable 315(a) 3.9(b) 315(b) 2.7(a) 315(c) 3.9(a) 315(d) 3.9(b) 316(a) and (b) 2.6 and Annex I (Sections 5 and 6) 316(c) 3.6(e) 317(a) 3.8(c) 317(b) 3.8(h) * This Cross-Reference Table does not constitute part of the Declaration and shall not affect the interpretation of any of its terms or provisions. AMENDED AND RESTATED DECLARATION OF TRUST OF POTOMAC ELECTRIC POWER COMPANY TRUST I ____________, 1998 THIS AMENDED AND RESTATED DECLARATION OF TRUST (Declaration") is dated and effective as of _______, 1998, by the Trustees (as defined herein), the Sponsor (as defined herein) and by the holders, from time to time, of undivided beneficial interests in the Trust to be issued pursuant to this Declaration. WHEREAS, the Trustees and the Sponsor established Potomac Electric Power Company Trust I (the "Trust"), a statutory business trust under the Business Trust Act (as defined herein), pursuant to a Declaration of Trust dated as of April 24, 1998 (the "Original Declaration"), and a Certificate of Trust filed with the Secretary of State of the State of Delaware on April 24, 1998 (the "Certificate of Trust") for the sole purpose of issuing and selling certain securities representing undivided beneficial interests in the assets of the Trust and investing the proceeds thereof in certain Debentures of the Debenture Issuer (as defined herein); and WHEREAS, as of the date hereof, no Securities (as defined herein) have been issued; and WHEREAS, all of the Trustees and the Sponsor, by this Declaration, hereby amend and restate each and every term and provision of the Original Declaration. NOW, THEREFORE, it being the intention of the parties hereto to continue the Trust as a business trust under the Business Trust Act and that this Declaration constitute the governing instrument of such business trust, the Trustees declare that all assets contributed to the Trust will be held in trust for the benefit of the Holders, subject to the provisions of this Declaration. ARTICLE I INTERPRETATION AND DEFINITIONS SECTION 1.1 Definitions. Unless the context otherwise requires: (a) capitalized terms used in this Declaration but not defined in the preamble above have the respective meanings assigned to them in this Section 1.1; (b) a term defined anywhere in this Declaration has the same meaning throughout; (c) all references to "the Declaration" or "this Declaration" are to this Declaration as modified, supplemented or amended from time to time; (d) all references in this Declaration to Articles, Sections, Annexes and Exhibits are to Articles and Sections of, and Annexes and Exhibits to, this Declaration; (e) a term defined in the Trust Indenture Act has the same meaning when used in this Declaration unless otherwise defined in this Declaration or unless the context otherwise requires; and (f) a reference to the singular includes the plural and vice versa. "Affiliate" has the same meaning as given to that term in Rule 405 under the Securities Act or any successor rule thereunder. "Authorized Officer" of a Person means any Person that is authorized to bind such Person (including, in the case of the Trust, a Regular Trustee). "Book Entry Interest" means a direct or indirect beneficial interest in a Global Certificate, the ownership and transfer of which shall be maintained and made through book entries by a Depository Institution as described in Section 9.4. "Business Day" means any day other than a day on which federal or state banking institutions in the Borough of Manhattan, New York, New York are authorized or obligated by law, executive order or regulation to close. "Business Trust Act" means Chapter 38 of Title 12 of the Delaware Code, 12 Del. Code Section 3801 et seq., as it may be amended from time to time, or any successor legislation. "Certificate" means a Common Security Certificate or a Preferred Security Certificate. "Closing Date" means the day on which the Closing Time (as defined by the Purchase Agreement) shall occur. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor legislation. "Commission" means the Securities and Exchange Commission. "Common Securities" has the meaning set forth in Section 7.1(a). "Common Securities Guarantee" means the guarantee agreement dated as of ______, 1998, of the Sponsor in respect of the Common Securities. "Common Security Certificate" means a certificate representing a Common Security, substantially in the form of Exhibit A-2. "Company Indemnified Person" means (a) any Regular Trustee; (b) any Affiliate of any Regular Trustee; (c) any officer, director, shareholder, member, partner, employee, representative or agent of any Regular Trustee; or (d) any officer, employee, representative or agent of the Trust or its Affiliates. "Compound Interest" has the meaning set forth in Section 2(b) of Annex I. "Corporate Trust Office" means the office of the Institutional Trustee at which the corporate trust business of the Institutional Trustee shall, such at any particular time, be principally administered, which office at the date of execution of this Declaration is located at 101 Barclay Street, Floor 21 West, New York, New York 10286. "Covered Person" means: (a) any officer, director, shareholder, partner, member, representative, employee or agent of (i) the Trust or (ii) the Trust's Affiliates; and (b) any Holder of Securities. "Coupon Rate" has the meaning set forth in Section 2(a) of Annex I. "Creditor" has the meaning set forth in Section 4.4. "Debenture means __% Junior Deferrable Interest Subordinated Debentures issued under the Indenture. 2 "Debenture Issuer" means Potomac Electric Power Company, a District of Columbia and Virginia corporation, in its capacity as issuer of the Debentures under the Indenture. "Debt Trustee" means The Bank of New York, a New York banking corporation, as trustee under the Indenture until a successor is appointed thereunder, and thereafter means such successor trustee. "Delaware Trustee" has the meaning set forth in Section 5.2. "Depository Institution" shall mean The Depository Trust Company or any successor appointed by the Regular Trustees pursuant to Section 9.6 that is registered as a clearing agency under the Exchange Act, or other applicable statute or regulation. "Depository Institution Participant" means a broker, dealer, bank, other financial institution or other Person for whom from time to time the Depository Institution effects book-entry transfers and pledges of securities deposited with the Depository Institution. "Direct Action" has the meaning set forth in Section 3.8(e). "Distribution" means a distribution payable to Holders of Securities payable in accordance with the provisions of Section 2 of Annex I. "Distribution Payment Date" has the meaning set forth in Section 2(b) of Annex I. "Event of Default" means an Indenture Event of Default (as hereinafter defined) that has occurred and is continuing. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor legislation. "Extension Period" has the meaning set forth in Section 2(a) of Annex I. "Fiduciary Indemnified Person" has the meaning set forth in Section 10.4(b). "Fiscal Year" has the meaning set forth in Section 11.1. "Global Certificate" has the meaning set forth in Section 9.4. "Holder" means a Person in whose name a Certificate representing a Security (or a Successor Security) is registered, such Person being a beneficial owner within the meaning of the Business Trust Act. "Indemnified Person" means a Company Indemnified Person or a Fiduciary Indemnified Person. "Indenture" means the Indenture dated as of ___________, 1998, between the Debenture Issuer and the Debt Trustee, and any indenture supplemental thereto pursuant to which the Debentures are to be issued. "Indenture Event of Default" means an Event of Default (as defined under the Indenture). "Institutional Trustee" means the Trustee described in Section 5.3. "Institutional Trustee Account" has the meaning set forth in Section 3.8(c). "Investment Company" means an investment company as defined in the Investment Company Act. 3 "Investment Company Act" means the Investment Company Act of 1940, as amended from time to time, or any successor legislation. "Legal Action" has the meaning set forth in Section 3.6(g). "Liquidation" has the meaning set forth in Section 3 of Annex I. "Liquidation Distribution" has the meaning set forth in Section 3 of Annex I. "List of Holders" has the meaning set forth in Section 2.2(a). "Majority in liquidation amount of the Securities" means, except as otherwise provided in the terms of the Preferred Securities set forth in Annex I hereto or by the Trust Indenture Act, Holder(s) of outstanding Securities voting together as a single class or, as the context may require, Holders of outstanding Preferred Securities or Holders of outstanding Common Securities voting separately as a class, who are the record owners of more than 50% of the aggregate liquidation amount (consisting of the stated amount that would be paid on redemption or liquidation plus accrued and unpaid Distributions to the date upon which the voting percentages are determined) of all outstanding Securities of the relevant class. "Maturity Redemption Price" shall have the meaning set forth in Section 4(a) of Annex I. "NYSE" means the New York Stock Exchange, Inc. "Officers' Certificate" means, with respect to any Person, a certificate signed by two Authorized Officers of such Person. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for in this Declaration shall include: (a) a statement that each officer signing the certificate has read the covenant or condition and the definitions relating thereto; (b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer in rendering the certificate; (c) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such officer, such condition or covenant has been complied with. "Optional Prepayment Price" has the meaning set forth in Section 4(b) of Annex I. "Paying Agent" has the meaning set forth in Section 7.2. "Payment Amount" has the meaning set forth in Section 6.1. "Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature. "Preferred Guarantee Trustee" means The Bank of New York, a New York banking corporation, as trustee under 4 the Preferred Securities Guarantee until a successor is appointed thereunder, and thereafter means such successor trustee. "Preferred Securities" has the meaning set forth in Section 7.1(a). "Preferred Securities Guarantee" means the guarantee agreement dated as of ______, 1998, of the Sponsor in respect of the Preferred Securities. "Preferred Security Beneficial Owner" means, with respect to a Book Entry Interest, a Person who is the beneficial owner of such Book Entry Interest, as reflected on the books of the Depository Institution, or on the books of a Person maintaining an account with such Depository Institution (directly as a Depository Institution Participant or as an indirect participant, in each case in accordance with the rules of such Depository Institution). "Preferred Security Certificate" means a certificate representing a Preferred Security, substantially in the form of Exhibit A-1. "Pro Rata" has the meaning set forth in Section 8 of Annex I. "Purchase Agreement" means the Purchase Agreement for the offering and sale of Preferred Securities in the form of Exhibit C. "Quorum" means a majority of the Regular Trustees or, if there are only two Regular Trustees, both of them. "Redemption/Distribution Notice" has the meaning set forth in Section 4(g) of Annex I. "Redemption Price" means any of the Maturity Redemption Price, the Optional Prepayment Price or the Tax Event Prepayment Price. "Regular Trustee" has the meaning set forth in Section 5.1. "Resignation Request" has the meaning set forth in Section 5.6(c). "Responsible Officer" means, with respect to the Institutional Trustee, any officer within the Corporate Trust Office of the Institutional Trustee, including any vice president, any assistant vice president, any assistant secretary, any assistant treasurer or other officer of the Corporate Trust Office of the Institutional Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. "Rule 3a-5" means Rule 3a-5 under the Investment Company Act. "Securities" means the Common Securities and the Preferred Securities. "Securities Act" means the Securities Act of 1933, as amended from time to time, or any successor legislation. "Securities Guarantees" means the Common Securities Guarantee and the Preferred Securities Guarantee. "Sponsor" means Potomac Electric Power Company, a District of Columbia and Virginia corporation, or any successor entity in a merger, consolidation or amalgamation, in its capacity as sponsor of the Trust. "Stated Maturity" has the meaning set forth in Section 4(a) of Annex I. 5 "Successor Delaware Trustee" has the meaning set forth in Section 5.6(b)(ii). "Successor Entity" has the meaning set forth in Section 3.15(b)(i). "Successor Institutional Trustee" has the meaning set forth in Section 5.6(b)(i). "Successor Securities" has the meaning set forth in Section 3.15(b)(i). "Super Majority" has the meaning set forth in Section 2.6(a)(ii). "Tax Event" has the meaning set forth in Section 4(d) of Annex I hereto. "Tax Event Prepayment Price" has the meaning set forth in Section 4(c) of Annex I. "10% in liquidation amount of the Securities" means, except as otherwise provided in the terms of the Preferred Securities set forth in Annex I hereto or by the Trust Indenture Act, Holder(s) of outstanding Securities voting together as a single class or, as the context may require, Holders of outstanding Preferred Securities or Holders of outstanding Common Securities voting separately as a class, who are the record owner of 10% or more of the aggregate liquidation amount (consisting of the stated amount that would be paid on redemption or liquidation, plus accrued and unpaid Distributions to the date upon which the voting percentages are determined) of all outstanding Securities of the relevant class. "Treasury Regulations" means the income tax regulations, including temporary and proposed regulations, promulgated under the Code by the United States Department of the Treasury, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended from time to time, or any successor legislation. "Trustee" or "Trustees" means each Person who has signed this Declaration as a trustee, so long as such Person shall continue in office in accordance with the terms hereof, and all other Persons who may from time to time be duly appointed, qualified and serving as Trustees in accordance with the provisions hereof, and references herein to a Trustee or the Trustees shall refer to such Person or Persons solely in their capacity as trustees hereunder. ARTICLE II TRUST INDENTURE ACT SECTION 2.1 Trust Indenture Act; Application. (a) This Declaration is subject to the provisions of the Trust Indenture Act that are required to be part of this Declaration and shall, to the extent applicable, be governed by such provisions. (b) The Institutional Trustee shall be the only Trustee which is a trustee for the purposes of the Trust Indenture Act. (c) If, and to the extent that, any provision of this Declaration limits, qualifies or conflicts with the duties imposed by Sections 310 to 317, inclusive, of the Trust Indenture Act, the duties imposed by the Trust Indenture Act shall control. (d) The application of the Trust Indenture Act to this Declaration shall not affect the nature of the Securities as equity securities representing undivided beneficial interests in the assets of the Trust. 6 SECTION 2.2 Lists of Holders of Securities. (a) Either the Sponsor or the Regular Trustees on behalf of the Trust shall provide the Institutional Trustee (i) on a semi-annual basis within five Business Days after a record date for payment of Distributions, a list, in such form as the Institutional Trustee may reasonably require, of the names and addresses of the Holders ("List of Holders") as of such record date, provided that neither the Sponsor nor the Regular Trustees on behalf of the Trust shall be obligated to provide such List of Holders at any time the List of Holders does not differ from the most recent List of Holders given to the Institutional Trustee by the Sponsor or the Regular Trustees on behalf of the Trust, and (ii) at any other time, within 30 days of receipt by the Trust of a written request for a List of Holders as of a date no more than 14 days before such List of Holders is given to the Institutional Trustee. The Institutional Trustee shall preserve, in as current a form as is reasonably practicable, all information contained in the Lists of Holders given to it or which it receives in its capacity as Paying Agent (if acting in such capacity) provided that the Institutional Trustee may destroy any List of Holders previously given to it on receipt of a new List of Holders. This requirement shall not apply however at any time while the Institutional Trustee is acting in the capacity of the registrar for the Securities. (b) The Institutional Trustee shall comply with its obligations under Sections 311(a), 311(b) and 312(b) of the Trust Indenture Act. SECTION 2.3 Reports by the Institutional Trustee. Within 60 days after April 15 of each year, the Institutional Trustee shall provide to the Holders of the Preferred Securities reports as are required by Section 313 of the Trust Indenture Act, if any, in the form and in the manner provided by Section 313 of the Trust Indenture Act. The Institutional Trustee shall also comply with the requirements of Section 313(d) of the Trust Indenture Act. SECTION 2.4 Periodic Reports to Institutional Trustee. Each of the Sponsor and the Regular Trustees on behalf of the Trust shall provide to the Institutional Trustee, the Holders and the Commission such documents, reports and information, if any, as required by Section 314 of the Trust Indenture Act. Delivery of documents, reports and information to the Trustee is for informational purposes only and the Instutional Trustee's receipt of such shall not constitute constructive notice of any information contained therein. Each of the Sponsor and the Regular Trustees on behalf o fthe Trust shall furnish to the Institutional Trustee the compliance certificate required by Section 314(a)(4) of the Trust Indenture Act within 120 days of the end of each fiscal year. SECTION 2.5 Evidence of Compliance with Conditions Precedent. Each of the Sponsor and the Regular Trustees on behalf of the Trust shall provide to the Institutional Trustee such evidence of compliance with any conditions precedent, if any, provided for in this Declaration that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) may be given in the form of an Officers' Certificate. SECTION 2.6 Events of Default; Waiver. (a) Subject to Section 2.6(c), the Holders of a Majority in liquidation amount of Preferred Securities may, by vote, on behalf of the Holders of all of the Preferred Securities, waive any Event of Default under this Declaration in respect of the Preferred Securities and its consequences, provided that, if the corresponding Indenture Event of Default: (i) is not waivable under the Indenture, the Event of Default shall not be waivable under this 7 Declaration; or (ii) requires the consent or vote of the holders of greater than a majority in principal amount of the outstanding Debentures (a "Super Majority") to be waived under the Indenture, then the Event of Default under this Declaration may only be waived by the vote of the Holders of at least the proportion in liquidation amount of the Preferred Securities that the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding; or (iii) requires the consent or vote of each holder of the Debentures to be waived under the Indenture, then the Event of Default under this Declaration may only be waived by each Holder of Preferred Securities. The foregoing provisions of this Section 2.6(a) shall be in lieu of Section 316(a)(1)(B) of the Trust Indenture Act and such Section 316(a)(1)(B) of the Trust Indenture Act is hereby expressly excluded from this Declaration and the Securities, as permitted by the Trust Indenture Act. Upon such waiver, the Event of Default shall cease to exist, and any Event of Default with respect to the Preferred Securities arising therefrom under this Declaration shall be deemed to have been cured, for every purpose of this Declaration, but no such waiver shall extend to any subsequent or other Event of Default under this Declaration with respect to the Preferred Securities or impair any right consequent thereon. Any waiver by the Holders of the Preferred Securities of an Event of Default under this Declaration with respect to the Preferred Securities shall also be deemed to constitute a waiver by the Holders of the Common Securities of any such Event of Default with respect to the Common Securities for all purposes of this Declaration without any further act, vote or consent of the Holders of the Common Securities. (b) Subject to Section 2.6(c), the Holders of a Majority in liquidation amount of the Common Securities may, by vote, on behalf of the Holders of all of the Common Securities, waive any Event of Default under this Declaration with respect to the Common Securities and its consequences, provided that, if the corresponding Indenture Event of Default: (i) is not waivable under the Indenture, except where the Holders of the Common Securities are deemed to have waived such Event of Default as provided below in this Section 2.6(b), then the Event of Default under this Declaration shall not be waivable; or (ii) requires the consent or vote of (A) a Super Majority to be waived, then the Event of Default under this Declaration may only be waived by the vote of the Holders of at least the proportion in liquidation amount of the Common Securities that the relevant Super Majority represents of the aggregate principal amount of the outstanding Debentures or (B) each holder of Debentures to be waived, then the Event of Default under this Declaration may only be waived by each Holder of Common Securities, except where the Holders of the Common Securities are deemed to have waived such Event of Default as provided below in this Section 2.6(b); provided further, each Holder of Common Securities will be deemed to have waived any such Event of Default and all Events of Default under this Declaration with respect to the Common Securities and its consequences until all Events of Default under this Declaration with respect to the Preferred Securities have been cured, waived or otherwise eliminated, and until such Events of Default have been so cured, waived or otherwise eliminated, the Institutional Trustee will be deemed to be acting solely on behalf of the Holders of the Preferred Securities and only the Holders of the Preferred Securities will have the right to direct the Institutional Trustee in accordance with the terms of the Securities set forth in Annex I hereto. If any Event of Default with respect to the Preferred Securities is waived by the Holders of Preferred Securities as provided in this Declaration, the Holders of Common Securities agree that such waiver shall also constitute the waiver of such Event of Default with respect to the Common Securities for all purposes under this Declaration without any further act, vote or consent of the Holders of the Common Securities. Subject to the foregoing provisions of this Section 2.6(b), upon a waiver of an Event of Default by the Holders of the Common Securities, such Event of Default shall cease to exist, and any Event of Default with respect to the Common Securities arising therefrom shall under this Declaration shall be 8 deemed to have been cured for every purpose of this Declaration, but no such waiver shall extend to any subsequent or Event of Default under this Declaration with respect to the Common Securities or impair any right consequent thereon. The foregoing provisions of this Section 2.6(b) shall be in lieu of Sections 316(a)(1)(A) and 316(a)(1)(B) of the Trust Indenture Act and such Sections 316(a)(1)(A) and 316(a)(1)(B) of the Trust Indenture Act are hereby expressly excluded from this Declaration and the Securities, as permitted by the Trust Indenture Act. (c) The right of any Holder to receive payment of Distributions in accordance with this Declaration and the terms of the Securities set forth in Annex I on or after the respective payment dates therefor, or to institute suit for the enforcement of any such payment on or after such payment dates, shall not be impaired without the consent of each such Holder. (d) A waiver of an Indenture Event of Default by the Institutional Trustee at the written direction of the Holders of the Preferred Securities constitutes a waiver of the corresponding Event of Default. The foregoing provisions of this Section 2.6(d) shall be in lieu of Section 316(a)(1)(B) of the Trust Indenture Act and such Section 316(a)(1)(B) of the Trust Indenture Act is hereby expressly excluded from this Declaration and the Securities, as permitted by the Trust Indenture Act. SECTION 2.7 Event of Default; Notice. (a) The Institutional Trustee shall, within 90 days after the occurrence of an Event of Default, transmit by mail, first class postage prepaid, to the Holders, notice of all defaults with respect to the Securities actually known to a Responsible Officer, unless such defaults have been cured before the giving of such notice (the term "defaults" for the purposes of this Section 2.7(a) being hereby defined to be an Event of Default as defined in the Indenture, not including any periods of grace provided for therein and irrespective of the giving of any notice provided therein); provided that, except for a default in the payment of principal of premium, if any, or interest on any of the Debentures, or in the payment of any sinking fund installment established for the Debentures, the Institutional Trustee shall be protected in withholding such notice if and so long as a Responsible Officer in good faith determines that the withholding of such notice is in the interests of the Holders; and provided further, that in the case of any default of the character specified in Section 5.01(c) of the Indenture, no such notice to Holders shall be given until at least 60 days after the occurrence thereof, but shall be given within 90 days after such occurrence. (b) The Institutional Trustee shall not be deemed to have knowledge of any default except: (i) a default under Sections 5.01(a), (b), (d), (e) and (f) of the Indenture; or (ii) any default as to which the Institutional Trustee shall have received written notice or of which a Responsible Officer charged with the administration of the Declaration shall have actual knowledge. ARTICLE III ORGANIZATION SECTION 3.1 Name. The Trust continued by this Declaration is named "Potomac Electric Power Company Trust I," as such name may be modified from time to time by the Regular Trustees following written notice to the Holders. The Trust's activities may be conducted under the name of the Trust or any other name deemed advisable by the Regular Trustees. 9 SECTION 3.2 Office. The address of the principal office of the Trust is c/o Potomac Electric Power Company, 1900 Pennsylvania Avenue, N.W., Washington, D.C. 20068. Upon ten (10) Business Days' written notice to the Institutional Trustee and the Holders of Securities, the Regular Trustees may designate another principal office. SECTION 3.3 Purpose. The exclusive purposes and functions of the Trust are (i) to issue (a) its Preferred Securities pursuant to the Purchase Agreement in exchange for cash and (b) its Common Securities to the Sponsor in exchange for cash, and to use the aggregate proceeds of the sale of the Securities to purchase the Debentures, (ii) to enter into such agreements and arrangements as may be necessary in connection with the issuance and sale of the Securities and to take all actions, and exercise such discretion, as may be necessary or desirable in connection with the issuance and sale of the Securities and to file such registration statements or make such other filings under the Securities Act, the Exchange Act or state securities or "Blue Sky" laws as may be necessary or desirable in connection with the offer and the issuance and sale of the Securities, and (iii) except as otherwise limited herein, to engage in only those other activities necessary or incidental thereto. As more specifically provided in Section 3.7, the Trust shall not borrow money, issue debt or reinvest proceeds derived from investments, pledge any of its assets, or otherwise undertake (or permit to be undertaken) any activity that would cause the Trust not to be classified for United States federal income tax purposes as a grantor trust. SECTION 3.4 Authority. Subject to the limitations provided in this Declaration and to the specific duties of the Institutional Trustee, the Regular Trustees shall have exclusive and complete authority to carry out the purposes of the Trust. Any action taken by the Regular Trustees in accordance with their powers shall constitute the act of and serve to bind the Trust and any action taken by the Institutional Trustee on behalf of the Trust in accordance with its powers shall constitute the act of and serve to bind the Trust. In dealing with the Trustees acting on behalf of the Trust, no person shall be required to inquire into the authority of the Trustees to bind the Trust. Persons dealing with the Trust are entitled to rely conclusively on the power and authority of the Trustees as set forth in this Declaration. SECTION 3.5 Title to Property of the Trust. Except as provided in Section 3.8 with respect to the Debentures and the Institutional Trustee Account or as otherwise provided in this Declaration, legal title to all assets of the Trust shall be vested in the Trust. The Holders shall not have legal title to any part of the assets of the Trust, but shall have an undivided beneficial interest in the assets of the Trust. SECTION 3.6 Powers and Duties of the Regular Trustees. The Regular Trustees shall have the exclusive power, duty and authority to cause the Trust to engage in the following activities: (a) to issue and sell the Securities in accordance with this Declaration; provided, however, that the Trust may issue no more than one series of Preferred Securities and no more than one series of Common Securities; and, provided further, that there shall be no interests in the Trust other than the Securities, and the issuance of Securities shall be limited to a one-time simultaneous issuance of both Preferred Securities and Common Securities on the Closing Date; 10 (b) in connection with the issue of the Preferred Securities, at the direction of the Sponsor, to: (i) execute and file with the Commission one or more registration statements under the Securities Act on Form S-3 prepared by the Sponsor, including any and all amendments thereto, pertaining to the Preferred Securities; (ii) execute and file any documents prepared by the Sponsor, or take any acts as determined by the Sponsor to be necessary in order to qualify or register all or part of the Preferred Securities in any state in which the Sponsor has determined to qualify or register such Preferred Securities for offer and sale; (iii) execute and file an application, prepared by the Sponsor, to the NYSE or any other national stock exchange or the NASDAQ Stock Market's National Market for listing or quotation upon notice of issuance of any Preferred Securities; (iv) execute and file with the Commission a registration statement on Form 8-A, including any amendments thereto, prepared by the Sponsor, relating to the registration of the Preferred Securities under Section 12(b) or Section 12(g) of the Exchange Act; (v) execute and enter into the Purchase Agreement providing for the sale of the Preferred Securities; and (vi) execute and deliver letters, documents or instruments with DTC. (c) to acquire the Debentures with the proceeds of the sale of the Preferred Securities and the Common Securities; provided, however, that the Regular Trustees shall cause legal title to the Debentures to be held of record in the name of the Institutional Trustee for the benefit of the Holders; (d) to give the Sponsor and the Institutional Trustee prompt written notice of the occurrence of a Tax Event; (e) to establish a record date with respect to all actions to be taken hereunder that require a record date be established, including and with respect to, for the purposes of Section 316(c) of the Trust Indenture Act, Distributions, voting rights, redemptions and exchanges, and to issue relevant notices to the Holders of Securities as to such actions and applicable record dates; (f) to take all actions and perform such duties as may be required of the Regular Trustees pursuant to the terms of the Securities set forth in Annex I hereto; (g) to bring or defend, pay, collect, compromise, arbitrate, resort to legal action, or otherwise adjust claims or demands of or against the Trust ("Legal Action"), unless pursuant to Section 3.8(e), the Institutional Trustee has the exclusive power to bring such Legal Action; (h) to employ or otherwise engage employees and agents (who may be designated as officers with titles) and managers, contractors, advisors, and consultants and to pay reasonable compensation for such services; (i) to cause the Trust to comply with the Trust's obligations under the Trust Indenture Act; (j) to give the certificate required by Section 314(a)(4) of the Trust Indenture Act to the Institutional Trustee, which certificate may be executed by any Regular Trustee; (k) to incur expenses that are necessary or incidental to carry out any of the purposes of the Trust; 11 (l) to act as, or appoint another Person to act as, registrar, transfer agent and paying agent for the Securities; (m) to execute all documents or instruments, perform all duties and powers, and do all things for and on behalf of the Trust in all matters necessary or incidental to the foregoing; (n) to take all action that may be necessary or appropriate for the preservation and the continuation of the Trust's valid existence, rights, franchises and privileges as a statutory business trust under the laws of the State of Delaware and of each other jurisdiction in which such existence is necessary to protect the limited liability of the Holders or to enable the Trust to effect the purposes for which the Trust was created; (o) to take any action, not inconsistent with this Declaration or with applicable law, that the Regular Trustees determine in their discretion to be necessary or desirable in carrying out the activities of the Trust as set out in this Section 3.6, including, but not limited to: (i) causing the Trust not to be deemed to be an Investment Company that is required to be registered under the Investment Company Act; (ii) causing the Trust to be classified for United States federal income tax purposes as a grantor trust; and (iii) cooperating with the Debenture Issuer to ensure that the Debentures will be treated as indebtedness of the Debenture Issuer for United States federal income tax purposes, provided that such actions do not adversely affect the interests of Holders; and (p) to take all action necessary to cause all applicable tax returns and tax information reports that are required to be filed with respect to the Trust to be duly prepared and filed by the Regular Trustees on behalf of the Trust. The Regular Trustees shall exercise the powers set forth in this Section 3.6 in a manner that is consistent with the purposes and functions of the Trust set out in Section 3.3, and the Regular Trustees shall not take any action that is inconsistent with the purposes and functions of the Trust set forth in Section 3.3. Subject to this Section 3.6, the Regular Trustees shall have none of the powers or the authority of the Institutional Trustee set forth in Section 3.8. Any expenses incurred by the Regular Trustees pursuant to this Section 3.6 shall be reimbursed by the Debenture Issuer. SECTION 3.7 Prohibition of Actions by the Trust and the Trustees. (a) The Trust shall not, and the Trustees (including the Institutional Trustee) shall cause the Trust not to, engage in any activity other than in connection with the purpose of the Trust or other than as required or authorized by this Declaration. In particular, the Trust shall not, and the Trustees (including the Institutional Trustee) shall cause the Trust not to: (i) invest any proceeds received by the Trust from holding the Debentures, but shall distribute all such proceeds to Holders pursuant to the terms of this Declaration and of the Securities; (ii) acquire any assets other than as expressly provided herein; (iii) possess Trust property for other than a Trust purpose; 12 (iv) make any investments, other than investments represented by the Debentures; (v) possess any power or otherwise act in such a way as to vary the Trust assets or the terms of the Securities in any way whatsoever; (vi) issue any securities or other evidences of beneficial ownership of, or beneficial interest in, the Trust, other than the Securities; (vii) incur any indebtedness for borrowed money; or (viii) other than as provided in this Declaration or Annex I hereto, (A) direct the time, method and place of exercising any trust or power conferred upon the Debt Trustee with respect to the Debentures, (B) waive any past default that is waivable under the Indenture, (C) exercise any right to rescind or annul any declaration that the principal of all the Debentures held in the Trust shall be due and payable, or (D) consent to any amendment, modification or termination of the Indenture or the Debentures if such action would cause the Trust to be classified for United States federal income tax purposes as other than a grantor trust or would cause the Trust to be deemed an Investment Company that is required to be registered under the Investment Company Act. SECTION 3.8 Powers and Duties of the Institutional Trustee. (a) The legal title to the Debentures shall be owned by and held of record in the name of the Institutional Trustee in trust for the benefit of the Holders. The right, title and interest of the Institutional Trustee to the Debentures shall vest automatically in each Person who may hereafter be appointed as Institutional Trustee in accordance with Section 5.6. Such vesting and cessation of title shall be effective whether or not conveyancing documents with regard to the Debentures have been executed and delivered. (b) The Institutional Trustee shall not transfer its right, title and interest in the Debentures to the Regular Trustees or to the Delaware Trustee (if the Institutional Trustee does not also act as Delaware Trustee). (c) The Institutional Trustee shall: (i) establish and maintain a segregated non-interest bearing trust account (the "Institutional Trustee Account") in the name of and under the exclusive control of Institutional Trustee on behalf of the Holders and, upon the receipt of payments of funds made in respect of the Debentures held by the Institutional Trustee, deposit such funds into the Institutional Trustee Account and make payments to the Holders from the Institutional Trustee Account in accordance with Section 6.1. Funds the Institutional Trustee Account shall be held uninvested until disbursed in accordance with this Declaration; (ii) engage in such ministerial activities as shall be necessary or appropriate to effect the redemption of the Securities to the extent the Debentures are redeemed or mature; and (iii) upon written notice of distribution issued by the Regular Trustees in accordance with the terms of the Securities, engage in such ministerial activities as shall be necessary or appropriate to effect the distribution of the Debentures to Holders in accordance with the provisions of the Indenture. (d) The Institutional Trustee shall take all actions and perform such duties as may be specifically required of the Institutional Trustee pursuant to the terms of the Securities. (e) The Institutional Trustee shall take any Legal Action which arises out of or in connection with (i) an Event of Default of which a Responsible Officer has actual knowledge or (ii) the Institutional Trustee's duties and 13 obligations under this Declaration or the Trust Indenture Act. If the Institutional Trustee fails to enforce its rights under the Debentures after a Holder of Preferred Securities has made a written request, such Holder may institute a legal proceeding against the Debenture Insurer to enforce the Institutional Trustee's rights under the Debentures without first instituting any legal proceeding against the Institutional Trustee or any other person or entity. Notwithstanding the foregoing, if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Debenture Issuer to pay interest or principal on the Debentures on the date such interest or principal is otherwise payable (or in the case of redemption, on the redemption date), then a Holder of Preferred Securities may directly institute a proceeding for enforcement of payment to such Holder of the principal of, or interest on, the Debentures having a principal amount equal to the aggregate liquidation amount of the Preferred Securities of such Holder (a "Direct Action") on or after the respective due dates specified in the Debentures. Notwithstanding any payments made to such Holder of Preferred Securities by the Debenture Issuer in connection with a Direct Action, the Debenture Issuer shall remain obligated to pay the principal of or interest on the Debentures held by the Trust or the Institutional Trustee of the Trust, and the Debenture Issuer shall be subrogated to the rights of the Holder of such Preferred Securities with respect to payments on the Preferred Securities. Except as provided in the preceding sentences and in the Preferred Securities Guarantee, the Holders of Preferred Securities will not be able to exercise directly any other remedy available to the holders of the Debentures. (f) The Institutional Trustee shall not resign as a Trustee unless either: (i) the Trust has been completely liquidated and the proceeds of the liquidation distributed to the Holders pursuant to the terms of the Securities; or (ii) a Successor Institutional Trustee has been appointed and has accepted that appointment in accordance with Section 5.6. (g) The Institutional Trustee shall have the legal power to exercise all of the rights, powers and privileges of a holder of Debentures under the Indenture and, if an Event of Default actually known to a Responsible Officer occurs and is continuing, the Institutional Trustee shall, for the benefit of Holders, enforce its rights as holder of the Debentures subject to the rights of the Holders pursuant to the terms of such Securities. (h) The Institutional Trustee shall give prompt written notice to the Holders of the Securities of any notice received by it from the Debenture Issuer of the Debenture Issuer's election to defer payments of interest on the Debentures by extending the interest payment period with respect thereto as permitted by the Indenture. (i) The Institutional Trustee shall notify all Holders of the Preferred Securities of any notice of default received from the Debt Trustee with respect to the Debentures. Such notice shall state that such Indenture Event of Default also constitutes an Event of Default hereunder. (j) Subject to this Section 3.8, the Institutional Trustee shall have none of the duties, liabilities, powers or the authority of the Regular Trustees set forth in Section 3.6. The Institutional Trustee shall exercise the powers set forth in this Section 3.8, and in Sections 3.9 and 3.10, in a manner that is consistent with the purposes and functions of the Trust set out in Section 3.3, and the Institutional Trustee shall not take any action that is inconsistent with the purposes and functions of the Trust set out in Section 3.3. 14 SECTION 3.9 Certain Duties and Responsibilities of the Institutional Trustee. (a) The Institutional Trustee, prior to the occurrence of an Event of Default and after the curing of all Events of Default that may have occurred, undertakes to perform only such duties as are specifically set forth in this Declaration and no implied covenants shall be read into this Declaration against the Institutional Trustee. In case an Event of Default has occurred (that has not been cured or waived pursuant to Section 2.6) of which a Responsible Officer has actual knowledge, the Institutional Trustee shall exercise such of the rights and powers vested in it by this Declaration, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his own affairs. (b) No provision of this Declaration shall be construed to relieve the Institutional Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) prior to the occurrence of an Event of Default and after the curing or waiving of all such Events of Default that may have occurred: (A) the duties and obligations of the Institutional Trustee shall be determined solely by the express provisions of this Declaration and the Institutional Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Declaration, and no implied covenants or obligations shall be read into this Declaration against the Institutional Trustee; and (B) in the absence of bad faith on the part of the Institutional Trustee, the Institutional Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Institutional Trustee and conforming to the requirements of this Declaration; but in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Institutional Trustee, the Institutional Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Declaration (but need not confirm or investigate the accuracy of mathematical calculations or other facts stated therein); (ii) the Institutional Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Institutional Trustee was negligent in ascertaining the pertinent facts; (iii) the Institutional Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a Majority in liquidation amount of the Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Institutional Trustee, or exercising any trust or power conferred upon the Institutional Trustee under this Declaration; (iv) no provision of this Declaration shall require the Institutional Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Declaration or adequate indemnity against such risk is not reasonably assured to it; (v) the Institutional Trustee's sole duty with respect to the custody, safe keeping and physical preservation of the Debentures and the Institutional Trustee Account shall be to deal with such property in a similar manner as the Institutional Trustee deals with similar property for its own account, subject to the protections and limitations on liability afforded to the Institutional Trustee under this Declaration and the Trust Indenture Act; 15 (vi) the Institutional Trustee shall have no duty or liability for or with respect to the value, genuineness, existence or sufficiency of the Debentures or the payment of any taxes or assessments levied thereon or in connection therewith; (vii) the Institutional Trustee shall not be liable for any interest on any money received by it except as it may otherwise agree in writing with the Sponsor. Money held by the Institutional Trustee need not be segregated from other funds held by it except in relation to the Institutional Trustee Account maintained by the Institutional Trustee pursuant to Section 3.8(c)(i) and except to the extent otherwise required by law; and (viii) the Institutional Trustee shall not be responsible for monitoring the compliance by the Regular Trustees or the Sponsor with their respective duties under this Declaration, nor shall the Institutional Trustee be liable for any default or misconduct of the Regular Trustees or the Sponsor. SECTION 3.10 Certain Rights of the Institutional Trustee. (a) Subject to the provisions of Section 3.9: (i) the Institutional Trustee may conclusively rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture or other paper or document believed by it to be genuine and to have been signed, sent or presented by the proper party or parties; (ii) any direction or act of the Sponsor or the Regular Trustees contemplated by this Declaration shall be sufficiently evidenced by an Officers' Certificate; (iii) whenever in the administration of this Declaration, the Institutional Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting any action hereunder, the Institutional Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and conclusively rely upon an Officers' Certificate which, upon receipt of such request, shall be promptly delivered by the Sponsor or the Regular Trustees; (iv) the Institutional Trustee shall have no duty to see to any recording, filing or registration of any instrument (including any financing or continuation statement or any filing under tax or securities laws) or any rerecording, refiling or registration thereof; (v) the Institutional Trustee may consult with counsel of its selection or other experts of its selection and the advice or opinion of such counsel and experts with respect to legal matters or advice within the scope of such experts' area of expertise shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or opinion, which counsel may be counsel to the Sponsor or any of its Affiliates, and may include any of its employees. The Institutional Trustee shall have the right at any time to seek instructions concerning the administration of this Declaration from any court of competent jurisdiction; (vi) the Institutional Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Declaration at the request, order or direction of any Holder, unless such Holder shall have provided to the Institutional Trustee security and indemnity satisfactory to the Institutional Trustee against the costs, expenses (including attorneys' fees and expenses and the expenses of the Institutional Trustee's agents, nominees or custodians) and liabilities that might be incurred by it 16 in complying with such request or direction, including such reasonable advances as may be requested by the Institutional Trustee, provided that nothing contained in this Section 3.10(a)(vi) shall be taken to relieve the Institutional Trustee, upon the occurrence of an Event of Default, of its obligation to exercise the rights and powers vested in it by this Declaration; (vii) the Institutional Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, coupon or other paper or document, but the Institutional Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit; (viii) the Institutional Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, custodians, nominees or attorneys and the Institutional Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (ix) any action taken by the Institutional Trustee or its agents hereunder shall bind the Trust and the Holders; and the signature of the Institutional Trustee or its agents alone shall be sufficient and effective to perform any such action and no third party shall be required to inquire as to the authority of the Institutional Trustee to so act or as to its compliance with any of the terms and provisions of this Declaration, both of which shall be conclusively evidenced by the Institutional Trustee's or its agent's taking such action; (x) whenever in the administration of this Declaration the Institutional Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Institutional Trustee (i) may request instructions from the Holders which instructions may only be given by the Holders of the same proportion in liquidation amount of the Securities as would be entitled to direct the Institutional Trustee under the terms of the Securities in respect of such remedy, right or action, (ii) may refrain from enforcing such remedy or right or taking such other action until such instructions are received, and (iii) shall be protected in conclusively relying on or acting in or accordance with such instructions; and (xi) except as otherwise expressly provided by this Declaration, the Institutional Trustee shall not be under any obligation to take any action that is discretionary under the provisions of this Declaration. (b) No provision of this Declaration shall be deemed to impose any duty or obligation on the Institutional Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it in any jurisdiction in which it shall be illegal, or in which the Institutional Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Institutional Trustee shall be construed to be a duty. SECTION 3.11 Delaware Trustee. Notwithstanding any other provision of this Declaration other than Section 5.2, the Delaware Trustee shall not be entitled to exercise any powers, nor shall the Delaware Trustee have any of the duties and responsibilities of the Regular Trustees or the Institutional Trustee described in this Declaration. Except as set forth in Section 5.2, the Delaware Trustee shall be a Trustee for the sole and limited purpose of fulfilling the requirements of Section 3807 of the Business Trust Act. Notwithstanding anything herein to the contrary, the Delaware Trustee shall not be liable for the acts or omissions to act of the Trust or of the Regular Trustees except, such acts as the Delaware Trustee is expressly obligated or authorized to undertake under this Declaration or the Business Trust Act and except for the gross negligence or willful misconduct of the Delaware Trustee. 17 SECTION 3.12 Execution of Documents. Unless otherwise determined by the Regular Trustees, and except as otherwise required by the Business Trust Act or applicable law, any one of the Regular Trustees is authorized to execute on behalf of the Trust any documents which the Regular Trustees have the power and authority to execute pursuant to Section 3.6. SECTION 3.13 Not Responsible for Recitals or Issuance of Securities. The recitals contained in this Declaration and the Securities shall be taken as the statements of the Sponsor, and the Trustees do not assume any responsibility for their correctness. The Trustees make no representations as to the value or condition of the property of the Trust or any part thereof. The Trustees make no representations as to the validity or sufficiency of this Declaration or the Securities. SECTION 3.14 Duration of Trust. The Trust, unless terminated pursuant to the provisions of Article VIII hereof, shall have existence until _______, 2043. SECTION 3.15 Mergers. (a) The Trust may not consolidate, amalgamate, merge with or into, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to, any corporation or other body, except as described in Sections 3.15(b) and (c). (b) The Trust may, with the consent of the Regular Trustees or, if there are more than two, a majority of the Regular Trustees, and without the consent of the Holders, the Institutional Trustee or the Delaware Trustee, consolidate, amalgamate, merge with or into, or be replaced by a trust organized as such under the laws of any state of the United States; provided that: (i) if the Trust is not the survivor, such successor entity (the "Successor Entity") either: (A) expressly assumes all of the obligations of the Trust under the Securities; or (B) substitutes for the Preferred Securities other securities having substantially the same terms as the Preferred Securities (the "Successor Securities") so long as the Successor Securities rank the same as the Preferred Securities rank with respect to Distributions and payments upon liquidation, redemption and otherwise; (ii) the Debenture Issuer expressly acknowledges a trustee of the Successor Entity that possesses the same powers and duties as the Institutional Trustee as the holder of the Debentures; (iii) the Preferred Securities or any Successor Securities are listed, or any Successor Securities will be listed upon notification of issuance, on any national securities exchange or with another organization on which the Preferred Securities are then listed or quoted; (iv) such consolidation, amalgamation, merger or replacement does not cause the Preferred Securities (including any Successor Securities) to be downgraded by any nationally recognized statistical rating organization; (v) such consolidation, amalgamation, merger or replacement does not adversely affect the rights, preferences and privileges of the Holders (including the holders of any Successor Securities) in any 18 material respect (other than with respect to any dilution of such Holders' interests in the Successor Entity); (vi) such Successor Entity has a purpose identical to that of the Trust; (vii) prior to such consolidation, amalgamation, merger or replacement, the Debenture Issuer has received an opinion of a nationally recognized independent counsel to the Trust experienced in such matters to the effect that: (A) such consolidation, amalgamation, merger or replacement does not adversely affect the rights, preferences and privileges of the Holders (including the holders of any Successor Securities) in any material respect (other than with respect to any dilution of the Holders' interest in the Successor Entity); and (B) following such consolidation, amalgamation, merger or replacement, neither the Trust nor the Successor Entity will be required to register as an Investment Company under the Investment Company Act; (C) following such consolidation, amalgamation, merger or replacement, the Trust (or the Successor Entity) will be treated as a grantor trust for United States federal income tax purposes; and (viii) the Sponsor guarantees the obligations of such Successor Entity under the Successor Securities at least to the extent provided by the Preferred Securities Guarantee and the Common Securities Guarantee. (c) Notwithstanding Section 3.15(b), the Trust shall not, except with the consent of Holders of 100% in liquidation amount of the Securities, consolidate, amalgamate, merge with or into, or be replaced by any other entity or permit any other entity to consolidate, amalgamate, merge with or into, or replace it, if such consolidation, amalgamation, merger or replacement would cause the Trust or the Successor Entity to be classified as other than a grantor trust for United States federal income tax purposes. ARTICLE IV SPONSOR SECTION 4.1 Sponsor's Purchase of Common Securities. On the Closing Date, the Sponsor will purchase all of the Common Securities issued by the Trust, in an amount at least equal to 3% of the total capital of the Trust, at the same time as the Preferred Securities are issued pursuant to the Purchase Agreement. SECTION 4.2 Responsibilities of the Sponsor. In connection with the issue and sale of the Preferred Securities, the Sponsor shall have the exclusive right and responsibility to engage in the following activities: (a) to prepare for filing by the Trust with the Commission one or more registration statements on Form S-3 in relation to the Preferred Securities, including any amendments thereto; (b) to determine the states in which to take appropriate action to qualify or register for sale all or part of the Preferred Securities and to do any and all such acts, other than actions which must be taken by the Trust, and advise the Trust of actions it must take, and prepare for execution and filing any documents to be executed and filed by the Trust, as the Sponsor deems necessary or advisable in order to comply with the applicable laws of any such 19 states; (c) if so determined by the Sponsor, to prepare for filing by the Trust an application to the NYSE or any other national stock exchange or the NASDAQ National Market for listing or quotation upon notice of issuance of the Preferred Securities; (d) if so determined by the Sponsor, to prepare for filing by the Trust with the Commission a registration statement on Form 8-A relating to the registration of the Preferred Securities under Section 12(b)or Section 12(g) of the Exchange Act, including any amendments thereto; and (e) to negotiate the terms of the Purchase Agreement providing for the issuance of the Preferred Securities. SECTION 4.3 Right to Proceed. The Sponsor acknowledges the rights of the Holders to institute a Direct Action as set forth in Section 3.8(e) hereto. SECTION 4.4 Expenses. In connection with the offering, sale and issuance of the Debentures to the Institutional Trustee and in connection with the sale of the Securities by the Trust, the Debenture Issuer, in its capacity as borrower with respect to the Debentures, shall: (a) pay all costs and expenses relating to the offering, sale and issuance of the Debentures, including commissions to the underwriter payable pursuant to the Purchase Agreement and compensation of the Trustee under the Indenture in accordance with the provisions of Section 6.06 of the Indenture; (b) be responsible for and shall pay all debts and obligations (other than with respect to the Securities) and all costs and expenses of the Trust (including, but not limited to, costs and expenses relating to the organization, maintenance and dissolution of the Trust, the offering, sale and issuance of the Securities, the fees and expenses (including reasonable counsel fees and expenses) of the Institutional Trustee, the Delaware Trustee and the Regular Trustees (including any amounts payable under Article X of this Declaration), the costs and expenses relating to the operation of the Trust, including without limitation, costs and expenses of accountants, attorneys, statistical or bookkeeping services, expenses for printing and engraving and computing or accounting equipment, paying agent(s), registrar(s), transfer agent(s), duplicating, travel and telephone and other telecommunications expenses and costs and expenses incurred in connection with the acquisition, financing, and disposition of Trust assets and the enforcement by the Institutional Trustee of the rights of the Holders of the Preferred Securities; (c) be primarily liable for any indemnification obligations arising with respect to this Declaration; and (d) pay any and all taxes (other than United States withholding taxes attributable to the Trust or its assets) and all liabilities, costs and expenses with respect to such taxes of the Trust. The Debenture Issuer's obligations under this Section 4.4 shall be for the benefit of, and shall be enforceable by, any person to whom such debts, obligations, costs, expenses and taxes are owed (a "Creditor") whether or not such Creditor has received notice hereof. Any such Creditor may enforce the Debenture Issuer's obligations under this Section 4.4 directly against the Debenture Issuer and the Debenture Issuer irrevocably waives any right of remedy to require that any such Creditor take any action against the Trust or any other Person before proceeding against the Debenture Issuer. The Debenture Issuer agrees to execute such additional agreements as may be necessary or desirable in order to give full effect to the provisions of this Section 4.4. 20 ARTICLE V TRUSTEES SECTION 5.1 Number of Trustees. (a) The number of Trustees initially shall be five. At any time before the issuance of any Securities, the Sponsor may, by written instrument, increase or decrease the number of Trustees. After the issuance of any Securities, the number of Trustees may be increased or decreased by vote of the Holders of a majority in liquidation amount of the Common Securities voting as a class at a meeting of the Holders of the Common Securities; provided, however, that, the number of Trustees shall in no event be less than two; and provided further that (i) one Trustee shall be a Person that satisfies the requirements of Section 5.2; (ii) at least one Trustee shall be an employee or officer of, or affiliated with, the Sponsor (a "Regular Trustee"); and (iii) for so long as this Declaration is required to qualify as an indenture under the Trust Indenture Act one Trustee shall be the Institutional Trustee. (b) Any action taken by Holders of Common Securities pursuant to this Article V shall be taken at a meeting of Holders of Common Securities convened for such purpose or by written consent of such Holders. (c) Except as otherwise provided herein, no amendment may be made to this Section 5.1 which would change any rights with respect to the number, existence or appointment and removal of Trustees, except with the consent of each Holder of Common Securities. SECTION 5.2 Delaware Trustee. If required by the Business Trust Act, one Trustee (the "Delaware Trustee") shall be: (a) a natural person who is a resident of the State of Delaware; or (b) if not a natural person, an entity which has its principal place of business in the State of Delaware, and otherwise meets the requirements of applicable law, provided that, if the Institutional Trustee has its principal place of business in the State of Delaware and otherwise meets the requirements of applicable law, then the Institutional Trustee shall also be the Delaware Trustee and Section 3.11 shall have no application. The initial Delaware Trustee shall be The Bank of New York (Delaware), an affiliate of the Institutional Trustee, until removed or replaced in accordance with Section 5.6. SECTION 5.3 Institutional Trustee; Eligibility. (a) There shall at all times be one Trustee which shall act as Institutional Trustee and which shall: (i) not be an Affiliate of the Sponsor; and (ii) be a corporation organized and doing business under the laws of the United States of America or any state or territory thereof or of the District of Columbia, or a corporation or Person permitted by the Commission to act as an institutional trustee under the Trust Indenture Act, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000 (US), and subject to supervision or examination by federal, state, territorial or District of Columbia authority. If such corporation or Person publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority referred to above, then for the purposes of this Section 5.3(a)(ii), the combined capital and surplus of such corporation or Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. 21 (b) If at any time the Institutional Trustee shall cease to be eligible to so act under Section 5.3(a), the Institutional Trustee shall immediately resign in the manner and with the effect set forth in Section 5.6(c). (c) If the Institutional Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act or becomes a creditor of the Sponsor during the time periods specified in Section 311 of the Trust Indenture Act, the Institutional Trustee and the Holder of the Common Securities (as if it were the obligor referred to in Section 310(b) of the Trust Indenture Act) shall in all respects comply with the provisions of Section 310(b) and 311 of the Trust Indenture Act, as applicable. (d) The Preferred Securities Guarantee shall be deemed to be specifically described in this Declaration for purposes of clause (i) of the first provision contained in Section 310(b) of the Trust Indenture Act. (e) The initial Institutional Trustee shall be The Bank of New York until removed or replaced in accordance with Section 5.6. SECTION 5.4 Certain Qualifications of the Regular Trustees and the Delaware Trustee Generally. Each Regular Trustee and the Delaware Trustee (unless the Institutional Trustee also acts as Delaware Trustee) shall be either a natural person who is at least 21 years of age or a legal entity that shall act through one or more Authorized Officers. SECTION 5.5 Regular Trustees. The initial Regular Trustees shall be _________, _________ and __________. (a) Except as expressly set forth in this Declaration and except if a meeting of the Regular Trustees is called with respect to any matter over which the Regular Trustees have power to act, any power of the Regular Trustees may be exercised by, or with the consent of, any one such Regular Trustee; and (b) a Regular Trustee may, by power of attorney consistent with applicable law, delegate to any other natural person over the age of 21 his or her power for the purposes of signing any documents which the Regular Trustees have power and authority to cause the Trust to execute pursuant to Section 3.6. SECTION 5.6 Appointment, Removal and Resignation of Trustees. (a) Subject to Section 5.6(b), Trustees may be appointed or removed without cause at any time: (i) until the issuance of any Securities, by written instrument executed by the Sponsor; and (ii) after the issuance of any Securities, by the vote or consent of the Holders of a Majority in liquidation amount of the Common Securities voting as a class. (b) (i) The Trustee that acts as Institutional Trustee shall not be removed in accordance with Section 5.6(a) if there is a continuing Event of Default or, in other circumstances, until a successor institutional Trustee possessing the qualifications to act as Institutional Trustee under Section 5.3(a) (a "Successor Institutional Trustee") has been appointed and has accepted such appointment by written instrument executed by such Successor Institutional Trustee and delivered to the Regular Trustees, the Sponsor and the Institutional Trustee being removed; and (ii) the Trustee that acts as Delaware Trustee shall not be removed in accordance with this Section 5.6(a) until a successor Trustee possessing the qualifications to act as Delaware Trustee under Sections 5.2 and 5.4 (a "Successor Delaware Trustee") has been appointed and has accepted 22 such appointment by written instrument executed by such Successor Delaware Trustee and delivered to the Regular Trustees, the Sponsor and the Delaware Trustee being removed. (c) A Trustee appointed to office shall hold office until his successor shall have been appointed or until his death, removal or resignation. Any Trustee may resign from office (without need for prior or subsequent accounting) by an instrument (a "Resignation Request") in writing signed by the Trustee and delivered to the Sponsor and the Trust, which resignation shall take effect upon such delivery or upon such later date as is specified therein; provided, however, that: (i) no such resignation of the Trustee that acts as the Institutional Trustee shall be effective: (A) until a Successor Institutional Trustee has been appointed and has accepted such appointment by instrument executed by such Successor Institutional Trustee and delivered to the Trust, the Sponsor and the resigning Institutional Trustee; or (B) until the assets of the Trust have been completely liquidated and the proceeds thereof distributed to the holders of the Securities; and (ii) no such resignation of the Trustee that acts as the Delaware Trustee shall be effective until a Successor Delaware Trustee has been appointed and has accepted such appointment by instrument executed by such Successor Delaware Trustee and delivered to the Trust, the Sponsor and the resigning Delaware Trustee. (d) The Holders of the Common Securities shall use their best efforts to promptly appoint a Successor Institutional Trustee or Successor Delaware Trustee as the case may be if the Institutional Trustee or the Delaware Trustee delivers a Resignation Request in accordance with this Section 5.6. (e) If no Successor Institutional Trustee or Successor Delaware Trustee shall have been appointed and accepted appointment as provided in this Section 5.6 within 60 days after delivery to the Sponsor and the Trust of a Resignation Request or after delivery to the Institutional Trustee or the Delaware Trustee, as the case may be, of a notice of removal, the Institutional Trustee or Delaware Trustee resigning or being removed, as applicable, may, at the expense of the Debenture Issuer, petition any court of competent jurisdiction for appointment of a Successor Institutional Trustee or Successor Delaware Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper and prescribe, appoint a Successor Institutional Trustee or Successor Delaware Trustee, as the case may be. (f) No Institutional Trustee or Delaware Trustee shall be liable for the acts or omissions to act of any Successor Institutional Trustee or Successor Delaware Trustee, as the case may be. SECTION 5.7 Vacancies among Trustees. If a Trustee ceases to hold office for any reason and the number of Trustees is not reduced pursuant to Section 5.1, or if the number of Trustees is increased pursuant to Section 5.1, a vacancy shall occur. A resolution certifying the existence of such vacancy by the Regular Trustees or, if there are more than two, a majority of the Regular Trustees, shall be conclusive evidence of the existence of such vacancy. The vacancy shall be filled with a Trustee appointed in accordance with Section 5.6. SECTION 5.8 Effect of Vacancies. The death, resignation, retirement, removal, bankruptcy, dissolution, liquidation, incompetence or incapacity to perform the duties of a Trustee shall not operate to annul the Trust. Whenever a vacancy in the number of Regular Trustees shall occur, until such vacancy is filled by the appointment of a Regular Trustee in accordance with 23 Section 5.6, the Regular Trustees in office, regardless of their number, shall have all the powers granted to the Regular Trustees and shall discharge all the duties imposed upon the Regular Trustees by this Declaration. SECTION 5.9 Meetings. If there is more than one Regular Trustee, meetings of the Regular Trustees shall be held from time to time upon the call of any Regular Trustee. Regular meetings of the Regular Trustees may be held at a time and place fixed by resolution of the Regular Trustees. Notice of any in-person meetings of the Regular Trustees shall be hand delivered or otherwise delivered in writing (including by facsimile, with a hard copy by overnight courier) not less than 48 hours before such meeting. Notice of any telephonic meetings of the Regular Trustees or any committee thereof shall be hand delivered or otherwise delivered in writing (including by facsimile, with a hard copy by overnight courier) not less than 24 hours before a meeting. Notices shall contain a brief statement of the time, place and anticipated purposes of the meeting. The presence (whether in person or by telephone) of a Regular Trustee at a meeting shall constitute a waiver of notice of such meeting, except where a Regular Trustee attends a meeting for the express purpose of objecting to the transaction of any activity on the ground that the meeting has not been lawfully called or convened. Unless provided otherwise in this Declaration, any action of the Regular Trustees may be taken at a meeting by vote of a majority of the Regular Trustees present (whether in person or by telephone) and eligible to vote with respect to such matter, provided that a Quorum is present, or without a meeting by the unanimous written consent of the Regular Trustees. In the event there is only one Regular Trustee, any and all action of such Regular Trustee shall be evidenced by a written consent of such Regular Trustee. SECTION 5.10 Delegation of Power. The Regular Trustees shall have power to delegate from time to time to such of their number or to officers of the Trust the doing of such things and the execution of such instruments, either in the name of the Trust or the names of the Regular Trustees, as the Regular Trustees may deem expedient, to the extent such delegation is not prohibited by applicable law or contrary to the provisions of this Declaration. SECTION 5.11 Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Institutional Trustee or the Delaware Trustee, as the case may be, may be merged or converted or with which either may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Institutional Trustee or the Delaware Trustee, as the case may be, shall be bound by this Declaration, or any corporation succeeding to all or substantially all the corporate trust business of the Institutional Trustee or the Delaware Trustee, as the case may be, shall be the successor of the Institutional Trustee or the Delaware Trustee, as the case may be, hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. 24 ARTICLE VI DISTRIBUTIONS SECTION 6.1 Distributions. Holders shall receive Distributions in accordance with the terms of the Holder's Securities as set forth in Annex I. ARTICLE VII ISSUANCE OF SECURITIES SECTION 7.1 General Provisions Regarding Securities. (a) The Regular Trustees shall on behalf of the Trust issue one class of preferred securities (the "Preferred Securities"), representing undivided beneficial interests in the assets of the Trust having such terms as are set forth in Annex I (which terms are incorporated by reference in, and made a part of, this Declaration as if specifically set forth herein) and one class of common securities (the "Common Securities"), representing undivided beneficial interests in the assets of the Trust having such terms as are set forth in Annex I (which terms are incorporated by reference in, and made a part of, this Declaration as if specifically set forth herein). The Trust shall issue no securities or other interests in the assets of the Trust other than the Preferred Securities and the Common Securities. Each Security shall be dated the date of its authentication. (b) The Certificates shall be signed on behalf of the Trust by a Regular Trustee. Such signature may be the manual or facsimile signature of any Regular Trustee. Typographical and other minor errors or defects in any facsimile of any such signature shall not affect the validity of any Security. In case any Regular Trustee of the Trust who shall have signed any of the Securities shall cease to be such Regular Trustee before the Certificates so signed shall be delivered by the Trust, such Certificates nevertheless may be delivered as though the person who signed such Certificates had not ceased to be such Regular Trustee; and any Certificate may be signed on behalf of the Trust by such persons who, at the actual date of execution of such Security, shall be the Regular Trustees, although at the date of the execution and delivery of the Declaration any such person was not a Regular Trustee. Certificates shall be printed, lithographed or engraved or may be produced in any other manner as is reasonably acceptable to the Regular Trustees, as evidenced by their execution thereof, and may have such letters, numbers or other marks of identification or designation and such legends or endorsements as the Regular Trustees may deem appropriate, or as may be required to comply with any law or with any rule or regulation of any stock exchange on which Securities may be listed, or to conform to usage. Pending the preparation of definitive Certificates, the Regular Trustees on behalf of the Trust may execute and the Institutional Trustee shall authenticate, temporary Certificates (printed, lithographed or typewritten), substantially in the form of the definitive Certificates in lieu of which they are issued, but with such omissions, insertions and variations as may be appropriate for temporary Certificates, all as may be determined by the Regular Trustees on behalf of the Trust, upon the same conditions and in substantially the same manner, and with like effect, as definitive Certificates. Without unnecessary delay, the Regular Trustees on behalf of the Trust shall execute and furnish, and the Institutional Trustee shall authenticate, definitive Certificates, and thereupon any or all temporary Certificates may be surrendered to the transfer agent and registrar in exchange therefor (without charge to the Holders). (c) A Security shall not be valid until authenticated by the manual signature of an authorized signatory of the Institutional Trustee upon receipt of an order signed by a Regular Trustee. Such signature shall be conclusive evidence that the Security has been authenticated under this Declaration. The Institutional Trustee may appoint an authenticating agent acceptable to the Trust to authenticate Securities. An authenticating agent may authenticate Securities whenever the Institutional Trustee may do so. Each reference in this Declaration to authentication by the Institutional Trustee includes authentication by such agent. An 25 authenticating agent has the same rights as the Institutional Trustee to deal with the Sponsor or any Affiliate thereof. (d) The consideration received by the Trust for the issuance of the Securities shall constitute a contribution to the capital of the Trust and shall not constitute a loan to the Trust. (e) Upon issuance of the Securities as provided in this Declaration, the Securities so issued shall be deemed to be validly issued, fully paid and non-assessable. (f) Every Person, by virtue of having become a Holder or a Preferred Security Beneficial Owner in accordance with the terms of this Declaration, shall be deemed to have expressly assented and agreed to the terms of, and shall be bound by, this Declaration. SECTION 7.2 Paying Agent. In the event that the Preferred Securities are not in book-entry only form, the Trust shall maintain in the Borough of Manhattan, New York, New York, an office or agency where the Preferred Securities may be presented for payment ("Paying Agent"). The Trust may appoint the Paying Agent and may appoint one or more additional paying agents in such other locations as it shall determine. The term "Paying Agent" includes any additional paying agent. The Trust may change any Paying Agent without prior notice to any Holder. The Trust shall notify the Institutional Trustee of the name and address of any Paying Agent not a party to this Declaration. If the Trust fails to appoint or maintain another entity as Paying Agent, the Institutional Trustee shall act as such. The Trust or any of its Affiliates may act as Paying Agent. The Bank of New York shall initially act as Paying Agent for the Preferred Securities. ARTICLE VIII TERMINATION OF TRUST SECTION 8.1 Termination of Trust. (a) The Declaration and the Trust shall terminate and be of no further force or effect: (i) on _______, 2043, the expiration of the term of the Trust; (ii) upon the bankruptcy of the Sponsor or the Trust; (iii) upon the filing of a certificate of dissolution or its equivalent with respect to the Sponsor, the filing of a certificate of cancellation with respect to the Trust after having obtained the consent of the Holders of at least a Majority in liquidation amount of the Securities voting together as a single class to file such certificate of cancellation, or the revocation of the Sponsor's charter and the expiration of 90 days after the date of revocation without a reinstatement thereof; (iv) upon the entry of a decree of judicial dissolution of the Sponsor or the Trust; (v) when all of the Securities shall have been called for redemption and the amounts necessary for redemption thereof shall have been paid to the Holders in accordance with the terms of the Securities; (vi) upon the distribution of all of the Debentures to the Holders in exchange for all of the Securities in accordance with the terms of the Securities; or (vii) before the issuance of any Securities, with the consent of all of the Regular Trustees and the Sponsor. 26 (b) As soon as is practicable after the occurrence of an event referred to in Section 8.1(a), the Trustees shall file (if not previously filed) a certificate of cancellation with the Secretary of State of the State of Delaware. (c) The provisions of Section 3.9 and Article X shall survive the termination of the Trust. ARTICLE IX TRANSFER OF INTERESTS SECTION 9.1 Transfer of Securities. (a) Securities may only be transferred, in whole or in part, in accordance with the terms and conditions set forth in this Declaration and in the terms of the Securities. Any transfer or purported transfer of any Security not made in accordance with this Declaration shall be null and void. (b) Subject to this Article IX, Preferred Securities shall be freely transferable. (c) The Sponsor may not transfer the Common Securities. SECTION 9.2 Transfer of Certificates. (a) General. The Regular Trustees shall provide for the registration of Certificates and, to the extent permitted by Section 9.7, registration of transfers of Certificates, which shall be effected without charge, but only upon payment (with such indemnity as the Regular Trustees may require) of any tax or other government charges that may be imposed in relation thereto. Upon surrender for registration of transfer of any Certificate, the Regular Trustees shall cause one or more new Certificates to be issued and authenticated by the Institutional Trustee in the name of the designated transferee or transferees. Every Certificate surrendered for registration of transfer shall be accompanied by a written instrument of transfer in form satisfactory to the Regular Trustees duly executed by the Holder or such Holder's attorney duly authorized in writing. Each Certificate surrendered for registration of transfer shall be canceled by the Regular Trustees. A transferee of a Certificate shall be entitled to the rights and shall be subject to the obligations of a Holder hereunder upon the receipt by such transferee of a Certificate. By acceptance of a Certificate, each transferee shall be deemed to have expressly assented and agreed to the terms of, and shall be bound by, this Declaration. (b) Transfer of a Preferred Security Certificate for a Beneficial Interest in a Global Certificate. Subject to Section 9.7, upon receipt by the Institutional Trustee of a Preferred Security Certificate, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Institutional Trustee, requesting transfer of such Preferred Security Certificate for a beneficial interest in a Global Certificate, the Institutional Trustee shall cancel such Preferred Security Certificate and cause, or direct the Depository Institution to cause, the aggregate number of Preferred Securities evidenced by the Global Certificate to be increased accordingly. If no Global Certificates are then outstanding, the Trust shall issue and the Institutional Trustee shall authenticate, upon written order of any Regular Trustee, a Global Certificate. (c) Transfer of a Beneficial Interest in a Global Certificate for a Preferred Security Certificate. Subject to Section 9.7, upon receipt by the Institutional Trustee from the Depository Institution or its nominee on behalf of a Preferred Security Beneficial Owner of written instructions or such other form of instructions as is customary for the Depository Institution or its nominee requesting transfer of a beneficial interest in a Global Certificate for a Preferred Security Certificate, the Institutional Trustee or the securities custodian, at the direction of the Institutional Trustee, shallcause, in accordance with the standing instructions and procedures existing between the Depository Institution and the securities custodian, the aggregate principal amount of the Global Certificate to be reduced on its books and records and, following such reduction, the Trust shall execute and the Institutional Trustee shall authenticate and deliver to the transferee a Preferred Security Certificate. 27 Preferred Security Certificates issued in exchange for a beneficial interest in a Global Certificate shall be registered in such names and in such authorized denominations as the Depository Institution, pursuant to instructions from its Depository Institution Participants or indirect participants or otherwise, shall instruct the Institutional Trustee. The Institutional Trustee shall deliver such Preferred Security Certificate to the persons in whose names such Preferred Securities are so registered in accordance with the instructions of the Depository Institution. (d) Transfer and Exchange of Global Certificates. Notwithstanding any other provisions of this Declaration, a Global Certificate may not be transferred as a whole, except by the Depository Institution to a nominee of the Depository Institution or by the Depository Institution or any such nominee to a successor Depository Institution or a nominee of such successor Depository Institution. SECTION 9.3 Deemed Security Holders. The Trustees may treat the Person in whose name any Certificate shall be registered on the books and records of the Trust (including the Depository Institution) as the sole holder of such Certificate and of the Securities evidenced by such Certificate for purposes of receiving Distributions and for all other purposes whatsoever and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Certificate or in the Securities represented by such Certificate on the part of any Person, whether or not the Trust shall have actual or other notice thereof. SECTION 9.4 Book-Entry Interests. Unless otherwise specified in the terms of the Preferred Securities set forth in Annex I, the Preferred Securities, shall be evidenced by one or more, fully-registered, global Preferred Security Certificates (each a "Global Certificate"), to be delivered to the Depository Institution by, or on behalf of, the Trust. Such Global Certificates shall be registered on the books and records of the Trust in the name of the Depository Institution or its nominee, and no Preferred Security Beneficial Owner will receive a Preferred Security Certificate evidencing such Preferred Security Beneficial Owner's interest in Preferred Securities, except as provided in Section 9.7. Unless and until Preferred Security Certificates are issued to the Preferred Security Beneficial Owners pursuant to Section 9.7: (a) the provisions of this Section 9.4 shall supercede any contrary provision of this Declaration; (b) except as otherwise required by law, the Trust and the Trustees shall be entitled to deal with the Depository Institutionfor all purposes of this Declaration (including the payment of Distributions and the soliciting and obtaining of any approvals, votes or consents hereunder) as the Holder of the Preferred Securities evidenced by one or more Global Certificates, and the Trust and the Trustees shall have no responsibility or obligation to any Preferred Security Beneficial Owner; and (c) the rights of Preferred Security Beneficial Owners shall be exercised only through the Depository Institution and shall be limited to those established by law and agreements between such Preferred Security Beneficial Owners and the Depository Institution and/or Depository Institution Participants. Depository Institution Participants shall have no rights under this Declaration with respect to any Global Certificate held by the Depository Institution (or by the Institutional Trustee as the custodian of the Depository Institution) or under such Global Certificate, and the Depository Institution may be treated by the Trust, the Trustees and any agent of the Trust or the Trustees as the absolute owner of such Global Certificate for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Trust, the Trustees or any agent of the Trust or the Trustees from giving effect to any written certification, proxy or other authorization furnished by the Depository 28 Institution or impair, as between the Depository Institution and its Depository Institution Participants, the operation of customary practices of such Depository Institution governing the exercise of the rights of a holder of a beneficial interest in any Global Certificate. At such time as all beneficial interests in a Global Certificate have either been exchanged for Preferred Security Certificates (to the extent permitted by this Declaration) or redeemed, repurchased or canceled in accordance with the terms of this Declaration, such Global Certificate shall be returned by the Depository Institution to the Institutional Trustee for cancellation (or, if held by the Institutional Trustee as custodian for the Depository Institution, shall be retained and canceled by the Institutional Trustee). At any time prior to such cancellation, if any beneficial interest in a Global Certificate is exchanged for a Preferred Security Certificate, or if a Preferred Security Certificate is exchanged for a beneficial interest in a Global Certificate, the Preferred Securities evidenced by such Global Certificate shall be reduced or increased and an adjustment shall be made on the books and records of the Institutional Trustee (if it is then the securities custodian for such Global Certificate) with respect to such Global Certificate to reflect such reduction or increase. SECTION 9.5 Notices to Depository Institution. Whenever a notice or other communication to the Holders of Preferred Securities is required under this Declaration, unless and until Preferred Security Certificates shall have been issued to the Preferred Security Beneficial Owners pursuant to Section 9.7, the Regular Trustees shall give to the Depository Institution all such notices and communications specified herein to be given to the Holders of Preferred Securities and shall have no notice obligations to the Preferred Security Beneficial Owners. SECTION 9.6 Appointment of Successor Depository Institution. If any Depository Institution elects to discontinue its services as securities depositary with respect to the Preferred Securities, the Regular Trustees may, in their sole discretion, appoint a successor Depository Institution with respect to such Preferred Securities. SECTION 9.7 Issuance of Preferred Security Certificates. If: (a) a Depository Institution elects to discontinue its services as securities depositary with respect to the Preferred Securities and a successor Depository Institution is not appointed within 90 days after such discontinuance pursuant to Section 9.6; or (b) the Regular Trustees elect after consultation with the Sponsor to terminate the book-entry system through the Depository Institution with respect to the Preferred Securities; or (c) there shall have occurred an Event of Default then: (i) Preferred Security Certificates shall be prepared by the Regular Trustees on behalf of the Trust with respect to the Preferred Securities; and (ii) upon surrender of the Global Certificates by the Depository Institution, accompanied by registration instructions, the Regular Trustees shall cause Preferred Security Certificates to be delivered to Preferred Security Beneficial Owners in accordance with the instructions of the Depository Institution. Neither the Trustees nor the Trust shall be liable for any delay in delivery of such instructions and each of them may conclusively rely on and shall be protected in relying on, said instructions of the Depository Institution. 29 SECTION 9.8 Mutilated, Destroyed, Lost or Stolen Certificates. If: (a) any mutilated Certificates should be surrendered to the Regular Trustees, or if the Regular Trustees shall receive evidence to their satisfaction of the destruction, loss or theft of any Certificate; and (b) there shall be delivered to the Regular Trustees, the Institutional Trustee or any authenticating agent such security or indemnity as may be required by them to keep each of them harmles then, in the absence of notice that such Certificate shall have been acquired by a bona fide purchaser, any Regular Trustee on behalf of the Trust shall execute and deliver and the Institutional Trustee shall authenticate, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Certificate, a new Certificate of like denomination. In connection with the issuance of any new Certificate under this Section 9.8, the Regular Trustees may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Any replacement Certificate issued pursuant to this Section 9.8 shall constitute conclusive evidence of an ownership interest in the Securities evidenced thereby, whether or not the lost, stolen or destroyed Certificate shall be found at any time. SECTION 9.9 CUSIP Numbers The Trust, in issuing the Securities, may use "CUSIP" numbers (if then generally in use), and, if so, the Institutional Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in, or omission of, such numbers. The Company shall promptly notify the Institutional Trustee of any change in the "CUSIP" numbers. ARTICLE X LIMITATION OF LIABILITY OF HOLDERS OF SECURITIES, TRUSTEES OR OTHERS SECTION 10.1 Liability. (a) Except as expressly set forth in this Declaration, the Securities Guarantees and the terms of the Securities, the Sponsor shall not be: (i) personally liable for the return of any portion of the capital contributions (or any return thereon) of the Holders which shall be made solely from assets of the Trust; or (ii) be required to pay to the Trust or to any Holder any deficit upon dissolution of the Trust or otherwise. (b) The Debenture Issuer shall be liable for all of the debts and obligations of the Trust (other than with respect to the Securities) to the extent not satisfied out of the Trust's assets. (c) Pursuant to Section 3803(a) of the Business Trust Act, the Holders shall be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. 30 SECTION 10.2 Exculpation. (a) No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Trust or any Covered Person for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith on behalf of the Trust and in a manner such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Declaration or by law, except that an Indemnified Person shall be liable for any such loss, damage or claim incurred by reason of such Indemnified Person's gross negligence or willful misconduct with respect to such acts or omissions. (b) An Indemnified Person shall be fully protected in relying in good faith upon the records of the Trust and upon such information, opinions, reports or statements presented to the Trust by any Person as to matters the Indemnified Person reasonably believes are within such other Person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Trust, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which Distributions to Holders might properly be paid. SECTION 10.3 Fiduciary Duty. (a) To the extent that, at law or in equity, an Indemnified Person has duties (including fiduciary duties) and liabilities relating thereto to the Trust or to any Covered Person, an Indemnified Person acting under this Declaration shall not be liable to the Trust or to any Covered Person for its good faith reliance on the provisions of this Declaration. The provisions of this Declaration, to the extent that they restrict the duties and liabilities of an Indemnified Person otherwise existing at law or in equity (other than the duties imposed on the Institutional Trustee under the Trust Indenture Act), are agreed by the parties hereto to replace (to the fullest extent permitted by law) such other duties and liabilities of such Indemnified Person. (b) Unless otherwise expressly provided herein: (i) whenever a conflict of interest exists or arises between an Indemnified Person and any Covered Persons; or (ii) whenever this Declaration or any other agreement contemplated herein provides that an Indemnified Person shall act in a manner that is, or provides terms that are, fair and reasonable to the Trust or any Holder, the Indemnified Person shall resolve such conflict of interest, take such action or provide such terms, considering in each case the relative interest of each party (including its own interest) to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interests, any customary or accepted industry practices, and any applicable generally accepted accounting practices or principles. In the absence of bad faith by the Indemnified Person, the resolution, action or term so made, taken or provided by the Indemnified Person shall not constitute a breach of this Declaration or any other agreement contemplated herein or of any duty or obligation of the Indemnified Person at law or in equity or otherwise. (c) Whenever in this Declaration an Indemnified Person is permitted or required to make a decision: (i) in its "discretion" or under a grant of similar authority, the Indemnified Person shall be entitled to consider such interests and factors as it desires, including its own interests, and shall have no duty or obligation to give any consideration to any interest of or factors affecting the Trust or any other Person; or (ii) in its "good faith" or under another express standard, the Indemnified Person shall act under such express standard and shall not be subject to any other or different standard imposed by this 31 Declaration or by applicable law. SECTION 10.4 Indemnification. (a) (i) The Debenture Issuer shall indemnify, to the full extent permitted by law, any Company Indemnified Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Trust) by reason of the fact that he is or was a Company Indemnified Person against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Company Indemnified Person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Trust, or, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (ii) The Debenture Issuer shall indemnify, to the full extent permitted by law, any Company Indemnified Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Trust to procure a judgment in its favor by reason of the fact that he is or was a Company Indemnified Person against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust, except that no such indemnification shall be made in respect of any claim, issue or matter as to which such Company Indemnified Person shall have been adjudged to be liable to the Trust unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such Person is fairly and reasonably entitled to indemnity for such expenses which such Court of Chancery or such other court shall deem proper. (iii) To the extent that a Company Indemnified Person shall be successful on the merits or otherwise (including dismissal of an action without prejudice or the settlement of an action without admission of liability) in defense of any action, suit or proceeding referred to in paragraphs (i) and (ii) of this Section 10.4(a), or in defense of any claim, issue or matter therein, he shall be indemnified, to the full extent permitted by law, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (iv) Any indemnification under paragraphs (i) or (ii) of this Section 10.4(a) (unless ordered by a court) shall be made by the Debenture Issuer only as authorized in the specific case upon a determination that indemnification of the Company Indemnified Person is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraphs (i) or (ii). Such determination shall be made (1) by the Regular Trustees by a majority vote of a Quorum consisting of such Regular Trustees who were not parties to such action, suit or proceeding, (2) if such a Quorum is not obtainable, or, even if obtainable, if a Quorum of disinterested Regular Trustees so directs, by independent legal counsel in a written opinion, or (3) by the Debenture Issuer. (v) Expenses (including attorneys' fees) incurred by a Company Indemnified Person in defending a civil, criminal, administrative or investigative action, suit or proceeding referred to in paragraphs (i) or (ii) of this Section 10.4(a) shall be paid by the Debenture Issuer in advance of the final 32 disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Company Indemnified Person to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Debenture Issuer as authorized in this Section 10.4(a). Notwithstanding the foregoing, no advance shall be made by the Debenture Issuer if a determination is reasonably and promptly made (i) by the Regular Trustees by a majority vote of a Quorum of disinterested Regular Trustees, (ii) if such a Quorum is not obtainable, or, even if obtainable, if a Quorum of disinterested Regular Trustees so directs, by independent legal counsel in a written opinion or (iii) by the Debenture Issuer, that, based upon the facts known to the Regular Trustees, counsel or the Debenture Issuer, as the case may be, at the time such determination is made, such Company Indemnified Person acted in bad faith or in a manner that such Person did not believe to be in or not opposed to the best interests of the Trust, or, with respect to any criminal proceeding, that such Company Indemnified Person believed or had reasonable cause to believe his conduct was unlawful. In no event shall any advance be made in instances where the Regular Trustees, independent legal counsel or the Debenture Issuer reasonably determines that such Person deliberately breached his duty to the Trust or the Holders. (vi) The indemnification and advancement of expenses provided by, or granted pursuant to, the other paragraphs of this Section 10.4(a) shall not be deemed exclusive of any other rights to which those seeking indemnification and advancement of expenses may be entitled under any agreement, with the Debenture Issuer or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. All rights to indemnification under this Section 10.4(a) shall be deemed to be provided by a contract between the Debenture Issuer and each Company Indemnified Person who serves in such capacity at any time while this Section 10.4(a) is in effect. Any repeal or modification of this Section 10.4(a) shall not affect any rights or obligations then existing. (vii) The Debenture Issuer or the Trust may purchase and maintain insurance on behalf of any person who is or was a Company Indemnified Person against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Debenture Issuer would have the power to indemnify him against such liability under the provisions of this Section 10.4(a). (viii) For purposes of this Section 10.4(a), references to "the Trust" shall include, in addition to the resulting or surviving entity, any constituent entity (including any constituent of a constituent) absorbed in a consolidation or merger, so that any person who is or was a director, trustee, officer or employee of such constituent entity, or is or was serving at the request of such constituent entity as a director, trustee, officer, employee or agent of another entity, shall stand in the same position under the provisions of this Section 10.4(a) with respect to the resulting or surviving entity as he would have with respect to such constituent entity if its separate existence had continued. (ix) The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 10.4(a) shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a Company Indemnified Person and shall inure to the benefit of the heirs, executors and administrators of such a person. (b) The Debenture Issuer agrees to indemnify the (i) Institutional Trustee, (ii) the Delaware Trustee, (iii) any Affiliate of the Institutional Trustee and the Delaware Trustee, and (iv) any officer, director, shareholder, member, partner, employee, representative, custodian, nominee or agent of the Institutional Trustee and the Delaware Trustee (each of the Persons in (i) through (iv) being referred to as a "Fiduciary Indemnified Person") for, and to hold each Fiduciary Indemnified Person harmless against, any loss, liability or expense incurred without negligence or willful misconduct on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses (including reasonable legal fees and expenses) of defending itself against 33 or investigating any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligation to indemnify as set forth in this Section 10.4(b) shall survive the termination of the Trust. SECTION 10.5 Outside Businesses. Any Covered Person, Regular Trustee, the Sponsor, the Delaware Trustee and the Institutional Trustee may engage in or possess an interest in other business ventures of any nature or description, independently or with others, similar or dissimilar to the business of the Trust, and the Trust and the Holders shall have no rights by virtue of this Declaration in and to such independent ventures or the income or profits derived therefrom, and the pursuit of any such venture, even if competitive with the business of the Trust, shall not be deemed wrongful or improper. No Covered Person, Regular Trustee, the Sponsor, the Delaware Trustee, or the Institutional Trustee shall be obligated to present any particular investment or other opportunity to the Trust even if such opportunity is of a character that, if presented to the Trust, could be taken by the Trust, and any Covered Person, Regular Trustee, the Sponsor, the Delaware Trustee and the Institutional Trustee shall have the right to take for its own account (individually or as a partner or fiduciary) or to recommend to others any such particular investment or other opportunity. Any Covered Person, Regular Trustee, the Delaware Trustee and the Institutional Trustee may engage or be interested in any financial or other transaction with the Sponsor or any Affiliate of the Sponsor, or may act as depositary for, trustee or agent for, or act on any committee or body of holders of, securities or other obligations of the Sponsor or its Affiliates. ARTICLE XI ACCOUNTING SECTION 11.1 Fiscal Year. The fiscal year of the Trust ("Fiscal Year") shall be the calendar year, or such other year as is required by the Code. SECTION 11.2 Certain Accounting Matters. (a) At all times during the existence of the Trust, the Regular Trustees shall keep, or cause to be kept, full books of account, records and supporting documents, which shall reflect in reasonable detail, each transaction of the Trust. The books of account shall be maintained on the accrual method of accounting, in accordance with generally accepted accounting principles, consistently applied. The Trust shall use the accrual method of accounting for United States federal income tax purposes. The books of account and the records of the Trust shall be examined by and reported upon as of the end of each Fiscal Year by a firm of independent certified public accountants selected by the Regular Trustees. The books and records of the Trust, together with a copy of the Declaration and a certified copy of the Certificate of Trust, and any amendment thereto shall at all times be maintained at the principal office of the Trust and shall be open for inspection for any examination by any Holder or its duly authorized representative for any purpose reasonably related to its interest in the Trust during normal business hours. (b) The Regular Trustees shall cause to be prepared and delivered to each of the Holders, within 90 days after the end of each Fiscal Year, annual financial statements of the Trust, including a balance sheet of the Trust as of the end of such Fiscal Year, and the related statements of income or loss; (c) The Regular Trustees shall cause to be duly prepared and delivered to each of the Holders, any annual United States federal income tax information statement required by the Code, containing such information with regard to the Securities held by such Holder as is required by the Code and the Treasury Regulations. Notwithstanding any right under the Code to deliver any such statement at a later date, the Regular Trustees shall endeavor to deliver all such statements within 30 days after the end of each Fiscal Year. 34 (d) The Regular Trustees shall cause to be duly prepared and filed with the appropriate taxing authority, an annual United States federal income tax return, on a Form 1041 or such other form required by United States federal income tax law, and any other annual income tax returns required to be filed by the Trust or by the Regular Trustees on behalf of the Trust with any state or local taxing authority. SECTION 11.3 Banking. The Trust may maintain one or more bank accounts in the name and for the sole benefit of the Trust; provided, however, that all payments of funds in respect of the Debentures held by the Institutional Trustee shall be made directly to the Institutional Trustee Account and no other funds of the Trust shall be deposited in the Institutional Trustee Account. The sole signatories for such bank accounts (other than the Institutional Trustee Account) shall be designated by the Regular Trustees. The Institutional Trustee shall designate the signatories for the Institutional Trustee Account. SECTION 11.4 Withholding. The Trust and the Regular Trustees shall comply with all withholding requirements under United States federal, state and local law. The Trust shall request, and the Holders shall provide to the Trust, such forms or certificates as are necessary to establish an exemption from withholding with respect to each Holder, and any representations and forms as shall reasonably be requested by the Trust to assist it in determining the extent of, and in fulfilling, its withholding obligations. The Regular Trustees shall file required forms with applicable jurisdictions and, unless an exemption from withholding is properly established by a Holder, shall remit amounts withheld with respect to the Holder to applicable jurisdictions. To the extent that the Trust is required to withhold and pay over any amounts to any authority with respect to distributions or allocations to any Holder, the amount withheld shall be deemed to be a distribution in the amount of the withholding to the Holder. In the event of any claimed over-withholding, Holders shall be limited to an action against the applicable jurisdiction. If the amount required to be withheld was not withheld from actual Distributions made, the Trust may reduce subsequent Distributions by the amount of such withholding. ARTICLE XII AMENDMENTS AND MEETINGS SECTION 12.1 Amendments. (a) Except as otherwise provided in this Declaration or by any applicable terms of the Securities, this Declaration may only be amended by a written instrument approved and executed by: (i) the Regular Trustees (or, if there are more than two Regular Trustees, a majority of the Regular Trustees); (ii) if the amendment affects the rights, powers, duties, obligations or immunities of the Institutional Trustee, the Institutional Trustee; and (iii) if the amendment affects the rights, powers, duties, obligations or immunities of the Delaware Trustee, the Delaware Trustee. (b) No amendment shall be made, and any purported amendment shall be void and ineffective: 35 (i) unless, in the case of any proposed amendment, the Institutional Trustee shall have first received an Officers' Certificate and an opinion of counsel from each of the Trust and the Sponsor that such amendment is permitted by, and conforms to, the terms of this Declaration (including the terms of the Securities); (ii) unless, in the case of any proposed amendment that affects the rights, powers, duties, obligations or immunities of the Institutional Trustee, the Institutional Trustee shall have agreed to join in such amendment; and (iii) to the extent the result of such amendment would be to: (A) cause the Trust to fail to continue to be classified for purposes of United States federal income taxation as a grantor trust; (B) reduce or otherwise adversely affect the powers of the Institutional Trustee in contravention of the Trust Indenture Act; or (C) cause the Trust to be deemed to be an Investment Company that is required to be registered under the Investment Company Act; (c) At such time after the Trust has issued any Securities that remain outstanding, any amendment that would adversely affect the rights, privileges or preferences of any Holder may be effected only with such additional requirements as may be set forth in the terms of such Securities. (d) Sections 4.4, 9.1(c) and this Section 12.1 shall not be amended without the consent of all of the Holders of the Securities. (e) Article IV shall not be amended without the consent of the Sponsor. (f) The rights of the holders of the Common Securities under Article V to increase or decrease the number of, and appoint and remove Trustees shall not be amended without the consent of the Holders of a Majority in liquidation amount of the Common Securities. (g) Notwithstanding Section 12.1(c), this Declaration may be amended without the consent of the Holders to: (i) cure any ambiguity; (ii) correct or supplement any provision in this Declaration that may be defective or inconsistent with any other provision of this Declaration; (iii) add to the covenants, restrictions or obligations of the Sponsor; (iv) conform to any change in Rule 3a-5 or written change in interpretation or application of Rule 3a-5 by any legislative body, court, government agency or regulatory authority which amendment does not have a material adverse effect on the right, preferences or privileges of the Holders; or (v) preserve the status of the Trust as a grantor trust for federal income tax purposes. 36 SECTION 12.2 Meetings of the Holders; Action by Written Consent. (a) Meetings of the Holders of any class of Securities may be called at any time by the Regular Trustees (or as provided in the terms of the Securities) to consider and act on any matter on which Holders of such class of Securities are entitled to act under the terms of this Declaration, the terms of the Securities or the rules of any stock exchange on which the Preferred Securities are listed or admitted for trading. The Regular Trustees shall call a meeting of the Holders of such class if directed to do so by the Holders of at least 10% in liquidation amount of the Securities of such class. Such direction shall be given by delivering to the Regular Trustees one or more notices in a writing stating that the signing Holders wish to call a meeting and indicating the general or specific purpose for which the meeting is to be called. Any Holders calling a meeting shall specify in writing the Certificates held by the Holders exercising the right to call a meeting and only those Securities specified shall be counted for purposes of determining whether the required percentage set forth in the second sentence of this paragraph has been met. (b) Except to the extent otherwise provided in the terms of the Securities, the following provisions shall apply to meetings of Holders: (i) notice of any such meeting shall be given to all the Holders having a right to vote thereat at least seven days and not more than 60 days before the date of such meeting. Whenever a vote, consent or approval of the Holders is permitted or required under this Declaration or the rules of any stock exchange on which the Preferred Securities are listed or admitted for trading, such vote, consent or approval may be given at a meeting of the Holders. Any action that may be taken at a meeting of the Holders may be taken without a meeting if a consent in writing setting forth the action so taken is signed by the Holders owning not less than the minimum amount of Securities in liquidation amount that would be necessary to authorize or take such action at a meeting at which all Holders having a right to vote thereon were present and voting. Prompt notice of the taking of action without a meeting shall be given to the Holders entitled to vote who have not consented in writing. The Regular Trustees may specify that any written ballot submitted to the Holders for the purpose of taking any action without a meeting shall be returned to the Trust within the time specified by the Regular Trustees; (ii) each Holder may authorize any Person to act for it by proxy on all matters in which a Holder is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Holder executing it. Except as otherwise provided herein, all matters relating to the giving, voting or validity of proxies shall be governed by the General Corporation Law of the State of Delaware relating to proxies, and judicial interpretations thereunder, as if the Trust were a Delaware corporation and the Holders were stockholders of a Delaware corporation; (iii) each meeting of the Holders shall be conducted by the Regular Trustees or by such other Person that the Regular Trustees may designate; and (iv) unless the Business Trust Act, this Declaration, the terms of the Securities, the Trust Indenture Act or the listing rules of any stock exchange on which the Preferred Securities are then listed or trading otherwise provides, the Regular Trustees, in their sole discretion, shall establish all other provisions relating to meetings of Holders, including notice of the time, place or purpose of any meeting at which any matter is to be voted on by any Holders, waiver of any such notice, action by consent without a meeting, the establishment of a record date, quorum requirements, voting in person or by proxy or any other matter with respect to the exercise of any such right to vote. 37 ARTICLE XIII REPRESENTATIONS OF INSTITUTIONAL TRUSTEE AND DELAWARE TRUSTEE SECTION 13.1 Representations and Warranties of Institutional Trustee and Successor Institutional Trustee. The Trustee that acts as initial Institutional Trustee represents and warrants to the Trust and to the Sponsor at the date of this Declaration, and each Successor Institutional Trustee represents and warrants to the Trust and the Sponsor at the time of the Successor Institutional Trustee's acceptance of its appointment as Institutional Trustee, as applicable, that: (a) such Institutional Trustee or Successor Institutional Trustee satisfies the qualifications set forth in Section 5.3, and has the trust power and authority to execute and deliver, and to carry out and perform its obligations under the terms of, this Declaration; (b) the execution, delivery and performance by such Institutional Trustee or Successor Institutional Trustee of this Declaration has been duly authorized by all necessary corporate action on the part of such Institutional Trust; and this Declaration has been duly executed and delivered by such Institutional Trustee or Successor Institutional Trustee, and constitutes the legal, valid and binding obligation of such Institutional Trustee or Successor Institutional Trustee, enforceable against it in accordance with its terms, subject to applicable bankruptcy, reorganization, moratorium, insolvency, and other similar laws affecting creditors' rights generally and to general principles of equity and the discretion of the court (regardless of whether the enforcement of such remedies is considered in a proceeding in equity or at law); (c) the execution, delivery and performance of this Declaration by such Institutional Trustee or Successor Institutional Trustee does not conflict with or constitute a breach of the Organization Certificate or By-laws (or similar governing instruments) of such Institutional Trustee or Successor Institutional Trustee; (d) no consent, approval or authorization of, or registration with or notice to, any State of New York or federal banking authority is required for the execution, delivery or performance by such Institutional Trustee or Successor Institutional Trustee of this Declaration; and (e) on the Closing Date, such Institutional Trustee will be the record holder of the Debentures and the Institutional Trustee has not and will not knowingly creat any liens or encumbrances on such Debentures. SECTION 13.2 Representations and Warranties of Delaware Trustee or Successor Delaware Trustee. The Trustee that acts as initial Delaware Trustee represents and warrants to the Trust and to the Sponsor at the date of this Declaration, and each Successor Delaware Trustee represents and warrants to the Trust and the Sponsor at the time of the Successor Delaware Trustee's acceptance of its appointment as Delaware Trustee, that: (a) The Delaware Trustee or Successor Delaware Trustee satisfies the requirement of Section 5.2 and has the power and authority to execute and deliver, and to carry out and perform its obligations under the terms of, this Declaration. (b) The Delaware Trustee or Successor Delaware Trustee has been authorized by all requisite corporate action to execute and deliver this Declaration and to perform its obligations under this Declaration. This Declaration constitutes a legal, valid and binding obligation of the Delaware Trustee or Successor DelawareTrustee, enforceable against it in accordance with its terms, subject to applicable bankruptcy, reorganization, moratorium, insolvency, and other similar laws affecting creditors' rights generally and to general principles of equity and the discretion of the court (regardless of whether the enforcement of such remedies is considered in a proceeding in equity or at law). 38 (c) No consent, approval or authorization of, or registration with or notice to, any State of Delaware or federal authority is required for the execution, delivery or performance by the Delaware Trustee or Successor Delaware Trustee of this Declaration. ARTICLE XIV MISCELLANEOUS SECTION 14.1 Notices. All notices provided for in this Declaration shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied or mailed, by registered or certified mail, as follows: (a) if given to the Trust, in care of the Regular Trustees at the Trust's mailing address set forth below (or such other address as the Trust may give notice of to the Holders): Potomac Electric Power Company Trust I c/o Potomac Electric Power Company 1900 Pennsylvania Avenue, N.W. Washington, D.C. 20068 Attention: Treasurer (b) if given to the Delaware Trustee, at the mailing address set forth below (or such other address as the Delaware Trustee may give notice of to the Holders): The Bank of New York (Delaware) White Clay Center Route 273 Newark, Delaware 19711 Attention: Corporate Trust Department (c) if given to the Institutional Trustee, at the Institutional Trustee's mailing address set forth below (or such other address as the Institutional Trustee may give notice of to the Holders): The Bank of New York 101 Barclay Street 21st Floor West New York, NY10286 Attention: Corporate Trust Trustee Administration (d) if given to the Holder of the Common Securities, at the mailing address of the Sponsor set forth below (or such other address as the Holder of the Common Securities may give notice to the Trust): Potomac Electric Power Company 1900 Pennsylvania Avenue, N.W. Washington, D.C. 20068 Attention: Associate General Counsel (e) if given to any other Holder, at the address set forth on the books and records of the Trust. All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid, except that if a notice or other document is refused delivery or cannot 39 be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. SECTION 14.2 Governing Law. THIS DECLARATION AND THE RIGHTS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE AND ALL RIGHTS AND REMEDIES SHALL BE GOVERNED BY SUCH LAWS WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. SECTION 14.3 Intention of the Parties. It is the intention of the parties hereto that the Trust be classified for United States federal income tax purposes as a grantor trust. The provisions of this Declaration shall be interpreted to further this intention of the parties. SECTION 14.4 Headings. Headings contained in this Declaration are inserted for convenience of reference only and do not affect the interpretation of this Declaration or any provision hereof. SECTION 14.5 Successors and Assigns. Whenever in this Declaration any of the parties hereto is named or referred to, the successors and assigns of such party shall be deemed to be included, and all covenants and agreements in this Declaration by the Sponsor and the Trustees shall bind and inure to the benefit of their respective successors and assigns, whether so expressed. SECTION 14.6 Partial Enforceability. If any provision of this Declaration, or the application of such provision to any Person or circumstance, shall be held invalid, the remainder of this Declaration, or the application of such provision to persons or circumstances other than those to which it is held invalid, shall not be affected thereby. SECTION 14.7 Counterparts. This Declaration may contain more than one counterparts of the signature page and this Declaration may be executed by the affixing of the signature of each of the Trustees to one of such counterpart signature pages. All of such counterpart signature pages shall be read as though one, and they shall have the same force and effect as though all of the signers had signed a single signature page. 40 IN WITNESS WHEREOF, the undersigned has caused these presents to be executed as of the day and year first above written. _______________________________ [ ], as Regular Trustee _______________________________ [ ], as Regular Trustee _______________________________ [ ], as Regular Trustee THE BANK OF NEW YORK (DELAWARE), as Delaware Trustee By: _________________________ Name: Title: THE BANK OF NEW YORK, as Institutional Trustee By: ________________________ Name: Title: POTOMAC ELECTRIC POWER COMPANY, as Sponsor By: ________________________ Name: Title: 41 ANNEX I TERMS OF [ ]% PREFERRED SECURITIES [ ]% COMMON SECURITIES Pursuant to Section 7.1 of the Amended and Restated Declaration of Trust, dated as of ________, 1998 (as amended from time to time, the "Declaration"), the designation, rights, privileges, restrictions, preferences and other terms and provisions of the Securities are set out below (each capitalized term used but not defined herein has the meaning set forth in the Declaration): 1. Designation and Number. (a) Preferred Securities. [ ] Preferred Securities of the Trust with an aggregate stated liquidation amount with respect to the assets of the Trust of [ ]Dollars ($______) and a stated liquidation amount with respect to the assets of the Trust of $25 per Preferred Security, are hereby designated for the purposes of identification only as "___% Preferred Securities." The Preferred Security Certificates evidencing the Preferred Securities shall be substantially in the form of Exhibit A-1 to the Declaration, with such changes and additions thereto or deletions therefrom as may be required by ordinary usage, custom or practice or to conform to the rules of any stock exchange on which the Preferred Securities are listed. (b) Common Securities. [ ] Common Securities of the Trust with an aggregate stated liquidation amount with respect to the assets of the Trust of [ ] Dollars ($______) and a stated liquidation amount with respect to the assets of the Trust of $25 per Common Security, are hereby designated for the purposes of identification only as "[ ]% Common Securities." The Common Security Certificates evidencing the Common Securities shall be substantially in the form of Exhibit A-2 to the Declaration, with such changes and additions thereto or deletions therefrom as may be required by ordinary usage, custom or practice. (c) The Preferred Securities and the Common Securities represent undivided beneficial interests in the assets of the Trust. (d) In connection with the sale of the Securities, the Sponsor will deposit in the Trust, and the Trust will purchase with the proceeds of the sale of the Securities, to be held as trust assets, Debentures having an aggregate principal amount equal to $[ ], and bearing interest at an annual rate equal to the annual Coupon Rate (as defined herein) on the Preferred Securities and Common Securities and having payment and redemption provisions which correspond to the payment and redemption provisions of the Preferred Securities and Common Securities. 2. Distributions. (a) Distributions payable on each Security will be fixed at a rate per annum of [ ]% (the "Coupon Rate") of the stated liquidation amount of $25 per Security, such rate being the rate of interest payable on the Debentures to be held by the Institutional Trustee. Distributions in arrears for more than one quarterly period will bear interest thereon (to the extent permitted by applicable law), compounded quarterly, at a rate equal to the Coupon Rate. The term "Distributions" as used herein includes, as applicable, any Compound Interest (as defined herein). A Distribution will be made by the Institutional Trustee only to the extent that payments are made in respect of the Debentures held by the Institutional Trustee and to the extent the Trust has funds available in the Institutional Trustee Account. The amount of Distributions payable for any period will be computed for any full quarterly period on the basis of a 360-day year of twelve 30-day months, and for any period shorter than a full quarterly period on the basis of the actual number of days elapsed. (b) Distributions on the Securities will be cumulative, will accrue from ________, 1998 and, except during an Extension Period, will be payable quarterly in arrears, on March 1, June 1, September 1 and December 1 of each year, commencing on September 1, 1998, when, as and if available for payment (a "Distribution Payment Date") . So long as the Debenture Issuer shall not be in default in the payment of interest on the Debentures, the Debenture Issuer has the right under the Indenture to defer payments of interest on the Debentures by extending from time to time the interest payment period on the Debentures for a period not exceeding 20 consecutive quarterly periods (each an "Extension Period"), during which Extension Period no interest shall be due and payable on the Debentures, provided that no Extension Period shall extend beyond the Stated Maturity of the Debentures. As a consequence of such deferral, Distributions also will be deferred for the duration of such Extension Period. Despite such deferral, quarterly Distributions will continue to accrue, with interest thereon (to the extent permitted by applicable law) at a rate equal to the Coupon Rate, compounded quarterly, during the Extension Period ("Compound Interest"). Prior to the termination of any such Extension Period, the Debenture Issuer may further defer payments of interest by further extensing the interest payment period; provided that such Extension Period, together with all such previous and further extensions thereof, may not exceed 20 consecutive quarterly periods or extend beyond the Stated Maturity of the Debentures. All Distributions (including Compound Interest) accrued during the Extenstion Period shall be paid on the first Distribution Payment Date following the Extension Period to the Holders in whose names the Securities are registered on the security register on the record date for such Distribution Payment Date, if and to the extent that the corresponding payments are made in respect of the Debentures. Upon the termination of any Extension Period and the payment of all amounts then due, the Debenture Issuer may commence a new Extension Period, subject to the above limitations. In the event that the Debenture Issuer exercises this deferral right, then (i) the Debenture Issuer shall not declare or pay any dividend on, make a distribution with respect to, or redeem, purchase or acquire, or make a liquidation payment with respect to, any of its capital stock (other than (a) purchases or acquisitions of shares of its common stock in connection with the satisfaction by the Debenture Issuer of its obligations under any employee benefit plans or any other contractual obligation of the Debenture Issuer (other than a contractual obligation ranking pari passu with or junior to the Debentures) or (b) the purchase of fractional interests in shares of the Debenture Issuer's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged), (ii) the Debenture Issuer shall not make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by the Debenture Issuer that rank pari passu with or junior to such Debentures and (iii) the Debenture Issuer shall not make any guarantee payments with respect to the foregoing (other than pursuant to the Preferred Securities Guarantee). (c) Distributions on the Securities shall be payable promptly by the Institutional Trustee, upon receipt of immediately available funds, to the Holders thereof as they appear on the books and records of the Trust on the relevant record dates, which will be, as long as the Securities remain in book-entry form, one Business Day prior to the relevant Distribution Payment Date or, in the event the Securities are not in book-entry form, the tenth day of the month prior to the month in which the relevant Distribution Payment Date occurs. Distributions payable on any Securities that are not punctually paid on the applicable Distribution Payment Date, as a result of the Debenture Issuer having failed to make the corresponding interest payment on the Debentures, will forthwith cease to be payable to the Person in whose name such Securities are registered on the relevant record date, and such defaulted Distribution will instead be payable to the Person in whose name such Securities are registered on the special record date established by the Regular Trustees, which record date shall be the same date as the special record date or other specified date established for the payment of defaulted interest in accordance with the Indenture; provided, however, that Distributions shall not be considered payable on any Distribution Payment Date falling within an Extension Period unless the Debenture Issuer has elected to make a full or partial payment of interest accrued on the Debentures on such Distribution Payment Date. Distributions on the Securities shall be paid by the Trust. All Distributions paid with respect to the Securities shall be paid on a Pro Rata basis to Holders thereof entitled thereto. If any date on which a Distribution is payable is not a Business Day, then payment of the A-2 Distribution payable on such date shall be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on the date such Distribution otherwise was payable. (d) In the event that there is any money or other property held by or for the Trust that is not accounted for hereunder, such property shall be distributed Pro Rata among the Holders. 3. Liquidation Distribution Upon Dissolution. In the event of any voluntary or involuntary liquidation, dissolution, winding-up or termination of the Trust (each a "Liquidation"), the Holders on the date of the Liquidation will be entitled to receive Pro Rata out of the assets of the Trust available for distribution to Holders, after satisfaction of liabilities of creditors, if any, distributions in an amount equal to the aggregate of the stated liquidation amount of $25 per Security, plus accrued and unpaid Distributions thereon to the date of payment (the "Liquidation Distribution"), unless, in connection with such Liquidation, Debentures in an aggregate stated principal amount equal to the aggregate stated liquidation amount of such Securities, with an interest rate equal to the Coupon Rate of, and bearing accrued and unpaid interest in an amount equal to the accrued and unpaid Distributions on, such Securities shall be distributed on a Pro Rata basis to the Holders in exchange for such Securities. 4. Redemption and Distribution. (a) Redemption of the Securities will occur simultaneously with any repayment of the Debentures. The Debentures will mature on __________, 2038 (the "Stated Maturity"), and are prepayable as set forth in this Section 4. Upon the repayment of the Debentures in whole or in part, whether at maturity or upon redemption, the proceeds from such repayment shall be simultaneously applied to redeem Securities having an aggregate liquidation amount equal to the aggregate principal amount of the Debentures so repaid. Securities redeemed upon maturity of the Debentures will redeemed at a redemption price, payable in cash, of $25 per Security, plus an amount equal to accrued and unpaid Distributions thereon at the date of redemption (the "Maturity Redemption Price"). If fewer than all the outstanding Securities are to be so redeemed, the Securities will be redeemed Pro Rata and the Preferred Securities to be redeemed will be as described in Section 4(g)(ii) below. (b) As provided in Section 3.1 of the First Supplemental Indenture to the Indenture, the Debentures are prepayable, in whole or in part, at the option of the Debenture Issuer at any time on or after ______, 2003, at a prepayment price equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon (including any Compound Interest (as defined by the Indenture)), to the date of prepaymen (the "Optional Prepayment Price"). (c) As provided in Section 3.2 of the First Supplemental Indenture to the Indenture, if a Tax Event shall occur, the Debenture Issuer may, at its option, prepay the Debentures in whole (but not in part) at any time prior to ____, 2003, within 90 days after the occurrence of such Tax Event, at a prepayment price equal to 100% of the principal amount of such Debentures, plus accrued and unpaid interest thereon (including any Compound Interest (as defined by the Indenture)), to the date of prepayment (the "Tax Event Prepayment Price"). A-3 (d) The following term used herein shall be defined as follows: "Tax Event" means that the Regular Trustees shall have received an opinion of a nationally recognized independent tax counsel experienced in such matters to the effect that, as a result of (a) any amendment to, or change (including any announced prospective change) in, the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein, or (b) any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or such pronouncement or decision is announced on or after the date of the original issuance of the Securities, there is more than an insubstantial risk that (i) the Trust is, or will be within 90 days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Debentures, (ii) interest payable on the Debentures is not, or within 90 days of the date thereof will not be, deductible by the Debenture Issuer, in whole or in part, for United States federal income tax purposes, or (iii) the Trust is, or will be within 90 days of the date thereof, subject to more than a de minimis amount of other taxes, duties or other governmental charges. (e) The Trust may not redeem fewer than all the outstanding Securities unless all accrued and unpaid Distributions have been paid on all Securities for all quarterly Distribution periods terminating on or before the date of redemption. (f) The Debenture Issuer has the right at any time to direct the Trustees to liquidate the Trust and distribute the Debentures to the Holders. If the Debentures are distributed to the Holders and the Preferred Securities are then listed on an exchange, the Debenture Issuer will use its best efforts to cause the Debentures to be listed on the NYSE or on such other exchange as the Preferred Securities are then listed. On the date fixed for distribution of Debentures upon dissolution of the Trust, (i) the Securities will no longer be deemed to be outstanding, (ii) the Debenture Issuer shall deliver to the Depository Institution or its nominee, as the recordholder of the Preferred Securities, a registered global certificate or certificates representing the Debentures to be delivered to the Depository Institution or its nominee upon such distribution, and (iii) any certificates representing Preferred Securities not held by the Depository Institution or its nominee will be deemed to represent Debentures having an aggregate principal amount equal to the aggregate stated liquidation amount of such Preferred Securities until such certificates are presented to the Debenture Issuer or its transfer agent in exchange for Debentures. (g) Redemption or Distribution Procedures. (i) Notice of any redemption of the Securities, or notice of distribution of Debentures in exchange for the Securities prepared by the Trust (a "Redemption/Distribution Notice") shall be given by the Trust by mail to each Holder of Securities to be redeemed or exchanged not fewer than 30 nor more than 60 days before the date fixed for redemption or exchange thereof which, in the case of a redemption, will be the date fixed for repayment of the Debentures. For purposes of the calculation of the date of redemption or exchange and the dates on which notices are given pursuant to this Section 4(g)(i), a Redemption/Distribution Notice shall be deemed to be given on the day such notice is first mailed by first-class mail, postage prepaid, to Holders. Each Redemption/Distribution Notice shall be addressed to the Holders at the address of each such Holder appearing in the books and records of the Trust. No defect in the Redemption/Distribution Notice or in the mailing of either thereof with respect to any Holder shall affect the validity of the redemption or exchange proceedings with respect to any other Holder. (ii) In the event that fewer than all the outstanding Securities are to be redeemed, the Securities to be redeemed shall be redeemed Pro Rata. In respect of Preferred Securities A-4 registered in the name of and held of record by the Depository Institution or its nominee, the distribution of the proceeds of such redemption shall be made to each Depository Institution Participant (or Person on whose behalf such nominee holds such securities) in accordance with the procedures applied by such agency or nominee. (iii) If Securities are to be redeemed and the Trust gives a Redemption/Distribution Notice, which notice may only be issued if the Debentures are to be redeemed as set out in this Section 4 (which notice will be irrevocable), then prior to 12:00 noon, New York City time, on the redemption date, the Debenture Issuer shall deposit with one or more paying agents an amount of money sufficient to redeem on the redemption date all the Securities so called for redemption at the applicable Redemption Price. If a Redemption/Distribution Notice shall have been given and funds are deposited as required, then on and after the date fixed for redemption, distributions will cease to accrue on the Securities so called for redemption. All rights of Holders of such Securities so called for redemption will cease, except the right of the Holders of such Securities to receive the applicable Redemption Price. On presentation and surrender of such Securities at a place of payment specified in said notice, the Securities shall be paid and redeemed by the Trust at the applicable Redemption Price. If any date fixed for redemption of Securities is not a Business Day, then payment of the Redemption Price shall be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day falls in the next calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date fixed for redemption. If payment of the Redemption Price in respect of any Securities is improperly withheld or refused and not paid either by the Trust or by the Sponsor as guarantor pursuant to the relevant Securities Guarantee, Distributions on such Securities will continue to accrue from the original redemption date to the actual date of payment, in which case the actual payment date will be considered the date fixed for redemption for purposes of calculating the Redemption Price. (iv) The Trust shall not be required to (i) register the transfer or exchange of any Securities during a period beginning at the opening of business 15 days before the mailing of a notice of redemption of Securities and ending at the close of business on the day of the mailing of the notice of redemption or (ii) register the transfer or exchange of any Securities so selected for redemption, in whole or in part, except for the unredeemed portion of any Securities being redeemed in part. (v) Subject to applicable law (including, without limitation, United States securities laws), the Sponsor or any of its subsidiaries may at any time and from time to time purchase outstanding Preferred Securities by tender, in the open market or by private agreement. 5. Voting Rights - Preferred Securities. (a) Except as provided under Sections 5(b) and 7, and as otherwise required by law and the Declaration, the Holders of the Preferred Securities will have no voting rights. (b) Subject to the requirements set forth in the immediately following paragraph, the Holders of a majority in aggregate liquidation amount of the Preferred Securities, voting separately as a class, have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Institutional Trustee, or to direct the exercise of any trust or power conferred upon the Institutional Trustee under the Declaration, including the right to direct the Institutional Trustee, as holder of the Debentures, to (i) exercise the remedies available to it under the Indenture as holder of the Debentures, (ii) waive any Indenture Event of Default and its consequences that is waivable under the Indenture, (iii) exercise any A-5 right to rescind or annul a declaration that the principal of all the Debentures shall be due and payable, or (iv) consent to any amendment, modification or termination of the Indenture or the Debentures where such consent shall be required; provided, however, that, where a consent or action under the Indenture would require the consent or act of a Super Majority, only the Holders of at least such Super Majority in aggregate liquidation amount of the Preferred Securities may direct the Institutional Trustee to give such consent or take such action; and provided further, that where a consent or action under the Indenture is only effective against each holder of Debentures who has consented thereto, such consent or action will only be effective against a holder of Preferred Securities who directs the Institutional Trustee to give such consent or take such action. A waiver of an Indenture Event of Default will constitute a waiver of the corresponding Event of Default. The Institutional Trustee shall not revoke any action previously authorized or approved by a vote of the Holders of the Preferred Securities. If the Institutional Trustee fails to enforce its rights under the Debentures after a holder of record of Preferred Securities has made a written request, such holder of record of Preferred Securities may institute a legal proceeding directly against the Debenture Issuer to enforce the Institutional Trustee's rights under the Debentures without first instituting any legal proceeding against the Institutional Trustee or any other person or entity. Notwithstanding the foregoing, if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Debenture Issuer to pay interest or principal on the Debentures on the date such interest or principal is otherwise payable (or in the case of redemption, on the redemption date), then a Holder of Preferred Securities may institute a Direct Action for enforcement of payment to such Holder of the principal of or interest on the Debentures having a principal amount equal to the aggregate liquidation amount of the Preferred Securities o such holder on or after the respective due dates specified in the Debentures. Notwithstanding any payments made to such Holder of Preferred Securities by the Debenture Issuer in connection with a Direct Action, the Debenture Issuer shall remain obligated to pay the principal of or interest on the Debentures held by the Trust or the Institutional Trustee of the Trust, and the Debenture Issuer shall be subrogated to the rights of the Holder of such Preferred Securities with respect to payments on the Preferred Securities to the extent of any payments made by the Debenture Issuer to such Holder in any Direct Action. Except as provided in the preceding sentences, the Holders of Preferred Securities will not be able under this Declaration to exercise directly any other remedy available to the holders of the Debentures. Except with respect to directing the time, method and place of conducting a proceeding for a remedy, the Institutional Trustee shall not take any of the actions described in clauses (i), (ii) or (iii) above unless the Institutional Trustee has received an opinion of a nationally-recognized tax counsel experienced in such matters to the effect that, as a result of such action, the Trust will not fail to be classified as a grantor trust for United States federal income tax purposes. Any approval or direction of Holders of Preferred Securities may be given at a separate meeting of Holders of Preferred Securities convened for such purpose, at a meeting of all of the Holders of Securities or pursuant to written consent. The Regular Trustees shall cause a notice of any meeting at which Holders of Preferred Securities are entitled to vote, or of any matter upon which action by written consent of such Holders is to be taken, to be mailed to each Holder of Preferred Securities. Each such notice shall include a statement setting forth (i) the date of such meeting or the date by which such action is to be taken, (ii) a description of any resolution proposed for adoption at such meeting on which such Holders are entitled to vote or of such matter upon which written consent is sought and (iii) instructions for the delivery of proxies or consents. No vote or consent of the Holders of the Preferred Securities will be required for the Trust to redeem and cancel Preferred Securities or to distribute the Debentures in accordance with the Declaration and the terms of the Securities. Notwithstanding that Holders of Preferred Securities are entitled to vote or consent under any of the circumstances described above, any Preferred Securities that are owned by the Sponsor or any Affiliate of the Sponsor shall not be entitled to vote or consent and shall, for purposes of such vote or consent, be A-6 treated as if they were not outstanding. Holders of the Preferred Securities have no right to appoint or remove the Trustees, which may be appointed, removed or replaced solely by the Holders of the Common Securities. 6. Voting Rights - Common Securities. (a) Except as provided under Sections 6(b) and (c) and Section 7, and as otherwise required by law and the Declaration, the Holders of the Common Securities will have no voting rights. (b) The Holders of the Common Securities are entitled, in accordance with Article V of the Declaration, to vote to appoint, remove or replace any Trustee or to increase or decrease the number of Trustees. (c)Subject to Section 2.6 of the Declaration and only after the Event of Default with respect to the Preferred Securities has been cured, waived, or otherwise eliminated and subject to the requirements of the second to last sentence of this paragraph, the Holders of a Majority in liquidation amount of the Common Securities, voting separately as a class, have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Institutional Trustee, or to direct the exercise of any trust or power conferred upon the Institutional Trustee under the Declaration, including the right to direct the Institutional Trustee, as holder of the Debentures, to (i) exercise the remedy available under the Indenture as holder of the Debentures, (ii) waive any Event of Default and its consequences that is waivable under the Indenture, or (iii) exercise any right to rescind or annul a declaration that the principal of all the Debentures shall be due and payable; provided that, where a consent or action under the Indenture would require the consent or act of a Super Majority, the Institutional Trustee may only give such consent or take such action at the written direction of the Holders of at least the proportion in liquidation amount of the Common Securities which the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding; and provided further, that where a consent or action under the Indenture would require the consent or action of each holder of Debentures, each holder of Common Securities must direct the Institutional Trustee to give such consent or take such action. Except with respect to directing the time, method and place of conducting a proceeding for a remedy, the Institutional Trustee shall not take any action in accordance with the directions of the Holders of the Common Securities under this paragraph unless the Institutional Trustee has received an opinion of a nationally-recognized tax counsel experienced in such matters to the effect that, as a result of such action, the Trust will not fail to be classified as a grantor trust for United States federal income tax purposes. If the Institutional Trustee fails to enforce its rights under the Declaration after a holder of record of Common Securities has made a written request, such holder of record of Common Securities may institute a legal proceeding directly against the Debenture Issuer to enforce the Institutional Trustee's rights under the Declaration, without first instituting a legal proceeding against the Institutional Trustee or any other Person. Any approval or direction of Holders of Common Securities may be given at a separate meeting of Holders of Common Securities convened for such purpose, at a meeting of all of the Holders of Securities or pursuant to written consent. The Regular Trustees shall cause a notice of any meeting at which Holders of Common Securities are entitled to vote, or of any matter upon which action by written consent of such Holders is to be taken, to be mailed to each Holder of Common Securities. Each such notice shall include a statement setting forth (i) the date of such meeting or the date by which such action is to be taken, (ii) a description of any resolution proposed for adoption at such meeting on which such Holders are entitled to vote or of such matter upon which written consent is sought and (iii) instructions for the delivery of proxies or consents. No vote or consent of the Holders of the Common Securities will be required for the Trust to redeem and cancel Common Securities or to distribute the Debentures in accordance with the Declaration and the terms A-7 of the Securities. 7. Amendments to Declaration and Indenture. (a) In addition to any requirements under Section 12.1 of the Declaration, if any proposed amendment to the Declaration provides for, or the Regular Trustees otherwise propose to effect, (i) any action that would adversely affect the powers, preferences or special rights of the Securities, whether by way of amendment to the Declaration or otherwise, or (ii) the dissolution, winding-up or termination of the Trust, other than as provided for in Section 8.1 of the Declaration, then the Holders of outstanding Securities voting together as a single class will be entitled to vote on such amendment or proposal (but not on any other amendment or proposal) and such amendment or proposal shall not be effective except with the approval of the Holders of at least a Majority in liquidation amount of the Securities affected thereby, provided, that, if any amendment or proposal referred to in clause (i) above would adversely affect only the Preferred Securities or only the Common Securities, then only the affected class will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of a Majority in liquidation amount of such class of Securities. (b) In the event the consent of the Institutional Trustee, as the holder of the Debentures, is required under the Indenture with respect to any amendment, modification or termination on the Indenture, the Institutional Trustee shall request the written direction of the Holders of the Securities with respect to such amendment, modification or termination and shall vote with respect to such amendment, modification or termination as directed by a Majority in liquidation amount of the Securities voting together as a single class; provided, however, that where a consent under the Indenture would require the consent of a Super Majority, the Institutional Trustee may only give such consent at the direction of the Holders of at least the proportion in liquidation amount of the Securities which the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding; and provided, further, that where a consent or action under the Indenture is only effective against each holder of Debentures who has consented thereto, such consent or action will only be effective against a holder of Securities who directs the Institutional Trustee to give such consent or take such action; and provided, further, that the Institutional Trustee shall not take any action in accordance with the directions of the Holders of the Securities under this Section 7(b) unless the Institutional Trustee has received an opinion of a nationally recognized tax counsel experienced in such matters to the effect that for the purposes of United States federal income tax the Trust will not be classified as other than a grantor trust on account of such action. (c) Notwithstanding the foregoing, no amendment or modification shall be made to the Declaration if such amendment or modification would (i) cause the Trust to be classified for purposes of United States federal income taxation as other than a grantor trust, (ii) reduce or otherwise adversely affect the powers of the Institutional Trustee or (iii) cause the Trust to be deemed an Investment Company that is required to be registered under the Investment Company Act. 8. Pro Rata. A reference in these terms of the Securities to any payment, distribution or treatment as being "Pro Rata" shall mean pro rata to each Holder according to the aggregate stated liquidation amount of the Securities held by the relevant Holder in relation to the aggregate stated liquidation amount of all Securities outstanding unless, in relation to a payment, an Event of Default has occurred and is continuing, in which case any funds available to make such payment shall be paid first to each Holder of the Preferred Securities pro rata according to the aggregate stated liquidation amount of Preferred Securities held by the relevant Holder relative to the aggregate stated liquidation amount of all Preferred Securities outstanding, and only after satisfaction of all amounts owed to the Holders of the Preferred Securities, to each Holder of Common Securities pro rata according to the aggregate stated liquidation amount of Common Securities held by the relevant Holder relative to the aggregate stated liquidation amount of all Common Securities outstanding. A-8 9. Ranking. The Preferred Securities rank pari passu, and payment thereon shall be made Pro Rata, with the Common Securities, except that, if an Event of Default occurs and is continuing, the rights of Holders of the Common Securities to receive payment of Distributions and payments upon liquidation, redemption and otherwise will be subordinated to the rights of the Holders of the Preferred Securities. 10. Acceptance of Securities Guarantee and Indenture. Each Holder of Preferred Securities and Common Securities, by the acceptance thereof, agrees to the provisions of the Preferred Securities Guarantee and the Common Securities Guarantee, respectively, including the subordination provisions therein, and to the provisions of the Indenture. 11. No Preemptive Rights. The Holders shall have no preemptive rights to subscribe for any additional securities. 12. Miscellaneous. These terms constitute a part of the Declaration. The Sponsor will provide a copy of the Declaration, the Preferred Securities Guarantee or the Common Securities Guarantee, and the Indenture to a Holder without charge on written request to the Sponsor at its principal place of business. A-9 EXHIBIT A-1 FORM OF PREFERRED SECURITY CERTIFICATE Certificate Number[ ] Number of Preferred Securities[ ] CUSIP NO. [ ] Certificate Evidencing Preferred Securities of POTOMAC ELECTRIC POWER COMPANY TRUST I [ ]% Preferred Securities (liquidation amount $25 per Preferred Security) POTOMAC ELECTRIC POWER COMPANY TRUST I, a statutory business trust formed under the laws of the State of Delaware (the "Trust"), hereby certifies that ______________ (the "Holder") is the registered owner of preferred securities of the Trust representing undivided beneficial interests in the assets of the Trust designated the [ ]% Preferred Securities (liquidation amount $25 per Preferred Security) (the "Preferred Securities"). The Preferred Securities are transferable on the books and records of the Trust, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer. The designation, rights, privileges, restrictions, preferences and other terms and provisions of the Preferred Securities represented hereby are issued under, and shall in all respects be subject to, the provisions of the Amended and Restated Declaration of Trust of the Trust dated as of _______, 1998, as the same may be amended from time to time (the "Declaration"), including the designation of the terms of the Preferred Securities as set forth in Annex I to the Declaration. Capitalized terms used herein but not defined shall have the meaning given them in the Declaration. The Holder is entitled to the benefits of the Preferred Securities Guarantee to the extent provided therein. The Sponsor will provide a copy of the Declaration, the Preferred Securities Guarantee and the Indenture to the Holder without charge upon written request to the Trust at its principal place of business. Upon receipt of this certificate, the Holder is bound by the Declaration and is entitled to the benefits thereunder. By acceptance hereof, the Holder agrees to treat, for United States federal income tax purposes, the Debentures as indebtedness and the Preferred Securities as evidence of indirect beneficial ownership in the Debentures. Unless the Institutional Trustee's Certificate of Authentication hereon has been properly executed, these Preferred Securities shall not be entitled to any benefit under the Declaration or be valid or obligatory for any purpose. A1-1 IN WITNESS WHEREOF, the Trust has executed this certificate this ___ day of ____________, 1998. POTOMAC ELECTRIC POWER COMPANY TRUST I By: Name: Title: Regular Trustee A1-2 TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Preferred Securities referred to in the within-mentioned Declaration. Dated _____________, ________ THE BANK OF NEW YORK, as Institutional Trustee By: Authorized Signatory A1-3 [FORM OF REVERSE OF SECURITY] Distributions payable on each Preferred Security will be fixed at a rate per annum of [ ]% (the "Coupon Rate") of the stated liquidation amount of $25 per Preferred Security, such rate being the rate of interest payable on the Debentures to be held by the Institutional Trustee. Distributions in arrears for more than one quarterly period (to the extent permitted by applicable law) will bear interest thereon, compounded quarterly, at the Coupon Rate. A Distribution will be made by the Institutional Trustee only to the extent that payments are made in respect of the Debentures held by the Institutional Trustee and to the extent the Institutional Trustee has funds available in the Institutional Trustee Account. The amount of Distributions payable for any period will be computed for any full quarterly Distribution period on the basis of a 360-day year of twelve 30-day months and for any period shorter than a full quarterly Distribution period on the basis of the actual number of days elapsed. Distributions on the Preferred Securities will be cumulative, will accrue from the date of original issuance and, except during an Extension Period, will be payable quarterly in arrears on March 1, June 1, September 1 and December 1 of each year, commencing on September 1, 1998, to Holders on the relevant record dates, which will be, as long as the Preferred Securities remain in book-entry form, one Business Day prior to the relevant distribution date and, in the event the Preferred Securities are not in book-entry form, the tenth day of the month prior to the month in which the relevant distribution date occurs, which payment dates shall correspond to the interest payment dates on the Debentures. The Debenture Issuer has the right under the Indenture to defer payments of interest by extending the interest payment period from time to time on the Debentures for a period not exceeding 20 consecutive quarterly periods (each an "Extension Period"), provided that no Extension Period shall extend beyond the date of the maturity of the Debentures and, as a consequence of such deferral, quarterly Distributions will also be deferred. During the Extension Period, quarterly Distributions will continue to accrue with interest thereon (to the extent permitted by applicable law) at the Coupon Rate, compounded quarterly. Prior to the termination of any such Extension Period, the Debenture Issuer may further defer payments of interest by further extending the interest payment period; provided that such Extension Period, together with all such previous and further extensions thereof, may not exceed 20 consecutive quarterly periods or extend beyond the maturity of the Debentures. Payments of accrued Distributions will be payable on the first distribution payment date following the Extension Period to Holders as they appear on the books and records of the Trust on the record date for such payment date. Upon the termination of any Extension Period and the payment of all amounts then due, the Debenture Issuer may commence a new Extension Period, subject to the above limitations. The Preferred Securities shall be redeemable as provided in the Declaration. A1-4 ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers this Preferred Security Certificate to: (Insert assignee's social security or tax identification number) (Insert address and zip code of assignee) and irrevocably appoints _____________________________________ to transfer this Preferred Security Certificate on the books of the Trust. The agent may substitute another to act for him or her. Date: Signature: (Sign exactly as your name appears on the other side of this Preferred Security Certificate) (Signature(s) must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Trustee, which requirements include membership or participation in STAMP or such other "signature guaranty program" as may be determined by the Trustee in addition to or in substitution for STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.) A1-5 EXHIBIT A-2 FORM OF COMMON SECURITY CERTIFICATE Certificate Number[ ] Number of Common Securities [ ] Certificate Evidencing Common Securities of POTOMAC ELECTRIC POWER COMPANY TRUST I [ ]% Common Securities (liquidation amount $25 per Common Security) POTOMAC ELECTRIC POWER COMPANY TRUST I, a statutory business trust formed under the laws of the State of Delaware (the "Trust"), hereby certifies that _________________ (the "Holder") is the registered owner of common securities of the Trust representing undivided beneficial interests in the assets of the Trust designated the [ ]% Common Securities (liquidation amount $25 per Common Security) (the "Common Securities"). The Common Securities are transferable on the books and records of the Trust, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer. The designation, rights, privileges, restrictions, preferences and other terms and provisions of the Common Securities represented hereby are issued under, and shall in all respects be subject to, the provisions of the Amended and Restated Declaration of Trust of the Trust dated as of _________, 1998, as the same may be amended from time to time (the "Declaration"), including the designation of the terms of the Common Securities as set forth in Annex I to the Declaration. Capitalized terms used herein but not defined shall have the meaning given them in the Declaration. The Holder is entitled to the benefits of the Common Securities Guarantee to the extent provided therein. The Sponsor will provide a copy of the Declaration, the Common Securities Guarantee and the Indenture to the Holder without charge upon written request to the Sponsor at its principal place of business. Upon receipt of this certificate, the Holder is bound by the Declaration and is entitled to the benefits thereunder. By acceptance hereof, the Holder agrees to treat, for United States federal income tax purposes, the Debentures as indebtedness and the Common Securities as evidence of indirect beneficial ownership in the Debentures. Unless the Institutional Trustee's Certificate of Authentication hereon has been properly executed, these Common Securities shall not be entitled to any benefit under the Declaration or be valid or obligatory for any purpose. A2-1 IN WITNESS WHEREOF, the Trust has executed this certificate this ___ day of ____________, 1998. POTOMAC ELECTRIC POWER COMPANY TRUST I By: Name: Title: Regular Trustee A2-2 [FORM OF REVERSE OF SECURITY] Distributions payable on each Common Security will be fixed at a rate per annum of [ ]% (the "Coupon Rate") of the stated liquidation amount of $25 per Common Security, such rate being the rate of interest payable on the Debentures to be held by the Institutional Trustee. Distributions in arrears for more than one quarterly period will (to the extent permitted by law) bear interest thereon, compounded quarterly, at the Coupon Rate. A Distribution will be made by the Institutional Trustee only to the extent that payments are made in respect of the Debentures held by the Institutional Trustee and to the extent the Institutional Trustee has funds available in the Institutional Trustee Account. The amount of Distributions payable for any period will be computed for any full quarterly Distribution period on the basis of a 360-day year of twelve 30-day months and for any period shorter than a full quarterly Distribution period on the basis of the actual number of days elapsed. Distributions on the Common Securities will be cumulative, will accrue from the date of original issuance and, except during an Extension Period, will be payable quarterly in arrears, on March 1, June 1, September 1 and December 1 of each year, commencing on September 1, 1998, to Holders on the relevant record dates, which will be one Business Day prior to the relevant payment date, which payment dates shall correspond to the interest payment dates on the Debentures. The Debenture Issuer has the right under the Indenture to defer payments of interest by extending the interest payment period from time to time on the Debentures for a period not exceeding 20 consecutive quarterly periods (each an "Extension Period"), provided that no Extension Period shall extend beyond the date of the maturity of the Debentures and, as a consequence of such deferral, Quarterly distributions will also be deferred. During the Extension Period, quarterly Distributions will continue to accrue with interest thereon (to the extent permitted by applicable law) at the Coupon Rate, compounded quarterly. Prior to the termination of any such Extension Period, the Debenture Issuer may further defer payments of interest by further extending the interest payment period; provided that such Extension Period, together with all such previous and further extensions thereof, may not exceed 20 consecutive quarterly periods or extend beyond the maturity date of the Debentures. Payments of accrued Distributions will be payable on the first distribution date following the Extension Period to Holders as they appear on the books and records of the Trust on the record date for such payment date. Upon the termination of any Extension Period and the payment of all amounts then due, the Debenture Issuer may commence a new Extension Period, subject to the above limitations. The Common Securities shall be redeemable as provided in the Declaration. A2-3 ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers this Common Security Certificate to: (Insert assignee's social security or tax identification number) (Insert address and zip code of assignee) and irrevocably appoints _________________________________ to transfer this Common Security Certificate on the books of the Trust. The agent may substitute another to act for him or her. Date: Signature: (Sign exactly as your name appears on the other side of this Common Security Certificate) (Signature(s) must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Trustee, which requirements include membership or participation in STAMP or such other "signature guaranty program" as may be determined by the Trustee in addition to or in substitution for STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.) A2-4 EXHIBIT B SPECIMEN OF DEBENTURE B-1 EXHIBIT C PURCHASE AGREEMENT C-1 EX-4 4 FIRST SUPPLEMENTAL INDENTURE FIRST SUPPLEMENTAL INDENTURE between POTOMAC ELECTRIC POWER COMPANY and THE BANK OF NEW YORK, as Trustee Dated as of __________, 1998 TABLE OF CONTENTS* Page ---- ARTICLE I DEFINITIONS SECTION 1.1 Definition of Terms 1 ARTICLE II GENERAL TERMS AND CONDITIONS OF THE DEBENTURES SECTION 2.1 Designation and Principal Amount 3 SECTION 2.2 Maturity 3 SECTION 2.3 Form and Payment 3 SECTION 2.4 Global Debenture 3 SECTION 2.5 Interest 4 ARTICLE III REDEMPTION OF THE DEBENTURES SECTION 3.1 Optional Redemption 5 SECTION 3.2 Tax Event Redemption 5 SECTION 3.3 Redemption Procedures 5 SECTION 3.4 No Sinking Fund 5 ARTICLE IV EXTENSION OF INTEREST PAYMENT PERIOD SECTION 4.1 Extension of Interest Payment Period 5 SECTION 4.2 Notice of Extension 6 SECTION 4.3 Limitation of Transactions 6 ARTICLE V EXPENSES SECTION 5.1 Payment of Expenses 6 SECTION 5.2 Payment Upon Resignation or Removal 7 ARTICLE VI COVENANT TO LIST ON EXCHANGE SECTION 6.1 Listing on an Exchange 7 ARTICLE VII FORM OF DEBENTURE SECTION 7.1 Form of Debenture 8 *THIS TABLE OF CONTENTS SHALL NOT, FOR ANY PURPOSE, BE DEEMED TO BE A PART OF THIS FIRST SUPPLEMENTAL INDENTURE. ARTICLE VIII ORIGINAL ISSUE OF DEBENTURES SECTION 8.1 Original Issue of Debentures 12 ARTICLE IX MISCELLANEOUS SECTION 9.1 Ratification of Indenture 12 SECTION 9.2 Trustee Not Responsible for Recitals 12 SECTION 9.3 Governing Law 12 SECTION 9.4 Separability 12 SECTION 9.5 Counterparts 13 FIRST SUPPLEMENTAL INDENTURE, dated as of _________, 1998 (the "First Supplemental Indenture"), between Potomac Electric Power Company, a District of Columbia and Virginia corporation (the "Company"), and The Bank of New York, a New York banking corporation, as trustee (the "Trustee"), under the Indenture dated as of ______, 1998 between the Company and the Trustee (the "Indenture"). WHEREAS, the Company executed and delivered the Indenture to the Trustee to provide for the future issuance of the Company's junior subordinated unsecured debentures, notes and other evidences of indebtedness to be issued from time to time in one or more series as may be determined by the Company under the Indenture, in an unlimited aggregate principal amount that may be authenticated and delivered as provided in the Indenture; WHEREAS, pursuant to the terms of the Indenture, the Company desires to provide for the establishment of a new series of such securities to be known as its [ ]% Junior Subordinated Deferrable Interest Debentures due 2038 (the "Debentures"), the form and substance of such Debentures and the terms, provisions and conditions thereof to be set forth as provided in the Indenture and this First Supplemental Indenture; WHEREAS, Potomac Electric Power Company Trust I, a Delaware statutory business trust (the "Trust"), has offered to the public $[ ] aggregate liquidation amount of its [ ]% Preferred Securities (the "Preferred Securities"), representing preferred undivided beneficial interests in the assets of the Trust, and proposes to invest the proceeds from such offering, together with the proceeds of the issuance and sale by the Trust to the Company of $[ ] aggregate liquidation amount of its [ ]% Common Securities (the "Common Securities"), in $[ ] aggregate principal amount of the Debentures; and WHEREAS, the Company has requested that the Trustee execute and deliver this First Supplemental Indenture, and all requirements necessary to make this First Supplemental Indenture a valid instrument in accordance with its terms, and to make the Debentures, when executed by the Company and authenticated and delivered by the Trustee, the valid obligations of the Company, have been performed, and the execution and delivery of this First Supplemental Indenture has been duly authorized in all respects. NOW, THEREFORE, in consideration of the purchase and acceptance of the Debentures by the Holder (as defined herein) thereof, and for the purpose of setting forth, as provided in the Indenture, the form and substance of the Debentures and the terms, provisions and conditions thereof, the Company covenants and agrees with the Trustee as follows: ARTICLE I DEFINITIONS SECTION 1.1. Definition of Terms. Unless the context otherwise requires: (a) a term defined in the Indenture has the same meaning when used in this First Supplemental Indenture; (b) a term defined anywhere in this First Supplemental Indenture has the same meaning throughout; (c) the singular includes the plural and vice versa; (d) a reference to a Section or Article is to a Section or Article of this First Supplemental Indenture; (e) headings are for convenience of reference only and do not affect interpretation; (f) the following terms have the meanings given to them in the Declaration (as hereinafter defined): (i) Purchase Agreement; (ii) Delaware Trustee; (iii) Distribution; (iv) Institutional Trustee; (v) Preferred Securities Guarantee; (vi) Preferred Security Certificate; (vii) Regular Trustee; and (viii) Trust Securities. (g) the following terms have the meanings given to them in this Section 1.1(g): "Additional Interest" shall have the meaning set forth in Section 2.5(c). "Compound Interest" shall have the meaning set forth in Section 4.1. "Coupon Rate" shall have the meaning set forth in Section 2.5(a). "Creditor" shall have the meaning set forth in Section 5.1. "Declaration" means the Amended and Restated Declaration of Trust of Potomac Electric Power Company Trust I, a Delaware statutory business trust, dated as of _________, 1998. "Deferred Interest" shall have the meaning set forth in Section 4.1. "Dissolution Event" means the dissolution of the Trust and distribution of the Debentures held by the Institutional Trustee pro rata to the holders of the Trust Securities in accordance with the Declaration, such event to occur at the option of the Company at any time. "Extended Interest Payment Period" shall have the meaning set forth in Section 4.1. "Global Debenture" shall have the meaning set forth in Section 2.4(a). "Holder" means any person in whose name at the time a Debenture is registered on the Security Register. "Interest Payment Date" shall have the meaning set forth in Section 2.5(a). "Non Book-Entry Preferred Securities" shall have the meaning set forth in Section 2.4(a). "Optional Prepayment Price" shall have the meaning set forth in Section 3.1. "Prepayment Price" shall mean either of the Optional Prepayment Price or the Tax Event Prepayment Price. "Stated Maturity" means the date on which the Debentures mature and on which the principal shall be due and payable, together with all accrued and unpaid interest thereon (including Compound Interest and Additional Interest, if any) which date shall be ________, 2038. "Tax Event" means that the Regular Trustees shall have received an opinion of a nationally recognized independent tax counsel experienced in such matters to the effect that, as a result of (a) any amendment to, or change (including any announced prospective change) in, the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein, or (b) any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or such pronouncement or decision is announced on or after the date of the original issuance of the Trust Securities, there is more than an insubstantial risk that (i) the Trust is, or will be within 90 days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Debentures, (ii) interest payable by the Company on the Debentures is not, or within 90 days of the date of such opinionwill not be, deductible by the Company, in whole or in part, for United States federal income tax purposes, or (iii) the Trust is, or will be within 90 days of the date of such opinion, subject to more than a de minimis amount of other taxes, duties or other governmental charges. "Tax Event Prepayment Price" shall have the meaning set forth in Section 3.2. 2 ARTICLE II GENERAL TERMS AND CONDITIONS OF THE DEBENTURES SECTION 2.1. Designation and Principal Amount. There is hereby authorized a series of Securities designated the "[ ]% Junior Subordinated Deferrable Interest Debentures due 2038", limited in aggregate principal amount to $[ ], which amount shall be as set forth in any written order of the Company for the authentication and delivery of Debentures pursuant to Section 2.04 of the Indenture. SECTION 2.2. Maturity. (a) The Debentures shall mature on the Stated Maturity. SECTION 2.3. Form and Payment. Except as provided in Section 2.4, the Debentures shall be issued in fully registered certificated form without interest coupons. Principal and interest on the Debentures issued in certificated form will be payable, the transfer of such Debentures will be registrable and such Debentures will be exchangeable for Debentures bearing identical terms and provisions at the office or agency of the Trustee in New York, New York; provided, however, that payment of interest may be made, at the option of the Company, by check mailed to the Holder entitled thereto at such address as shall appear in the Security Register or by wire transfer to an account appropriately designated by the Holder entitled thereto. Notwithstanding the foregoing, so long as the Holder of any Debentures is the Institutional Trustee, the payment of the principal of and interest (including Compound Interest and Additional Interest, if any) on such Debentures held by the Institutional Trustee will be made at such place and to such account as may be designated by the Institutional Trustee. SECTION 2.4. Global Debenture. (a) In connection with a Dissolution Event, (i) the Debentures in certificated form shall be presented to the Trustee by the Institutional Trustee (as the Holder of the Debentures) in exchange for a global Debenture in an aggregate principal amount equal to the aggregate principal amount of all outstanding Debentures (a "Global Debenture"), to be registered in the name of the Depository Institution, or its nominee, and delivered by the Trustee to the Depository Institution for crediting to the accounts of its participants. The Company upon any such presentation shall execute a Global Debenture in such aggregate principal amount and deliver the same to the Trustee for authentication and delivery in accordance with the Indenture and this First Supplemental Indenture. Payments on the Debentures issued as a Global Debenture will be made to the Depository Institution; and (ii) if any Preferred Securities are held in non book-entry form, any Preferred Security Certificate which represents Preferred Securities other than Preferred Securities held by the Depository Institution or its nominee ("Non Book-Entry Preferred Securities") will be deemed to represent beneficial interests in Debentures presented to the Trustee by the Institutional Trustee having an aggregate principal amount equal to the aggregate liquidation amount of the Non Book-Entry Preferred Securities until such Preferred Security Certificates are presented to the security registrar for transfer or reissuance, at which time such Preferred Security Certificates will be cancelled and a Debenture, registered in the name of the holder of the Preferred Security Certificate or the transferee of the holder of such Preferred Security Certificate, as the case may be, with an aggregate principal amount equal to the aggregate liquidation amount of the Preferred Security Certificate cancelled, will be executed by the Company and delivered to the Trustee for authentication and delivery in accordance with the Indenture and this First Supplemental Indenture. On issue of such Debentures, Debentures evidenced by a Global Debenture will be deemed to have been cancelled. 3 (b) A Global Debenture may be transferred by the Depository Institution, in whole but not in part, only to a nominee of the Depository Institution, or to a successor Depository Institution selected or approved by the Company or to a nominee of such successor Depository Institution. (c) If there shall have occurred an Event of Default, then the Company shall execute, and, subject to Section 2.07 of the Indenture, the Trustee, upon receipt of an Officers' Certificate evidencing such determination by the Company, shall authenticate and make available for delivery the Debentures in definitive registered form without coupons, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the Global Debenture, in exchange for such Global Debenture. Upon the exchange of the Global Debenture for such Debentures in definitive registered form without coupons, in authorized denominations, the Global Debenture shall be cancelled by the Trustee. Such Debentures in definitive registered form issued in exchange for the Global Debenture shall be registered in such names and in such authorized denominations as the Depository Institution, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. The Trustee shall deliver such Debentures to the Depository Institution for delivery to the Persons in whose names such Debentures are so registered. SECTION 2.5. Interest. (a) Each Debenture will bear interest at the rate of [ ]% per annum (the "Coupon Rate") from the date of original issuance until the principal thereof becomes due and payable, and on any overdue principal and, to the extent that payment of such interest is enforceable under applicable law, on any overdue installment of interest at the Coupon Rate, compounded quarterly, payable quarterly in arrears on March 1, June 1, September 1 and December 1 of each year (each, an "Interest Payment Date"), commencing on September 1, 1998, to the Person in whose name such Debenture or any Predecessor Security is registered, at the close of business on the relevant record date, which will be, as long as the Preferred Securities remain in book-entry form, one Business Day prior to the relevant Interest Payment Date and, in the event the Debentures are not in book-entry form, the tenth day of the month prior to the month in which the relevant Interest Payment Date occurs, except as otherwise provided pursuant to the provisions of Article IV hereof. (b) The amount of interest payable for any full quarterly period will be computed on the basis of a 360-day year of twelve 30-day months. Except as provided in the following sentence, the amount of interest payable for any period shorter than a full quarterly period for which interest is computed will be computed on the basis of the actual number of days elapsed. In the event that any date on which interest is payable on the Debentures is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, then such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on the date that such interest otherwise would have been payable. (c) If, at any time while the Institutional Trustee is the holder of any Debentures, the Trust or the Institutional Trustee is required to pay any taxes, duties, assessments or governmental charges of whatever nature (other than withholding taxes) imposed by the United States, or any other taxing authority, then, in any such case, the Company will pay as additional interest ("Additional Interest") on the Debentures held by the Institutional Trustee, such additional amounts as shall be required so that the net amounts received and retained by the Trust and by the Institutional Trustee, after paying such taxes, duties, assessments or other governmental charges, will be equal to the amounts the Trust and the Institutional Trustee would have received had no such taxes, duties, assessments or other governmental charges been imposed. 4 ARTICLE III REDEMPTION OF THE DEBENTURES SECTION 3.1 Optional Redemption The Debentures are prepayable, in whole or in part, at the option of the Company at any time on or after ______, 2003, at a prepayment price (the "Optional Prepayment Price") equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon (including Compound Interest and Additional Interest, if any) to the date of prepayment. SECTION 3.2 Tax Event Redemption If a Tax Event shall occur, the Company may, at its option, prepay the Debentures in whole (but not in part) at any time prior to ________, 2003, within 90 days after the occurrence of such Tax Event, at a prepayment price (the "Tax Event Prepayment Price") equal to 100% of the principal amount of such Debentures, plus accrued and unpaid interest thereon (including Compound Interest and Additional Interest, if any) to the date of prepayment. SECTION 3.3 Redemption Procedures Notice of any redemption will be mailed at least 30 days, but not more than 60 days, before the redemption date specified therein to each Holder of Debentures to be prepaid at its registered address. Unless the Company defaults in payment of the prepayment price, on and after the redemption date interest shall cease to accrue on such Debentures as are called for redemption. If the Debentures are redeemed only in part pursuant to Section 3.1, the Debentures will be redeemed pro rata, by lot or by any other method selected by the Trustee; provided that, if at the time of redemption the Debentures are registered as a Global Debenture, the Depository Institution shall determine, in accordance with its customary procedures, the principal amount of such Debentures held by each Depository Institution participant to be redeemed. The Prepayment Price shall be paid prior to 12:00 noon, New York time, on the date of such redemption or at such earlier time as the Company determines; provided that the Company shall have deposited with the Trustee an amount sufficient to pay the Prepayment Price prior to such time. SECTION 3.4. No Sinking Fund. The Debentures are not entitled to the benefit of any sinking fund. ARTICLE IV EXTENSION OF INTEREST PAYMENT PERIOD SECTION 4.1. Extension of Interest Payment Period. So long as the Company shall not be in default in the payment of interest on the Debentures, the Company shall have the right, at any time and from time to time during the term of the Debentures, to defer payments of interest by extending the interest payment period of such Debentures for a period not exceeding 20 consecutive quarterly periods (the "Extended Interest Payment Period"), during which Extended Interest Payment Period no interest shall be due and payable; provided that no Extended Interest Payment Period may extend beyond the Stated Maturity. To the extent permitted by applicable law, interest, the payment of which has been deferred because of the extension of the interest payment period pursuant to this Section 4.1, shall bear interest thereon at the Coupon Rate, compounded quarterly, for each quarterly period of the Extended Interest Payment Period ("Compound Interest"). After the expiration of the Extended Interest Payment Period, the Company shall pay all interest accrued and unpaid on the Debentures, including Compound Interest and Additional Interest, if any (together, "Deferred Interest"), on the first Interest Payment Date following the Extended Interest Payment Period to the Holders in whose names the Debentures are registered in the Security Register on the record date for such Interest Payment Date. Prior to the termination of any Extended Interest Payment Period, the Company may further extend such period, provided that such period, together with all such further extensions thereof, shall not exceed 20 consecutive quarterly periods or extend beyond the Stated Maturity of the 5 Debentures. At the termination of any Extended Interest Payment Period and upon the payment of all Deferred Interest then due, the Company may commence a new Extended Interest Payment Period, subject to the foregoing limitations. No interest shall be due and payable during an Extended Interest Payment Period, but the Company may prepay at any time all or any portion of the interest accrued during an Extended Interest Payment Period. SECTION 4.2. Notice of Extension. (a) If the Institutional Trustee is the only Holder at the time the Company elects to commence an Extended Interest Payment Period, the Company shall give written notice to the Institutional Trustee and the Trustee of its election of such Extended Interest Payment Period one Business Day prior to the earlier of (i) the next succeeding date on which Distributions on the Trust Securities issued are payable, or (ii) the date the Trust is required to give notice to the New York Stock Exchange or other applicable self-regulatory organization or to holders of the Preferred Securities of the record or distribution date, but in any event at least one Business Day prior to such record date. (b) If the Institutional Trustee is not the only Holder at the time the Company elects to commence an Extended Interest Payment Period, the Company shall give the Holders and the Trustee written notice of its election of such Extended Interest Payment Period at least ten Business Days prior to the earlier of (i) the next succeeding Interest Payment Date, or (ii) the date the Company is required to give notice to the New York Stock Exchange or other applicable self-regulatory organization or to the Holders of the record date or the Interest Payment Date. (c) The quarterly period in which any notice is given pursuant to paragraphs (a) or (b) of this Section 4.2 shall be counted as one of the 20 quarterly periods permitted in computing the maximum duration of the Extended Interest Payment Period permitted under Section 4.1. SECTION 4.3. Limitation of Transactions. If (i) the Company shall exercise its right to defer payment of interest as provided in Section 4.1 and the Extended Interest Payment Period is continuing or (ii) there shall have occurred any Event of Default, then (a) the Company shall not declare or pay any dividend on, make any distribution with respect to, or redeem, purchase, acquire or make a liquidation payment with respect to, any of its capital stock (other than (1) purchases or acquisitions of shares of its common stock in connection with the satisfaction by the Company of its obligations under any employee benefit plans or any other contractual obligation of the Company (other than a contractual obligation ranking pari passu with or junior to the Debentures) or (2) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged), (b) the Company shall not make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by the Company that rank pari passu with or junior to the Debentures and (c) the Company shall not make any guarantee payments with respect to the foregoing (other than pursuant to the Preferred Securities Guarantee and, to the extent permitted by the Declaration, the Common Securities Guarantee). ARTICLE V EXPENSES SECTION 5.1. Payment of Expenses. In connection with the offering, sale and issuance of the Debentures to the Institutional Trustee and in connection with the sale of the Trust Securities by the Trust, the Company, in its capacity as borrower with respect to the Debentures, shall: 6 (a) pay all costs and expenses relating to the offering, sale and issuance of the Debentures and compensation of the Trustee under the Indenture in accordance with the provisions of Section 6.06 of the Indenture; (b) be responsible for and shall pay all debts and obligations (other than with respect to the Trust Securities) and all costs and expenses of the Trust (including, but not limited to, costs and expenses relating to the organization, maintenance and dissolution of the Trust, the offering, sale and issuance of the Trust Securities (including commissions to the underwriters in connection therewith), the fees and expenses (including reasonable counsel fees and expenses) of the Institutional Trustee, the Delaware Trustee and the Regular Trustees, the costs and expenses relating to the operation of the Trust, including without limitation, costs and expenses of accountants, attorneys, statistical or bookkeeping services, expenses for printing and engraving and computing or accounting equipment, paying agent(s), registrar(s), transfer agent(s), duplicating, travel and telephone and other telecommunications expenses and costs and expenses incurred in connection with the acquisition and disposition of Trust assets and the enforcement by the Institutional Trustee of the rights of the holders of the Prererred Securities); (c) be liable for any indemnification obligations arising with respect to the Declaration; and (d) pay any and all taxes (other than United States withholding taxes attributable to the Trust or its assets) and all liabilities, costs and expenses with respect to such taxes, of the Trust. The Company's obligations under this Section 5.1 shall be for the benefit of, and shall be enforceable by, any person to whom such debts, obligations, costs, expenses and taxes are owed (a "Creditor"), whether or not such Creditor has received notice hereof. Any such Creditor may enforce the Company's obligations under this Section 5.1 directly against the Company and the Company irrevocably waives any right of remedy to require that any such Creditor take any action against the Trust or any other Person before proceeding against the Company. The Company agrees to execute such additional agreements as may be necessary or desirable in order to give full effect to the provisions of this Section 5.1. SECTION 5.2. Payment Upon Resignation or Removal. Upon termination of this First Supplemental Indenture or the Indenture or the removal or resignation of the Trustee, the Company shall pay to the Trustee all amounts accrued to the date of such termination, removal or resignation that are payable pursuant to Section 6.06 of the Indenture. Upon termination of the Declaration or the removal or resignation of the Delaware Trustee or the Institutional Trustee, as the case may be, pursuant to Section 5.6 of the Declaration, the Company shall pay to the Delaware Trustee or the Institutional Trustee, as the case may be, all compensation and expenses payable as of the date of such termination, removal or resignation. ARTICLE VI COVENANT TO LIST ON EXCHANGE SECTION 6.1. Listing on an Exchange. If the Debentures are distributed to the holders of the Trust Securities and the Preferred Securities are then listed on the New York Stock Exchange, Inc. or another exchange, the Company will use its best efforts to list the Debentures on such exchange. 7 ARTICLE VII FORM OF DEBENTURE SECTION 7.1. Form of Debenture. The Debentures and the Trustee's Certificate of Authentication to be endorsed thereon are to be substantially in the following forms: (FORM OF FACE OF DEBENTURE) [If the Debenture is to be a Global Debenture, Insert -- This Debenture is a Global Debenture within the meaning of the Indenture hereinafter referred to and is registered in the name of a Depository or a nominee of a Depository. This Debenture is exchangeable for Debentures registered in the name of a person other than the Depository or its nominee only in the limited circumstances described in the Indenture, and no transfer of this Debenture (other than a transfer of this Debenture as a whole by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository) may be registered except in limited circumstances.] Unless this Debenture is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York) to the issuer or its agent for registration of transfer, exchange or payment, and any Debenture issued in exchange therefor is registered in the name of Cede & Co. or such other name as requested by an authorized representative of The Depository Trust Company and any payment hereon is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY A PERSON IS WRONGFUL since the registered owner hereof, Cede & Co., has an interest herein. No. ______________________________ POTOMAC ELECTRIC POWER COMPANY [ ]% JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURE DUE 2038 CUSIP No. ------------ POTOMAC ELECTRIC POWER COMPANY, a District of Columbia and Virginia corporation (the "Company", which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to The Bank of New York, as Institutional Trustee of Potomac Electric Power Company Trust I under that certain Amended and Restated Declaration of Trust dated as of __________, 1998 (the "Declaration"), or registered assigns, the principal sum of [ ]Dollars ($_________) on _________, 2038 (the"Stated Maturity"), and to pay interest on said principal sum from ________, 1998, or from the most recent interest payment date (each such date, an "Interest Payment Date") to which interest as been paid or duly provided for, quarterly (subject to deferral as set forth herein) in arrears on March 1, June 1, September 1 and December 1 of each year commencing September 1, 1998, at the rate of [ ]% per annum (the "Coupon Rate"), until the principal hereof shall have become due and payable, and on any overdue principal, and (without duplication and to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the same rate per annum, compounded quarterly. The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year of twelve 30-day months and, except as provided in the following sentences, for any shorter period on the basis of the actual number of days elapsed. In the event that any date on which interest is payable on this Debenture is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on the date such interest otherwise would have 8 been payable. The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the person in whose name this Debenture (or one or more Predecessor Securities, as defined in the Indenture) is registered at the close of business on the relevant record dates, which will be, as long as the Debenture remains in book-entry form, one Business Day prior to the relevant Interest Payment Date and, in the event the Debenture is not in book-entry form, the tenth day of the month prior to the month in which the relevant Interest Payment Date occurs. Payments of interest may be deferred by the Company pursuant to the provisions of Article IV of the Supplemental Indenture (as hereinafter defined). Any such interest installment not punctually paid or duly provided for shall forthwith cease to be payable to the registered holders on such regular record date and shall be paid to the Person in whose name this Debenture (or one or more Predecessor Securities) is registered at the close of business on a special record date to be fixed by the Trustee for the payment of such defaulted interest, notice whereof shall be given to the registered holders of this series of Debentures not less than 10 days nor more than 15 days prior to such special record date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Debentures may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture. The principal of and the interest on this Debenture shall be payable at the office or agency of the Trustee maintained for that purpose in any coin or currency of the United States of America that at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by check mailed to the registered holder at such address as shall appear in the Security Register. Notwithstanding the foregoing, so long as the holder of this Debenture is the Institutional Trustee, the payment of the principal of and interest on this Debenture will be made at such place and to such account as may be designated by the Institutional Trustee. The indebtedness evidenced by this Debenture is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Indebtedness and Other Financial Obligations (each as defined in the Indenture), and this Debenture is issued subject to the provisions of the Indenture with respect thereto. Each holder of this Debenture, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee his or her attorney-in-fact for any and all such purposes. Each holder hereof, by his or her acceptance hereof, hereby waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Indebtedness and Other Financial Obligations, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions. This Debenture shall not be entitled to any benefit under the Indenture hereinafter referred to, be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by or on behalf of the Trustee. The provisions of this Debenture are continued on the reverse side hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place. IN WITNESS WHEREOF, the Company has caused this instrument to be executed. POTOMAC ELECTRIC POWER COMPANY By:____________________________________ Name Title Attest: By:______________________________________ Name: Title: 9 (FORM OF CERTIFICATE OF AUTHENTICATION) CERTIFICATE OF AUTHENTICATION Dated: ____________, 1998 This is one of the Securities of the series designated herein referred to in the within-mentioned Indenture. The Bank of New York, as Trustee By: _______________________________________ Authorized Signatory (FORM OF REVERSE OF DEBENTURE) This Debenture is one of a duly authorized series of Debentures of the Company (herein sometimes referred to as the "Debentures"), specified in the Indenture, all issued or to be issued in one or more series under and pursuant to an Indenture dated as of __________, 1998, duly executed and delivered between the Company and The Bank of New York, as trustee (the "Trustee"), as supplemented by the First Supplemental Indenture dated as of _______, 1998 (the "Supplemental Indenture"), between the Company and the Trustee (the Indenture as so supplemented, the "Indenture"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Debentures. By the terms of the Indenture, the Debentures are issuable in series that may vary as to amount, date of maturity, rate of interest and in other respects as provided in the Indenture. This series of Debentures is limited in aggregate principal amount as specified in said First Supplemental Indenture. This Debenture is redeemable by the Company (i) in whole but not in part (a "Tax Event Redemption") at any time prior to _______ ___, 2003, within 90 days after the occurrence of a Tax Event (as defined in the Indenture) and (ii) in whole or in part (an "Optional Redemption") on or after _______, 2003. Any such redemption will be made upon not less than 30 days nor more than 60 days notice, at a price equal to 100% of the principal amount hereof, plus any accrued and unpaid interest hereon, to the date of such redemption (the "Prepayment Price"). The Prepayment Price shall be paid prior to 12:00 noon, New York time, on the date of such redemption or at such earlier time as the Company determines. If the Debentures are only partially redeemed by the Company pursuant to an Optional Redemption, the Debentures will be redeemed pro rata, by lot or by any other method selected by the Trustee; provided that if, at the time of redemption, the Debentures are registered as a Global Debenture, the Depository shall determine, in accordance with its customary procedures, the principal amount of such Debentures held by each Depository Institution participant to be redeemed. In the event of redemption of this Debenture in part only, a new Debenture or Debentures of this series for the unredeemed portion hereof will be issued in the name of the holder hereof upon the cancellation hereof. In case an Event of Default shall have occurred and be continuing, the principal of all of the Debentures may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than a majority in aggregate principal amount of the Debentures of each series affected at the time outstanding, as defined in the Indenture, to execute supplemental indentures for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Debentures; provided, however, that no such supplemental indenture shall (i) extend the fixed maturity of any Debentures of any series, or reduce the principal amount thereof or any premium thereon, or reduce the rate or extend the time of payment of interest thereon, or 10 reduce any amount payable on redemption thereof or make the principal thereon or any interest or premium thereon payable in any coin or currency other than that provided in this Debenture, or impair or affect the right of any holder of a Debenture to institute suit for payment thereof or the right of repayment, if any, at the option of the holder, without the consent of the holder of each Debenture so affected, or (ii) reduce the aforesaid percentage of Debentures, the holders of which are required to consent to any such supplemental indenture, without the consent of the holders of each Debenture then outstanding and affected thereby. The Indenture also contains provisions permitting the holders of a majority in aggregate principal amount of the Debentures of any series at the time outstanding affected thereby, on behalf of all of the holders of the Debentures of such series, to waive any past default in the performance of any of the covenants contained in the Indenture, or established pursuant to the Indenture with respect to such series, and its consequences, except a default in the payment of the principal of or premium, if any, or interest on any of the Debentures of such series. Any such consent or waiver by the holder of this Debenture (unless revoked as provided in the Indenture) shall be conclusive and binding upon such holder and upon all future holders of this Debenture and of any Debenture issued in exchange hereof or in place hereof (whether by registration of transfer or otherwise), irrespective of whether or not any notation of such consent or waiver is made upon this Debenture. No reference herein to the Indenture and no provision of this Debenture or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, and interest on, this Debenture at the time and place and at the rate and in the money herein prescribed. The Company shall have the right, at any time and from time to time during the term of the Debentures, to defer payments of interest by extending the interest payment period of such Debentures for up to 20 consecutive quarterly periods (an "Extended Interest Payment Period"), at the end of which period the Company shall pay all interest then accrued and unpaid (together with interest on such deferred amounts at the Coupon Rate, compounded quarterly, to the extent that payment of such interest is permitted by applicable law); provided that no Extended Interest Payment Period may extend beyond the Stated Maturity of the Debentures. Prior to the termination of any such Extended Interest Payment Period, the Company may further extend such period, provided that such period, together with all such further extensions thereof, shall not exceed 20 consecutive quarterly periods or extend beyond the Stated Maturity of the Debentures. At the termination of any such Extended Interest Payment Period and upon the payment of all accrued and unpaid interest then due (including Compound Interest), the Company may commence a new Extended Interest Payment Period. As provided in the Indenture and subject to certain limitations therein set forth, this Debenture is transferable by the registered holder hereof on the Security Register, upon surrender of this Debenture for registration of transfer at the office or agency of the Trustee in the City and State of New York, accompanied by a written instrument or instruments of transfer in form satisfactory to the Company or the Trustee duly executed by the registered holder hereof or his attorney duly authorized in writing, and thereupon one or more new Debentures of authorized denominations and for the same aggregate principal amount and series will be issued to the designated transferee or transferees. No service charge will be made for any such transfer, but the Company or the Trustee may require payment of a sum sufficient to cover any tax, fee or other governmental charge payable in relation thereto. Prior to due presentment for registration of transfer of this Debenture, the Company, the Trustee, any authenticating agent, any paying agent, any transfer agent and any security registrar may deem and treat the registered holder hereof as the absolute owner hereof (whether or not this Debenture shall be overdue and notwithstanding any notice of ownership or writing hereon made by anyone other than the security registrar) for the purpose of receiving payment of or on account of the principal hereof and interest due hereon and for all other purposes, and none of the Company, the Trustee, any authenticating agent, any paying agent, any transfer agent, or any security registrar shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or the interest on this Debenture, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture, against any incorporator, stockholder, officer or director, past, present or future, as such, of the Company or of any predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issuance hereof, expressly waived and released. 11 The Debentures of this series are issuable only in registered form without coupons in denominations of $25 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations herein and therein set forth, Debentures of this series so issued are exchangeable for a like aggregate principal amount of Debentures of this series of a different authorized denomination, as requested by the Holder surrendering the same. This Debenture shall be governed by, and construed in accordance with, the laws of the State of New York. All terms used in this Debenture that are defined in the Indenture shall have the meanings assigned to them in the Indenture. ARTICLE VIII ORIGINAL ISSUE OF DEBENTURES SECTION 8.1. Original Issue of Debentures. Debentures in the aggregate principal amount of $[ ], may, upon execution of this First Supplemental Indenture or upon any written order of the Company setting forth the amount therefor, be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Debentures to or upon the written order of the Company, signed by its Chairman, its President, or any Vice President and its Treasurer, its Secretary, any Assistant Treasurer, or any Assistant Secretary, without any further action by the Company. ARTICLE IX MISCELLANEOUS SECTION 9.1. Ratification of Indenture. The Indenture, as supplemented by this First Supplemental Indenture, is in all respects ratified and confirmed, and this First Supplemental Indenture shall be deemed part of the Indenture in the manner and to the extent herein and therein provided. SECTION 9.2. Trustee Not Responsible for Recitals. The recitals herein contained are made by the Company and not by the Trustee, and the Trustee assumes no responsibility for the correctness thereof. The Trustee makes no representation as to the validity or sufficiency of this First Supplemental Indenture. SECTION 9.3. Governing Law. This First Supplemental Indenture and each Debenture shall be deemed to be a contract made under the internal laws of the State of New York, and for all purposes shall be construed in accordance with the laws of said State. SECTION 9.4. Separability. In case any one or more of the provisions contained in this First Supplemental Indenture or in the Debentures shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this First Supplemental Indenture or of the Debentures, but this First Supplemental Indenture and the Debentures shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein. 12 SECTION 9.5. Counterparts. This First Supplemental Indenture may be executed in any number of counterparts each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed by their respective officers thereunto duly authorized and their respective corporate seals to be hereunto duly affixed and attested, all as of the day and year first above written. POTOMAC ELECTRIC POWER COMPANY Attest: By: - ------------------------- --------------------------- Name: Name: Title: Title: Attest: THE BANK OF NEW YORK, as Trustee - ------------------------ By:---------------------------- Name: Name: Title: Title: 13 EX-4 5 FORM OF SUPPLEMENTAL INDENTURE POTOMAC ELECTRIC POWER COMPANY INDENTURE DATED AS OF _________, 1998 THE BANK OF NEW YORK, AS TRUSTEE JUNIOR SUBORDINATED DEBENTURES TABLE OF CONTENTS* Page Parties 1 Recitals 1 Authorization of Indenture 1 Compliance with Legal Requirements 1 Purpose of and Consideration for Indenture 1 ARTICLE I DEFINITIONS SECTION 1.01. Definitions 1 ARTICLE II SECURITIES SECTION 2.01. Forms Generally 8 SECTION 2.02. Form of Trustee's Certificate of Authentication 9 SECTION 2.03. Amount Unlimited; Issuable in Series 9 SECTION 2.04. Authentication and Dating 11 SECTION 2.05. Date and Denomination of Securities 12 SECTION 2.06. Execution of Securities 14 SECTION 2.07. Exchange and Registration of Transfer of Securities 15 SECTION 2.08. Mutilated, Destroyed, Lost or Stolen Securities 16 SECTION 2.09. Temporary Securities 17 SECTION 2.10. Cancellation of Securities Paid, etc. 18 SECTION 2.11. Global Securities 18 SECTION 2.12 CUSIP Numbers 19 ARTICLE III PARTICULAR COVENANTS OF THE COMPANY SECTION 3.01. Payment of Principal, Premium and Interest 20 SECTION 3.02. Offices for Notices and Payments, etc. 20 SECTION 3.03. Appointments to Fill Vacancies in Trustee's Office 21 SECTION 3.04. Provision as to Paying Agent 21 SECTION 3.05. Certificate to Trustee 22 SECTION 3.06. Compliance with Consolidation Provisions 22 SECTION 3.07. Limitation on Dividends; Transactions with Affiliates 22 SECTION 3.08. Covenants as to Potomac Electric Power Company Trusts 23 SECTION 3.09. Notice of Default 23 ARTICLE IV SECURITYHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE SECTION 4.01. Securityholders' Lists 23 SECTION 4.02. Preservation and Disclosure of Lists 24 SECTION 4.03. Reports by Company 25 SECTION 4.04. Reports by the Trustee 26 ARTICLE V REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT SECTION 5.01. Events of Default 27 SECTION 5.02. Payment of Securities on Default; Suit Therefor 29 SECTION 5.03. Application of Moneys Collected by Trustee 31 SECTION 5.04. Proceedings by Securityholders 32 SECTION 5.05. Proceedings by Trustee 33 SECTION 5.06. Remedies Cumulative and Continuing 33 SECTION 5.07. Direction of Proceedings and Waiver of Defaults by Majority of Securityholders 33 SECTION 5.08. Notice of Defaults 35 SECTION 5.09. Undertaking to Pay Costs 35 * THIS TABLE OF CONTENTS SHALL NOT, FOR ANY PURPOSE, BE DEEMED TO BE A PART OF THE INDENTURE. ARTICLE VI CONCERNING THE TRUSTEE SECTION 6.01. Duties and Responsibilities of Trustee 36 SECTION 6.02. Reliance on Documents, Opinions, et 37 SECTION 6.03. No Responsibility for Recitals, etc. 39 SECTION 6.04. Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Securities 39 SECTION 6.05. Moneys to be Held in Trust 39 SECTION 6.06. Compensation and Expenses of Trustee 39 SECTION 6.07. Officers' Certificate as Evidence 40 SECTION 6.08. Conflicting Interest of Trustee 41 SECTION 6.09. Eligibility of Trustee 41 SECTION 6.10. Resignation or Removal of Trustee 41 SECTION 6.11. Acceptance by Successor Trustee 43 SECTION 6.12. Succession by Merger, etc. 44 SECTION 6.13. Limitation on Rights of Trustee as a Creditor 44 SECTION 6.14. Authenticating Agents 45 ARTICLE VII CONCERNING THE SECURITYHOLDERS SECTION 7.01. Action by Securityholders 46 SECTION 7.02. Proof of Execution by Securityholders 47 SECTION 7.03. Who Are Deemed Absolute Owners 47 SECTION 7.04. Securities Owned by Company Deemed Not Outstanding 48 SECTION 7.05. Revocation of Consents; Future Holders Bound 48 ARTICLE VIII SECURITYHOLDERS' MEETINGS SECTION 8.01. Purposes of Meetings 49 SECTION 8.02. Call of Meetings by Trustee 49 SECTION 8.03. Call of Meetings by Company or Securityholders 49 SECTION 8.04. Qualifications for Voting 50 SECTION 8.05. Regulations 50 SECTION 8.06. Voting 51 ARTICLE IX SUPPLEMENTAL INDENTURES SECTION 9.01. Supplemental Indentures without Consent of Securityholders 52 SECTION 9.02. Supplemental Indentures with Consent of Securityholders 53 SECTION 9.03. Compliance with Trust Indenture Act; Effect of Supplemental Indentures 55 SECTION 9.04. Notation on Securities 55 SECTION 9.05. Evidence of Compliance of Supplemental Indenture to be Furnished Trustee 56 ARTICLE X CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE SECTION 10.01. Company May Consolidate, etc., on Certain Terms 56 SECTION 10.02. Successor Corporation to be Substituted for Company 57 SECTION 10.03. Opinion of Counsel to be Given Trustee 57 ARTICLE XI SATISFACTION AND DISCHARGE OF INDENTURE SECTION 11.01. Discharge of Indenture 58 SECTION 11.02. Deposited Moneys and U.S. Government Obligations to be Held in Trust by Trustee 59 SECTION 11.03. Paying Agent to Repay Moneys Held 59 SECTION 11.04. Return of Unclaimed Moneys 59 SECTION 11.05. Defeasance Upon Deposit of Moneys or U.S. Government Obligations 59 ARTICLE XII IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 12.01. Indenture and Securities Solely Corporate Obligations 61 ARTICLE XIII MISCELLANEOUS PROVISIONS SECTION 13.01. Successors 62 SECTION 13.02. Official Acts by Successor Corporation 62 SECTION 13.03. Surrender of Company Powers 62 SECTION 13.04. Addresses for Notices, etc. 62 SECTION 13.05. Governing Law 63 SECTION 13.06. Evidence of Compliance with Conditions Precedent 63 SECTION 13.07. Legal Holidays 63 SECTION 13.08. Trust Indenture Act to Control 64 SECTION 13.09. Table of Contents, Headings, etc. 64 SECTION 13.10. Execution in Counterparts 64 SECTION 13.11. Separability 64 SECTION 13.12. Assignment 65 SECTION 13.13. Acknowledgment of Rights 65 ARTICLE XIV REDEMPTION OF SECURITIES SECTION 14.01. Applicability of Article 65 SECTION 14.02. Notice of Redemption; Selection of Securities 66 SECTION 14.03. Payment of Securities Called for Redemption 67 ARTICLE XV SUBORDINATION OF SECURITIES SECTION 15.01. Agreement to Subordinate 67 SECTION 15.02. Default on Senior Indebtedness 68 SECTION 15.03. Liquidation; Dissolution; Bankruptcy 69 SECTION 15.04. Subrogation 70 SECTION 15.05. Trustee to Effectuate Subordination 71 SECTION 15.06. Notice by the Company 72 SECTION 15.07. Rights of the Trustee; Holders of Senior Indebtedness and Other Financial Obligations 73 SECTION 15.08. Subordination May Not Be Impaired 73 Testimonium 74 Signatures 74 THIS INDENTURE, dated as of ________, 1998, between Potomac Electric Power Company, a District of Columbia and Virginia corporation (hereinafter sometimes called the "Company"), and The Bank of New York, a New York banking corporation, as trustee (hereinafter sometimes called the "Trustee"), W I T N E S S E T H : WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issuance from time to time of its junior subordinated unsecured debentures, notes or other evidences of indebtedness to be issued in one or more series (the "Securities") up to such principal amount or amounts as may from time to time be authorized in accordance with the terms of this Indenture and, to provide the terms and conditions upon which the Securities are to be authenticated, issued and delivered, the Company has duly authorized the execution of this Indenture; and WHEREAS, all acts and things necessary to make this Indenture a valid agreement according to its terms, have been done and performed; NOW, THEREFORE, This Indenture Witnesseth: In consideration of the premises, and the purchase of the Securities by the holders thereof, the Company covenants and agrees with the Trustee for the equal and proportionate benefit of the respective holders from time to time of the Securities or of any series thereof, as follows: ARTICLE I DEFINITIONS SECTION 1.01. Definitions. The terms defined in this Section 1.01 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.01. All other terms used in this Indenture which are defined in the Trust Indenture Act (as hereinafter defined), or which are by reference therein defined in the Securities Act of 1933, as amended (the "Securities Act"), shall (except as herein otherwise expressly provided or unless the context otherwise requires) have the meanings assigned to such terms in said Trust Indenture Act and in said Securities Act as in force at the date of this Indenture as originally executed. All accounting terms used herein and not expressly defined shall have the meanings assigned to such terms in accordance with generally accepted accounting principles and the term "generally accepted accounting principles" means such accounting principles as are generally accepted at the time of any computation. The words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. "Additional Provisions" shall have the meaning given to such term in Section 15.01. "Affiliate" has the same meaning as given to that term in Rule 405 of the Securities Act of 1933, as amended, or any successor rule thereunder. "Authenticating Agent" shall mean any agent or agents of the Trustee which at the time shall be appointed and acting pursuant to Section 6.14. "Bankruptcy Code" shall mean Title 11, U.S. Code, or similar federal or state law for the relief of debtors. "Board of Directors" shall mean the Board of Directors or the Executive Committee or any other duly authorized committee thereof of the Company. "Board Resolution" shall mean a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification. "Business Day" shall mean, with respect to any series of Securities, any day other than a day on which federal or state banking institutions in the Borough of Manhattan, The City of New York, are authorized or obligated by law, executive order or regulation to close. "Certificate" shall mean a certificate signed by the principal executive officer, the principal financial officer or the principal accounting officer of the Company. "Certificate of Authentication" shall mean the certificate issued by the Trustee or the Authenticating Agent as to the form of Security issued under the Indenture. "Commission" shall mean the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. 2 "Common Securities" shall mean undivided beneficial interests in the assets of a Potomac Electric Power Company Trust which rank pari passu with Preferred Securities issued by such Potomac Electric Power Company Trust; provided, however, that upon the occurrence of an Event of Default, the rights of holders of Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of holders of Preferred Securities. "Common Securities Guarantee" shall mean any guarantee that the Company enters into for the benefit of holders of Common Securities issued by a Potomac Electric Power Company Trust. "Company" shall mean Potomac Electric Power Company, a District of Columbia and Virginia corporation, and, subject to the provisions of Article Ten, shall include its successors and assigns. "Corporate Trust Office" means the office of the Trustee at which the corporate trust business of the Preferred Guarantee Trustee shall, at any particular time, be principally administered, which office at the date of execution of this Agreement is located at 101 Barclay Street, New York, New York 10286. "Declaration," with respect to a Potomac Electric Power Company Trust, shall mean the Amended and Restated Declaration of Trust of such Potomac Electric Power Company Trust that establishes the terms of the Preferred Securities and Common Securities thereof. "Default" means any event, act or condition that with notice or lapse of time, or both, would constitute an Event of Default. "Defaulted Interest" shall have the meaning given to such term in Section 2.05. "Defeasance Agent" shall have the meaning given to such term in Section 11.05(c). "Depository Institution" shall mean, with respect to Securities of any series, for which the Company shall determine that such Securities will be issued as a Global Security, The Depository Trust Company, New York, New York, or another clearing agency, or any successor thereof, that is registered as a clearing agency under the Exchange Act, or other applicable statute or regulation, which, in each case, shall be designated by the Company pursuant to either Section 2.03 or 2.11. 3 "Discharged" shall have the meaning given to such term in Section 11.05(b). "Event of Default" shall mean any event specified in Section 5.01, continued for the period of time, if any, and after the giving of the notice, if any, therein designated. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Global Security" means, with respect to any series of Securities, a Security executed by the Company and delivered by the Trustee to the Depository Institution or pursuant to the Depository Institution's instruction, all in accordance with the Indenture, which shall be registered in the name of the Depository Institution or its nominee. "Indenture" shall mean this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented, or both, and shall include the form and terms of particular series of Securities established as contemplated hereunder. "Institutional Trustee" has the meaning set forth in the Declaration of the applicable Potomac Electric Power Company Trust. "Interest" shall mean, when used with respect to non-interest bearing Securities, interest payable at maturity. "Interest Payment Date", when used with respect to any installment of interest on a Security of a particular series, shall mean the date specified in such Security or in a Board Resolution or in an indenture supplemental hereto with respect to such series as the fixed date on which an installment of interest with respect to Securities of that series is due and payable. "Officers' Certificate" shall mean a certificate signed by the Chairman of the Board, the President or any Vice President, and by the Treasurer, an Assistant Treasurer, the Controller, an Assistant Controller, the Secretary or an Assistant Secretary of the Company and delivered to the Trustee. Each such certificate shall include the statements provided for in Section 13.06 if and to the extent provided by the provisions of such Section. "Opinion of Counsel" shall mean an opinion in writing signed by legal counsel experienced in the matters as to which such opinion is being delivered, who may be an employee of or counsel to the Company. Each such opinion shall include the statements provided for in Section 13.06 if and to the extent required by the provisions of such Section. 4 "Other Financial Obligations" means all obligations of the Company to make payment pursuant to the terms of financial instruments, such as (i) securities contracts and foreign currency exchange contracts, (ii) derivative instruments, such as swap agreements (including interest rate and foreign exchange rate swap agreements), cap agreements, floor agreements, collar agreements, interest rate agreements, foreign exchange rate agreements, options, commodity futures contracts, commodity option contracts and (iii) in the case of both (i) and (ii) above, similar financial instruments, other than (A) obligations on account of Senior Indebtedness and (B) obligations on account of indebtedness for money borrowed ranking pari passu with or subordinate to the Securities. The term "outstanding" (except as otherwise provided in Section 7.01), when used with reference to Securities, shall, subject to the provisions of Section 7.04, mean, as of any particular time, all Securities authenticated and delivered by the Trustee or the Authenticating Agent under this Indenture, except (a) Securities theretofore cancelled by the Trustee or the Authenticating Agent or delivered to the Trustee for cancellation; (b) Securities, or portions thereof, for the payment or redemption of which moneys in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own paying agent); provided that, if such Securities, or portions thereof, are to be redeemed prior to maturity thereof, notice of such redemption shall have been given as in Article Fourteen provided or provision satisfactory to the Trustee shall have been made for giving such notice; and (c) Securities that have been paid pursuant to Section 2.08 or in lieu of or in substitution for which other Securities shall have been authenticated and delivered pursuant to the terms of Section 2.08 unless proof satisfactory to the Company and the trustee is presented that any such Securities are held by bona fide holders in due course. "Person" shall mean any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. 5 "Potomac Electric Power Company Trust" shall mean each of Potomac Electric Power Company Trust I, a Delaware business trust, or any other similar trust created for the purpose of issuing securities the proceeds of which are used to acquire Securities issued under this Indenture. "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt and as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 2.08 in lieu of a lost, destroyed or stolen Security shall be deemed to evidence the same debt as the lost, destroyed or stolen Security. "Preferred Securities" shall mean undivided beneficial interests in the assets of a Potomac Electric Power Company Trust which rank pari passu with Common Securities issued by such Potomac Electric Power Company Trust; provided, however, that upon the occurrence of an Event of Default, the rights of holders of Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of holders of Preferred Securities. "Preferred Securities Guarantee" shall mean any guarantee that the Company enters into for the benefit of holders of Preferred Securities of a Potomac Electric Power Company Trust. "Officer" means, with respect to the Trustee, any officer within the Corporate Trust Office, including any vice president, any assistant vice president, any assistant secretary, any assistant treasurer or other officer of the Corporate Trust Office customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. "Security" or "Securities" shall have the meaning stated in the first recital of this Indenture and more particularly means any security or securities, as the case may be, authenticated and delivered under this Indenture. "Security Register" shall have the meaning given to such term in Section 2.07. "Securityholder", "holder of Securities", or other similar terms, shall mean any person in whose name at the time a particular Security is registered on the register kept by the Company or the Trustee for that purpose in accordance with the terms hereof. 6 "Senior Indebtedness" means (i) the principal, premium, if any, and interest in respect of (A) indebtedness of the Company for money borrowed and (B) indebtedness evidenced by securities, debentures, bonds or other similar instruments issued by the Company, (ii) all capital lease obligations of the Company, (iii) all obligations of the Company issued or assumed as the deferred purchase price of property, all conditional sale obligations of the Company and all obligations of the Company under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business), (iv) all obligations of the Company for the reimbursement of any letter of credit, banker's acceptance, security purchase facility or similar credit transaction, (v) all obligations of the type referred to in clauses (i) through (iv) above of other persons for the payment of which the Company is responsible or liable as obligor, guarantor or otherwise and (vi) all obligations of the type referred to in clauses (i) through (v) above of other persons secured by any lien on any property or asset of the Company (whether or not such obligation is assumed by the Company), except that Senior Indebtedness shall not include (i) any such indebtedness that is by its terms subordinated to or ranks pari passu with the Securities and (ii) any indebtedness between and among the Company or its Affiliates, including all other debt securities and guarantees in respect to those debt securities, issued to any other trust, or a trustee of such trust, partnership or other entity affiliated with the Company that is a financing vehicle of the Company (a "financing entity") in connection with the issuance by such financing entity of Preferred Securities or other securities that rank pari passu with, or junior to, the Preferred Securities. "Subsidiary" shall mean with respect to any Person, (i) any corporation at least a majority of the outstanding voting stock of which is owned, directly or indirectly, by such Person or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries, (ii) any general partnership, joint venture or similar entity, at least a majority of whose outstanding partnership or similar interests shall at the time be owned by such Person, or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries and (iii) any limited partnership of which such Person or any of its Subsidiaries is a general partner. For the purposes of this definition, "voting stock" means shares, interests, participations or other equivalents in the equity interest (however designated) in such Person having ordinary voting power for the election of a majority of the directors (or the equivalent) of such Person, other than shares, interests, participations or other equivalents having such power only by reason of the occurrence of a contingency. "Trustee" shall mean the Person identified as "Trustee" in the first paragraph hereof, and, subject to the provisions of Article Six hereof, shall also include its successors and assigns as Trustee hereunder. The term 7 "Trustee" as used with respect to a particular series of the Securities shall mean the trustee with respect to that series. "Trust Indenture Act" shall mean the Trust Indenture Act of 1939, as in force at the date of execution of this Indenture, except as provided in Section 9.03. "Trust Securities" shall mean Common Securities and Preferred Securities of a Potomac Electric Power Company Trust. "U.S. Government Obligations" shall mean securities that are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case under clauses (i) or (ii) are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such U.S. Government Obligation or a specific payment of interest on or principal of any such U.S. Government Obligation held by such custodian for the account of the holder of a depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of interest on or principal of the U.S. Government Obligation evidenced by such depository receipt. ARTICLE II SECURITIES SECTION 2.01. Forms Generally. The Securities of each series shall be in substantially the form as shall be established by or pursuant to a Board Resolution and as set forth in an Officers' Certificate or in one or more indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with any law or with any rules made pursuant thereto or with any rules of any securities exchange or securities depository or all as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution of the Securities. 8 The definitive Securities shall be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities. SECTION 2.02. Form of Trustee's Certificate of Authentication. The Trustee's Certificate of Authentication on all Securities shall be in substantially the following form: This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture. The Bank of New York, as Trustee By _______________________________________ Authorized Signatory SECTION 2.03. Amount Unlimited; Issuable in Series. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited. The Securities may be issued in one or more series up to the aggregate principal amount of securities of that series from time to time authorized by or pursuant to a Board Resolution or pursuant to one or more indentures supplemental hereto. Prior to the initial issuance of Securities of any series, there shall be established in or pursuant to a Board Resolution and set forth in an Officers' Certificate or established in one or more indentures supplemental hereto: (a) the title of the Securities of the series (which shall distinguish the Securities of the series from all other Securities); (b) any limit upon the aggregate principal amount of the Securities of the series which may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Sections 2.07, 2.08, 2.09, 9.04 or 14.03); (c) the date or dates on which the principal of and premium, if any, on the Securities of the series is payable, and the right, if any, to extend such date or dates; (d) the rate or rates at which the Securities of the series shall bear interest, if any, or the method by which such interest may be determined, the 9 date or dates from which such interest shall accrue, the Interest Payment Dates on which such interest shall be payable or the manner of determination of such Interest Payment Dates and the record dates for the determination of holders to whom interest is payable on any such Interest Payment Dates; (e) the place or places where the principal of, and premium, if any, and any interest on Securities of the series shall be payable; (f) the right, if any, to extend the interest payment periods and the duration of such extension; (g) the price or prices at which, the period or periods within which and the terms and conditions upon which Securities of the series may be redeemed, in whole or in part, at the option of the Company, pursuant to any sinking fund or otherwise; (h) the obligation, if any, of the Company to redeem, purchase or repay Securities of the series pursuant to any sinking fund or analogous provisions or at the option of a Securityholder thereof and the price or prices at which, and the period or periods within which, and the terms and conditions upon which, Securities of the series shall be redeemed, purchased or repaid, in whole or in part, pursuant to such obligation; (i) if other than denominations of $1,000 and any integral multiple thereof, the denominations in which Securities of the series shall be issuable; (j) any Events of Default with respect to the Securities of a particular series, if not set forth herein; (k) the form of the Securities of the series including the form of the Certificate of Authentication of such series; (l) any trustee, authenticating or paying agents, warrant agents, transfer agents or registrars with respect to the Securities of such series; (m) whether the Securities of the series shall be issued in whole or in part in the form of one or more Global Securities and, in such case, the Depository Institution for such Global Security or Securities, and whether beneficial owners of interests in any such Global Securities may exchange such interests for other Securities of such series in the manner provided in Section 2.07, and the manner and the circumstances under which and the place or places where any such exchanges may occur if other than in the manner provided in Section 2.07, and any other terms of the series relating to the global nature of the Global Securities of such series and the exchange, 10 registration or transfer thereof and the payment of any principal thereof, or interest or premium, if any, thereon; and (n) any other terms of the series (which terms shall not be inconsistent with the provisions of this Indenture). All Securities of any one series shall be substantially identical except as to denomination and except as may otherwise be provided in or pursuant to such Board Resolution or in any such indenture supplemental hereto. If any of the terms of the series are established by action taken pursuant to a Board Resolution, a copy of an appropriate record of such action shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Officers' Certificate setting forth the terms of the series. SECTION 2.04. Authentication and Dating. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities of any series executed by the Company to the Trustee for authentication, and the Trustee shall thereupon authenticate and make said Securities available for delivery to or upon the written order of the Company, signed by its Chairman of the Board of Directors, President or one of its Vice Presidents and by its Treasurer, any Assistant Treasurer, Secretary or any Assistant Secretary, without any further action by the Company hereunder. In authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and (subject to Section 6.01) shall be fully protected in relying upon: (a) a copy of any Board Resolution or Resolutions relating thereto and, if applicable, an appropriate record of any action taken pursuant to such resolution, in each case certified by the Secretary or an Assistant Secretary of the Company; (b) an executed supplemental indenture, if any; (c) an Officers' Certificate setting forth the form and terms of the Securities as required pursuant to Sections 2.01 and 2.03, respectively; and (d) an Opinion of Counsel prepared in accordance with Section 13.06 which shall also state: (i)that the form of such Securities has been established by or pursuant to a resolution of the Board of Directors or by a 11 supplemental indenture as permitted by Section 2.01 in conformity with the provisions of this Indenture; (ii) that the terms of such Securities have been established by or pursuant to a resolution of the Board of Directors or by a supplemental indenture as permitted by Section 2.03 in conformity with the provisions of this Indenture; (iii)that such Securities, when authenticated and delivered by the Trustee and issued by the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and legally binding obligations of the Company; (iv) that all laws and requirements in respect of the execution and delivery by the Company of the Securities have been complied with and that authentication and delivery of the Securities by the Trustee will not violate the terms of the Indenture; and (v)such other matters as the Trustee may reasonably request. The Trustee shall have the right to decline to authenticate and deliver any Securities under this Section if the Trustee, being advised by counsel, determines that such action may not lawfully be taken or if the Trustee in good faith by its board of directors or trustees, executive committee, or a trust committee of directors or trustees and/or vice presidents shall determine that such action would expose the Trustee to personal liability to existing holders of Securities. SECTION 2.05. Date and Denomination of Securities. The Securities shall be issuable as registered Securities without coupons and in such denominations as shall be specified as contemplated by Section 2.03. In the absence of any such specification with respect to the Securities of any series, the Securities of such series shall be issuable in the denominations of $1,000 and any multiple thereof. The Securities shall be numbered, lettered, or otherwise distinguished in such manner or in accordance with such plans as the officers of the Company executing the same may determine with the approval of the Trustee as evidenced by the execution and authentication thereof. Every Security shall be dated the date of its authentication, shall bear interest, if any, from such date and shall be payable on such dates, in each case, as contemplated by Section 2.03. The interest installment on any 12 Security that is payable, and is punctually paid or duly provided for, on any Interest Payment Date for Securities of that series shall be paid to the Person in whose name said Security (or one or more Predecessor Securities) is registered at the close of business on the regular record date for such interest installment. In the event that any Security of a particular series or portion thereof is called for redemption and the redemption date is subsequent to a regular record date with respect to any Interest Payment Date and prior to such Interest Payment Date, interest on such Security will be paid upon presentation and surrender of such Security as provided in Section 3.01. Any interest on any Security that is payable, but is not punctually paid or duly provided for, on any Interest Payment Date for any Security of the same series (herein called "Defaulted Interest") shall forthwith cease to be payable to the registered holder on the relevant regular record date by virtue of having been such holder, and such Defaulted Interest shall be paid by the Company, at its election, as provided in clause (a) or clause (b) below: (a) The Company may make payment of any Defaulted Interest on Securities to the Persons in whose names such Securities (or their respective Predecessor Securities) are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner: the Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each such Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a special record date for the payment of such Defaulted Interest which shall not be more than 15 nor less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such special record date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the special record date therefor to be mailed, first class postage prepaid, to each Securityholder at his or her address as it appears in the Security Register (as hereinafter defined), not less than 10 days prior to such special record date. Notice of the proposed payment of such Defaulted Interest and the special record date therefor having 13 been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names such Securities (or their respective Predecessor Securities) are registered on such special record date and shall be no longer payable pursuant to the following clause (b). (b) The Company may make payment of any Defaulted Interest on any Securities in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustees of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. Unless otherwise set forth in a Board Resolution or one or more indentures supplemental hereto establishing the terms of any series of Securities pursuant to Section 2.03 hereof, the term "regular record date" as used in this Section with respect to a series of Securities with respect to any Interest Payment Date for such series shall mean either the fifteenth day of the month in which an Interest Payment Date established for such series pursuant to Section 2.03 hereof shall occur, if such Interest Payment Date is the last day of a month, or the last day of the month immediately preceding the month in which an Interest Payment Date established for such series pursuant to Section 2.03 hereof shall occur, if such Interest Payment Date is the fifteenth day of a month, whether or not such date is a Business Day. Subject to the foregoing provisions of this Section, each Security of a series delivered under this Indenture upon transfer of or in exchange for or in lieu of any other Security of such series shall carry the rights to interest accrued and unpaid, and to accrue, that were carried by such other Security. SECTION 2.06. Execution of Securities. The Securities shall be signed in the name and on behalf of the Company by the facsimile signature of its Chairman of the Board of Directors, President or one of its Vice Presidents and by the facsimile signature of its Treasurer, one of its Assistant Treasurers, Secretary or one of its Assistant Secretaries. Only such Securities as shall bear thereon a Certificate of Authentication substantially in the form hereinbefore recited, executed by the Trustee or the Authenticating Agent, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee or the Authenticating Agent upon any Security executed by the Company shall be conclusive evidence that the Security so authenticated has been duly 14 authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. In case any officer of the Company who shall have signed any of the Securities shall cease to be such officer before the Securities so signed shall have been authenticated and delivered by the Trustee or the Authenticating Agent, or disposed of by the Company, such Securities nevertheless may be authenticated and delivered or disposed of as though the person who signed such Securities had not ceased to be such officer of the Company; and any Security may be signed on behalf of the Company by such persons as, at the actual date of the execution of such Security, shall be the proper officers of the Company, although at the date of the execution of this Indenture any such person was not such an officer. SECTION 2.07. Exchange and Registration of Transfer of Securities. Securities of any series may be exchanged for a like aggregate principal amount of Securities of the same series of other authorized denominations. Securities to be so exchanged may be surrendered at the Corporate Trust Office or at any office or agency to be maintained by the Company for such purpose as provided in Section 3.02, and the Company or the Trustee shall execute and register and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in exchange therefor the Security or Securities which the Securityholder making the exchange shall be entitled to receive. Upon due presentment for registration of transfer of any Security of any series at the Corporate Trust Office or at any office or agency of the Company maintained for such purpose as provided in Section 3.02, the Company or the Trustee shall execute and register and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in the name of the transferee or transferees a new Security or Securities of the same series for a like aggregate principal amount. Registration or registration of transfer of any Security by the Trustee or by any agent of the Company appointed pursuant to Section 3.02, and delivery of such Security, shall be deemed to complete the registration or registration of transfer of such Security. The Company or the Trustee shall keep, at the Corporate Trust Office, a register for each series of Securities issued hereunder (the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company or the Trustee shall register all Securities and shall register the transfer of all Securities as in this Article Two provided. Such register shall be in written form or in any other form capable of being converted into written form within a reasonable time. All Securities presented for registration of transfer or for exchange or payment shall (if so required by the Company or the Trustee or the 15 Authenticating Agent) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company and the Trustee or the Authenticating Agent duly executed by, the holder or his attorney duly authorized in writing. No service charge shall be made for any exchange or registration of transfer of Securities, but the Company or the Trustee may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in connection therewith. The Company or the Trustee shall not be required to exchange or register a transfer of (a) any Security for a period of 15 days next preceding the date of mailing of a notice of redemption of Securities of such series, or (b) any Securities of any series selected, called or being called for redemption in whole or in part, except in the case of any Securities of any series to be redeemed in part, the portion thereof not so to be redeemed. SECTION 2.08. Mutilated, Destroyed, Lost or Stolen Securities. In case any temporary or definitive Security shall become mutilated or be destroyed, lost or stolen, the Company shall execute, and upon its written request the Trustee shall authenticate and make available for delivery, a new Security of the same series bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated Security, or in lieu of and in substitution for the Security so destroyed, lost or stolen. In every case the applicant for a substituted Security shall furnish to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company and the Trustee evidence to their satisfaction of the destruction, loss or theft of such Security and of the ownership thereof. The Trustee may authenticate any such substituted Security and make the same available for delivery upon the written request or authorization of any officer of the Company. Upon the issuance of any substituted Security, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. In case any Security which has matured or is about to mature or has been called for redemption in full shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substitute Security, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Security) if the applicant for such payment shall furnish to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless and, in case of destruction, loss or theft, evidence satisfactory to the Company and 16 to the Trustee of the destruction, loss or theft of such Security and of the ownership thereof. Every substituted Security of any series issued pursuant to the provisions of this Section 2.08 by virtue of the fact that any such Security is destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be found at any time, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities of the same series duly issued hereunder. All Securities shall be held and owned upon the express condition that, to the extent permitted by applicable law, the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender. SECTION 2.09. Temporary Securities. Pending the preparation of definitive Securities of any series, the Company may execute and the Trustee shall authenticate and make available for delivery temporary Securities (printed or lithographed). Temporary Securities shall be issuable in any authorized denomination, and substantially in the form of the definitive Securities but with such omissions, insertions and variations as may be appropriate for temporary Securities, all as may be determined by the Company. Every such temporary Security shall be executed by the Company and be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with the same effect, as the definitive Securities. Without unreasonable delay the Company will execute and deliver to the Trustee or the Authenticating Agent definitive Securities and thereupon any or all temporary Securities of such series may be surrendered in exchange therefor, at the Corporate Trust Office or at any office or agency maintained by the Company for such purpose as provided in Section 3.02, and the Trustee or the Authenticating Agent shall, at the Company's written request, authenticate and make available for delivery in exchange for such temporary Securities a like aggregate principal amount of such definitive Securities. Such exchange shall be made by the Company at its own expense and without any charge therefor except that in case of any such exchange involving a registration of transfer the Company may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in relation thereto. Until so exchanged, the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of the same series authenticated and delivered hereunder. 17 SECTION 2.10. Cancellation of Securities Paid, etc. All Securities surrendered for the purpose of payment, redemption, exchange or registration of transfer, shall, if surrendered to the Company or any paying agent, be surrendered to the Trustee and promptly cancelled by it, or, if surrendered to the Trustee or any Authenticating Agent, shall be promptly cancelled by it, and no Securities shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. All Securities cancelled by any Authenticating Agent shall be delivered to the Trustee. If the Company shall acquire any of the Securities, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Securities unless and until the same are surrendered to the Trustee for cancellation. SECTION 2.11. Global Securities. (a) If the Company shall establish pursuant to Section 2.03 that the Securities of a particular series are to be issued as a Global Security, then the Company shall execute and the Trustee shall, in accordance with Section 2.04, authenticate and make available for delivery, a Global Security that (i) shall represent, and shall be denominated in an amount equal to the aggregate principal amount of, all of the outstanding Securities of such series, (ii) shall be registered in the name of the Depository Institution or its nominee, (iii) shall be delivered by the Trustee to the Depository Institution or pursuant to the Depository Institution's instruction and (iv) shall bear a legend substantially to the following effect: "Except as otherwise provided in Section 2.11 of the Indenture, this Security may be transferred, in whole but not in part, only to another nominee of the Depository Institution or to a successor Depository Institution or to a nominee of such successor Depository Institution." (b) Notwithstanding the provisions of Section 2.07, the Global Security of a series may be transferred, in whole but not in part and in the manner provided in Section 2.07, only to another nominee of the Depository Institution for such series or to a successor Depository Institution for such series selected or approved by the Company or to a nominee of such successor Depository Institution. (c) If at any time the Depository Institution for a series of the Securities notifies the Company that it is unwilling or unable to continue as Depository Institution for such series or if at any time the Depository Institution for such series shall no longer be registered or in good standing under the Exchange Act, or other applicable statute or regulation, and a successor Depository Institution for such series is not appointed by the Company within 90 days after the Company receives such notice or becomes aware 18 of such condition, as the case may be, this Section 2.11 shall no longer be applicable to the Securities of such series and the Company will execute, and subject to Section 2.07, the Trustee will authenticate and make available for delivery, the Securities of such series in definitive registered form without coupons, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the Global Security of such series in exchange for such Global Security. In addition, the Company may at any time determine that the Securities of any series shall no longer be represented by a Global Security and that the provisions of this Section 2.11 shall no longer apply to the Securities of such series. In such event the Company will execute and, subject to Section 2.07, the Trustee, upon receipt of an Officers' Certificate evidencing such determination by the Company, will authenticate and make available for delivery the Securities of such series in definitive registered form without coupons, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the Global Security of such series in exchange for such Global Security. Upon the exchange of the Global Security for such Securities in definitive registered form without coupons, in authorized denominations, the Global Security shall be cancelled by the Trustee. Such Securities in definitive registered form issued in exchange for the Global Security pursuant to this Section 2.11(c) shall be registered in such names and in such authorized denominations as the Depository Institution, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. The Trustee shall deliver such Securities to the Depository Institution for delivery to the Persons in whose names such Securities are so registered. SECTION 2.12. CUSIP Numbers. The Company in issuing the Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any change in the "CUSIP" numbers. 19 ARTICLE III PARTICULAR COVENANTS OF THE COMPANY. SECTION 3.01. Payment of Principal, Premium and Interest. The Company covenants and agrees for the benefit of the holders of each series of Securities that it will duly and punctually pay or cause to be paid the principal of, and premium, if any, and interest on, each of the Securities of that series at the place, at the respective times and in the manner provided in such Securities. Each installment of interest on the Securities of any series may be paid, at the election of the Company, by mailing checks for such interest payable to the order of the holders of Securities entitled thereto as they appear on the Security Register or by wire transfer to an account appropriately designated by the holders of Securities entitled thereto. SECTION 3.02. Offices for Notices and Payments, etc. So long as any of the Securities remains outstanding, the Company will maintain in the Borough of Manhattan, The City of New York, an office or agency where the Securities of each series may be presented for payment, an office or agency where the Securities of that Series may be presented for registration of transfer and for exchange as in this Indenture provided, and an office or agency where notices and demands to or upon the Company in respect of the Securities of that Series or of this Indenture may be served. The Company will give to the Trustee written notice of the location of any such office or agency and of any change of location thereof. Until otherwise designated from time to time by the Company in a notice to the Trustee, or specified as contemplated by Section 2.03, any such office or agency for all of the above purposes shall be the office or agency of the Trustee. In case the Company shall fail to maintain any such office or agency in the Borough of Manhattan, The City of New York, or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made and notices may be served at the Corporate Trust Office. In addition to any such office or agency, the Company may from time to time designate one or more offices or agencies outside the Borough of Manhattan, The City of New York, where the Securities may be presented for registration of transfer and for exchange in the manner provided in this Indenture, and the Company may from time to time rescind such designation, as the Company may deem desirable or expedient; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain any such office or agency in the Borough of Manhattan, The City of New York, for the purposes above mentioned. The Company will give 20 to the Trustee prompt written notice of any such designation or rescission thereof. SECTION 3.03. Appointments to Fill Vacancies in Trustee's Office. The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 6.10, a Trustee, so that there shall at all times be a Trustee hereunder. SECTION 3.04. Provision as to Paying Agent. (a) If the Company shall appoint a paying agent other than the Trustee with respect to the Securities of any series, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section 3.04: (1) that it will hold all sums held by it as such agent for the payment of the principal of, and premium, if any, or interest, if any, on, the Securities of such series (whether such sums have been paid to it by the Company or by any other obligor on the Securities of such series) in trust for the benefit of the holders of the Securities of such series; and (2) that it will give the Trustee notice of any failure by the Company (or by any other obligor on the Securities of such series) to make any payment of the principal of, and premium, if any, or interest, if any, on, the Securities of such series when the same shall be due and payable. (b) If the Company shall act as its own paying agent, it will, on or before each due date of the principal of and premium, if any, or interest, if any, on the Securities of any series, set aside, segregate and hold in trust for the benefit of the holders of the Securities of such series a sum sufficient to pay such principal, premium or interest so becoming due and will notify the Trustee of any failure to take such action and of any failure by the Company (or by any other obligor under the Securities of such series) to make any payment of the principal of, and premium, if any, or interest, if any, on, the Securities of such series when the same shall become due and payable. (c) Anything in this Section 3.04 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge with respect to one or more or all series of Securities hereunder, or for any other reason, pay or cause to be paid to the Trustee all sums held in trust for any such series by any paying agent hereunder, as required by 21 this Section 3.04, such sums to be held by the Trustee upon the trusts herein contained. (d) Anything in this Section 3.04 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 3.04 is subject to Sections 11.03 and 11.04. SECTION 3.05. Certificate to Trustee. The Company will deliver to the Trustee, within 120 days after the end of each calendar year, commencing with the first calendar year following the issuance of Securities of any series under this Indenture, so long as Securities of any series are outstanding hereunder, a Certificate stating that in the course of the performance by the signer of his duties as an officer of the Company he would normally have knowledge of any default (without regard to any notice requirements or periods of grace) by the Company in the performance of any covenants contained herein, stating whether or not he has knowledge of any such default and, if so, specifying each such default of which the signer has knowledge and the nature thereof. SECTION 3.06. Compliance with Consolidation Provisions. The Company will not, while any of the Securities remain outstanding, consolidate with, or merge into, or merge into itself, or sell or convey all or substantially all of its property to any other Person unless the provisions of Article Ten hereof are complied with. SECTION 3.07. Limitation on Dividends; Transactions with Affiliates. If Securities are issued to a Potomac Electric Power Company Trust or a trustee of such trust in connection with the issuance of Trust Securities by such Potomac Electric Power Company Trust and (i) there shall have occurred an Event of Default, or (ii) the Company shall be in default with respect to its payment of any obligations under the Preferred Securities Guarantee or Common Securities Guarantee relating to such Potomac Electric Power Company Trust, then (a) the Company shall not declare or pay any dividend on, make any distribution with respect to, or redeem, purchase, acquire or make a liquidation payment with respect to, any of its capital stock (other than (i) purchases or acquisitions of shares of common stock of the Company in connection with the satisfaction by the Company of its obligations under any employee benefit plans or any other contractual obligation of the Company (other than a contractual obligation ranking pari passu with or junior to the Securities) or (ii) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such Company capital stock or the security being converted or exchanged), 22 (b) the Company shall not make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by the Company that rank pari passu with or junior to the Securities; and (c) the Company shall not make any guarantee payments with respect to the foregoing (other than pursuant to the Preferred Securities Guarantee). SECTION 3.08. Covenants as to Potomac Electric Power Company Trusts. In the event Securities are issued to a Potomac Electric Power Company Trust or a trustee of such trust in connection with the issuance of Trust Securities by such Potomac Electric Power Company Trust, for so long as such Trust Securities remain outstanding, the Company will (i) maintain 100% direct or indirect ownership of the Common Securities of such Potomac Electric Power Company Trust; provided, however, that any permitted successor of the Company under the Indenture may succeed to the Company's ownership of the Common Securities, (ii) use its reasonable efforts to cause such Potomac Electric Power Company Trust (a) to remain a statutory business trust, except in connection with a distribution of Securities, the redemption of all of the Trust Securities of such Potomac Electric Power Company Trust or certain mergers, consolidations or amalgamations, each as permitted by the Declaration of such Potomac Electric Power Company Trust, and (b) to otherwise continue not to be treated as an association taxable as a corporation or partnership for United States federal income tax purposes and (iii) use its reasonable efforts to cause each holder of Trust Securities to be treated as owning an individual beneficial interest in the Securities. SECTION 3.09. Notice of Default. The Company shall file with a Responsible Officer of the Trustee written notice of the occurrence of any Default or Event of Default within 30 Business Days of its becoming aware of any such Default or Event of Default. ARTICLE IV SECURITYHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE. SECTION 4.01. Securityholders' Lists. The Company covenants and agrees that it will furnish or cause to be furnished to the Trustee: (a) within five Business Days after a record date for each series of Securities, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Securityholders of such series of Securities as of 23 such record date (and on dates to be determined pursuant to Section 2.03 for non-interest bearing securities in each year); and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company, of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; except that no such lists need be furnished so long as the Trustee is in possession thereof by reason of its acting as Security registrar for such series. SECTION 4.02. Preservation and Disclosure of Lists. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of each series of Securities (1) contained in the most recent list furnished to it as provided in Section 4.01 or (2) received by it in the capacity of Securities registrar (if so acting) hereunder. The Trustee may destroy any list furnished to it as provided in Section 4.01 upon receipt of a new list so furnished. (b) In case three or more holders of Securities of any series (hereinafter referred to as "applicants") apply in writing to the Trustee and furnish to the Trustee reasonable proof that each such applicant has owned a Security of such series for a period of at least 6 months preceding the date of such application, and such application states that the applicants desire to communicate with other holders of Securities of such series or with holders of all Securities with respect to their rights under this Indenture or under such Securities and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall within 5 Business Days after the receipt of such application, at its election, either: (1) afford such applicants access to the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02; or (2) inform such applicants as to the approximate number of holders of such series or all Securities, as the case may be, whose names and addresses appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02, and as to the approximate cost of mailing to such Securityholders the form of proxy or other communication, if any, specified in such application. 24 If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Securityholder of such series or all Securities, as the case may be, whose name and address appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02 a copy of the form of proxy or other communication which is specified in such request with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within 5 days after such tender, the Trustee shall mail to such applicants and file with the Commission, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interests of the holders of Securities of such series or all Securities, as the case may be, or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If the Commission, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, the Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Securityholders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application. (c) Each and every holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any paying agent shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the holders of Securities in accordance with the provisions of subsection (b) of this Section 4.02, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under said subsection (b). SECTION 4.03. Reports by Company. (a) The Company covenants and agrees to file with the Trustee, within 15 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Company 25 may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if the Company is not required to file information, documents or reports pursuant to either of such sections, then to file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports which may be required pursuant to Section 13 of the Exchange Act in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations. Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). (b) The Company covenants and agrees to file with the Trustee and the Commission, in accordance with the rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants provided for in this Indenture as may be required from time to time by such rules and regulations. (c) The Company covenants and agrees to transmit by mail to all holders of Securities in accordance with Section 313(c) of the Trust Indenture Act, within 30 days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by the Company pursuant to subsections (a) and (b) of this Section 4.03 as may be required by rules and regulations prescribed from time to time by the Commission. SECTION 4.04. Reports by the Trustee. (a) The term "reporting date", as used in this Section, shall be April 15 of each year, commencing with the first April 15 after the first issuance of Securities of a series for which the Trustee is acting as Trustee pursuant to this Indenture. Within 60 days after the reporting date in each year, the Trustee shall transmit by mail to all holders of Securities as provided in Section 313(c) of the Trust Indenture Act a brief report dated as of such reporting date, if required by Section 313(a) of the Trust Indenture Act. (b) A copy of each such report shall, at the time of such transmission to the holders of Securities, be filed by the Trustee with each stock exchange upon which the Securities of any applicable series are listed and also with the Commission. The Company will notify the Trustee promptly when and as the 26 Securities of any series become listed on any stock exchange and any delisting thereof. (c) The Trustee shall comply with Sections 313(b) of the Trust Indenture Act, if applicable. ARTICLE V REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT. SECTION 5.01. Events of Default. In case one or more of the following Events of Default with respect to Securities of any series, or such other events as may be established with respect to the Securities of that series as contemplated by Section 2.03 hereof, shall have occurred and be continuing: (a) default in the payment of any interest upon any Securities of that series when it becomes due and payable, and continuance of such default for a period of 30 days; provided, however, that a valid extension of an interest payment period by the Company in accordance with the terms of any particular series of Securities established as contemplated in this Indenture shall not constitute a default in the payment of interest for this purpose; or (b) default in the payment of all or any part of the principal of, or premium, if any, on, any Securities of that series as and when the same shall become due and payable either at maturity, upon redemption (including redemption for a sinking fund, if any), by declaration or otherwise; provided, however, that a valid extension of the maturity of such Securities in accordance with the terms of any particular series of Securities established as contemplated in this Indenture shall not constitute a default in the payment of principal or premium, if any, for this purpose; or (c) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section specifically dealt with and other than those set forth exclusively in terms of any particular series of Securities established as contemplated in this Indenture), and continuance of such default or breach for a period of 90 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the holders of at least 25% in principal amount of the outstanding Securities a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or 27 (d) a court having jurisdiction in the premises shall enter a decree or order for relief in respect of the Company in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Company or for any substantial part of its property, or ordering the winding-up or liquidation of its affairs and such decree or order shall remain unstayed and in effect for a period of 90 consecutive days; or (e) the Company shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of the Company or of any substantial part of its property, or shall make any general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due; or (f) in the event Securities are issued to a Potomac Electric Power Company Trust or a trustee of such trust in connection with the issuance of Trust Securities by such Potomac Electric Power Company Trust, such Potomac Electric Power Company Trust shall have voluntarily or involuntarily dissolved, wound-up its business or otherwise terminated its existence except in connection with (i) the distribution of Securities to holders of Trust Securities in liquidation of their interests in such Potomac Electric Power Company Trust, (ii) the redemption of all of the outstanding Trust Securities of such Potomac Electric Power Company Trust or (iii) certain mergers, consolidations or amalgamations, each as permitted by the Declaration of such Potomac Electric Power Company Trust. Then, and in each and every such case, unless the principal of all of the Securities of such series shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Securities of that series then outstanding hereunder, by notice in writing to the Company (and to the Trustee if given by Securityholders), may declare the entire principal of all Securities of that series and the interest accrued thereon, if any, to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable. The foregoing provisions, however, are subject to the condition that if, at any time after the principal of the Securities of any series (or of all the Securities, as the case may be) shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, the Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured 28 installments of interest upon all the Securities of such series (or of all the Securities, as the case may be) and the principal of and premium, if any, on any and all Securities of such series (or of all the Securities, as the case may be) which shall have become due otherwise than by acceleration (with interest upon such principal and premium, if any, and, to the extent that payment of such interest is enforceable under applicable law, on overdue installments of interest, at the same rate as the rate of interest specified in the Securities of such series (or at the respective rates of interest of all the Securities, as the case may be), to the date of such payment or deposit) and such amount as shall be sufficient to cover reasonable compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith, and if any and all Events of Default under the Indenture, other than the non-payment of the principal of or premium, if any, on Securities which shall have become due by acceleration, shall have been cured, waived or otherwise remedied as provided in this Indenture, then and in every such case the holders of a majority in aggregate principal amount of the Securities of such series (or of all the Securities, as the case may be) then outstanding, by written notice to the Company and to the Trustee, may waive all defaults with respect to that series (or with respect to all Securities, as the case may be, in such case, treated as a single class) and rescind and annul such declaration and its consequences, but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such rescission or annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company, the Trustee and the holders of the Securities shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company, the Trustee and the holders of the Securities shall continue as though no such proceeding had been taken. SECTION 5.02. Payment of Securities on Default; Suit Therefor. The Company covenants that (a) in case an Event of Default under Section 5.01(a), (b), (c) or (f) shall have occurred and be continuing, then, upon demand of the Trustee, the Company will pay to the Trustee, for the benefit of the holders of the Securities of that series, the whole amount that then shall have become due and payable on all such Securities of that series for principal and premium, if any, or interest, or both, as the case may be, with interest upon the overdue principal and premium, if any, and (to the extent that payment of such interest is enforceable under applicable law and, if the 29 Securities are held by a Potomac Electric Power Company Trust or a trustee of such trust, without duplication of any other amounts paid by Potomac Electric Power Company Trust or trustee in respect thereof) upon the overdue installments of interest at the rate borne by the Securities of that series; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including a reasonable compensation to the Trustee, its agents, attorneys and counsel, and any expenses or liabilities incurred by the Trustee hereunder other than through its negligence or bad faith. In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any action or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or any other obligor on such Securities and collect in the manner provided by law out of the property of the Company or any other obligor on such Securities wherever situated the moneys adjudged or decreed to be payable. In case an Event of Default under Section 5.01(d) or (e) shall have occurred, the Trustee, irrespective of whether the principal of the Securities of any series shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 5.02, shall be entitled and empowered, by intervention in such proceedings or otherwise, to file and prove a claim or claims for the whole amount of principal and interest owing and unpaid in respect of the Securities of such series and, in case of any judicial proceedings, to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for reasonable compensation to the Trustee and each predecessor Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee, except as a result of negligence or bad faith) and of the Securityholders allowed in such judicial proceedings relative to the Company or any other obligor on the Securities of any series, or to the creditors or property of the Company or such other obligor, unless prohibited by applicable law and regulations, to vote on behalf of the holders of the Securities of any series in any election of a trustee or a standby trustee in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings or person performing similar functions in comparable proceedings, and to collect and receive any moneys or other property payable or deliverable on any such claims, and to distribute the same after the deduction of its charges and expenses; and any receiver, assignee or trustee in bankruptcy or reorganization is hereby authorized by 30 each of the Securityholders to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to the Securityholders, to pay to the Trustee such amounts as shall be sufficient to cover reasonable compensation to the Trustee, each predecessor Trustee and their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or willful misconduct. Nothing herein contained shall be construed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Securities of any series or the rights of any holder thereof or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding. All rights of action and of asserting claims under this Indenture, or under any of the Securities, may be enforced by the Trustee without the possession of any of the Securities, or the production thereof in any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall be for the ratable benefit of the holders of the Securities. In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party) the Trustee shall be held to represent all the holders of the Securities, and it shall not be necessary to make any holders of the Securities parties to any such proceedings. SECTION 5.03. Application of Moneys Collected by Trustee. Any moneys collected by the Trustee shall be applied in the order following, at the date or dates fixed by the Trustee for the distribution of such moneys, upon presentation of the several Securities in respect of which moneys have been collected, and stamping thereon the payment, if only partially paid, and upon surrender thereof if fully paid: First: To the payment of costs and expenses of collection applicable to such series and reasonable compensation to the Trustee, its agents, attorneys and counsel, and of all other expenses and liabilities incurred, and all advances made, by the Trustee except as a result of its negligence or bad faith; 31 Second: To the payment of all Senior Indebtedness and Other Financial Obligations of the Company if and to the extent required by Article Fifteen; Third: To the payment of the amounts then due and unpaid upon Securities of such series for principal (and premium, if any), and interest on the Securities of such series, in respect of which or for the benefit of which money has been collected, ratably, without preference of priority of any kind, according to the amounts due on such Securities for principal (and premium, if any) and interest, respectively. SECTION 5.04. Proceedings by Securityholders. No holder of any Security of any series shall have any right by virtue of or by availing of any provision of this Indenture to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Indenture or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless such holder previously shall have given to the Trustee written notice of an Event of Default and of the continuance thereof with respect to the Securities of such series specifying such Event of Default, as hereinbefore provided, and unless also the holders of not less than 25% in aggregate principal amount of the Securities of that series then outstanding shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action, suit or proceeding, it being understood and intended, and being expressly covenanted by the taker and holder of every Security with every other taker and holder and the Trustee, that no one or more holders of Securities of any series shall have any right in any manner whatever by virtue of or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of any other holder of Securities, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Securities of the applicable series. Notwithstanding any other provisions in this Indenture, however, the right of any holder of any Security to receive payment of the principal of (premium, if any) and interest, if any, on such Security, on or after the same shall have become due and payable, or to institute suit for the enforcement of any such payment, shall not be impaired or affected without the consent of such holder and by accepting a Security hereunder it is expressly understood, intended and covenanted by the taker and holder of every Security of such series with every other such taker and holder and the Trustee, that no one or 32 more holders of Securities of such series shall have any right in any manner whatsoever by virtue or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of the holders of any other such Securities, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Securities of such series. For the protection and enforcement of the provisions of this Section, each and every Securityholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. SECTION 5.05. Proceedings by Trustee. In case of an Event of Default hereunder the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. SECTION 5.06. Remedies Cumulative and Continuing. Except as otherwise provided in the last paragraph of Section 2.08 with respect to the replacement or payment of mutilated, lost or stolen Securities, all powers and remedies given by this Article Five to the Trustee or to the Securityholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any other powers and remedies available to the Trustee or the holders of the Securities, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture or otherwise established with respect to such series, and no delay or omission of the Trustee or of any holder of any of the Securities to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or an acquiescence therein; and, subject to the provisions of Section 5.04, every power and remedy given by this Article Five or by law to the Trustee or to the Securityholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Securityholders. SECTION 5.07. Direction of Proceedings and Waiver of Defaults by Majority of Securityholders. 33 The holders of a majority in aggregate principal amount of the Securities of any or all series affected (voting as one class) at the time outstanding shall 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; provided, however, that (subject to the provisions of Section 6.01) the Trustee shall have the right to decline to follow any such direction if the Trustee shall determine that the action so directed would be unjustly prejudicial to the holders not taking part in such direction or if the Trustee being advised by counsel determines that the action or proceeding so directed may not lawfully be taken or if the Trustee in good faith by its board of directors or trustees, executive committee, or a trust committee of directors or trustees and/or Responsible Officers shall determine that the action or proceedings so directed would involve the Trustee in personal liability. Prior to any declaration accelerating the maturity of any series of the Securities, or of all the Securities, as the case may be, the holders of a majority in aggregate principal amount of the Securities of that series at the time outstanding may on behalf of the holders of all of the Securities of such series waive any past default or Event of Default including any default established pursuant to Section 2.03 and its consequences except a default (a) in the payment of principal of, premium, if any, or interest on any of the Securities, (b) in respect of covenants or provisions hereof which cannot be modified or amended without the consent of the holder of each Security affected, or (c) a default of the covenants contained in Section 3.06; provided, however, that if the Securities of such series are held by a Potomac Electric Power Company Trust or a trustee of such trust, such waiver or modification to such waiver shall not be effective until the holders of a majority in liquidation amount of Trust Securities of the applicable Potomac Electric Power Company Trust shall have consented to such waiver or modification to such waiver; provided further, that if the consent of the holder of each outstanding Security is required, such waiver shall not be effective until each holder of the Trust Securities of the applicable Potomac Electric Power Company Trust shall have consented to such waiver. Upon any such waiver, the default covered thereby shall be deemed to be cured for all purposes of this Indenture and the Company, the Trustee and the holders of the Securities of such series shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. Upon any such waiver the Company, the Trustee and the holders of the Securities of that series (or of all Securities, as the case may be) shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Whenever any default or Event of Default hereunder shall have been waived as permitted by this Section 5.07, said default or Event of Default shall for all purposes 34 of the Securities of that series (or of all Securities, as the case may be) and this Indenture be deemed to have been cured and to be not continuing. The foregoing provisions shall be in lieu of Sections 316(a)(1)(A) and 316(a)(1)(B) of the Trust Indenture Act and such sections are hereby expressly excluded from this Indenture and the Securities, as permitted by the Trust Indenture Act. SECTION 5.08. Notice of Defaults. The Trustee shall, within 90 days after the occurrence of a default with respect to the Securities of any series, mail to all Securityholders of that series, as the names and addresses of such holders appear upon the Security Register, notice of all defaults with respect to that series actually known to a Responsible Officer of the Trustee, unless such defaults shall have been cured before the giving of such notice (the term "defaults" for the purpose of this Section 5.08 being hereby defined to be the events specified in clauses (a), (b), (c), (d), (e) and (f) of Section 5.01, not including periods of grace, if any, provided for therein, and irrespective of the giving of written notice specified in clause (c) of Section 5.01); and provided that, except in the case of default in the payment of the principal of, premium, if any, or interest on any of the Securities of such series, the Trustee shall be protected in withholding such notice if and so long as a trust committee of directors and/or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interests of the Securityholders of such series; and provided further, that in the case of any default of the character specified in Section 5.01(c), no such notice to Securityholders of such series shall be given until at least 60 days after the occurrence thereof but shall be given within 90 days after such occurrence. SECTION 5.09. Undertaking to Pay Costs. All parties to this Indenture agree, and each holder of any Security by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 5.09 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder, or group of Securityholders of any series, holding in the aggregate more than 10% in principal amount of the Securities of that series outstanding, or to any suit 35 instituted by any Securityholder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Security against the Company on or after the same shall have become due and payable. ARTICLE VI CONCERNING THE TRUSTEE SECTION 6.01. Duties and Responsibilities of Trustee. With respect to the holders of any series of Securities issued hereunder, the Trustee, prior to the occurrence of an Event of Default with respect to Securities of that series and after the curing or waiving of all Events of Default which may have occurred, with respect to Securities of that series, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default with respect to the Securities of a series has occurred (which has not been cured or waived) the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own bad faith, except that (a) prior to the occurrence of an Event of Default with respect to Securities of a series and after the curing or waiving of all Events of Default with respect to that series which may have occurred (1) the duties and obligations of the Trustee with respect to Securities of a series shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations with respect to such series as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to 36 determine whether or not they conform to the requirements of this Indenture (but need not confirm or investiage the accuracy of mathematical calculations or other facts stated therein); (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and; (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith, in accordance with the direction of the Securityholders pursuant to Section 5.07, relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there is reasonable ground for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Indenture or adequate indemnity against such risk is not reasonably assured to it. SECTION 6.02. Reliance on Documents, Opinions, etc. Except as otherwise provided in Section 6.01: (a) the Trustee may conclusively rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, note, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by an Officers' Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any Board Resolution may be evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Company; (c) the Trustee may consult with counsel of its selection and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; 37 (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Securityholders, pursuant to the provisions of this Indenture, unless such Securityholders shall have offered to the Trustee security or indemnity satisfactory to the Trustee against the costs, expenses and liabilities which may be incurred therein or thereby; (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; nothing contained herein shall, however, relieve the Trustee of the obligation, upon the occurrence of an Event of Default with respect to a series of the Securities (that has not been cured or waived) to exercise with respect to Securities of that series such of the rights and powers vested in it by this Indenture, and to use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, coupon or other paper or document, unless requested in writing to do so by the holders of not less than a majority in principal amount of the outstanding Securities of the series affected thereby; provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expense or liability as a condition to so proceeding; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents (including any Authenticating Agent), custodians, nominees or attorneys, and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed by it with due care; (h) the Trustee shall not be deemed to have notice of any Default or Event of Default unless a Responsible Officer of the Trustee has actual knowledge thereof or unless written notice of any event which is in fact such default is received by the Trustee at the Corporate Trust Office, and such notice references the Securities and this Indenture; and (i) the rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified, 38 are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder, and to each agent, custodian and other Person employed to act hereunder. SECTION 6.03. No Responsibility for Recitals, etc. The recitals contained herein and in the Securities (except in the certificate of authentication of the Trustee or the Authenticating Agent) shall be taken as the statements of the Company and any Trustee and any Authenticating Agent assume no responsibility for the correctness of the same. The Trustee and any Authenticating Agent make no representations as to the validity or sufficiency of this Indenture or of the Securities. The Trustee and any Authenticating Agent shall not be accountable for the use or application by the Company of any Securities or the proceeds of any Securities authenticated and delivered by the Trustee or any Authenticating Agent in conformity with the provisions of this Indenture. SECTION 6.04. Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Securities. The Trustee or any Authenticating Agent or any paying agent or any transfer agent or any Security registrar, in its individual or any other capacity, may become the owner or pledgee of Securities with the same rights it would have if it were not Trustee, Authenticating Agent, paying agent, transfer agent or Security registrar. SECTION 6.05. Moneys to be Held in Trust. Subject to the provisions of Section 11.04, all moneys received by the Trustee or any paying agent shall, until used or applied as herein provided, be held in trust for the purpose for which they were received, but need not be segregated from other funds except to the extent required by law. The Trustee and any paying agent shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company. So long as no Event of Default shall have occurred and be continuing, all interest allowed on any such moneys shall be paid from time to time upon the written order of the Company, signed by the Chairman of the Board of Directors, the President, any Vice President, the Treasurer or any Assistant Treasurer of the Company. SECTION 6.06. Compensation and Expenses of Trustee. The Company, as borrower, covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, such compensation as shall be agreed in writing between the Company and the Trustee (which shall 39 not be limited by any provision of law in regard to the compensation of a trustee of an express trust), and the Company will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or bad faith. The Company also covenants to indemnify each of the Trustee and any predecessor Trustee (and their respective officers, agents, directors and employees) for, and to hold it harmless against any and all loss, liability or expense incurred without negligence or bad faith on the part of the Trustee and arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim of liability in the premises. The obligations of the Company under this Section 6.06 to compensate and indemnify the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder, and shall survive the resignation or removal of the Trustee and the termination of this Indenture. Such additional indebtedness shall be secured by a lien prior to that of the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Securities. When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 5.01(d) or Section 5.01(e), the expenses (including the reasonable charges and expenses of its counsel) and the compensation for services are intended to constitute expenses of administration under any applicable federal or state bankruptcy, insolvency or other similar law. SECTION 6.07. Officers' Certificate as Evidence. Except as otherwise provided in Sections 6.01 and 6.02, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee, and such certificate, in the absence of negligence or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken or omitted by it under the provisions of this Indenture upon the faith thereof. 40 SECTION 6.08. Conflicting Interest of Trustee. If the Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Trustee and the Company shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. SECTION 6.09. Eligibility of Trustee. The Trustee hereunder shall at all times be a corporation organized and doing business under the laws of the United States of America or any state or territory thereof or of the District of Columbia or a corporation or other Person permitted to act as trustee by the Commission authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000 (US) and subject to supervision or examination by federal, state, territorial, or District of Columbia authority. If such corporation or other Person publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section 6.09 the combined capital and surplus of such corporation or other Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. The Company may not, nor may any Person directly or indirectly controlling, controlled by, or under common control with the Company, serve as Trustee. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 6.09, the Trustee shall resign immediately in the manner and with the effect specified in Section 6.10. SECTION 6.10. Resignation or Removal of Trustee. (a) The Trustee, or any trustee or trustees hereafter appointed, may at any time resign with respect to one or more or all series of Securities by giving written notice of such resignation to the Company and by mailing notice thereof to the holders of the applicable series of Securities at their addresses as they shall appear on the Security Register. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee or trustees with respect to the applicable series by written instrument, in duplicate, executed by order of its Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed with respect to any series of Securities and have accepted appointment within 30 days after the mailing of such notice of resignation to the affected 41 Securityholders, the resigning Trustee may, at the expense of the Company, petition any court of competent jurisdiction for the appointment of a successor trustee, or any Securityholder who has been a bona fide holder of a Security or Securities of the applicable series for at least six months may, subject to the provisions of Section 5.09, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. (b) In case at any time any of the following shall occur -- (i) the Trustee shall fail to comply with the provisions of Section 6.08 after written request therefor by the Company or by any Securityholder who has been a bona fide holder of a Security or Securities for at least six months, or (ii) the Trustee shall cease to be eligible in accordance with the provisions of Section 6.09 and shall fail to resign after written request therefor by the Company or by any such Securityholder, or (iii)the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, the Company may remove the Trustee and appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 5.09, any Securityholder who has been a bona fide holder of a Security or Securities of the applicable series for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. (c) The holders of a majority in aggregate principal amount of the Securities of any series at the time outstanding may at any time remove the Trustee with respect to such series and nominate a successor trustee with respect to the applicable series of Securities or all series, as the case may be, which shall be deemed appointed as successor trustee with respect to the applicable series unless within 10 days after such nomination the Company objects thereto, in which case the Trustee so removed or any Securityholder of 42 the applicable series, upon the terms and conditions and otherwise as provided in subsection (a) of this Section 6.10, may, at the expense of the Company, petition any court of competent jurisdiction for an appointment of a successor trustee with respect to such series. (d) Any resignation or removal of the Trustee and appointment of a successor trustee pursuant to any of the provisions of this Section 6.10 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 6.11. SECTION 6.11. Acceptance by Successor Trustee. Any successor trustee appointed as provided in Section 6.10 shall execute, acknowledge and deliver to the Company and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the retiring trustee with respect to all or any applicable series shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations with respect to such series of its predecessor hereunder, with like effect as if originally named as trustee herein; but, nevertheless, on the written request of the Company or of the successor trustee, the trustee ceasing to act shall, upon payment of any amounts then due it pursuant to the provisions of Section 6.06, execute and deliver an instrument transferring to such successor trustee all the rights and powers of the trustee so ceasing to act and shall duly assign, transfer and deliver to such successor trustee all property and money held by such retiring trustee thereunder. Upon request of any such successor trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. Any trustee ceasing to act shall, nevertheless, retain a lien upon all property or funds held or collected by such trustee to secure any amounts then due it pursuant to the provisions of Section 6.06. If a successor trustee is appointed with respect to the Securities of one or more (but not all) series, the Company, the retiring trustee and each successor trustee with respect to the Securities of any applicable series shall execute and deliver an indenture supplemental hereto which shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring trustee with respect to the Securities of any series as to which the predecessor trustee is not retiring shall continue to be vested in the predecessor trustee, and shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trust hereunder by more than one trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such trustees co-trustees of the same 43 trust and that each such trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such trustee. No successor trustee shall accept appointment as provided in this Section 6.11 unless at the time of such acceptance such successor trustee shall be qualified under the provisions of Section 6.08 and eligible under the provisions of Section 6.09. Upon acceptance of appointment by a successor trustee as provided in this Section 6.11, the Company shall mail notice of the succession of such trustee hereunder to the holders of Securities of any applicable series at their addresses as they shall appear on the Security Register. If the Company fails to mail such notice within 10 days after the acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be mailed at the expense of the Company. SECTION 6.12. Succession by Merger, etc. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Securities of any series shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Securities so authenticated; and in case at that time any of the Securities of any series shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Securities of such series or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or authenticate Securities of any series in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 6.13. Limitation on Rights of Trustee as a Creditor. 44 The Trustee shall comply with Section 311(a) of the Trust Indenture Act, excluding any creditor relationship described in Section 311(b) of the Trust Indenture Act. A Trustee who has resigned or been removed shall be subject to Section 311(a) of the Trust Indenture Act to the extent included therein. SECTION 6.14. Authenticating Agents. There may be one or more Authenticating Agents appointed by the Trustee upon the request of the Company with power to act on its behalf and subject to its direction in the authentication and delivery of Securities of any series issued upon exchange or transfer thereof as fully to all intents and purposes as though any such Authenticating Agent had been expressly authorized to authenticate and deliver Securities of such series; provided, that the Trustee shall have no liability to the Company for any acts or omissions of the Authenticating Agent with respect to the authentication and delivery of Securities of any series. Any such Authenticating Agent shall at all times be a corporation organized and doing business under the laws of the United States or of any state or territory thereof or of the District of Columbia authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of at least $5,000,000 and being subject to supervision or examination by federal, state, territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually pursuant to law or the requirements of such authority, then for the purposes of this Section 6.14 the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect herein specified in this Section. Any corporation into which any Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, consolidation or conversion to which any Authenticating Agent shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of any Authenticating Agent, shall be the successor of such Authenticating Agent hereunder, if such successor corporation is otherwise eligible under this Section 6.14 without the execution or filing of any paper or any further act on the part of the parties hereto or such Authenticating Agent. Any Authenticating Agent may at any time resign with respect to one or more or all series of Securities by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time terminate the agency of any Authenticating Agent with respect to one or more or all series of Securities by giving written notice of termination to such Authenticating 45 Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any Authenticating Agent shall cease to be eligible under this Section 6.14, the Trustee may, and upon the request of the Company shall, promptly appoint a successor Authenticating Agent with respect to the applicable series eligible under this Section 6.14, shall give written notice of such appointment to the Company and shall mail notice of such appointment to all holders of the applicable series of Securities as the names and addresses of such holders appear on the Security Register. Any successor Authenticating Agent with respect to all or any series upon acceptance of its appointment hereunder shall become vested with all rights, powers, duties and responsibilities with respect to such series of its predecessor hereunder, with like effect as if originally named as Authenticating Agent herein. The Company agrees to pay to any Authenticating Agent from time to time reasonable compensation for its services. In the absence of negligence or willful misconduct, any Authenticating Agent shall have no responsibility or liability for any action taken by it as such in accordance with the directions of the Trustee. ARTICLE VII CONCERNING THE SECURITYHOLDERS SECTION 7.01. Action by Securityholders. Whenever in this Indenture it is provided that the holders of a specified percentage in aggregate principal amount of the Securities of any or all series may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action) the fact that at the time of taking any such action the holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by such Securityholders in person or by agent or proxy appointed in writing, or (b) by the record of such holders of Securities voting in favor thereof at any meeting of such Securityholders duly called and held in accordance with the provisions of Article Eight, or (c) by a combination of such instrument or instruments and any such record of such a meeting of such Securityholders. If the Company shall solicit from the Securityholders of any series any request, demand, authorization, direction, notice, consent, waiver or other action, the Company may, at its option, as evidenced by an Officers' Certificate, fix in advance a record date for such series for the determination of Securityholders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other action, but the 46 Company shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other action may be given before or after the record date, but only the Securityholders of record at the close of business on the record date shall be deemed to be Securityholders for the purposes of determining whether Securityholders of the requisite proportion of outstanding Securities of that series have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other action, and for that purpose the outstanding Securities of that series shall be computed as of the record date; provided, however, that no such authorization, agreement or consent by such Securityholders on the record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date. SECTION 7.02. Proof of Execution by Securityholders. Subject to the provisions of Section 6.01, 6.02 and 8.05, proof of the execution of any instrument by a Securityholder or his agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The ownership of Securities shall be proved by the Security Register or by a certificate of the Security registrar. The Trustee may require such additional proof of any matter referred to in this Section as it shall deem necessary. The record of any Securityholders' meeting shall be proved in the manner provided in Section 8.06. SECTION 7.03. Who Are Deemed Absolute Owners. Prior to due presentment for registration of transfer of any Security, the Company, the Trustee, any Authenticating Agent, any paying agent, any transfer agent and any Security registrar may deem the person in whose name such Security shall be registered upon the Security Register to be, and may treat him as, the absolute owner of such Security (whether or not such Security shall be overdue) for the purpose of receiving payment of or on account of the principal of, premium, if any, and interest on such Security and for all other purposes; and neither the Company nor the Trustee nor any Authenticating Agent nor any paying agent nor any transfer agent nor any Security registrar shall be affected by any notice to the contrary. All such payments so made to any holder for the time being or upon his order shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Security. 47 SECTION 7.04. Securities Owned by Company Deemed Not Outstanding. In determining whether the holders of the requisite aggregate principal amount of Securities have concurred in any direction, consent or waiver under this Indenture, Securities which are owned by the Company or any other obligor on the Securities or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any other obligor on the Securities shall be disregarded and deemed not to be outstanding for the purpose of any such determination; provided that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver, only Securities which a Responsible Officer actually knows are so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as outstanding for the purposes of this Section 7.04 if the pledgee shall establish to the satisfaction of the Trustee the pledgee's right to vote such Securities and that the pledgee is not the Company or any such other obligor or Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. SECTION 7.05. Revocation of Consents; Future Holders Bound. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 7.01, of the taking of any action by the holders of the percentage in aggregate principal amount of the Securities specified in this Indenture in connection with such action, any holder of a Security (or any Security issued in whole or in part in exchange or substitution therefor) the serial number of which is shown by the evidence to be included in the Securities the holders of which have consented to such action may, by filing written notice with the Trustee at its principal office and upon proof of holding as provided in Section 7.02, revoke such action so far as concerns such Security (or so far as concerns the principal amount represented by any exchanged or substituted Security). Except as aforesaid any such action taken by the holder of any Security shall be conclusive and binding upon such holder and upon all future holders and owners of such Security, and of any Security issued in exchange or substitution therefor, irrespective of whether or not any notation in regard thereto is made upon such Security or any Security issued in exchange or substitution therefor. 48 ARTICLE VIII SECURITYHOLDERS' MEETINGS SECTION 8.01. Purposes of Meetings. A meeting of Securityholders of any or all series may be called at any time and from time to time pursuant to the provisions of this Article Eight for any of the following purposes: (a) to give any notice to the Company or to the Trustee, or to give any directions to the Trustee, or to consent to the waiving of any default hereunder and its consequences, or to take any other action authorized to be taken by Securityholders pursuant to any of the provisions of Article Five; (b) to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article Six; (c) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 9.02; or (d) to take any other action authorized to be taken by or on behalf of the holders of any specified aggregate principal amount of such Securities under any other provision of this Indenture or under applicable law. SECTION 8.02. Call of Meetings by Trustee. The Trustee may at any time call a meeting of Securityholders of any or all series to take any action specified in Section 8.01, to be held at such time and at such place in the Borough of Manhattan, The City of New York, as the Trustee shall determine. Notice of every meeting of the Securityholders of any or all series, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be mailed to holders of Securities of each series affected at their addresses as they shall appear on the Security Register of such series. Such notice shall be mailed not less than 20 nor more than 180 days prior to the date fixed for the meeting. SECTION 8.03. Call of Meetings by Company or Securityholders. In case at any time the Company pursuant to a resolution of the Board of Directors, or the holders of at least 10% in aggregate principal amount of the 49 Securities of any or all series, as the case may be, then outstanding, shall have requested the Trustee to call a meeting of Securityholders of any or all series, as the case may be, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then the Company or such Securityholders may determine the time and the place in said Borough of Manhattan for such meeting and may call such meeting to take any action authorized in Section 8.01, by mailing notice thereof as provided in Section 8.02. SECTION 8.04. Qualifications for Voting. To be entitled to vote at any meeting of Securityholders a person shall (a) be a holder of one or more Securities with respect to which the meeting is being held or (b) a person appointed by an instrument in writing as proxy by a holder of one or more such Securities. The only persons who shall be entitled to be present or to speak at any meeting of Securityholders shall be the persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. SECTION 8.05. Regulations. Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Securityholders, in regard to proof of the holding of Securities and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit. The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Securityholders as provided in Section 8.03, in which case the Company or the Securityholders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by majority vote of the meeting. Subject to the provisions of Section 7.04, at any meeting each holder of Securities with respect to which such meeting is being held or proxy therefor shall be entitled to one vote for each $1,000 principal amount of Securities 50 held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Security challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Securities held by him or instruments in writing as aforesaid duly designating him as the person to vote on behalf of other Securityholders. Any meeting of Securityholders duly called pursuant to the provisions of Section 8.02 or 8.03 may be adjourned from time to time by a majority of those present, whether or not constituting a quorum, and the meeting may be held as so adjourned without further notice. SECTION 8.06. Voting. The vote upon any resolution submitted to any meeting of holders of Securities with respect to which such meeting is being held shall be by written ballots on which shall be subscribed the signatures of such holders or of their representatives by proxy and the serial number or numbers of the Securities held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in triplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Securityholders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 8.02. The record shall show the serial numbers of the Securities voting in favor of or against any resolution. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated. 51 ARTICLE IX SUPPLEMENTAL INDENTURES SECTION 9.01. Supplemental Indentures without Consent of Securityholders. The Company and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act as then in effect), without the consent of the Securityholders, for one or more of the following purposes: (a) to evidence the succession of another corporation to the Company, or successive successions, and the assumption by the successor corporation of the covenants, agreements and obligations of the Company pursuant to Article Ten hereof; (b) to add to the covenants of the Company such further covenants, restrictions or conditions for the protection of the holders of all or any series of Securities (and if such covenants are to be for the benefit of less than all series of Securities stating that such covenants are expressly being included for the benefit of such series) as the Board of Directors and the Trustee shall consider to be for the protection of the holders of such Securities, and to make the occurrence, or the occurrence and continuance, of a default in any of such additional covenants, restrictions or conditions a default or an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; provided, however, that in respect of any such additional covenant, restriction or condition such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default; (c) to provide for the issuance under this Indenture of Securities in coupon form (including Securities registrable as to principal only) and to provide for exchangeability of such Securities with the Securities issued hereunder in fully registered form and to make all appropriate changes for such purpose; (d) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or 52 inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture; provided that any such action shall not adversely affect the interests of the holders of the Securities; (e) to evidence and provide for the acceptance of appointment hereunder by a successor trustee with respect to the Securities of one or more series and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one trustee, pursuant to the requirements of Section 6.11; (f) to make any change that does not adversely affect the rights of any Securityholder in any material respect; or (g) to provide for the issuance of and establish the form and terms and conditions of the Securities of any series, as permitted by Sections 2.01 and 2.03, to establish the form of any certifications required to be furnished pursuant to the terms of this Indenture or any series of Securities, or to add to the rights of the holders of any series of Securities. The Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder, but the Trustee shall not be obligated to, but may in its discretion, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section 9.01 may be executed by the Company and the Trustee without the consent of the holders of any of the Securities at the time outstanding, notwithstanding any of the provisions of Section 9.02. SECTION 9.02. Supplemental Indentures with Consent of Securityholders. With the consent (evidenced as provided in Section 7.01) of the holders of not less than a majority in aggregate principal amount of the Securities at the time outstanding of all series affected by such supplemental indenture (voting as a class), the Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the 53 Trust Indenture Act then in effect) for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Securities of each series so affected; provided, however, that no such supplemental indenture shall, without the consent of the holders of each Security affected thereby, (i) extend the fixed maturity of any Security of any series, or reduce the rate or extend the time of payment of interest thereon, or reduce the principal amount thereof or any premium thereon, or reduce any amount payable on redemption thereof or make the principal thereof or any interest or premium thereon payable in any coin or currency other than that provided in the Securities, or impair or affect the right of any Securityholder to institute suit for payment thereof or the right of repayment, if any, at the option of the holder, (ii) reduce the aforesaid percentage of Securities the holders of which are required to consent to any such supplemental indenture or (iii) otherwise materially adversely affect the interest of the holders of any series of the Securities or the Preferred Securities; provided, further, that if the Securities of such series are held by a Potomac Electric Power Company Trust or a trustee of such trust, such supplemental indenture shall not be effective until the holders of a majority in liquidation amount of Trust Securities of the applicable trust shall have consented to such supplemental indenture; provided further, that if the consent of the holder of each outstanding Security is required, such supplemental indenture shall not be effective until each holder of the Trust Securities of the applicable Potomac Electric Power Company Trust shall have consented to such supplemental indenture. A supplemental indenture which changes or eliminates any covenant or other provision of this Indenture which has expressly been included solely for the benefit of one or more particular series of Securities, or which modifies the rights of Securityholders of such series with respect to such covenant or provision, shall be deemed not to affect the rights under this Indenture or the Securityholders of any other series. Upon the request of the Company accompanied by a copy of a resolution of the Board of Directors certified by its Secretary or Assistant Secretary authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Securityholders as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. 54 Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Trustee shall transmit by mail, first class postage prepaid, a notice, to be prepared by the Company, setting forth in general terms the substance of such supplemental indenture, to the Securityholders of all series affected thereby as their names and addresses appear upon the Security Register. Any failure of the Trustee to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. It shall not be necessary for the consent of the Securityholders under this Section 9.02 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. SECTION 9.03. Compliance with Trust Indenture Act; Effect of Supplemental Indentures. Any supplemental indenture executed pursuant to the provisions of this Article Nine shall comply with the Trust Indenture Act, as then in effect. Upon the execution of any supplemental indenture pursuant to the provisions of this Article Nine, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Securities of each series affected thereby shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 9.04. Notation on Securities. Securities of any series authenticated and delivered after the execution of any supplemental indenture affecting such series pursuant to the provisions of this Article Nine may bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may be prepared and executed by the Company, authenticated by the Trustee or the Authenticating Agent and delivered in exchange for the Securities of any series then outstanding. 55 SECTION 9.05. Evidence of Compliance of Supplemental Indenture to be Furnished Trustee. The Trustee, subject to the provisions of Sections 6.01 and 6.02, shall receive an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Article Nine. ARTICLE X CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE. SECTION 10.01. Company May Consolidate, etc., on Certain Terms. Nothing contained in this Indenture or in any of the Securities shall prevent any consolidation or merger of the Company with or into any other corporation or corporations organized under the laws of a domestic jurisdiction (whether or not affiliated with the Company), or successive consolidations or mergers in which the Company, or its successor or successors, shall be a party or parties, or shall prevent any sale, conveyance, transfer or other disposition of the property of the Company, or its successor or successors, as an entirety, or substantially as an entirety, to any other corporation organized under the laws of a domestic jurisdiction (whether or not affiliated with the Company or its successor or successors) authorized to acquire and operate the same; provided, however, that the Company hereby covenants and agrees that, upon any such consolidation, merger, sale, conveyance, transfer or other disposition, the due and punctual payment, in the case of the Company, of the principal of (premium, if any) and interest on all of the Securities of all series in accordance with the terms of each series according to their tenor, and the due and punctual performance and observance of all the covenants and conditions of this Indenture with respect to each series or established with respect to such series to be kept or performed by the Company, shall be expressly assumed by supplemental indenture (which shall conform to the provisions of the Trust Indenture Act, as then in effect) satisfactory in form to the Trustee executed and delivered to the Trustee by the entity formed by such consolidation or into which the Company shall have been merged, or by the entity which shall have acquired such property; provided, further, that after giving effect thereto, no Default shall have occurred and be continuing hereunder. 56 SECTION 10.02. Successor Corporation to be Substituted for Company. In case of any such consolidation, merger, conveyance or transfer and upon the assumption by the successor corporation, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of and premium, if any, and interest on all of the Securities and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed or observed by the Company, such successor corporation shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the party of the first part, and the Company thereupon shall be relieved of any further liability or obligation hereunder or upon the Securities. Such successor corporation thereupon may cause to be signed, and may issue either in its own name or in the name of Potomac Electric Power Company, any or all of the Securities issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee or the Authenticating Agent; and, upon the order of such successor corporation instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee or the Authenticating Agent shall authenticate and deliver any Securities which previously shall have been signed and delivered by the officers of the Company to the Trustee or the Authenticating Agent for authentication, and any Securities which such successor corporation thereafter shall cause to be signed and delivered to the Trustee or the Authenticating Agent for that purpose. All the Securities so issued shall in all respects have the same legal rank and benefit under this Indenture as the Securities theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Securities had been issued at the date of the execution hereof. SECTION 10.03. Opinion of Counsel to be Given Trustee. The Trustee, subject to the provisions of Sections 6.01 and 6.02, shall receive an Opinion of Counsel as conclusive evidence that any consolidation, merger, conveyance or transfer, and any assumption, permitted or required by the terms of this Article Ten complies with the provisions of this Article Ten. 57 ARTICLE XI SATISFACTION AND DISCHARGE OF INDENTURE. SECTION 11.01. Discharge of Indenture. When (a) the Company shall deliver to the Trustee for cancellation all Securities theretofore authenticated (other than any Securities which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.08) and not theretofore cancelled, or (b) all the Securities not theretofore cancelled or delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and the Company shall deposit with the Trustee, in trust, funds sufficient to pay at maturity or upon redemption all of the Securities (other than any Securities which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.08) not theretofore cancelled or delivered to the Trustee for cancellation, including principal and premium, if any, and interest due or to become due to such date of maturity or redemption date, as the case may be, but excluding, however, the amount of any moneys for the payment of principal of, and premium, if any, or interest on the Securities (1) theretofore repaid to the Company in accordance with the provisions of Section 11.04, or (2) paid to any State or to the District of Columbia pursuant to its unclaimed property or similar laws, and if in either case the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect, except that the provisions of Sections 2.05, 2.07, 2.08, 3.01, 3.02, 3.04, 6.06, 6.10 and 11.04 hereof shall survive until such Securities shall mature and be paid. Thereafter, Sections 6.10 and 11.04 shall survive, and the Trustee, on demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel reasonably requested by the Trustee and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture, the Company, however, hereby agreeing to reimburse the Trustee for any costs or expenses thereafter incurred by the Trustee in connection with this Indenture or the Securities. 58 SECTION 11.02. Deposited Moneys and U.S. Government Obligations to be Held in Trust by Trustee. Subject to the provisions of Section 11.04, all moneys and U.S. Government Obligations deposited with the Trustee pursuant to Sections 11.01 or 11.05 shall be held in trust and applied by it to the payment, either directly or through any paying agent (including the Company if acting as its own paying agent), to the holders of the particular Securities for the payment of which such moneys or U.S. Government Obligations have been deposited with the Trustee, of all sums due and to become due thereon for principal, premium, if any, and interest. SECTION 11.03. Paying Agent to Repay Moneys Held. Upon the satisfaction and discharge of this Indenture all moneys then held by any paying agent of the Securities (other than the Trustee) shall, upon written demand of the Company, be repaid to it or paid to the Trustee, and thereupon such paying agent shall be released from all further liability with respect to such moneys. SECTION 11.04. Return of Unclaimed Moneys. Any moneys deposited with or paid to the Trustee or any paying agent for payment of the principal of, and premium, if any, or interest on Securities and not applied but remaining unclaimed by the holders of Securities for two years after the date upon which the principal of, and premium, if any, or interest on such Securities, as the case may be, shall have become due and payable, shall be repaid to the Company by the Trustee or such paying agent on written demand; and the holder of any of the Securities shall thereafter look only to the Company for any payment which such holder may be entitled to collect and all liability of the Trustee or such paying agent with respect to such moneys shall thereupon cease. SECTION 11.05. Defeasance Upon Deposit of Moneys or U.S. Government Obligations. (a) The Company shall be deemed to have been Discharged (as defined below) from its respective obligations with respect to any series of Securities upon satisfaction of the applicable conditions set forth below with respect to any series of Securities: 59 (i) The Company shall have deposited or caused to be deposited irrevocably with the Trustee or the Defeasance Agent (as defined below) as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the holders of the Securities of such series (A) money in an amount, or (B) U.S. Government Obligations which through the payment of interest and principal in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (C) a combination of (A) and (B), sufficient, in the opinion (with respect to (B) and (C)) of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee and the Defeasance Agent, if any, to pay and discharge each installment of principal (including any mandatory sinking fund payments) of, and interest and premium, if any, on, the outstanding Securities of such series on the dates such installments of principal, interest or premium are due; (ii) if the Securities of such series are then listed on any national securities exchange, the Company shall have delivered to the Trustee and the Defeasance Agent, if any, an Opinion of Counsel to the effect that the exercise of the option under this Section 11.05 would not cause such Securities to be delisted from such exchange; (iii) no Event of Default or event which with notice or lapse of time would become an Event of Default with respect to the Securities of such series shall have occurred and be continuing on the date of such deposit; and (iv) the Company shall have delivered to the Trustee and the Defeasance Agent, if any, an Opinion of Counsel to the effect that holders of the Securities of such series will not recognize income, gain or loss for United States federal income tax purposes as a result of the exercise of the option under this Section 11.05 and will be subject to United States federal income tax on the same amount and in the same manner and at the same times as would have been the case if such option had not been exercised, and, in the case of the Securities of such series being Discharged, such opinion shall be accompanied by a private letter ruling to that effect received from the United States Internal Revenue Service or a revenue ruling pertaining to a comparable form of transaction to that effect published by the United States Internal Revenue Service. 60 (b) "Discharged" means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by, and obligations under, the Securities of such series and to have satisfied all the obligations under this Indenture relating to the Securities of such series (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except (A) the rights of holders of Securities of such series to receive, from the trust fund described in clause (1) above, payment of the principal of and the interest and premium, if any, on such Securities when such payments are due; (B) the Company's obligations with respect to such Securities under Sections 2.07, 2.08, 5.02 and 11.04; and (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder. (c) "Defeasance Agent" means another financial institution which is eligible to act as Trustee hereunder and which assumes all of the obligations of the Trustee necessary to enable the Trustee to act hereunder. In the event such a Defeasance Agent is appointed pursuant to this section, the following conditions shall apply: (i) The Trustee shall have approval rights over the document appointing such Defeasance Agent and the document setting forth such Defeasance Agent's rights and responsibilities; (ii) The Defeasance Agent shall provide verification to the Trustee acknowledging receipt of sufficient money and/or U.S. Government Obligations to meet the applicable conditions set forth in this Section 11.05; (iii)The Trustee shall determine whether the Company shall be deemed to have been Discharged from its respective obligations with respect to any series of Securities. ARTICLE XII IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS. SECTION 12.01. Indenture and Securities Solely Corporate Obligations. No recourse for the payment of the principal of or premium, if any, or interest on any Security, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture or in any supplemental indenture, 61 or in any Security, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, officer or director, as such, past, present or future, of the Company or of any successor corporation of the Company, either directly or through the Company or any successor corporation of the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Securities. ARTICLE XIII MISCELLANEOUS PROVISIONS. SECTION 13.01. Successors. All the covenants, stipulations, promises and agreements in this Indenture contained by the Company shall bind its successors and assigns whether so expressed or not. SECTION 13.02. Official Acts by Successor Corporation. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee or officer of any corporation that shall at the time be the lawful sole successor of the Company. SECTION 13.03. Surrender of Company Powers. The Company by instrument in writing executed by authority of 2/3 (two- thirds) of its Board of Directors and delivered to the Trustee may surrender any of the powers reserved to the Company, and thereupon such power so surrendered shall terminate both as to the Company, as the case may be, and as to any successor corporation. SECTION 13.04. Addresses for Notices, etc. Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the holders of Securities on the Company may be given or served by being deposited postage prepaid by registered or certified mail in a post office letter box addressed 62 (until another address is filed by the Company with the Trustee for the purpose) to Potomac Electric Power Company, 1900 Pennsylvania Avenue, N.W., Washington, D.C. 20068, Attention: Treasurer. Any notice, direction, request or demand by any Securityholder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the Corporate Trust Office, addressed to the Trustee, The Bank of New York, 101 Barclay Street, Floor 21 West, New York, NY 10286, Attention: Corporate Trust Trustee Administration. SECTION 13.05. Governing Law. This Indenture and each Security shall be deemed to be a contract made under the laws of the State of New York, and for all purposes shall be governed by and construed in accordance with the laws of said State. SECTION 13.06. Evidence of Compliance with Conditions Precedent. Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that in the opinion of the signers all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. SECTION 13.07. Legal Holidays. In any case when the date of payment of interest on or principal of the Securities will be in The City of New York, New York on a day other than a Business Day, the payment of such interest on or principal of the Securities 63 need not be made on such date but may be made on the next succeeding day not in the City a legal holiday or a day on which banking institutions are authorized by law to close, with the same force and effect as if made on the date of payment and no interest shall accrue for the period from and after such date. SECTION 13.08. Trust Indenture Act to Control. (a) If and to the extent that any provision of this Indenture limits, qualifies or conflicts with another provision included in this Indenture which is required to be included in this Indenture by any of Sections 310 to 317, inclusive, of the Trust Indenture Act, such required provision shall control. (b) Notwithstanding the foregoing, any provisions contained in this Indenture as to directions and waivers by Securityholders or impairment of Securityholders' rights to payment shall be in lieu of Sections 316(a)(1)(A) and 316(a)(1)(B) of the Trust Indenture Act and such sections are hereby expressly excluded from this Indenture and the Securities, as permitted by the Trust Indenture Act. SECTION 13.09. Table of Contents, Headings, etc. The table of contents and the titles and headings of the articles and sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. SECTION 13.10. Execution in Counterparts. This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. SECTION 13.11. Separability. In case any one or more of the provisions contained in this Indenture or in the Securities of any series shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Indenture or of such Securities, but this Indenture and such Securities shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein. 64 SECTION 13.12. Assignment. The Company will have the right at all times to assign any of its respective rights or obligations under this Indenture to a direct or indirect wholly-owned Subsidiary of the Company, provided that, in the event of any such assignment, the Company will remain liable for all such obligations. Subject to the foregoing, the Indenture is binding upon and inures to the benefit of the parties hereto and their respective successors and assigns. This Indenture may not otherwise be assigned by the parties hereto. SECTION 13.13. Acknowledgment of Rights. The Company acknowledges that, with respect to any Securities held by a Potomac Electric Power Company Trust or a trustee of such trust, if the Institutional Trustee of such Trust fails to enforce its rights under this Indenture as the holder of the series of Securities held as the assets of such Potomac Electric Power Company Trust, any holder of Preferred Securities may institute legal proceedings directly against the Company to enforce such Institutional Trustee's rights under this Indenture without first instituting any legal proceedings against such Institutional Trustee or any other person or entity. Notwithstanding the foregoing, if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Company to pay interest or principal on the applicable series of Securities on the date such interest or principal is otherwise payable (or in the case of redemption, on the redemption date), the Company acknowledges that a holder of Preferred Securities may directly institute a proceeding for enforcement of payment to such holder of the principal of or interest on the applicable series of Securities having a principal amount equal to the aggregate liquidation amount of the Preferred Securities of such holder on or after the respective due date specified in the applicable series of Securities. ARTICLE XIV REDEMPTION OF SECURITIES SECTION 14.01. Applicability of Article. The provisions of this Article shall be applicable to the Securities of any series which are redeemable before their maturity or to any sinking fund for the retirement of Securities of a series except as otherwise specified as contemplated by Section 2.03 for Securities of such series. 65 SECTION 14.02. Notice of Redemption; Selection of Securities. In case the Company shall desire to exercise the right to redeem all, or, as the case may be, any part of the Securities of any series in accordance with their terms, it shall fix a date for redemption and shall mail a notice of such redemption at least 30 and not more than 60 days prior to the date fixed for redemption to the holders of Securities of such series so to be redeemed as a whole or in part at their last addresses as the same appear on the Security Register. Such mailing shall be by first class mail. The notice if mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any Security of a series designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Security of such series. Each such notice of redemption shall identify the Securities to be redeemed (including CUSIP number) and shall specify the date fixed for redemption, the redemption price at which Securities of such series are to be redeemed, the place or places of payment, that payment will be made upon presentation and surrender of such Securities, that interest accrued to the date fixed for redemption will be paid as specified in said notice, and that on and after said date interest thereon or on the portions thereof to be redeemed will cease to accrue. If less than all the Securities of such series are to be redeemed the notice of redemption shall specify the numbers of the Securities of that series to be redeemed. In case any Security of a series is to be redeemed in part only, the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of such Security, a new Security or Securities of that series in principal amount equal to the unredeemed portion thereof will be issued. Prior to the redemption date specified in the notice of redemption given as provided in this Section, the Company will deposit with the Trustee or with one or more paying agents an amount of money sufficient to redeem on the redemption date all the Securities so called for redemption at the appropriate redemption price, together with accrued interest to the date fixed for redemption. If all of the Securities of a series are to be redeemed, the Company will give the Trustee written notice not less than 45 days prior to the redemption date. If less than all the Securities of a series are to be 66 redeemed, the Company will give the Trustee written notice not less than 60 days prior to the redemption date as to the aggregate principal amount of Securities of that series to be redeemed and the Trustee shall select, by lot, pro rata or otherwise in such manner as in its sole discretion it shall deem appropriate and fair, the Securities of that series or portions thereof (in integral multiples of $1,000, except as otherwise set forth in the applicable form of Security) to be redeemed. SECTION 14.03. Payment of Securities Called for Redemption. If notice of redemption has been given as provided in Section 14.02 or Section 14.04, the Securities or portions of Securities of the series with respect to which such notice has been given shall become due and payable on the date and at the place or places stated in such notice at the applicable redemption price, together with interest accrued to the date fixed for redemption, and on and after said date (unless the Company shall default in the payment of such Securities at the redemption price, together with interest accrued to said date) interest on the Securities or portions of Securities of any series so called for redemption shall cease to accrue. On presentation and surrender of such Securities at a place of payment specified in said notice, the said Securities or the specified portions thereof shall be paid and redeemed by the Company at the applicable redemption price, together with interest accrued thereon to the date fixed for redemption. Upon presentation of any Security of any series redeemed in part only, the Company shall execute and the Trustee shall authenticate and make available for delivery to the holder thereof, at the expense of the Company, a new Security or Securities of such series of authorized denominations, in principal amount equal to the unredeemed portion of the Security so presented. ARTICLE XV SUBORDINATION OF SECURITIES SECTION 15.01. Agreement to Subordinate. The Company covenants and agrees, and each holder of Securities issued hereunder and under any supplemental indenture or Board Resolution ("Additional Provisions") by such Securityholder's acceptance thereof likewise covenants and agrees, that all Securities shall be issued subject to the provisions of this Article Fifteen; and each holder of a Security, whether 67 upon original issue or upon transfer or assignment thereof, accepts and agrees to be bound by such provisions. The payment by the Company of the principal of, premium, if any, and interest on all Securities shall, to the extent and in the manner hereinafter set forth, be subordinated and junior in right of payment to the prior payment in full of all Senior Indebtedness and Other Financial Obligations of the Company and rank pari passu and equivalent to all other general unsecured claims of creditors against the Company not entitled to statutory priority under the Bankruptcy Code or otherwise, in each case whether outstanding at the date of this Indenture or thereafter incurred. No provision of this Article Fifteen shall prevent the occurrence of any Default or Event of Default hereunder. SECTION 15.02. Default on Senior Indebtedness. No payment may be made of the principal of, premium, if any, or interest on the Securities, or in respect of any redemption, retirement, purchase or other acquisition of any of the Securities, at any time when (i) there is a default in the payment of the principal of, premium, if any, or interest on, or otherwise in respect of, any Senior Indebtedness, whether at maturity or at a date fixed for prepayment or by declaration or otherwise, or (ii) any event of default with respect to any Senior Indebtedness has occurred and is continuing, or would occur as a result of such payment on the Securities or any redemption, retirement, purchase or other acquisition of any of the Securities, permitting the holders of such Senior Indebtedness (or a trustee on behalf of the holders thereof) to accelerate the maturity thereof. In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee when such payment is prohibited by the preceding paragraph of this Section 15.02, such payment shall be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Indebtedness and Other Financial Obligations or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior Indebtedness and Other Financial Obligations may have been issued, as their respective interests may appear, but only to the extent that the holders of the Senior Indebtedness and Other Financial Obligations (or their representative or representatives or a trustee) notify the Trustee in writing within 90 days of such payment of the amounts then due and owing on the Senior Indebtedness and Other Financial Obligations and only the amounts 68 specified in such notice to the Trustee shall be paid to the holders of Senior Indebtedness and Other Financial Obligations. SECTION 15.03. Liquidation; Dissolution; Bankruptcy. Upon any payment by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution, winding-up, liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due upon all Senior Indebtedness and Other Financial Obligations of the Company shall first be paid in full, or payment thereof provided for in money in accordance with their terms, before any payment is made by the Company on account of the principal (and premium, if any) or interest on the Securities; and upon any such dissolution or winding-up or liquidation or reorganization, any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Securityholders or the Trustee would be entitled to receive from the Company, except under the provisions of this Article Fifteen, shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the Securityholders or by the Trustee under the Indenture if received by them or it, directly to the holders of Senior Indebtedness and Other Financial Obligations of the Company (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness and Other Financial Obligations held by such holders, as calculated by the Company) or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness and Other Financial Obligations may have been issued, as their respective interests may appear, to the extent necessary to pay such Senior Indebtedness and Other Financial Obligations in full, in money or money's worth, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness and Other Financial Obligations, before any payment or distribution is made to the Securityholders or to the Trustee. For purposes of this Article Fifteen, the words "cash, property or securities" shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article Fifteen with respect to the Securities to the payment of all Senior Indebtedness and Other Financial Obligations of the Company, as the case may 69 be, that may at the time be outstanding, provided that (i) such Senior Indebtedness and Other Financial Obligations is assumed by the new corporation, if any, resulting from any such reorganization or readjustment, and (ii) the rights of the holders of such Senior Indebtedness and Other Financial Obligations are not, without the consent of such holders, altered by such reorganization or readjustment. The consolidation of the Company with, or the merger of the Company into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided for in Article Ten of this Indenture shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section 15.03 if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Article Ten of this Indenture. Nothing in Section 15.02 or in this Section 15.03 shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.06 of this Indenture. SECTION 15.04. Subrogation. Subject to the payment in full of all Senior Indebtedness and Other Financial Obligations, the rights of the Securityholders shall be subrogated to the rights of the holders of such Senior Indebtedness and Other Financial Obligations to receive payments or distributions of cash, property or securities of the Company applicable to such Senior Indebtedness and Other Financial Obligations until all amounts owing on the Securities shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of such Senior Indebtedness and Other Financial Obligations of any cash, property or securities to which the Securityholders or the Trustee would be entitled except under the provisions of this Article Fifteen, and no payment over pursuant to the provisions of this Article Fifteen to or for the benefit of the holders of such Senior Indebtedness and Other Financial Obligations by Securityholders or the Trustee, shall, as between the Company and its creditors (other than holders of Senior Indebtedness and Other Financial Obligations, and the holders of the Securities) be deemed to be a payment by the Company to or on account of such Senior Indebtedness and Other Financial Obligations. It is understood that the provisions of this Article Fifteen are and are intended solely for the purposes of defining the relative rights of the holders of the Securities, on the one hand, and the holders of such Senior Indebtedness and Other Financial Obligations, on the other hand. 70 Nothing contained in this Article Fifteen or elsewhere in this Indenture, any Additional Provisions or in the Securities is intended to or shall impair, as between the Company and its creditors (other than the holders of Senior Indebtedness and Other Financial Obligations, and the holders of the Securities), the obligation of the Company, which is absolute and unconditional, to pay to the holders of the Securities the principal of, premium, if any, and interest on, the Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holders of the Securities and creditors of the Company (other than the holders of Senior Indebtedness and Other Financial Obligations), nor shall anything herein or therein prevent the Trustee or the holder of any Security from exercising all remedies otherwise permitted by applicable law upon default under the Indenture (subject to the rights, if any, under this Article Fifteen of the holders of such Senior Indebtedness and Other Financial Obligations in respect of cash, property or securities of the Company received upon the exercise of any such remedy). Upon any payment or distribution of assets of the Company referred to in this Article Fifteen, the Trustee, subject to the provisions of Article Six of this Indenture, and the Securityholders shall be entitled to rely conclusively upon any order or decree made by any court of competent jurisdiction in which such dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidation trustee, agent or other Person making such payment or distribution, delivered to the Trustee or to the Securityholders, for the purposes of ascertaining the Persons entitled to participate in such distribution, the holders of Senior Indebtedness, Other Financial Obligations and other indebtedness of the Company, as the case may be, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article Fifteen. SECTION 15.05. Trustee to Effectuate Subordination. Each Securityholder by such Securityholder's acceptance of a Security authorizes and directs the Trustee on such Securityholder's behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article Fifteen and appoints the Trustee such Securityholder's attorney-in-fact for any and all such purposes. 71 SECTION 15.06. Notice by the Company. The Company shall give prompt written notice to a Responsible Officer of any fact known to the Company that would prohibit the making of any payment of monies to or by the Trustee in respect of the Securities pursuant to the provisions of this Article Fifteen. Notwithstanding the provisions of this Article Fifteen or any other provision of this Indenture or any Additional Provisions, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment of monies to or by the Trustee in respect of the Securities pursuant to the provisions of this Article Fifteen, unless and until a Responsible Officer shall have received written notice thereof from the Company or a holder or holders of Senior Indebtedness or Other Financial Obligations or from any trustee therefor; and before the receipt of any such written notice, the Trustee, subject to the provisions of Article Six of this Indenture, shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received the notice provided for in this Section 15.06 at least two Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of (or premium, if any) or interest on any Security), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purposes for which they were received, and shall not be affected by any notice to the contrary that may be received by it within two Business Days prior to such date. The Trustee, subject to the provisions of Article Six of this Indenture, shall be entitled to conclusively rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness or Other Financial Obligations of the Company, as the case may be (or a trustee on behalf of such holder), to establish that such notice has been given by a holder of such Senior Indebtedness or Other Financial Obligations (or a trustee on behalf of any such holder). In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of such Senior Indebtedness or Other Financial Obligations to participate in any payment or distribution pursuant to this Article Fifteen, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of such Senior Indebtedness or Other Financial Obligations held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article Fifteen, and, if such evidence is not furnished, the Trustee may defer any 72 payment to such Person pending judicial determination as to the right of such Person to receive such payment. SECTION 15.07. Rights of the Trustee; Holders of Senior Indebtedness and Other Financial Obligations. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article Fifteen in respect of any Senior Indebtedness or Other Financial Obligations at any time held by it, to the same extent as any other holder of Senior Indebtedness or Other Financial Obligations, and nothing in this Indenture or any Additional Provisions shall deprive the Trustee of any of its rights as such holder. With respect to the holders of Senior Indebtedness or Other Financial Obligations of the Company, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article Fifteen, and no implied covenants or obligations with respect to the holders of such Senior Indebtedness or Other Financial Obligations shall be read into this Indenture or any Additional Provisions against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of such Senior Indebtedness or Other Financial Obligations and, subject to the provisions of Article Six of this Indenture, the Trustee shall not be liable to any holder of such Senior Indebtedness or Other Financial Obligations if it shall in good faith mistakenly pay over or deliver to holders of Securities, the Company or any other Person money or assets to which any holder of such Senior Indebtedness or Other Financial Obligations shall be entitled by virtue of this Article Fifteen or otherwise. Nothing in this Article shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.06. SECTION 15.08. Subordination May Not Be Impaired. No right of any present or future holder of any Senior Indebtedness or Other Financial Obligations of the Company to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company, as the case may be, or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company, as the case may be, with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof that any such holder may have or otherwise be charged with. 73 Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness or Other Financial Obligations of the Company may, at any time and from time to time, without the consent of or notice to the Trustee or the Securityholders, without incurring responsibility to the Securityholders and without impairing or releasing the subordination provided in this Article Fifteen or the obligations hereunder of the holders of the Securities to the holders of such Senior Indebtedness or Other Financial Obligations, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, such Senior Indebtedness or Other Financial Obligations, or otherwise amend or supplement in any manner such Senior Indebtedness or Other Financial Obligations or any instrument evidencing the same or any agreement under which such Senior Indebtedness or Other Financial Obligations is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing such Senior Indebtedness or Other Financial Obligations; (iii) release any Person liable in any manner for the collection of such Senior Indebtedness or Other Financial Obligations; and (iv) exercise or refrain from exercising any rights against the Company, as the case may be, and any other Person. The Bank of New York hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions hereinabove set forth. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed by their respective officers thereunto duly authorized and their respective corporate seals to be hereunto duly affixed and attested, all as of the day and year first above written. POTOMAC ELECTRIC POWER COMPANY Attest: ____________________________________ By________________________________ Name: Name: Title: Title: THE BANK OF NEW YORK, as Trustee Attest: ___________________________________ By_______________________________ Title: EX-4 6 PREFERRED SECURITIES GUARANTEE PREFERRED SECURITIES GUARANTEE AGREEMENT Potomac Electric Power Company Trust I Dated as of , 1998 TABLE OF CONTENTS ARTICLE I DEFINITIONS AND INTERPRETATIONS SECTION 1.1 Definitions and Interpretation 1 ARTICLE II TRUST INDENTURE ACT SECTION 2.1 Trust Indenture Act; Application 3 SECTION 2.2 Lists of Holders of Securities 3 SECTION 2.3 Reports by the Preferred Guarantee Trustee 4 SECTION 2.4 Periodic Reports to Preferred Guarantee Trustee 4 SECTION 2.5 Evidence of Compliance with Conditions Precedent 4 SECTION 2.6 Events of Default; Waiver 4 SECTION 2.7 Event of Default; Notice 4 SECTION 2.8 Conflicting Interests 5 ARTICLE III POWERS, DUTIES AND RIGHTS OF PREFERRED GUARANTEE TRUSTEE SECTION 3.1 Powers and Duties of the Preferred Guarantee Trustee 5 SECTION 3.2 Certain Rights of Preferred Guarantee Trustee 6 SECTION 3.3 Not Responsible for Recitals or Issuance of Preferred Securities Guarantee 7 ARTICLE IV PREFERRED GUARANTEE TRUSTEE SECTION 4.1 Preferred Guarantee Trustee; Eligibility 8 SECTION 4.2 Appointment, Removal and Resignation of Preferred Guarantee Trustee 8 ARTICLE V GUARANTEE SECTION 5.1 Guarantee 9 SECTION 5.2 Waiver of Notice and Demand 9 SECTION 5.3 Obligations Not Affected 9 SECTION 5.4 Enforcement of Guarantee; Rights of Holders 10 SECTION 5.5 Guarantee of Payment 10 SECTION 5.6 Subrogation 10 SECTION 5.7 Independent Obligations 11 ARTICLE VI LIMITATION OF TRANSACTIONS; SUBORDINATION SECTION 6.1 Limitation of Transactions 11 SECTION 6.2 Ranking 11 ARTICLE VII TERMINATION SECTION 7.1 Termination 12 ARTICLE VIII INDEMNIFICATION SECTION 8.1 Exculpation 12 SECTION 8.2 Indemnification 12 ARTICLE IX MISCELLANEOUS SECTION 9.1 Successors and Assigns 13 SECTION 9.2 Amendments 13 SECTION 9.3 Notices 13 SECTION 9.4 Benefit 14 SECTION 9.5 Governing Law 14 SECTION 9.6 Genders 14 SECTION 9.7 Counterparts 14 PREFERRED SECURITIES GUARANTEE AGREEMENT This GUARANTEE AGREEMENT (the "Preferred Securities Guarantee"), dated as of , 1998, is executed and delivered by Potomac Electric Power Company, a District of Columbia and Virginia corporation (the "Guarantor"), and The Bank of New York, a New York banking corporation, as trustee for the benefit of the Holders (as defined herein) of Potomac Electric Power Company Trust I, a Delaware statutory business trust (the "Issuer"). WHEREAS, pursuant to an Amended and Restated Declaration of Trust (the "Declaration"), dated as of , 1998, among the trustees of the Issuer named therein, the Guarantor, as sponsor, and the holders from time to time of undivided beneficial interests in the assets of the Issuer, the Issuer is issuing on the date hereof [ ] preferred securities, having an aggregate liquidation amount of $ , designated the % Preferred Securities (the "Preferred Securities"); and WHEREAS, as incentive for the Holders to purchase the Preferred Securities, the Guarantor desires irrevocably and unconditionally to agree, to the extent set forth in this Preferred Securities Guarantee, to pay to the Holders the Guarantee Payments (as defined herein) and to make certain other payments on the terms and conditions set forth herein. WHEREAS, the Guarantor is also executing and delivering a guarantee agreement (the "Common Securities Guarantee") in substantially identical terms to this Preferred Securities Guarantee for the benefit of the holders of the Common Securities (as defined herein), except that if an Event of Default (as defined by the Indenture), has occurred and is continuing, the rights of holders of the Common Securities to receive Guarantee Payments under the Common Securities Guarantee are subordinated to the rights of Holders to receive Guarantee Payments under this Preferred Securities Guarantee. NOW, THEREFORE, in consideration of the purchase by each Holder, which purchase the Guarantor hereby agrees shall benefit the Guarantor, the Guarantor executes and delivers this Preferred Securities Guarantee for the benefit of the Holders. ARTICLE I DEFINITIONS AND INTERPRETATION SECTION 1.1 Definitions and Interpretation In this Preferred Securities Guarantee, unless the context otherwise requires: (a) Capitalized terms used in this Preferred Securities Guarantee but not defined in the preamble above have the respective meanings assigned to them in this Section 1.1; (b) a term defined anywhere in this Preferred Securities Guarantee has the same meaning throughout; (c) all references to "the Preferred Securities Guarantee" or "this Preferred Securities Guarantee" are to this Preferred Securities Guarantee as modified, supplemented or amended from time to time; (d) all references in this Preferred Securities Guarantee to Articles and Sections are to Articles and Sections of this Preferred Securities Guarantee, unless otherwise specified; (e) a term defined in the Trust Indenture Act has the same meaning when used in this Preferred Securities Guarantee, unless otherwise defined in this Preferred Securities Guarantee or unless the context otherwise requires; and (f) a reference to the singular includes the plural and vice versa. "Affiliate" has the same meaning as given to that term in Rule 405 of the Securities Act of 1933, as amended, or any successor rule thereunder. "Authorized Officer" of a Person means any Person that is authorized to bind such Person. "Business Day" means any day other than a day on which federal or state banking institutions in the Borough of Manhattan, The City of New York, are authorized or obligated by any law, executive order or regulation to close. "Common Securities" means the securities representing common undivided beneficial interests in the assets of the Issuer. "Corporate Trust Office" means the office of the Preferred Guarantee Trustee at which the corporate trust business of the Preferred Guarantee Trustee shall, at any particular time, be principally administered, which office at the date of execution of this Agreement is located at 101 Barclay Street, New York, New York 10286. "Covered Person" means any Holder or beneficial owner of Preferred Securities. "Debentures" means the % Junior Subordinated Deferrable Interest Debentures due 2038 issued by the Guarantor to the Issuer. "Event of Default" means a default by the Guarantor on any of its payment or other obligations under this Preferred Securities Guarantee. "Guarantee Payments" means the following payments or distributions, without duplication, with respect to the Preferred Securities, to the extent not paid or made by the Issuer: (i) any accrued and unpaid Distributions (as defined in the Declaration) that are required to be paid on such Preferred Securities, to the extent the Issuer shall have funds available therefor, (ii) the redemption price, including all accrued and unpaid Distributions to the date of redemption (the "Redemption Price"), to the extent the Issuer has funds available therefor, with respect to any Preferred Securities called for redemption by the Issuer, and (iii) upon a voluntary or involuntary dissolution, winding-up or termination of the Issuer (other than in connection with the distribution of Debentures to the Holders or the redemption of all of the Preferred Securities as provided in the Declaration), the lesser of (a) the aggregate of the liquidation amount and all accrued and unpaid Distributions on the Preferred Securities to the date of payment, to the extent the Issuer shall have funds available therefor, and (b) the amount of assets of the Issuer remaining available for distribution to Holders in liquidation of the Issuer (in either case, the "Liquidation Distribution"). If an event of default under the Indenture has occurred and is continuing, the rights of holders of the Common Securities to receive payments under the Common Securities Guarantee Agreement are subordinated to the rights of Holders to receive Guarantee Payments. "Holder" means any holder, as registered on the books and records of the Issuer, of any Preferred Securities; provided, however, that, in determining whether the holders of the requisite percentage of Preferred Securities have given any request, notice, consent or waiver hereunder, "Holder" shall not include the Guarantor or any Affiliate of the Guarantor, but only to the extent that the Issuer has actual knowledge of such ownership. "Indemnified Person" means the Preferred Guarantee Trustee, any Affiliate of the Preferred Guarantee Trustee, or any officers, directors, shareholders, members, partners, employees, representatives, nominees, custodians or agents of the Preferred Guarantee Trustee. "Indenture" means the Indenture dated as of , 1998, among the Guarantor (the "Debenture Issuer") and The Bank of New York, as trustee, and any indenture supplemental thereto pursuant to which the Debentures are to be issued to the Institutional Trustee (as defined by the Declaration) of the Issuer. "Majority in liquidation amount of the Preferred Securities" means, except as provided by the Trust Indenture Act, a vote by Holder(s), voting separately as a class, of more than 50% of the liquidation amount (consisting of the stated amount that would be paid on redemption, liquidation or otherwise, plus accrued and unpaid Distributions to the date upon which the voting percentages are determined) of all outstanding Preferred Securities. "Officers' Certificate" means, with respect to any Person, a certificate signed by two Authorized Officers of such Person. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for in this Preferred Securities Guarantee shall include: (a) a statement that each officer signing the Officers' Certificate has read the covenant or condition and the definition relating thereto; 2 (b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer in rendering the Officers' Certificate; (c) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such officer, such condition or covenant has been complied with. "Preferred Guarantee Trustee" means The Bank of New York, a New York banking corporation, until a Successor Preferred Guarantee Trustee has been appointed and has accepted such appointment pursuant to the terms of this Preferred Securities Guarantee and thereafter means each such Successor Preferred Guarantee Trustee. "Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature. "Resignation Request" has the meaning set forth in Section 4.2(c). "Responsible Officer" means, with respect to the Preferred Guarantee Trustee, any officer within the Corporate Trust Office of the Preferred Guarantee Trustee, including any vice president, any assistant vice president, any assistant secretary, any assistant treasurer or other officer of the Corporate Trust Office of the Preferred Guarantee Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. "Successor Preferred Guarantee Trustee" means a successor Preferred Guarantee Trustee possessing the qualifications to act as Preferred Guarantee Trustee under Section 4.1. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended. ARTICLE II TRUST INDENTURE ACT SECTION 2.1 Trust Indenture Act; Application (a) This Preferred Securities Guarantee is subject to the provisions of the Trust Indenture Act that are required to be part of this Preferred Securities Guarantee and shall, to the extent applicable, be governed by such provisions. (b) If and to the extent that any provision of this Preferred Securities Guarantee limits, qualifies or conflicts with the duties imposed by Section 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. (c) The application of the Trust Indenture Act to this Preferred Securities Guarantee shall not affect the nature of the Preferred Securities as equity securities representing undivided beneficial interests in the assets of the Issuer. SECTION 2.2 Lists of Holders of Securities (a) The Guarantor shall provide the Preferred Guarantee Trustee (i) on a semi-annual basis, within five Business Days after a record date, with a list, in such form as the Preferred Guarantee Trustee may reasonably require, of the names and addresses of the Holders as of such date,and (ii) at any other time within 30 days of receipt by the Guarantor of a written request therefor. Such list of Holders shall be as of a date no more than 15 days before such list is given to the Preferred Guarantee Trustee. The Guarantor shall not be obligated to provide such list of Holders if at any time the list does 3 not differ from the most recent list given to the Preferred Guarantee Trustee by the Guarantor. The Preferred Guarantee Trustee may destroy any list of Holders previously given to it on receipt of a new list of Holders. (b) The Preferred Guarantee Trustee shall comply with its obligations under Sections 311(a), 311(b) and Section 312 of the Trust Indenture Act. SECTION 2.3 Reports by the Preferred Guarantee Trustee Within 60 days after April 15 of each year, the Preferred Guarantee Trustee shall provide to the Holders such reports as are required by Section 313(a) of the Trust Indenture Act, and any reports required by Section 313(b) of the Trust Indenture Act, within the timeframes specified therein, in the form and in the manner provided by Section 313 of the Trust Indenture Act. The Preferred Guarantee Trustee shall also comply with the requirements of Section 313(d) of the Trust Indenture Act. SECTION 2.4 Periodic Reports to Preferred Guarantee Trustee The Guarantor shall provide to the Preferred Guarantee Trustee and to the Securities and Exchange Commission such documents, reports and information as required by Section 314 (if any) and the compliance certificates required by Section 314 of the Trust Indenture Act in the form, in the manner and at the times required by Section 314 of the Trust Indenture Act. Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). SECTION 2.5 Evidence of Compliance with Conditions Precedent The Guarantor shall provide to the Preferred Guarantee Trustee such evidence of compliance with any conditions precedent, if any, provided for in this Preferred Securities Guarantee that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) may be given in the form of an Officers' Certificate. SECTION 2.6 Events of Default; Waiver (a) The Holders of a Majority in liquidation amount of Preferred Securities may, by vote, on behalf of all of the Holders waive any Event of Default and its consequences. Upon such waiver, any such Event of Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Preferred Securities Guarantee, but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. (b) Notwithstanding the provisions of subsection (a) of this Section 2.6, the right of any Holder of Preferred Securities to receive payment of the Guarantee Payments in accordance with this Preferred Securities Guarantee, or to institute suit for the enforcement of any such payment, shall not be impaired without the consent of each such Holder. SECTION 2.7 Event of Default; Notice (a) The Preferred Guarantee Trustee shall, within 90 days after the occurrence of an Event of Default, transmit by mail, first class postage prepaid, to the Holders notices of all Events of Default actually known to a Responsible Officer of the Preferred Guarantee Trustee, unless such defaults have been cured before the giving of such notice; provided, that, the Preferred Guarantee Trustee shall be protected in withholding such notice if and so long as a Responsible Officer in good faith determines that the withholding of such notice is in the interests of the Holders of the Preferred Securities. (b) The Preferred Guarantee Trustee shall not be deemed to have actual knowledge of any Event of Default unless the Preferred Guarantee Trustee shall have received written notice thereof, or of which a Responsible Officer charged with the administration of this Preferred Securities Guarantee shall have obtained actual knowledge. 4 SECTION 2.8 Conflicting Interests The Declaration shall be deemed to be specifically described in this Preferred Securities Guarantee for the purposes of clause (i) of the first proviso contained in Section 310(b) of the Trust Indenture Act. ARTICLE III POWERS, DUTIES AND RIGHTS OF PREFERRED GUARANTEE TRUSTEE SECTION 3.1 Powers and Duties of the Preferred Guarantee Trustee (a) This Preferred Securities Guarantee shall be held by the Preferred Guarantee Trustee in trust for the benefit of the Holders, and the Preferred Guarantee Trustee shall not transfer its right, title and interest in this Preferred Securities Guarantee to any Person except a Holder exercising his or her rights pursuant to Section 5.4(d) or a Successor Preferred Guarantee Trustee on acceptance by such Successor Preferred Guarantee Trustee of its appointment to act as Successor Preferred Guarantee Trustee. The right, title and interest of the Preferred Guarantee Trustee shall automatically vest in any Successor Preferred Guarantee Trustee, and such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered pursuant to the appointment of such Successor Preferred Guarantee Trustee. (b) If an Event of Default actually known to a Responsible Officer has occurred and is continuing, the Preferred Guarantee Trustee shall enforce this Preferred Securities Guarantee for the benefit of the Holders. (c) This Preferred Securities Guarantee and all moneys received by the Preferred Guarantee Trustee hereunder in respect of the Guarantee Payments will not be subject to any right, charge, security interest, lien or claim of any kind in favor of, or for the benefit of, the Preferred Guarantee Trustee or its agents or their creditors. (d) The Preferred Guarantee Trustee, prior to the occurrence of any Event of Default and after the curing of all Events of Default that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Preferred Securities Guarantee, and no implied covenants shall be read into this Preferred Securities Guarantee against the Preferred Guarantee Trustee. In case an Event of Default has occurred (that has not been cured or waived pursuant to Section 2.6) and is actually known to a Responsible Officer, the Preferred Guarantee Trustee shall exercise such of the rights and powers vested in it by this Preferred Securities Guarantee, and use the same degree of care and skill in its exercise thereof as a prudent person would exercise or use under the circumstances in the conduct of his own affairs. (e) No provision of this Preferred Securities Guarantee shall be construed to relieve the Preferred Guarantee Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) prior to the occurrence of any Event of Default and after the curing or waiving of all such Events of Default that may have occurred: (A) the duties and obligations of the Preferred Guarantee Trustee shall be determined solely by the express provisions of this Preferred Securities Guarantee, and the Preferred Guarantee Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Preferred Securities Guarantee, and no implied covenants or obligations shall be read into this Preferred Securities Guarantee against the Preferred Guarantee Trustee; and 5 (B) in the absence of bad faith on the part of the Preferred Guarantee Trustee, the Preferred Guarantee Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Preferred Guarantee Trustee and conforming to the requirements of this Preferred Securities Guarantee; but in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Preferred Guarantee Trustee, the Preferred Guarantee Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Preferred Securities Guarantee (but need not confirm or investigate the accuracy of mathematical calculations or other facts stated therein); (ii) the Preferred Guarantee Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Preferred Guarantee Trustee was negligent in ascertaining the pertinent facts upon which such judgment was made; (iii) the Preferred Guarantee Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a Majority in liquidation amount of the Preferred Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Preferred Guarantee Trustee, or exercising any trust or power conferred upon the Preferred Guarantee Trustee under this Preferred Securities Guarantee; and (iv) no provision of this Preferred Securities Guarantee shall require the Preferred Guarantee Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers. SECTION 3.2 Certain Rights of Preferred Guarantee Trustee (a) Subject to the provisions of Section 3.1: (i) The Preferred Guarantee Trustee may conclusively rely, and shall be fully protected in acting or refraining from acting upon, any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it in good faith to be genuine and to have been signed, sent or presented by the proper party or parties. (ii) Any direction or act of the Guarantor contemplated by this Preferred Securities Guarantee shall be sufficiently evidenced by an Officers' Certificate. (iii) Whenever, in the administration of this Preferred Securities Guarantee, the Preferred Guarantee Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting any action hereunder, the Preferred Guarantee Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and conclusively rely upon an Officers' Certificate which, upon receipt of such request, shall be promptly delivered by the Guarantor. (iv) The Preferred Guarantee Trustee shall have no duty to see to any recording, filing or registration of any instrument (or any rerecording, refiling or registration thereof). (v) The Preferred Guarantee Trustee may consult with counsel of its selection, and the advice or opinion of such counsel with respect to legal matters shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or opinion. Such counsel may be counsel to the Guarantor or any of its Affiliates and may include any of its employees. The Preferred Guarantee Trustee shall have the right at any time to seek instructions concerning the administration of this Preferred Securities Guarantee from any court of competent jurisdiction. 6 (vi) The Preferred Guarantee Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Preferred Securities Guarantee at the request or direction of any Holder, unless such Holder shall have provided to the Preferred Guarantee Trustee such security and indemnity, reasonably satisfactory to the Preferred Guarantee Trustee, against the costs, expenses (including attorneys' fees and expenses and the expenses of the Preferred Guarantee Trustee's agents, nominees or custodians) and liabilities that might be incurred by it in complying with such request or direction, including such reasonable advances as may be requested by the Preferred Guarantee Trustee; provided that, nothing contained in this Section 3.2(a)(vi) shall relieve the Preferred Guarantee Trustee, upon the occurrence of an Event of Default which has not been cured or waived, of its obligation to exercise the rights and powers vested in it by this Preferred Securities Guarantee and to use the same degree of care and skill in this exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (vii) The Preferred Guarantee Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Preferred Guarantee Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit. (viii) The Preferred Guarantee Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, nominees, custodians or attorneys, and the Preferred Guarantee Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. (ix) Any action taken by the Preferred Guarantee Trustee or its agents hereunder shall bind the Holders, and the signature of the Preferred Guarantee Trustee or its agents alone shall be sufficient and effective to perform any such action. No third party shall be required to inquire as to the authority of the Preferred Guarantee Trustee to so act or as to its compliance with any of the terms and provisions of this Preferred Securities Guarantee, both of which shall be conclusively evidenced by the Preferred Guarantee Trustee's or its agent's taking such action. (x) Whenever in the administration of this Preferred Securities Guarantee the Preferred Guarantee Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Preferred Guarantee Trustee (i) may request instructions from the Holders of a Majority in liquidation amount of the Preferred Securities, (ii) may refrain from enforcing such remedy or right or taking such other action until such instructions are received, and (iii) shall be protected in conclusively relying on or acting in accordance with such instructions. (b) No provision of this Preferred Securities Guarantee shall be deemed to impose any duty or obligation on the Preferred Guarantee Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it in any jurisdiction in which it shall be illegal, or in which the Preferred Guarantee Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Preferred Guarantee Trustee shall be construed to be a duty. SECTION 3.3. Not Responsible for Recitals or Issuance of Preferred Securities Guarantee The recitals contained in this Preferred Securities Guarantee shall be taken as the statements of the Guarantor, and the Preferred Guarantee Trustee does not assume any responsibility for their correctness. The Preferred Guarantee Trustee makes no representation as to the validity or sufficiency of this Preferred Securities Guarantee. 7 ARTICLE IV PREFERRED GUARANTEE TRUSTEE SECTION 4.1 Preferred Guarantee Trustee; Eligibility (a) There shall at all times be a Preferred Guarantee Trustee which shall: (i) not be an Affiliate of the Guarantor; and (ii) be a corporation organized and doing business under the laws of the United States of America or any state or territory thereof or of the District of Columbia, or a corporation or Person permitted by the Securities and Exchange Commission to act as an institutional trustee under the Trust Indenture Act, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least 50 million U.S. dollars ($50,000,000), and subject to supervision or examination by federal, state, territorial or District of Columbia authority. If such corporation or Person publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority referred to above, then, for the purposes of this Section 4.1(a)(ii), the combined capital and surplus of such corporation or Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. (b) If at any time the Preferred Guarantee Trustee shall cease to be eligible to so act under Section 4.1(a), the Preferred Guarantee Trustee shall immediately resign in the manner and with the effect set out in Section 4.2(c). (c) If the Preferred Guarantee Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Preferred Guarantee Trustee and Guarantor shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. SECTION 4.2 Appointment, Removal and Resignation of Preferred Guarantee Trustee (a) Subject to Section 4.2(b), the Preferred Guarantee Trustee may be appointed or removed without cause by the Guarantor at any time while there is no continuing Event of Default. (b) The Preferred Guarantee Trustee shall not be removed in accordance with Section 4.2(a) until a Successor Preferred Guarantee Trustee has been appointed and has accepted such appointment by written instrument executed by such Successor Preferred Guarantee Trustee and delivered to the Guarantor and to the Preferred Guarantee Trustee being removed. (c) The Preferred Guarantee Trustee appointed to office shall hold office until a Successor Preferred Guarantee Trustee shall have been appointed or until its removal or resignation. The Preferred Guarantee Trustee may resign from office (without need for prior or subsequent accounting) by an instrument (a "Resignation Request") in writing executed by the Preferred Guarantee Trustee and delivered to the Guarantor which resignation shall take effect upon such delivery or upon such later date as is specified therein; provided, however, that no such resignation of the Preferred Guarantee Trustee shall be effective until a Successor Preferred Guarantee Trustee has been appointed and has accepted such appointment by instrument in writing executed by such Successor Preferred Guarantee Trustee and delivered to the Guarantor and the resigning Preferred Guarantee Trustee. (d) If no Successor Preferred Guarantee Trustee shall have been appointed and accepted appointment as provided in this Section 4.2 within 60 days after delivery to the Guarantor of a Resignation Request, the resigning Preferred Guarantee Trustee may, at the expense of the Guarantor, petition any court of competent jurisdiction for appointment of a 8 Successor Preferred Guarantee Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Successor Preferred Guarantee Trustee. (e) No Preferred Guarantee Trustee shall be liable for the acts or omissions to act of any Successor Preferred Guarantee Trustee. (f) Upon termination of this Preferred Securities Guarantee or removal or resignation of the Preferred Guarantee Trustee pursuant to this Section 4.2, the Guarantor shall pay to the Preferred Guarantee Trustee all amounts payable to the Preferred Guarantee Trustee that have accrued to the date of such termination, removal or resignation. ARTICLE V GUARANTEE SECTION 5.1 Guarantee The Guarantor irrevocably and unconditionally agrees to pay in full to the Holders the Guarantee Payments (without duplication of amounts theretofore paid by the Issuer), as and when due, regardless of any defense, right of set-off or counterclaim that the Issuer may have or assert. The Guarantor's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by the Guarantor to the Holders or by causing the Issuer to pay such amounts to the Holders. SECTION 5.2 Waiver of Notice and Demand The Guarantor hereby waives notice of acceptance of this Preferred Securities Guarantee and of any liability to which it applies or may apply, presentment, demand for payment, any right to require a proceeding first against the Issuer or any other Person before proceeding against the Guarantor, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. SECTION 5.3 Obligations Not Affected The obligations, covenants, agreements and duties of the Guarantor under this Preferred Securities Guarantee shall in no way be affected or impaired by reason of the happening from time to time of any of the following: (a) the release or waiver, by operation of law or otherwise, of the performance or observance by the Issuer of any express or implied agreement, covenant, term or condition relating to the Preferred Securities to be performed or observed by the Issuer; (b) the extension of time for the payment by the Issuer of all or any portion of the Distributions, Redemption Price, Liquidation Distribution or any other sums payable under the terms of the Preferred Securities or the extension of time for the performance of any other obligation under, arising out of, or in connection with, the Preferred Securities (other than an extension of time for payment of Distributions, Redemption Price, Liquidation Distribution or other sum payable that results from the extension of any interest payment period on the Debentures or any extension of the maturity date of the Debentures permitted by the Indenture); (c) any failure, omission, delay or lack of diligence on the part of the Holders to enforce, assert or exercise any right, privilege, power or remedy conferred on the Holders pursuant to the terms of the Preferred Securities, or any action on the part of the Issuer granting indulgence or extension of any kind; 9 (d) the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Issuer or any of the assets of the Issuer; (e) any invalidity of, or defect or deficiency in, the Preferred Securities; (f) the settlement or compromise of any obligation guaranteed hereby or hereby incurred; or (g) any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a guarantor, it being the intent of this Section 5.3 that the obligations of the Guarantor hereunder shall be absolute and unconditional under any and all circumstances. There shall be no obligation of the Holders to give notice to, or obtain consent of, the Guarantor with respect to the happening of any of the foregoing. SECTION 5.4 Enforcement of Guarantee; Rights of Holders The Guarantor and the Preferred Guarantee Trustee expressly acknowledge that: (a) this Preferred Securities Guarantee will be deposited with the Preferred Guarantee Trustee to be held for the benefit of the Holders; (b) the Preferred Guarantee Trustee has the right to enforce this Preferred Securities Guarantee on behalf of the Holders; (c) the Holders of a Majority in liquidation amount of the Preferred Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Preferred Guarantee Trustee in respect of this Preferred Securities Guarantee or exercising any trust or power conferred upon the Preferred Guarantee Trustee under this Preferred Securities Guarantee; and (d) any Holder may institute a legal proceeding directly against the Guarantor to enforce the Preferred Guarantee Trustee's rights and the obligations of the Guarantor under this Preferred Securities Guarantee, without first instituting a legal proceeding against the Issuer, the Preferred Guarantee Trustee or any other person or entity, and the Guarantor waives any right or remedy to require that any action be brought first against the Issuer or any other person or entity before proceeding directly against the Guarantor. SECTION 5.5 Guarantee of Payment This Preferred Securities Guarantee creates a guarantee of payment and not of collection. This Preferred Securities Guarantee will not be discharged except by payment of the Guarantee Payments in full (without duplication of amounts therefor paid by the Issuer). SECTION 5.6 Subrogation The Guarantor shall be subrogated to all (if any) rights of the Holders against the Issuer in respect of any amounts paid to such Holders by the Guarantor under this Preferred Securities Guarantee; provided, however, that the Guarantor shall not (except to the extent required by mandatory provisions of law) be entitled to enforce or exercise any right that it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Preferred Securities Guarantee, if, at the time of any such payment, any amounts are due and unpaid under this 10 Preferred Securities Guarantee. If any amount shall be paid to the Guarantor in violation of the preceding sentence, the Guarantor agrees to hold such amount in trust for the Holders and to pay over such amount to the Holders. SECTION 5.7 Independent Obligations The Guarantor acknowledges that its obligations hereunder are independent of the obligations of the Issuer with respect to the Preferred Securities, and that the Guarantor shall be liable as principal and as debtor hereunder to make Guarantee Payments pursuant to the terms of this Preferred Securities Guarantee notwithstanding the occurrence of any event referred to in subsections (a) through (g), inclusive, of Section 5.3 hereof. ARTICLE VI LIMITATION OF TRANSACTIONS; SUBORDINATION SECTION 6.1 Limitation of Transactions So long as any Preferred Securities remain outstanding, if (a) there shall have occurred an Event of Default, (b) there shall have occurred an Event of Default (as defined by the Indenture) or (c) the Guarantor has exercised its option to defer interest payments on the Debentures by extending the interest payment period as provided in Article IV of the First Supplemental Indenture to the Indenture and such period or extension thereof shall be continuing, then (i) the Guarantor shall not declare or pay any dividend on, make any distribution with respect to, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of its capital stock (other than (A) purchases or acquisitions of shares of Guarantor's common stock in connection with the satisfaction by the Guarantor of its obligations under any employee benefit plans or any other contractual obligation of the Guarantor (other than a contractual obligation ranking pari passu with or junior to the Debentures), or (B) the purchase of fractional interests in shares of the Guarantor's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged), (ii) the Guarantor shall not make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by the Guarantor that rank pari passu with or junior to the Debentures and (iii) the Guarantor shall not make any guarantee payments with respect to the foregoing (other than pursuant to this Preferred Securities Guarantee). In addition, so long as any Preferred Securities remain outstanding, the Guarantor (i) will remain the sole direct or indirect owner of all of the outstanding Common Securities; provided that any permitted successor of the Guarantor under the Indenture may succeed to the Guarantor's ownership of the Common Securities and (ii) will not take any action which would cause the Issuer to cease to be treated as a grantor trust for United States federal income tax purposes except in connection with a distribution of Debentures as provided in the Declaration. SECTION 6.2 Ranking This Preferred Securities Guarantee will constitute an unsecured obligation of the Guarantor and will rank (i) subordinate and junior in right of payment to all other liabilities of the Guarantor, except those made pari passu or subordinate by their terms, (ii) pari passu with the most senior preferred or preference stock now or hereafter issued by the Guarantor and with any guarantee now or hereafter entered into by the Guarantor in respect of any preferred or preference stock of any Affiliate of the Guarantor, and (iii) senior to the Guarantor's common stock. 11 ARTICLE VII TERMINATION SECTION 7.1 Termination This Preferred Securities Guarantee shall terminate and be of no further force and effect upon (i) full payment of the Redemption Price of all Preferred Securities, (ii) upon the distribution of all of the Debentures to the Holders or (iii) upon full payment of the amounts payable in accordance with the Declaration upon liquidation of the Issuer. Notwithstanding the foregoing, this Preferred Securities Guarantee will continue to be effective or will be reinstated, as the case may be, if at any time any Holder must restore payment of any sums paid under the Preferred Securities or under this Preferred Securities Guarantee. ARTICLE VIII INDEMNIFICATION SECTION 8.1 Exculpation (a) No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Guarantor or any Covered Person for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith in accordance with this Preferred Securities Guarantee and in a manner that such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Preferred Securities Guarantee or by law, except that an Indemnified Person shall be liable for any such loss, damage or claim incurred by reason of such Indemnified Person's negligence or willful misconduct with respect to such acts or omissions. (b) An Indemnified Person shall be fully protected in relying in good faith upon the records of the Guarantor and upon such information, opinions, reports or statements presented to the Guarantor by any Person as to matters the Indemnified Person reasonably believes are within such other Person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Guarantor, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which Distributions to Holders might properly be paid. SECTION 8.2 Indemnification To the fullest extent permitted by applicable law, the Guarantor agrees to indemnify each Indemnified Person for, and to hold each Indemnified Person harmless against, any loss, liability or expense incurred by such Indemnified Person by reason of any act or omission performed or omitted by such Indemnified Person without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses (including reasonable legal fees and expenses) of defending itself against, or investigating, any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligation to indemnify as set forth in this Section 8.2 shall survive the termination of this Preferred Securities Guarantee. 12 ARTICLE IX MISCELLANEOUS SECTION 9.1 Successors and Assigns All guarantees and agreements contained in this Preferred Securities Guarantee shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor and shall inure to the benefit of the Holders of the Preferred Securities then outstanding. Except in connection with any merger or consolidation of the Guarantor with or into another entity or any sale, transfer or lease of the Guarantor's assets to another entity, each as permitted by the Indenture, the Guarantor may not assign its rights or delegate its obligations under this Preferred Securities Guarantee without the prior approval of the Holders of at least a Majority in liquidation amount of the Preferred Securities then outstanding. SECTION 9.2 Amendments Except with respect to any changes that do not adversely affect the rights of Holders (in which case no consent of Holders will be required), this Preferred Securities Guarantee may only be amended with the prior approval of the Holders of at least a Majority in liquidation amount of the Preferred Securities. The provisions of Section 12.2 of the Declaration with respect to meetings of Holders apply to the giving of such approval. SECTION 9.3 Notices All notices provided for in this Preferred Securities Guarantee shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied or mailed by registered or certified mail, as follows: (a) If given to the Preferred Guarantee Trustee, at the Preferred Guarantee Trustee's mailing address set forth below (or such other address as the Preferred Guarantee Trustee may give notice of to the Holders): The Bank of New York 101 Barclay Street, Floor 21W New York, NY 10286 Attention: Corporate Trust Trustee Administration (b) If given to the Guarantor, at the Guarantor's mailing address set forth below (or such other address as the Guarantor may give notice of to the Holders): Potomac Electric Power Company 1900 Pennsylvania Avenue, N.W. Washington, DC 20068 Attention: Treasurer (c) If given to any Holder, at the address set forth on the books and records of the Issuer. All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. 13 SECTION 9.4 Benefit This Preferred Securities Guarantee is solely for the benefit of the Holders and is not separately transferable from the Preferred Securities. SECTION 9.5 Governing Law THIS PREFERRED SECURITIES GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK AND ALL RIGHTS AND REMEDIES SHALL BE GOVERNED BY SUCH LAWS WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. SECTION 9.6 Genders The masculine, feminine and neuter genders used herein shall include the masculine, feminine and neuter genders. SECTION 9.7 Counterparts This Preferred Securities Guarantee may be executed in counterparts, each of which shall be an original, but such counterparts shall together constitute one and the same instrument. THIS PREFERRED SECURITIES GUARANTEE is executed as of the day and year first above written. Potomac Electric Power Company, as Guarantor By: ________________________________________ Name: Title: The Bank of New York, as Preferred Guarantee Trustee By: _______________________________________ Name: Title: 14 EX-5 7 OPINION OF COVINGTON & BURLING [LETTERHEAD OF COVINGTON & BURLING] Exhibit 5.1 May 7, 1998 Potomac Electric Power Company 1900 Pennsylvania Avenue, N.W. Washington, D.C. 20068 Ladies and Gentlemen: Reference is made to a Registration Statement on Form S-3 (File No. 333-51241) filed by Potomac Electric Power Company, a District of Columbia and Virginia corporation (the "Company"), and Potomac Electric Power Company Trust I, a Delaware business trust (the "Trust"), with the Securities and Exchange Commission (the "Commission") on April 28, 1998 (as amended by an Amendment No. 1 thereto ("Amendment No. 1") to be filed on the date hereof, the "Registration Statement"), for the registration under the Securities Act of 1933, as amended (the "Securities Act"), of preferred securities representing undivided beneficial interests in the assets of the Trust (the "Preferred Securities"). The terms of the Preferred Securities will be set forth in an Amended and Restated Declaration of Trust to be entered into among the Company and the trustees thereof (the "Declaration"), the form of which is to be filed as an exhibit to the Registration Statement in connection with Amendment No. 1. The Preferred Securities are to be sold by the Trust pursuant to a Purchase Agreement to be entered into among the Company, the Trust and the Underwriters named therein (the "Purchase Agreement"), the form of which is to be filed as an Exhibit to the Registration Statement in connection with Amendment No. 1. The proceeds from the sale of the Preferred Securities will be used by the Trust to purchase Junior Subordinated Deferrable Interest Debentures (the "Junior Subordinated Debentures"). The Junior Subordinated Debentures will be issued in accordance with the provisions of an indenture to be entered into between the Company and The Bank of New York, as trustee (the "Indenture"), as supplemented by a First Supplemental Indenture thereto, the forms of which are to be filed as exhibits to the Registration Statement in connection with Amendment No. 1. The Preferred Securities will be guaranteed by the Company in the manner and to the extent set forth in a Preferred Securities Guarantee Agreement to be entered into between the Company and The Bank of New York, as trustee (the "Preferred Securities Agreement"), the form of which is to be filed as an exhibit to the Registration Statement in connection with Amendment No. 1. The opinions set forth herein are being delivered by us in the capacity of counsel for the Company. We are not opining on any matters with respect to the Trust. In connection with rendering the opinions herein set forth, we have examined the following documents and records: (1) the Registration Statement; (2) the form of the Declaration to be filed in connection with Amendment No. 1; (3) the form of Purchase Agreement to be filed in connection with Amendment No. 1; (4) the forms of the Indenture and the Supplemental Indenture to be filed in connection with Amendment No. 1; (5) the form of Preferred Securities Agreement to be filed in connection with Amendment No. 1; and (6) certified extracts of the minutes of proceedings of the Board of Directors of the Company relating to the issuance of the Preferred Securities and the Junior Subordinated Debentures. As to matters of fact relevant to the opinions set forth herein, we have relied exclusively, without independent investigation or verification, on the documents referred to above. In our examinations, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, and the conformity to original documents of all documents submitted to us as copies. We also have assumed that each of the Declaration, the Purchase Agreement, the Indenture, the Supplemental Indenture and the Preferred Securities Agreement will be executed substantially in the form filed as an exhibit to the Registration Statement. Based on the foregoing, and subject to the qualifications stated herein, it is our opinion that: 1. When the Indenture and the Supplemental Indenture are approved by the Executive Committee of the Board of Directors of the Company (the "Executive Committee"), the Junior Subordinated Debentures will be duly and validly authorized by the Company and, when the Junior Subordinated Debentures are thereafter executed, authenticated, issued and delivered in the manner contemplated by the Indenture, the Supplemental Indenture and the Purchase Agreement, they will constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as such enforcement may be limited by (i) bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws or equitable principles relating to or limiting creditors' rights and remedies generally and (ii) the application of general principles of equity. 2. When the Preferred Securities Agreement is approved by the Executive Committee, it will be duly and validly authorized by the Company, and, when Preferred Securities Agreement thereafter is executed and delivered by the Company, it will constitute the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms except as enforcement may be limited by (i) bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws or equitable principles relating to or limiting creditors rights and remedies generally and (ii) the application of general principles of equity. The opinions expressed herein are rendered solely for your benefit in connection with the transactions described herein. These opinions may not be used or relied upon by any other person or for any other purpose, nor may this letter or any copies thereof be furnished to any third party, filed with any other governmental agency, or quoted, cited or otherwise referred to, without our prior written consent. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm in the Prospectus which is part of the Registration Statement. Sincerely, /s/ Covington & Burling Covington & Burling EX-5 8 OPINION OF SKADDEN, ARPS [Letterhead of Skadden, Arps, Slate, Meagher & Flom LLP] Delaware May 7, 1998 Potomac Electric Power Company Potomac Electric Power Company Trust I c/o Potomac Electric Power Company 1900 Pennsylvania Avenue, N.W. Washington, D.C. 20068 Re: Potomac Electric Power Company Potomac Electric Power Company Trust I; Registration Statement on Form S-3 Ladies and Gentlemen: We have acted as special Delaware counsel to Potomac Electric Power Company Trust I ("PEPCO Trust"), a statutory business trust formed under the laws of the State of Delaware, in connection with the preparation of a Registration Statement on Form S-3 (Registration No. 33-51241) and an Amendment No. 1 thereto, filed by Potomac Electric Power Company, a District of Columbia and Virginia corporation (the "Company"), and PEPCO Trust with the Securities and Exchange Commission (the "Commis- sion") on April 28, 1998 and May 7, 1998, respectively, under the Securities Act of 1933, as amended (the "Act"), (such Registration Statement, as amended, being hereinafter referred to as the "Registration Statement") in connection with the public offering of preferred secu- rities (the "Trust Preferred Securities") of PEPCO Trust, and certain other securities. Potomac Electric Power Company Potomac Electric Power Company Trust I May , 1998 Page 2 The Trust Preferred Securities of PEPCO Trust are to be issued pursuant to the Amended and Restated Declaration of Trust of PEPCO Trust (the "Declaration"), such Declaration being among the Company, as sponsor, The Bank of New York (Delaware), as Delaware trustee (the "Delaware Trustee"), The Bank of New York, as institu- tional trustee (the "Institutional Trustee"), Dennis R. Wraase, Anthony J. Kamerick and Ellen Sheriff Rogers, as trustees (together, the "Regular Trustees"). This opinion is being delivered in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Act. Capitalized terms used but not otherwise defined herein have the meanings ascribed to them in the Registration Statement. In connection with this opinion, we have exam- ined originals or copies, certified or otherwise identi- fied to our satisfaction, of (i) the certificate of trust of PEPCO Trust (the "Certificate of Trust"), filed with the Secretary of State of the State of Delaware on April 24, 1998; (ii) the form of the Declaration of PEPCO Trust; (iii) the form of the Trust Preferred Securities of PEPCO Trust and (iv) the Registration Statement. We have also examined originals or copies, certified or otherwise identified to our satisfaction, of such other documents, certificates and records as we have deemed necessary or appropriate as a basis for the opinions set forth herein. In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all Potomac Electric Power Company Potomac Electric Power Company Trust I May , 1998 Page 3 signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photo- static copies and the authenticity of the originals of such copies. In making our examination of documents exe- cuted by parties other than PEPCO Trust, we have assumed that such parties had the power, corporate or other, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate or other, and execution and delivery by such parties of such documents and that such documents constitute valid and binding obligations of such parties. In addition, we have assumed that the Declaration of PEPCO Trust and the Trust Preferred Securities of PEPCO Trust, when executed, will be executed in substantially the forms reviewed by us. As to any facts material to the opinions expressed herein which were not independent- ly established or verified, we have relied upon oral or written statements and representations of officers, trustees and other representatives of the Company, PEPCO Trust and others. Members of our firm are admitted to the bar in the State of Delaware, and we do not express any opinion as to the laws of any jurisdiction other than the laws of the State of Delaware. Based on and subject to the foregoing and to the other qualifications and limitations set forth here- in, we are of the opinion that the Trust Preferred Secu- rities of PEPCO Trust, when the Declaration of PEPCO Trust is duly executed and delivered by the parties Potomac Electric Power Company Potomac Electric Power Company Trust I May , 1998 Page 4 thereto and the terms of the Trust Preferred Securities are established in accordance with the terms of the Declaration of PEPCO Trust, will be duly authorized for issuance and, when issued, executed and authenticated in accordance with the Declaration of PEPCO Trust and deliv- ered and paid for as contemplated by the Registration Statement, will be validly issued, fully paid and nonas- sessable, representing undivided beneficial interests in the assets of PEPCO Trust; and the holders of Trust Pre- ferred Securities will be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. We bring to your attention, however, that the holders of Trust Pre- ferred Securities of PEPCO Trust may be obligated, pursu- ant to the Declaration of PEPCO Trust, to (i) provide indemnity and/or security in connection with and pay taxes or governmental charges arising from transfers of Trust Preferred Securities and (ii) provide security and indemnity in connection with the requests of or direc- tions to the Institutional Trustee of PEPCO Trust to exercise its rights and powers under the Declaration of PEPCO Trust. This opinion is furnished to you solely for your benefit in connection with the filing of the Regis- tration Statement and, except as set forth below, is not to be used, circulated, quoted or otherwise referred to for any other purpose or relied upon by any other person for any purpose without our prior written consent. We hereby consent to the use of our name under the heading "Legal Matters" in the prospectus which forms a part of the Registration Statement. We also hereby consent to Potomac Electric Power Company Potomac Electric Power Company Trust I May , 1998 Page 5 the filing of this opinion with the Commission as an exhibit to the Registration Statement. In giving this consent, we do not thereby admit that we are within the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission promulgated thereunder. This opinion is ex- pressed as of the date hereof unless otherwise expressly stated, and we disclaim any undertaking to advise you of any subsequent changes in the facts stated or assumed herein or of any subsequent changes in applicable law. Very truly yours, /s/SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP Skadden, Arps, Slate, Meagher & Flom LLP EX-8 9 TAX OPINION OF COVINGTON & BURLING [LETTERHEAD OF COVINGTON & BURLING] Exhibit No. 8 May 7, 1998 Potomac Electric Power Company 1900 Pennsylvania Avenue, N.W. Washington, D.C. 20068 Ladies and Gentlemen: We have acted as special tax counsel to Potomac Electric Power Company, a District of Columbia and Virginia corporation (the "Company"), and to Potomac Electric Power Company Trust I, a Delaware business trust (the "Trust"), in connection with a Registration Statement on Form S-3 (File No. 333-51241) filed by the Company and the Trust with the Securities and Exchange Commission (the "Commission") on April 28, 1998 (as amended by an Amendment No. 1 thereto to be filed on the date hereof, the "Registration Statement"), for the registration under the Securities Act of 1933, as amended (the "Securities Act"), of preferred securities representing undivided beneficial interests in the assets of the Trust (the "Preferred Securities"). We hereby confirm that, although the discussion set forth under the heading "UNITED STATES FEDERAL INCOME TAXATION" in the Prospectus Supplement filed as part of Amendment No. 1 to the Registration Statement (the "Supplemental Prospectus") does not purport to discuss all possible United States federal income tax consequences of the purchase, ownership and disposition of Preferred Securities, in our opinion, such discussion constitutes, in all material respects, a fair and accurate summary of the United States federal income tax consequences of the purchase, ownership and disposition of Preferred Securities, based on current law. It is possible that contrary positions may be taken by the Internal Revenue Service and that a court may agree with such contrary positions. This opinion is expressed as of the date hereof and applies only to the disclosure under the heading "UNITED STATES FEDERAL INCOME TAXATION" set forth in the Prospectus Supplement. We disclaim any undertaking to advise you of any subsequent changes of the facts stated or assumed herein or any subsequent changes in applicable law. This opinion is furnished to you solely for your benefit in connection with the filing of the Registration Statement and is not to be used or relied upon by any other Potomac Electric Power Company May 7, 1998 Page 2 person or for any other purpose, nor may this letter or any copies thereof be furnished to any third party, filed with any other governmental agency, or quoted, cited or otherwise referred to, without our prior written consent. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm in the Supplemental Prospectus which is a part of the Registration Statement. Sincerely, /s/ Covington & Burling Covington & Burling EX-12 10 COMPUTATION OF RATIOS Exhibit 12 Computation of Ratios - ---------- --------------------- The computations of the coverage of fixed charges, before income taxes, and the coverage of combined fixed charges and preferred dividends for each of the years 1997 through 1993 on the basis of parent company operations only, are as follows.
For The Year Ended December 31, --------------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- (Thousands of Dollars) Net income $164,749 $220,066 $218,788 $208,074 $216,478 Taxes based on income 97,487 135,011 129,439 116,648 107,223 --------- --------- --------- --------- --------- Income before taxes 262,236 355,077 348,227 324,722 323,701 --------- --------- --------- --------- --------- Fixed charges: Interest charges 146,703 146,939 146,558 139,210 141,393 Interest factor in rentals 23,616 23,560 23,431 6,300 5,859 --------- --------- --------- --------- --------- Total fixed charges 170,319 170,499 169,989 145,510 147,252 --------- --------- --------- --------- --------- Income before income taxes and fixed charges $432,555 $525,576 $518,216 $470,232 $470,953 ========= ========= ========= ========= ========= Coverage of fixed charges 2.54 3.08 3.05 3.23 3.20 ==== ==== ==== ==== ==== Preferred dividend requirements $16,579 $16,604 $16,851 $16,437 $16,255 --------- --------- --------- --------- --------- Ratio of pre-tax income to net income 1.59 1.61 1.59 1.56 1.50 --------- --------- --------- --------- --------- Preferred dividend factor $26,361 $26,732 $26,793 $25,642 $24,383 --------- --------- --------- --------- --------- Total fixed charges and preferred dividends $196,680 $197,231 $196,782 $171,152 $171,635 ========= ========= ========= ========= ========= Coverage of combined fixed charges and preferred dividends 2.20 2.66 2.63 2.75 2.74 ==== ==== ==== ==== ====
Exhibit 12 Computation of Ratios - ---------- --------------------- The computations of the coverage of fixed charges, before income taxes, and the coverage of combined fixed charges and preferred dividends for each of the years 1997 through 1993 on a fully consolidated basis are as follows.
For The Year Ended December 31, --------------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- (Thousands of Dollars) Net income $181,830 $236,960 $94,391 $227,162 $241,579 Taxes based on income 65,669 80,386 43,731 93,953 62,145 --------- --------- --------- --------- --------- Income before taxes 247,499 317,346 138,122 321,115 303,724 --------- --------- --------- --------- --------- Fixed charges: Interest charges 216,156 231,029 238,724 224,514 221,312 Interest factor in rentals 23,687 23,943 26,685 9,938 9,257 --------- --------- --------- --------- --------- Total fixed charges 239,843 254,972 265,409 234,452 230,569 --------- --------- --------- --------- --------- Nonutility subsidiary capitalized interest (493) (649) (529) (521) (2,059) --------- --------- --------- --------- --------- Income before income taxes and fixed charges $486,849 $571,669 $403,002 $555,046 $532,234 ========= ========= ========= ========= ========= Coverage of fixed charges 2.03 2.24 1.52 2.37 2.31 ==== ==== ==== ==== ==== Preferred dividend requirements $16,579 $16,604 $16,851 $16,437 $16,255 --------- --------- --------- --------- --------- Ratio of pre-tax income to net income 1.36 1.34 1.46 1.41 1.26 --------- --------- --------- --------- --------- Preferred dividend factor $22,547 $22,249 $24,602 $23,176 $20,481 --------- --------- --------- --------- --------- Total fixed charges and preferred dividends $262,390 $277,221 $290,011 $257,628 $251,050 ========= ========= ========= ========= ========= Coverage of combined fixed charges and preferred dividends 1.86 2.06 1.39 2.15 2.12 ==== ==== ==== ==== ====
EX-23 11 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Prospectus constituting part of the combined Registration Statement on Form S-3 (No. 333-51241) of our report dated January 16, 1998, which appears on page 32 of the 1997 Annual Report to Shareholders of Potomac Electric Power Company, which is incorporated by reference in Potomac Electric Power Company's Annual Report on Form 10-K for the year ended December 31, 1997. We also consent to the incorporation by reference of our report on the Consolidated Financial Statement Schedule, which appears on page 49 of such Annual Report on Form 10-K. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ Price Waterhouse LLP Washington, D.C. May 7, 1998 EX-25 12 FORM T-1 ================================================================= FORM T-1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) |__| ___________________ THE BANK OF NEW YORK (Exact name of trustee as specified in its charter) New York 13-5160382 (State of incorporation (I.R.S. employer if not a U.S. national bank) identification no.) 48 Wall Street, New York, N.Y. 10286 (Address of principal executive offices) (Zip code) ___________________ POTOMAC ELECTRIC POWER COMPANY (Exact name of obligor as specified in its charter) District of Columbia and Virginia 53-0127880 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 1900 Pennsylvania Avenue, N.W. Washington, D.C. 20068 (Address of principal executive offices) (Zip code) ______________________ Junior Subordinated Debentures (Title of the indenture securities) ================================================================= 1. General information. Furnish the following information as to the Trustee: (a) Name and address of each examining or supervising authority to which it is subject. - ----------------------------------------------------------------- Name Address - ----------------------------------------------------------------- Superintendent of Banks of the 2 Rector Street, New York, State of New York N.Y. 10006, and Albany, N.Y. 12203 Federal Reserve Bank of New York 33 Liberty Plaza, New York, N.Y. 10045 Federal Deposit Insurance Corporation Washington, D.C. 20429 New York Clearing House Association New York, New York 10005 (b) Whether it is authorized to exercise corporate trust powers. Yes. 2. Affiliations with Obligor. If the obligor is an affiliate of the trustee, describe each such affiliation. None. 16. List of Exhibits. Exhibits identified in parentheses below, on file with the Commission, are incorporated herein by reference as an exhibit hereto, pursuant to Rule 7a-29 under the Trust Indenture Act of 1939 (the "Act") and 17 C.F.R. 229.10(d). 1. A copy of the Organization Certificate of The Bank of New York (formerly Irving Trust Company) as now in effect, which contains the authority to commence business and a grant of powers to exercise corporate trust powers. (Exhibit 1 to Amendment No. 1 to Form T-1 filed with Registration Statement No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with Registration Statement No. 33-21672 and Exhibit 1 to Form T-1 filed with Registration Statement No. 33-29637.) 4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form T-1 filed with Registration Statement No. 33-31019.) -2- 6. The consent of the Trustee required by Section 321(b) of the Act. (Exhibit 6 to Form T-1 filed with Registration Statement No. 33-44051.) 7. A copy of the latest report of condition of the Trustee published pursuant to law or to the requirements of its supervising or examining authority. -3- SIGNATURE Pursuant to the requirements of the Act, the Trustee, The Bank of New York, a corporation organized and existing under the laws of the State of New York, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in The City of New York, and State of New York, on the 24th day of April, 1998. THE BANK OF NEW YORK By: /S/WALTER N. GITLIN Name: WALTER N. GITLIN Title: VICE PRESIDENT EXHIBIT 7 __________________________________________________________________ Consolidated Report of Condition of THE BANK OF NEW YORK of 48 Wall Street, New York, N.Y. 10286 And Foreign and Domestic Subsidiaries, a member of the Federal Reserve System, at the close of business December 31, 1997, published in accordance with a call made by the Federal Reserve Bank of this District pursuant to the provisions of the Federal Reserve Act. Dollar Amounts ASSETS in Thousands Cash and balances due from depos- itory institutions: Noninterest-bearing balances and currency and coin ................... $ 5,742,986 Interest-bearing balances ............ 1,342,769 Securities: Held-to-maturity securities .......... 1,099,736 Available-for-sale securities ........ 3,882,686 Federal funds sold and Securities pur- chased under agreements to resell..... 2,568,530 Loans and lease financing receivables: Loans and leases, net of unearned income ............................. 35,019,608 LESS: Allowance for loan and lease losses ....................... 627,350 LESS: Allocated transfer risk reserve............................. 0 Loans and leases, net of unearned income, allowance, and reserve 34,392,258 Assets held in trading accounts ........ 2,521,451 Premises and fixed assets (including capitalized leases) .................. 659,209 Other real estate owned ................ 11,992 Investments in unconsolidated subsidiaries and associated companies ............................ 226,263 Customers' liability to this bank on acceptances outstanding .............. 1,187,449 Intangible assets ...................... 781,684 Other assets ........................... 1,736,574 ----------- Total assets ........................... $56,153,587 =========== LIABILITIES Deposits: In domestic offices .................. $27,031,362 Noninterest-bearing .................. 11,899,507 Interest-bearing ..................... 15,131,855 In foreign offices, Edge and Agreement subsidiaries, and IBFs ..... 13,794,449 Noninterest-bearing .................. 590,999 Interest-bearing ..................... 13,203,450 Federal funds purchased and Securities sold under agreements to repurchase. 2,338,881 Demand notes issued to the U.S. Treasury ............................. 173,851 Trading liabilities .................... 1,695,216 Other borrowed money: With remaining maturity of one year or less ............................ 1,905,330 With remaining maturity of more than one year through three years........ 0 With remaining maturity of more than three years ........................ 25,664 Bank's liability on acceptances exe- cuted and outstanding ................ 1,195,923 Subordinated notes and debentures ...... 1,012,940 Other liabilities ...................... 2,018,960 ----------- Total liabilities ...................... 51,192,576 ----------- EQUITY CAPITAL Common stock ........................... 1,135,284 Surplus ................................ 731,319 Undivided profits and capital reserves ............................. 3,093,726 Net unrealized holding gains (losses) on available-for-sale securities ........................... 36,866 Cumulative foreign currency transla- tion adjustments ..................... ( 36,184) ------------ Total equity capital ................... 4,961,011 ----------- Total liabilities and equity capital .............................. $56,153,587 =========== I, Robert E. Keilman, Senior Vice President and Comptroller of the above-named bank do hereby declare that this Report of Condition has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true to the best of my knowledge and belief. Robert E. Keilman We, the undersigned directors, attest to the correctness of this Report of Condition and declare that it has been examined by us and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true and correct. ) Thomas A. Renyi ) Alan R. Griffith ) Directors J. Carter Bacot ) ) EX-25 13 FORM T-1 ================================================================= FORM T-1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) |__| ---------------------- THE BANK OF NEW YORK (Exact name of trustee as specified in its charter) New York 13-5160382 (State of incorporation (I.R.S. employer if not a U.S. national bank) identification no.) 48 Wall Street, New York, N.Y. 10286 (Address of principal executive offices) (Zip code) ---------------------- POTOMAC ELECTRIC POWER COMPANY TRUST I (Exact name of obligor as specified in its charter) Delaware Not Applicable (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 1900 Pennsylvania Avenue, N.W. Washington, D.C. 20068 (Address of principal executive offices) (Zip code) ______________________ Preferred Securities (Title of the indenture securities) ================================================================= 1. General information. Furnish the following information as to the Trustee: (a) Name and address of each examining or supervising authority to which it is subject. - ----------------------------------------------------------------- Name Address - ----------------------------------------------------------------- Superintendent of Banks of the 2 Rector Street, New York, State of New York N.Y. 10006, and Albany, N.Y. 12203 Federal Reserve Bank of New York 33 Liberty Plaza, New York, N.Y. 10045 Federal Deposit Insurance Corporation Washington, D.C. 20429 New York Clearing House Association New York, New York 10005 (b) Whether it is authorized to exercise corporate trust powers. Yes. 2. Affiliations with Obligor. If the obligor is an affiliate of the trustee, describe each such affiliation. None. 16. List of Exhibits. Exhibits identified in parentheses below, on file with the Commission, are incorporated herein by reference as an exhibit hereto, pursuant to Rule 7a-29 under the Trust Indenture Act of 1939 (the "Act") and 17 C.F.R. 229.10(d). 1. A copy of the Organization Certificate of The Bank of New York (formerly Irving Trust Company) as now in effect, which contains the authority to commence business and a grant of powers to exercise corporate trust powers. (Exhibit 1 to Amendment No. 1 to Form T-1 filed with Registration Statement No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with Registration Statement No. 33-21672 and Exhibit 1 to Form T-1 filed with Registration Statement No. 33-29637.) 4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form T-1 filed with Registration Statement No. 33-31019.) -2- 6. The consent of the Trustee required by Section 321(b) of the Act. (Exhibit 6 to Form T-1 filed with Registration Statement No. 33-44051.) 7. A copy of the latest report of condition of the Trustee published pursuant to law or to the requirements of its supervising or examining authority. -3- SIGNATURE Pursuant to the requirements of the Act, the Trustee, The Bank of New York, a corporation organized and existing under the laws of the State of New York, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in The City of New York, and State of New York, on the 24th day of April, 1998. THE BANK OF NEW YORK By: /S/WALTER N. GITLIN Name: Walter N. Gitlin Title: Vice President EXHIBIT 7 __________________________________________________________________ Consolidated Report of Condition of THE BANK OF NEW YORK of 48 Wall Street, New York, N.Y. 10286 And Foreign and Domestic Subsidiaries, a member of the Federal Reserve System, at the close of business December 31, 1997, published in accordance with a call made by the Federal Reserve Bank of this District pursuant to the provisions of the Federal Reserve Act. Dollar Amounts ASSETS in Thousands Cash and balances due from depos- itory institutions: Noninterest-bearing balances and currency and coin ................... $ 5,742,986 Interest-bearing balances ............ 1,342,769 Securities: Held-to-maturity securities .......... 1,099,736 Available-for-sale securities ........ 3,882,686 Federal funds sold and Securities pur- chased under agreements to resell..... 2,568,530 Loans and lease financing receivables: Loans and leases, net of unearned income ............................. 35,019,608 LESS: Allowance for loan and lease losses ....................... 627,350 LESS: Allocated transfer risk reserve............................. 0 Loans and leases, net of unearned income, allowance, and reserve 34,392,258 Assets held in trading accounts ........ 2,521,451 Premises and fixed assets (including capitalized leases) .................. 659,209 Other real estate owned ................ 11,992 Investments in unconsolidated subsidiaries and associated companies ............................ 226,263 Customers' liability to this bank on acceptances outstanding .............. 1,187,449 Intangible assets ...................... 781,684 Other assets ........................... 1,736,574 ----------- Total assets ........................... $56,153,587 =========== LIABILITIES Deposits: In domestic offices .................. $27,031,362 Noninterest-bearing .................. 11,899,507 Interest-bearing ..................... 15,131,855 In foreign offices, Edge and Agreement subsidiaries, and IBFs ..... 13,794,449 Noninterest-bearing .................. 590,999 Interest-bearing ..................... 13,203,450 Federal funds purchased and Securities sold under agreements to repurchase. 2,338,881 Demand notes issued to the U.S. Treasury ............................. 173,851 Trading liabilities .................... 1,695,216 Other borrowed money: With remaining maturity of one year or less ............................ 1,905,330 With remaining maturity of more than one year through three years........ 0 With remaining maturity of more than three years ........................ 25,664 Bank's liability on acceptances exe- cuted and outstanding ................ 1,195,923 Subordinated notes and debentures ...... 1,012,940 Other liabilities ...................... 2,018,960 ----------- Total liabilities ...................... 51,192,576 ----------- EQUITY CAPITAL Common stock ........................... 1,135,284 Surplus ................................ 731,319 Undivided profits and capital reserves ............................. 3,093,726 Net unrealized holding gains (losses) on available-for-sale securities ........................... 36,866 Cumulative foreign currency transla- tion adjustments ..................... ( 36,184) ------------ Total equity capital ................... 4,961,011 ----------- Total liabilities and equity capital .............................. $56,153,587 =========== I, Robert E. Keilman, Senior Vice President and Comptroller of the above-named bank do hereby declare that this Report of Condition has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true to the best of my knowledge and belief. Robert E. Keilman We, the undersigned directors, attest to the correctness of this Report of Condition and declare that it has been examined by us and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true and correct. ) Thomas A. Renyi ) Alan R. Griffith ) Directors J. Carter Bacot ) ) EX-25 14 FORM T-1 ================================================================= FORM T-1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) |__| ---------------- THE BANK OF NEW YORK (Exact name of trustee as specified in its charter) New York 13-5160382 (State of incorporation (I.R.S. employer if not a U.S. national bank) identification no.) 48 Wall Street, New York, N.Y. 10286 (Address of principal executive offices) (Zip code) ---------------- POTOMAC ELECTRIC POWER COMPANY (Exact name of obligor as specified in its charter) District of Columbia and Virginia 53-0127880 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 1900 Pennsylvania Avenue, N.W. Washington, D.C. 20068 (Address of principal executive offices) (Zip code) ______________________ Guarantee of Preferred Securities of Potomac Electric Power Company Trust I (Title of the indenture securities) ================================================================= 1. General information. Furnish the following information as to the Trustee: (a) Name and address of each examining or supervising authority to which it is subject. - ----------------------------------------------------------------- Name Address - ----------------------------------------------------------------- Superintendent of Banks of the 2 Rector Street, New York, State of New York N.Y. 10006, and Albany, N.Y. 12203 Federal Reserve Bank of New York 33 Liberty Plaza, New York, N.Y. 10045 Federal Deposit Insurance Corporation Washington, D.C. 20429 New York Clearing House Association New York, New York 10005 (b) Whether it is authorized to exercise corporate trust powers. Yes. 2. Affiliations with Obligor. If the obligor is an affiliate of the trustee, describe each such affiliation. None. 16. List of Exhibits. Exhibits identified in parentheses below, on file with the Commission, are incorporated herein by reference as an exhibit hereto, pursuant to Rule 7a-29 under the Trust Indenture Act of 1939 (the "Act") and 17 C.F.R. 229.10(d). 1. A copy of the Organization Certificate of The Bank of New York (formerly Irving Trust Company) as now in effect, which contains the authority to commence business and a grant of powers to exercise corporate trust powers. (Exhibit 1 to Amendment No. 1 to Form T-1 filed with Registration Statement No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with Registration Statement No. 33-21672 and Exhibit 1 to Form T-1 filed with Registration Statement No. 33-29637.) 4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form T-1 filed with Registration Statement No. 33-31019.) -2- 6. The consent of the Trustee required by Section 321(b) of the Act. (Exhibit 6 to Form T-1 filed with Registration Statement No. 33-44051.) 7. A copy of the latest report of condition of the Trustee published pursuant to law or to the requirements of its supervising or examining authority. -3- SIGNATURE Pursuant to the requirements of the Act, the Trustee, The Bank of New York, a corporation organized and existing under the laws of the State of New York, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in The City of New York, and State of New York, on the 24th day of April, 1998. THE BANK OF NEW YORK By: /S/WALTER N. GITLIN Name: WALTER N. GITLIN Title: VICE PRESIDENT EXHIBIT 7 __________________________________________________________________ Consolidated Report of Condition of THE BANK OF NEW YORK of 48 Wall Street, New York, N.Y. 10286 And Foreign and Domestic Subsidiaries, a member of the Federal Reserve System, at the close of business December 31, 1997, published in accordance with a call made by the Federal Reserve Bank of this District pursuant to the provisions of the Federal Reserve Act. Dollar Amounts ASSETS in Thousands Cash and balances due from depos- itory institutions: Noninterest-bearing balances and currency and coin ................... $ 5,742,986 Interest-bearing balances ............ 1,342,769 Securities: Held-to-maturity securities .......... 1,099,736 Available-for-sale securities ........ 3,882,686 Federal funds sold and Securities pur- chased under agreements to resell..... 2,568,530 Loans and lease financing receivables: Loans and leases, net of unearned income ............................. 35,019,608 LESS: Allowance for loan and lease losses ....................... 627,350 LESS: Allocated transfer risk reserve............................. 0 Loans and leases, net of unearned income, allowance, and reserve 34,392,258 Assets held in trading accounts ........ 2,521,451 Premises and fixed assets (including capitalized leases) .................. 659,209 Other real estate owned ................ 11,992 Investments in unconsolidated subsidiaries and associated companies ............................ 226,263 Customers' liability to this bank on acceptances outstanding .............. 1,187,449 Intangible assets ...................... 781,684 Other assets ........................... 1,736,574 ----------- Total assets ........................... $56,153,587 =========== LIABILITIES Deposits: In domestic offices .................. $27,031,362 Noninterest-bearing .................. 11,899,507 Interest-bearing ..................... 15,131,855 In foreign offices, Edge and Agreement subsidiaries, and IBFs ..... 13,794,449 Noninterest-bearing .................. 590,999 Interest-bearing ..................... 13,203,450 Federal funds purchased and Securities sold under agreements to repurchase. 2,338,881 Demand notes issued to the U.S. Treasury ............................. 173,851 Trading liabilities .................... 1,695,216 Other borrowed money: With remaining maturity of one year or less ............................ 1,905,330 With remaining maturity of more than one year through three years........ 0 With remaining maturity of more than three years ........................ 25,664 Bank's liability on acceptances exe- cuted and outstanding ................ 1,195,923 Subordinated notes and debentures ...... 1,012,940 Other liabilities ...................... 2,018,960 ----------- Total liabilities ...................... 51,192,576 ----------- EQUITY CAPITAL Common stock ........................... 1,135,284 Surplus ................................ 731,319 Undivided profits and capital reserves ............................. 3,093,726 Net unrealized holding gains (losses) on available-for-sale securities ........................... 36,866 Cumulative foreign currency transla- tion adjustments ..................... ( 36,184) ------------ Total equity capital ................... 4,961,011 ----------- Total liabilities and equity capital .............................. $56,153,587 =========== I, Robert E. Keilman, Senior Vice President and Comptroller of the above-named bank do hereby declare that this Report of Condition has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true to the best of my knowledge and belief. Robert E. Keilman We, the undersigned directors, attest to the correctness of this Report of Condition and declare that it has been examined by us and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true and correct. ) Thomas A. Renyi ) Alan R. Griffith ) Directors J. Carter Bacot ) ) -----END PRIVACY-ENHANCED MESSAGE-----