-----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, ExyxzjQ5IKRfh4O+2SC2sqT1fiYogtfQU8dDqON7H5arUoKMhjbRF5upAMXzvE8D wmSRKvbLo8bXfU3RMbArKg== 0000008192-95-000058.txt : 19951121 0000008192-95-000058.hdr.sgml : 19951121 ACCESSION NUMBER: 0000008192-95-000058 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19951116 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATLANTIC CITY ELECTRIC CO CENTRAL INDEX KEY: 0000008192 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 210398280 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03559 FILM NUMBER: 95594369 BUSINESS ADDRESS: STREET 1: 6801 BLACK HORSE PIKE CITY: PLEASANTVILLE STATE: NJ ZIP: 08232 BUSINESS PHONE: 6096454100 MAIL ADDRESS: STREET 1: PO BOX 1264 CITY: PLEASANTVILLE STATE: NJ ZIP: 08232 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATLANTIC ENERGY INC CENTRAL INDEX KEY: 0000806393 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 222871471 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09760 FILM NUMBER: 95594370 BUSINESS ADDRESS: STREET 1: 6801 BLACK HORSE PIKE CITY: PLEASANTVILLE STATE: NJ ZIP: 08232 BUSINESS PHONE: 6096454500 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Registrant; State of I.R.S.Employer Commission Incorporation; Address; Identification File No and Telephone Number Number 1-9760 ATLANTIC ENERGY, INC. 22-2871471 (a New Jersey Corporation) 6801 BLACK HORSE PIKE, PLEASANTVILLE, NEW JERSEY 08232 609-645-4500 1-3559 ATLANTIC CITY ELECTRIC COMPANY 21-0398280 (a New Jersey Corporation) 6801 BLACK HORSE PIKE, P.O Box 1264 PLEASANTVILLE, NEW JERSEY 08232 609-645-4100 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock, No Par Value New York Stock Exchange of Atlantic Energy, Inc. Philadelphia Stock Exchange Pacific Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10K. X Estimated aggregate market value of the voting stock of Atlantic Energy, Inc. held by non-affiliates at March 6, 1995, was $976,552,108.88 based on a closing price of $18.375 per share for the 53,145,693 outstanding shares at such date. Atlantic Energy, Inc. owns all of the 18,320,937 outstanding shares of Common Stock of Atlantic City Electric Company. Documents Incorporated by Reference: Certain sections of the Notice of Annual Meeting of Shareholders and Proxy Statement in connection with the Annual Meeting of Shareholders, to be held April 26, 1995, have been incorporated by reference to provide information required by the following parts of this report: Part III-Item 10, Directors and Executive Officers of the Registrant; Item 11, Executive Compensation; Item 12, Security Ownership of Certain Beneficial Owners and Management; Item 13, Certain Relationships and Related Transactions. This combined Form 10-K is filed separately by Atlantic Energy, Inc. and Atlantic City Electric Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Atlantic City Electric Company makes no representation as to information relating to Atlantic Energy, Inc. PART I ITEM 1 BUSINESS 1 General 1 Atlantic City Electric Company 1 Competition 2 Nonutility Subsidiaries 4 Construction and Financing 6 Rates 8 Energy Requirements and Power Supply 9 Power Pool and Interconnection Agreements 10 Power Purchases and Sales 10 Capacity Planning 11 Nonutility Generation 13 Nuclear Generating Station Developments 13 Hope Creek Station 15 Salem Station 16 Peach Bottom 18 Fuel Supply 20 Oil 20 Coal 21 Gas 21 Nuclear Fuel 21 Regulation 25 Environmental Matters 27 General 27 Air 30 Water 32 Executive Officers 35 ITEM 2 PROPERTIES 37 ITEM 3 LEGAL PROCEEDINGS 37 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 37 PART II 37 ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 37 ITEM 6 SELECTED FINANCIAL DATA 39 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 40 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 52 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 82 PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 82 ITEM 11 EXECUTIVE COMPENSATION 82 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 82 ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 82 PART IV 82 ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 82 SIGNATURES 84 PART I ITEM 1 BUSINESS General Atlantic Energy, Inc. (the Company), the principal office of which is located at 6801 Black Horse Pike, Egg Harbor Township, New Jersey, (mailing address-6801 Black Horse Pike, Pleasantville, NJ 08232, telephone 609-645-4500) was organized under the laws of New Jersey in August 1986. The Company is a public utility holding company as defined in the Public Utility Holding Company Act of 1935 (the 1935 Act), and has claimed an exemption from substantially all of the provisions of the 1935 Act. The Company is the parent company of Atlantic City Electric Company (ACE) and several non-utility subsidiaries as follows: Atlantic Generation, Inc. (AGI), ATE Investment, Inc. (ATE), Atlantic Southern Properties, Inc. (ASP), Atlantic Energy Technology, Inc. (AET) and Atlantic Thermal Systems, Inc. (ATS). On January 1, 1995, the Company formed a new subsidiary, Atlantic Energy Enterprises, Inc. (AEE), to which ownership of the existing non-utility companies will be transferred. Principal cash inflows of the Company include proceeds from the issuance and sale of its Common Stock and the receipt of dividends from ACE. During 1994, the Company's Dividend Reinvestment and Stock Purchase Plan, before converting to an open market type plan, raised $14 million in new equity capital and issued 699,493 new shares of Common Stock. Proceeds from the issuance and sale of Common Stock by the Company are deposited into the general funds of the Company and are invested in ACE and other subsidiaries based upon their respective capital requirements. Principal cash outflows of the Company in 1994 included capital contributions and advances to its subsidiaries, the payment of dividends to common shareholders and the repurchase of outstanding common stock. Atlantic City Electric Company ACE, which has a wholly-owned subsidiary, Deepwater Operating Company, is the principal subsidiary of the Company and is engaged in the generation, transmission, distribution, and sale of electric energy in the southern part of New Jersey. ACE's principal office is located at 6801 Black Horse Pike, Egg Harbor Township, New Jersey (mailing address-6801 Black Horse Pike, P.O. Box 1264, Pleasantville, NJ 08232, telephone 609-645- 4100), and was organized under the laws of New Jersey on April 28, 1924, by merger and consolidation of several utility companies. ACE is subject to regulation by the New Jersey Board of Public Utilities (BPU) and the Federal Energy Regulatory Commission (FERC). At December 31, 1994, ACE had over 465,000 customers and employed 1,794 persons, of which 741 were affiliated with a national labor organization. With the exception of a municipal electric system providing electric service within the municipal boundaries of the City of Vineland, New Jersey, ACE supplies electric service to the southern one- third of the State of New Jersey. ACE is a utility whose peak load has occurred during the summer months, and approximately 30% of 1994 revenues were recorded during the quarter ended September 30, 1994. ACE has experienced, in varying degrees, some of the problems common to the electric utility industry in general, particularly an increasingly competitive energy marketplace. In addition, certain problems experienced by other utilities could have an indirect effect upon ACE's operations and financial condition, as a result of common regulatory requirements and the fact that general industry developments could affect ACE's cost of capital. Competition Between 1991 and 1994, sales to industrial customers declined as a result of cogeneration projects constructed pursuant to the Federal Public Utility Regulatory Policies Act (PURPA). Effective June 30, 1994, a contract with ACE's largest industrial customer was terminated. ACE's contract provided for the delivery of process steam, water and by-product electricity generated by back pressure turbines by a subsidiary of ACE. In 1993, ACE received $12 million in revenues for services and energy sales. In accordance with the termination agreement, ACE received $4.2 million in cash proceeds, certain emission allowances valued at $6.5 million and made provisions to retire certain equipment. The steam and electricity needs of this customer are now provided by a non-utility cogeneration facility. In addition, ACE has a contract for the purchase of 188 megawatts (MW) of capacity and energy from this facility. Currently, ACE is under contract with four independent power producers for the purchase of 572 MW of capacity and energy including the facility above. The effects of any such future displacement from cogeneration projects could be mitigated by natural growth in the service territory and additional marketing efforts by ACE to reduce the impact of the potential loss of kilowatt-hour sales and revenues. As a result of changes in Federal law designed to promote energy efficiency, reduce reliance on imported oil, and encourage competition in the generation of electricity, the electric utility business is undergoing significant changes. In October 1992, the Energy Policy Act (the Act) was enacted which includes, among other things, amendments to the Public Utility Holding Company Act of 1935 (PUHCA) and PURPA. The Act provides for increased competition between utility and non-utility electric generators, and provides for the creation of exempt wholesale generators which would be exempt from certain PUHCA regulation. The Act also permits FERC to authorize wholesale transmission access, or wheeling, provided that certain requirements are met. On October 26, 1994, FERC issued a pricing policy statement which became effective upon issue. The policy statement is designed to provide the framework for developing transmission pricing tariffs and contains several principles for evaluation of proposals. Proposals include those based on a standard methodology which seeks to recover costs based on traditional revenue requirements, or embedded cost, and those based on non-traditional approaches that deviate from the utility's embedded cost. Filing for an open access transmission tariff with the FERC may not be required until such time as a transmission service agreement needs to be filed for a specific customer. Another factor in determining the effects of competition on the electric utility business will be the extent to which New Jersey public utility regulation is modified to reflect the competitive energy marketplace. In that regard, the Draft New Jersey Energy Master Plan Phase I Report was issued in November 1994 and is designed to provide a framework for managing the transition of the State's natural gas and electric power industries from markets guided by regulation to those guided by market-based principles and competition. For further information see "Capacity Planning" herein. Legislation proposed for New Jersey would, if enacted, allow the BPU, upon petition from any electric or gas utility, to adopt a plan of regulation other than the traditional rate base/rate of return regulation. The legislation is designed to promote economic development and will include investment in, or expenditures for, innovative programs or technology for energy conservation, energy efficiency or environmental quality. The BPU, during the planning of the New Jersey Energy Master Plan, has indicated that a new bill is to be drafted and introduced for legislative approval. Other proposed regulatory changes have been suggested relating to matters at the state and Federal level which could have operating and financial implications for ACE. See "Competition", "Regulation" and "Environmental Controls" herein for additional information. Nonutility Subsidiaries Atlantic Generation, Inc. At December 31,1994, AGI's activities were represented by partnership interests in three cogeneration power projects. Project Fuel Capacity Commercial Ownership Location Type (MW) Operation Interest Binghamton, New York gas 50 1992 one-third Pedricktown, New Jersey gas 117 1992 one-half Vineland, New Jersey gas 46.5 1994 one-half Subsidiaries of Tristar Ventures Corporation (Tristar), a subsidiary of The Columbia Gas System, Inc. (Columbia) have partnership interests in both the Pedricktown and the Binghamton projects; subsidiaries of Stone & Webster Development Corporation have a one-third partnership interest in the Binghamton project. The Binghamton facility is hosted by a large paper manufacturer and supplies New York State Gas and Electric under a power purchase agreement. The Pedricktown facility is hosted by a tire manufacturer and supplies 106 MW of capacity and energy to ACE under a cogeneration agreement executed by ACE and approved by the BPU. An amendment to this agreement, which returns the project host to ACE as a retail customer has been completed, executed and is awaiting BPU approval. The Vineland facility is hosted by a food processor and provides 46.5 MW of capacity and energy to the City of Vineland under a twenty-five year contract. During 1994, AGI and its partner in Cogeneration Partners of America, TriStar, split the day-to-day responsibilities related to their cogeneration projects. AGI maintained management of plant operations while TriStar maintained responsibility for the financial, legal and fuel procurement matters. Columbia, Tristar's parent company, and its principal subsidiary, Columbia Gas Transmission Corporation, filed petitions seeking protection under Chapter 11 of the Federal Bankruptcy Code in July 1991. A reorganization plan from both companies is expected to be filed during the first half of 1995. AGI does not anticipate any changes in its common partnership arrangements as a result of the reorganization plan. At December 31, 1994, total equity in AGI amounted to $23.6 million, the funding of which has been through capital contributions and advances from the Company. ATE Investment Inc. ATE commenced activities in 1988. At December 31, 1994, ATE has invested $78.2 million in leveraged leases of three commercial aircraft and two containerships. ATE has issued $15 million principal amount of long term debt and has utilized a revolving credit and term loan agreement with a bank to finance a portion of its investment in leveraged leases and other investment activities. The remainder is provided by capital contributions from the Company. At December 31, 1994, total equity amounted to $9.4 million. Atlantic Southern Properties, Inc. ASP owns and manages a 280,000 square foot commercial property within the Company's service territory. A portion of the office space is presently under lease to ACE. At December 31, 1994, ASP's assets consisted primarily of this real estate site at a net book value of $10.3 million. Financing ASP's operations have been accomplished through capital contributions and advances from the Company, and loans from ATE. At December 31, 1994, equity totalled $3.2 million. Atlantic Energy Technology, Inc. AET's sole investment is a 100% ownership interest in a company that owns a patented technology and has proprietary knowledge relating to alternate energy technologies. Previous funding of this investment has been through capital contribution and loans from the parent company. AET has ceased operations and is currently concluding the affairs of its subsidiary. As of December 31, 1994, equity in AET totalled $1.3 million. Atlantic Thermal Systems, Inc. In May 1994, the Company formed a subsidiary, Atlantic Thermal Systems, Inc., to develop, own and operate thermal heating and cooling systems. ATS, and its wholly-owned subsidiary also formed in May 1994, has obtained funds for its project development through advances from the Company and through loan agreements with ATE. At December 31, 1994, advances from the Company amounted to $3.6 million and equity contributions by AEI amounted to $2.6 million. Atlantic Energy Enterprises, Inc. On January 1, 1995, the Company formed a new subsidiary, Atlantic Energy Enterprises, Inc., a holding company, to which ownership of the existing non-utility businesses were transferred. Under this organizational structure, AEE expects to pursue non-regulated business opportunities related to the core utility business with greater flexibility. AEE's business plan projects an investment of approximately $215 million over the next five years. The amount of capital invested by the Company in its non- utility subsidiaries will be affected, to a large degree, by the rate of development of the respective businesses, by the business opportunities which may exist and by the opportunities for external financings by such subsidiaries themselves. Construction and Financing ACE maintains a continuous construction program, principally for electric generation, transmission and distribution facilities. The construction program, including the estimates of construction expenditures, as well as the timing of construction additions, is under continuous review. ACE's construction expenditures will depend upon factors such as long term load growth, general economic conditions, the ability of ACE to raise the necessary capital, regulatory and environmental requirements, the availability of capacity and energy from utility and nonutility sources and the Company return on such investments. Reference is made to "Energy Requirements and Power Supply" herein for information with respect to ACE's estimates of future load growth and capacity plans. ACE's construction program and related expenditures reflect the anticipated effects of customer-owned generation, cogeneration and ACE's demand-side management programs. ACE's demand-side management programs are designed to reduce the rate of growth in electric system peak demand without restricting the continued economic development of ACE's service area. ACE anticipates that its demand-side management programs will encourage the efficient use, and shift the pattern, of energy consumption, resulting in a deferral of future construction. Although deferrals in construction timing may result in near-term expenditure reductions, changes in capacity plans and general inflationary price trends could increase ultimate construction costs. The table below presents ACE's estimated cash construction costs for utility plant for the years 1995 through 1997: (Millions of Dollars) 1995 1996 1997 Total Nuclear Generating $ 14 $ 12 $ 7 $ 33 Fossil Steam Generating 23 7 7 37 Transmission and Distribution 56 42 35 133 General Plant 19 17 15 51 Combustion Turbine 4 3 7 14 Total Cash $116 $ 81 $ 71 $268 Construction Costs ==== ==== ===== ==== On an interim basis, ACE finances that portion of its construction costs and other capital requirements in excess of its internally generated funds through the issuance of unsecured short term debt, consisting of bank loans and commercial paper. ACE undertakes permanent financing through the issuance of long term debt, preferred stock and/or capital contributions from the Company. Costs associated with ACE's share of nuclear fuel requirements for the jointly-owned Peach Bottom, Salem and Hope Creek generating stations have been financed by a non-affiliated company which generally recovers its investment costs as nuclear fuel is consumed for power generation. At December 31, 1994, ACE had available for use various bank lines of credit totaling $150 million, which are subject to continuing review and to termination by the banks involved. On December 31, 1994, ACE had short term borrowings of $8.6 million outstanding. Based on the above level of construction expenditures, ACE currently estimates that during the three-year period 1995-1997, it will issue, excluding amounts issued for refunding purposes, approximately $50 million in debt, including First Mortgage Bonds. ACE also undertakes to reduce its overall cost of funds through refundings of existing securities. During 1994, ACE refunded and retired over $41.56 million principal amount of its First Mortgage Bonds, plus premiums. Funds for such redemptions were obtained through the issuance and sale by ACE of $54.65 million of First Mortgage Bonds. Additional funds were used for construction purposes. Reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 6 and 7 of the Notes to Financial Statements, incorporated by reference herein as Exhibit 28(a), for information relating to ACE's financing activities for the 1992-1994 period and for maturities and sinking fund provisions during the period 1995-1997. ACE's debt securities are currently rated "A-/A3" by the major rating agencies, its preferred stock is rated "BBB+/Baa1" and its commercial paper is rated "A-2/P2." No assurances can be given that the ratings of ACE's securities will be maintained or continue at their present levels, or be withdrawn if such credit rating agency should, in its opinion, take such action. Downward revisions or changes in ratings of a company's securities could have an adverse effect on the market price of such securities and could increase a company's cost of capital. Rates ACE's rates for electric service at retail are subject to the approval of the BPU. For information concerning changes in base rates and the levelized energy clause (LEC) for the years 1992 through 1994 and certain other proceedings relating to rates, see "Purchased Power" herein and Notes 1, 3 and 8 of ACE's Notes to Financial Statements, incorporated by reference herein as Exhibit 28(a). A performance standard for ACE's five jointly-owned nuclear units was adopted in 1987 by the BPU, with certain aspects of the performance standards revised effective January 1, 1990. Under these standards, the target capacity factor for such units remained at 70%, but are measured based upon the maximum dependable capacity of the units. The zone of reasonable performance (deadband) is between 65% and 75%. Penalties or rewards are based on graduated percentages of estimated costs of replacement power. Such amount is calculated monthly, utilizing the average PJM monthly billing rate as the cost basis for replacement power, to the boundaries of the deadband, with penalties calculated incrementally in steps. Any penalties incurred are not permitted to be recovered from customers and are required to be charged against income. Implementation of the nuclear unit performance standard is done through ACE's LEC for which rates are generally set annually. The 1994 composite capacity factor for ACE's jointly-owned nuclear units was 73.2%, which did not result in a penalty or reward under the nuclear performance standard. (See "Nuclear Generating Station Developments" herein.) In February 1995, ACE filed a petition with the BPU requesting approval of a pilot economic development power contract program for large commercial and industrial customers. This pilot program, if approved, would permit industrial and commercial customers to contract for electric service on a negotiated basis with ACE, and is designed to promote economic stability and job retention and creation. Contracts of between three and seven years would be available to those customers who maintain or increase load by at least 500 kilowatts (KW) or new customers with load of at least 2,000 KW. Contract pricing would be, at a minimum, the marginal cost of service and, at a maximum, the current tariff rate. The pilot would be limited to an aggregate of 125 megawatts, or approximately 7% of ACE's utility system peak. The timing of BPU approval on this proposal is not known at this time. Energy Requirements and Power Supply ACE's 1994 kilowatt-hour sales increased by approximately 1.3% over 1993 sales. Commercial sales grew by 2.6%, offset by a 2.9% decline in industrial sales. The 1994 utility system's peak demand of 1,834 MW occurred on July 9, 1994, below the record peak demand recorded on Saturday, July 10, 1993 at 1,962 MW. For the five-year period of 1995 through 1999, ACE's estimate of projected annual sales growth is 2.4% and peak load growth (adjusted for weather) is 2.0%. These include the estimated effects of load-reducing cogeneration and demand-side management programs. ACE has generally been able to provide for the growth of energy requirements through the construction of additional generating capacity, joint ownership in larger units and through capacity purchases from other utilities. The net summer installed capacity, in KW, of ACE at December 31, 1994, consisted of the following: Year(s) Net Station and Primary Unit(s) Capability Location Fuels Installed (KW) Deepwater Salem Co., N.J. Oil/Coal/Gas 1930/ 54,000 1954-1958 166,000 B.L. England Cape May Co., N.J. Coal/Oil 1962-1964/ 289,000 1974 155,000 Keystone Indiana Co., PA. Coal 1967-1968 42,000 (1) Conemaugh Indiana Co., PA. Coal 1970-1971 65,000 (1) Peach Bottom York Co., PA. Nuclear 1974 157,000 (1) Salem Salem Co., N.J. Nuclear 1977-1981 164,000 (1) Hope Creek Salem Co., N.J. Nuclear 1987 52,000 (1) Combustion Turbine Units Oil/Gas 1967-1991 524,000 (various locations) Diesel Units Oil Total Generating Capability 1961-1970 8,700 Firm Capacity Purchases and Sales-Net 651,000 (2) Total Capability 2,327,700 ========== Notes (1) ACE's share of jointly-owned stations. See Note 5 of ACE's Notes to Financial Statements, incorporated by reference herein as Exhibit 28(a). (2) 125,000 KW from thirteen coal-fired units of Pennsylvania Power & Light Company, 572,000 KW from four nonutility suppliers, and the sale of 46,000 KW to another electric utility. Certain of ACE's units at the Deepwater and B. L. England Stations and certain combustion turbine units have the capability of using more than one primary fuel type. In such instances, the use of a particular fuel type depends upon relative cost, availability and applicable environmental regulations and requirements. Power Pool and Interconnection Agreements ACE is a member of PJM, an integrated power pool which coordinates the bulk power supply to eleven member utilities in Pennsylvania, New Jersey, Delaware, Maryland, Virginia and the District of Columbia, and is interconnected with other major utilities in the northeastern United States. As a member of PJM, ACE is required to plan for reserve capacity based on estimated aggregate PJM requirements allocated to member companies. ACE periodically files its capacity addition plans with PJM which are intended to meet forecast capacity and reserve obligations. PJM member companies make use of a planning year concept in reviewing capacity and reserve requirements. Each planning year commences on June 1 and ends on the succeeding May 31. PJM provides for after-the-fact accounting by its members for differences between forecast and actual load experience. ACE is also a party to the Mid-Atlantic Area Coordination Agreement, which provides for coordinated planning of generation and transmission facilities by the companies included in PJM. Further coordination of short term power supply planning is provided by inter-area agreements with adjacent power pools. Power Purchases and Sales Pursuant to power purchase arrangements with Pennsylvania Power and Light Company (PPL), ACE is purchasing a total of 125 MW of capacity and energy from PPL coal-fired sources through September 2000. ACE also has agreements with certain other electric utilities for the purchase of short term generating capacity, energy and transmission capacity on an as-needed basis, which are utilized to the extent they are economic and available. ACE has agreed to sell 46 MW of firm capacity to Baltimore Gas & Electric Co. for the period June 1, 1994 through May 31, 1995 and 34 MW for the period June 1, 1995 through May 31, 1996. Capacity Planning New capacity built by a utility is subject to a Certificate of Need (CON) process. A CON is required prior to constructing a new generating facility in excess of 100 MW, or adding either 100 MW or 25% of capacity, whichever is smaller, to an existing site. In addition, New Jersey utilities are required to comply with a stipulation of settlement approved by the BPU in July 1988. The purpose of the stipulation of settlement is to procure future capacity and energy from qualified cogeneration and small power production facilities through an annual competitive bidding process, based on a long-term capacity plan. The amount to be bid upon is subject to BPU review and will be based upon such factors as a utility's five year projected capacity needs and its current generating capacity, service life extension plans for existing units, new construction, power purchases and commitments from other utilities and non-utility sources. In general, the procedures provide that each utility will procure non-utility power when needed through an evaluation system which ranks proposed projects on price and non-price factors. The price of such power is capped at the utility's avoided cost, which avoided cost is subject to BPU review, with a floor price of 25% of such avoided cost. Non-price factors in the evaluation process include project status and viability, fuel source and efficiency, project location and environmental effects. The stipulation of settlement was due to expire on September 15, 1993. The BPU ordered an extension of the current date filing requirements consistent with PURPA requirements through February 18, 1995. Similarly, the CON was set to expire on January 30, 1994. Since no processes were in place to replace the CON, the New Jersey Department of Environmental Protection (NJDEP) readopted the legislation and extended it through January 28, 1999. ACE, pursuant to the terms of the July 1988 stipulation, filed data with the BPU for the fifth procurement period in September 1993, indicating that it does not require additional nonutility capacity for the 1994-1998 period. Additional capacity is not required for the l999 planning year. In 1993, an Advisory Council on Electricity Planning and Procurement was formed under BPU Commissioner Armenti to assess existing electric planning, resource procurement and regulatory review processes. Two working groups were formed to address the integrated resource planning (IRP) process and supply-side procurement issues, respectively. As a result of recommendations that came out of the Advisory Council discussions, two committees were formed at the state level for the development of an integrated resource planning process and a supply procurement process. The primary purpose of the integrated resource planning process will be to define the split between supply-side and demand-side resources, and the type of resource (base, intermediate, or peaking). Supply-side and demand-side resources will each have their own bidding procedure to fill that resource need. The supply procurement process will address the procedures for bidding and construction of future resources. In September 1994, the New Jersey Energy Master Plan Committee began discussions on an update of the 1991 State plan. The New Jersey Energy Master Plan will be developed in three phases: 1) a review of key policy goals and objectives, 2) implementation needs, and 3) an assessment of the findings. A completion date is targeted for year end 1995. Released in November 1994, the phase one draft report's key recommendations impacted New Jersey electric utilities. The recommendations include the adoption of flexible utility rates, a streamlining of the regulatory process and the revamping of tax policies on energy consumption. The streamlining of the regulatory process will build upon the groundwork already achieved in the IRP and competitive supply procurement and will include a repeal of the CON legislation. ACE's ability to meet its planned capacity obligations and its projected load growth will depend upon the continued availability of currently owned and purchased generating capability, on the availability of capacity from cogeneration and other power projects to be owned by others, on ACE's own planned capacity additions and on capacity purchases from sources yet to be determined. ACE's installed capacity, planned capacity additions, and capacity purchase arrangements for 1995-1997 are expected to be sufficient to supply its share of PJM reserve requirements during that period. Increases in PJM reserve requirements, less than anticipated benefits associated with conservation and load management efforts, and delays in the construction of facilities by ACE or others could further increase ACE's need for additional generating capacity. To the extent that such capacity provided by others is not available, ACE would be required to pursue other sources of capacity, and to accelerate or expand its construction program which, in certain instances, may require additional regulatory approvals and construction expenditures which could be substantial. On an operational basis, ACE expects to be able to continue to meet the demand for electricity on its system through operation of available equipment and by power purchases. However, if periods of unusual demand should coincide with forced outages of equipment, ACE could find it necessary at times to reduce or curtail load in order to safeguard the continued operation of its system. Nonutility Generation Additional sources of capacity for use by ACE are made available by non-utility sources, principally cogenerators. ACE currently has four, BPU-approved power purchase agreements for the purchase of capacity and energy from non-utility sources under the standard offer methodology developed and approved by the BPU in August 1987. Project Fuel MW Date of Location Type Provided Commercial Operation Chester, solid Pennsylvania waste 75 September 1991 Pedricktown, New Jersey gas 106 March 1992 Carney's Point, New Jersey coal 188 March 1994 Logan Township, New Jersey coal 203 September 1994 Total 572 The Logan Township facility was placed in commercial operation under a renegotiated agreement approved by the BPU in August 1993. The renegotiated agreement reduced ACE's cost for capacity and energy. An amendment to the agreement between ACE and the sponsors of the Pedricktown facility has been completed, executed and is awaiting BPU approval. The amendment restructures ACE's payment for capacity and energy reducing the energy component of the payment. The amendment also increases the available capacity of the facility from 106 MW to 116 MW and returns the project's thermal host to ACE as a retail customer. Renegotiation of a third contract is currently underway and is expected to be completed in the third quarter of 1995. Nuclear Generating Station Developments ACE is a co-owner of the Hope Creek and Salem Nuclear Generating Stations, to the extent of 5% and 7.41%, respectively. The Hope Creek Unit and Salem Units 1 and 2 are located adjacent to each other in Salem County, New Jersey and are operated by Public Service Electric & Gas Company (PS). ACE is also an owner of 7.51% of Peach Bottom Units 2 and 3, which are located in York County, Pennsylvania and are operated by PECO. See Note 5 of the Notes to Financial Statements of ACE filed as Exhibit 28(a) and incorporated by reference for additional information relating to the Company's investment in jointly-owned generating stations. In 1994, nuclear generation provided 23% of ACE's total energy requirements. The approximate capacity factors (based on maximum dependable capacity ratings) for ACE's jointly-owned units for 1993 and 1994 were as follows: Unit 1994 1993 Salem Unit 1 59.3% 60.5% Salem Unit 2 57.8% 57.2% Peach Bottom Unit 2 80.3% 83.4% Peach Bottom Unit 3 97.8% 69.6% Hope Creek 78.9% 97.7% ACE is collecting through rates amounts to fund its share of estimated future costs relating to the decommissioning of the five nuclear units in which it has joint ownership interests. Such estimated decommissioning costs are based on studies and forecasts including generic estimates provided by the NRC. Funding to cover the future costs of decommissioning each of the five nuclear units, as currently authorized by the BPU and provided for in rates, is $6.4 million annually. See Note 1 of ACE's Notes to Financial Statements filed as Exhibit 28(a) and incorporated by reference for additional information relating to nuclear decommissioning. ACE has been advised that the NRC has raised concerns that the Thermo-Lag 330 fire barrier systems used to protect cables and equipment at the Peach Bottom Station may not provide the necessary level of fire protection and has requested licensees to describe short and long term measures being taken to address this concern. ACE has been advised that PECO has informed the NRC that it has taken short term compensatory actions to address the inadequacies of the Thermo-Lag barriers installed at Peach Bottom and is participating in an industry-coordinated program to provide long term corrective solutions. By letter dated December 21, 1992, the NRC stated that PECO's interim actions were acceptable. By letters dated December 22, 1993 and December 20, 1994, the NRC requested additional information on the Company's long-term measures to address Thermo-Lag 330 fire barrier issues. PECO responded to the first two letters by providing details on its Thermo-Lag reduction program. A response to the third letter will be provided in March 1995. PECO's engineering re-analysis will be completed in 1995. This re-analysis will determine the extent of modifications that will be performed over the next several years at Peach Bottom in order to complete the long term measures to address the concern over Thermo-Lag use. ACE has been advised that in October 1990 General Electric Company (GE) reported that crack indications were discovered near the seam welds in the core shroud assembly in a GE boiling water reactor (BWR) located outside the United States. As a result, GE issued a letter requesting that the owners of GE BWR plants take interim corrective actions, including a review of fabrication records and visual examinations of accessible areas of the core shroud seam welds. Both Peach Bottom Units 2 and 3 and Hope Creek are affected by this issue and both PECO and PS are participating in the GE BWR Owners Group to evaluate this issue and develop long-term corrective action. PECO advised ACE that Peach Bottom Unit 2 was inspected in October 1994 during its last refueling outage and the inspection revealed a minimal amount of flaws. In a letter dated Novebmer 7, 1994, PECO submitted its findings to the NRC and provided justification for continued operation of Unit 2. PECO also advised ACE that Peach Bottom Unit 3 was examined in October 1993 during the last refueling outage and crack indications were identified in two locations. ACE was advised that on November 3, 1993, PECO presented its findings to the NRC and provided justification for continued operation of Unit 3 for another 2-year cycle with the crack indications. At the Hope Creek Unit, PS advised ACE that during the spring 1994 refueling outage, PS inspected the shroud of Hope Creek in accordance with GE's recommendations and found no cracks. PS reports that minimal impact to Hope Creek is expected due to the age and materials of the Hope Creek shroud and the historical maintenance of low conductivity water chemistry. As a result, Hope Creek has been placed in the lowest susceptibility category by the BWR Owners' Group. ACE cannot predict what action will be taken with regard to the Peach Bottom Units or what long-term corrective actions, if any, will be identified. The periodic review and evaluation of nuclear generating station licensees conducted by the NRC is known as the Systematic Assessment of Licensee Performance (SALP). Under the revised SALP process, ratings are assigned in four assessment areas, reduced from seven assessment areas: Operations, Maintenance, Engineering and Plant Support (the Plant Support area includes security, emergency preparedness, radiological controls, fire protection, chemistry and housekeeping). Ratings are assigned from "1" to "3", with "1" being the highest and "3" being the lowest. Hope Creek Station The NRC's most recent SALP report for Hope Creek for the period December 29, 1991 through June 19, 1993 assigned ratings of 1 in the areas of Plant Operations; Maintenance/Surveillance; Radiological Controls; Security; and Safety/Assessment/Quality Verification; a rating of 1-Declining, in the area of Emergency Preparedness and a rating of 2-Improving, in the functional category of Engineering/Technical Support. ACE has been advised by PS that as a result of an NRC inspection in July 1991 at Hope Creek, an enforcement conference was held with the NRC on September 9, 1991 to discuss, among other things, three potential violations relating to reports PS submitted to the NRC regarding the reliability of motor operated valves at Hope Creek. Two violations with no civil penalty were issued to PS on October 10, 1991. The third potential violation was investigated by the NRC's Office of Investigators (OI). By letter dated October 20, 1993, the NRC advised PS that OI concluded such reports were incomplete and contained inaccurate information. An enforcement conference to review this matter was held on December 20, 1993 at which time PS presented its position on the issues to demonstrate that the reports were complete and accurate and that no violation had occurred. ACE cannot predict what actions, if any, the NRC may take in this matter. PS has advised ACE that as a result of an internal allegation report, PS submitted a License Event Report to the NRC on October 14, 1994 which stated that in 1992, the Hope Creek control room was understaffed for approximately three minutes and a decision was made by those involved that the incident did not warrant initiation of NRC reporting documentation. A meeting with Region I NRC personnel was held on October 18, 1994 in which the NRC expressed a high degree of concern over the issue. The OI has since looked into the event, as well as an internal investigation by PS as to the validity of the allegation. The NRC's Senior Resident Inspector has indicated to PS that a Notice of Violation would likely be issued. A second meeting with the NRC was held on February 3, 1995, with resolution of this issue pending completion of the NRC's investigation. ACE cannot predict what other action, if any, the NRC may take in this matter. Salem Station ACE was advised on January 3, 1995, the NRC issued its SALP report for the Salem Station for the period covering June 20, 1993 through November 5, 1994. The Salem SALP report was issued under the revised SALP process in which the number of assessment areas has been reduced from seven to four: Operations, Maintenance, Engineering and Plant Support (the Plant Support area includes security, emergency preparedness, radiological controls, fire protection, chemistry and housekeeping). The NRC assigned ratings of "1" in the functional area of Plant Support, "2" in the area of Engineering and "3" in the areas of Operations and Maintenance. The NRC noted an overall decline in performance, and evidenced particular concern with plant and operator challenges caused by repetitive equipment problems and personnel errors. The NRC has noted that although PS has initiated several comprehensive actions within the past year to improve plant performance, and some recent incremental gains have been made, these efforts have yet to noticeably change overall performance at Salem. ACE was advised that as a result of the NRC investigation following the reactor shutdown of Salem Unit 1 in April 1994, PS was fined $500,000 for violations relating to the failure to identify and correct significant conditions adverse to quality at the facility related to spurious steam flow signals and inoperable atmospheric relief valves, both of which, the NRC concluded, lead to unnecessary safety injections during the event; the failure to identify and correct significant conditions adverse to quality at the facility related to providing adequate training, guidance and procedures for the operators to cope with the event; and the failure by supervisors to exercise appropriate command and control of the operations staff and the reactor during the event. ACE has been advised by PS that PS's own assessments, as well as those by the NRC and the Institute of Nuclear Power Operations, indicate that additional efforts are required to further improve operating performance and that PS is committed to taking the necessary actions to address Salem's performance needs. It is anticipated that the NRC will maintain a close watch on Salem's performance and corrective actions related to the April reactor shutdown. No assurance can be given as to what, if any, further or additional actions may be taken or required by the NRC to improve Salem's performance. ACE has been informed by PS that PS is taking significant steps to address performance shortfalls at Salem. In 1993, a comprehensive performance assessment team identified areas of weakness through an in-depth investigation of common causes and events. Corrective action plans and effectiveness measures were then initiated in 1994 and are ongoing, along with additional measures designed to achieve a change in Salem's performance. Personnel performance is being addressed through improved supervisory training and increased monitoring of work activities, improved operational command and control and the reorganization and increased staffing at Salem. PS has established a goal of safe, uneventful operation to be achieved through enhanced self- assessment and corrective action processes, resolution of long- standing equipment problems, improved independent oversight of plant operations and improved root-cause analysis of plant problems. In furtherance of these goals, PS has reorganized the operational structure of its Nuclear Department and recruited a new chief nuclear officer. In addition, PS's parent company, Public Service Enterprise Group, Incorporated (Enterprise), has strengthened oversight of nuclear plant operations by establishing a standing Nuclear Committee of its Board of Directors. ACE was advised that on February 6, 1995, Enterprise and PS received a request from the NRC for a meeting of its representatives with their respective Board of Directors to discuss the need for continued improvements in equipment reliability and staff performance. The meeting is scheduled for March 21, 1995. Neither ACE, nor PS, can predict what actions, if any, the NRC may take as a result of this meeting. ACE was advised in 1990 that the NJDEP issued a draft New Jersey Pollutant Discharge Elimination System (NJPDES) Permit to the Salem Station which required closed-cycle cooling. In response to the 1990 Draft Permit, PS submitted further written comments to the NJDEP regarding the ecological effects of station operations demonstrating that Salem was not having and would not have an adverse environmental impact and that closed-cycle cooling was an inappropriate solution. PS also developed and submitted a supplement to the permit renewal application setting forth an alternative approach that would protect aquatic life in the Delaware Estuary and provide other ecological benefits. PS proposed intake screen modifications to reduce fish loss, a study of sound deterrent systems to divert fish from the intake and a limit on intake flow. In addition, PS proposed conservation measures, including the restoration of up to 10,000 acres of degraded wetlands and the installation of fish ladders to allow fish to reach upstream spawning areas. Finally, PS proposed a comprehensive biological monitoring program to expand existing knowledge of the Delaware Estuary and to monitor station impacts. In June 1993, ACE was advised that the NJDEP issued Salem a revised draft permit which reconsidered the requirement for closed-cycle cooling and adopted the alternative measures proposed by PS with certain modifications. A final five-year permit was issued on July 20, 1994 with an effective date of September 1, 1994. The EPA, which has the authority to review the final permit issued by the NJDEP, completed its review and has not raised any objections. Certain environmental groups and other entities, including the State of Delaware, have filed requests for hearings with the NJDEP challenging the final permit. The NJDEP granted the hearing requests on certain of the issues and PS has been named as a respondent along with the NJDEP in these matters which are pending in the Office of Administrative Law of the State of New Jersey. ACE has been advised that PS is implementing the final permit. Additional permits from various agencies are required to be obtained to implement the permit. No assurances can be given as to receipt of any such additional permits. PS has advised ACE that it estimates that the cost of compliance with the final permit is approximately $100 million, of which ACE's share is 7.41% and is included in ACE's current forecast of construction expenditures. Peach Bottom Station On June 29, 1994, the NRC issued its SALP report for the Peach Bottom Station for the period covering November 1, 1992 through April 30, 1994. The NRC assigned ratings of "1" in the functional area of Operations, and "2" in the areas of Engineering, Plant Support and Maintenance. Overall, the NRC found continued improvement in performance during the period. The NRC stated that enhancement in problem identification and resolution, good control of refuelings and outages, and excellent oversight by plant management of day-to-day activities in a manner that ensured safer operation of the units contributed to the improvement. Despite the overall improvement, the NRC noted that some areas require continued management attention and that management needs to continue to encourage plant personnel at all levels to identify existing, and sometimes longstanding, problems so that priorities can be established and effective corrective actions implemented. The NRC also noted instances of personnel inattention to detail and failure to follow procedures which warranted additional management attention. ACE has been advised that PECO has taken and is taking actions to address the weaknesses discussed in the SALP Report. ACE has been advised by PECO that in May 1992, PECO filed a request with the NRC to amend its Facility Operating License for Peach Bottom Units 2 and 3 to extend the expiration dates to 40 years from the date of issuance. The current operating licenses expire 40 years from the issuance of the construction permits, thereby allowing for an effective operating period of 34 years six months and 33 years seven months for Peach Bottom Units 2 and 3, respectively. Operating license extensions to the years 2013 and 2014 for Units 2 and 3, respectively, would result from the extension. ACE has been advised that by letter dated March 28, 1994, the NRC approved PECO's request to extend the license expiration dates. ACE has been advised by letter dated October 18, 1994 the NRC approved PECO's request to rerate the authorized maximum reactor core power levels of each Peach Bottom units by 5% to 1,093 megawatts thermal. The amendment to the Peach Bottom Unit 2 facility operating license was effective upon the date of the NRC approval letter and the hardware changes required to rerate Unit 2 were implemented during the Fall 1994 refueling outage. After the initial start-up period, the unit has operated at the rerated conditions since its return to service on October 22, 1994. The amendment of the Peach Bottom Unit 3 facility operating license will be effective upon the implementation of associated hardware changes. The hardware changes required to rerate Peach Bottom Unit 3 are planned for the Fall 1995 refueling outage. ACE has been advised that on November 21, 1994, the NRC issued an $87,500 fine to PECO for violations of NRC requirements during testing of certain motor-operated valves in the emergency service water (ESW) system at Peach Bottom in August 1994. The violations involved failure to adequately control testing activities. As a result, valves in the ESW system were placed in an inappropriate configuration, which could have rendered the system incapable of performing its function under accident conditions. ACE has been advised that PECO paid the fine in December 1994. ACE has been advised that as a result of an inspection in October 1993, the NRC held an Enforcement Conference in December 1993 to discuss potential violations involving inappropriate protective measures taken by workers entering radiologically controlled areas. On January 19, 1994, the NRC issued a Level III violation with no associated civil penalty. PECO has advised ACE that on July 24, 1992, the NRC issued an information notice alerting utilities owning BWRs to potential inaccuracies in water-level instrumentation during and after rapid depressurization events. On May 28, 1993, the NRC issued a bulletin requesting utilities owning BWRs to, among other things, install certain hardware modifications at the next cold shutdown of the BWR after July 30, 1993 to ensure accurate functioning of the water-level instrumentation. These hardware changes were made on Peach Bottom Unit 2 and 3 in August 1993 and November 1993, respectively. Fuel Supply ACE's sources of electrical energy (including power purchases) for the years indicated are shown below: Source 1994 1993 1992 Coal 29% 34% 37% Nuclear 23% 24% 22% Oil/Natural Gas 7% 5% 5% Interchange and Purchased Power 24% 28% 28% Cogeneration 17% 9% 8% The prices of all types of fuels used by ACE for the generation of electricity are subject to various factors, such as world markets, labor unrest and actions by governmental authorities, including allocations of fuel supplies, over which ACE has no control. Oil Residual oil and distillate oil for ACE's wholly-owned stations are furnished under two separate contracts with a major fuel supplier. ACE has a contract for the supply of 1.0% sulfur residual oil for both Deepwater and B. L. England Stations and for distillate oil sufficient to supply ACE's combustion turbines. Both contracts expire October 31, 1997. See "Environmental Controls-Air" for information concerning the use of particular fuels at B. L. England Station. On December 31, 1994, the oil supply at Deepwater Station was sufficient to operate Deepwater Unit 1 for 70 days, and the supply at B. L. England Station was sufficient to operate Unit 3 for 39 days. Coal ACE has contracted with one supplier for the purchase of 2.6% sulfur coal for B. L. England Units 1 and 2 through April 30, 1999. On December 31, 1994, the coal inventory at the B. L. England Station was sufficient to operate Units 1 and 2 for 83 days. See "Environmental Controls-Air" herein for additional information relating to B.L. England Station. ACE has contracted with one supplier for the purchase of 1.0% sulfur coal for Deepwater Unit 6/8 through June 30, 1998. On December 31, 1994, the coal inventory at Deepwater Station was sufficient to operate Unit 6/8 for 117 days. The Keystone and Conemaugh Stations, in which ACE has joint ownership interests of 2.47% and 3.83%, respectively, are mine- mouth generating stations located in western Pennsylvania. The owners of the Keystone Station have a contract through 2004, providing for a portion of the annual bituminous coal requirements of the Keystone Station. A combination of long and short term contracts provide for the annual bituminous coal requirements of the Conemaugh Station. To the extent that the requirements of both plants are not covered by these contracts, coal supplies are obtained from local suppliers. As of December 31, 1994, Keystone and Conemaugh had approximately a 22 day supply and a 66 day supply of coal, respectively. Gas ACE is currently capable of firing natural gas in six combustion turbine peaking units and in two conventional steam turbine generating units. ACE has entered into a firm electric service tariff with South Jersey Gas Company for the supply of natural gas to its units. The tariff provides for the payment of certain commodity and demand charges. Portions of the gas supply are obtained from the spot market under short term renewable gas supply and transportation contracts with various producers/suppliers and pipelines. Nuclear Fuel As a joint owner of the Peach Bottom, Salem and Hope Creek generating units, ACE relies upon the respective operating company for arrangements for nuclear fuel supply and management. ACE is responsible for the costs thereof to the extent of its particular ownership interest through an arrangement with a third party. Generally, the supply of fuel for nuclear generating units involves the mining and milling of uranium ore to uranium concentrate, conversion of the uranium concentrate to uranium hexafluoride, enrichment of uranium hexafluoride and fabrication of fuel assemblies. After spent fuel is removed from a nuclear reactor, it is placed in temporary storage for cooling in a spent fuel pool at the nuclear station site. Under the Nuclear Waste Policy Act of 1982 (NWPA), the Federal government has a contractual obligation for transportation and ultimate disposal of the spent fuel. ACE has been advised by PECO, the operator of Peach Bottom, that it has contracts for uranium concentrates to fully operate Peach Bottom Units 2 and 3 through 2002. ACE has been advised that two of the companies that supply uranium concentrates to PECO filed for bankruptcy under Chapter 11 of the Bankruptcy Code on February 23, 1995. The two companies supply approximately half of PECO's 1995 and 1996 requirements for uranium concentrates. In addition, one of the companies is under contract to supply approximately 25% of PECO's uranium concentrate requirements for the period 1997 to 2002. ACE has been advised that PECO has made alternative arrangements with other suppliers to satisfy its short-term requirements for uranium concentrates. For the longer-term, PECO is evaluating its requirements and potential supply sources, including the two suppliers which have filed petitions for bankruptcy. ACE has been advised that neither PECO nor PS anticipate any difficulties in obtaining its requirements for uranium concentrates. ACE has also been advised that by PECO that its contracts for uranium concentrates will be allocated to the Peach Bottom units, and other PECO nuclear facilities in which ACE has no ownership interest, on an as-needed basis. ACE has also been advised that PECO has contracted for the following segments of the nuclear fuel supply cycle with respect to the Peach Bottom units through the following years: Nuclear Unit Conversion Enrichment Fabrication Peach Bottom Unit 2 1997 2008 1999 Peach Bottom Unit 3 1997 2008 1998 ACE has been advised by PS, the operating company for the Salem and Hope Creek Stations, that it has arrangements which are expected to provide sufficient uranium concentrates to meet the current projected requirements of the Salem and Hope Creek units through the year 2000 and approximately 60% of the requirements through 2002. PS has advised ACE that present contracts meet the other nuclear fuel cycle requirements for the Salem and Hope Creek units through the years indicated below: Nuclear Unit Conversion Enrichment Fabrication Salem Unit 1 2000 1998 2004 Salem Unit 2 2000 1998 2005 Hope Creek 2000 1998 2000 In conformity with the NWPA, PS and PECO, on behalf of the co-owners of the Salem and Hope Creek, and Peach Bottom stations, respectively, have entered into contracts with the Department of Energy (DOE) for the disposal of spent nuclear fuel from those stations. Under these contracts, the DOE is to take title to the spent fuel at the site, then transport it and provide for its permanent disposal at a cost to utilities based on nuclear generation, subject to such escalation as may be required to assure full cost recovery by the Federal government. Under NWPA, the Federal government must commence the acceptance of these materials for permanent offsite storage no later than 1998, but it is possible that such storage may be delayed indefinitely. ACE has been advised that in December 1989, the DOE announced that it would not be able to open a permanent, high-level nuclear waste storage facility until 2010, at the earliest. The DOE stated that it would seek legislation from Congress for the construction of a temporary storage facility which would accept spent nuclear fuel from utilities in 1998 or soon thereafter. ACE has been advised that in October 1990, the NRC determined that spent nuclear fuel generated in any reactor can be stored safely and without significant environmental impacts in reactor facility storage pools or in independent spent fuel storage installations located at reactor or away-from-reactor sites for at least 30 years beyond the licensed life for operation (which may include the term of a revised or renewed license). The DOE has stated that neither the NWPA nor its contracts imposes an unconditional obligation to accept spent fuel by 1998 and indicated that such obligation is conditional upon commencement of a temporary storage facility. It is not possible to predict when any type of Federal storage facility will become available. PECO has advised ACE that spent fuel racks at Peach Bottom Units 2 and 3 have storage capacity until 1998 for Unit 2 and 1999 for Unit 3. Options for expansion of storage capacity at Peach Bottom beyond the pertinent dates, including rod consolidation, are being investigated. PS has advised ACE that on-site temporary spent fuel storage capability will permit storage of spent fuel for Salem Units 1 an 2 through March 1998 and March 2002, respectively, when operational full core discharge capability requirements are considered. PS has advised ACE that it has developed an integrated strategy to meet the longer term Salem and Hope Creek spent fuel storage needs, and estimates that with reracking with maximum density racks, storage capability at Salem Units 1 and 2 would be extended through 2008 and 2012, respectively. PS has further advised ACE that the Hope Creek pool has the capacity to hold spent fuel through September 2007 considering operational full core discharge requirements. The Energy Policy Act states, among other things, that utilities with nuclear reactors must pay for the decommissioning and decontamination of the DOE nuclear fuel enrichment facilities. The total costs are estimated to be $150 million per year for 15 years, of which ACE's share is estimated to be $8.5 million. The Act provides that these costs are to be recoverable in the same manner as other fuel costs. ACE has recorded a liability of $8.5 million and a related regulatory asset for such costs. ACE made its first payment related to this liability to the respective operating companies in September 1993. In ACE's 1993 LEC filing, the BPU approved a stipulation of settlement which included, among other things, the full LEC recovery of this and future assessments. ACE is collecting through rates amounts to fund its share of the estimated future costs related to the decommissioning of the five nuclear units in which it has joint ownership interests. ACE's current annual funding amount, as authorized by the BPU, totals $6.4 million. This amount is based on estimates of the future cost of decommissioning each of the units, dates that decommissioning activities are expected to occur and an estimate of the return to be earned by the assets of the decommissioning fund. The present value of ACE's nuclear decommissioning obligation, based on 1987 site specific studies used by the BPU for approval in 1991 and restated in 1994 dollars, is $152.2 million. ACE will seek to adjust these estimates and the level of rates collected from customers in future BPU proceedings to reflect changes in decommissioning cost estimates and the expected return to be earned by the assets of the fund. As of December 31, 1994, the present value of such funding contributions based on current estimates for future decommissioning costs and the dates such activities are expected to occur is $111.4 million without regard for interest or fund appreciation. As of December 31, 1994, the cost and market value of the fund is $52 million, of which $36.9 million is qualified for Federal income tax purposes. Reserves for decommissioning obligations, presented as a component of accumulated depreciation, amounted to $51.1 million at December 31, 1994. In January 1993, the BPU adopted N.J.A.C. 14:5A which was designed to provide a mechanism for periodic review of the estimated costs of decommissioning nuclear generating stations owned by New Jersey electric utilities. The purpose of this regulation is to insure that adequate funds are available to assure completion of decommissioning activities at the cessation of commercial operation. The regulation established decommissioning trust fund reporting requirements for electric utilities in order to provide the BPU with timely information for its oversight of these funds. See Note 1 and Note 8 of ACE's Notes to Financial Statements for further information relating to nuclear decommissioning funding. Regulation ACE is a public utility organized under the laws of New Jersey and is subject to regulation as such by the BPU, among others, which is also charged with the responsibility for energy planning and coordination within the State of New Jersey. ACE is also subject to regulation by the Pennsylvania Public Utility Commission in limited respects concerning property and operations in Pennsylvania. ACE is also subject, in certain respects, to the jurisdiction of the FERC, and ACE maintains a system of accounts in conformity with the Uniform System of Accounts prescribed for public utilities and licensees subject to the provisions of the Federal Power Act. The construction of generating stations and the availability of generating units for commercial operation are subject to the receipt of necessary authorizations and permits from regulatory agencies and governmental bodies. Standards as to environmental suitability or operating safety are subject to change. Litigation or legislation designed to delay or prevent construction of generating facilities and to limit the use of existing facilities may adversely affect the planned installation and operation of such facilities. No assurance can be given that necessary authorizations and permits will be received or continued in effect, or that standards as to environmental suitability or operating safety will not be changed in a manner to adversely affect the Company, ACE or its operations. Pursuant to legislation enacted in the State of New Jersey in 1983, no public utility can commence construction of certain electric facilities without having obtained a certificate of need from the appropriate state regulatory authorities. For purposes of the legislation, such electrical facilities are electric generating units at a single site having a combined capacity of 100 MW or more and electric generating units which, when added to an existing electric generating facility, would increase the installed capacity of such facility by 25% or by more than 100 MW, whichever is smaller. Operation of nuclear generating units involves continuous close regulation by the NRC. Such regulation involves testing, evaluation and modification of all aspects of plant operation in light of NRC safety and environmental requirements, and continuous demonstration to the NRC that plant operations meet applicable requirements. The NRC has the ultimate authority to determine whether any nuclear generating plant may operate. In addition, the Federal Emergency Management Agency has responsibility for the review, in conjunction with the NRC, of certain aspects of emergency planning relating to the operation of nuclear plants. As a by-product of nuclear operations, nuclear generating units, including those in which ACE owns an interest, produce substantial amounts of low-level radioactive waste (LLRW). Such waste is presently accumulated on-site pending permanent storage in federally licensed disposal facilities located elsewhere. However, under provisions of the Federal Low Level Radioactive Policy Act, as amended (LLRWPA), as of July l, 1994, operating disposal sites have exercised their authority to either cease operation or deny access to LLRW generated in states which are not members of the regional compact in which they are located. ACE has been advised by PS and PECO that as of July l, 1994 LLRW generated at Salem, Hope Creek and Peach Bottom is being temporarily stored in on-site facilities pending development of permanent disposal sites in New Jersey and Pennsylvania. The LLRWPA further provides that each state must have a permanent storage facility operational by January 1, 1996. ACE has been advised that to date Pennsylvania has met such requirements by entering into a compact with West Virginia, Maryland, Delaware and the District of Columbia. To date, New Jersey has complied with the LLRWPA requirements by entering into a compact with the State of Connecticut and certifying its capability to manage, store or dispose of low-level radioactive waste requiring disposal after December 31, 1992. In June 1991, New Jersey enacted legislation providing for funding of an estimated $80 million cost of establishing a facility for disposal by 1998. Fee regulation provided for in the statute will permit the state to recover costs of such facility from waste generators. ACE has been advised that on-site waste storage will be provided until permanent storage facilities are operational or until another means of disposal is available. It is not possible to determine the outcome of this matter at this time. In March 1983, New Jersey enacted the Public Utility Fault Determination Act which requires that the BPU make a determination of fault with regard to any past or future accident at any electric generating or transmission facility, prior to granting a request by that utility for a rate increase to cover accident-related costs in excess of $10 million. However, the law allows the affected utility to file for non-accident related rate increases during such fault determination hearings and to recover contributions to federally mandated or voluntary cost- sharing plans. The law further allows the BPU to authorize the recovery of certain fault-related repair, cleanup, power replacement or damage costs if substantiated by the evidence presented and if authorized in writing by the BPU. Information regarding ACE's nuclear power replacement cost insurance and liability under the Federal Price-Anderson Act is incorporated herein by reference to Note 8 of ACE's Notes to Financial Statements, filed as Exhibit 28(a) to this report. Environmental Matters General ACE is subject to regulation with respect to air and water quality and other environmental matters by various Federal, state and local authorities. Emissions and discharges from ACE's facilities are required to meet established criteria, and numerous permits are required to construct new facilities and to operate new and existing facilities. Additional regulations and requirements are continually being developed by various government agencies. The principal laws, regulations and agencies relating to the protection of the environment which affect ACE's operations are described below. Construction projects and operations of ACE are affected by the National Environmental Policy Act under which all Federal agencies are required to give appropriate consideration to environmental values in major Federal actions significantly affecting the quality of the human environment. The Federal Resource Conservation and Recovery Act of 1976 (RCRA) provides for the identification of hazardous waste and includes standards and procedures that must be followed by all persons that generate, transport, treat, store or dispose of hazardous waste. ACE has filed notifications and plans with the United States Environmental Protection Agency (EPA) relating to the generation and treatment of hazardous waste at certain of its facilities and generating stations. The Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), as amended by the Superfund Amendments and Reauthorization Act of 1986 (SARA), and RCRA authorize the EPA to bring an enforcement action to compel responsible parties to take investigative and/or cleanup actions at any site that is determined to present an imminent and substantial danger to the public or to the environment because of an actual or threatened release of one or more hazardous substances. The New Jersey Spill Compensation and Control Act (Spill Act) provides similar authority to the NJDEP. Because of the nature of ACE's business, including the production of electricity, various by-products and substances are produced and/or handled which are classified as hazardous under the above laws. ACE generally provides for the disposal and/or processing of such substances through licensed independent contractors. However, the statutory provisions may impose joint and several responsibility without regard to fault on the generators of hazardous substances for certain investigative and/or cleanup costs at the site where these substances were disposed and/or processed. Generally, actions directed at funding such site investigations and/or cleanups include all known allegedly responsible parties. ACE has received requests for information under CERCLA with respect to certain sites. One site, a sanitary landfill comprising approximately 40 acres, is situated in Atlantic County, New Jersey. ACE received a Directive, dated November 7, 1991, from the NJDEP, identifying ACE as one of a number of parties allegedly responsible for the placement of certain hazardous substances, namely, flyash which had been approved as landfill material. An Administrative Consent Order (ACO) has been executed and submitted to the NJDEP by ACE and at least four other identified responsible parties. Site remediation will include a soil cover of the site. ACE has joined with three other parties and will cooperate in implementing the terms of the ACO. Approximately eight additional responsible parties have also been identified by the NJDEP. ACE, together with the other signatories to the ACO, will pursue recovery against those persons who may also pursue recovery against other responsible parties not named in the NJDEP Directive. ACE has been served a Summons and Complaint dated June 30, 1992 in a civil action brought pursuant to Section 107(a) of CERCLA on behalf of the EPA. ACE has been named as one of several defendants in connection with the recovery of costs incurred, and to be incurred, in response to the alleged release of hazardous substances located in Gloucester County, New Jersey. Approximately 70 separate financially solvent entities have been identified as having responsibility for remediation which is now predicted to be in excess of $175 million. Sufficient discovery has been conducted to establish that ACE's contribution to the clean-up and remediation activity will be within the lower tiers of financial participation. Notwithstanding the joint and several liability imposed by law, primary responsibility will be apportioned among others, including Federal and State agencies and private parties. It is estimated that ACE's contribution for the remediation and clean-up of both the Atlantic County and Gloucester County sites is not expected to exceed $1 million. The New Jersey Environmental Clean-up Responsibility Act was supplemented and amended in June 1993 and became the New Jersey Industrial Site Recovery Act. The act provides, among other things, that any business having certain Standard Industrial Classification Code numbers that generates, uses, transports, manufactures, refines, treats, stores, handles or disposes of hazardous substances or hazardous wastes is subject to the requirements of the act upon the closing of operations or a transfer of ownership or operations. As a precondition to such termination or transfer of ownership or operations, the approval of the NJDEP of a negative declaration, a remedial action work plan or a remediation agreement and the establishment of the remediation funding source is required. Various state and Federal legislation have established a comprehensive program for the disclosure of information about hazardous substances in the workplace and the community, and provided a procedure whereby workers and residents can gain access to this information. Implementing the regulations provides for extensive recordkeeping, labeling and training to be accomplished by each employer responsible for the handling of hazardous substances. ACE has implemented the requirements of this legislation to achieve substantial compliance with appropriate schedules. ACE is also subject to the Wetlands Act of 1970, which requires applications to and permits from the NJDEP for conducting regulated activities (including construction and excavation) within the "coastal wetlands," as defined therein. Legislation enacted in 1987 by the State of New Jersey designates certain areas as fresh water wetlands and restricts development in those areas. The New Jersey Coastal Area Facility Review Act (CAFRA) requires applications to and permits from the NJDEP for construction of certain types of facilities within the "coastal area" as defined by CAFRA. Recent changes in regulations effective July 1994 may have substantive impact and are in the process of being finalized. Although the CAFRA regulations, as initially drafted, exclude certain utilities from the most rigorous portions of the regulations, electric utilities were not excluded. At the present time, the NJDEP indicates that the final rules will exclude electric lines and substation construction and maintenance from the definition of "public development". These activities will then be excluded from regulation. ACE will continue an aggressive pursuit for the exemption; omission of the exemption could have a significant impact on service to customers in the coastal regions the extent of which has not been determined. Public concern continues over the health effects from exposure to electric and magnetic fields (EMF). To date, there are not conclusive scientific studies to support such concerns. The New Jersey Commission on Radiation Protection is considering promulgation of regulations which would authorize the NJDEP to review all new power line projects of 100 kilovolts or more. The promulgation of such regulations may affect the design and location of ACE's existing and future electric power lines and facilities and the cost thereof. ACE's program of Prudent Field Management implements reasonable measures, at modest cost, to limit magnetic field levels in the design and location of new facilities. Such amounts as may be necessary to comply with any new EMF rules cannot be determined at this time and are not included in ACE's 1995-1997 estimated construction expenditures. Air The Federal Clean Air Act, as amended, requires that all states achieve specified primary ambient air quality standards (relating to public health) by December 31, 1982 unless the deadline is extended for certain pollutants for a particular state by appropriate action taken by the EPA, and also requires that states achieve secondary ambient air quality standards (relating to public welfare) under the Clean Air Act within a reasonable time. The Clean Air Act also requires the Administrator of the EPA to promulgate revised new source performance standards for sulfur dioxide, particulates and nitrogen dioxide, mandate the use of the "best technological system of continuous emission reduction" and preclude the use of low sulfur coal as a sole means of achieving compliance with sulfur regulations for new power plants. The Clean Air Act Amendments (CAAA), which provide for penalties in the event of noncompliance, further provide that State Implementation Plans (SIP) contain emission limitations and such other measures as may be necessary, as determined under regulations promulgated by the EPA, to prevent "significant deterioration" of air quality based on regional non-degradation classifications. The NJDEP is using the New Jersey Administrative Code, Title 7, Chapter 27 (NJAC 7:27) as its SIP to achieve compliance with the national ambient air quality standards adopted by EPA under the Clean Air Act. NJAC 7:27 currently provides ambient air quality standards and emission limitations, all of which have EPA approval, for seven pollutants, including sulfur dioxide and particulates. ACE believes that all of its fossil fuel-fired generating units are, in all substantial respects, currently operating in compliance with NJAC 7:27 and the EPA approved SIP. In November 1990, the CAAA was enacted to provide for further restrictions and limitations on sulfur dioxide and other emission sources as a means to reduce acid deposition. Phase I of the legislation mandates compliance with the sulfur dioxide reduction provisions of the legislation by January 1, 1995 by utility power plants emitting sulfur dioxide at a rate of above 2.5 pounds per million BTU. Plants utilizing certain control technologies to meet the Phase I sulfur dioxide reductions could be permitted, subject to EPA approval, to either postpone compliance until 1997 or receive an early reduction bonus allowance for reductions achieved between 1995 and 1997. Phase II of the legislation requires controls by January 1, 2000 on plants emitting sulfur dioxide at a rate above 1.2 pounds per million BTU. ACE's wholly-owned B. L. England Units 1 and 2 and its jointly-owned Conemaugh Units 1 and 2, in which ACE has a 3.83% ownership interest, are affected by Phase I, and all of ACE's other fossil-fueled steam generating units are affected by Phase II. The Keystone Station, in which ACE has a 2.47% ownership interest, is impacted by the sulfur dioxide provisions of Title IV of the CAAA during Phase II. In addition, all of ACE's fossil-fueled steam generating units will be affected by the nitrogen oxide provisions of the CAAA. Compliance with the legislation will cause ACE to incur additional capital and/or operating costs. On April 26, 1991, the NJDEP renewed ACE's expiring Certificates to Operate Control Apparatus or Equipment (Certificates) for the three generating units at B.L. England Station for a period of five years. The Certificates constitute a concurrent five-year authorization to burn coal exceeding one percent sulfur at B.L. England Units 1 and 2. Such authorization is subject to certain conditions, including the submittal by ACE of certain permits relating to the installation of flue gas desulfurization systems (scrubbers) on B.L. England Units 1 and 2. Subject to receipt of necessary permits and approvals, and to delays beyond its control, ACE would be obligated to install and operate the scrubbers by June 30, 1995 for Unit 2 and January 31, 1997 for Unit 1. The provisions of the Certificates do not preclude NJDEP or the BPU from allowing ACE to pursue a compliance strategy other than scrubbing, or from disapproving any compliance strategy, including scrubbing. The Certificates do not preclude the NJDEP from requiring reductions in the emissions of nitrogen oxides, and require periodic reporting by ACE on nitrogen oxide control strategies, and by the end of 1995, an evaluation of the applicability of nitrogen oxide control at B.L. England Station. ACE constructed a scrubber at a cost of approximately $81 million, at B.L. England Unit 2, which will satisfy Phase I sulfur dioxide emission requirements for both B.L. England Units 1 and 2. Construction of the scrubber commenced in late 1992 and commercial operation began in late 1994. The Conemaugh owners have elected to install scrubbers on Conemaugh Units 1 and 2, with ACE's share of the total cost estimated to be about $15 million. Scrubber construction for Conemaugh Unit 1 was also completed in late 1994 and Unit 2 construction is expected to be completed in 1995. The cost of certain power purchase arrangements between ACE and other electric utilities may also be affected by the legislation. A portion of the capital costs necessary to continue compliance with the CAAA are included in ACE's current estimate of construction expenditures shown under "Construction and Financing" above. ACE expects that costs associated with compliance would be recoverable through rates, and may be offset, in part, by utilization of certain allowances as permitted by the CAAA, the value of which is not presently determinable. The CAAA requires that reductions in nitrogen oxide (Nox)be made from the emissions of major contributing sources and each state must impose reasonable available control technologies on these major sources by May 1995. NJDEP regulations adopted in November 1993 require that a compliance plan be filed with the NJDEP by April 15, 1994. ACE's compliance plan was filed and ACE is awaiting comment. Preliminary capital expenditures are estimated at $20 million with additional expenditures expected in the year 2000 to achieve compliance with Phase II NOx reductions. The necessary emission reductions are based on modeling results and regulatory agency discussions and could result in additional changes to equipment and in methods of operation and fuel, the extent of which has not been fully determined. Water The Federal Water Pollution Control Act, as amended (the Clean Water Act) provides for the imposition of effluent limitations to regulate the discharge of pollutants, including heat, into the waters of the United States. The Clean Water Act also requires that cooling water intake structures be designed to minimize adverse environmental impact. Under the Clean Water Act, compliance with applicable effluent limitations is to be achieved by a National Pollution Discharge Elimination System (NPDES) permit program to be administered by the EPA or by the state involved if such state establishes a permit program and water quality standards satisfactory to the EPA. Having previously adopted the New Jersey Pollution Discharge Elimination System (NJPDES), NJDEP assumed authority to operate the NPDES permit program. During 1981, ACE received NJPDES permits for discharges to surface waters for all facilities with existing EPA-issued NPDES permits. During 1986, ACE received draft renewal permits for both B.L. England Station and Deepwater Station for discharges to surface waters as well as groundwater. ACE filed extensive comments with the NJDEP contesting the numerous newly-imposed conditions in both permits. The NJDEP subsequently issued final permits for both stations containing certain conditions which are unacceptable to ACE. ACE filed requests for adjudicatory hearings contesting the unacceptable conditions contained in the permits. ACE has reached a resolution with the NJDEP relating to groundwater permits at B.L. England Station which required ACE to conduct additional studies, which were completed in 1991. A draft NPDES was issued in February 1994 to include past contested conditions and bring current permit limitations with respect to today's environment and technology. Most of the contested conditions were resolved with the issuance of the NPDES permit renewal effective January 1, 1995. ACE has adjudicated two minor issues related to permit conditions requiring that a pollutant reduction and a dilution study be conducted. Effective December 2, 1974, the NJDEP adopted new surface water quality standards which, in part, provide guidelines for heat dissipation from any source and which become standards for subsequent Federal permits. These NJDEP guidelines were included in the final EPA permits issued for the B. L. England, Deepwater, Salem, and Hope Creek stations. On receipt of the permits for B. L. England and Deepwater stations, ACE filed with the EPA a request for alternative thermal limitations (variance) in accordance with the provisions of Section 316(a) of the Act. The NJDEP and EPA have subsequently determined that B. L. England Units 1 and 2 are in compliance with applicable thermal water quality standards. The request for a Section 316(a) variance for Deepwater Station has not yet been acted upon. ACE is not able at this time to predict the outcome of the request, but it believes that it has adequately supported the request for such variance. ACE believes that all of its wholly-owned steam electric generating units are, in all substantial respects, currently operating in compliance with all applicable standards and NJPDES permit limitations, except as described herein above. All current surface water discharge permits for B.L. England have been renewed as of January 1, 1995 and ACE has filed for renewal of the ground water discharge permits for B. L. England and surface water discharge permits for Deepwater. Renewal of these permits should be received this year. The Delaware River Basin Commission (DRBC) has required various electric utilities, as a condition of being permitted to withdraw water from the Delaware River for use in connection with the operation of certain electric generating stations, to provide for a means of replacing water withdrawn from the river during certain periods of low river flow. Such a requirement presently applies to the Salem and Hope Creek Stations. As a result of such requirement, ACE and certain other electric utilities constructed the Merrill Creek Reservoir Project. ACE owns a 4.8% ownership interest in the reservoir project. Although ACE expects that sufficient replacement water would be provided by Merrill Creek during periods of low river flow to permit the full operation of Salem and Hope Creek, such events cannot be assured. Environmental control technology, generally, is in the process of further development and the implementation of such may require, in many instances, balancing of the needs for additional quantities of energy in future years and the need to protect the environment. As a result, ACE cannot estimate the precise effect of existing and potential regulations and legislation upon any of its existing and proposed facilities and operations, or the additional costs of such regulations. ACE's capital expenditures related to compliance with environmental requirements in 1994 amounted to $57.5 million, and its most recent estimate for such compliance for the years 1995-1997 is $70.7 million. Such estimates do not include amounts which ACE may be required to expend to comply with Phase II requirements of the CAAA at B.L. England Unit 1 and Keystone Station or the normal costs of compliance with radiation protection. Such additional costs which ACE may incur in affecting compliance with potential regulations and legislation are not included in the estimated construction costs for the period 1995-1997 (see "Construction and Financing"). Future regulatory and legislative developments may require ACE to further modify, supplement or replace equipment and facilities, and may delay or impede the construction and operation of new facilities, at costs which could be substantial. Executive Officers Information concerning the Executive Officers of the Company and ACE, as of December 31, 1994, is set forth below. Executive Officers are elected by the respective Boards of Directors of the Company and ACE and may be removed from office at any time by a vote of a majority of all the Directors in office. Name (age) Title(s) (effective date of election to current position(s) Jerrold L. Jacobs (55) President and Chief Executive Officer of the Company and Chairman, President and Chief Executive Officer of ACE (4/28/93). Michael J. Chesser (46) Vice President of the Company and Executive Vice President and Chief Operating Officer of ACE (2/1/94), Director of ACE. James E. Franklin II (48) Secretary and General Counsel to the Company and ACE (1/31/95), Director of ACE. Meredith I. Harlacher, Jr.(52) Vice President of the Company and Senior Vice President-Energy Supply of ACE (4/28/93), Director of ACE. Henry K. Levari, Jr. (46) Vice President of the Company (8/13/86) and Senior Vice President- Customer Operations of ACE (9/17/94), Director of ACE. Jerry G. Salomone (54) Vice President and Treasurer of the Company (8/13/86) and Senior Vice President-Finance & Administration of ACE (4/28/93), Director of ACE. (Retired 2/1/95) Frank F. Frankowski (44) Vice President-Controller, Assistant Treasurer and Assistant Secretary of ACE (7/25/94). Ernest L. Jolly (42) Vice President-Atlantic Transformation of ACE (5/23/94). J. David McCann (43) Vice President-Strategic Customer Support of ACE (4/28/93). Marilyn T. Powell (47) Vice President-Marketing of ACE (9/16/94). Henry C. Schwemm, Jr. (53) Vice President-Power Generation & Fuels Management of ACE (4/28/93). Scott B. Ungerer (36) Vice President of the Company (1/17/94). Louis M. Walters (42) Vice President-Treasurer and Assistant Secretary of ACE (1/31/95). Prior to election to the positions above, the following officers held other positions with ACE (unless otherwise noted) since January 1, 1990: M.J. Chesser Vice President-Marketing & Gas Operations, Baltimore Gas & Electric Company F.F. Frankowski Vice President-Controller and Assistant Treasurer of ACE (4/28/93); General Manager of Accounting Services (8/1/91). J.E. Franklin II General Counsel to the Company and ACE (10/1/94); Partner in the law firm Megargee, Youngblood, Franklin & Corcoran, P.A. M.I. Harlacher, Jr. Vice President of the Company and Senior Vice President-Utility Operations of ACE (8/9/91). J.L. Jacobs President of the Company and President and Chief Operating Officer of ACE (1/1/90). E.L. Jolly Vice President-External Affairs of ACE (3/1/92); Station Manager Deepwater Generating Station-Dupont Area for ACE. H.K. Levari, Jr. Vice President of the Company and Senior Vice President-Marketing and Customer Operations of ACE (4/28/93); Vice President of the Company and Senior Vice President-Corporate Planning and Services of ACE (8/9/91); Vice President-Power Delivery of ACE (4/24/90). J.D. McCann Vice President-Power Delivery of ACE (8/9/91). M.T. Powell Director of marketing process, International Business Machines Corporation. J.G. Salomone Senior Vice President, Finance and Accounting, Treasurer (4/22/92). H.C. Schwemm, Jr. Vice President-Production of ACE. S.B. Ungerer Manager, Business Planning Services (1/4/93); Manager, Strategic Business Planning (1/6/92); Manager, Joint Generation. L.M. Walters Vice President-Treasurer and Secretary (4/28/94); Vice President-Treasurer and Assistant Secretary (4/28/93); General Manager, Treasury and Finance (8/1/91). ITEM 2 PROPERTIES Reference is made to the Financial Statements for information regarding investment in such property by the Company and ACE. Substantially all of ACE's electric plant is subject to the lien of the Mortgage and Deed of Trust under which First Mortgage Bonds of ACE are issued. Reference is made to Item 1 - Business "General" and "Energy Requirements and Power Supply" for information regarding ACE's properties. Information concerning leases is set forth in Note 9 of ACE's Notes to Financial Statements incorporated herein by reference. Information regarding electric generating stations is set forth in Item 1, Business-"Energy Requirements and Power Supply." ITEM 3 LEGAL PROCEEDINGS Reference is made to Item 1-Business and the Notes to Financial Statements of the Company (Notes 3 and 10) and ACE (Notes 3 and 8) for information regarding various pending administrative and judicial proceedings involving rate and operating and environmental matters, respectively. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed on the New York, Philadelphia, and Pacific Stock Exchanges. All of ACE's Common Stock is owned by the Company. At December 31, 1994, there were 48,850 holders of record of the Company's Common Stock. The following table indicates the high and low sale prices for the Company's Common Stock as reported in the Wall Street Journal- Composite Transactions, and dividends paid for the periods indicated: Dividends High Low per Share Common Stock: 1994 First Quarter $21.750 $19.875 $ .385 Second Quarter $21.500 $16.375 $ .385 Third Quarter $19.625 $16.125 $ .385 Fourth Quarter $18.250 $16.000 $ .385 1993 First Quarter $25.000 $21.875 $ .380 Second Quarter $23.875 $21.625 $ .380 Third Quarter $25.375 $22.625 $ .385 Fourth Quarter $23.875 $20.375 $ .385 The funds required to enable the Company to pay dividends on its Common Stock are derived primarily from the dividends paid by ACE on its Common Stock, all of which is held by the Company. Therefore the ability of the Company to pay dividends on its Common Stock will be governed by the ability of ACE to pay dividends on its Common Stock. The rate and timing of future dividends of the Company will depend upon the earnings and financial condition of the Company and its subsidiaries, including ACE, and upon other factors affecting dividend policy not presently determinable. ACE is subject to certain limitations on the payment of dividends to the Company. Whenever full dividends on Preferred Stock have been paid for all past quarter-yearly periods, ACE may pay dividends on its Common Stock from funds legally available for such purpose. Until all cumulative dividends have been paid upon all series of Preferred Stock and until certain required sinking fund redemptions of such Preferred Stock have been made, no dividend or other distribution may be paid or declared on the Common Stock of ACE and no Common Stock of ACE shall be purchased or otherwise acquired for value by ACE. In addition, as long as any Preferred Stock is outstanding, ACE may not pay dividends or make other distributions to the holder of its Common Stock if, after giving effect to such payment or distribution, the capital of ACE represented by its Common Stock, together with its surplus as then stated on its books of account, shall in the aggregate, be less than the involuntary liquidation value of the then outstanding shares of Preferred Stock. ITEM 6 SELECTED FINANCIAL DATA Selected financial data for the Company and ACE for each of the last five years is listed below.
Atlantic Energy, Inc. 1994 1993 1992 1991 1990 (Thousands of Dollars) Operating Revenues $ 913,039 $ 865,675 $ 816,825 $ 808,374 $ 740,894 Net Income $ 76,113 $ 95,297 $ 86,210 $ 85,635 $ 68,879 Earnings per Average Common Share $ 1.41 $ 1.80 $ 1.67 $ 1.75 $ 1.51 Total Assets (Year-end) $2,545,555 $2,487,508 $2,219,338 $2,151,416 $2,006,010 Long Term Debt and Redeemable Preferred Stock (Year-end)(b) $ 940,788 $ 952,101 $ 842,236 $ 807,347 $ 747,877 Capital Lease Obligations (Year-end)(b) $ 42,030 $ 45,268 $ 49,303 $ 53,093 $ 57,971 Common Dividends Declared $ 1.54 $ 1.535 $ 1.515 $ 1.495 $ 1.47
Atlantic City Electric Company 1994 1993 1992 1991 1990 (Thousands of Dollars) Operating Revenues $ 913,226 $ 865,799 $ 816,931 $ 808,482 $ 741,005 Net Income $ 93,174 $ 109,026 $ 107,446 $ 107,428 $ 80,176 Earnings for Common Shareholder (a) $ 76,458 $ 91,621 $ 89,634 $ 91,017 $ 69,377 Total Assets (Year-end) $2,421,316 $2,363,584 $2,100,278 $2,042,859 $1,903,326 Long Term Debt and Redeemable Preferred Stock (Year-end)(b) $ 924,788 $ 937,101 $ 817,108 $ 768,247 $ 708,977 Capital Lease Obligations (Year-end)(b) $ 42,030 $ 45,268 $ 49,303 $ 53,093 $ 57,971 Common Dividends Declared (a) $ 83,482 $ 81,347 $ 78,336 $ 74,073 $ 67,085 (a) Amounts shown as total, rather than on a per-share basis, since ACE is a wholly-owned subsidiary of the Company. (b) Includes current portion. /TABLE ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Atlantic Energy, Inc. (the Company, AEI or parent) is the parent of a consolidated group of wholly-owned subsidiaries consisting of Atlantic City Electric Company (ACE) and the following nonutility companies: Atlantic Energy Technology, Inc. (AET), Atlantic Generation, Inc. (AGI), Atlantic Southern Properties, Inc. (ASP), ATE Investment, Inc. (ATE) and Atlantic Thermal Systems, Inc. (ATS). ACE, the primary subsidiary, is an electric utility regulated by the New Jersey Board of Public Utilities (BPU). ACE has a wholly-owned subsidiary that operates certain generating facilities. AGI is engaged in the development and operation of cogeneration and alternate energy projects through various partnership arrangements. ASP owns and manages a commercial real estate property. ATE manages a portfolio of leveraged lease investments and provides financing and fund management to an affiliate. ATS is engaged with development of district heating and cooling facilities which it intends to own and operate. AET is presently concluding the affairs of its subsidiary which is its sole investment. On January 1, 1995, a new subsidiary of AEI, Atlantic Energy Enterprises, Inc. (AEE), was formed. AEI will transfer direct ownership of the existing nonutility companies to AEE. The Company's business plan will concentrate on the core utility operations of ACE and the expansion of non-utility business opportunities related to the core business. The emergence of competition in the area of electric generation, slower growth in energy sales, Federal deregulation of wholesale energy sales, prospective retail wheeling initiatives coupled with a public utility's obligation to serve and the need to mitigate future rate increases has caused ACE to re-examine its traditional approach to its business. ACE's current business plan recognizes the increasingly competitive nature of the electric energy business in general and the need to encourage economic growth and stability in the service territory and surrounding region. ACE is re-evaluating its revenue requirements and service pricing, the implementation of additional cost controls and the development of new sources of revenue. Nonutility business strategies are expected to pursue new investment opportunities closely related to the utility business, primarily in the areas of nonregulated electric generation, energy technology investments and thermal energy systems. Investments in these areas may take place as direct ownership or in partnership with others. Financial Results Consolidated operating revenues for 1994, 1993 and 1992 were $913.0 million, $865.7 million and $816.8 million, respectively. The increase in 1994 revenue reflects an increase in Levelized Energy Clause (LEC) revenues as a result of a $55.0 million rate increase effective July 1994 and an increase in sales for resale. The increased revenues for 1993 reflect the effect of a rate increase of $10.9 million effective in that year. The revenue increase in 1993 also reflects the contrast between the 1993 normal and the 1992 below normal summer temperatures. Consolidated earnings per share for 1994 were $1.41 on net income of $76.1 million, compared with $1.80 on net income of $95.3 million in 1993 and $1.67 on net income of $86.2 million in 1992. The 1994 earnings were attributable solely to ACE and include a reduction of $.32 for employee separation programs and $.02 for the write-off of deferred nuclear study costs. In 1993, ACE contributed $1.73 to consolidated earnings, primarily as a result of increased kilowatt-hour sales due to the contrast between 1993 and 1992 summer temperatures. ACE's 1993 earnings were reduced by $.10 as a result of charges for reorganization activities. In 1992, ACE contributed $1.74 to consolidated earnings, which included $.15 for a litigation settlement with PECO Energy. Nonutility operations resulted in a net loss of $345 thousand for 1994, net income of $3.7 million for 1993 and a net loss for 1992 of $3.4 million. The net loss for 1994 reflects the write-down of carrying value of ASP's commercial site in the amount of $1.7 million after tax, or $.03 per share. This was offset, in part, by the earnings of AGI. Non-utility net income for 1993 was primarily the result of higher earnings of AGI derived from the first full year's commercial operation of two of its cogeneration projects. The loss in 1992 was primarily due to provisions made by AET relating to restructuring of certain business activities. That loss was offset, in part, by earnings of AGI resulting from the start-up of two of AGI's cogeneration projects and by ATE's lower interest expense. The quarterly dividend paid on Common Stock was $.385 per share, or an annual rate of $1.54 per share. Information with respect to Common Stock for the period 1992-1994 is as follows: 1994 1993 1992 Dividends Paid Per Share $ 1.54 $ 1.53 $ 1.51 Book Value Per Share $15.56 $15.62 $15.17 Annualized Dividend Yield 8.7% 7.0% 6.6% Return on Average Common Equity 9.1% 11.7% 11.1% Total Return (Dividends paid plus change in share price) (11.9)% 0.6% 20.2% Market to Book Value 113% 139% 152% Price/Earnings Ratio 13 12 14 Closing Price-New York Stock Exchange $17.63 $21.75 $23.13 Liquidity and Capital Resources Overview The Company's cash flows are dependent on the cash flows of its subsidiaries, primarily ACE. Principal cash inflows of the Company are dividends from ACE and funds provided by the issuance of Common Stock. Principal cash outflows of the Company are investments (capital contributions and advances) in its subsidiaries for their investing activities, dividends to common shareholders and repurchase of outstanding common stock. Cash invested in ACE is utilized primarily for the construction of utility generation, transmission and distribution facilities, re- demption and maturity of long and short term debt and redemption of preferred stock. Current investing activities of the nonutility subsidiaries are primarily for the development of nonutility power generation projects and thermal heating and cooling systems. Agreements between the Company and its subsidiaries provide for allocation of tax liabilities and benefits generated by the respective subsidiaries. A separate credit support agreement exists between the Company and ATE. In 1994, 1993 and 1992, the Company recorded $83.2 million, $81.3 million and $78.3 million, respectively, in dividends from ACE. Other sources of funds available to the Company, which include the issuance of common equity through optional cash purchases under the Dividend Reinvestment and Stock Purchase Plan (DRP) through July 1994 and ACE's employee benefit plans, are shown as follows: 1994 1993 1992 DRP Optional Cash Purchases Shares issued 336,193 690,466 719,324 Proceeds (000) $6,737 $15,985 $16,034 Employee Benefit Plans Shares issued - 8,033 10,897 Proceeds (000) $ - $258 $259 Additional common equity has been provided by reinvested divi- dends through the DRP. In June 1994, the Company discontinued the issuance of new Common Stock through the DRP, except for certain employee benefit plans. Common shares issued from reinvested dividends in 1994, 1993 and 1992 were 370,654, 609,663 and 572,329, respectively. Major cash outflows of the Company were as follows: 1994 1993 1992 (Millions) Dividends to Shareholders $83.2 $81.3 $78.3 Advances and Capital Contributions to Subsidiaries* $25.6 $29.8 $24.1 * Net of Repayments On October 27, 1994, the Company's Board of Directors authorized the Company to acquire up to three million shares of Common Stock. The Company will cancel these shares. As of December 31, 1994, the Company has acquired and cancelled 221,700 shares at a cost of $3.9 million. Atlantic City Electric Company Cash construction expenditures for the 1992-1994 period amounted to $388.8 million and included expenditures for upgrades to existing transmission and distribution facilities and compliance with provisions of the Clean Air Act Amendments (CAAA) of 1990. ACE's current estimate of cash construction expenditures for the 1995-1997 period is $268 million. These estimated expenditures reflect necessary improvements to transmission and distribution facilities and further compliance with provisions of the CAAA. ACE also utilizes cash for mandatory redemptions of Preferred Stock and maturities and redemption of long term debt. Optional redemptions of securities are reviewed on an ongoing basis with a view toward reducing the overall cost of funds. Redemptions of Preferred Stock (at par or stated value)for the period 1992-1994 are shown as follows: 1994 1993 1992 Preferred Stock (Series) 9.96% (Shares) - 48,000 8,000 $8.53 (Shares) 240,000 - - $8.25 (Shares) 5,000 5,000 2,500 Aggregate Amount (000) $24,500 $5,300 $1,050 First Mortgage Bonds redeemed or acquired and retired or matured in the period 1992-1994 were as follows: Date Series Principal Amount Price(%) (000) November 1994 7-5/8% due 2005 $ 6,500 100.00 June 1994 10-1/2% due 2014 23,150 102.00 Various 1994 Dates 9-1/4% due 2019 11,910 105.38* September 1993 9-1/4% due 2019 69,233 110.95* September 1993 8-7/8% due 2016 125,000 104.80 March 1993 8-7/8% due 2000 19,000 102.41 March 1993 8% due 2001 27,000 102.53 March 1993 8% due 1996 95,000 100.91 March 1993 4-3/8% due 1993 9,540 100.00 July 1992 4-1/2% due 1992 10,350 100.00 * Average price Scheduled debt maturities and sinking fund requirements aggregate $69 million for the years 1995-1997. On or before April 1 of each year, ACE and other New Jersey utilities are required to pay gross receipts and franchise taxes (state excise taxes) to the State of New Jersey. In March 1994, ACE paid $137.5 million. Included in that amount was approximately $50 million representing the second and final installment for the additional one-half year's amount of tax due as required by amended state law. This additional amount of gross receipts and franchise tax payment, plus the additional one-half year's payment in 1993 of $45 million, has been recorded on the Consolidated Balance Sheet as Unrecovered State Excise Taxes and is being recovered through rates by ACE. In December 1993, ACE paid $20 million in connection with renegotiation of a nonutility purchase power contract which ACE is recovering through its LEC. The estimated savings of this renegotiation, based on currently forecasted fuel costs, is $15 million to $20 million per year, net of the $20 million payment. On an interim basis, ACE finances that portion of its con- struction costs and other capital requirements in excess of internally generated funds through the issuance of unsecured short term debt consisting of commercial paper and borrowings from banks. As of December 31, 1994, ACE has arranged for lines of credit of $150 million of which $141.4 million was available. Permanent financing by ACE is undertaken by the issuance of its long term debt and Preferred Stock and from capital contributions by the parent company. ACE's nuclear fuel requirements associated with its jointly-owned units have been financed through arrangements with a third party. In 1994, ACE issued and sold $54.65 million of its long term debt consisting of Pollution Control Bonds. The proceeds from the financings were used for refunding higher cost Pollution Control Bonds and for construction purposes. Additionally, $125 million in debt securities were registered and are available for issuance in 1995. In 1993, ACE issued and sold $469 million of long term debt consisting of $240 million of Series B Medium Term Notes, $225 million of First Mortgage Bonds and $4 million of Pollution Control Bonds. The proceeds from the 1993 financings were also used for refunding higher cost debt and construction purposes. In 1992, ACE issued and sold $60 million of Series A Medium Term Notes, the proceeds of which were used for ACE's construction program. During 1995-1997, ACE expects to issue $50 million in new long term debt to be used for funding of construction and repayment of short term debt. Provisions of ACE's charter, mortgage and debenture agreements can limit, in certain cases, the amount and type of additional financing which may be used. At December 31, 1994, ACE estimates additional funding capacities of $218 million of First Mortgage Bonds, or $530 million of Preferred Stock, or $432 million of unsecured debt. These amounts are not necessarily additive. Non-Utility Companies Management of the nonutility companies is evaluating business opportunities which are expected to enhance nonutility operations over the next five years, with focused efforts on expanding and improving its financial performance in nonutility activities. Matters specific to each of the nonutility companies are discussed below. Atlantic Energy Enterprises, Inc. On January 1, 1995, AEI formed a new subsidiary, Atlantic Energy Enterprises, Inc. (AEE), which will hold ownership of the existing nonutility businesses of AGI, ASP, ATE, ATS, and AET. As part of this reorganization, AEE expects to develop an organization structured to allow greater flexibility to pursue non-regulated business opportunities. Expansion of business is expected to focus in the areas of non-regulated electric generation, energy technology investments and thermal energy systems. Investments in these areas may take place as direct ownership or in partnership with others. AEE's business plan reflects the potential investment of approximately $215 million over the next five years. AEE will have its own Board of Directors, including outside directors which will help to guide the non-regulated enterprises. Atlantic Generation, Inc. AGI's activities are represented by partnership interests in three cogeneration projects. At December 31, 1994, total investments amounted to $24.6 million. Cash outlays for investments (comprised of capital investment, advances and loans) by AGI for the period 1992-1994 totaled $14.6 million. AGI obtained the funds for its investments through capital contributions from the parent company. During the period 1992- 1994, AGI received distributions from the partnerships totaling $4.4 million from return of investment and repayment of outstanding advances and loans. In June 1994, the third cogeneration project became operational. AGI expects to continue investment in additional domestic independent power projects in the years 1995-1999. Atlantic Southern Properties, Inc. ASP's real estate investment at December 31, 1994 is a 280,000 square-foot office and warehouse facility in Atlantic County, New Jersey. This investment has a net book value of $10.3 million after a write-down of the carrying value in 1994 of $2.6 million reflecting diminished value due to excess vacancy. As of December 31, 1994, ASP's investment has been funded by capital contributions from the parent company and borrowings under a loan agreement with ATE. ASP's current agreement with ATE provides for the repayment of such borrowings on or before December 31, 1995. Extensions to repay these borrowings have been routinely granted in the past. No real estate activity beyond the existing site is contemplated at this time by ASP. ATE Investment, Inc. ATE has invested $78.2 million in leveraged leases of three commercial aircraft and two containerships. ATE has loans outstanding to ASP which totaled $8.7 million at December 31, 1994. ATE obtained funds for its business activities and loans to ASP through capital contributions from the parent company and external borrowings which include $15 million principal amount of 7.44% Senior Notes due 1999 and a revolving credit and term loan facility for borrowings of up to $35 million. At December 31, 1994, there was $1 million in borrowings outstanding under this facility. ATE's cash flows are provided from lease rental receipts and realization of existing tax benefits generated by the leveraged leases sufficient to sustain operations. Atlantic Thermal Systems, Inc. ATS is presently engaged in the development of thermal heating and cooling systems. ATS has obtained funds for its project development through advances from the parent company and has established a $10 million revolving credit agreement with ATE. There were no loans outstanding from this agreement as of December 31, 1994. Atlantic Energy Technology, Inc. AET is currently concluding the affairs of its subsidiary, which is its sole investment. The net investment in this subsidiary is nominal. The amount of this investment was written down in 1993 as a result of planned reorganization activities that were provided for in 1992. At that time the subsidiary discontinued its operations to concentrate on licensing its proprietary knowledge. In 1993, AET received life insurance proceeds of $500 thousand through its subsidiary. There are no future plans for investment activity at this time by AET. RESULTS OF OPERATIONS Operating results are dependent upon the performance of the subsidiaries, primarily ACE. Since ACE is the principal subsidiary within the consolidated group, the operating results presented in the Consolidated Statement of Income are those of ACE, after elimination of transactions among members of the consolidated group. Results of the nonutility companies are reported in Other Income. Revenues Operating Revenues - Electric increased 5.5% and 6.0% in 1994 and 1993, respectively. Components of the overall changes are shown as follows: (millions) 1994 1993 Base Revenues $(4.2) $12.2 Levelized Energy Clauses 30.3 (5.0) Kilowatt-hour Sales 9.6 42.6 Unbilled Revenues (7.3) (1.2) Sales for Resale 17.8 0.7 Other 1.2 (0.4) Total $47.4 $48.9 Levelized Energy Clause (LEC) revenues increased in 1994 due to rate increases of $55 million in July 1994 and $10.9 million in October 1993. The decrease in 1993 LEC revenues was the net result of the increase in October 1993 and an $8.5 million decrease effective October 1992. Changes in kilowatt-hour sales are discussed under "Billed Sales to Ultimate Utility Customers." Overall, the combined effects of changes in rates charged to customers and kilowatt-hour sales resulted in increases of 3.1% and 0.8% in revenues per kilowatt-hour in 1994 and 1993, respectively. The changes in Unbilled Revenues are a result of the amount of kilowatt-hours consumed by ultimate customers at the end of the respective periods, which are affected by weather and economic conditions, and the corresponding price per kilowatt-hour. The changes in Sales for Resale are a function of ACE's energy mix strategy, which in turn is dependent upon ACE's needs for energy, the energy needs of other utilities participating in the regional power pool of which ACE is a member, and the sources and prices of energy available. The increase in Sales for Resale for 1994 was the result of meeting the demands of the regional power pool due to the extreme weather conditions during the first six months of 1994. Effective July 1, 1994, the BPU permitted hotel-casino customers to take service under existing commercial rate schedules which is expected to reduce annual revenue by approximately $7 million. Billed Sales to Ultimate Utility Customers Changes in kilowatt-hour sales are generally due to changes in the average number of customers and average customer use, which is affected by economic and weather conditions. Energy sales statistics, stated as percentage changes from the previous year, are shown as follows: 1994 1993 Avg Avg # Avg Avg # Customer Class Sales Use of Cust Sales Use of Cust Residential 1.5% .4% 1.1% 6.7% 5.9% .8% Commercial 2.6 .5 2.1 5.1 3.2 1.9 Industrial (2.9) (3.8) .9 2.6 4.6 (1.9) Other 3.2 4.0 (.8) 1.2 1.6 (.4) Total 1.3 - 1.2 5.4 4.4 .9 The 1994 increase in total kilowatt-hour sales was due to the extreme weather conditions during the first quarter of 1994 and an increased number of billing days in 1994 compared to 1993. This increase was partially offset by the abnormal weather conditions during the last half of the year when kilowatt-hour usage fell below 1993 levels. In 1993, total kilowatt-hour sales increased primarily due to the colder winter temperatures during the first quarter, and below normal temperatures during the summer of 1992. Improved economic conditions also contributed to the increase in 1993 sales. Commercial sales in both years benefitted from night lighting programs. The decline in 1994 industrial sales is due to the loss of ACE's largest customer to an independent power producer during the year. Costs and Expenses Total Operating Expenses increased 7.6% and 3.9% in 1994 and 1993, respectively. Included in these expenses are the costs of energy, purchased capacity, operations, maintenance, depreciation and taxes. Energy expense reflects cost incurred for energy needed to meet load requirements, various energy supply sources used and operation of the LECs. Changes in costs reflect the varying availability of low-cost generation from ACE-owned and purchased energy sources, and the corresponding unit prices of the energy sources used, as well as changes in the needs of other utilities participating in the Pennsylvania-New Jersey-Maryland Interconnection. The cost of energy is recovered from customers primarily through the operation of the LEC. Until 1994, earnings were generally not affected by energy costs because these costs are adjusted to match the associated LEC revenues. In any period, the actual amount of LEC revenue recovered from customers may be greater or less than the actual amount of energy cost incurred in that period. Such respective overrecovery or underrecovery of energy costs is recorded on the Consolidated Balance Sheet as a liability or an asset as appropriate. Amounts in the balance sheet are recognized in the Consolidated Statement of Income within Energy expense during the period in which they are subsequently recovered through the LEC. ACE was underrecovered by $11 million and by $7.2 million at December 31, 1994 and 1993, respectively. As a result of implementing the Southern New Jersey Economic Initiative in rates, effective July 19, 1994, the Company is forgoing recovery of future energy costs in LEC rates of $28 million through May 31, 1995. After tax income has been reduced by $10.1 million due to the effects of this initiative in 1994. In 1994, Energy expense increased 32.7% due to the adoption of the Southern New Jersey Economic Initiative and the increase in the levelized energy clause that reduced underrecovered fuel costs. Production-related energy costs for 1994 increased by 19.9% due to increased overall generation and the high cost of energy from additional nonutility sources. The average unit cost for energy in 1994 increased to 2.04 cents per kilowatt-hour compared to 1.82 cents per kilowatt-hour in 1993. Energy expense for 1993 decreased 1.1% primarily due to an increase in underrecovered fuel costs in 1993 compared to 1992. Production- related energy cost for 1993 increased by 6.7% largely due to increased generation. The average unit cost for energy in 1993 increased to 1.82 cents per kilowatt-hour compared to 1.8 cents per kilowatt-hour in 1992. The 1993 increase in the per unit cost is a result of increased amounts of higher cost energy from nonutility sources and a decreased supply of lower cost energy from coal sources. Purchased Capacity expense reflects entitlements to generating capacity owned by others. Purchased Capacity expense increased 18.2% and 7.4% in 1994 and 1993, respectively. The increases in Purchased Capacity reflect additional capacity supplied by nonutility power producers that became operational in each year. Operations expense decreased 3.5% in 1994 and increased 8.9% in 1993. The increase in 1993 was due primarily to corporate reorganization activities by ACE. Maintenance expense decreased 17.2% in 1994 due to cost saving measures in maintenance activities. The 9% decrease in 1993 maintenance expense was due to the scheduling of maintenance projects. Depreciation and Amortization expense increased 7.9% in 1994 as a result of an increase in the depreciable base of ACE's electric plant in service. State Excise Taxes expense decreased 6.9% in 1994 and increased by 6.4% in 1993. The increase in 1993 is due to a higher tax assessment. Federal Income Taxes decreased 6.1% in 1994 and increased 21.9% in 1993 as a result of the level of taxable income during those periods. The change in the 1993 amount reflects the increase in the Federal income tax rate to 35% from 34%, effective in that year. Employee Separation costs represents programs by ACE to reduce its workforce by about 20%, or 350 people. Other-Net within Other Income (Expense) decreased in 1994 due to the net after tax impacts of the write-off of deferred nuclear study costs of $1.4 million and the write-down of the carrying value of ASP's commercial property of $1.7 million. Litigation Settlement in 1992 represents ACE's share of the settlement of litigation concerning the Nuclear Regulatory Commission imposed shutdown in earlier years of the Peach Bottom Atomic Power Station. The Litigation Settlement for 1993 represents an additional allocation to customers of the proceeds from the 1992 settlement as ordered by the BPU. Other-Net increased for 1993 as a result of the first full year operation of AGI's cogeneration projects. Interest on Long Term Debt decreased in 1994 due to refunding of higher cost debt. Interest on Long Term Debt increased 11.4% in 1993 reflecting the net effects of issuance of $469 million of First Mortgage Bonds during the year, and the maturity, redemption and reacquisition of various series of First Mortgage Bonds totaling $344.8 million principal amount. At December 31, 1994, 1993 and 1992, ACE's embedded cost of long term debt was 7.6%, 7.8% and 8.8%, respectively. Preferred Stock Dividend Requirements decreased as a result of continuing mandatory and optional redemptions in each year. Embedded cost of Preferred Stock as of December 31, 1994, 1993 and 1992 was 7.6%, 7.7% and 7.7%, respectively. Outlook The nature of the electric utility business is capital intensive. ACE's ability to generate cash flows from operating activities and its continued access to the capital markets is affected by the timing and adequacy of rate relief, competition and the economic vitality of its service territory. ACE has lowered its planned capital expenditures for the period 1995-1999 which will reduce its external cash requirements. Additionally, ACE expects to review its revenue requirements with a view toward overall rate stability in light of expected price competition. ACE believes one of its greatest assets is its high level of customer service and reliability. The financial performance of ACE will be affected in the future by the level of sales of energy and the impacts of regulation and competition. To better position itself for a more competitive environment, ACE initiated cost reduction programs in 1994. One such program was a workforce reduction program which ACE expects will result in annual after tax cost savings in excess of $10 million. Other issues which may impact the electric utility business include public health, safety and environmental legislation. Changes in operating revenues in the future will result from changes in customer rates, energy consumption and general economic conditions in the service area, as well as the impacts of load management and conservation programs instituted by ACE. ACE's revenues could also be affected by the increasing competition in the retail and wholesale energy market. The emergence of competition among suppliers of electricity may require ACE to create new rate structures and to offer incentives to its Commercial and Industrial customers. Net income of ACE may be affected by the operational performance of nuclear generating facilities. ACE is subject to a BPU-mandated nuclear unit performance standard. Under the standard, penalties or rewards are based on the aggregate capacity factor of ACE's five jointly-owned nuclear units. Any penalties incurred would not be permitted to be recovered from customers and would be charged against income. The Energy Policy Act, enacted in October 1992, provides, among other things, for increased competition between utility and non- utility electric generators and permits wholesale transmission access, or wheeling, with certain requirements. Other pressures such as increased customer demands for competitive rates, potential loss of municipal power sales, excess generating capacity, together with the emergence of nonutility energy sources, are expected to increase the amount of business risk for electric utilities in the future. In addition, the extent to which New Jersey public utility regulation is modified to be reflective of these new competitive realities will be a key factor affecting the Company. Development of electric generating facilities by nonutilities has occurred in ACE's service territory. Effects of nonutility generation could be offset to some extent by natural growth in the service territory and additional efforts by ACE to reduce the impact of the potential loss of kilowatt-hour sales and revenues. The CAAA will require modifications at certain of ACE's facilities. Compliance with the CAAA will cause ACE to incur additional operating and/or capital costs. Presently, ACE's construction budget for 1995 through 1997 includes approximately $16 million related to the cost of compliance. In addition, certain power purchase arrangements will be affected by the CAAA, the effects of which are not presently determinable. Federal and state legislation authorize various governmental authorities to issue orders compelling responsible parties to take cleanup action at sites determined to present danger from releases of hazardous substances. The various statutes impose joint and several liability without regard to fault for certain investigative and cleanup costs for all potentially responsible parties. ACE has received notification with respect to two sites within New Jersey as one of a number of alleged responsible parties for cleanup and remedial actions. ACE's responsibility is not expected to exceed $1 million in the aggregate. The Company believes that to continue to be successful it will need to focus on improving the core utility operations of ACE to meet expected competition, while identifying opportunities for new businesses and growth in earnings through AEE. With support from the Board of Directors, management has embarked on implementing an aggressive business plan which it believes will position the Company to meet the challenges of a new competitive environment. Inflation Inflation affects the level of operating expenses and also the cost of new utility plant placed in service. Traditionally, the rate making practices that have applied to ACE have involved the use of historical test years and the actual cost of utility plant. However, the ability to recover increased costs through rates, whether resulting from inflation or otherwise, depends upon the frequency, timing and results of rate case decisions. ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF MANAGEMENT The management of Atlantic Energy, Inc. and its subsidiaries (the Company) is responsible for the preparation of the financial statements presented in this Annual Report. The financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management made informed judgments and estimates, as necessary, relating to events and transactions reported. Management is also responsible for the preparation of other financial information included elsewhere in this Annual Report. Management has established a system of internal accounting and financial controls and procedures designed to provide reasonable assurance as to the integrity and reliability of financial reporting. In any system of financial reporting controls, inherent limitations exist. Management continually examines the effectiveness and efficiency of this system, and actions are taken when opportunities for improvement are identified. Management believes that, as of December 31, 1994, the system of internal accounting and financial controls over financial reporting is effective. Management also recognizes its responsibility for fostering a strong ethical climate in which the Company's affairs are conducted according to the highest standards of corporate conduct. This responsibility is characterized and reflected in the Company's code of ethics and business conduct policy. The financial statements have been audited by Deloitte & Touche LLP, Certified Public Accountants. Deloitte & Touche LLP provides objective, independent audits as to management's discharge of its responsibilities insofar as they relate to the fairness of the financial statements. Their audits are based on procedures believed by them to provide reasonable assurance that the financial statements are free of material misstatement. The Company's internal auditing function conducts audits and appraisals of the Company's operations. It evaluates the system of internal accounting, financial and operational controls and compliance with established procedures. Both the external auditors and the internal auditors periodically make recommendations concerning the Company's internal control structure to management and the Audit Committee of the Board of Directors. Management responds to such recommendations as appropriate in the circumstances. None of the recommendations made for the year ended December 31, 1994 represented significant deficiencies in the design or operation of the Company's internal control structure. J. L. Jacobs F. F. Frankowski President and Chief Accounting Officer Chief Executive Officer February 9, 1995 REPORT OF THE AUDIT COMMITTEE The Audit Committee of the Board of Directors is comprised solely of independent directors. The members of the Committee are: Jos. Michael Galvin, Jr., Gerald A. Hale, Matthew Holden, Jr., Kathleen MacDonnell and Harold J. Raveche. The Committee held four meetings during 1994. The Committee oversees the Company's financial reporting process on behalf of the Board of Directors. In fulfilling its responsibility, the Committee recommended to the Board of Directors, subject to shareholder ratification, the selection of the Company's independent auditors, Deloitte & Touche LLP . The Committee discussed with the Company's internal auditors and Deloitte & Touche LLP the overall scope of and specific plans for their respective activities concerning the Company. The Committee also discussed the Company's consolidated financial statements with Deloitte & Touche LLP. The Committee meets regularly with the internal and external auditors, without management present, to discuss the results of their activities, the adequacy of the Company's system of accounting, financial and operational controls and the overall quality of the Company's financial reporting. The meetings are designed to facilitate any private communication with the Committee desired by the internal and external auditors. No significant actions by the Committee were required during the year ended December 31, 1994 as a result of any private communications conducted. Matthew Holden, Jr. Chairman, Audit Committee February 9, 1995 INDEPENDENT AUDITORS' REPORT To the Shareholders and the Board of Directors of Atlantic Energy, Inc.: We have audited the accompanying consolidated balance sheets of Atlantic Energy, Inc. and subsidiaries as of December 31, 1994 and 1993 and the related consolidated statements of income, changes in common shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Atlantic Energy, Inc. and its subsidiaries at December 31, 1994 and 1993 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP February 9, 1995 Parsippany, New Jersey CONSOLIDATED STATEMENT OF INCOME Atlantic Energy, Inc. and Subsidiaries (Thousands of Dollars) For the Years Ended December 31, 1994 1993 1992 Operating Revenues-Electric $913,039 $865,675 $816,825 Operating Expenses: Energy 210,891 159,438 161,134 Purchased Capacity 130,929 110,781 103,173 Operations 156,409 162,151 148,917 Maintenance 37,568 45,360 49,837 Depreciation and Amortization 73,344 67,950 69,371 State Excise Taxes 97,072 104,280 97,969 Federal Income Taxes 42,529 45,277 37,143 Other Taxes 10,757 10,854 12,113 Total Operating Expenses 759,499 706,091 679,657 Operating Income 153,540 159,584 137,168 Other Income and Expense: Allowance for Equity Funds Used During Construction 3,634 2,368 2,212 Employee Separation Costs, net of tax of $9,265 (17,335) - - Litigation Settlement, net of tax of: 1993-$(1,321); 1992-$4,982 - (2,564) 9,671 Other-Net 8,678 12,884 9,519 Total Other Income and Expense (5,023) 12,688 21,402 Income Before Interest Charges 148,517 172,272 158,570 Interest Charges: Interest on Long Term Debt 57,346 59,385 53,284 Other Interest Expense 1,114 1,633 2,678 Total Interest Charges 58,460 61,018 55,962 Allowance for Borrowed Funds Used During Construction (2,772) (1,448) (1,414) Net Interest Charges 55,688 59,570 54,548 Less Preferred Stock Dividend Requirements of Subsidiary 16,716 17,405 17,812 Net Income $ 76,113 $ 95,297 $ 86,210 Average Number of Shares of Common Stock Outstanding (in thousands) 54,149 52,888 51,592 Per Common Share: Earnings $1.41 $1.80 $1.67 Dividends Declared $1.54 $1.535 $1.515 Dividends Paid $1.54 $1.53 $1.51 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. CONSOLIDATED STATEMENT OF CASH FLOWS Atlantic Energy, Inc. and Subsidiaries (Thousands of Dollars) For the Years Ended December 31, 1994 1993 1992 Cash Flows Of Operating Activities: Net Income $ 76,113 $ 95,297 $ 86,210 Deferred Purchased Power Costs 14,920 (6,050) 13,410 Deferred Energy Costs (3,819) (15,269) (6,143) Preferred Stock Dividend Requirements of Subsidiary 16,716 17,405 17,812 Depreciation and Amortization 73,344 67,950 69,371 Deferred Income Taxes-Net 17,863 20,901 23,386 Prepaid State Excise Taxes (37,029) (35,982) 540 Employee Separation Costs 26,600 - - Net (Increase) Decrease in Other Working Capital (24,571) 32,364 7,685 Other-Net (2,457) 1,534 5,650 Net Cash Provided by Operating Activities 157,680 178,150 217,921 Cash Flows Of Investing Activities: Utility Cash Construction Expenditures (119,961) (138,111) (130,700) Leased Property (10,713) (9,946) (9,565) Nuclear Decommissioning Trust Fund Deposits (6,424) (6,424) (6,424) Other-Net (11,276) (9,832) (8,524) Net Cash Used by Investing Activities (148,374) (164,313) (155,213) Cash Flows Of Financing Activities: Proceeds from Long Term Debt 54,572 464,633 74,655 Retirement and Maturity of Long Term Debt (42,664) (370,541) (40,599) Increase (Decrease) in Short Term Debt 8,600 (14,600) (6,000) Proceeds from Common Stock Issued 10,289 16,208 16,110 Repurchase of Common Stock (3,909) - - Redemption of Preferred Stock (24,500) (5,469) (250) Dividends Declared on Preferred Stock (16,716) (17,405) (17,812) Dividends Declared on Common Stock (75,829) (67,259) (65,644) Other-Net 12,330 8,584 4,412 Net Cash (Used) Provided by Financing Activities (77,827) 14,151 (35,128) Net (Decrease) Increase in Cash and Temporary Investments (68,521) 27,988 27,580 Cash and Temporary Investments, beginning of year 73,635 45,647 18,067 Cash and Temporary Investments, end of year $ 5,114 $ 73,635 $ 45,647 Supplemental Schedule of Payments: Interest $ 62,855 $ 52,765 $ 55,275 Income taxes $ 23,374 $ 19,565 $ 24,312 Noncash Financing Activities: Common Stock issued under stock plans $ 7,652 $ 14,088 $ 12,692 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. CONSOLIDATED BALANCE SHEET Atlantic Energy, Inc. and Subsidiaries (Thousands of Dollars) December 31, 1994 1993 Assets Electric Utility Plant: In Service: Production $1,151,661 $1,054,217 Transmission 357,389 338,584 Distribution 659,619 627,649 General 180,204 173,206 Total In Service 2,348,873 2,193,656 Less Accumulated Depreciation 725,999 668,832 Net 1,622,874 1,524,824 Construction Work in Progress 110,078 156,590 Land Held for Future Use 6,941 6,901 Leased Property-Net 42,030 45,268 Electric Utility Plant-Net 1,781,923 1,733,583 Investments and Nonutility Property: Investment in Leveraged Leases 78,216 77,268 Nuclear Decommissioning Trust Fund 52,004 43,163 Nonutility Property and Equipment-Net 18,163 14,535 Other Investments and Funds 28,940 18,102 Total Investments and Nonutility Property 177,323 153,068 Current Assets: Cash and Temporary Investments 5,114 73,635 Accounts Receivable: Utility Service 54,554 51,502 Miscellaneous 14,067 11,420 Allowance for Doubtful Accounts (3,300) (3,000) Unbilled Revenues 32,070 39,309 Fuel (at average cost) 28,030 14,635 Materials and Supplies (at average cost) 27,823 28,230 Working Funds 14,475 14,315 Deferred Energy Costs 10,999 7,180 Deferred Income Taxes 12,264 3,283 Other 11,883 15,796 Total Current Assets 207,979 256,305 Deferred Debits: Unrecovered Purchased Power Costs 115,538 130,458 Recoverable Future Federal Income Taxes 85,854 85,855 Unrecovered State Excise Taxes 73,834 33,706 Unamortized Debt Costs 38,184 39,306 Other Regulatory Assets 47,055 41,705 Other 17,865 13,522 Total Deferred Debits 378,330 344,552 Total Assets $2,545,555 $2,487,508 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Atlantic Energy, Inc. and Subsidiaries (Thousands of Dollars) December 31, 1994 1993 Liabilities and Capitalization Capitalization: Common Shareholders' Equity: Common Stock, no par value; 75,000,000 shares authorized; issued and outstanding: 1994 - 54,155,245; 1993 - 53,506,786 $ 593,475 $ 579,443 Retained Earnings 249,181 256,549 Total Common Shareholders' Equity 842,656 835,992 Preferred Stock of Atlantic City Electric Company: Not Subject to Mandatory Redemption 40,000 40,000 Subject to Mandatory Redemption 149,250 173,750 Long Term Debt 778,288 766,101 Total Capitalization (excluding current portion) 1,810,194 1,815,843 Current Liabilities: Preferred Stock Redemption Requirement 12,250 12,250 Long Term Debt 1,000 - Short Term Debt 8,600 - Accounts Payable 66,080 63,847 Taxes Accrued 10,409 16,020 Interest Accrued 19,168 22,149 Dividends Declared 24,681 24,910 Accrued Employee Separation Costs 26,600 - Other 19,813 25,626 Total Current Liabilities 188,601 164,802 Deferred Credits and Other Liabilities: Deferred Income Taxes 412,574 383,347 Deferred Investment Tax Credits 51,646 54,180 Capital Lease Obligations 41,111 44,407 Other 41,429 24,929 Total Deferred Credits and Other Liabilities 546,760 506,863 Commitments and Contingencies (Note 10) Total Liabilities and Capitalization $2,545,555 $2,487,508 CONSOLIDATED STATEMENT OF CHANGES IN Atlantic Energy, Inc. COMMON SHAREHOLDERS' EQUITY and Subsidiaries (Thousands of Dollars) Common Retained Shares Stock Earnings Balance, December 31, 1991 50,896,074 $520,345 $234,894 Common Stock issued 1,302,550 28,802 Net Income 86,210 Common stock dividends (78,336) Balance, December 31, 1992 52,198,624 549,147 242,768 Common Stock issued 1,308,162 30,296 Net Income 95,297 Capital stock expense of subsidiary (169) Common stock dividends (81,347) Balance, December 31, 1993 53,506,786 579,443 256,549 Common Stock issued 870,159 17,941 Common Stock repurchased (221,700) (3,909) Net Income 76,113 Common stock dividends (83,481) Balance, December 31, 1994 54,155,245 $593,475 $249,181 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Notes to Consolidated Financial Statements Note 1. SIGNIFICANT ACCOUNTING POLICIES Organization - Atlantic Energy, Inc. (the Company, AEI or parent) is the parent of a consolidated group of wholly-owned subsidiaries consisting of: Atlantic City Electric Company (ACE) and the following nonutility companies: Atlantic Energy Technology, Inc. (AET), Atlantic Generation, Inc. (AGI), Atlantic Southern Properties, Inc. (ASP), ATE Investment, Inc. (ATE) and Atlantic Thermal Systems, Inc. (ATS). ACE is a public utility primarily engaged in the generation, transmission, distribution and sale of electric energy. Rates for service are regulated by the New Jersey Board of Public Utilities (BPU), formerly Board of Regulatory Commissioners. ACE's service territory encompasses approximately 2,700 square miles within the southern one-third of New Jersey. The majority of ACE's customers are residential and commercial. ACE, with its wholly-owned subsidiary that operates certain generating facilities, is the principal subsidiary within the consolidated group. AGI and its wholly-owned subsidiaries are engaged in the development and operation of cogeneration power projects, currently located in New Jersey and New York through several partnership arrangements. ASP owns and manages a commercial office and warehouse facility located in southern New Jersey. ATE provides fund management and financing to affiliates and manages a portfolio of investments in leveraged leases for equipment used in the airline and shipping industries. ATS and its wholly-owned subsidiary, both formed in May 1994, are engaged in the development of thermal heating and cooling systems. AET is presently concluding the affairs of its subsidiary, which is its sole investment. On January 1, 1995, a new subsidiary of AEI, Atlantic Energy Enterprises, Inc. (AEE), was formed. AEI will transfer direct ownership of the existing nonutility companies to AEE. AEE will seek to form new businesses and ventures and invest in established businesses. Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. ACE, AET, AGI and ATS consolidate their respective subsidiaries. AGI accounts for another investment using the equity method by recognizing its proportionate share of the results of operations of that investment. The results of operations of the nonutility companies are not significant to the results of the Company and are classified under Other Income in the Consolidated Statement of Income. Regulation - The accounting policies and rates of ACE are subject to the regulations of the BPU and in certain respects to the Federal Energy Regulatory Commission (FERC). ACE follows generally accepted accounting principles (GAAP) and financial reporting requirements employed by all industries as specified by the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC). However, accounting for rate regulated industries may depart from GAAP applied by other industries as permitted by Statement of Financial Accounting Standards No. 71 (SFAS No. 71). SFAS No. 71 provides guidance on circumstances where the economic effect of a regulator's decision warrants different applications of GAAP as a result of the rate making process. In setting rates, a regulator may provide recovery of an incurred cost in a year or years other than the year the cost is incurred. As permitted by SFAS No. 71, costs ordered by a regulator to be deferred or capitalized for future recovery are recorded as a regulatory asset because the regulator's rate action provides reasonable assurance of future economic benefits attributable to these costs. In a non-rate regulated industry, such costs may be charged to expense in the year incurred. SFAS No. 71 further specifies that a regulatory liability is recorded when a regulator orders a refund to customers of revenues previously collected, or when existing rates provide for recovery of future costs not yet incurred. Such treatment is not afforded to non-rate regulated companies. When collection of regulatory assets or relief of regulatory liabilities is no longer probable, the assets and liabilities are applied to income in the year that the probability assessment is made. Specific regulatory assets and liabilities that have been recorded are discussed elsewhere in the notes to the consolidated financial statements. Electric Operating Revenues - Revenues are recognized when electric energy services are rendered, and include estimates for amounts unbilled at the end of the period for energy used subsequent to the last billing cycle. Nuclear Fuel - Fuel costs associated with ACE's participation in jointly-owned nuclear generating stations, including spent nuclear fuel disposal costs, are charged to Energy expense based on the units of thermal energy produced. Electric Utility Plant - Property is stated at original cost. Generally, the plant is subject to a first mortgage lien. The cost of property additions, including replacement of units of property and betterments, is capitalized. Included in certain property additions is an Allowance for Funds Used During Construction (AFDC), which is defined in the applicable regulatory system of accounts as the cost during the period of construction of borrowed funds used for construction purposes and a reasonable rate on other funds when so used. AFDC has been calculated using a semi-annually compounded rate of 8.25%, as approved by the BPU, since August 1, 1993. The AFDC rate was 8.95%, as approved by the BPU, prior to this date. Depreciation - ACE provides for straight-line depreciation based on the estimated remaining life of transmission and distribution property, remaining life of the related nuclear plant operating license for nuclear property and estimated average service life for all other depreciable property. The overall composite rate of depreciation was approximately 3.3% in 1994 and 1993 and 3.5% in 1992. Accumulated depreciation is charged with the cost of depreciable property retired together with removal costs less salvage and other recoveries. Depreciation expense for the nonutility companies is not significant. Nuclear Decommissioning Trust - ACE has a trust to fund the future costs of decommissioning each of the five nuclear units in which it has an ownership interest. The current annual funding amount, as authorized by the BPU, totals $6.4 million and is provided for in rates charged to customers. The funding amount is based on estimates of the future cost of decommissioning each of the units, dates that decommissioning activities are expected to occur and return to be earned by the assets of the fund. The present value of ACE's nuclear decommissioning obligation, based on 1987 site specific studies used by the BPU for approval in 1991 and restated in 1994 dollars, is $152.2 million. The BPU has further established that decommissioning activities are expected to begin in 2006 and continue through 2032. Actual costs and timing of decommissioning activities may vary from the current estimates. ACE will seek to adjust these estimates and the level of rates collected from customers in future BPU proceedings to reflect changes in decommissioning cost estimates and the expected levels of inflation and interest to be earned by the assets in the trust. As of December 31, 1994, the present value of such contributions based on estimates for future decommissioning costs and the dates such activities are expected to occur is $111.4 million, without earnings on or appreciation of the fund assets. As of December 31, 1994, the cost and market value of the trust were $52 million. Trust contributions of the related $36.9 million qualify for Federal income tax purposes. The related reserve for decommissioning costs are presented as a component of accumulated depreciation and amount to $51.1 million at December 31, 1994 and $42.2 million at December 31, 1993. The SEC has questioned certain accounting practices employed by the electric utility industry concerning decommissioning costs for nuclear generating facilities. The FASB is currently reviewing this issue within the broad context of removal costs relative to all industries. At this time, the Company cannot predict what future accounting practices may be required by the FASB and SEC concerning this issue, nor the impact on the financial statements that any new accounting practices may have. Deferred Energy Costs - As approved by the BPU, ACE has a Levelized Energy Clause (LEC) through which energy and energy- related costs (energy) are charged to customers. LEC rates are based on projected energy costs and prior period underrecoveries or overrecoveries of energy costs. Energy costs are recovered through levelized rates over the period of projection, which is generally a 12-month period. In any period, the actual amount of LEC revenues recovered from customers may be greater or less than the recoverable amount of actual energy costs incurred in that period. Energy expense is adjusted to match the associated LEC revenues. Any underrecovery (an asset representing energy costs incurred that are to be collected from customers) or overrecovery (a liability representing previously collected energy costs to be returned to customers) of costs is deferred on the Consolidated Balance Sheet as Deferred Energy Costs. These deferrals are recognized in the Consolidated Statement of Income as Energy expense during the period in which they are subsequently included in the LEC. Income Taxes - Effective January 1, 1993, deferred Federal and state income taxes are provided on all significant temporary differences between book bases and tax bases of assets and liabilities, transactions that reflect taxable income in a year different than book income, and tax carryforwards. Deferred Federal and state income taxes for 1992 were provided on all significant current transactions for which the timing of recognition differs for book and tax purposes. Investment tax credits, which are used to reduce current Federal income taxes, are deferred on the Consolidated Balance Sheet and recognized in book income over the life of the related property. The Company and its subsidiaries file a consolidated Federal income tax return. Income taxes are allocated to each of the companies within the consolidated group based on the separate return method. Earnings Per Common Share - This is computed based upon the weighted average number of common shares outstanding during the year. Common stock equivalents attributable to the Equity Incentive Plan do not impact this computation because they are currently antidilutive. Unrecovered Purchased Power Costs - ACE has an arrangement that commenced in 1983 to purchase capacity and related energy through September 30, 2000. Levelized base rates over the term of the arrangement were approved by the BPU to recover costs estimated at commencement to be incurred. During the first half of the term, estimated costs that exceeded levelized revenues were deferred on the Consolidated Balance Sheet as Unrecovered Purchased Power Costs. Since then, levelized revenues have been greater than the estimated costs, permitting the deferred costs to be charged to Purchased Capacity expense on the Consolidated Statement of Income. The BPU granted a return on the unrecovered deferred balance throughout the term of the arrangement. The unrecovered deferred balances at December 31, 1994 and 1993 were $95.9 million and $110.5 million, respectively. Also included within Unrecovered Purchased Power Costs are costs incurred in renegotiating a contract with an independent power producer. These costs are amortized to expense over the BPU-approved recovery period of 20 years beginning in 1994. The unrecovered balances were $19.6 million and $20 million at December 31, 1994, respectively. Regulatory Assets and Liabilities - Costs incurred by ACE that have been permitted by the BPU to be deferred for recovery in rates in more than one year, or for which future recovery is probable, have been recorded as regulatory assets. Regulatory assets are amortized to expense over the period of recovery. Total regulatory assets on the Consolidated Balance Sheet at December 31, 1994 and 1993 were $365.5 million and $332.1 million, respectively. Unamortized costs currently being recovered in rates at December 31, 1994 and 1993, respectively, and remaining recovery periods at December 31, 1994 are: Unrecovered State Excise Taxes of $73.8 million and $33.7 million, with a remaining recovery period of eight years; decommissioning and decontaminating Federally-owned nuclear units of $7.2 million and $8.4 million, with a remaining recovery period of 14 years; and asbestos removal of $9.6 million and $9.9 million for which the recovery period is over the remaining depreciable life of the related generating station of 36 years. Property Abandonment Costs at their net present value of $5 million and $6.3 million at December 31, 1994 and 1993, respectively, are being recovered through rates with no return on the unamortized balances of $6.5 million and $8.5 million, respectively. Such costs were written down to their net present values at the date of abandonment with subsequent accretions of the unamortized balances over the recovery period. These costs have a recovery period between two and seven years. Also included in Other Regulatory Assets are amounts for which future recovery is probable of $9.4 million and $9.1 million at December 31, 1994 and 1993, respectively. Costs associated with debt reacquired by refundings, included in Unamortized Debt Costs, are amortized over the life of the newly issued debt as permitted by the BPU in accordance with FERC guidelines. The unamortized balances of these costs were $32.2 million and $33.2 million at December 31, 1994 and 1993, respectively. Recovery of regulatory assets for Unrecovered Purchased Power Costs (Note 1), Deferred Energy Costs (Note 1), Recoverable Future Federal Income Taxes (Note 2) and Postretirement Benefits Other Than Pensions (Note 4) are separately discussed in the Notes to Consolidated Financial Statements where indicated. No regulatory liabilities existed at December 31, 1994 and 1993. Financial Instruments - A number of items within Current Assets and Current Liabilities on the Consolidated Balance Sheet are considered to be financial instruments because they are cash or are to be settled in cash. Due to their short term nature, the carrying values of these items approximate their fair market values. Accounts Receivable - Utility Service and Unbilled Revenues are subject to concentration of credit risk because they pertain to utility service conducted within a confined geographic region. Investments in Leveraged Leases are subject to concentration of credit risk because they are exclusive to a small number of parties within two industries. The Company has recourse to the affected assets under lease. These leased assets are of general use within their respective industries. Other - Debt premium, discount and expenses of ACE are amortized over the life of the related debt. Temporary investments considered as cash equivalents for Consolidated Statement of Cash Flows purposes represent purchases of highly liquid debt instruments maturing in three months or less. The weighted daily average interest rates on short term debt was 4.4% for 1994 and 3.2% for 1993. Certain prior year amounts have been reclassified to conform to the current year reporting of these items. NOTE 2. INCOME TAXES For the Years Ended December 31, (000) 1994 1993 1992 The components of Federal income tax expense are as follows: Current $ 19,729 $ 25,349 $ 22,441 Deferred 17,414 20,247 23,154 Investment Tax Credits Recognized on Leveraged Leases - (12) (233) Total Federal Income Tax Expense 37,143 45,584 45,362 Less Amounts Included in Other Income (5,386) 307 8,219 Federal Income Taxes Included in Operating Expenses $ 42,529 $ 45,277 $ 37,143 A reconciliation of the expected Federal income taxes compared to the reported Federal income tax expense computed by applying the statutory rate follows: Statutory Federal Income Tax Rate 35% 35% 34% Income Tax Computed at the Statutory Rate $ 45,490 $ 55,400 $ 50,791 Plant Basis Differences (27) (5,171) 2,022 Amortization of Investment Tax Credits (2,534) (2,546) (2,767) Tax Adjustments (4,097) (2,071) (3,757) Other-Net (1,689) (28) (927) Total Federal Income Tax Expense $ 37,143 $ 45,584 $ 45,362 Effective Federal Income Tax Rate 29% 29% 30% State income tax expense is not significant. Items comprising deferred tax balances are as follows at December 31, 1994 and 1993: (000) 1994 1993 Deferred Tax Liabilities: Plant Basis Differences $304,476 $295,445 Leveraged Leases 61,409 53,461 Unrecovered Purchased Power Costs 33,557 38,792 State Excise Taxes 25,842 11,797 Other 24,732 21,057 Total Deferred Tax Liabilities 450,016 420,552 Deferred Tax Assets: Deferred Investment Tax Credits 27,879 29,247 Employee Separation Costs 6,932 - Other 15,245 11,741 Total Deferred Tax Assets 50,056 40,988 Total Deferred Taxes-Net $399,960 $379,564 At December 31, 1994 and 1993, valuation allowances exist against deferred tax assets primarily for cumulative net operating losses (NOLs) for state income tax purposes. The effects of the valuation allowances and state NOLs are generally not material to consolidated results of operation and financial position. The Company is subject to Federal Alternative Minimum Tax (AMT), which is attributable to nonutility operations. At December 31, 1994, there is an estimated cumulative AMT credit of $12.5 million. The AMT credit is available for an indefinite carryforward period against future Federal income tax payable, to the extent that the regular Federal income tax payable exceeds future AMT payable. Deferred tax costs associated with additional deferred tax liabilities resulting from a change in accounting standards regarding deferred taxes effective in 1993 are recorded on the Consolidated Balance Sheet as Recoverable Future Federal Income Taxes. Such recognition is given in respect of the probable amount of revenue to be collected from ratepayers for these additional taxes to be paid in future years. NOTE 3: RATE MATTERS OF ACE Energy Clause Proceedings Changes in Levelized Energy Clause Rates 1992 - 1994 Amount Amount Date Requested Granted Date Filed (millions) (millions) Effective 2/92 $(6.6) $(8.5) 10/92 3/93 14.2 10.9 10/93 2/94 63.0 55.0 7/94 ACE's Levelized Energy Clause (LEC) is subject to annual review by the BRC. In February 1992, ACE filed a petition with the BPU for the LEC period June 1, 1992 through May 31, 1993 requesting no change in LEC rates. In April 1992, ACE filed a revision to their petition requesting a $6.6 million decrease in LEC rates based on an update for the projected overrecovery of prior LEC costs and an amount allocated to customers from the litigation settlement with PECO Energy (PECO) related to the Peach Bottom Atomic Power Station. In October 1992, the BPU approved a reduction in annual LEC revenues of $8.5 million which included the recovery of $10.4 million over a three-year period of certain deferred costs relating to the Salem Nuclear Generating Station. The PECO settlement allocation was subject to review by the BPU in ACE's 1993 LEC proceeding. In March 1993, ACE filed a petition with the BPU requesting a $14.2 million increase in LEC revenues for the June 1, 1993 through May 31, 1994 LEC period. Effective for service rendered on and after October 1, 1993, the BPU approved an increase of $10.9 million which included the following: 1) an additional $3.8 million of the PECO settlement together with accrued interest to be returned to customers during the 1994-1995 LEC period; 2) recovery of $400 thousand for the annual assessment for the Department of Energy (DOE) decommissioning and decontamination fund; 3) full LEC recovery of all future assessments for the DOE decommissioning and decontamination fund and 4) recognition of the $48 thousand penalty for 1992 nuclear operations as required by the Nuclear Performance Standard. The additional allocation of the PECO settlement was provided for in the 1993 financial results and the reimbursement was made through the 1994 LEC. On February 8, 1994, ACE filed a petition with the BPU requesting an increase in LEC revenues of $63 million for the period June 1, 1994 through May 31, 1995. The increase was due primarily to the additional costs incurred from two new independent power producers (IPPs) scheduled to begin commercial operation during the 1994/1995 LEC period. The total projected costs for fuel and capacity for the LEC period were $147 million. ACE reduced the requested amount by $84 million as a result of the utilization of $56 million of current base rate revenues associated with a utility power purchase contract expiring in May 1994 and the Southern New Jersey Economic Initiative (SNJEI), an ACE initiative that forgoes the recovery of $28 million of fuel costs. Included in ACE's request was the recovery over five years of $20 million paid by ACE in December 1993 in connection with contract renegotiations with an IPP. Effective July 26, 1994, the BPU approved a provisional increase of $55 million based on an adjustment to actual costs for fuel and capacity. On November 30, 1994, the BPU rendered its decision on ACE's LEC request approving the continuation of provisional LEC rates, the recovery of the $20 million in renegotiation costs and the reduction for the $28 million SNJEI. Base Rate Case Proceedings Effective October 1992, the BPU authorized a net increase in annual base rate revenues of $12.9 million. In March 1994, in response to an appeal filed by the Ratepayer Advocate in December 1992, the Superior Court of New Jersey, Appellate Division, affirmed the BPU's decision to allow an increase in base rates relating to changes in the state excise tax. Other Rate Proceedings In November 1993, ACE filed a petition with the BPU requesting that hotel-casino customers be permitted to take service under rate schedules offered to all other commercial and industrial customers. On June 23, 1994, the BPU approved the request with a provision that ACE not seek recovery of lost revenues resulting from the hotel-casinos being permitted to shift to other rate schedules prior to ACE's next base rate case. The BPU also allowed for a one-time adjustment to be billed to hotel-casino customers for the associated underrecovery in ACE's fuel clause. Prior to BPU approval, hotel-casino customers were served under the Hotel Casino Service rate schedule, the highest rate for service of all ACE's service classes. Effective July 1, 1994, all hotel-casino customers began taking service under a general service rate schedule which could reduce annual base rate revenues by approximately $7 million. Effective July 25, 1994, the Hotel Casino Service rate schedules were no longer offered for electric service. In July 1993, the BPU initiated a generic proceeding to address the recovery of the capacity costs associated with purchases of power from nonutility generation projects. This issue relates to the Ratepayer Advocate's contention that present BPU policy which permits full recovery of these costs through the LEC provides for a "double recovery" of cogeneration capacity costs. In August 1993, the Ratepayer Advocate identified ACE as one of the electric utilities for which they considered the double recovery of capacity costs to be at issue. Pursuant to its February 18, 1994 decision supporting the investigation of the double recovery of capacity costs from nonutility generation projects, the BPU issued its written order on September 16, 1994. The order confirmed the establishment of a generic proceeding to review the nonutility purchase power capacity cost recovery methodology and ordered that the matter be reviewed in a two phase proceeding. The scope of the issues to be resolved during the first phase of the proceeding will include: 1) the determination of the existence, or lack of existence, of the double recovery as a result of the traditional LEC pass-through of nonutility generation capacity costs; 2) the quantification of any such double recovery found to exist for each utility for the relevant periods; and 3) a determination of an appropriate remedy or adjustment if such double recovery is found to occur and the periods of time over which such an adjustment would be applicable. Following the conclusion of the first phase of the proceeding, the BPU, in the second phase, will render a final decision regarding the specific findings of the Office of Administrative Law and address the broader issues relating to the appropriate prospective purchase power capacity cost recovery methods. Evidentiary hearings have been scheduled through December 1995. The BPU's final decision is not anticipated until 1996. At this time, ACE cannot predict the outcome of this proceeding and cannot estimate the impact that the double recovery issue may have on future rates. NOTE 4. RETIREMENT BENEFITS Pension ACE has a noncontributory defined benefit pension plan covering substantially all of its employees and those of its wholly-owned subsidiary. Benefits are based on an employee's years of service and average final pay. ACE's policy is to fund pension costs within the guidelines of the minimum required by the Employee Retirement Income Security Act and the maximum allowable as a tax deduction. Each company is allocated its participative share of plan costs and contributions. Net periodic pension costs for 1994, 1993 and 1992 included the following components: (000) 1994 1993 1992 Service cost - benefits earned during the period $ 6,871 $ 7,196 $ 7,310 Interest cost on projected benefit obligation 15,390 16,016 17,301 Actual return on plan assets (860) (23,200) (13,283) Other-net (16,885) 5,496 (3,795) Net periodic pension costs $ 4,516 $ 5,508 $ 7,533 Approximately $3 million, $5.2 million and $4.8 million of these costs were charged to operating expense in 1994, 1993 and 1992, respectively, and the remaining costs, which are associated with construction labor, were charged to the cost of new utility plant. A reconciliation of the funded status of the plan as of December 31, 1994 and 1993 is as follows: (000) 1994 1993 Fair value of plan assets $190,200 $213,600 Projected benefit obligation 206,742 207,246 Plan assets (less than) in excess of projected benefit obligation (16,542) 6,354 Unrecognized net transition asset (1,722) (1,894) Unrecognized prior service cost 306 329 Unrecognized net loss (gain) 24,106 (638) Prepaid pension cost $ 6,148 $ 4,151 Accumulated benefit obligation: Vested benefits $166,602 $165,872 Nonvested benefits 485 1,216 Total $167,087 $167,088 At December 31, 1994, approximately 60% of plan assets were invested in equity securities, 18% in fixed income securities and 22% in other investments. The assumed rates used in determining the actuarial present value of the projected benefit obligation at year-end were as follows: 1994 1993 Weighted average discount 7.5% 7.5% Anticipated increase in compensation 3.5% 3.5% The assumed long term rate of return on plan assets was 8.5% for both 1994 and 1993 and 8% for 1992. Other Postretirement Benefits ACE and its subsidiary provide certain health care and life insurance benefits for retired employees and their eligible dependents. Substantially all employees may become eligible for these benefits if they reach retirement age while working for the companies. Benefits are provided through insurance companies and other plan providers whose premiums and related plan costs are based on the benefits paid during the year. ACE has a tax qualified trust to fund these benefits. Each company is allocated its participative share of plan costs and contributions. The cost of other postretirement benefits was $15.6 million, $13.1 million and $6 million in 1994, 1993 and 1992, respectively. These costs were allocated as follows: (millions) 1994 1993 1992 Operating expense $5.6 $3.3 $3.8 New utility plant-associated with construction labor .2 1.7 2.2 Regulatory asset 9.8 8.1 - The regulatory assets represent the amount of cost recognized under accounting standards effective January 1, 1993 in excess of the amount of cost currently recovered in rates. These excess costs are deferred as authorized by an accounting order of the BPU pending future recovery through rates. Net periodic other postretirement benefits cost as calculated in accordance with accounting standards in effect since January 1, 1993 include: 1994 1993 (000) Service cost-benefits attributed to service during the period $ 3,817 $ 3,045 Interest cost on accumulated postretirement benefits obligation 8,450 7,133 Actual return on plan assets 100 (255) Amortization of unrecognized transition obligation 3,893 3,893 Other-net (700) (711) Net periodic other postretirement cost $15,560 $13,105 A reconciliation of the funded status of the plan and the obligation for other postretirement benefits recognized in the Consolidated Balance Sheet as of December 31, 1994 and 1993 is as follows: (000) 1994 1993 Accumulated benefits obligation: Retirees $ 43,265 $ 32,720 Fully eligible active plan participants 18,010 21,267 Other active plan participants 60,588 49,125 Total accumulated benefits obligation 121,863 103,112 Less fair value of plan assets 14,700 14,400 Accumulated benefits obligation in excess of plan assets 107,163 88,712 Unrecognized net loss (19,223) (6,639) Unamortized unrecognized transition obligation (70,075) (73,968) Accrued other postretirement benefits cost obligation $ 17,865 $ 8,105 At December 31, 1994, approximately 81% of plan assets were invested in fixed income securities and 19% in other investments. The assumed health care costs trend rate for 1994 is 10% and is assumed to evenly decline to an ultimate constant rate of 5% in the year 2000 and thereafter. If the assumed health care costs trend rate was increased by 1% in each future year, the aggregate service and interest costs of the 1994 net periodic benefits cost would increase by $1.9 million, and the accumulated postretirement benefits obligation at December 31, 1994 would increase by $16.7 million. The weighted average discount rate assumed in determining the accumulated benefits obligation was 7.5% for 1994 and 1993. The assumed long term return rate on plan assets was 7% for 1994 and 1993. NOTE 5. JOINTLY-OWNED GENERATING STATIONS ACE owns jointly with other utilities several electric production facilities. ACE is responsible for its pro-rata share of the costs of construction, operation and maintenance of each facility. The amounts shown represent ACE's share of each facility at, or for the year ending, December 31, including AFDC as appropriate. Peach Hope Keystone Conemaugh Bottom Salem Creek Energy Source Coal Coal Nuclear Nuclear Nuclear Company's Share (%/MWs) 2.47/42.3 3.83/65.4 7.51/157.0 7.41/164.0 5.00/52.0 Electric Plant in Service (000): 1994 $11,293 $26,607 $125,003 $206,804 $238,980 1993 10,746 18,055 123,428 203,858 237,496 Accumulated Depreciation (000): 1994 $3,180 $6,237 $55,190 $79,898 $53,746 1993 3,231 5,971 51,871 78,383 46,933 Construction Work in Progress (000): 1994 $1,216 $2,649 $11,002 $ 8,727 $ 387 1993 758 9,956 7,983 10,799 1,022 Working Funds (000): 1994 $44 $69 $5,051 $5,199 $2,013 1993 44 69 4,772 5,249 2,061 Operation and Maintenance Expenses (including fuel)(000): 1994 $5,085 $7,211 $29,530 $27,731 $10,471 1993 5,323 6,855 31,479 27,021 9,764 1992 4,976 7,194 29,618 25,461 9,541 Generation (MWH): 1994 257,561 419,313 1,214,776 836,725 355,390 1993 293,876 416,263 1,043,485 840,043 440,118 1992 294,222 457,771 958,740 737,356 351,672 ACE provides financing during the construction period for its share of the jointly-owned facilities and includes its share of direct operations and maintenance expenses in the Consolidated Statement of Income. Additionally, ACE provides an amount of working funds to the operators of the facilities to fund operational needs. The increase in Electric Plant in Service and decrease in Construction Work in Progress for Conemaugh is primarily due to the placement in service of flue gas disulfurization equipment (scrubber). NOTE 6. NONUTILITY COMPANIES The Company (AEI) is the parent holding company of the consolidated group. Its primary activities are the management of investments in the subsidiary companies, issuance of common equity and performance of administrative functions on behalf of the consolidated group. Principal assets of each of the subsidiary companies are: AGI - capital investments of approximately $30.3 million in cogeneration development projects and partnerships; ASP - commercial real estate site with a net book value of $10.3 million; ATE - leveraged lease investments of $78.2; million and ATS - construction costs in thermal heating and cooling projects of $6.3 million. AET is presently concluding the affairs of its subsidiary, which is its sole investment. The net investment in this subsidiary is nominal. Other financial information regarding the subsidiary companies is as follows: Net Assets Net Income (Loss) Company 1994 1993 1994 1993 1992 (000) AGI $23,610 $18,746 $2,959 $4,459 $ 1,366 ASP 3,175 5,131 (1,956) (347) (263) ATE 9,449 9,182 266 (777) 667 ATS 2,577 - (327) - - AET 1,324 2,069 (744) 524 (4,793) AGI's results reflect the operation of cogeneration facilities in which AGI has an ownership interest. AGI's 1994 results were reduced by decreased operation of a cogeneration unit and an increase in deferred income tax expenses. ASP's results in each year reflect the vacancy in its commercial site due to generally poor market conditions in commercial real estate. The 1994 results include a net after tax write-down of the carrying value of the commercial site of $1.7 million. ATE's 1994 results reflect a reduction in deferred income tax expense. ATE's 1993 results were reduced by increased deferred state income tax expense. ATE's 1992 results benefitted from lower interest rates on amounts outstanding under its revolving credit agreement. ATS, formed in May 1994, is primarily a developmental stage company that will become operational as heating and cooling system projects are completed. The 1994 results reflect administrative and general costs. AET's 1994 results reflect expenses incurred researching future investment opportunities and an increase in deferred Federal income tax expense. AET's 1993 results are due to the receipt of life insurance proceeds by its subsidiary company. In 1993, this subsidiary discontinued its operating activities to concentrate on licensing its patented proprietary knowledge. AET's 1992 results reflect the provision for the restructuring of its subsidiary's activities. AEI parent-only operations, excluding its equity in the results of subsidiary companies, generally reflect administrative expenses. Net results were losses of $543 thousand in 1994, $183 thousand in 1993 and $401 thousand in 1992. NOTE 7. CUMULATIVE PREFERRED STOCK OF ACE ACE has authorized 799,979 shares of Cumulative Preferred Stock, $100 Par Value, two million shares of No Par Preferred Stock and three million shares of Preference Stock, No Par Value. Information relating to outstanding shares at December 31 is shown in the table below. Current Optional 1994 1993 Redemption Series Par Value Shares (000) Shares (000) Price Not Subject to Mandatory Redemption: 4% $100 77,000 $ 7,700 77,000 $ 7,700 $105.50 4.10% 100 72,000 7,200 72,000 7,200 101.00 4.35% 100 15,000 1,500 15,000 1,500 101.00 4.35% 100 36,000 3,600 36,000 3,600 101.00 4.75% 100 50,000 5,000 50,000 5,000 101.00 5% 100 50,000 5,000 50,000 5,000 100.00 7.52% 100 100,000 10,000 100,000 10,000 101.88 Total $40,000 $40,000 Subject to Mandatory Redemption: $8.25 None 55,000 $ 5,500 60,000 $ 6,000 104.66 $8.53 None 360,000 36,000 600,000 60,000 102.00 $8.20 None 500,000 50,000 500,000 50,000 - $7.80 None 700,000 70,000 700,000 70,00 - Total 161,500 186,000 Less portion due within one year 12,250 12,250 Total $149,250 $173,750 Cumulative Preferred Stock Not Subject to Mandatory Redemption is redeemable solely at the option of ACE. On November 1 of each year, 2,500 shares of the $8.25 No Par Preferred Stock must be redeemed through the operation of a sinking fund at a redemption price of $100 per share. ACE may redeem not more than an additional 2,500 shares on any sinking fund date without premium. ACE redeemed 5,000 shares in both 1994 and 1993. Commencing in 1994, on November 1 of each year, 120,000 shares of the $8.53 No Par Preferred Stock must be redeemed through the operation of a sinking fund at a redemption price of $100 per share. At the option of ACE, not more than an additional 120,000 shares may be redeemed on any sinking fund date without premium. ACE redeemed 240,000 shares in 1994. Beginning August 1, 1996 and annually thereafter, 100,000 shares of the $8.20 No Par Preferred Stock must be redeemed through the operation of a sinking fund at a redemption price of $100 per share. At the option of ACE, not more than an additional 100,000 shares may be redeemed on any sinking fund date without premium. This series is not refundable prior to August 1, 2000. Beginning May 1, 2001 and annually through 2005, 115,000 shares of $7.80 No Par Preferred Stock must be redeemed through the operation of a sinking fund at a redemption price of $100 per share. On May 1, 2006, the remaining shares outstanding must be redeemed at $100 per share. ACE has the option to redeem up to an additional 115,000 shares without premium on each May 1 through 2005. This series is not refundable prior to May 1, 2006. For the next five years, the annual minimum sinking fund requirements of the Cumulative Preferred Stock Subject to Mandatory Redemption is $12.25 million for the year 1995, and $22.25 million in each of the years 1996 and 1997 and $10.25 million in each of the years 1998 and 1999. Cumulative Preferred Stock of ACE is not widely held and trades infrequently. The estimated aggregate fair market value of ACE's outstanding Cumulative Preferred Stock at December 31, 1994 and 1993 was approximately $185 million and $231 million, respectively. The fair market value has been determined using market information available from actual trades of similar instruments of companies with similar credit quality and rate. NOTE 8. LONG TERM DEBT Maturity December 31 Series Date 1994 1993 (Medium Term Notes (MTNs) have varying maturity dates and are shown with the weighted average interest rate of the related issues within the year of maturity.) (000) 5-1/8% First Mortgage Bonds 2/1/1996 $ 9,980 $ 9,980 Medium Term Notes Series B (6.28%) 1998 56,000 56,000 Medium Term Notes Series A (7.52%) 1999 30,000 30,000 Medium Term Notes Series B (6.83%) 2000 46,000 46,000 7-1/2% First Mortgage Bonds 4/1/2002 20,000 20,000 Medium Term Notes Series B (7.18%) 2003 20,000 20,000 7-3/4% First Mortgage Bonds 6/1/2003 29,976 29,976 Medium Term Notes Series A (7.98%) 2004 30,000 30,000 Medium Term Notes Series B (7.125%) 2004 28,000 28,000 7-5/8% Pollution Control 1/1/2005 - 6,500 Medium Term Notes Series B (6.45%) 2005 40,000 40,000 6-3/8% Pollution Control 12/1/2006 2,500 2,500 Medium Term Notes Series B (6.76%) 2008 50,000 50,000 10-1/2% Pollution Control Series B 7/15/2012 850 850 6-5/8% First Mortgage Bonds 8/1/2013 75,000 75,000 7-3/8% Pollution Control Series A 4/15/2014 18,200 18,200 10-1/2% Pollution Control Series C 7/15/2014 - 23,150 8-1/4% Pollution Control Series A 7/15/2017 4,400 4,400 9-1/4% First Mortgage Bonds 10/1/2019 53,857 65,767 6.80% Pollution Control Series A 3/1/2021 38,865 38,865 7% First Mortgage Bonds 9/1/2023 75,000 75,000 5.60% Pollution Control Series A 11/1/2025 4,000 4,000 7% First Mortgage Bonds 8/1/2028 75,000 75,000 6.15% Pollution Control Series A 6/1/2029 23,150 - 7.20% Pollution Control Series A 11/1/2029 25,000 - 7% Pollution Control Series B 11/1/2029 6,500 - Total 762,278 749,188 Debentures: 5-1/4% 2/1/1996 2,267 2,267 7-1/4% 5/1/1998 2,619 2,619 Total 4,886 4,886 Unamortized Premium and Discount-Net (3,876) (2,973) Total Long Term Debt of ACE 763,288 751,101 Long Term Debt of ATE 16,000 15,000 Less Portion Due within One Year 1,000 - $778,288 $766,101 In 1994, ACE redeemed its 10-1/2% Pollution Control Bonds Series C due 7/15/2014 and its 7-5/8% Pollution Control Bonds due 1/1/2005. ACE acquired and retired $11.9 million principal amount of First Mortgage Bonds, 9-1/4% Series due 10/1/2019. The aggregate cost of these redemptions was $1.2 million, net of related Federal income taxes. Sinking fund deposits are required for retirement of the 5-1/4% Debentures annually on February 1 through 1995 and for the 7-1/4% Debentures annually on May 1 through 1997 in amounts in each case sufficient to redeem $100,000 principal amount. ACE may, at its option, redeem an additional $100,000 annually in each case. Through December 31, 1994, ACE acquired and cancelled $333 thousand and $181 thousand principal amount of the 5-1/4% and 7-1/4% Debentures, respectively, which will be used to satisfy its requirements for 1995. Certain series of First Mortgage Bonds contain provisions for deposits of cash or certification of bondable property currently amounting to $100 thousand, which ACE may elect to satisfy through property additions. For the next five years, the annual amount of scheduled maturities and sinking fund requirements of ACE's long term debt are $12.266 million in 1996, $175 thousand in 1997, $58.575 million in 1998 and $30.075 million in 1999. ACE's long term debt securities are not widely held and generally trade infrequently. The estimated aggregate fair market value of ACE's outstanding long term debt at December 31, 1994 and 1993 was $693 million and $768 million, respectively. The fair market value has been determined based on quoted market prices for the same or similar debt issues or on debt instruments of companies with similar credit quality, coupon rates and maturities. Long term debt of ATE primarily consists of $15 million of 7.44% Senior Notes due 1999.The estimated fair market value of these Notes at December 31, 1994 and 1993 was $14 million and $16 million, respectively, based on debt instruments of companies with similar credit quality, coupon rates and maturities. Also, ATE has a revolving credit and term loan agreement which provides for borrowings of up to $35 million during successive revolving credit and term loan periods through June 1995. There were $1 million in borrowings outstanding under this agreement at December 31, 1994. Commitment fees on the unused credit line were not significant. NOTE 9. COMMON SHAREHOLDERS' EQUITY In addition to public offerings, Common Stock may be issued through the Dividend Reinvestment and Stock Purchase Plan (DRP), ACE benefit plans (ACE plans) and the Equity Incentive Plan (EIP). The number of shares of Common Stock issued (forfeited), and the number of shares reserved for issuance at December 31, 1994, were as follows: 1994 1993 1992 Reserved DRP 699,493 1,300,129 1,291,653 723,975 ACE Plans (5,046) 8,033 10,897 141,038 EIP 175,712 - - 624,288 Total 870,159 1,308,162 1,302,550 In April 1994, the shareholders of the Company approved the EIP. Eligible participants are officers, general managers and nonemployee directors of the Company and its subsidiaries. Under the EIP, nonemployee director participants are entitled to receive a grant of 1,000 shares of restricted stock. Restrictions on these grants expire over a five-year period. Employee participants may be awarded shares of restricted Common Stock, stock options and other Common Stock-based awards. Actual awards of restricted shares are based on attainment of various levels of certain Company performance criteria within a three- year period. Restrictions lapse upon actual award at the end of the three-year performance period. Shares not awarded are forfeited. Dividends earned on restricted stock issued through the EIP are invested in additional restricted stock under the EIP. Such stock acquired is subject to the same restrictions. The number of restricted shares issued in 1994 to employee participants was 167,300. Stock options granted in 1994 are nonqualified and are exercisable three years after but within 10 years from the date of grant. Stock options are priced at an amount at least equal to 100% of the fair market value of Common Stock on the date of grant. As of December 31, 1994, options on 167,300 shares of common stock were granted at a price of $21.125 per share. No options were eligible to be exercised in 1994. In October 1994, the Board of Directors authorized reacquisition of up to three million shares of the Company's Common Stock. Management will use its discretion, based on market conditions, as to the timing and price of shares repurchased. There is no schedule or specific share price target associated with the acquisition and the authorized number of shares will not be affected. Shares repurchased are cancelled. During 1994,the Company reacquired 221,700 shares at prices ranging from $16.50 to $18.125 per share. NOTE 10. COMMITMENTS AND CONTINGENCIES Construction Program ACE's cash construction expenditures for 1995, which excludes AFDC and customer contributions are estimated to be approximately $116 million. Current commitments for the construction of major production and transmission facilities approximate $23 million, of which it is estimated that $19 million will be expended in 1995. Insurance Programs ACE is a member of certain insurance programs that provide coverage for decontamination and property damage to members' nuclear generating plants. Facilities at the Peach Bottom, Salem and Hope Creek stations are insured against property damage losses up to $2.75 billion per site under these programs. In addition, ACE is a member of an insurance program which provides coverage for the cost of replacement power during prolonged outages of nuclear units caused by certain specific conditions. The insurer for nuclear extra expense insurance provides stated value coverage for replacement power costs incurred in the event of an outage at a nuclear unit resulting from physical damage to the nuclear unit. The stated value coverage is subject to a deductible period of the first 21 weeks of any outage. Limitations of coverage include, but are not limited to, outages (1) not resulting from physical damage to the unit, (2) resulting from any government mandated shutdown of the unit, (3) resulting from any gradual deterioration, corrosion, wear and tear, etc. of the unit, (4) resulting from any intentional acts committed by an insured and (5) resulting from certain war risk conditions. Under the property and replacement power insurance programs, ACE could be assessed retrospective premiums in the event the insurers' losses exceed their reserves. As of December 31, 1994, the maximum amount of retrospective premiums ACE could be assessed for losses during the current policy year was $6.6 million under these programs. The Price-Anderson provisions of the Atomic Energy Act of 1954, as amended by the Price-Anderson Amendments Act of 1988, govern liability and indemnification for nuclear incidents. All nuclear facilities could be assessed, after exhaustion of private insurance, up to $79.275 million each, payable at $10 million per year, per reactor and per incident. Based on its ownership share of nuclear facilities, ACE could be assessed up to $27.6 million per incident. This amount would be payable at $3.48 million per year, per incident. Energy and Capacity Arrangements UTILITY SOURCES ACE has an arrangement for the purchase of 125 MWs of capacity and related energy from Pennsylvania Power and Light through September 30, 2000. Capacity costs, including certain deferred charges, totaled $26.6 million, $24.4 million and $25.1 million, and energy costs totaled $10.8 million, $11.2 million and $13.4 million in 1994, 1993 and 1992, respectively. Commitments for capacity costs expected to be incurred are $11.7 million, $12.0 million, $12.3 million, $12.6 million, $14.2 million and $12.3 million in each of the years 1995-2000, respectively. ACE's arrangement for the purchase of 200 MWs of capacity and related energy from PECO expired May 31, 1994. Capacity costs charged to Purchased Capacity expense totaled $25.6 million through May 1994 and $55.9 million and $52.5 million for 1993 and 1992, respectively. Energy costs for the same periods amounted to $11.4 million, $21.0 million and $19.2 million, respectively. ACE also had another arrangement with PECO for the purchase of energy only which terminated in October 1994. Energy costs under this arrangement amounted to $32.5 million, $19.0 million and $17.5 million in 1994, 1993 and 1992, respectively. ACE is a member of the Pennsylvania-New Jersey-Maryland Interconnection (PJM), an integrated power pool that is connected with other utilities for the interchange of energy on an as-needed and as-available basis. ACE is required to plan for reserve capacity based on aggregate PJM requirements allocated to member companies. ACE has satisfied its current reserve requirements. ACE also has an interchange agreement with the City of Vineland, New Jersey, which operates a municipal utility located in ACE's service territory. The cost of energy purchased through interchange agreements totaled $10.4 million, $9.9 million and $9.4 million in 1994, 1993 and 1992, respectively. NONUTILITY SOURCES ACE has contracted for a total of 569 MWs of capacity and related energy from four nonutility sources. The last two projects under contract for 388 MWs became operational in 1994. Non-utility capacity costs totaled $77.0 million, $30.2 million and $24.4 million, and energy costs totaled $62.5 million, $36.0 million and $27.6 million, in 1994, 1993 and 1992, respectively. Capacity and energy costs from nonutility sources are recovered through the LEC. Environmental Matters The provisions of Title IV of the Clean Air Act Amendments of 1990 (CAAA) will require, among other things, phased reductions of sulfur dioxide (SO2) emissions by 10 million tons per year, and a limit on S02 emissions nationwide by the year 2000, and reductions in emissions of nitrogen oxides (NOx) by approximately 2 million tons per year. ACE's wholly-owned B.L. England Units 1 and 2 and its jointly-owned Conemaugh Station Units 1 and 2 are affected during Phase I (1995) and all of ACE's other fossil-fuel steam generating units are affected by Phase II (2000) of the CAAA. ACE has installed a scrubber on B.L. England Unit 2 at a cost of $81 million which went into service in December 1994. By scrubbing B.L. England Unit 2, Phase I S02 emission requirements are met for both B.L. England Units 1 and 2. The Conemaugh owners installed a scrubber on Conemaugh Unit 1 which went into service in December 1994. ACE's 3.83% share of the cost was $11 million. A scrubber on Conemaugh Unit 2 is to be completed in 1995, with ACE's share of the cost estimated to be $4 million. The jointly-owned Keystone Station is impacted by the SO2 and NOx provisions of Title IV of the CAAA during Phase II. Currently, the Keystone owners plan to rely on utilizing emission allowances, and modified fuel content to a lesser extent, to meet compliance with the CAAA through the year 2000. In addition, certain purchase power arrangements will be affected by the CAAA, in amounts that are not presently determinable. Federal and state legislation authorize various governmental authorities to issue orders compelling responsible parties to take cleanup action at sites determined to present danger from releases of hazardous substances. The various statutes impose joint and several liability without regard to fault for certain investigative and cleanup costs for all potentially responsible parties. ACE has received notification with respect to two sites within New Jersey as one of a number of alleged responsible parties for cleanup and remedial actions. ACE's maximum expense for these claims is not expected to exceed $1 million. ACE believes that insurance coverage is available to satisfy any amounts in excess of the self-insured limits associated with these particular claims should any liability result. The insurer for pollution liability insurance provides comprehensive excess general liability coverage, including pollution liability, for environmental costs incurred in the event of bodily injury or property damage resulting from the discharge or release of pollutants into or upon the land, atmosphere or water. Limitations of coverage include any pollution liability 1) resulting subsequent to the disposal of such pollutants, 2) resulting from the operation of a storage facility of such pollutants, 3) resulting in the formation of acid rain, 4) caused to property owned by an insured and 5) resulting from any intentional acts committed by an insured. Other ACE is subject to a performance standard for all of its jointly-owned nuclear units. This standard is used by the BPU in determining recovery of replacement energy costs resulting from poor nuclear performance. The standard establishes a target aggregate capacity factor within a zone of reasonable performance to be achieved by the units. Performance outside of the zone results in penalties or rewards. Any penalties incurred would not be permitted to be recovered from customers and would be charged against income. For 1994, the aggregate capacity factor of ACE's nuclear units is within the reasonable performance zone, which results in no penalty or reward. A contract with an industrial company whereby ACE delivered process steam, water and by-product electricity was terminated by this company effective June 30, 1994. In 1993, ACE received approximately $12 million from this company for services and energy sales. In accordance with the termination agreement, ACE received $4.2 million in cash proceeds, 45,165 emission allowances valued at $6.5 million, and made provisions to retire certain equipment. A net gain of $2.4 million net of tax resulted. The steam and electricity needs of this company are provided by a nonutility cogeneration facility. ACE has a contract for the purchase of 188 MWs of capacity and energy from this facility. In November 1994, ACE announced a program to reduce its workforce by up to 20% or 350 people. This program was initiated so that ACE can better position itself for the more competitive environment within the electric industry. Under the program, certain employees will separate from the company and be entitled to a severance package, including salary continuation, lump sum payments, extended medical benefits and outplacement services. In December 1994, ACE accrued the costs of the workforce reduction in the amount of $17.3 million, net of tax of $9.3 million, or $.32 in earnings per share. Included is ACE's share of an early retirement program of a jointly-owned nuclear station. ACE's employee separations are expected to be substantially completed by March 1, 1995. AGI, through its subsidiaries, has partnership interests in common with affiliates of Columbia Gas System, Inc. (Columbia) in certain cogeneration projects. Columbia has been operating under Chapter 11 of the Federal Bankruptcy Code since 1991. A reorganization plan for Columbia and its principal pipeline unit is expected to be filed with the U.S. Bankruptcy Court in the first half of 1995. AGI does not anticipate any significant changes in its partnership arrangements as a result of Columbia's reorganization plan. The Energy Policy Act of 1992 permits the Federal government to assess investor-owned electric utilities that have ownership interests in nuclear generating facilities an amount to fund the decontamination and decommissioning of three Federally operated nuclear enrichment facilities. Based on its ownership in five nuclear generating units, ACE recorded a liability of $6.6 million and $8 million at December 31, 1994 and 1993, respectively, for its obligation to be paid over the next 13 years. ACE has an associated regulatory asset of $7.2 million and $8.4 million at December 31, 1994 and 1993, respectively. Amounts are currently being recovered in rates for this liability and the regulatory asset is concurrently being amortized to expense based on the annual assessment billed by the Federal government. NOTE 11. LEASES ACE leases various types of property and equipment for use in its operations. Certain of these lease agreements are capital leases consisting of the following at December 31: (000) 1994 1993 Production plant $13,521 $13,521 Less accumulated amortization 9,707 8,846 Net 3,814 4,675 Nuclear fuel 38,216 40,593 Leased property-net $42,030 $45,268 ACE has a contractual obligation to obtain nuclear fuel for the Salem, Hope Creek and Peach Bottom stations. The asset and related obligation for the leased fuel are reduced as the fuel is burned and are increased as additional fuel purchases are made. No commitments for future payments beyond satisfaction of the outstanding obligation exist. Operating expenses for 1994, 1993 and 1992 include leased nuclear fuel costs of $14.1 million, $13.9 million and $13.5 million, respectively, and rentals and lease payments for all other capital and operating leases of $5.3 million, $4.8 million and $4.8 million, respectively. Future minimum rental payments for all noncancellable lease agreements are not significant to ACE's operations. Rental charges of other subsidiary companies are not significant. NOTE 12. QUARTERLY FINANCIAL RESULTS (UNAUDITED) Quarterly financial data, reflecting all adjustments necessary in the opinion of the Company for a fair presentation of such amounts, are as follows: Operating Operating Net Earnings Dividends Paid Quarter Revenues Income Income Per Share Per Share 1994 (000) (000) (000) 1st $232,098 $ 39,712 $22,862 $ .43 $ .385 2nd 205,822 30,427 16,798 .31 .385 3rd 272,708 58,431 46,323 .85 .385 4th 202,410 24,969 (9,871) (.18) .385 Annual $913,039 $153,540 $76,113 $1.41 $1.54 1993 1st $203,656 $ 35,445 $19,995 $ .38 $ .38 2nd 192,538 27,381 11,093 .21 .38 3rd 268,883 68,580 52,329 .99 .385 4th 200,596 28,177 11,880 .22 .385 Annual $865,675 $159,584 $95,297 $1.80 $1.53 Individual quarters may not add to the total due to rounding, and the effect on earnings per share of changing average number of common shares outstanding. The revenues of ACE are subject to seasonal fluctuations due to increased sales and higher residential rates during the summer months. Net Income reflects special charges aggregating $20.4 million, after tax of $10.9 million, or $.37 per share, recorded in Other Income during the fourth quarter of 1994. One of the charges is an accrual of the costs of workforce reductions for severance and benefits packages in the amount of $17.3 million, net of tax of $9.3 million, or $.32 per share. Another charge is an amount for ACE's share of deferred costs for studies at a nuclear station in the amount of $1.4 million, net of tax of $735 thousand, or $.02 per share. Also included is the write-down of the carrying value of ASP's commercial site of $1.7 million, net of tax of $926 thousand, or $.03 per share. ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information for this item concerning Directors of the Company is set forth in the section entitled "Nominees for Election" on page 2 of the Company's Notice of Annual Meeting of Shareholders and definitive Proxy Statement, which is incorporated by reference. The information required by Item 10 of Form 10-K with respect to the executive officers of the Company and the directors of ACE is, pursuant to Instruction 3 to Item 401(b) of Regulation S-K, set forth in Part I of this Form 10-K under the heading "Executive Officers". ITEM 11 EXECUTIVE COMPENSATION Information for this item with respect to the amounts paid to the five most highly compensated executive officers of the Company and ACE, is set forth in the section entitled " Table 1- Summary Compensation Table" on page 14 of the Company's Notice of Annual Meeting of Shareholders and definitive Proxy Statement, which is incorporated herein by reference. The cash compensation paid to twelve executive officers of ACE, as a group, in 1994 was $2,598,662. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item as to compliance with Section 16(a) of the Exchange Act is contained in the section captioned "Stock Ownership of Directors and Officers" on page 5 of the Company's Notice of Annual Meeting of Shareholders and definitive Proxy Statement, which is incorporated herein by reference. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information for this item is set forth in the section entitled "Compensation Committee Interlocks and Insider Participation" on page 13 of the Company's Notice of Annual Meeting of Shareholders and definitive Proxy Statement, which is incorporated herein by reference. PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Exhibits: See Exhibit Index attached. Financial Statements and Supplementary Schedules: The following information for Atlantic Energy, Inc. is filed as part of this report. Management's Discussion and Analysis of Financial Condition and Results of Operation Page 40 Consolidated Statement of Income for the three years ended December 31, 1994 Page 55 Consolidated Statement of Cash Flows for the three years ended December 31, 1994 Page 56 Consolidated Balance Sheet - December 31, 1994 and December 31, 1993 Page 57 Consolidated Statement of Changes in Common Shareholders' Equity (Note 9 to Financial Statements) Page 59 Notes to Consolidated Financial Statements Page 81 Supplementary information regarding selected quarterly financial data (Unaudited) (Note 12 to Financial Statements) Page 81 Independent Auditors' Report Page 54 Report of Management Page 52 The following financial information, financial statements and notes to financial statements for ACE are filed herewith as Exhibit 28(a) and are incorporated by reference herein: Management's Discussion and Analysis of Financial Condition and Results of Operation; Consolidated Statement of Income for the three years ended December 31, 1994; Consolidated Statement of Cash Flows for the three years ended December 31, 1994; Consolidated Balance Sheet-December 31, 1994 and December 31, 1993; Consolidated Statement of Changes in Common Shareholder's Equity; Notes to Consolidated Financial Statements; Independent Auditors' Report. All other financial schedules are included in the Financial Statements and Notes to Financial Statements of the Company and ACE. Reports on Form 8-K: None SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, who also signed in the capacity indicated. ATLANTIC ENERGY, INC. ATLANTIC CITY ELECTRIC COMPANY Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the date indicated. Date: March 21, 1995 By: /s/ J. L. Jacobs J. L. Jacobs Title: President and Chief Executive Officer and Director of Atlantic Energy, Inc. and Chairman, President, Chief Executive Officer and Director of Atlantic City Electric Company Date: March 21, 1995 By: /s/ L. M. Walters L. M. Walters Title: Acting Chief Financial Officer of Atlantic Energy, Inc. and Vice President-Treasurer and Assistant Secretary of Atlantic City Electric Company DIRECTORS OF ATLANTIC ENERGY, INC.: Jos. Michael Galvin, Jr.* Kathleen MacDonnell* Gerald A. Hale* Richard B. McGlynn* Matthew Holden, Jr.* Bernard J. Morgan* Cyrus H. Holley* Harold J. Raveche* E. Douglas Huggard* A MAJORITY OF DIRECTORS OF ATLANTIC CITY ELECTRIC COMPANY: Michael J. Chesser* James E. Franklin II* Meredith I. Harlacher, Jr.* Henry K. Levari, Jr.* Date: March 21, 1995 *By: /s/ L. M. Walters L. M. Walters Attorney-in-Fact EXHIBIT INDEX 3a Restated Certificate of Incorporation of Atlantic Energy, Inc. (File No. 1-9760, Form 10-Q for quarter ended September 30, 1987-Exhibit 4(a)); Certificate of Amendment to restated Certificate of Incorporation of Atlantic Energy, Inc. dated April 15, 1992. File No. 33-53511, Form S-8 dated May 6, 1994-Exhibit No. 3(ii). 3b By-Laws of Atlantic Energy, Inc. as amended August 8, 1991 (File No. 1-9760, Form 10-K for year ended December 31, 1991- Exhibit No. 3b). 3c Agreement of Merger between Atlantic City Electric Company and South Jersey Power & Light Company filed June 30, 1949, and Amendments through May 3, 1991 (File No. 2-71312-Exhibit No. 3(a); File No. 1-3559, Form 10-Q for quarter ended June 30, 1982- Exhibit No. 3(b); Form 10-Q for quarter ended March 31, 1985- Exhibit No. 3(a); Form 10-Q for quarter ended March 31, 1987- Exhibit No. 3(a): Form 8-K dated October 12, 1988-Exhibit No. 3(a); Form 10-K for fiscal year ended December 31, 1990-Exhibit No. 3c; and Form 10-Q for quarter ended September 30, 1991- Exhibit No. 3c). 3d By-Laws of Atlantic City Electric Company, as amended April 24, 1989 (File No. 1-3559, Form 10-Q for the quarter ended September 31, 1989-Exhibit No. 3). 4a Purchase Agreement, dated as of July 17, 1974, with respect to 9.96% Cumulative Preferred Stock of Atlantic City Electric Company (File No. 2-52000-Exhibit No. 2(hh)). 4b Purchase Agreement, dated as of December 1, 1977, with respect to $8.25 No Par Preferred Stock of Atlantic City Electric Company (File No. 2-60966-Exhibit No. 2(d)). 4c Mortgage and Deed of Trust, dated January 15, 1937, between Atlantic City Electric Company and The Bank of New York (formerly Irving Trust Company) and Supplemental Indentures through September 1, 1993 (File No. 2-66280-Exhibit No. 2(b); File No. 1- 3559, Form 10-K for year ended December 31, 1980-Exhibit No. 4(d); Form 10-Q for quarter ended June 30, 1981-Exhibit No. 4(a); Form 10-K for year ended December 31, 1983-Exhibit No. 4(d); Form 10-Q for quarter ended March 31, 1984-Exhibit No. 4(a); Form 10-Q for quarter ended June 30, 1984-Exhibit 4(a); Form 10-Q for quarter ended September 30, 1985-Exhibit 4; Form 10-Q for quarter ended March 31, 1986-Exhibit No. 4; Form 10-K for year ended December 31, 1987-Exhibit No. 4(d); Form 10-Q for quarter ended September 30, 1989-Exhibit No. 4(a); Form 10-K for year ended December 31, 1990-Exhibit No. 4(c); File No. 33-49279-Exhibit No. 4(b); File No. 1-3559, Form 10-Q for the quarter ended September 30, 1993 - Exhibits 4(a) & 4(b); Form 10-K for the year ended December 31, 1993 - Exhibit 4c(i); File no. 1-3559, Form 10-Q for the quarter ended June 30, 1994 - Exhibit 4(a); File No. 1-3559, Form 10-Q for the quarter ended September 30, 1994 - Exhibit 4(a). 4c(1) Indenture Supplemental dated as of November 1, 1994 to Mortgage and Deed of Trust dated January 15, 1937 between Atlantic City Electric Company and The Bank of New York filed herewith. 4e Agreement dated as of February 1, 1966, between Atlantic City Electric Company and Fidelity Union Trust Company and Supplement dated as of May 1, 1968. (File No. 1-3559, Form 8-K dated March 7, 1966-Exhibit 13(b)(2); Form 8-K dated June 6, 1968- Exhibit No. 13(b)(1)). 4f(1) Revolving Credit and Term Loan Agreement dated as of May 24, 1988 by and between ATE Investment, Inc. and The Bank of New York (File No.1-9760, Form 10-K for year ended December 31, 1988- Exhibit No. 4g(1)). 4f(2) Support Agreement dated as of May 24, 1988 between Atlantic Energy, Inc. and ATE Investment, Inc. (File No. 1-9760, Form 10-K for year ended December 31, 1988-Exhibit No. 4g(2)). 4f(3) Letter Agreement dated as of May 24, 1988 between Atlantic Energy, Inc. and The Bank of New York (File No. 1-9760, Form 10-K for year ended December 31, 1988-Exhibit No. 4g(3)). 4f(4) Amendment No. 1 dated as of February 22, 1989 to Revolving Credit and Term Loan Agreement dated as of May 24, 1988 by and between ATE Investment, Inc. and The Bank of New York (File No. 1-9760, Form 10-K for the fiscal year ended December 31, 1988). 4f(5) Amendment No. 2 dated as of June 1, 1991, to Revolving Credit and Term Loan Agreement dated as of May 24, 1988 by and between ATE Investment, Inc. and The Bank of New York (File No. 1-9760, Form 10-K for year ended December 31, 1991-Exhibit No. 4f(5)). 10a(1) Atlantic Energy, Inc. Directors Deferred Compensation Plan revised as of February 4, 1988 (File No. 1-9760, Form 10-K for year ended December 31, 1988-Exhibit No. 10a(1)). 10a(2) Description of amendment to the Deferred Compensation Plan for Directors effective December 10, 1992 (File No. 1-9760, Form 10-K for year ended December 31, 1992-Exhibit No. 10a(1)). 10a(3) Deferred Compensation Plan for Employees of Atlantic Energy, Inc. and Participating Subsidiaries (File No. 1-9760, Form 10-K for year ended December 31, 1988-Exhibit No. 10a(2)). 10a(4) Description of amendment to Deferred Compensation Plan for Employees of Atlantic Energy, Inc. and Participating Subsidiaries effective December 10, 1992 (File No. 1-9760, Form 10-K for year ended December 31, 1992-Exhibit No. 10a(2)). 10a(5) Supplemental Executive Retirement Plan for Officers of Atlantic City Electric Company, as amended effective March 1, 1990 (File No. 1-9760, Form 10-K for year ended December 31, 1989-Exhibit No. 10a(4)). 10a(6) Description of amendment to Supplemental Executive Retirement Plan effective December 10, 1992 (File No. 2-9760, Form 10-K for year ended December 31, 1992-Exhibit 10a(3)). 10a(7) Executive Medical Expense Reimbursement Plan for Officers of Atlantic City Electric Company (File No. 1-3559, Form 10-K for year ended December 31, 1985-Exhibit No. 10a(5)). 10a(8) Copy of Management Annual Incentive Plan of Atlantic Energy, Inc. and its subsidiaries, effective January 1, 1992 (File No. 1-9760, Form 10-K for year ended December 31, 1991- Exhibit No. 10a(5)). 10a(9) Copy of Atlantic Electric Excess Benefit Retirement Income Program, as amended, effective as of August 2, 1990 (File No. 1-3559, Form 10-K for year ended December 31, 1991-Exhibit No. 10a(6)). 10a(10) Description of amendment to the Excess Benefit Retirement Income Program effective December 10, 1992 (File No. 1-9760, Form 10-K for year ended December 31, 1992-Exhibit 10a(6)). 10a(11) Agreement, effective as of February 1, 1990, between Atlantic City Electric Company and E. Douglas Huggard (File No. 1-9760, Form 10-K for year ended December 31, 1989-Exhibit No. 10a(8)). 10a(12) Agreement entered February 11, 1993 between Atlantic City Electric Company and E. Douglas Huggard (File No. 1-9760, Form 10-K for year ended December 31, 1992-Exhibit No. 10a(7)). 10a(13) Copy of Atlantic City Electric Company Long-Term Performance Incentive Plan, as amended effective November 1, 1990 (File No. 1-3559, Form 10-K for year ended December 31, 1991- Exhibit No. 10a(8)). 10a(14) Atlantic Energy, Inc. Retirement Plan for Directors, as amended effective November 13, 1991 (File No. 1-9760, Form 10-K for year ended December 31, 1991-Exhibit No. 10a(9)). 10a(15) Copy of Atlantic Energy, Inc. Restricted Stock Plan for Non-employee Directors, effective January 1, 1991 (File No. 1- 9760, Form 10-K for year ended December 31, 1991-Exhibit No. 10a(10)). 10a(16) Agreement dated February 11, 1993 between Atlantic City Electric Company and Jerrold L. Jacobs (File No. 1-3559, Form 10- K for the year ended December 31, 1994 - Exhibit No. 10a(16)). 10a(17) Agreement dated February 10, 1994 between Atlantic City Electric Company and Meredith I. Harlacher, Jr. (File No. 1`- 3559, Form 10-K for the year ended December 31, 1993 - Exhibit No. 10a(17)). 10a(18) Agreement dated February 10, 1994 between Atlantic City Electric Company and Henry K. Levari, Jr. (File No. 1-3559, Form 10-K for the year ended December 31, 1993 - Exhibit No. 10a(18)). 10a(19) Agreement dated February 10, 1994 between Atlantic City Electric Company and J. G. Salomone, Amendment to Agreement Termination and Release Agreement dated January 31, 1995 between Atlantic City Electric Company and J. G. Salomone (File No. 1- 3559, Form 10-K for the year ended December 31, 1993 - Exhibit No. 10a(19)); Amendment to Agreement Termination and Release Agreement between Atlantic City Electric Company and J. G. Salomone, filed herewith. 10a(20) Agreement dated January 10, 1994 between Atlantic City Electric Company and Michael Chesser (File No. 1-3559, Form 10-K for the year ended December 31, 1993 - Exhibit No. 10a(20)). 10a(21) Employment Termination Agreement dated February 17, 1994 between John R. Lilly and Atlantic Energy, Inc. (File No. 1-3559, Form 10-K for the year ended December 31, 1993 - Exhibit No. 10a(21)). 10a(22) Retirement and Release Agreement dated as of October 28, 1992 between Thomas E. Freeman and Atlantic City Electric Company (File No. 1-3559, Form 10-K for the year ended December 31, 1993 - - Exhibit No. 10a(22)). 10a(23) Agreement dated October 1, 1994 between Atlantic City Electric Company and James E. Franklin II, filed herewith. 10a(24) Termination and Release Agreement dated March 31, 1994 between Atlantic City Electric Company and S. D. McMillian, filed herewith. 10a(25) Termination and Release Agreement dated June 22, 1994 between Atlantic City Electric Company and J. J. Lees, filed herewith. 10a(26) Atlantic Energy, Inc. Equity Incentive Plan (File No. 33-53511, Form S-8 filed May 6, 1994-Exhibit 10.) 10b(1) Agreement as to ownership as tenants in common of the Salem Nuclear Generating Station Units 1, 2, and 3, dated November 24, 1971, and of Supplements, dated as of September 1, 1975, and as of January 26, 1977 (File No. 2-43137-Exhibit No. 5(p); File No. 2-60966-Exhibit No. 5(m); and File No. 2-58430- Exhibit No. 5(o)). 10b(2) Agreement as to ownership as tenants in common of the Peach Bottom Atomic Power Station Units 2 and 3, dated November 24, 1971 and of Supplements dated as of September 1, 1975 and as of January 26, 1977 (File No. 2-43137-Exhibit No. 5(o); File No. 2-60966-Exhibit No. 5(j); File No. 2-58430-Exhibit No. 5(m)). 10b(3) Owners Agreement, dated April 28, 1977 between Atlantic City Electric Company and Public Service Electric & Gas Company for the Hope Creek Generating Station Units No. 1 and 2 (File No. 2-60966-Exhibit No. 5(v)). 10b(3-1) Amendment to Owners Agreement for Hope Creek Generating Station, dated as of December 23, 1981, between Atlantic City Electric Company and Public Service Electric & Gas Company (File No. 1-3559, Form 10-K for year ended December 31, 1983-Exhibit No. 10b(3-2)). 10b(4) Pennsylvania-New Jersey-Maryland Interconnection Agreement, dated September 26, 1956 between Public Service Electric & Gas Company, Philadelphia Electric Company, Pennsylvania Power & Light Company, Baltimore Gas & Electric Company, Jersey Central Power & Light Company, Metropolitan Edison Company, Pennsylvania Electric Company, Potomac Electric Power Company and supplemental agreements through June 15, 1977 (File No. 1-3559, Form 10-K for year ended December 31, 1981- Exhibit No. 10(p)). 10b(5) Pennsylvania-New Jersey-Maryland Interconnection Supplemental Agreement, dated March 26, 1981, between Public Service Electric & Gas Company, Philadelphia Electric Company, Pennsylvania Power & Light Company, Baltimore Gas & Electric Company, Jersey Central Power & Light Company, Metropolitan Edison Company, Pennsylvania Electric Company, Potomac Electric Power Company, Atlantic City Electric Company and Delmarva Power & Light Company (File No. 1-3559, Form 10-Q for quarter ended March 31, 1981-Exhibit No. 20b). 24 Independent Auditors' Consent, filed herewith. 25a Powers of Attorney for Atlantic Energy, Inc. dated as of March 9, 1995, filed herewith. 25b Powers of Attorney for Atlantic City Electric Company dated as of March 6, 1995, filed herewith. 27 Financial Data Schedules for Atlantic Energy, Inc. and Atlantic City Electric Company for periods ended December 31, 1994. 28(a) Consolidated Financial Statements, Notes to Financial Statements, Management's Discussion and Analysis of Results of Operation and Financial Condition, and Independent Auditors' Report for Atlantic City Electric Company for the three years ended December 31, 1994, filed herewith. 28(b) Supplemental Financial Schedules for Atlantic Energy, Inc. and Atlantic City Electric Company for the three years ended December 31, 1994, filed herewith. EX-24 2 Exhibit 24 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration No. 33-49683 of Atlantic Energy, Inc. on Form S-3 and Registration No. 33-53511 of Atlantic Energy, Inc. on Form S-8 and Registration No. 33-53841 of Atlantic City Electric Company on Form S-3 of our reports dated February 9, 1995 appearing in this Annual Report on Form 10-K of Atlantic Energy, Inc. and Atlantic City Electric Company for the year ended December 31, 1994. DELOITTE & TOUCHE LLP Parsippany, New Jersey March 21, 1995 EX-25 3 Exhibit 25(a) ATLANTIC ENERGY, INC. POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, L. M. WALTERS and J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1994 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 9th day of March, 1995. /s/ J. L. Jacobs J. L. Jacobs ATLANTIC ENERGY, INC. POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, L. M. WALTERS AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1994 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 9th day of March, 1995. /s/ M. J. Chesser M. J. Chesser ATLANTIC ENERGY, INC. POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, L. M. WALTERS AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1994 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 9th day of March, 1995. /s/ J. M. Galvin, Jr. J. M. Galvin, Jr. ATLANTIC ENERGY, INC. POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, L. M. WALTERS AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1994 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 9th day of March, 1995. /s/ G. A. Hale G. A. Hale ATLANTIC ENERGY, INC. POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, L. M. WALTERS AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1994 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 9th day of March, 1995. /s/ M. Holden, Jr. M. Holden, Jr. ATLANTIC ENERGY, INC. POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, L. M. WALTERS AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1994 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 9th day of March, 1995. /s/ C. H. Holley C. H. Holley ATLANTIC ENERGY, INC. POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, L. M. WALTERS AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1994 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 9th day of March, 1995. /s/ B. J. Morgan B. J. Morgan ATLANTIC ENERGY, INC. POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, L. M. WALTERS AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1994 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 9th day of March, 1995. /s/ H. J. Raveche H. J. Raveche ATLANTIC ENERGY, INC. POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, L. M. WALTERS AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1994 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 9th day of March, 1995. /s/ R. B. McGlynn R. B. McGlynn ATLANTIC ENERGY, INC. POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, L. M. WALTERS AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1994 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 9th day of March, 1995. /s/ E. D. Huggard E. D. Huggard ATLANTIC ENERGY, INC. POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, L. M. WALTERS AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1994 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 9th day of March, 1995. /s/ L. M. Walters L. M. Walters ATLANTIC ENERGY, INC. POWER OF ATTORNEY The undersigned, a director or officer of Atlantic Energy, Inc., a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, L. M. WALTERS AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for her and in her name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1994 and any and all amendments thereto, and execute and deliver for the undersigned and in her name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as her own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 9th day of March, 1995. /s/ K. MacDonnell K. MacDonnell EX-25 4 Exhibit 25(b) ATLANTIC CITY ELECTRIC COMPANY POWER OF ATTORNEY The undersigned, a director or officer of Atlantic City Electric Company, a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, L. M. WALTERS AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1994 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 6th day of March, 1995. /s/ M. I. Harlacher, Jr. M. I. Harlacher, Jr. ATLANTIC CITY ELECTRIC COMPANY POWER OF ATTORNEY The undersigned, a director or officer of Atlantic City Electric Company, a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, L. M. WALTERS AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1994 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 6th day of March, 1995. /s/ M. J. Chesser M. J. Chesser ATLANTIC CITY ELECTRIC COMPANY POWER OF ATTORNEY The undersigned, a director or officer of Atlantic City Electric Company, a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, L. M. WALTERS AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1994 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 6th day of March, 1995. /s/ J. L. Jacobs J. L. Jacobs ATLANTIC CITY ELECTRIC COMPANY POWER OF ATTORNEY The undersigned, a director or officer of Atlantic City Electric Company, a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, L. M. WALTERS AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1994 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 6th day of March, 1995. /s/ H. K. Levari, Jr. H. K. Levari, Jr. ATLANTIC CITY ELECTRIC COMPANY POWER OF ATTORNEY The undersigned, a director or officer of Atlantic City Electric Company, a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, L. M. WALTERS AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1994 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 6th day of March, 1995. /s/ L. M. Walters L. M. Walters ATLANTIC CITY ELECTRIC COMPANY POWER OF ATTORNEY The undersigned, a director or officer of Atlantic City Electric Company, a New Jersey corporation, does hereby appoint J. L. JACOBS, M. J. CHESSER, L. M. WALTERS AND J. E. FRANKLIN II and each of them (with power to act without the other), including full power of substitution and revocation, as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in all capacities for him and in his name, place and stead in connection with the filing with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the year ended December 31, 1994 and any and all amendments thereto, and execute and deliver for the undersigned and in his name, place and stead all such other documents or instruments and to take such further action as they, or any of them, deem appropriate. The undersigned hereby ratifies and adopts as his own act and deed the acts lawfully taken by said attorneys-in-fact and agents, or any of them, or by their respective substitutes pursuant to the powers and authorities granted herein. IN WITNESS WHEREOF, the undersigned has executed this document as of this 6th day of March, 1995. /s/ J. E. Franklin, II J. E. Franklin, II EX-27 5
UT 0000806393 ATLANTIC ENERGY, INC. YEAR DEC-31-1994 DEC-31-1994 PER-BOOK 1,781,923 177,323 207,979 378,330 0 2,545,555 593,475 0 249,181 842,656 149,250 40,000 778,288 8,600 0 0 1,000 12,250 41,111 940 671,460 2,545,555 913,039 42,529 716,970 759,499 153,540 (2,251) 148,517 58,460 76,113 0 76,113 83,481 0 157,680 1.41 1.41
EX-27 6
UT 0000008192 ATLANTIC CITY ELECTRIC CO. YEAR DEC-31-1994 DEC-31-1994 PER-BOOK 1,781,923 55,143 207,815 376,435 0 2,421,316 54,963 493,830 249,767 796,260 149,250 40,000 763,288 8,600 0 0 0 12,250 41,102 928 607,338 2,421,316 913,226 42,529 717,702 760,231 152,995 (1,361) 148,862 58,460 93,174 16,716 76,458 83,482 0 148,697 0 0
EX-99 7 Exhibit 10a(19) EMPLOYMENT SEPARATION and RELEASE AGREEMENT between Jerry G. Salomone and Atlantic Energy, Inc. and its affiliated and subsidiary companies inclusive of Atlantic City Electric Company This Employment Separation and Release Agreement (Agreement) is made and entered into this 31st day of January, 1995 by and among JERRY G. SALOMONE (Incumbent) residing at 306 Reed Road, Absecon, County of Atlantic, State of New Jersey and Atlantic Energy, Inc. and its affiliated and subsidiary companies (sometimes hereinafter referred to as "Energy") including Atlantic City Electric Company (hereinafter sometimes referred to as "Atlantic") (hereinafter sometimes collectively referred to as the "Company") having principal Executive Offices located at 6801 Black Horse Pike, Pleasantville, County of Atlantic, State of New Jersey. WHEREAS, Incumbent has been employed by the Company for some time past in the capacity of an Officer and employee; and WHEREAS, Incumbent has requested the Company to amend that certain Employment Agreement dated February 10, 1994 among J. G. Salomone, Atlantic Energy, Inc. and Atlantic City Electric Company (the "Employment Agreement") to permit Incumbent to terminate and withdraw from continued employment with the Company, and to retire from the Company effective close of business January 31, 1995 as his voluntary act and deed; and WHEREAS, the Company has agreed to amend the Employment Agreement to release Incumbent from his continuing obligations thereunder in order to grant Incumbent his request to retire from the Company effective close of business on January 31, 1995; and WHEREAS, Incumbent and the Company have agreed that Incumbent shall irrevocably withdraw from and terminate the employment relationship with the Company and to retire from the Company upon the terms and conditions more fully set forth herein; NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained which the parties hereto hereby agree constitute fair, reasonable and valuable consideration, Incumbent and the Company, intending to be legally bound, hereby represent, covenant and agree as follows: 1. The Recital Clauses hereinabove set forth are incorporated and made a material part of this Agreement. 2. Incumbent shall terminate and withdraw from full time employment as an Officer and employee of the Company, and shall resign as a Director of Atlantic effective close of business on January 31, 1995 (the "Retirement Date"). Incumbent acknowledges that he has selected the Retirement Date. Company acknowledges that it has agreed to the Retirement Date selected by Incumbent. Incumbent acknowledges that he has heretofore voluntarily submitted Letters of Resignation resigning as a member of the Board of Directors of all other subsidiaries of Energy or of Atlantic for which he has served as a member of the Board of Directors, and has also submitted his resignation as a member of the Board of Managers of Cogenerations Partners of America. Company acknowledges that such Letters of Resignation have heretofore been accepted, the originals of which have been filed in the corporate books and records of such companies. 3. Notwithstanding the Termination and Retirement Date, Incumbent shall be entitled to receive payment for all accumulated vacation and personal days to the extent same have been earned, but unused during calendar years 1994 and 1995. 4. In addition to any benefit to which Incumbent is otherwise entitled by reason of having been an employee of the Company, the Company agrees to: (a) Pay Incumbent an amount ($219,623.22) equivalent to sixty-two (62) weeks of his annual Base Salary in effect as of January 31, 1995 ($184,200.00), as established by the Board of Directors of the Company, which shall be reduced by all deductions required to be made by law. This payment shall be made in monthly installments to be computed by the Company, with the first such payment to be made March 1, 1995 and continuing to be paid on the first business day of each month thereafter until fully satisfied; and such amount shall not be subject to payment of any interest thereon. Such payment will be made upon the condition that Incumbent has executed and returned this Agreement and the General Release, Waiver and Acknowledgment (General Release) not later than January 31, 1995, and that the revocation period specified in Exhibit A shall have expired without revocation by Incumbent. (b) Pay Incumbent an Incentive Award pursuant to: (i) the 1994 Management Annual Incentive Compensation Plan of Energy and its Subsidiaries in which Incumbent is a participant (the "1994 Plan"); and (ii) the 1995 Management Annual Incentive Compensation Plan of Energy and its Subsidiaries in which Incumbent is a participant (the "1995 Plan"). For purposes of the 1995 Plan, Incumbent shall be deemed to have satisfactorily contributed toward the achievement of the requisite goals through January 31, 1995. Therefore, any award which may be granted by the Board of Directors in accordance with and pursuant to the 1995 Plan shall be prorated as to Incumbent and the prorated period shall be 1/12 of the annual performance period. For the 1994 Plan, Incumbent participated as an employee for the entire plan period, being calendar year 1994. Any award which may be granted by the Board of Directors shall be in accordance with and pursuant to the 1994 Plan terms, and the determination by the Board of Directors shall be final. (c) Deliver to Incumbent those shares of stock to which Incumbent is otherwise eligible in accordance with and pursuant to the Company Long-Term Performance Incentive Plan ("LTPIP") currently in effect covering the period January 1, 1993 through December 31, 1995. For purposes of determining the amount of stock to be delivered to Incumbent, Incumbent will be credited with service through January 31, 1995 and will be deemed to have satisfactorily contributed toward the achievement of the longer-term financial and operating performance objectives of such Plan for the specified period (i.e. 25/36ths of the period). The stock will be delivered to Incumbent at the same time that shares are otherwise distributed pursuant to the LTPIP. (d) Deliver to Incumbent the Stock Option(s) together with the restricted shares of stock to be determined in accordance with and pursuant to the Equity Incentive Plan (the "EIP") approved by the shareholders of Atlantic Energy, Inc. on April 27, 1994. The Stock Option shall be exercised in accordance with the provisions set forth in Section 5(h) of the EIP and without acceleration. The restricted shares granted to Incumbent pursuant to the EIP on April 27, 1994 will be awarded, together with accumulated dividends, on a prorated basis at the end of the first performance cycle and subject to performance results, in the same manner as distributed to the other participants in the EIP. The prorated period shall be deemed to be 13/36ths of the total performance cycle. (e) Provide Incumbent with continued coverage under the Medical Expense Reimbursement Plan of the Company through January 31, 1995; and, in addition, pay to Incumbent the additional lump sum of Eight Thousand Dollars ($8,000.00) intended to compensate Incumbent for certain medical procedures currently in progress, but unbilled, and for which the Company shall have no further obligation. This amount shall be treated as income, and shall be added to the amount to be paid to Incumbent pursuant to Subsection (a) of Paragraph 4 of this Agreement, to be payable over the same period, without interest and from which amount all deductions required by law shall be taken. (f) Pay to Incumbent, in a lump sum the present value of the Supplemental Executive Retirement Plan (SERP) benefit (using, for 1995, the Base Salary in effect as of 1/31/95) to which Incumbent would be entitled at age 55 (grossed up for tax purposes assuming an individual rate of 44.80%). Upon the making of such payment to Incumbent, Company shall have no further liability to Incumbent for any SERP benefit; except that the Company shall be obligated to pay the Death Benefit pursuant to the terms of the SERP upon Incumbent's death. (g) Pay to the Incumbent, or his designated beneficiary, all other benefits to which he is entitled by reason of his having been an employee of the Company, which shall be paid in the manner, amounts and at such times as are provided in accordance with the terms and conditions thereof as in effect on the Retirement Date, and using the Retirement Date as the date of separation. (h) In the event the Board of Directors of Energy shall recommend, and the Board of Directors of Atlantic shall adopt, a resolution which shall otherwise increase the amount of Base Salary compensation to be paid to the Officers of Energy and of Atlantic during calendar year 1995, in such event the Board of Directors shall, in their sole discretion, establish a dollar amount for Incumbent to be used for the sole purpose of calculating an additional lump sum payment to be made to Incumbent applying the following formula: (i) Amount of increase, if any, as may be determined by the Board in its discretion, to be multiplied by 25%; the product (ii) To be multiplied by the PBGC factor in effect during 1995 (11.5243); to be (iii) grossed up for tax purposes assuming an individual tax rate of 44.80%. It is the intent of this provision to pay to Incumbent an amount to make Incumbent whole as if such increase in salary had been in effect on the Retirement Date and the increased salary amount would have been utilized to calculate the present value of the SERP benefit to which Incumbent would otherwise have been entitled. It is understood and agreed, however, that Incumbent is not to receive any additional Base Salary payment, or any other additional compensation as a result of such action having been taken by the Board of Directors of Energy and of Atlantic, except as specifically set forth in this subsection (h) of Paragraph 4. It is also understood and agreed that the Board of Directors shall have the sole discretion to make such a determination and as to the amount of any such award; and the determination by the Board of Directors shall be final. Payment of the Incentive Award and delivery of those shares of restricted stock and the Stock Option referred to in Subparagraphs (b), (c) and (d) of this Paragraph or shall be consummated and delivered to Incumbent at such time as such payment and award shall be made to all other Officers of the Company. Should Incumbent die prior to receiving any of the payments or those shares of stock hereinabove referenced, payment of such amount and/or delivery of such shares shall be made to the Estate of the Incumbent or to such other beneficiary as Incumbent shall designate in writing to be delivered to the Company prior to his death to the extent permitted by the LTPIP and the EIP. Payment by the Company to Incumbent of the compensation and benefits described in subsections (a) through (h) of this Paragraph 4 shall be paid to Incumbent upon the condition that Incumbent has executed and returned this Agreement together with the General Release not later than January 24, 1995, and that the revocation period specified in Exhibit A shall have expired without revocation by Incumbent. 5. The consideration given to Incumbent pursuant to this Agreement, with the exception of those benefits to which he and his beneficiary or estate are otherwise entitled by reason of his having been an employee of the Company, constitute the total amount to which Incumbent is entitled as a result of his employment with the Company and is paid in satisfaction of any and all claims of any nature whatsoever, however arising, whether known or unknown, which Incumbent has or may have against the Company at any time as a result of, relating to or arising out of his employment with the Company or his retirement and separation therefrom. 6. Attached hereto and made a part hereof as Exhibit "B" is Article VI of the By-Laws of Energy. Energy, on behalf of itself and its subsidiaries, warrants and represents that pursuant to these By-Laws (and the By-Laws of the applicable subsidiary companies), Incumbent will be provided with indemnification against liability (including attorney's fees and related expenses) imposed upon or incurred by him in any threatened, pending or completed investigation, claim, action, suit, or proceeding, whether civil, administrative or investigative in nature which may be instituted by or on behalf of Energy, or any of its Subsidiaries, inclusive of Atlantic, against Incumbent. Energy further represents and warrants that in the event the By-Laws of Energy (or any subsidiary thereof) are hereafter amended to alter or extinguish such obligation to indemnify, notwithstanding such amendment or alteration, the obligation to indemnify as set forth herein shall nonetheless remain in full force and effect. In the event that Energy or its applicable subsidiary refuses to indemnify Incumbent, or in the event a Court of competent jurisdiction holds that Energy (or the applicable subsidiary thereof) is not obligated to indemnify the Incumbent (other than where a judgment or other final adjudication establishes that the acts or omissions of the Incumbent involved a knowing violation of law constituting criminal conduct or are otherwise beyond the scope of indemnity provided by the By-Laws as in effect at the time of execution and delivery of this Agreement) then the General Release given to Energy and its Subsidiaries, inclusive of Atlantic by Incumbent shall become null and void for purposes of the litigation or claim for which indemnity is being sought by Incumbent, and shall not bar Incumbent from thereafter asserting any claim or counterclaim he may have against Energy, or its Subsidiaries, inclusive of Atlantic arising out of such litigation and failure to indemnify. Furthermore, in the event Energy does not provide such indemnification to the Incumbent, neither Energy nor its Subsidiaries, inclusive of Atlantic, shall invoke any defense based in whole or in part on any Statute of Limitations or on the timeliness of such claim which may thereafter be instituted by the Incumbent in accordance with the provisions of this paragraph and limited to the litigation or claim for which indemnity is being sought by Incumbent. 7. This Agreement shall apply to and be binding upon all affiliated, related, parent, subsidiary and successor corporations of the Company, and their assigns; and shall apply to and be binding upon Incumbent, his personal representative, heirs, executors, administrators, trustees, successors, assigns and any and all persons who may succeed the legal rights and interests of Incumbent. 8. In exchange for the undertakings of the Company contained in Article 4, and as a condition precedent thereto, Incumbent agrees to execute and deliver a General Release in the form attached hereto as Exhibit A. Incumbent expressly acknowledges that he is aware that he has rights under federal and state laws which prohibit discrimination in employment based on race, sex, national origin, age, religion, disability and veteran rights, including the Age Discrimination in Employment Act, as amended, Title VII of the Civil Rights Act of 1964, as amended, the Equal Pay Act of 1963, as amended, the Employee Retirement Income Security Act of 1974 (ERISA), as amended, the New Jersey Law Against Discrimination, the New Jersey Conscientious Employee Protection Act, the New Jersey Wage Law and the Americans with Disabilities Act (hereinafter collectively referred to as the "Acts"); and further acknowledges that this Agreement and the attached General Release do legally bind Incumbent to REMISE, RELEASE AND FOREVER DISCHARGE the Company and its affiliated corporate entities, its and their respective officers, directors, employees and agents, and it and their predecessors, successors, assigns, heirs, executors and administrators, of and from any and all manner of actions and causes of actions, suits, debts, demands and claims whatsoever, at law or in equity whether arising out of his employment with the Company and his withdraw and retirement therefrom which Incumbent ever had, now has, or hereafter may have, or which his heirs, executors or administrators hereafter may have by reason of any matter, cause or thing whatsoever from the beginning of his employment with the Company to the Retirement Date and, more particularly, but without limitation of the foregoing terms, any and all claims concerning or relating in any way to his employment relationship and/or his voluntary termination from employment with the Company and his Retirement therefrom including, but not limited to, all claims under any and all federal, state, local and common laws dealing with employment, separation and damages, including the Acts hereinabove referred to in this Article, including any claims for counsel fees and costs. It is expressly understood and agreed that this Agreement shall operate as a clear and unequivocable waiver by Incumbent of any claim for accrued or future wages or benefits except in connection with any claim relating to pension or other retirement benefits which may arise in the future. Incumbent further agrees not to commence any legal action, in any form, against any releasee identified in the attached General Release or any other party connected with his employment with the Company with respect to any right or claim, direct or indirect, encompassed by the attached General Release and this Agreement, except to enforce the terms of this Agreement. 9. Incumbent and the Company mutually covenant and agree that they shall not engage in any communications which shall disparage one another or interfere with their existing or prospective business relationships or economic or career prospects. The only exception to the foregoing shall be in those circumstances in which Incumbent or the Company are obligated to provide information in response to an investigation by a duly authorized governmental entity or in response to legal proceedings. 10. Incumbent agrees that, except as expressly provided below, he will not communicate or disclose the terms of this Agreement or of the attached General Release to or with any person(s) with the exception of members of his immediate family, his attorney(s), his financial advisor(s) and/or his accountant(s). In such communication or disclosure, Incumbent shall inform the recipient of the information that same is being provided in a confidential manner and subject to a requirement of confidentiality. Company agrees that it will treat this Agreement and the attached General Release as a personnel item to be retained in the personnel file of Incumbent and not to be disclosed to third parties without the express written consent of Incumbent; except to the extent that same shall be required to be produced in any legal proceeding, in response to an investigation by a duly authorized governmental entity, or as required to be disclosed by law. 11. It is expressly understood and agreed that any violation of the confidentiality provision in the preceding Article by Incumbent or Company, or anyone acting on his or its behalf, shall be deemed to be a material breach of this Agreement. 12. Incumbent agrees and recognizes that he has submitted a voluntary request to the Company to modify and amend the terms of a certain Employment Agreement in order to permit Incumbent to retire without violating the terms of said Employment Agreement, and that the Company has agreed to modify the terms of the Employment Agreement to allow Incumbent to retire; and that this Employment Separation and Release Agreement and the attached General Release constitute a material portion of the amendment to the Employment Agreement and have served as a material inducement to Company to amend the Employment Agreement. 13.A. Incumbent agrees that he shall not, directly or indirectly, knowingly disclose to any other person, firm or corporation nor appropriate to his own use or to the use of any person, firm or corporation, any Confidential Information (as defined herein) used by or belonging to the Company, or any of its subsidiaries or affiliates, except as may be expressly authorized in advance by the Company in a writing signed by a Senior Officer of the affected company. For purposes of this Agreement, the term Senior Officer shall mean a person holding a title within any of the companies which constitute the Company of Senior Vice President or higher. For purposes of this Agreement, the term Confidential Information includes, by way of illustration and not limitation, matters of a technical nature such as "know how", "formulae", "processes", "procedures", "techniques", "machinery", "apparatus, "inventions", "studies", "research projects", "technical data", "development plans", "product specifications", as well as matters of a business or financial nature such as, by way of illustration and not limitation, information about the cost, sources of, and arrangements for service or materials supplied to customers or clients of the Company, submission and proposal procedures, production, labor and/or material costs, profits and losses, prices, discounts, sales, markets, customer lists, future plans, trade secrets and proprietary information not generally available to the public. B. In addition, Incumbent represents and warrants that he will never, directly or indirectly lecture upon or publish articles concerning any Confidential Information without first having obtained from the affected company prior approval and written consent in the manner hereinabove contained. C. Incumbent shall act with due diligence in order that, on or before February 1, 1995, Incumbent shall have turned over to the Company all documents and other things, and all copies thereof within his possession, custody or control which may contain or which may have been derived from, or which may have the potential of disclosing any Confidential Information. D. Notwithstanding the preceding subparagraphs of this Article, it is understood and agreed that Incumbent shall not be bound by any covenant not to compete. He shall be permitted to engage in employment with a competitor of the Company without limitation as to time or geographical area. However, by engaging in such employment, Incumbent represents and warrants that he will not violate the provision of Subparagraphs A through C of this Article and will not, directly or indirectly, disclose any Confidential Information of the Company or of any of its subsidiaries or affiliates, except as expressly authorized in advance by the Company in the manner set forth in Subparagraph A of this Article. 14. In the event of a breach by Incumbent of any of Articles 8, 9, 10 or 13 of this Agreement or of the attached General Release, the Company shall be relieved and discharged of its obligations under the terms of this Agreement to provide Incumbent with any consideration which is in addition to the payments and benefits to which he and his beneficiaries or his estate are entitled by reason of his having been an employee of the Company in accordance with the terms and conditions of such plans and policies; and shall thereupon be entitled to institute an action to obtain any damages that may arise from such breach. In addition, the parties recognize that money damages are inadequate to compensate the Company for irreparable harm that may result from a breach of the confidentiality provisions contained within Article 13 of this Agreement and that equitable remedies are appropriate, inclusive of injunctive relief, which shall be in addition to any other remedies available to the Company at law or in Equity. In the event of a breach by the Company of Article 9 or 10 of this Agreement or of the attached General Release, the Incumbent shall be entitled to institute an action for any damages which may arise from such a breach. In addition, the parties recognize and agree that money damages may be inadequate to compensate the Incumbent for irreparable harm that may result from a breach of the recommendation and confidentiality provisions contained in Articles 9 and 10, respectively, and that equitable remedies are appropriate, inclusive of injunctive relief, which shall be in addition to any other remedies available to the Incumbent at law or in Equity. In the event either party shall be required to commence an action, at law or in equity, to enforce its rights under or as a result of a breach of this Agreement, the parties shall bear their own attorneys' fees and costs. 15.Incumbent acknowledges that he has been informed of his right to consider this Agreement and the terms thereof for a period of at least twenty-one (21) days prior to executing and delivering this Agreement to the Company; and that Incumbent has considered this Agreement and the terms thereof for in excess of twenty-one (21) days. He further acknowledges that he understands his right to revoke this Agreement and the attached General Release, by giving written notice to the Company in the manner set forth in the General Release attached hereto as Exhibit A. Such notice shall be effective upon receipt by the Company. This right is being provided to Incumbent as required under the Age Discrimination in Employment Act. Incumbent further acknowledges that he has been given the opportunity to have this Agreement and the attached General Release reviewed by attorney(s), accountant(s) and/or financial advisor(s) of his own choice; and that Incumbent has provided comments which have been incorporated into this Agreement to his satisfaction. 16. In further consideration of the undertakings by Company, which consideration is deemed by Incumbent to be fair, adequate and reasonable, Incumbent agrees, covenants and warrants that Incumbent shall hereafter, and at all reasonable times, cooperate with the Company and any affiliates and subsidiaries thereof in the analysis, prosecution or defense of any claim which may hereafter be asserted, as to which Incumbent has knowledge as a result of his employment with the Company, which shall include but not be limited to Incumbent's attendance at depositions, trial and similar activities. The Company shall exercise reasonable efforts to minimize Incumbent's participation and to cooperate with Incumbent in scheduling appearances at such proceedings. This agreement to cooperate shall extend to any matters which are alleged to have arisen during Incumbent's employment with the Company. 17. This Agreement and the attached General Release contain the entire Agreement with respect to the matters contained herein and therein and cannot be altered or amended except in a writing duly executed by the parties or their legal representatives. 18. Nothing in this Agreement or the attached General Release shall be construed or considered as evidence of or an admission by the Company of a violation of the United States Constitution, of the Age Discrimination in Employment Act, of Title VII of the Civil Rights Act of 1964, as amended, of the New Jersey Law against Discrimination, of the New Jersey Conscientious Employee Protection Act, of the New Jersey Wage Law, of the Equal Pay Act of 1963, as amended, of the Employee Retirement Income Security Act of 1974 (ERISA), as amended, of the New Jersey Conscientious Employee Protection Act, of the Americans with Disabilities Act, of any other act, law, rule or regulation referred to herein or of any other federal, state or local law, statute, ordinance, code, regulation, rule or order; and any such violation is specifically denied. 19. This Agreement and the attached General Release shall be interpreted, construed and enforced in accordance with the laws of the State of New Jersey. Should any part of this Agreement or of the attached General Release be determined to be unenforceable by a court of competent jurisdiction, the parties shall immediately meet to amend the Agreement or Release to effectuate the intent of the parties; and the surviving portions of the Agreement and Release shall remain binding and enforceable and in full force and effect. 20. Any notices required to be given under this Agreement or Release shall be either hand-delivered or delivered by certified mail, return receipt requested and shall be directed as follows: If to Company: Jerrold L. Jacobs Chairman, President & CEO Atlantic City Electric Company 6801 Black Horse Pike P.O. Box 1264 Pleasantville, NJ 08232 If to Incumbent: Jerry G. Salomone 306 Reed Road Absecon, NJ 08201 or to such other person and/or to such other address as the party to receive notice may, from time to time, indicate in writing. IN WITNESS WHEREOF, intending to be legally bound, the parties hereto attach their signatures and seals effective the date and year first above written. DATE: INCUMBENT: 1/31/95 /s/ J. G. Salomone J. G. Salomone STATE OF NEW JERSEY : : ss. COUNTY OF ATLANTIC : I hereby certify that on January 31, 1995, Jerry G. SALOMONE, personally came before me and acknowledged under oath, to my satisfaction, that he is the person named in and that he did personally sign this Employment Separation and Release Agreement. /s/ Paula M. James Notary Public - State of New Jersey ATTEST: DATE: ATLANTIC CITY ELECTRIC COMPANY: /s/ L. M. Walters 1/31/95 /s/ Jerrold L. Jacobs L. M. Walters, BY: Jerrold L. Jacobs Secretary President and Chief Executive Officer ATTEST: DATE: ATLANTIC ENERGY, INC.: /s/ J. E. Franklin, II 2/6/95 /s/ J. M. Galvin, Jr. J. E. Franklin, II BY: J. M. Galvin, Jr. Asst. Secretary Chairman of the Personnel Committee of Atlantic Energy, Inc. and designated by the Board of Directors of Atlantic Energy, Inc. as the individual authorized to execute and deliver this Employment Separation and Release Agreement on behalf of Atlantic Energy, Inc. GENERAL RELEASE, WAIVER and ACKNOWLEDGMENT In consideration of the undertakings of Atlantic Energy, Inc. and each of its Subsidiaries, inclusive of Atlantic City Electric Company (hereinafter collectively referred to as the "Company") set forth in Article 5 of the Employment Separation and Release Agreement to which this Exhibit A is appended, which provide for payment to me over and above those payments and benefits to which I am otherwise entitled by reason of having been an employee of the Company and subject to the terms and conditions thereof, I hereby release, waive and discharge the Company, and each of them, and their present and former Directors, Officers, employees, agents, representatives and attorneys and their respective successors, assigns, executors, administrators, estates and heirs from and against any and all claims of whatever nature, inclusive of claims for wrongful discharge, property damage, personal or bodily injury which I, my estate and heirs may have against any of them. This Release is intended to be legally binding and to release, relinquish, discharge, extinguish and waive any and all claims, whether known or unknown, direct or indirect which were or could have been or may hereafter be asserted, resulting from anything which has occurred through the effective date of this Release, including claims for attorneys' fees. I hereby promise not to commence or pursue, or to authorize anyone to commence or pursue on my behalf or in my interest any action whether legal, equitable or administrative, or to otherwise seek to recover any damages, remedy or relief of any kind from any releasee within the contemplation of this Release based upon any claim covered by this General Release, Waiver and Acknowledgment. Without limiting the scope of the foregoing in any way, I hereby acknowledge and confirm that my separation from employment as an Officer and employee of the Company constitutes my voluntary act and deed made of my own free will and without duress, undue influence or any other pressure or condition exerted or imposed upon me in any form by the Company or anyone acting on its behalf; and I specifically release and waive any and all claims relating to or arising out of any aspect of my employment with the Company or the separation therefrom including, but not limited to, all claims under the Age Discrimination in Employment Act (29 USC Sec. 621, et seq..), Title VII of the Civil Rights Act of 1964 (42 USC Sec. 2000(e), et seq.), as amended, the New Jersey Law Against Discrimination (N.J.S.A. 10:5-1 et seq.), the New Jersey Conscientious Employee Protection Act (N.J.S.A. 34:19-1 et seq.), the New Jersey Wage Law (N.J.S.A. 34:11-44.1 et seq.) and the Americans with Disabilities Act (42 USC Sec. 12101 et seq.), the Equal Pay Act of 1963 (29 USC Sec. 206, et seq.), the Employee Retirement Income Security Act of 1974 (ERISA), as amended, (29 USC Sec. 301, et seq.), the Employment Contract dated February 10, 1994, as amended, any other contract of employment, express or implied, any provision of the Constitution of the United States of America or of the Constitution of the State of New Jersey, and any other law, whether common or statutory, and any rule, regulation or order of the Unites States, the State of New Jersey, or any other state, and all claims arising out of any legal restrictions on the rights of the Company or its Affiliates with respect to termination of employment and retirement except for any claims regarding pension or other retirement benefits which may arise in the future. I certify that I have read the terms of this General Release, Waiver and Acknowledgment, that I have been advised by the Company to consult an attorney of my own choice prior to executing this Agreement, that I have discussed it with my attorney, and that he understands its terms and effects. I further acknowledge that I am executing this Agreement and Release of my own volition, with a full understanding of its terms and effects, and with the intention of releasing all claims recited herein in exchange for the consideration described herein, which I acknowledge to be fair, adequate and satisfactory to me. Neither the Company nor its agents, representatives, employees or attorneys have made any representations to me concerning the terms or effects of this General Release, Waiver and Acknowledgment other than those contained herein and in the Employment Separation and Release Agreement to which it is a part. I UNDERSTAND THAT FOR A PERIOD OF SEVEN (7) CALENDAR DAYS FOLLOWING THE SIGNING OF THIS GENERAL RELEASE, WAIVER AND ACKNOWLEDGEMENT, I MAY REVOKE IT IN A WRITING ACKNOWLEDGED BY THE CHIEF EXECUTIVE OFFICER OF THE COMPANY, AND THAT THIS GENERAL RELEASE, WAIVER AND ACKNOWLEDGMENT WILL NOT BE EFFECTIVE OR ENFORCEABLE UNTIL SUCH REVOCATION PERIOD HAS EXPIRED. UPON EXPIRATION OF SUCH REVOCATION PERIOD I UNDERSTAND AND ACKNOWLEDGE THAT THIS GENERAL RELEASE, WAIVER AND ACKNOWLEDGEMENT AND THE EMPLOYMENT SEPARATION AND RELEASE AGREEMENT TO WHICH IT IS APPENDED SHALL BECOME FINAL AND ENFORCEABLE. /s/ J. G. SALOMONE J. G. SALOMONE DATED: January 31, 1995 STATE OF NEW JERSEY : : ss. COUNTY OF ATLANTIC : I hereby certify that on January 31, 1995, Jerry G. Salomone, personally came before me and acknowledged under oath, to my satisfaction, that he is the person named in and that he did personally sign this General Release, Waiver and Acknowledgement. /s/ Paula M. James Notary Public State of New Jersey ATLANTIC CITY ELECTRIC COMPANY BY:/s/ J. L. Jacobs J. L. Jacobs President & Chief Executive Officer ATTEST: /s/ L. M. Walters L. M. Walters, Secretary DATED:January 31, 1995 ATLANTIC ENERGY, INC. BY: /s/ J. M. Galvin, Jr., J. M. Galvin, Jr., Chairman of the Personnel Committee of Atlantic Energy, Inc. and designated by the Board of Directors of Atlantic Energy, Inc. as the individual authorized to execute and deliver this General Release, Waiver and Acknowledgment on behalf of Atlantic Energy, Inc. ATTEST: /s/ J. E. Franklin, II J. E. Franklin, II, Assistant Secretary DATED: February 6, 1995 AMENDMENT TO EMPLOYMENT AGREEMENT among Jerry G. Salomone, Atlantic City Electric Company and Atlantic Energy, Inc. THIS Employment Agreement Amendment is entered into effective the 31st day of January, 1995 among Atlantic City Electric Company, a corporation of the State of New Jersey (hereinafter the "Company"), Atlantic Energy, Inc. ("Energy") and Jerry G. Salomone ("Executive") (collectively the "Parties"). WHEREAS, an Employment Agreement was entered into among the Parties on the 10th day of February, 1994; and WHEREAS, the Term of Employment pursuant to the Employment Agreement expires at the close of business on the date of the Annual Meeting of the shareholders of Energy in 1997, subject only to such earlier termination as specifically provided within Article 5 of the Employment Agreement; and WHEREAS, the Parties hereto agree that none of the Early Termination Provisions enumerated within Article 5 of the Employment Agreement which would allow for Termination by the Executive, by Company or by Energy have occurred during the term of the Employment Agreement; and WHEREAS, the Executive has requested Energy and the Company to amend the terms of the Employment Agreement to grant the Executive's request to voluntarily retire from the Company and Energy effective on the first day of the first month following Executive's 55th birthday; and WHEREAS, Energy and Company have agreed to the request made by the Executive, and have agreed to pay the Executive certain additional consideration as more specifically set forth in the Employment Separation and Release Agreement attached hereto as Schedule 1; and WHEREAS, Executive, Company and Energy have mutually agreed to the amount of consideration, the manner and method of payment, and the selection by the Executive of the retirement date, In consideration for the mutual promises, covenants and agreements expressed in this Agreement Amendment, and the attachments hereto, the parties hereto, intending to be legally bound, hereby agree as follows: 1. The recital clauses hereinabove set forth are incorporated herein and made a material part of this Agreement Amendment. 2. The Termination Date specified in the Employment Agreement is hereby modified. The Termination Date shall now be close of business on January 31, 1995. 3. This Employment Agreement Amendment shall become effective and legally binding upon the parties hereto upon execution and delivery by the Executive of this Amendment and the execution and delivery by Executive of the Employment Separation and Release Agreement and the General Release, Waiver and Acknowledgment attached thereto (both of which documents are incorporated herein and made a part hereof and are contained within Schedule 1 attached hereto); and upon execution of same by the Company and Energy. Whereupon, the employment relationship of the Executive with the Company and Energy, and their affiliates will be permanently and irrevocably severed; and neither Company nor Energy nor any of its affiliated or related companies shall have any obligation, contractual or otherwise, to hire, rehire or re-employ Executive at any time. 4. The Parties mutually represent, covenant and warrant to the other that neither has a right to terminate this Agreement for any of the reasons or conditions set forth in Article 5 of the Employment Agreement; and Executive represents and warrants that his request to amend the Employment Agreement to allow for his Retirement from the Company is made of his own free will, without duress, undue influence or any other pressure or condition exerted or imposed upon him in any form by Energy, the Company, or any of their affiliates, or by anyone acting by or on their behalf; and is not based upon any representations made to Executive by Energy, the Company, or any of their affiliates, or their agents, representatives, employees or attorneys except those specifically contained herein and in the documents attached hereto as Schedule 1. 5. Upon satisfaction of the conditions precedent hereinabove set forth, the employment of the Executive as an officer of Energy, as an officer and director of Atlantic City Electric Company and as an officer and director of Deepwater Operating Company will terminate effective close of business on January 31, 1995. Executive represents that he has heretofore voluntarily submitted letters of resignation effectuating his resignation as a Director of Atlantic Generation, Inc., ATE Investment, Inc., Atlantic Southern Properties, Inc., Atlantic Energy Technology, Inc., Atlantic Thermal Systems, Inc. and of each such subsidiary thereof upon which he may have served as a Director or an Officer; and has also submitted his resignation as a member of the Board of Managers of Cogeneration Partners of America. Each such resignation has heretofore been accepted and the letter of resignation has been duly filed in the record books of each respective company. 6. Executive hereby agrees to execute and deliver such additional documents, inclusive of but not limited to, letters of resignation, which may be necessary or desirable, in the opinion of Energy, the Company or the non-regulated subsidiaries to evidence Executive's retirement and resignation therefrom. 7. The Employment Agreement will terminate at close of business on January 31, 1995 whereupon none of the Parties hereto shall have any further employment obligation to the other under the Employment Agreement; and the relationship among the Parties shall thereupon be governed and controlled by the terms of the Employment Separation and Release Agreement and the General Release, Waiver and Acknowledgment. 8. This Employment Agreement Addendum incorporates Articles 8 through 13 of the Employment Agreement. IN WITNESS WHEREOF, the Parties hereto have executed this Employment Agreement Addendum the date and year first above written. ATTEST: ATLANTIC ENERGY, INC. /s/ L. M. Walters BY:/s/ J. M. Galvin, Jr., L. M. Walters, Assistant J. M. Galvin, Jr., Secretary Chairman of the Personnel Committee of Atlantic Energy, Inc. and designated by the Board of Directors of Atlantic Energy, Inc. as the individual authorized to execute and deliver this Employment Agreement on behalf of Atlantic Energy, Inc. ATTEST: ATLANTIC CITY ELECTRIC COMPANY /s/ L. M. Walters BY:/s/ J. L. Jacobs, L. M. Walters, Secretary J. L. Jacobs, President and Chief Executive Officer WITNESS: EXECUTIVE: Paula M. James /s/ J. G. Salomone J. G. Salomone EX-99 8 Exhibit 10a(23) THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into effective the 1st day of October, 1994, among ATLANTIC CITY ELECTRIC COMPANY ("Company"), a corporation of the State of New Jersey, ATLANTIC ENERGY, INC. ("Energy"), and James E. Franklin, II, Esq. ("Executive") . AS consideration for the mutual promises, covenants and agreements expressed in this Agreement, the parties hereto, intending to be legally bound agree as follows: 1. Term of Employment. The Executive's term of employment shall commence October 1, 1994 (the "Commencement Date"), and shall terminate at the close of business on the date of the Annual Meeting of the Shareholders of Energy in 1997, (the "Term of Employment") subject only to such earlier termination as specifically provided in Article 5 hereof (the "Termination Date"). No extension of the term of employment shall occur without the written agreement of Executive, Company and Energy. 2. Place of Employment. The Executive's services during the term of this Agreement shall be performed primarily at the principal offices of the Company. The Executive shall be furnished with a suitable office and such other facilities and services as he may reasonably require in performing his obligations under this Agreement. 3. Employment Options. A. Executive Position: The Company hereby agrees to employ the Executive as its General Counsel for the Term of Employment. It is understood and agreed that the position of General Counsel is a Senior Vice Presidential level position and shall be considered as such for all purposes. B. Executive Responsibility: Executive hereby accepts employment with the Company as its General Counsel and agrees that during the Term of Employment the Executive shall exercise his reasonable best efforts in furtherance of, and shall devote substantially all of his working time and attention to the affairs of the Company, Energy or any subsidiary or affiliate thereof, and shall perform such duties and services as may reasonably be assigned to him by, and shall report directly to the President and Chief Executive Officer of the Company; provided, however, that the Executive may serve as a director of other corporations or organizations upon approval by the Board of Directors of the Company and by the Board of Directors of Energy (the "Boards") which, in the judgment of the Boards, will not present any conflict of interest with the Company, Energy or any subsidiary or affiliate thereof, and which would not affect the performance of Executive's duties pursuant to this Agreement, which approval shall not be unreasonably withheld; and provided further that the Executive shall neither (a) become an officer or director of (i) another entity which has or will have the status of a public utility under the Federal Power Act, or any successor Act, (ii) any bank, trust company, banking association, or firm that is authorized by law to underwrite or participate in the marketing of securities of a public utility, or (iii) any company supplying electrical equipment to the Company, nor (b) accept any such position and commence the performance of any duties or services in such capacity (herein called an "Interlock"), unless the Executive shall have first (x) furnished the Boards with at least thirty (30) days prior written notice of his intention to create such Interlock and (y) secured, if the Boards shall request that such action be taken, any necessary authorization for such Interlock, in form and substance satisfactory to the Boards, from the Federal Energy Regulatory Commission, or successor regulatory agency, pursuant to Section 305(b) of the Federal Power Act, or any supplement or amendment thereto. 4. Compensation. A. Base Salary and Supplements: During the Term of Employment, the Company shall pay to the Executive a base salary of one hundred seventy-five thousand dollars ($175,000.00) per annum (which shall be prorated in any partial calendar year), (the "Base Salary"). Such Base Salary shall be payable by the Company in installments to conform with regular payroll payment dates for officers of the Company. The Base Salary shall be reviewed annually by the Board. There shall be no downward adjustment in the Base Salary unless as part of a plan affecting all officers; and there shall be no proportionately greater reduction in the Base Salary of the Executive as compared to any other officer. The Executive shall be paid from time to time during the Term of Employment, in addition to his Base Salary, such incentive compensation as the Board shall in its discretion, elect to pay to the Executive. B. Other Expenses and Other Benefits: During the Term of Employment the Executive shall be entitled to such employee benefits and perquisites as shall be available, from time to time, to officers of the Company. Neither the Company nor Energy shall make any voluntary changes in such employee benefit plans or perquisites which would adversely affect Executive's rights or benefits thereunder, unless such change is applicable to all officers of the Company; and no such change shall result in a proportionately greater reduction in the rights or benefits of the Executive as compared with any other officer of the Company. The Company and Energy further agree that no such benefit or perquisite shall be changed in such a manner as to reduce any benefit or award earned or accrued by Executive prior to the date of any such modification, except as may be required by statute or regulation or to maintain the qualified status of an employee benefit plan. Executive shall receive reimbursement for all reasonable travel and other authorized expenses incurred by Executive in performing his obligations under this Agreement, or such expenses may be paid directly by the Company, all in accordance with the normal policies and practices of the Company. 5. Early Termination Provisions. A. Early Termination: The Executive's employment hereunder may be terminated prior to the Termination Date without breach of this Agreement only upon the following circumstances: (a) Death: The Executive's employment hereunder shall terminate on the date of the Executive's death. The Company shall thereupon pay to the Executive's designated beneficiary, in addition to any other benefits payable by or on behalf of the Company, Energy or any subsidiary or affiliate thereof, Executive's then current Base Salary through the date of death. (b) Disability: If, as a result of the Executive's incapacity due to physical or mental illness or accident, the Executive shall have been incapable or unable to substantially perform the Executive's duties hereunder on a full-time basis for a period of six (6) consecutive months, the Company, at any time thereafter and while such absence continues, may give written notice of early termination to the Executive if, in the good faith opinion of a majority of the Board of the Company the Executive is incapable or unable to substantially perform his duties on a full-time basis. Early termination shall be effective as of the date set forth in said notice. The Company shall pay to the Executive his Base Salary through such early termination date, together with any other earned and accrued benefits then in effect to which the Executive would otherwise be entitled. Following such early termination, the Executive shall be entitled to all benefits available through the Disability Benefit Plan covering officers of the Company. (c) Cause by the Company: The Company may terminate the Executive's employment hereunder for cause. For purposes of this Agreement, the Company shall have cause to terminate the Executive's employment hereunder only upon either willful and continuous failure by the Executive to substantially perform his duties hereunder (other than failure resulting from incapacity due to physical or mental illness), or willful engagement in misconduct which results in economic damage to the Company. In either such event the Board shall provide Executive with a notice of termination, stating that in the good faith opinion of a majority of the members of the Board of Energy who are not employees of the Company, the Executive is being terminated and setting forth the reasons for the Company's exercise of its right to terminate for cause. In such notice, an early termination date shall be stated, which shall be not less than twenty (20) days from the date of said notice (the "Early Termination Date"). In the event of the early termination of this Agreement for cause, the Company shall pay to the Executive his Base Salary through the Early Termination Date. In addition, the Executive shall be entitled to all other earned and accrued benefits to which the Executive would otherwise be entitled through the Early Termination Date. Neither the Company nor Energy shall have any further financial obligation to the Executive; provided, however, that in the event of a determination through arbitration that termination for Cause was without basis, the Executive shall then be entitled, if so determined by the arbitrator(s), to receive an award of up to his Base Salary through the Termination Date, together with an amount determined by the Company's actuary to be equal to the value of the employee benefits the Executive was deprived of by reason of the wrongful termination of employment, and together with interest thereon calculated at the prime rate(s) in effect for the period as established by The Bank of New York, or its successor. Payment of such arbitrators award by the Company shall constitute full and final discharge of any and all financial obligations of the Company and of Energy or any subsidiary or affiliate thereof to the Executive. (d) Termination by the Executive: The Executive may exercise early termination without constituting a breach of this Agreement upon not less than thirty (30) days advance written notice to the Company and to Energy only in the event of: (i) assignment to the Executive, without the Executive's express written approval of duties materially inconsistent with the Executive's position, duties, responsibilities, or status with the Company immediately prior to any change in control of the Company or of Energy, as hereinafter defined; or (ii) relocation, without the prior written consent of the Executive, of the principal offices of the Company or relocation of the Executive's personal office to a location more than sixty-five (65) miles from said location prior to any change in control; or (iii) Executive's position is eliminated or the duties and responsibilities of the Executive are materially and adversely changed as a result of a reorganization or restructuring of the Company or of Energy without the participation of and approval by Executive, regardless of whether there has been a change in control. For purposes of this Agreement, a change in control of the Company or of Energy shall be deemed to have occurred if (i) the persons who constituted a majority of the members of the Board of Energy at the commencement of this Agreement shall cease to constitute a majority of the Board of Energy, unless the election or the nomination for election by the shareholders of each such new director was approved by two-thirds of the members of the Board of Energy who were in office at the commencement of this Agreement, or by those Directors of Energy who shall have been added after the date of commencement of this Agreement and who shall have been elected without written objection of the Executive; (ii) as a result of a tender offer, merger, consolidation, sale of assets or contested election, or any combination of the foregoing transactions, the Company and/or Energy shall become a subsidiary of another corporation or either of them shall be merged or consolidated into another corporation, or if substantially all of the assets of the Company and/or Energy shall be sold to another corporation. The exercise by the Executive of early termination as a result of any of the events, or combination thereof, described within subparagraphs (i) through (iii) of this subsection, shall be communicated to the Company and to Energy by a written notice of termination. The notice of termination shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for early termination of the Executive's employment and the provisions of this Agreement upon which the decision shall have been based. Such written notice shall be communicated and delivered not less than thirty (30) days in advance of the date of early termination. If such a notice of termination shall have been properly given and supported by the events giving rise to such election, the Company shall thereupon pay to the Executive, in addition to any other benefits payable by or on behalf of the Company, Energy or their affiliates; (a) the Executive's Base Salary in effect at the time of termination, through the Termination Date which, at the discretion of the Company, may be payable either in up to three (3) equal installments with the first such installment payable not later than sixty (60) days following the date of early termination, and the last such installment payable not later than the Termination Date, or in equal installments to conform with the regular payroll payment dates for officers of the Company (Federal and State Income Taxes and other payroll deductions shall be deducted from such payments); (b) all salary supplements, bonuses and perquisites which shall have been earned through the date of early termination, which shall be prorated; (c) all rights and benefits under any plan in which the Executive was then participating related to the award of securities of Energy, which shall be accelerated and shall become exercisable immediately in full to the extent same shall have become vested and capable of determination. Any securities previously granted to the Executive which remain subject to any restrictions at the time of early termination shall have all such restrictions removed immediately following such early termination; (d) continuation of the Executive's medical plan benefits until the earlier of the Termination Date or the effective date of Executive's coverage under a subsequent employers plan or policy; and (e) an amount determined by the Company's actuary to be equal to the value of Executive's rights, benefits and awards for purposes of all retirement, deferred compensation and supplemental executive retirement plans through the Termination Date as if the Executive had continued through such date, and Termination Date shall be deemed to be the Executive's retirement date for purposes of said plans. In making such calculations, and in determining the benefits to be awarded, the Executive's age and years of service shall be based upon the age and years of service which would have been achieved as of the Termination Date. Notwithstanding the obligations undertaken by the Company in Subsection (e) above, it is understood and agreed that the Executive shall be entitled to all retirement benefits of the Company as of the date of early termination. However, the benefits under all such plans shall be calculated and determined in accordance with Subsection (e). Other than medical plan benefits, no other benefits to be paid to Executive pursuant to this section shall be offset or subject to mitigation as a result of Executive's subsequent employment following the date of early termination. B. Termination by Company: Any termination of the Executive by the Company or by Energy for any reason other than as specifically provided in Article 5 shall constitute a termination by the Company in breach of this Agreement. The Company shall thereupon be obligated to pay to the Executive the same amounts and in the same manner as if the Executive had terminated this Agreement in accordance with Article 5A(d); and upon satisfaction of those obligations, there shall be no further payments due or owing by the Company or by Energy to the Executive. 6. Successors; Binding Agreement. (a) The Company and Energy shall require any successor (whether direct or indirect, by purchase, merger, consolidation, condemnation or otherwise) to all or substantially all of the business and/or assets of the Company or of Energy, by agreement in form and substance satisfactory to the Executive, to expressly assume and to agree to perform this Agreement in same manner and to the same extent that the Company and Energy would be required to perform if no such succession had taken place. (b) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns, heirs, administrators, executors and legal representatives. (c) This Agreement shall not be assignable except as specifically provided herein and may not be assigned, pledged or sold by the Executive for the benefit of the Executive or for the benefit of the Executive's creditors. (d) The Executive shall not have any vested right in any payment to be made hereunder prior to the time when such payment is to be made by the terms hereof. Nothing contained within this Article 6 is intended to limit or restrict the ability of Executive to exercise the early termination provisions of Article 5. 7. Arbitration and Payment of Fees and Expenses. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three (3) neutral arbitrators in accordance with the commercial rules of the American Arbitration Association then in effect. The arbitrators shall sit within Atlantic County, New Jersey. Judgment may be entered upon the arbitrators' award in any court having jurisdiction. 8. Governing Law. The execution, validity, interpretation, performance and enforcement of this Agreement shall be governed and determined in accordance with the laws of the State of New Jersey 9. Entire Agreement. This Agreement contains the entire agreement of the parties. This Agreement may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement is sought. 10. Separability. If any provision of this Agreement shall be rendered or declared illegal, invalid or unenforceable by reason of any existing or subsequently enacted legislation or by decree of a court of competent jurisdiction, such determination shall not affect the validity or enforceability of any other provision of this Agreement. In the event of such determination, the parties hereto shall promptly meet to negotiate and agree upon substitute language to give effect to the intent of the parties and, if replacement language cannot be agreed upon, either party may seek recourse through arbitration in accordance with Article 7. 11. Article Headings. Article headings are included for convenience only and are not intended to affect the meaning or interpretation of this Agreement. 12. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same instrument. 13. Waiver. The waiver by either party of a breach of any provision of this Agreement by the other shall not be construed as a waiver of any subsequent breach. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the date and year first above written. ATTEST: ATLANTIC ENERGY, INC. /s/ J. G. Salomone BY: /s/ J. M. Galvin, Jr. J. G. Salomone J. M. Galvin, Jr., Chairman of the Personnel Committee of Atlantic Energy, Inc. and designated by the Board of Directors of Atlantic Energy, Inc. as the individual authorized to execute and deliver this Agreement on behalf of Atlantic Energy, Inc. ATTEST: ATLANTIC CITY ELECTRIC COMPANY /s/ L. M. Walters BY: /s/ J. L. Jacbos L. M. Walters J. L. Jacobs, Chairman, President and Chief Executive Officer WITNESS: EXECUTIVE: /s/ Lois F. Jennings /s/ James E. Franklin, II James E. Franklin, II frank794.wpd EX-99 9 Exhibit 10a(24) EMPLOYMENT SEPARATION and RELEASE AGREEMENT between S. D. McMillian and Atlantic Energy, Inc. and its affiliated and subsidiary companies inclusive of Atlantic City Electric Company This Employment Separation and Release Agreement (Agreement) is made and entered into effective the 31st day of March, 1994 by and between S. D. McMILLIAN (Incumbent) residing at 8157 East Beach Drive, N.W., Washington, D.C. 20012 and Atlantic Energy, Inc. and its affiliates and subsidiaries including Atlantic City Electric Company (hereinafter collectively referred to as the "Company") having a principal Executive Office located at 6801 Black Horse Pike, Pleasantville, County of Atlantic, State of New Jersey. WHEREAS, Incumbent had been employed by the Company for some time past in the capacity of an Officer and employee; and WHEREAS, Incumbent had given oral notice and has confirmed in a writing her intent to terminate and withdraw from continued employment with the Company, as her voluntary act and deed (hereinafter referred to as the "Notice of Separation"); and WHEREAS, the Company has agreed to accept the Notice of Separation; and WHEREAS, Incumbent and the Company have agreed that Incumbent shall withdraw from and terminate the employment relationship with the Company upon the terms and conditions more fully set forth herein; NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained which the parties hereto hereby agree constitute fair, reasonable and valuable consideration, Incumbent and the Company, intending to be legally bound, hereby represent, covenant and agree as follows: 1. The Recital Clauses hereinabove set forth are incorporated and made a material part of this Agreement. 2. Incumbent shall terminate and withdraw from full time employment as an Officer and employee of the Company effective close of business on March 31, 1994 (the "Termination Date"). Incumbent acknowledges that the Termination Date has been mutually agreed to between Company and Incumbent. 3. Notwithstanding the preceding paragraph, in consideration of the payment referred to in the next succeeding paragraph, Incumbent agrees to be available to consult with the Company through close of business on December 31, 1994. Incumbent agrees to provide such consultation, without additional compensation, except for reimbursement of reasonable out-of-pocket expenses upon approval by the Company. Incumbent shall provide such consultation upon the approval of the Chief Executive Officer of Atlantic City Electric Company. Incumbent shall have no obligation to provide any continuing consultation beyond the close of business on December 31, 1994. 4. In addition to any benefit to which Incumbent is otherwise entitled by reason of having been an employee of the Company, the Company agrees to: (a) Pay Incumbent in a single lump sum payment an amount equivalent to her current regular monthly salary as established by the Board of Directors of the Company which would otherwise have been paid for the period April 1, 1994 through December 31, 1994, net of deductions. This payment will be made upon the condition that Incumbent has executed and returned this Agreement not later than April 20, 1994 and the revocation period specified in Exhibit A shall have expired without revocation by Incumbent. This payment will then be made to Incumbent as soon as practicable following expiration of the revocation period. (b) Pay Incumbent an Incentive Award pursuant to the 1994 Management Annual Incentive Compensation Plan of Atlantic Energy, Inc., and its Subsidiaries (the "Plan"). For purposes of determining the amount of such Incentive Award, Incumbent shall be deemed to have satisfactorily contributed to the achievement of Performance Goals during the first quarter 1994 Plan year; (c) Deliver to Incumbent shares of stock pursuant to the Company Long-Term Performance Incentive Plan currently in effect covering the period January 1, 1993 through December 31, 1995. For purposes of determining the amount of stock to be delivered to Incumbent, the services provided by Incumbent through March 31, 1994 in the achievement of the longer-term financial and operating performance objective shall be deemed to have been satisfied, and of full value; (d) Pay to the Incumbent, or her designated beneficiary, the benefits to which she is entitled by reason of her having been an employee of the Company, which shall be paid in the manner, amounts and at such times as provided in accordance with the terms and conditions thereof, and using the Termination Date as the date of separation; and (e) Provide Incumbent with continued coverage under the Medical Expense Reimbursement Plan of the Company through June 1, 1994. Payment of the Incentive Award and delivery of the shares of stock referred to in Subparagraphs (b) and (c) of this Article shall be consummated not later than January 1, 1996. Should Incumbent die prior to receiving any of the payments or shares of stock hereinabove listed, payment of such amount and/or delivery of such shares shall be made to the Estate of the Incumbent. 5. The consideration given to Incumbent pursuant to this Agreement, with the exception of the benefits to which she and her beneficiary or estate are entitled by reason of her having been an employee of the Company, constitute the total amount to which Incumbent is entitled as a result of her employment with the Company and is paid in satisfaction of any and all claims which Incumbent has or may have against the Company at any time as a result of her employment with the Company and her separation therefrom. 6. This Agreement shall apply to and be binding upon all affiliated, related, subsidiary and successor corporations of the Company, and their assigns; and shall apply to and be binding upon Incumbent, her personal representative, heirs, executors, administrators, trustees, successors, assigns and any and all persons who may succeed the legal rights and interests of Incumbent. 7. In exchange for the undertakings of the Company contained in Article 4, and as a condition precedent thereto, Incumbent agrees to execute and deliver a General Release, Waiver and Acknowledgement (Release) in the form attached hereto as Exhibit A. Incumbent expressly acknowledges that she is aware of her rights under federal and state laws which prohibit discrimination in employment based on race, sex, national origin, age, religion, disability and veteran rights, including the Age Discrimination in Employment Act, as amended, Title VII of the Civil Rights Act of 1964, as amended, the New Jersey Law Against Discrimination, the New Jersey Conscientious Employee Protection Act, the New Jersey Wage Law and the Americans with Disabilities Act (hereinafter collectively referred to as the "Acts"); and further acknowledges that this Agreement and the attached Release are intended to include, without limitation, a release by her of any and all rights and claims arising out of her employment with the Company and her withdrawal and separation therefrom, including, but not limited to, all claims under any and all federal, state, local and common laws dealing with employment including the Acts hereinabove referred to in this Article. Incumbent further agrees not to commence any legal action, in any form, against any releasee identified in the attached Release or any other party connected with her employment with the Company with respect to any right or claim, direct or indirect, encompassed by the attached Release and this Agreement, except to enforce the terms of this Agreement. 8. Incumbent agrees that she will not engage in any communications which would injure the reputation of or interfere with existing or prospective business relationships of the Company. 9. Incumbent agrees that, except as expressly provided below, she will not communicate or disclose the terms of this Agreement or of the attached Release to or with any person(s) with the exception of members of her immediate family, her attorney(s), her financial advisor(s) and/or her accountant(s). In such communication or disclosure, Incumbent shall inform the recipient of the information that same is being provided in a confidential manner and subject to a requirement of confidentiality. 10. It is expressly understood and agreed that any violation of the confidentiality provision in the preceding Article by Incumbent, or anyone acting on her behalf, shall be deemed to be a material breach of this Agreement. 11. Incumbent agrees and recognizes that her employment relationship with the Company shall be permanently and irrevocably terminated at her voluntary request as contained in the Notice of Separation. Incumbent acknowledges that she has no contract or other rights to employment or re-employment with the Company; except that Incumbent shall continue to be available to provide consultation to the extent requested, consistent with the requirements of Article 3 of this Agreement. 12. Incumbent agrees that she shall not, directly or indirectly, knowingly disclose to any other person, firm or corporation nor appropriate to her own use or to the use of any person, firm or corporation, any Confidential Information (as defined herein) used by or belonging to the Company, except as same may be expressly authorized in advance by the Company in a writing signed by a Senior Officer of the affected company. For purposes of this Agreement, the term Senior Officer shall mean a person holding a title within any of the Companies which constitute the Company of Senior Vice President or higher. For purposes of this Agreement, the term Confidential Information includes, by way of illustration and not limitation, matters of a technical nature such as "know how", "formulae", "processes", "procedures", "techniques", "machinery", "apparatus, "inventions", "studies", "research projects", "technical data", "development plans", "product specifications", as well as matters of a business or financial nature such as, by way of illustration and not limitation, information about the cost, sources of, and arrangements for service or materials supplied to customers or clients of the Company, submission and proposal procedures, production, labor and/or material costs, profits and losses, prices, discounts, sales, markets, customer lists, future plans, trade secrets and proprietary information not generally available to the public. In addition, Incumbent represents and warrants that she will never, directly or indirectly lecture upon or publish articles concerning any Confidential Information without first having obtained from the Company prior approval and written consent in the manner hereinabove contained. On or before March 31, 1994, Incumbent shall turn over to the Company all documents and other things, and all copies thereof within her possession, custody or control which may contain or which may have been derived from, or which may have the potential of disclosing any Confidential Information. 13. In the event of a breach of Articles 3, 7, 8, 9 or 12 of this Agreement or of the attached Release, the Company shall be relieved and discharged of its obligations under the terms of this Agreement to provide Incumbent with any consideration which is in addition to the payments and benefits to which she, her beneficiaries, or her estate are entitled by reason of having been an employee of the Company in accordance with the terms and conditions of such plans and policies; and shall thereupon be entitled to institute an action to obtain any damages that may arise from such breach. In addition, the parties recognize that money damages are inadequate to compensate the Company for irreparable harm that may result from a breach of the confidentiality provisions contained within Article 12 of this Agreement and that equitable remedies are appropriate, inclusive of injunctive relief. In the event the Company shall be required to commence an action, at law or in equity, to enforce its rights under or as a result of a breach of Articles 3, 7, 8, 9 or 12 of this Agreement, the parties shall bear their own attorneys fees and costs. 14. Incumbent acknowledges that she has been given the opportunity to have this Agreement and the attached Release reviewed by an attorney(s), accountant(s) and/or a financial advisor(s) of her own choice; and Incumbent has exercised this right and has had the opportunity to review and consider this Agreement and the attached Release for a period in excess of twenty-one (21) days, and Incumbent hereby waives any further period of review or revocation, it being the intent of Incumbent and the Company that this Agreement shall be effective upon execution by all parties hereto; and the attached Release shall be effective in accordance with its terms. 15. This Agreement and the attached Release contain the entire Agreement with respect to the matters contained therein and cannot be altered or amended except in a writing duly executed by the parties or their legal representatives. 16. Nothing in this Agreement or the attached Release shall be construed or considered as evidence of or an admission by the Company of a violation of the United States Constitution, of the Age Discrimination in Employment Act, of Title VII of the Civil Rights Act of 1964, as amended, of the New Jersey Law against Discrimination, of the New Jersey Conscientious Employee Protection Act, of the New Jersey Wage Law, of the Americans with Disabilities Act, of any other act, law, rule or regulation referred to herein or of any other federal, state or local law, statute, ordinance, code, regulation, rule or order; and any such violation is specifically denied. 17. This Agreement and the attached Release shall be interpreted, construed and enforced in accordance with the laws of the State of New Jersey. Should any part of this Agreement or of the attached Release be determined to be unenforceable by a court of competent jurisdiction, the parties shall immediately meet to amend the Agreement or Release to effectuate the intent of the parties; and the surviving portions of the Agreement and Release shall remain binding and enforceable and in full force and effect. 18. Any notices required to be given under this Agreement or Release shall be either hand-delivered or by certified mail, return request requested and shall be directed as follows: If to Company: Jerrold L. Jacobs Chairman, President & CEO Atlantic City Electric Company 6801 Black Horse Pike P.O. Box 1264 Pleasantville, NJ 08232 If to Incumbent: Sabrina D. McMillian 8157 East Beach Drive, N.W. Washington, D.C. 20012 or to such other person and/or to such other address as the party to receive notice may, from time to time, indicate in writing. IN WITNESS WHEREOF, intending to be legally bound, the parties hereto attach their signatures and seals effective the date and year first above written. DATE: INCUMBENT: March 31, 1994 /s/ SABRINA D. McMILLIAN SABRINA D. McMILLIAN STATE OF NEW JERSEY : : ss. COUNTY OF ATLANTIC : I hereby certify that on March 31, 1994 SABRINA D. McMILLIAN, personally came before me and acknowledged under oath, to my satisfaction, that she is the person named in and that she did personally sign this Employment Separation and Release Agreement. /s/ K. D. Zimmerman Notary Public - State of New Jersey ATTEST: DATE: ATLANTIC ENERGY, INC. and its AFFILIATES inclusive of ATLANTIC CITY ELECTRIC COMPANY: L. M. Walters 3-31-94 /s/ Jerrold L .Jacobs Secretary BY: Jerrold L. Jacobs Exhibit A GENERAL RELEASE, WAIVER and ACKNOWLEDGMENT In consideration of the undertakings of Atlantic Energy, Inc. and its affiliates inclusive of Atlantic City Electric Company (hereinafter collectively referred to as the "Company") set forth in Article 4 of the Employment Separation and Release Agreement to which this Exhibit A is appended, which provide for payment to me over and above those payments and benefits to which I am otherwise entitled by reason of having been an employee of the Company and subject to the terms and conditions thereof, I hereby release, waive and discharge the Company, and each of them, and their present and former Directors, Officers, employees, agents, representatives and attorneys and their respective successors, assigns, executors, administrators, estates and heirs from and against any and all claims which I, my estate and heirs may have against any of them. This Release is intended to release, relinquish, discharge, extinguish and waive any and all claims, whether known or unknown, direct or indirect which were or could have been or may hereafter be asserted, resulting from anything which has occurred through the effective date of this Release, including claims for attorneys' fees. I hereby promise not to commence or pursue, or to authorize anyone to commence or pursue on my behalf or in my interest any action whether legal, equitable or administrative, or to otherwise seek to recover any damages, remedy or relief of any kind from any releasee within the contemplation of this Release based upon any claim covered by this General Release, Waiver and Acknowledgment. Without limiting the scope of the foregoing in any way, I hereby acknowledge and confirm that my separation from employment as an Officer and employee of the Company constitutes my voluntary act and deed made of my own free will and without duress, undue influence or any other pressure or condition exerted or imposed upon me in any form by any person or entity; and I specifically release and waive any and all claims relating to or arising out of any aspect of my employment with the Company or the separation therefrom including, but not limited to, all claims under the Age Discrimination in Employment Act (29 USC Sec. 621, et seq..), Title VI of the Civil Rights Act of 1964 (42 USC Sec. 2000(e), et seq.), as amended, the New Jersey Law Against Discrimination (N.J.S.A. 10:5-1 et seq.), the New Jersey Conscientious Employee Protection Act (N.J.S.A. 34:19-1 et seq.), the New Jersey Wage Law (N.J.S.A. 34:11-44.1 et seq.) and the Americans with Disabilities Act (42 USC Sec. 12101 et seq.), any contract of employment, express or implied, any provision of the Constitution of the United States of America or of the Constitution of the State of New Jersey, and any other law, whether common or statutory, and any rule, regulation or order of the Unites States, the State of New Jersey, or any other state, and all claims arising out of any legal restrictions on the rights of the Company or its Affiliates with respect to termination of employment. I UNDERSTAND THAT FOR A PERIOD OF SEVEN (7) CALENDAR DAYS FOLLOWING THE SIGNING OF THIS GENERAL RELEASE, WAIVER AND ACKNOWLEDGEMENT, I MAY REVOKE IT IN A WRITING ACKNOWLEDGED BY THE CHIEF EXECUTIVE OFFICER OF THE COMPANY, AND THAT THIS GENERAL RELEASE, WAIVER AND ACKNOWLEDGMENT WILL NOT BE EFFECTIVE OR ENFORCEABLE UNTIL SUCH REVOCATION PERIOD HAS EXPIRED. UPON EXPIRATION OF SUCH REVOCATION PERIOD I UNDERSTAND AND ACKNOWLEDGE THAT THIS GENERAL RELEASE, WAIVER AND ACKNOWLEDGEMENT AND THE EMPLOYMENT SEPARATION AND RELEASE AGREEMENT TO WHICH IT IS APPENDED SHALL BECOME FINAL AND ENFORCEABLE. Sabrinia D. McMillian DATED: April 26, 1994 STATE OF NEW JERSEY : : ss. COUNTY OF ATLANTIC : I hereby certify that on April 26th, 1994 SABRINIA D. McMILLIAN, personally came before me and acknowledged under oath, to my satisfaction, that she is the person named in and that she did personally sign this General Release, Waiver and Acknowledgement. /s/ K. D. Zimmerman Notary Public - State of New Jersey EX-99 10 Exhibit 10a(25) EMPLOYMENT SEPARATION and RELEASE AGREEMENT between J. J. Lees and Atlantic City Electric Company This Employment Separation and Release Agreement (Agreement) is made and entered into the 26th day of April, 1994 by and between J. J. LEES (Incumbent) residing at 8201 Atlantic Avenue in the City of Margate, County of Atlantic, State of New Jersey and Atlantic City Electric Company (Company) having a principal Executive Office located at 6801 Black Horse Pike, Pleasantville, County of Atlantic, State of New Jersey. WHEREAS, Incumbent has been employed by the Company since June 1, 1970 and, for some time past has served in the capacity of an Officer; and WHEREAS, Incumbent had given oral notice and has confirmed in a writing his intent to terminate and withdraw from continued employment with the Company, as his voluntary act and deed (hereinafter referred to as the "Notice of Separation"); and WHEREAS, the Company has agreed to accept the Notice of Separation; and WHEREAS, Incumbent and the Company have agreed that Incumbent shall withdraw from and terminate the employment relationship with the Company upon the terms and conditions more fully set forth herein; NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained which the parties hereto hereby agree constitute fair, reasonable and valuable consideration, Incumbent and the Company, intending to be legally bound, hereby represent, covenant and agree as follows: 1. The Recital Clauses hereinabove set forth are incorporated and made a material part of this Agreement. 2. Incumbent shall terminate and withdraw from full time employment as an Officer and employee of the Company effective close of business on June 3, 1994 (the "Termination Date"). Incumbent acknowledges that he has selected the Termination Date. Company acknowledges that it has agreed to the Termination Date. Notwithstanding the Termination Date, Incumbent shall be entitled to utilize accumulated vacation days and other benefits which allow him to discontinue his day-to-day activities as an employee as of April 26, 1994. Nonetheless, he shall continue to serve as an Officer and employee through the Termination Date. 3. In addition to any benefit to which Incumbent is otherwise entitled by reason of having been an employee of the Company, the Company agrees to: (a) Pay Incumbent in a single lump sum payment an amount equivalent to one (1) year of his current annual Base Salary ($112,900.00) as established by the Board of Directors of the Company, which shall be reduced by all deductions required by law. This payment will be made within thirty (30) days of the execution of this Agreement and attached General Release by Incumbent, provided that Incumbent signs and returns this Agreement and General Release not later than July 15, 1994 and the Revocation Period specified in Exhibit A shall have expired without revocation by Incumbent. This payment will then be made to Incumbent as soon as practicable following expiration of the revocation period; and (b) Pay Incumbent an Incentive Award pursuant to the 1994 Management Annual Incentive Compensation Plan of Atlantic Energy, Inc., and its Subsidiaries (the "Plan"). For purposes of determining the amount of such Incentive Award, Incumbent shall be deemed to have satisfactorily contributed to the achievement of Performance Goals through May 31 of the 1994 Plan year (i.e. 5/12ths); and (c) Deliver to Incumbent shares of stock pursuant to the Company Long-Term Performance Incentive Plan currently in effect covering the period January 1, 1993 through December 31, 1995. For purposes of determining the amount of stock to be delivered to Incumbent, Incumbent will be credited with service through May 31, 1994 and will be deemed to have satisfactorily contributed toward the achievement of the longer-term financial and operating performance objectives of such Plan for the specified period; and (d) Pay to the Incumbent, or his designated beneficiary, all those benefits to which he is entitled by reason of his having been an employee of the Company, which shall be paid in the manner, amounts and at such times as are provided in accordance with the terms and conditions thereof as in effect on the Termination Date, and using the Termination Date as the date of separation. This is contingent upon Incumbent's execution and delivery of and compliance with the terms of this Agreement in the manner specified herein. A schedule of such benefits is attached hereto as Exhibit "B"; and (e) Provide Incumbent with continued coverage under the Medical Expense Reimbursement Plan of the Company through June 3, 1994; and reimburse Incumbent for medical expenses incurred through that date. All such expenses shall be submitted for processing in compliance with the Plan requirements on or before September 1, 1994. Payment of the Incentive Award and delivery of the shares of stock referred to in Subparagraphs (b) and (c) of this Article shall be consummated at such time as the payment and award shall be made to all other Officers of the Company. Should Incumbent die prior to receiving any of the payments or shares of stock hereinabove listed, payment of such amount and/or delivery of such shares shall be made to the Estate of the Incumbent or to such other beneficiary as Incumbent shall designate in writing to be delivered to the Company prior to his death. 4. The consideration given to Incumbent pursuant to this Agreement, with the exception of those benefits to which he and his beneficiary or estate are otherwise entitled by reason of his having been an employee of the Company, constitute the total amount to which Incumbent is entitled as a result of his employment with the Company and is paid in satisfaction of any and all claims of any nature whatsoever, however arising, whether known or unknown, which Incumbent has or may have against the Company at any time as a result of, relating to or arising out of his employment with the Company or his separation therefrom. 5. Attached hereto and made a part hereof as Exhibit "C" is Article VI of the By-Laws of Atlantic Energy, Inc. (Atlantic Energy). Atlantic Energy, on behalf of itself and the Company, warrants and represents that pursuant to these By-Laws, it will provide Incumbent with indemnification against liability (including attorney's fees and related expenses) imposed upon or incurred by him in any threatened, pending or completed investigation, claim, action, suit, or proceeding, whether civil, administrative or investigative in nature which may be instituted by or on behalf of Atlantic Energy, or any of its Subsidiaries, inclusive of the Company, against Incumbent. Atlantic Energy further represents and warrants that in the event the By-Laws of Atlantic Energy are hereafter amended to alter or extinguish such obligation to indemnify, notwithstanding such amendment or alteration, the obligation to indemnify as set forth herein shall nonetheless remain in full force and effect. In the event that Atlantic Energy refuses to indemnify Incumbent, or in the event a Court of competent jurisdiction holds that Atlantic Energy is not obligated to indemnify the Incumbent (other than where a judgment or other final adjudication establishes that the acts or omissions of the Incumbent involved a knowing violation of law constituting criminal conduct) then the General Release given to Atlantic Energy and its Subsidiaries, inclusive of the Company by Incumbent shall become null and void for all purposes and shall not bar Incumbent from thereafter asserting any claim or counterclaim he may have against Atlantic Energy, or its Subsidiaries, inclusive of the Company. Furthermore, in the event Atlantic Energy does not provide such indemnification to the Incumbent, neither Atlantic Energy nor its Subsidiaries, inclusive of the Company, shall invoke any defense based in whole or in part on any Statute of Limitations or on the timeliness of such claim which may thereafter be instituted by the Incumbent in accordance with the provisions of this paragraph. 6. This Agreement shall apply to and be binding upon all affiliated, related, parent, subsidiary and successor corporations of the Company, and their assigns; and shall apply to and be binding upon Incumbent, his personal representative, heirs, executors, administrators, trustees, successors, assigns and any and all persons who may succeed the legal rights and interests of Incumbent. 7. In exchange for the undertakings of the Company contained in Article 4, and as a condition precedent thereto, Incumbent agrees to execute and deliver a General Release, Waiver and Acknowledgement (Release) in the form attached hereto as Exhibit A. Incumbent expressly acknowledges that he is aware that he has rights under federal and state laws which prohibit discrimination in employment based on race, sex, national origin, age, religion, disability and veteran rights, including the Age Discrimination in Employment Act, as amended, Title VII of the Civil Rights Act of 1964, as amended, the New Jersey Law Against Discrimination, the New Jersey Conscientious Employee Protection Act, the New Jersey Wage Law and the Americans with Disabilities Act (hereinafter collectively referred to as the "Acts"); and further acknowledges that this Agreement and the attached General Release are intended to include, without limitation, a release by him of any and all rights and claims arising out of his employment with the Company and his withdrawal and separation therefrom, including, but not limited to, all claims under any and all federal, state, local and common laws dealing with employment, separation and damages, including the Acts hereinabove referred to in this Article. Incumbent further agrees not to commence any legal action, in any form, against any releasee identified in the attached General Release or any other party connected with his employment with the Company with respect to any right or claim, direct or indirect, encompassed by the attached General Release and this Agreement, except to enforce the terms of this Agreement. 8. Incumbent and Company agree that neither will engage in any communications, oral or written, which would injure the reputation of or interfere with existing or prospective business relationships of the other. This covenant shall be effective as of April 26, 1994. Incumbent and Company agree that Company will provide Incumbent with a Letter of Recommendation in the form attached hereto as Exhibit D, the content of which has been reviewed and accepted by Incumbent. This Letter of Recommendation will be submitted in response to any and all inquiries from prospective employers. Incumbent shall direct all such inquiries to the attention of Jerrold J. Jacobs, President and Chief Executive Officer of the Company, or his successor. 9. Incumbent agrees that, except as expressly provided below, he will not communicate or disclose the terms of this Agreement or of the attached General Release to or with any person(s) with the exception of members of his immediate family, his attorney(s), his financial advisor(s) and/or his accountant(s). In such communication or disclosure, Incumbent shall inform the recipient of the information that same is being provided in a confidential manner and subject to a requirement of confidentiality. Company agrees that it will treat this Agreement and the attached General Release as a personnel item to be retained in the personnel file of Incumbent and not to be disclosed to third parties without the express written consent of Incumbent; except to the extent that same shall be required to be produced in any legal proceeding. 10. It is expressly understood and agreed that any violation of the confidentiality provision in the preceding Article by Incumbent or Company, or anyone acting on his or its behalf, shall be deemed to be a material breach of this Agreement. 11. Incumbent agrees and recognizes that his employment relationship with the Company shall be terminated at his voluntary request as contained in the Notice of Separation. Incumbent acknowledges that he has no contract or other rights to employment or re-employment with the Company. 12.A. Incumbent agrees that he shall not, directly or indirectly, knowingly disclose to any other person, firm or corporation nor appropriate to his own use or to the use of any person, firm or corporation, any Confidential Information (as defined herein) used by or belonging to the Company or its parent, subsidiary or affiliates, except as same may be expressly authorized in advance by the Company in a writing signed by a Senior Officer of the affected company. For purposes of this Agreement, the term Senior Officer shall mean a person holding a title within any of the Companies which constitute the Company of Senior Vice President or higher. For purposes of this Agreement, the term Confidential Information includes, by way of illustration and not limitation, matters of a technical nature such as "know how", "formulae", "processes", "procedures", "techniques", "machinery", "apparatus, "inventions", "studies", "research projects", "technical data", "development plans", "product specifications", as well as matters of a business or financial nature such as, by way of illustration and not limitation, information about the cost, sources of, and arrangements for service or materials supplied to customers or clients of the Company, submission and proposal procedures, production, labor and/or material costs, profits and losses, prices, discounts, sales, markets, customer lists, future plans, trade secrets and proprietary information not generally available to the public. B. In addition, Incumbent represents and warrants that he will never, directly or indirectly lecture upon or publish articles concerning any Confidential Information without first having obtained from the affected company prior approval and written consent in the manner hereinabove contained. C. Commencing on April 26, 1994 Incumbent shall commence to act with due diligence in order that, on or before June 3, 1994, Incumbent shall have turned over to the Company all documents and other things, and all copies thereof within his possession, custody or control which may contain or which may have been derived from, or which may have the potential of disclosing any Confidential Information. D. Notwithstanding the preceding subparagraphs of this Article, it is understood and agreed that Incumbent shall not be bound by any covenant not to compete. He shall be permitted to engage in employment with a competitor of the Company without limitation as to time or geographical area. However, by engaging in such employment, Incumbent represents and warrants that he will not violate the provision of Subparagraphs A through C of this Article and will not, directly or indirectly, disclose any Confidential Information of the Company or its parent, subsidiary or affiliates, except as expressly authorized in advance by the Company in the manner set forth in Subparagraph A of this Article. 13. In the event of a breach by Incumbent of Article 7, 8, 9 or 12 of this Agreement or of the attached General Release, the Company shall be relieved and discharged of its obligations under the terms of this Agreement to provide Incumbent with any consideration which is in addition to the payments and benefits to which he and his beneficiaries or his estate are entitled by reason of his having been an employee of the Company in accordance with the terms and conditions of such plans and policies; and shall thereupon be entitled to institute an action to obtain any damages that may arise from such breach. In addition, the parties recognize that money damages are inadequate to compensate the Company for irreparable harm that may result from a breach of the confidentiality provisions contained within Article 12 of this Agreement and that equitable remedies are appropriate, inclusive of injunctive relief, which shall be in addition to any other remedies available to the Company at law or in Equity. In the event of a breach by the Company of Article 8 or 9 of this Agreement or of the attached General Release, the Incumbent shall be entitled to institute an action for any damages which may arise from such a breach. In addition, the parties recognize and agree that money damages may be inadequate to compensate the Incumbent for irreparable harm that may result from a breach of the recommendation and confidentiality provisions contained in Articles 8 and 9, respectively, and that equitable remedies are appropriate, inclusive of injunctive relief, which shall be in addition to any other remedies available to the Incumbent at law or in Equity. In the event either party shall be required to commence an action, at law or in equity, to enforce its rights under or as a result of a breach of this Agreement, the parties shall bear their own attorneys fees and costs. 14. Incumbent acknowledges that he has been informed of his right to consider this Agreement and the terms thereof for a period of at least twenty-one (21) days prior to executing and delivering the Agreement to the Company. He further acknowledges that he understands his right to revoke this Agreement and the attached General Release by giving written notice to the Company in the manner set forth in the General Release attached hereto as Exhibit A. Such notice shall be effective upon receipt by the Company. This right is being provided to Incumbent as required under the Age Discrimination in Employment Act. Incumbent further acknowledges that he has been given the opportunity to have this Agreement and the attached General Release reviewed by attorney(s), accountant(s) and/or financial advisor(s) of his own choice. 15. This Agreement and the attached General Release contain the entire Agreement with respect to the matters contained herein and therein and cannot be altered or amended except in a writing duly executed by the parties or their legal representatives. 16. Nothing in this Agreement or the attached General Release shall be construed or considered as evidence of or an admission by the Company of a violation of the United States Constitution, of the Age Discrimination in Employment Act, of Title VII of the Civil Rights Act of 1964, as amended, of the New Jersey Law against Discrimination, of the New Jersey Conscientious Employee Protection Act, of the New Jersey Wage Law, of the Americans with Disabilities Act, of any other act, law, rule or regulation referred to herein or of any other federal, state or local law, statute, ordinance, code, regulation, rule or order; and any such violation is specifically denied. 17. This Agreement and the attached General Release shall be interpreted, construed and enforced in accordance with the laws of the State of New Jersey. Should any part of this Agreement or of the attached General Release be determined to be unenforceable by a court of competent jurisdiction, the parties shall immediately meet to amend the Agreement or Release to effectuate the intent of the parties; and the surviving portions of the Agreement and Release shall remain binding and enforceable and in full force and effect. 18. Any notices required to be given under this Agreement or Release shall be either hand-delivered or delivered by certified mail, return receipt requested and shall be directed as follows: If to Company: Jerrold L. Jacobs Chairman, President & CEO Atlantic City Electric Company 6801 Black Horse Pike P.O. Box 1264 Pleasantville, NJ 08232 If to Incumbent: James J. Lees 8201 Atlantic Avenue Margate, New Jersey 08402 or to such other person and/or to such other address as the party to receive notice may, from time to time, indicate in writing. IN WITNESS WHEREOF, intending to be legally bound, the parties hereto attach their signatures and seals effective the date and year first above written. DATE: INCUMBENT: 6-22-94 /s/ JAMES J. LEES JAMES J. LEES STATE OF NEW JERSEY : : ss. COUNTY OF ATLANTIC : I hereby certify that on June 22, 1994 JAMES J. LEES, personally came before me and acknowledged under oath, to my satisfaction, that he is the person named in and that he did personally sign this Employment Separation and Release Agreement. /s/ Robert K. Marshall Notary Public - State of New Jersey ATTEST: DATE: ATLANTIC CITY ELECTRIC COMPANY: L. M. Walters 6-22-94 /s/ Jerrold L. Jacobs Secretary BY: Jerrold L. Jacobs GENERAL RELEASE, WAIVER and ACKNOWLEDGMENT In consideration of the undertakings of Atlantic Energy, Inc. and its Subsidiaries, inclusive of Atlantic City Electric Company (hereinafter collectively referred to as the "Company") set forth in Article 4 of the Employment Separation and Release Agreement to which this Exhibit A is appended, which provide for payment to me over and above those payments and benefits to which I am otherwise entitled by reason of having been an employee of the Company and subject to the terms and conditions thereof, I hereby release, waive and discharge the Company, and each of them, and their present and former Directors, Officers, employees, agents, representatives and attorneys and their respective successors, assigns, executors, administrators, estates and heirs from and against any and all claims of whatever nature, inclusive of claims for wrongful discharge, property damage, personal or bodily injury which I, my estate and heirs may have against any of them. This Release is intended to release, relinquish, discharge, extinguish and waive any and all claims, whether known or unknown, direct or indirect which were or could have been or may hereafter be asserted, resulting from anything which has occurred through the effective date of this Release, including claims for attorneys' fees. I hereby promise not to commence or pursue, or to authorize anyone to commence or pursue on my behalf or in my interest any action whether legal, equitable or administrative, or to otherwise seek to recover any damages, remedy or relief of any kind from any releasee within the contemplation of this Release based upon any claim covered by this General Release, Waiver and Acknowledgment. Without limiting the scope of the foregoing in any way, I hereby acknowledge and confirm that my separation from employment as an Officer and employee of the Company constitutes my voluntary act and deed made of my own free will and without duress, undue influence or any other pressure or condition exerted or imposed upon me in any form by the Company or anyone acting on its behalf; and I specifically release and waive any and all claims relating to or arising out of any aspect of my employment with the Company or the separation therefrom including, but not limited to, all claims under the Age Discrimination in Employment Act (29 USC Sec. 621, et seq..), Title VI of the Civil Rights Act of 1964 (42 USC Sec. 2000(e), et seq.), as amended, the New Jersey Law Against Discrimination (N.J.S.A. 10:5-1 et seq.), the New Jersey Conscientious Employee Protection Act (N.J.S.A. 34:19-1 et seq.), the New Jersey Wage Law (N.J.S.A. 34:11-44.1 et seq.) and the Americans with Disabilities Act (42 USC Sec. 12101 et seq.), any contract of employment, express or implied, any provision of the Constitution of the United States of America or of the Constitution of the State of New Jersey, and any other law, whether common or statutory, and any rule, regulation or order of the Unites States, the State of New Jersey, or any other state, and all claims arising out of any legal restrictions on the rights of the Company or its Affiliates with respect to termination of employment. I UNDERSTAND THAT FOR A PERIOD OF SEVEN (7) CALENDAR DAYS FOLLOWING THE SIGNING OF THIS GENERAL RELEASE, WAIVER AND ACKNOWLEDGEMENT, I MAY REVOKE IT IN A WRITING ACKNOWLEDGED BY THE CHIEF EXECUTIVE OFFICER OF THE COMPANY, AND THAT THIS GENERAL RELEASE, WAIVER AND ACKNOWLEDGMENT WILL NOT BE EFFECTIVE OR ENFORCEABLE UNTIL SUCH REVOCATION PERIOD HAS EXPIRED. UPON EXPIRATION OF SUCH REVOCATION PERIOD I UNDERSTAND AND ACKNOWLEDGE THAT THIS GENERAL RELEASE, WAIVER AND ACKNOWLEDGEMENT AND THE EMPLOYMENT SEPARATION AND RELEASE AGREEMENT TO WHICH IT IS APPENDED SHALL BECOME FINAL AND ENFORCEABLE. /s/ JAMES J. LEES JAMES J. LEES DATED: June 22, 1994 STATE OF NEW JERSEY : : ss. COUNTY OF ATLANTIC : I hereby certify that on June 22, 1994 JAMES J. LEES, personally came before me and acknowledged under oath, to my satisfaction, that he is the person named in and that he did personally sign this General Release, Waiver and Acknowledgement. /s/ Robert K. Marshall Notary Public - State of New Jersey RELEASE In mutual consideration of the execution and delivery of the General Release, Waiver and Acknowledgment by James J. Lees (Incumbent), effective upon the expiration of the Revocation Period, as set forth therein, without exercise by Incumbent of such revocation, thereupon Atlantic Energy, Inc. and its Subsidiaries, inclusive of Atlantic City Electric Company (hereinafter collectively referred to as the "Company") hereby release, waive and discharge the Incumbent from and against any and all claims, exclusive of claims arising out of or based upon criminal conduct by the Incumbent which the Company may have against Incumbent and which arose during the term of Incumbent's employment with the Company. Except as hereinabove set forth above, this Release is intended to release, relinquish, discharge, extinguish and waive any and all claims, except claims founded upon criminal conduct by Incumbent, whether known or unknown, direct or indirect, which were or could have been or may hereafter be asserted, resulting from anything which occurred through the Termination Date of Incumbent's employment with the Company. The Company further promises not to commence or pursue, or to authorize anyone to commence or pursue on its behalf, or in its interest, any action, whether legal, equitable or administrative, or to otherwise seek to recover any damages, remedy or relief of any kind from Incumbent within the contemplation of this Release, based upon any claim covered by this Release. Notwithstanding the above, nothing contained herein is intended to preclude the Company from instituting any such action in the event of Incumbent's breach of the Employment Separation and Release Agreement or of Incumbent's breach of the General Release, Waiver and Acknowledgement hereinabove contained. ATLANTIC ENERGY, INC. AND ITS SUBSIDIARIES, INCLUSIVE OF ATLANTIC CITY ELECTRIC COMPANY BY: /s/ JERROLD L. JACOBS JERROLD L. JACOBS ATTEST: /s/ J. G. Salomone J. G. Salomone Secretary DATED:June 22, 1994 EX-99 11 Exhibit 4c(1) INDENTURE SUPPLEMENTAL TO MORTGAGE AND DEED OF TRUST (Dated January 15, 1937) Executed By ATLANTIC CITY ELECTRIC COMPANY TO THE BANK OF NEW YORK, Trustee. Dated as of November 1, 1994 This instrument was prepared by James E. Franklin II, Esq. /s/ James E. Franklin II, Esq. James E. Franklin II, Esq. SUPPLEMENTAL INDENTURE, dated as of November 1, 1994 for convenience of reference, and effective from the time of execution and delivery hereof, made and entered into by and between ATLANTIC CITY ELECTRIC COMPANY, a corporation of the State of New Jersey (hereinafter sometimes called the "Company"), party of the first part, and THE BANK OF NEW YORK (formerly Irving Trust Company), a corporation of the State of New York, as Trustee (hereinafter sometimes called the "Trustee"), party of the second part. WHEREAS, the Company has heretofore executed and delivered to the Trustee its Mortgage and Deed of Trust, dated January 15, 1937 (hereinafter referred to as the "Mortgage"), for the security of all bonds of the Company outstanding thereunder, and by said Mortgage conveyed to the Trustee, upon certain trusts, terms and conditions, and with and subject to certain provisos and covenants therein contained, all and singular the property, rights and franchises which the Company then owned or should thereafter acquire, excepting any property expressly excepted by the terms of the Mortgage; and WHEREAS, the Company has heretofore executed and delivered to the Trustee an Indenture Supplemental to Mortgage and Deed of Trust, dated as of June 1, 1949, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of July 1, 1950, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of November 1, 1950, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of March 1, 1952, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of January 1, 1953, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of March 1, 1954, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of March 1, 1955, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of January 1, 1957, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of April 1, 1958, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of April 1, 1959, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of March 1, 1961, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of July 1, 1962, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of March 1, 1963, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of February 1, 1966, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of April 1, 1970, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of September 1, 1970, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of May 1, 1971, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of April 1, 1972, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of June 1, 1973, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of January 1, 1975, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of May 1, 1975, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of December 1, 1976, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of January 1, 1980, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of May 1, 1981, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of November 1, 1983, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of April 15, 1984, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of July 15, 1984, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of October 1, 1985, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of May 1, 1986, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of July 15, 1987, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of October 1, 1989, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of March 1, 1991, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of May 1, 1992, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of January 1, 1993, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of August 1, 1993, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of September 1, 1993, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of November 1, 1993, an Indenture Supplemental to Mortgage and Deed of Trust, dated as of June 1, 1994, and an Indenture Supplemental to Mortgage and Deed of Trust, dated as of October 1, 1994, such instruments amending and supplementing the Mortgage in certain respects (the Mortgage, as so amended and supplemented, being hereinafter called the "Original Indenture") and conveying to the Trustee, upon certain trusts, terms and conditions, and with and subject to certain provisos and covenants therein contained, certain property rights and property therein described; and WHEREAS, the Company represents that no default has occurred under any of the provisions of the Original Indenture; and WHEREAS, the Original Indenture provides that bonds issued thereunder may be issued in one or more series and further provides that, with respect to each series, the rate of interest, the date or dates of maturity, the dates for the payment of interest, the terms and rates of optional redemption, and other terms and conditions shall be determined by the Board of Directors of the Company prior to the authentication thereof; and WHEREAS, Section 121 of the Original Indenture provides that any power, privilege or right expressly or impliedly reserved to or in any way conferred upon the Company by any provision of the Original Indenture, whether such power, privilege or right is in any way restricted or is unrestricted, may be in whole or in part waived or surrendered or subjected to any restriction if at the time unrestricted or to additional restriction if already restricted, and that the Company may enter into any further covenants, limitations or restrictions for the benefit of any one or more series of bonds issued under the Original Indenture and provide that a breach thereof shall be equivalent to a default under the Original Indenture, or the Company may cure any ambiguity or correct or supplement any defective or inconsistent provisions contained in the Original Indenture or in any indenture supplemental to the Original Indenture, by an instrument in writing, properly executed, and that the Trustee is authorized to join with the Company in the execution of any such instrument or instruments; and WHEREAS, the Company has heretofore from time to time, in accordance with the provisions of the Original Indenture, as at the time in effect, issued bonds of various series and in various amounts and, of the bonds so issued, $737,413,000 aggregate principal amount is outstanding at the date hereof; and WHEREAS, the Company, by appropriate corporate action in conformity with the terms of the Original Indenture, has duly determined to create two new series of bonds under the Original Indenture (herein sometimes referred to collectively as the "New Bonds"); and WHEREAS, each of the New Bonds is to be substantially in the form set forth in Schedule I hereto; and WHEREAS, each of the New Bonds (whether in temporary or definitive form) is to bear a certificate of authentication substantially in the form set forth in Schedule I hereto; and WHEREAS, the Company, in the exercise of the powers and authorities conferred upon and reserved to it under and by virtue of the provisions of the Original Indenture, and pursuant to resolutions of its Board of Directors, has duly resolved and determined to make, execute and deliver to the Trustee a supplemental indenture, in the form hereof, for the purposes herein provided; and WHEREAS, the Company represents that all conditions and requirements necessary to make this supplemental indenture (hereinafter sometimes referred to as the "Third 1994 Supplemental Indenture") a valid, binding and legal instrument in accordance with its terms, have been done, performed and fulfilled, and the execution and delivery hereof have been in all respects duly authorized; NOW, THEREFORE, THIS INDENTURE WITNESSETH: That Atlantic City Electric Company, in consideration of the premises and the sum of One Dollar ($1.00) and other good and valuable consideration paid to it by the Trustee at or before the ensealing and delivery of these presents, the receipt whereof is hereby acknowledged, for itself and its successors and assigns, hereby covenants and agrees to and with the Trustee, and its successor or successors in trust, as follows: SECTION 1. The terms defined in this Section 1 shall, for all purposes of this Third 1994 Supplemental Indenture and the Original Indenture, have the meanings herein specified, unless the context otherwise requires: Plant: The term "Plant" shall mean the B.L. England Generating Station located in Beesley's Point, Cape May County, New Jersey. Series A Project Facilities: The term "Series A Project Facilities" shall have the meaning set forth in the Cape May Facilities Agreement. Series B Project Facilities: The term "Series B Project Facilities" shall have the meaning set forth in the Cape May Facilities Agreement. Cape May Authority: The term "Cape May Authority" shall mean the Pollution Control Financing Authority of Cape May County (New Jersey) and any successor thereto. Cape May 1994 Series A Bonds: The term "Cape May 1994 Series A Bonds" shall mean the 7.20% Pollution Control Revenue Bonds of 1994, Series A (Atlantic City Electric Company Project) to be issued in 1994 under and pursuant to the Cape May Indenture. Cape May 1994 Series B Bonds: The term "Cape May 1994 Series B Bonds" shall mean the 7% Pollution Control Revenue Refunding Bonds of 1994, Series B (Atlantic City Electric Company Project) to be issued in 1994 under and pursuant to the Cape May Indenture. Cape May Indenture: The term "Cape May Indenture" shall mean the Trust Indenture, dated as of November 1, 1994, by and between the Cape May Authority and United Jersey Bank, as Trustee, pursuant to which the Cape May 1994 Series A Bonds and the Cape May 1994 Series B Bonds are issued. Cape May Trustee: The term "Cape May Trustee" shall mean, at any time in question, the person and/or corporation acting as trustee at any time under the Cape May Indenture. Cape May Facilities Agreement: The term "Cape May Facilities Agreement" shall mean the Pollution Control Facilities Agreement, dated as of November 1, 1994, between the Cape May Authority and the Company, and any and all modifications, supplements and amendments thereof. SECTION 2. The Company hereby creates a forty-fifth series of bonds to be issued under and secured by the Original Indenture and this Third 1994 Supplemental Indenture, to be designated and to be distinguished from the bonds of all other series by the title "First Mortgage Bonds, 7.20% Pollution Control Series A of 1994" (herein sometimes referred to as the "bonds of the Forty- fifth Series"). Bonds of the Forty-fifth Series shall mature on the maturity date of the Cape May 1994 Series A Bonds and shall be issued in temporary or definitive form, only as fully registered bonds, without coupons, in denominations of $5,000 and any multiple or multiples of $5,000 authorized by the Company; they shall bear interest at the rate of seven and twenty one-hundredths per centum per annum payable semiannually on the interest payment dates of the Cape May 1994 Series A Bonds; and the principal of, premium, if any, and interest on each said bond shall be payable at the office or agency of the Company, in Hackensack, New Jersey, and, at the option of the Company, at the office or agency of the Company in the City of New York, in lawful money of the United States of America; provided, however, that the Company shall receive the credits in respect of interest on and principal of bonds of the Forty-fifth Series as set forth in Section 5 hereof. Every bond of the Forty-fifth Series shall be dated and shall bear interest as provided in Section 10 of the Original Indenture; provided, however, that bonds of the Forty-fifth Series authenticated by the Trustee prior to the first interest payment date shall bear interest from November 1, 1994; and provided further, that if and to the extent that the Company shall default in the payment of interest due on any interest payment date, then any such bond of the Forty-fifth Series shall bear interest from the interest payment date next preceding the date of such bond to which interest has been paid, unless such interest payment date is the first interest payment date, in which case from November 1, 1994. Bonds of the Forty-fifth Series shall be subject to redemption prior to maturity, but if in part only in integral multiples of $5,000, under the conditions and upon the payment of the amounts specified in the following subsections, together in each case with interest accrued to the redemption date: (a) at the option of the Company, on any date on or after November 1, 2004, either as a whole or in part from time to time on any date, at the following redemption prices, expressed in percentages of the principal amount of the bonds to be redeemed: REDEMPTION PERIOD REDEMPTION PRICE November 1, 2004 through October 31, 2005 102% November 1, 2005 through October 31, 2006 101% November 1, 2006 and thereafter 100% (b) at the option of the Company, as a whole at any time at 100% of the principal amount thereof, if any of the following events shall have occurred: (1) any federal, state or local body exercising governmental or judicial authority has taken any action which results in the imposition of unreasonable burdens or excessive liabilities with respect to the Series A Project Facilities (or the facilities serviced thereby) or the Plant, rendering impracticable or uneconomical or enjoining or restraining the operation of all or a substantial portion of the Series A Project Facilities (or the facilities serviced thereby) or the Plant,including without limitation the condemnation or taking by eminent domain of all or a substantial portion of the Series A Project Facilities (or the facilities serviced thereby) or the Plant; or (2) changes in the cost or availability of raw materials, operating supplies, or facilities or technological or other changes have made the continued operation of all or a substantial portion of the Series A Project Facilities (or the facilities serviced thereby) or the Plant, uneconomical; or (3) all or a substantial portion of the Series A Project Facilities (or the facilities serviced thereby) or the Plant have been damaged or destroyed to such an extent that it is not practicable or desirable to rebuild, repair or restore the Series A Project Facilities (or the facilities serviced thereby) or the Plant; or (4) as a result of any change in the Constitution of the State of New Jersey or the Constitution of the United States of America, or as a result of any legislative or administrative action (whether state or federal) or any final decree, judgment or order of any court or administrative body (whether state or federal) after any contest thereof by the Company in good faith, the Cape May Indenture, the Cape May Facilities Agreement, the bonds issued under the Original Indenture, as supplemented, in accordance with the Cape May Facilities Agreement, or the Bonds issued under the Cape May Indenture, as supplemented, shall become void or unenforceable or impossible to perform in accordance with the intent and purposes of the parties as expressed in the Cape May Facilities Agreement. Any such redemption shall be on any date within one year following the determination by the Company as evidenced by the adoption of the resolution of the Board of Directors of the Company described below that one of the events listed above permitting the exercise of the option has occurred. (c) in whole (or in part, as hereinafter provided), at 100% of the principal amount thereof, plus interest accrued to the redemption date, in the event that it is finally determined by the Internal Revenue Service or by a court of competent jurisdiction that, as a result of the failure by the Company to observe any covenant, agreement or representation in the Cape May Facilities Agreement, the interest payable on the Cape May 1994 Series A Bonds is includable for federal income tax purposes in the gross income of any owner for federal income tax purposes of a Cape May 1994 Series A Bond, other than an owner who is a "substantial user" of the Series A Project Facilities or a "related person", as provided in Section 147(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and the applicable regulations thereunder. Any such determination will not be considered final for this purpose until the expiration of all periods for judicial review or appeal, as the case may be, nor will such a determination be deemed final unless (i) the Cape May Trustee shall have been advised by one or more owners for federal income tax purposes of the Cape May 1994 Series A Bonds that the Internal Revenue Service has notified such owner or owners in writing that it proposes to include the interest on the Cape May 1994 Series A Bonds in gross income as a result of such a failure by the Company and (ii) the Company has been afforded by the tribunal the opportunity to participate in and to direct any administrative proceeding or litigation resulting therefrom, either directly or in the name of any such owner of a Cape May 1994 Series A Bond. Any such redemption of bonds of the Forty-fifth Series shall be in an amount necessary to redeem the Cape May 1994 Series A Bonds on any date within 180 days from the time of such final determination that the Cape May 1994 Series A Bonds are to be redeemed. Bonds of the Forty-fifth Series shall be redeemed in whole after such final determination unless it is decided in such determination that redemption of a portion of the Cape May 1994 Series A Bonds outstanding would have the result that interest payable on the Cape May 1994 Series A Bonds remaining outstanding after such redemption would not be includable for federal income tax purposes in the gross income of any owner for federal income tax purposes of a Cape May 1994 Series A Bond (other than an owner who is a "substantial user" of the Series A Project Facilities or a "related person" within the meaning of Section 147(a) of the Code and the applicable regulations thereunder), and in such event bonds of the Forty-fifth Series shall be redeemed (in the principal amount of$5,000 or any integral multiple thereof) in such amount so as to accomplish that result. The election of the Company under subsections (a) or (b) above to redeem any of the bonds of the Forty-fifth Series shall be evidenced by a resolution of the Board of Directors of the Company calling for the redemption on a stated date of all or a stated principal amount thereof. To exercise its option to redeem the bonds of the Forty-fifth Series under subsection (a) or (b) above, the Company shall deliver to the Trustee, the Cape May Authority and the Cape May Trustee a certified copy of said resolution calling all or a stated principal amount of the bonds of the Forty-fifth Series for redemption on a date not more than 90 days from the date said resolution is delivered (in the case of a redemption under subsection (a) above) or not more than one year from the date of adoption of said resolution (in the case of a redemption under subsection (b) above). The delivery to the Cape May Trustee of a certified copy of such resolution shall constitute notice to the Cape May Trustee of the redemption referred to therein, on the terms specified therein. The Company shall on or before such redemption date deposit with the Cape May Trustee, as paying agent hereunder, the total applicable redemption price of all the bonds so called, with interest accrued thereon to the redemption date, less any credits to which the Company may be entitled pursuant to Section 5 hereof, and the Cape May Trustee, as such paying agent, shall apply such funds on the redemption date to the redemption of the bonds so called. The Cape May Trustee shall deliver to the Trustee prompt written notice of the occurrence of a "final determination" under subsection (c) above. Such notice shall be executed on behalf of the Cape May Trustee by its President or a Vice President or Trust Officer and shall fix a redemption date for the appropriate amounts of bonds of the Forty-fifth Series not more that 180 days after the occurrence of such "final determination". On or before such redemption date, the Company shall deposit with the Cape May Trustee, as paying agent hereunder, the total redemption price of the bonds so called, with interest accrued thereon to the redemption date, less any credits to which the Company may be entitled pursuant to Section 5 hereof, and the Cape May Trustee, as such paying agent, shall apply such funds, on the redemption date, to the redemption of the bonds so called. The delivery to the Trustee of a certified copy of such notice shall constitute notice to the Trustee of the redemption referred to therein on the terms specified therein. Whenever the Trustee shall receive a written demand for redemption (hereinafter called "Redemption Demand") from the Cape May Trustee, stating that the principal of all Cape May 1994 Series A Bonds then outstanding under the Cape May Indenture has been declared to be immediately due and payable pursuant to the provisions of Section 10.02 thereof and that such declaration of maturity has not been rescinded, the Trustee shall within 10 days of receiving such Redemption Demand mail a copy to the Company stamped or otherwise marked to show the date of receipt by the Trustee, and, in such event, the Company shall fix a redemption date for the redemption so demanded and shall mail to the Trustee notice of such date at least 30 days prior thereto. Such redemption date may be any day fixed by the Company which shall be not more than 180 days after the receipt of the Redemption Demand by the Company from the Trustee. If the Trustee does not receive such notice from the Company within 150 days after the Redemption Demand shall have been received by the Trustee, then the redemption date shall be the 180th day after such receipt of the Redemption Demand by the Company and the bonds of the Forty- fifth Series shall become due, together with accrued interest thereon, on such 180th day. The Trustee shall mail notice of the redemption date (hereinafter called the "Demand Redemption Notice") to the Cape May Trustee as hereinafter provided, provided however, that the Trustee shall not mail any Demand Redemption Notice (and no such redemption shall be made) if the Trustee shall have received a written cancellation of the Redemption Demand from the Cape May Trustee prior to the mailing of the Demand Redemption Notice. Anything in this paragraph contained to the contrary notwithstanding, if, after mailing of the Demand Redemption Notice and prior to the date fixed for redemption, the Trustee shall have been advised in writing by the Cape May Trustee that the Redemption Demand has been rescinded or that the declaration of maturity of the Cape May 1994 Series A Bonds has been rescinded, the Demand Redemption Notice shall thereupon, without further act of the Trustee or the Company, be rescinded and become null and void for all purposes hereunder and no redemption of the bonds of the Forty-fifth Series and no payments in respect thereof shall be effected or required. Any such redemption shall be at the redemption price equal to the principal amount of the bonds of the Forty-fifth Series to be redeemed, together with accrued interest to the date fixed for redemption. For the purposes of this Section 2, a demand or notice from the Cape May Trustee shall be executed on behalf of such trustee by its President or a Vice President or a Trust Officer, and shall be deemed received by the Trustee when delivered at its corporate trust office in the Borough of Manhattan, the City of New York. The Trustee may conclusively rely, as to the truth of the statements contained therein, upon any such demand. Notwithstanding the provisions of Section 52 of the Original Indenture, any Demand Redemption Notice shall be given by mail to the registered holder(s) of bonds of the Forty-fifth Series, not more than 10 or less than 5 days prior to the date fixed for redemption, and the registered holders of bonds of the Forty-fifth Series, by the acceptance of such bonds, waive any additional or further notice of redemption provided in the Original Indenture. Each bond or portion thereof of the Forty-fifth Series called for redemption under this Section 2 shall be due and payable at the office of the Cape May Trustee, as paying agent hereunder, at the applicable redemption price and on the specified redemption date, anything herein or in such bond to the contrary notwithstanding; provided, however, that notwithstanding the foregoing or any provisions of the Original Indenture, this Third 1994 Supplemental Indenture, the bonds of the Forty-fifth Series, or any notice of redemption of the bonds of the Forty- fifth Series to the contrary, in the case of bonds of the Forty- fifth Series to be redeemed pursuant to subsections (a) or (b) above, the notice of redemption in respect of such bonds shall, without further act of the Trustee or the Company, be rescinded and become null and void for all purposes hereunder and no redemption of such bonds and no payments in respect thereof shall be effected or required unless an equal principal amount of Cape May 1994 Series A Bonds are due and payable on such redemption date. From and after the date when each bond or portion thereof of the Forty-fifth Series shall be due and payable as aforesaid (unless upon said date the full amount due thereon shall not be held by the Cape May Trustee, as paying agent hereunder, and be immediately available for payment), all further interest shall cease to accrue on such bond or on such portion thereof, as the case may be. If only a portion of any bond of the Forty-fifth Series shall be called for redemption pursuant to this Section 2, the notice of redemption hereinbefore provided for shall specify the portion of the principal amount thereof to be redeemed. Upon payment of the portion so called for redemption, the Cape May Trustee shall make an appropriate notation upon the bond of the principal amount so redeemed. Bonds of the Forty-fifth Series shall not be transferable except as provided in the Cape May Indenture and then only upon presentation and surrender thereof, for cancellation, at the office or agency of the Company in the Borough of Manhattan, the City of New York, by the registered holders thereof, in person or by duly authorized attorney, in the manner prescribed in the Original Indenture. In the manner prescribed in the Original Indenture, bonds of the Forty-fifth Series may be exchanged for a like aggregate principal amount of fully registered bonds, without coupons, of the Forty-fifth Series of other authorized denominations, upon presentation and surrender thereof, for cancellation, at the office or agency of the Company in the borough of Manhattan, the City of New York. SECTION 3. The Company hereby creates a forty-sixth series of bonds to be issued under and secured by the Original Indenture and this Third 1994 Supplemental Indenture, to be designated and to be distinguished from the bonds of all other series by the title "First Mortgage Bonds, 7% Pollution Control Series B of 1994" (herein sometimes referred to as the "bonds of the Forty- sixth Series"). Bonds of the Forty-sixth Series shall mature on the maturity date of the Cape May 1994 Series B Bonds and shall be issued in temporary or definitive form, only as fully registered bonds, without coupons, in denominations of $5,000 and any multiple or multiples of $5,000 authorized by the Company; they shall bear interest at the rate of seven per centum per annum payable semiannually on the interest payment dates of the Cape May 1994 Series B Bonds; and the principal of, premium, if any, and interest on each said bond shall be payable at the office or agency of the Company, in Hackensack, New Jersey, and, at the option of the Company, at the office or agency of the Company in the City of New York, in lawful money of the United States of America; provided, however, that the Company shall receive the credits in respect of interest on and principal of bonds of the Forty-sixth Series as set forth in Section 6 hereof. Every bond of the Forty-sixth Series shall be dated and shall bear interest as provided in Section 10 of the Original Indenture; provided, however, that bonds of the Forty-sixth Series authenticated by the Trustee prior to the first interest payment date shall bear interest from November 1, 1994; and provided further, that if and to the extent that the Company shall default in the payment of interest due on any interest payment date, then any such bond of the Forty-sixth Series shall bear interest from the interest payment date next preceding the date of such bond to which interest has been paid, unless such interest payment date is the first interest payment date, in which case from November 1, 1994. Bonds of the Forty-sixth Series shall be subject to redemption prior to maturity, but if in part only in integral multiples of $5,000, under the conditions and upon the payment of the amounts specified in the following subsections, together in each case with interest accrued to the redemption date: (a) at the option of the Company, on any date on or after November 1, 2004, either as a whole or in part from time to time on any date, at the following redemption prices, expressed in percentages of the principal amount of the bonds to be redeemed: REDEMPTION PERIOD REDEMPTION PRICE November 1, 2004 through October 31, 2005 102% November 1, 2005 through October 31, 2006 101% November 1, 2006 and thereafter 100% (b) at the option of the Company, as a whole at any time at 100% of the principal amount thereof, if any of the following events shall have occurred: (1) any federal, state or local body exercising governmental or judicial authority has taken any action which results in the imposition of unreasonable burdens or excessive liabilities with respect to the Series B Project Facilities (or the facilities serviced thereby) or the Plant, rendering impracticable or uneconomical or enjoining or restraining the operation of all or a substantial portion of the Series B Project Facilities (or the facilities serviced thereby) or the Plant, including without limitation the condemnation or taking by eminent domain of all or a substantial portion of the Series B Project Facilities (or the facilities serviced thereby) or the Plant; or (2) changes in the cost or availability of raw materials, operating supplies, or facilities or technological or other changes have made the continued operation of all or a substantial portion of the Series B Project Facilities (or the facilities serviced thereby) or the Plant, uneconomical; or (3) all or a substantial portion of the Series B Project Facilities (or the facilities serviced thereby) or the Plant have been damaged or destroyed to such an extent that it is not practicable or desirable to rebuild, repair or restore the Series B Project Facilities (or the facilities serviced thereby) or the Plant; or (4) as a result of any change in the Constitution of the State of New Jersey or the Constitution of the United States of America, or as a result of any legislative or administrative action (whether state or federal) or any final decree, judgment or order of any court or administrative body (whether state or federal) after any contest thereof by the Company in good faith, the Cape May Indenture, the Cape May Facilities Agreement, the bonds issued under the Original Indenture, as supplemented, in accordance with the Cape May Facilities Agreement, or the bonds issued under the Cape May Indenture, as supplemented, shall become void or unenforceable or impossible to perform in accordance with the intent and purposes of the parties as expressed in the Cape May Facilities Agreement. Any such redemption shall be on any date within one year following the determination by the Company as evidenced by the adoption of the resolution of the Board of Directors of the company described below that one of the events listed above permitting the exercise of the option has occurred. (c) in whole (or in part, as hereinafter provided), at 100% of the principal amount thereof, plus interest accrued to the redemption date, in the event that it is finally determined by the Internal Revenue Service or by a court of competent jurisdiction that, as a result of the failure by the Company to observe any covenant, agreement or representation in the Cape May Facilities Agreement, the interest payable on the Cape May 1994 Series B Bonds is includable for federal income tax purposes in the gross income of any owner for federal income tax purposes of a Cape May 1994 Series B Bond, other than an owner who is a "substantial user" of the Series B Project Facilities or a "related person", as provided in Section 147(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and the applicable regulations thereunder. Any such determination will not be considered final for this purpose until the expiration of all periods for judicial review or appeal, as the case may be, nor will such a determination be deemed final unless (i) the Cape May Trustee shall have been advised by one or more owners for federal income tax purposes of the Cape May 1994 Series B Bonds that the Internal Revenue Service has notified such owner or owners in writing that it proposes to include the interest on the Cape May 1994 Series B Bonds in gross income as a result of such a failure by the Company and (ii) the Company has been afforded by the tribunal the opportunity to participate in and to direct any administrative proceeding or litigation resulting therefrom, either directly or in the name of any such owner of a Cape May 1994 Series B Bond. Any such redemption of bonds of the Forty- sixth Series shall be in an amount necessary to redeem the Cape May 1994 Series B Bonds on any date within 180 days from the time of such final determination that the Cape May 1994 Series B Bonds are to be redeemed. Bonds of the Forty-sixth Series shall be redeemed in whole after such final determination unless it is decided in such determination that redemption of a portion of the Cape May 1994 Series B Bonds outstanding would have the result that interest payable on the Cape May 1994 Series B Bonds remaining outstanding after such redemption would not be includable for federal income tax purposes in the gross income of any owner for federal income tax purposes of a Cape May 1994 Series B Bond (other than an owner who is a "substantial user" of the Series B Project Facilities or a "related person" within the meaning of Section 147(a) of the Code and the applicable regulations thereunder), and in such event bonds of the Forty- sixth Series shall be redeemed (in the principal amount of $5,000 or any integral multiple thereof) in such amount so as to accomplish that result. The election of the Company under subsections (a) or (b) above to redeem any of the bonds of the Forty-sixth Series shall be evidenced by a resolution of the Board of Directors of the Company calling for the redemption on a stated date of all or a stated principal amount thereof. To exercise its option to redeem the bonds of the Forty-sixth Series under subsection (a) or (b) above, the Company shall deliver to the Trustee, the Cape May Authority and the Cape May Trustee a certified copy of said resolution calling all or a stated principal amount of the bonds of the Forty-sixth Series for redemption on a date not more than 90 days from the date said resolution is delivered (in the case of a redemption under subsection (a) above) or not more than one year from the date of adoption of said resolution (in the case of a redemption under subsection (b) above). The delivery to the Cape May Trustee of a certified copy of such resolution shall constitute notice to the Cape May Trustee of the redemption referred to therein, on the terms specified therein. The Company shall on or before such redemption date deposit with the Cape May Trustee, as paying agent hereunder, the total applicable redemption price of all the bonds so called, with interest accrued thereon to the redemption date, less any credits to which the Company may be entitled pursuant to Section 6 hereof, and the Cape May Trustee, as such paying agent, shall apply such funds on the redemption date to the redemption of the bonds so called. The Cape May Trustee shall deliver to the Trustee prompt written notice of the occurrence of a "final determination" under subsection (c) above. Such notice shall be executed on behalf of the Cape May Trustee by its President or a Vice President or Trust Officer and shall fix a redemption date for the appropriate amounts of bonds of the Forty-sixth Series not more that 180 days after the occurrence of such "final determination". On or before such redemption date, the Company shall deposit with the Cape May Trustee, as paying agent hereunder, the total redemption price of the bonds so called, with interest accrued thereon to the redemption date, less any credits to which the Company may be entitled pursuant to Section 6 hereof, and the Cape May Trustee, as such paying agent, shall apply such funds, on the redemption date, to the redemption of the bonds so called. The delivery to the Trustee of a certified copy of such notice shall constitute notice to the Trustee of the redemption referred to therein on the terms specified therein. Whenever the Trustee shall receive a written demand for redemption (hereinafter called "Redemption Demand") from the Cape May Trustee, stating that the principal of all Cape May 1994 Series B Bonds then outstanding under the Cape May Indenture has been declared to be immediately due and payable pursuant to the provisions of Section 10.02 thereof and that such declaration of maturity has not been rescinded, the Trustee shall within 10 days of receiving such Redemption Demand mail a copy to the Company stamped or otherwise marked to show the date of receipt by the Trustee, and, in such event, the Company shall fix a redemption date for the redemption so demanded and shall mail to the Trustee notice of such date at least 30 days prior thereto. Such redemption date may be any day fixed by the Company which shall be not more than 180 days after the receipt of the Redemption Demand by the Company from the Trustee. If the Trustee does not receive such notice from the Company within 150 days after the Redemption Demand shall have been received by the Trustee, then the redemption date shall be the 180th day after such receipt of the Redemption Demand by the Company and the bonds of the Forty- sixth Series shall become due, together with accrued interest thereon, on such 180th day. The Trustee shall mail notice of the redemption date (hereinafter called the "Demand Redemption Notice") to the Cape May Trustee as hereinafter provided, provided however, that the Trustee shall not mail any Demand Redemption Notice (and no such redemption shall be made) if the Trustee shall have received a written cancellation of the Redemption Demand from the Cape May Trustee prior to the mailing of the Demand Redemption Notice. Anything in this paragraph contained to the contrary notwithstanding, if, after mailing of the Demand Redemption Notice and prior to the date fixed for redemption, the Trustee shall have been advised in writing by the Cape May Trustee that the Redemption Demand has been rescinded or that the declaration of maturity of the Cape May 1994 Series B Bonds has been rescinded, the Demand Redemption Notice shall thereupon, without further act of the Trustee or the Company, be rescinded and become null and void for all purposes hereunder and no redemption of the bonds of the Forty-sixth Series and no payments in respect thereof shall be effected or required. Any such redemption shall be at the redemption price equal to the principal amount of the bonds of the Forty-sixth Series to be redeemed, together with accrued interest to the date fixed for redemption. For the purposes of this Section 3, a demand or notice from the Cape May Trustee shall be executed on behalf of such trustee by its President or a Vice President or a Trust Officer, and shall be deemed received by the Trustee when delivered at its corporate trust office in the Borough of Manhattan, the City of New York. The Trustee may conclusively rely, as to the truth of the statements contained therein, upon any such demand. Notwithstanding the provisions of Section 52 of the Original Indenture, any Demand Redemption Notice shall be given by mail to the registered holder(s) of bonds of the Forty-sixth Series, not more than 10 or less than 5 days prior to the date fixed for redemption, and the registered holders of bonds of the Forty-sixth Series, by the acceptance of such bonds, waive any additional or further notice of redemption provided in the Original Indenture. Each bond or portion thereof of the Forty-sixth Series called for redemption under this Section 3 shall be due and payable at the office of the Cape May Trustee, as paying agent hereunder, at the applicable redemption price and on the specified redemption date, anything herein or in such bond to the contrary notwithstanding; provided, however, that notwithstanding the foregoing or any provisions of the Original Indenture, this Third 1994 Supplemental Indenture, the bonds of the Forty-sixth Series, or any notice of redemption of the bonds of the Forty- sixth Series to the contrary, in the case of bonds of the Forty- sixth Series to be redeemed pursuant to subsections (a) or (b) above, the notice of redemption in respect of such bonds shall, without further act of the Trustee or the Company, be rescinded and become null and void for all purposes hereunder and no redemption of such bonds and no payments in respect thereof shall be effected or required unless an equal principal amount of Cape May 1994 Series B Bonds are due and payable on such redemption date. From and after the date when each bond or portion thereof of the Forty-sixth Series shall be due and payable as aforesaid (unless upon said date the full amount due thereon shall not be held by the Cape May Trustee, as paying agent hereunder, and be immediately available for payment), all further interest shall cease to accrue on such bond or on such portion thereof, as the case may be. If only a portion of any bond of the Forty-sixth Series shall be called for redemption pursuant to this Section 3, the notice of redemption hereinbefore provided for shall specify the portion of the principal amount thereof to be redeemed. Upon payment of the portion so called for redemption, the Cape May Trustee shall make an appropriate notation upon the bond of the principal amount so redeemed. Bonds of the Forty-sixth Series shall not be transferable except as provided in the Cape May Indenture and then only upon presentation and surrender thereof, for cancellation, at the office or agency of the Company in the Borough of Manhattan, the City of New York, by the registered holders thereof, in person or by duly authorized attorney, in the manner prescribed in the Original Indenture. In the manner prescribed in the Original Indenture, bonds of the Forty-sixth Series may be exchanged for a like aggregate principal amount of fully registered bonds, without coupons, of the Forty-sixth Series of other authorized denominations, upon presentation and surrender thereof, for cancellation, at the office or agency of the Company in the borough of Manhattan, the City of New York. SECTION 4. In accordance with and in compliance with the provisions of Article V of the Original Indenture, $25,000,000 principal amount of bonds of the Forty-fifth Series and $6,500,000 principal amount of bonds of the Forty-sixth Series may be executed on behalf of the Company and delivered to the Trustee, and shall be authenticated by the Trustee and delivered (without awaiting the filing or recording of this Third 1994 Supplemental Indenture) from time to time in accordance with the order or orders of the Company, evidenced by a writing or writings signed in the name of the Company by its President, or one of its Vice Presidents and its Treasurer or one of its Assistant Treasurers. The bonds of the Forty-fifth and Forty- sixth Series shall be executed in the name of the Company by the manual or facsimile signature of its President or one of its Senior Vice Presidents or Vice Presidents, and its corporate seal, or a facsimile thereof, to be impressed or imprinted thereon and attested by the signature, or a facsimile thereof, of its Secretary or one of its Assistant Secretaries. SECTION 5. The Company shall be entitled to credits against amounts otherwise payable in respect of the bonds of the Forty- fifth Series in an amount or amounts corresponding to (i) the principal amount of any Cape May 1994 Series A Bond surrendered to the Cape May Trustee by the Company or the Cape May Authority, or purchased by the Cape May Trustee, for cancellation and (ii) the amount of moneys held by the Cape May Trustee and available and designated for the payment of principal or redemption price of, and/or interest on, the Cape May 1994 Series A Bonds, from any other source of payment to the Cape May Trustee of such moneys other than payments of principal of, premium, if any, or interest on bonds of the Forty-fifth Series. A certificate of the Company signed by its President or any Vice President, and by the Secretary or any Assistant Secretary, and consented to in writing by the Cape May Trustee, stating that the Company is entitled to a credit under this Section 5, and setting forth the basis therefor in reasonable detail, shall be conclusive evidence of such entitlement and, in the case of a credit with respect to the principal amount of the bonds of the Forty-fifth Series, of the discharge of the Company's obligation with respect to the payment of such principal amount, and the Trustee shall accept and shall be entitled to rely upon such certificate as such evidence without further investigation or verification of the matters stated therein. SECTION 6. The Company shall be entitled to credits against amounts otherwise payable in respect of the bonds of the Forty-sixth Series in an amount or amounts corresponding to (i) the principal amount of any Cape May 1994 Series B Bond surrendered to the Cape May Trustee by the Company or the Cape May Authority, or purchased by the Cape May Trustee, for cancellation and (ii) the amount of moneys held by the Cape May Trustee and available and designated for the payment of principal or redemption price of, and/or interest on, the Cape May 1994 Series B Bonds, from any other source of payment to the Cape May Trustee of such moneys other than payments of principal of, premium, if any, or interest on bonds of the Forty-sixth Series. A certificate of the Company signed by its President or any Vice President, and by the Secretary or any Assistant Secretary, and consented to in writing by the Cape May Trustee, stating that the Company is entitled to a credit under this Section 6, and setting forth the basis therefor in reasonable detail, shall be conclusive evidence of such entitlement and, in the case of a credit with respect to the principal amount of the bonds of the Forty-sixth Series, of the discharge of the Company's obligation with respect to the payment of such principal amount, and the Trustee shall accept and shall be entitled to rely upon such certificate as such evidence without further investigation or verification of the matters stated therein. SECTION 7. The approval by the Board of Public Utilities, State of New Jersey of the execution and delivery of this Third 1994 Supplemental Indenture shall not in anywise be construed as approval by said Board of any other act, matter or thing which requires the approval of said Board under the laws of the State of New Jersey; nor shall said approval bind said Board or any other public body or authority of the State of New Jersey having jurisdiction in the premises in any future application for the issue of bonds under the Original Indenture or any indenture supplemental thereto or otherwise. SECTION 8. As supplemented by this Third 1994 Supplemental Indenture, the Original Indenture is in all respects ratified and confirmed and the Original Indenture and this Third 1994 Supplemental Indenture shall be read, taken and construed as one and the same instrument. Nothing in this Third 1994 Supplemental Indenture contained shall, or shall be construed to, confer upon any person other than the holders of bonds issued under the Original Indenture and this Third 1994 Supplemental Indenture, the Company and the Trustee, any right to avail themselves of any benefit of any provision of the Original Indenture or of this Third 1994 Supplemental Indenture. The Trustee assumes no responsibility for the correctness of the recitals of facts contained herein and makes no representations as to the validity of this Third 1994 Supplemental Indenture. This Third 1994 Supplemental Indenture may be simultaneously executed in any number of counterparts, each of which so executed shall be deemed to be an original; but such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, ATLANTIC CITY ELECTRIC COMPANY, party of the first part, has caused this instrument to be signed in its name and behalf by its President or a Vice President, and its corporate seal to be hereunto affixed and attested by its Secretary or an Assistant Secretary, and THE BANK OF NEW YORK, party hereto of the second part, has caused this instrument to be signed in its name and behalf by a Vice President or an Assistant Vice President and its corporate seal to be hereunto affixed and attested by an Assistant Vice President or an Assistant Treasurer. Executed and delivered by Atlantic City Electric Company in the Township of Egg Harbor, New Jersey, the 3rd day of November, 1994. ATLANTIC CITY ELECTRIC COMPANY SEAL By: /s/ L. M. Walters (L. M. Walters) Vice President ATTEST: /s/ F. F. Frankowski (F. F. Frankowski) Assistant Secretary Signed, sealed and delivered by ATLANTIC CITY ELECTRIC COMPANY in the presence of: /s/ R. K. Marshall (R. K. Marshall) /s/ E. L. Kaminsky (E. L. Kaminsky) THE BANK OF NEW YORK SEAL By: /s/ Mary Jane Morrissey (Mary Jane Morrissey) Assistant Vice President ATTEST: /s/ Lucille Firrincieli (Lucille Firrincieli) Assistant Vice President Signed, sealed and delivered by THE BANK OF NEW YORK in the presence of: /s/ A. Mazur A. Mazur /s/ L. Mullen L. Mullen STATE OF NEW JERSEY ss: COUNTY OF ATLANTIC BE IT REMEMBERED that on this 3rd day of November, in the year of our Lord one thousand nine hundred and ninety-four before me, a Notary Public in and for the State and County aforesaid, personally appeared F. F. Frankowski, who being by me duly sworn on his oath says that he is Assistant Secretary of Atlantic City Electric Company, the grantor in the foregoing Indenture Supplemental to Mortgage and Deed of Trust, and that L. M. Walters is a Vice President; that deponent knows the common or corporate seal of said grantor, and the seal annexed to the said Indenture Supplemental to Mortgage and Deed of Trust is such common or corporate seal; that the said Indenture Supplemental to Mortgage and Deed of Trust was signed by the said Vice President and the seal of said grantor affixed thereto in the presence of deponent; that said Indenture Supplemental to Mortgage and Deed of Trust was signed, sealed and delivered as and for the voluntary act and deed of said grantor for the uses and purposes therein expressed, pursuant to a resolution of the Board of Directors of said grantor; and at the execution thereof this deponent subscribed his name thereto as witness. Sworn and subscribed the day and year aforesaid. /S/ STEPHANIE M. SCOLA STEPHANIE M. SCOLA NOTARY PUBLIC OF NEW JERSEY My Commission Expires October 13, 1999 [ SEAL ] STATE OF NEW YORK ss: COUNTY OF NEW YORK BE IT REMEMBERED that on this 4th day of November, in the year of our Lord one thousand nine hundred and ninety-four before me, a Notary Public in and for the State and County aforesaid, personally appeared Lucille Firrincieli, who being by me duly sworn on her oath says that she is an Assistant Vice President of THE BANK OF NEW YORK, the Trustee named in the foregoing Indenture Supplemental to Mortgage and Deed of Trust, and that Mary Jane Morrissey is an Assistant Vice President; that deponent knows the common or corporate seal of said Trustee, and that the seal annexed to the said Indenture Supplemental to Mortgage and Deed of Trust is such common or corporate seal; that the said Indenture Supplemental to Mortgage and Deed of Trust was signed by the said Assistant Vice President and the seal of said Trustee affixed thereto in the presence of deponent; that said Indenture Supplemental to Mortgage and Deed of Trust was signed, sealed and delivered as and for the voluntary act and deed of said Trustee for the uses and purposes therein expressed, pursuant to authority of the Board of Directors of said Trustee; and at the execution thereof this deponent subscribed his name thereto as witness. Sworn and subscribed the day and year aforesaid. [SEAL] /S/ WILLIAM J. CASSELS WILLIAM J. CASSELS NOTARY PUBLIC STATE OF NEW YORK No. 01CA5027729 My Commission Expires May 16, 1996 CERTIFICATE OF RESIDENCE THE BANK OF NEW YORK, Mortgagee and Trustee within named, hereby certifies that its precise residence is 101 Barclay Street, in the Borough of Manhattan, in The City of New York, in the State of New York. THE BANK OF NEW YORK By:/s/ Lucille Firrincieli Lucille Firrincieli Assistant Vice President SCHEDULE I This Bond is not transferable except as provided in the Trust Indenture dated as of November 1, 1994 of the Pollution Control Financing Authority of Cape May County (New Jersey) to United Jersey Bank, as Trustee. ATLANTIC CITY ELECTRIC COMPANY First Mortgage Bond % Pollution Control Series of 1994 Due November 1, 2029 No. $ ATLANTIC CITY ELECTRIC COMPANY, a corporation of the State of New Jersey (hereinafter called the Company), for value received, hereby promises to pay to United Jersey Bank, as trustee under the Trust Indenture dated as of November 1, 1994, of the Pollution Control Financing Authority of Cape May County (New Jersey) to United Jersey Bank, as trustee, or registered assigns, on November 1, 2029, at the office or agency of the Company in Hackensack, New Jersey, Dollars in lawful money of the United States of America, and to pay to the person in whose name this bond is registered interest thereon from November 1, 1994 or, if interest to any November 1 or May 1 has been paid, from the November 1 or May 1, as the case may be, next preceding the date of this bond to which interest has been paid, unless such interest payment date is May 1, 1995, in which case from November 1, 1994, at the rate of __________________ per centum per annum, in like money, at said office or agency on May 1 and November 1 in each year, until the Company's obligation with respect to the payment of such principal shall have been discharged. This bond is one of an issue of bonds of the Company, issuable in series, and is one of a series known as its First Mortgage Bonds, of the series designated in its title, all bonds of all series issued and to be issued under and equally secured (except insofar as any sinking fund, established in accordance with the provisions of the Mortgage hereinafter mentioned, may afford additional security for the bonds of any particular series) by a Mortgage and Deed of Trust (herein, together with any indentures supplemental thereto, called the Mortgage), dated January 15, 1937, executed by the Company to THE BANK OF NEW YORK, as Trustee, to which Mortgage reference is made for a description of the property mortgaged and pledged, the nature and I-1 extent of the security, the rights of the holders of the bonds in respect thereof, the duties and immunities of the Trustee, and the terms and conditions upon which the bonds are secured. With the consent of the Company and to the extent permitted by and as provided in the Mortgage, the rights and obligations of the Company and/or of the holders of the bonds and/or coupons and/or the terms and provisions of the Mortgage and/or of any instruments supplemental thereto may be modified or altered by affirmative vote of the holders of at least seventy-five per centum (75%) in principal amount of the bonds affected by such modification or alteration then outstanding under the Mortgage (excluding bonds disqualified from voting by reason of the Company's interest therein as provided in the Mortgage); provided that no such modification or alteration shall permit the extension of the maturity of the principal of this bond or the reduction in the rate of interest hereon or any other modification in the terms of payment of such principal or interest without the consent of the holder thereof. The principal hereof may be declared or may become due prior to the express date of the maturity hereof on the conditions, in the manner and at the time set forth in the Mortgage, upon the occurrence of a completed default as in the Mortgage provided. The bonds of this series are issuable in temporary or definitive form, only as fully registered bonds, without coupons, in denominations of $5,000 and authorized multiples thereof. In the manner prescribed in the Mortgage, registered bonds of this series may be exchanged for a like aggregate principal amount of registered bonds of other authorized denominations of the same series, upon presentation and surrender thereof, for cancellation, at the office or agency of the Company in the Borough of Manhattan, The City of New York. The Company and the Trustee may deem and treat the person in whose name this bond is registered as the absolute owner hereof for the purpose of receiving payment of or on account of principal or (subject to the provisions of the Mortgage) interest hereon and for all other purposes and the Company and the Trustee shall not be affected by any notice to the contrary. The bonds of this series are redeemable as provided in the Indenture Supplemental to Mortgage and Deed of Trust, dated as of November 1, 1994, creating the bonds of this series. Reference is made to the applicable provisions of said Supplemental Indenture, and such provisions shall for all purposes have the same effect as though fully set forth in this place. I-2 No recourse shall be had for the payment of the principal of or interest on this bond against any incorporator or any past, present or future subscriber to the capital stock, shareholder, officer or director, as such of the Company or of any successor corporation, either directly or through the Company or any successor corporation, under any rule of law, statute or constitution or by the enforcement of any assessment or otherwise, all such liability of incorporators, subscribers, shareholders, officers and directors, as such, being released by the holder or owner hereof by the acceptance of this bond and being likewise waived and released by the terms of the Mortgage. This bond shall not become valid or obligatory for any purpose until THE BANK OF NEW YORK, the Trustee under the Mortgage, or its successor thereunder, shall have signed the form of authentication certificate endorsed hereon. IN WITNESS WHEREOF, ATLANTIC CITY ELECTRIC COMPANY has caused this bond to be executed in its name by the signature, or a facsimile thereof, of its President or one of its Senior Vice Presidents or Vice Presidents, and its corporate seal, or a facsimile thereof, to be impressed or imprinted hereon and attested by the signature, or a facsimile thereof, of its Secretary or one of its Assistant Secretaries. Dated, ATLANTIC CITY ELECTRIC COMPANY By (Title) ATTEST: (Title) TRUSTEE'S AUTHENTICATION CERTIFICATE This bond is one of the bonds, of the series herein designated, described in the within-mentioned Mortgage. Dated, THE BANK OF NEW YORK, Trustee By Authorized Signatory I-3 EX-28 12 Exhibit 28(a) INDEPENDENT AUDITORS' REPORT To Atlantic City Electric Company: We have audited the accompanying consolidated balance sheets of Atlantic City Electric Company and subsidiary as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in common shareholder's equity, and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Atlantic City Electric Company and subsidiary at December 31, 1994 and 1993 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP February 9, 1995 Parsippany, New Jersey REPORT OF MANAGEMENT The management of Atlantic City Electric Company and subsidiary (the Company) is responsible for the preparation of the financial statements presented in this Annual Report on Form 10-K. The financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management made informed judgments and estimates, as necessary, relating to events and transactions reported. Management is also responsible for the preparation of other financial information included elsewhere in this Annual Report. Management has established a system of internal accounting and financial controls and procedures designed to provide reasonable assurance as to the integrity and reliability of financial reporting. In any system of financial reporting controls, inherent limitations exist. Management continually examines the effectiveness and efficiency of this system, and actions are taken when opportunities for improvement are identified. Management believes that, as of December 31, 1994, the system of internal accounting and financial controls over financial reporting is effective. Management also recognizes its responsibility for fostering a strong ethical climate in which the Company's affairs are conducted according to the highest standards of corporate conduct. This responsibility is characterized and reflected in the Company's code of ethics and business conduct policy. The financial statements have been audited by Deloitte & Touche LLP, Certified Public Accountants. Deloitte & Touche LLP provides an objective, independent audits as to management's discharge of its responsibilities insofar as they relate to the fairness of the financial statements. Their audits are based on procedures believed by them to provide reasonable assurance that the financial statements are free of material misstatement. The Company's internal auditing function conducts audits and appraisals of the Company's operations. It evaluates the system of internal accounting, financial and operational controls and compliance with established procedures. Both the external auditors and the internal auditors periodically make recommendations concerning the Company's internal control structure, and management responds to such recommendations as appropriate in the circumstances. None of the recommendations made for the year ended December 31, 1994 represented significant deficiencies in the design or operation of the Company's internal control structure. The Audit Committee of the Board of Directors of Atlantic Energy, Inc., the parent of the Company, has oversight responsibility for the ongoing examination of the Company's internal control structure and determining that the Company's management has fulfilled its obligation in the preparation of financial statements. The Committee, comprised exclusively of independent directors, discussed with the Company's internal auditors and Deloitte & Touche LLP the overall scope and specific plans for their respective activities concerning the Company. The Committee meets regularly with the internal auditors and Deloitte & Touche LLP, without management present, to discuss the results of the Company's financial reporting. The meetings are designed to facilitate any private communication with the Committee desired by the internal auditors or Deloitte & Touche LLP. No significant actions by the Committee were required during the year ended December 31, 1994 as a result of any private communications conducted. /s/ J. L. Jacobs /s/ F. F. Frankowski J. L. Jacobs F. F. Frankowski President and Controller - Vice President Chief Executive Officer February 9, 1995 CONSOLIDATED STATEMENT OF INCOME Atlantic City Electric Company and Subsidiary (Thousands of Dollars) For the Years Ended December 31, 1994 1993 1992 Operating Revenues-Electric $913,226 $865,799 $816,931 Operating Expenses: Energy 210,891 159,438 161,134 Purchased Capacity 130,929 110,781 103,173 Operations 157,047 162,840 149,604 Maintenance 37,662 45,452 49,926 Depreciation and Amortization 73,344 67,950 69,371 State Excise Taxes 97,072 104,280 97,969 Federal Income Taxes 42,529 45,277 37,143 Other Taxes 10,757 10,854 12,113 Total Operating Expenses 760,231 706,872 680,433 Operating Income 152,995 158,927 136,498 Other Income and Expense: Allowance for Equity Funds Used During Construction 3,634 2,368 2,212 Employee Separation Costs, net of tax of $9,265 (17,335) - - Litigation Settlement, net of tax of: 1993 - $(1,321); 1992 - $(4,982) - (2,564) 9,671 Other-Net 9,568 9,865 13,613 Total Other Income and Expense (4,133) 9,669 25,496 Income Before Interest Charges 148,862 168,596 161,994 Interest Charges: Interest on Long Term Debt 57,346 59,385 53,284 Other Interest Expense 1,114 1,633 2,678 Total Interest Charges 58,460 61,018 55,962 Allowance for Borrowed Funds Used During Construction (2,772) (1,448) (1,414) Net Interest Charges 55,688 59,570 54,548 Net Income $ 93,174 $109,026 $107,446 Earnings for Common Stock: Net Income $ 93,174 $109,026 $107,446 Less Preferred Stock Dividend Requirements 16,716 17,405 17,812 Income Available for Common Stock $ 76,458 $ 91,621 $ 89,634 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. CONSOLIDATED STATEMENT OF CASH FLOWS Atlantic City Electric Company and Subsidiary (Thousands of Dollars) For the Years Ended December 31, 1994 1993 1992 Cash Flows Of Operating Activities: Net Income $ 93,174 $ 109,026 $ 107,446 Deferred Purchased Power Costs 14,920 (6,050) 13,410 Deferred Energy Costs (3,819) (15,269) (6,143) Depreciation and Amortization 73,344 67,950 69,371 Deferred Income Taxes-Net 6,116 16,213 13,531 Prepaid State Excise Taxes (37,029) (35,982) 540 Net (Increase) Decrease in Other Working Capital (26,012) 30,762 8,661 Employee Separation Costs 26,600 - - Other-Net 1,403 7,559 6,450 Net Cash Provided by Operating Activities 148,697 174,209 213,266 Cash Flows Of Investing Activities: Utility Cash Construction Expenditures (119,961) (138,111) (130,700) Leased Property (10,713) (9,946) (9,565) Nuclear Decommissioning Trust Fund Deposits (6,424) (6,424) (6,424) Utility Plant Removal Costs (8,000) (1,943) (4,936) Other-Net 7,223 (3,824) (1,527) Net Cash Used by Investing Activities (137,875) (160,248) (153,152) Cash Flows Of Financing Activities: Proceeds from Long Term Debt 53,572 464,633 59,655 Retirement and Maturity of Long Term Debt (42,664) (360,414) (10,350) Increase (Decrease) in Short Term Debt 8,600 (14,600) (6,000) Proceeds from Capital Lease Obligations 10,713 9,946 9,565 Preferred Stock Redemption (24,500) (5,469) (250) Dividends (100,198) (98,752) (96,148) Capital Contributions 25,270 20,991 14,605 Other-Net 1,601 (1,362) (2,822) Net Cash (Used) Provided by Financing Activities (67,606) 14,973 (31,745) Net (Decrease) Increase in Cash and Temporary Investments (56,784) 28,934 28,369 Cash and Temporary Investments, beginning of year 60,243 31,309 2,940 Cash and Temporary Investments, end of year $ 3,459 $ 60,243 $ 31,309 Supplemental Schedule of Payments: Interest $ 61,035 $ 51,331 $ 53,593 Federal income taxes $ 32,254 $ 25,809 $ 36,399 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. CONSOLIDATED BALANCE SHEET Atlantic City Electric Company and Subsidiary (Thousands of Dollars) December 31, 1994 1993 Assets Electric Utility Plant: In Service: Production $1,151,661 $1,054,217 Transmission 357,389 338,584 Distribution 659,619 627,649 General 180,204 173,206 Total In Service 2,348,873 2,193,656 Less Accumulated Depreciation 725,999 668,832 Net 1,622,874 1,524,824 Construction Work in Progress 110,078 156,590 Land Held for Future Use 6,941 6,901 Leased Property-Net 42,030 45,268 Electric Utility Plant-Net 1,781,923 1,733,583 Investments and Nonutility Property: Nuclear Decommissioning Trust Fund 52,004 43,163 Nonutility Property and Equipment-Net 1,286 1,286 Other Investments and Funds 1,853 11 Total Investments and Nonutility Property 55,143 44,460 Current Assets: Cash and Temporary Investments 3,459 60,243 Accounts Receivable: Utility Service 54,554 51,502 Miscellaneous 15,804 10,940 Allowance for Doubtful Accounts (3,300) (3,000) Unbilled Revenues 32,070 39,309 Fuel (at average cost) 28,030 14,635 Materials and Supplies (at average cost) 27,823 28,230 Working Funds 14,475 14,313 Other Prepayments 11,760 15,582 Deferred Energy Costs 10,999 7,180 Deferred Income Taxes 12,141 2,945 Total Current Assets 207,815 241,879 Deferred Debits: Unrecovered Purchased Power Costs 115,538 130,458 Recoverable Future Federal Income Taxes 85,854 85,855 Unrecovered State Excise Taxes 73,834 33,706 Unamortized Debt Costs 38,083 39,185 Other Regulatory Assets 47,055 41,705 Other 16,071 12,753 Total Deferred Debits 376,435 343,662 Total Assets $2,421,316 $2,363,584 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Atlantic City Electric Company and Subsidiary (Thousands of Dollars) December 31, 1994 1993 Liabilities and Capitalization Capitalization: Common Shareholder's Equity: Common Stock $ 54,963 $ 54,963 Premium on Capital Stock 231,081 231,081 Contributed Capital 262,749 237,479 Capital Stock Expense (2,300) (2,470) Retained Earnings 249,767 256,961 Total Common Shareholders' Equity 796,260 778,014 Preferred Stock: Not Subject to Mandatory Redemption 40,000 40,000 Subject to Mandatory Redemption 149,250 173,750 Long Term Debt 763,288 751,101 Total Capitalization (excluding current portion) 1,748,798 1,742,865 Current Liabilities: Preferred Stock Redemption Requirement 12,250 12,250 Capital Lease Obligations 928 861 Short Term Debt 8,600 - Accounts Payable 65,632 63,819 Federal Income Taxes Payable - Affiliate 9,537 10,339 Other Taxes Accrued 3,490 6,873 Interest Accrued 19,048 22,038 Dividends Declared 24,681 24,910 Other 18,206 24,226 Accrued Employee Separation Costs 26,600 - Total Current Liabilities 188,972 165,316 Deferred Credits and Other Liabilities: Deferred Income Taxes 350,697 332,852 Deferred Investment Tax Credits 51,646 54,180 Capital Lease Obligations 41,102 44,407 Other 40,101 23,964 Total Deferred Credits and Other Liabilities 483,546 455,403 Commitments and Contingencies (Note 9) Total Liabilities and Capitalization $2,421,316 $2,363,584 CONSOLIDATED STATEMENT OF CHANGES IN Atlantic City Electric Company COMMON SHAREHOLDER'S EQUITY and Subsidiary (Thousands of Dollars) Premium on Capital Common Capital Contributed Stock Retained Stock Stock Capital Expense Earnings Balance, December 31, 1991 $54,963 $231,081 $201,883 $(2,502) $235,591 Net income 107,446 Capital stock expense 6 (6) Capital contribution from parent 14,605 Less dividends declared: Preferred (17,812) Common (78,336) Balance, December 31, 1992 54,963 231,081 216,488 (2,496) 246,883 Net income 109,026 Capital stock expense 26 (196) Capital contribution from parent 20,991 Less dividends declared: Preferred (17,405) Common (81,347) Balance, December 31, 1993 54,963 231,081 237,479 (2,470) 256,961 Net income 93,174 Capital stock expense 170 (170) Capital contribution from parent 25,270 Less dividends declared: Preferred (16,716) Common (83,482) Balance, December 31, 1994 $54,963 $231,081 $262,749 $(2,300) $249,767 As of December 31, 1993, the Company had 25 million authorized shares of Common Stock at $3 par value. Shares outstanding at December 31, 1993, 1992 and 1991 were 18,320,937. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Notes to Consolidated Financial Statements Note 1. SIGNIFICANT ACCOUNTING POLICIES Organization - Atlantic City Electric Company (the Company) is a wholly-owned subsidiary of Atlantic Energy, Inc. (AEI). Deepwater Operating Company, which operates certain generating facilities owned by the Company, is a wholly-owned subsidiary of the Company. The Company is a public utility primarily engaged in the generation, transmission, distribution and sale of electric energy. Rates for service are regulated by the New Jersey Board of Public Utilities (BPU), formerly the New Jersey Board of Regulatory Commissioners. The Company's service territory encompasses approximately 2,700 square miles within the southern one-third of New Jersey. The majority of the Company's customers are residential and commercial. Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. Regulation - The accounting policies and rates of the Company are subject to the regulations of the BPU and in certain respects to the Federal Energy Regulatory Commission (FERC). The Company follows generally accepted accounting principles (GAAP) and financial reporting requirements employed by all industries as specified by the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC). However, accounting for rate regulated industries may depart from GAAP applied by other industries as permitted by Statement of Financial Accounting Standards No. 71 (SFAS No. 71). SFAS No. 71 provides guidance on circumstances where the economic effect of a regulator's decision warrants different applications of GAAP as a result of the rate making process. In setting rates, a regulator may provide recovery of an incurred cost in a year or years other than the year the cost is incurred. As permitted by SFAS No. 71, costs ordered by a regulator to be deferred or capitalized for future recovery are recorded as a regulatory asset because the regulator's rate action provides reasonable assurance of future economic benefits attributable to these costs. In a non-rate regulated industry, such costs may be charged to expense in the year incurred. SFAS No. 71 further specifies that a regulatory liability is recorded when a regulator orders a refund to customers of revenues previously collected, or when existing rates provide for recovery of future costs not yet incurred. Such treatment is not afforded to non-rate regulated companies. When collection of regulatory assets or relief of regulatory liabilities is no longer probable, the assets and liabilities are applied to income in the year that the probability assessment is made. Specific regulatory assets and liabilities that have been recorded are discussed elsewhere in the notes to the consolidated financial statements. Electric Operating Revenues - Revenues are recognized when electric energy services are rendered, and include estimates for amounts unbilled at the end of the period for energy used subsequent to the last billing cycle. Nuclear Fuel - Fuel costs associated with the Company's participation in jointly-owned nuclear generating stations, including spent nuclear fuel disposal costs, are charged to Energy expense based on the units of thermal energy produced. Electric Utility Plant - Property is stated at original cost. Generally, the plant is subject to a first mortgage lien. The cost of property additions, including replacement of units of property and betterments, is capitalized. Included in certain property additions is an Allowance for Funds Used During Construction (AFDC), which is defined in the applicable regulatory system of accounts as the cost during the period of construction of borrowed funds used for construction purposes and a reasonable rate on other funds when so used. AFDC has been calculated using a semi-annually compounded rate of 8.25%, as approved by the BPU, since August 1, 1993. The AFDC rate was 8.95%, as approved by the BPU, prior to this date. Depreciation - The Company provides for straight-line depreciation based on the estimated remaining life of transmission and distribution property, remaining life of the related nuclear plant operating license for nuclear property and estimated average service life for all other depreciable property. The overall composite rate of depreciation was approximately 3.3% in 1994 and 1993 and 3.5% in 1992. Accumulated depreciation is charged with the cost of depreciable property retired together with removal costs less salvage and other recoveries. Nuclear Decommissioning Trust - The Company has a trust to fund the future costs of decommissioning each of the five nuclear units in which it has an ownership interest. The current annual funding amount, as authorized by the BPU, totals $6.4 million and is provided for in rates charged to customers. The funding amount is based on estimates of the future cost of decommissioning each of the units, dates that decommissioning activities are expected to occur and return to be earned by the assets of the fund. The present value of the Company's nuclear decommissioning obligation, based on 1987 site specific studies used by the BPU for approval in 1991 and restated in 1994 dollars, is $152.2 million. The BPU has further established that decommissioning activities are expected to begin in 2006 and continue through 2032. Actual costs and timing of decommissioning activities may vary from the current estimates. The Company will seek to adjust these estimates and the level of rates collected from customers in future BPU proceedings to reflect changes in decommissioning cost estimates and the expected levels of inflation and interest to be earned by the assets in the trust. As of December 31, 1994, the present value of such contributions based on estimates for future decommissioning costs and the dates such activities are expected to occur is $111.4 million, without earnings on or appreciation of the fund assets. As of December 31, 1994, the cost and market value of the trust were $52 million. Trust contributions of the related $36.9 million qualify for Federal income tax purposes. The related reserve for decommissioning costs are presented as a component of accumulated depreciation and amount to $51.1 million at December 31, 1994 and $42.2 million at December 31, 1993. The SEC has questioned certain accounting practices employed by the electric utility industry concerning decommissioning costs for nuclear generating facilities. The FASB is currently reviewing this issue within the broad context of removal costs relative to all industries. At this time, the Company cannot predict what future accounting practices may be required by the FASB and SEC concerning this issue, nor the impact on the financial statements that any new accounting practices may have. Deferred Energy Costs - As approved by the BPU, the Company has a Levelized Energy Clause (LEC) through which energy and energy- related costs (energy) are charged to customers. LEC rates are based on projected energy costs and prior period underrecoveries or overrecoveries of energy costs. Energy costs are recovered through levelized rates over the period of projection, which is generally a 12-month period. In any period, the actual amount of LEC revenues recovered from customers may be greater or less than the recoverable amount of actual energy costs incurred in that period. Energy expense is adjusted to match the associated LEC revenues. Any underrecovery (an asset representing energy costs incurred that are to be collected from customers) or overrecovery (a liability representing previously collected energy costs to be returned to customers) of costs is deferred on the Consolidated Balance Sheet as Deferred Energy Costs. These deferrals are recognized in the Consolidated Statement of Income as Energy expense during the period in which they are subsequently included in the LEC. Income Taxes - Effective January 1, 1993, deferred Federal and state income taxes are provided on all significant temporary differences between book bases and tax bases of assets and liabilities, transactions that reflect taxable income in a year different than book income, and tax carryforwards. Deferred Federal and state income taxes for 1992 were provided on all significant current transactions for which the timing of recognition differs for book and tax purposes. Investment tax credits, which are used to reduce current Federal income taxes, are deferred on the Consolidated Balance Sheet and recognized in book income over the life of the related property. The Company files a consolidated Federal income tax return with AEI. An agreement with AEI provides for allocation to the Company of the tax liabilities or benefits generated by the Company based on the separate return method. Such tax liabilities and benefits are periodically settled on a cash basis. Unrecovered Purchased Power Costs - The Company has an arrangement that commenced in 1983 to purchase capacity and related energy through September 30, 2000. Levelized base rates over the term of the arrangement were approved by the BPU to recover costs estimated at commencement to be incurred. During the first half of the term, estimated costs that exceeded levelized revenues were deferred on the Consolidated Balance Sheet as Unrecovered Purchased Power Costs. Since then, levelized revenues have been greater than the estimated costs, permitting the deferred costs to be charged to Purchased Capacity expense on the Consolidated Statement of Income. The BPU granted a return on the unrecovered deferred balance throughout the term of the arrangement. The unrecovered deferred balance at December 31, 1994 and 1993 were $95.9 million and $110.5 million, respectively. Also included within Unrecovered Purchased Power Costs are costs incurred in renegotiating a contract with an independent power producer. These costs are amortized to expense over the BPU-approved recovery period of 20 years beginning in 1994. The unrecovered balances were $19.6 million and $20 million at December 31, 1994 and 1993, respectively. Related Party Transactions - The Company has a contract for a total of 106 MWS of capacity and related energy from a cogeneration facility that is owned 50% by a wholly-owned subsidiary of AEI. Capacity costs totaled $23.0 million in 1994 and 1993 and $18.4 million in 1992 and energy costs totaled $13.4 million, $13.2 million and $8.7 million in 1994, 1993 and 1992, respectively. The Company also rents office space from and sells electricity to another wholly-owned subsidiary of AEI. The rents paid and the electric sales recorded are not significant to the Consolidated Statement of Income. The amounts receivable and payable to such affiliates were not significant at December 31, 1994 and 1993. Regulatory Assets and Liabilities - Costs incurred by the Company that have been permitted by the BPU to be deferred for recovery in rates in more than one year, or for which future recovery is probable, have been recorded as regulatory assets. Regulatory assets are amortized to expense over the period of recovery. Total regulatory assets on the Consolidated Balance Sheet at December 31, 1994 and 1993 were $365.5 million and $332.1 million, respectively. Unamortized costs currently being recovered in rates at December 31, 1994 and 1993, respectively, and remaining recovery periods at December 31, 1994 are: Unrecovered State Excise Taxes of $73.8 million and $33.7 million, with a remaining recovery period of eight years; decommissioning and decontaminating Federally-owned nuclear units of $7.2 million and $8.4 million, with a remaining recovery period of 14 years; and asbestos removal of $9.6 million and $9.9 million for which the recovery period is over the remaining depreciable life of the related generating station of 36 years. Property Abandonment Costs at their net present value of $5 million and $6.3 million at December 31, 1994 and 1993, respectively, are being recovered through rates with no return on the unamortized balances of $6.5 million and $8.5 million, respectively. Such costs were written down to their net present values at the date of abandonment with subsequent accretions of the unamortized balances over the recovery period. These costs have a recovery period between two and seven years. Also included in Other Regulatory Assets are amounts for which future recovery is probable of $9.4 million and $9.1 million at December 31, 1994 and 1993, respectively. Costs associated with debt reacquired by refundings, included in Unamortized Debt Costs, are amortized over the life of the newly issued debt as permitted by the BPU in accordance with FERC guidelines. The unamortized balances of these costs were $32.2 million and $33.2 million at December 31, 1994 and 1993, respectively. Recovery of regulatory assets for Unrecovered Purchased Power Costs (Note 1), Deferred Energy Costs (Note 1), Recoverable Future Federal Income Taxes (Note 2) and Postretirement Benefits Other Than Pensions (Note 4) are separately discussed in the Notes to Consolidated Financial Statements where indicated. No regulatory liabilities existed at December 31, 1994 and 1993. Financial Instruments - A number of items within Current Assets and Current Liabilities on the Consolidated Balance Sheet are considered to be financial instruments because they are cash or are to be settled in cash. Due to their short term nature, the carrying values of these items approximate their fair market values. Accounts Receivable - Utility Service and Unbilled Revenues are subject to concentration of credit risk because they pertain to utility service conducted within a confined geographic region. Other - Debt premium, discount and expenses of the Company are amortized over the life of the related debt. Temporary investments considered as cash equivalents for Consolidated Statement of Cash Flows purposes represent purchases of highly liquid debt instruments maturing in three months or less. The weighted daily average interest rates on short term debt was 4.4% for 1994 and 3.2% for 1993. Certain prior year amounts have been reclassified to conform to the current year reporting of these items. NOTE 2. FEDERAL INCOME TAXES For the Years Ended December 31, (000) 1994 1993 1992 The components of Federal income tax expense are as follows: Current $ 30,013 $ 29,679 $ 33,660 Deferred 6,116 16,214 13,531 Total Federal Income Tax Expense 36,129 45,893 47,191 Less Amounts Included in Other Income (6,400) 616 10,048 Federal Income Taxes Included in Operating Expenses $ 42,529 $ 45,277 $ 37,143 A reconciliation of the expected Federal income taxes compared to the reported Federal income tax expense computed by applying the statutory rate follows: Statutory Federal Income Tax Rate 35% 35% 34% Income Tax Computed at the Statutory Rate $ 45,256 $ 54,221 $ 52,577 Plant Basis Differences (27) (5,171) 2,022 Investment Tax Credits (2,534) (2,534) (2,534) Tax Adjustments (4,874) (750) (3,757) Other-Net (1,692) 127 (1,117) Total Federal Income Tax Expense $ 36,129 $ 45,893 $ 47,191 Effective Federal Income Tax Rate 28% 30% 31% Items comprising deferred tax amounts are as follows at December 31, 1994 and 1993: 1994 1993 Deferred Tax Liabilities: Plant Basis Differences $304,476 $295,445 Unrecovered Purchased Power Costs 33,557 38,792 State Excise Taxes 25,842 11,797 Other 22,573 21,057 Total Deferred Tax Liabilities 386,448 367,091 Deferred Tax Assets: Deferred Investment Tax Credits 27,879 29,247 Employee Separation Costs 6,932 - Other 13,081 7,938 Total Deferred Tax Assets 47,892 37,185 Total Deferred Taxes-Net $338,556 $329,906 The deferred tax costs associated with additional deferred tax liabilities resulting from a change in accounting standards regarding deferred taxes effective in 1993 are recorded on the Consolidated Balance Sheet as Recoverable Future Federal Income Taxes. Such recognition is given in respect of the probable amount of revenue to be collected from ratepayers for these additional taxes to be paid in future years. NOTE 3: RATE MATTERS Energy Clause Proceedings Changes in Levelized Energy Clause Rates 1992 - 1994 Amount Amount Date Requested Granted Date Filed (millions) (millions) Effective 2/92 $(6.6) $(8.5) 10/92 3/93 14.2 10.9 10/93 2/94 63.0 55.0 7/94 The Company's Levelized Energy Clause (LEC) is subject to annual review by the BPU. In February 1992, the Company filed a petition with the BPU for the LEC period June 1, 1992 through May 31, 1993 requesting no change in LEC rates. In April 1992, the Company filed a revision to their petition requesting a $6.6 million decrease in LEC rates based on an update for the projected overrecovery of prior LEC costs and an amount allocated to customers from the litigation settlement with PECO Energy (PECO) related to the Peach Bottom Atomic Power Station. In October 1992, the BPU approved a reduction in annual LEC revenues of $8.5 million which included the recovery of $10.4 million over a three-year period of certain deferred costs relating to the Salem Nuclear Generating Station. The PECO settlement allocation was subject to review by the BPU in the Company's 1993 LEC proceeding. In March 1993, the Company filed a petition with the BPU requesting a $14.2 million increase in LEC revenues for the June 1, 1993 through May 31, 1994 LEC period. Effective for service rendered on and after October 1, 1993, the BPU approved an increase of $10.9 million which included the following: 1) an additional $3.8 million of the PECO settlement together with accrued interest to be returned to customers during the 1994-1995 LEC period; 2) recovery of $400 thousand for the annual assessment for the Department of Energy (DOE) decommissioning and decontamination fund; 3) full LEC recovery of all future assessments for the DOE decommissioning and decontamination fund and 4) recognition of the $48 thousand penalty for 1992 nuclear operations as required by the Nuclear Performance Standard. The additional allocation of the PECO settlement was provided for in the 1993 financial results and the reimbursement was made through the 1994 LEC. On February 8, 1994, the Company filed a petition with the BPU requesting an increase in LEC revenues of $63 million for the period June 1, 1994 through May 31, 1995. The increase was due primarily to the additional costs incurred from two new independent power producers (IPPs) scheduled to begin commercial operation during the 1994/1995 LEC period. The total projected costs for fuel and capacity for the LEC period were $147 million. The Company reduced the requested amount by $84 million as a result of the utilization of $56 million of current base rate revenues associated with a utility power purchase contract expiring in May 1994 and the Southern New Jersey Economic Initiative (SNJEI), a Company initiative that forgoes the recovery of $28 million of fuel costs. Included in the Company's request was the recovery over five years of $20 million paid by the Company in December 1993 in connection with contract renegotiations with an IPP. Effective July 26, 1994, the BPU approved a provisional increase of $55 million based on an adjustment to actual costs for fuel and capacity. On November 30, 1994, the BPU rendered its decision on the Company's LEC request approving the continuation of provisional LEC rates, the recovery of the $20 million in renegotiation costs and the reduction for the $28 million SNJEI. Base Rate Case Proceedings Effective October 1992, the BPU authorized a net increase in annual base rate revenues of $12.9 million. In March 1994, in response to an appeal filed by the Ratepayer Advocate in December 1992, the Superior Court of New Jersey, Appellate Division, affirmed the BPU's decision to allow an increase in base rates relating to changes in the state excise tax. Other Rate Proceedings In November 1993, the Company filed a petition with the BPU requesting that hotel-casino customers be permitted to take service under rate schedules offered to all other commercial and industrial customers. On June 23, 1994, the BPU approved the request with a provision that the Company not seek recovery of lost revenues resulting from the hotel-casinos being permitted to shift to other rate schedules prior to the Company's next base rate case. The BPU also allowed for a one-time adjustment to be billed to hotel-casino customers for the associated underrecovery in the Company's fuel clause. Prior to BPU approval, hotel- casino customers were served under the Hotel Casino Service rate schedule, the highest rate for service of all the Company's service classes. Effective July 1, 1994, all hotel-casino customers began taking service under a general service rate schedule which could reduce annual base rate revenues by approximately $7 million. Effective July 25, 1994, the Hotel Casino Service rate schedules were no longer offered for electric service. In July 1993, the BPU initiated a generic proceeding to address the recovery of the capacity costs associated with purchases of power from nonutility generation projects. This issue relates to the Ratepayer Advocate's contention that present BPU policy which permits full recovery of these costs through the LEC provides for a "double recovery" of cogeneration capacity costs. In August 1993, the Ratepayer Advocate identified the Company as one of the electric utilities for which they considered the double recovery of capacity costs to be at issue. Pursuant to its February 18, 1994 decision supporting the investigation of the double recovery of capacity costs from nonutility generation projects, the BPU issued its written order on September 16, 1994. The order confirmed the establishment of a generic proceeding to review the nonutility purchase power capacity cost recovery methodology and ordered that the matter be reviewed in a two phase proceeding. The scope of the issues to be resolved during the first phase of the proceeding will include: 1) the determination of the existence, or lack of existence, of the double recovery as a result of the traditional LEC pass-through of nonutility generation capacity costs; 2) the quantification of any such double recovery found to exist for each utility for the relevant periods; and 3) a determination of an appropriate remedy or adjustment if such double recovery is found to occur and the periods of time over which such an adjustment would be applicable. Following the conclusion of the first phase of the proceeding, the BPU, in the second phase, will render a final decision regarding the specific findings of the Office of Administrative Law and address the broader issues relating to the appropriate prospective purchase power capacity cost recovery methods. Evidentiary hearings have been scheduled through December 1995. The BPU's final decision is not anticipated until 1996. At this time, the Company cannot predict the outcome of this proceeding and cannot estimate the impact that the double recovery issue may have on future rates. NOTE 4. RETIREMENT BENEFITS Pension The Company has a noncontributory defined benefit pension plan covering substantially all of its employees and those of its wholly-owned subsidiary. Benefits are based on an employee's years of service and average final pay. The Company's policy is to fund pension costs within the guidelines of the minimum required by the Employee Retirement Income Security Act and the maximum allowable as a tax deduction. Each company is allocated its participative share of plan costs and contributions. Net periodic pension costs for 1994, 1993 and 1992 included the following components: (000) 1994 1993 1992 Service cost - benefits earned during the period $ 6,871 $ 7,196 $ 7,310 Interest cost on projected benefit obligation 15,390 16,016 17,301 Actual return on plan assets (860) (23,200) (13,283) Other-net (16,885) 5,496 (3,795) Net periodic pension costs $ 4,516 $ 5,508 $ 7,533 Approximately $3 million, $5.2 million and $4.8 million of these costs were charged to operating expense in 1994, 1993 and 1992, respectively, and the remaining costs, which are associated with construction labor, were charged to the cost of new utility plant. A reconciliation of the funded status of the plan as of December 31, 1994 and 1993 is as follows: (000) 1994 1993 Fair value of plan assets $190,200 $213,600 Projected benefit obligation 206,742 207,246 Plan assets (less than)in excess of projected benefit obligation (16,542) 6,354 Unrecognized net transition asset (1,722) (1,894) Unrecognized prior service cost 306 329 Unrecognized net loss (gain) 24,106 (638) Prepaid pension cost $ 6,148 $ 4,151 Accumulated benefit obligation: Vested benefits $166,602 $165,872 Nonvested benefits 485 1,216 Total $167,087 $167,088 At December 31, 1994, approximately 60% of plan assets were invested in equity securities, 18% in fixed income securities and 22% in other investments. The assumed rates used in determining the actuarial present value of the projected benefit obligation at year-end were as follows: 1994 1993 Weighted average discount 7.5% 7.5% Anticipated increase in compensation 3.5% 3.5% The assumed long term rate of return on plan assets was 8.5% for both 1994 and 1993 and 8% for 1992. Other Postretirement Benefits The Company and its subsidiary provide certain health care and life insurance benefits for retired employees and their eligible dependents. Substantially all employees may become eligible for these benefits if they reach retirement age while working for the companies. Benefits are provided through insurance companies and other plan providers whose premiums and related plan costs are based on the benefits paid during the year. The Company has a tax qualified trust to fund these benefits. Each company is allocated its participative share of plan costs and contributions. The cost of other postretirement benefits was $15.6 million, $13.1 million and $6 million in 1994, 1993 and 1992, respectively. These costs were allocated as follows: (millions) 1994 1993 1992 Operating expense $5.6 $3.3 $3.8 New utility plant-associated with construction labor .2 1.7 2.2 Regulatory asset 9.8 8.1 - The regulatory assets represent the amount of cost recognized under accounting standards effective January 1, 1993 in excess of the amount of cost currently recovered in rates. These excess costs are deferred as authorized by an accounting order of the BPU pending future recovery through rates. Net periodic other postretirement benefits cost as calculated in accordance with accounting standards in effect since January 1, 1993 include: 1994 1993 (000) Service cost-benefits attributed to service during the period $ 3,817 $ 3,045 Interest cost on accumulated postretirement benefits obligation 8,450 7,133 Actual return on plan assets 100 (255) Amortization of unrecognized transition obligation 3,893 3,893 Other-net (700) (711) Net periodic other postretirement cost $15,560 $13,105 A reconciliation of the funded status of the plan and the obligation for other postretirement benefits recognized in the Consolidated Balance Sheet as of December 31, 1994 and 1993 is as follows: (000) 1994 1993 Accumulated benefits obligation: Retirees $ 43,265 $ 32,720 Fully eligible active plan participants 18,010 21,267 Other active plan participants 60,588 49,125 Total accumulated benefits obligation 121,863 103,112 Less fair value of plan assets 14,700 14,400 Accumulated benefits obligation in excess of plan assets 107,163 88,712 Unrecognized net loss (19,223) (6,639) Unamortized unrecognized transition obligation (70,075) (73,968) Accrued other postretirement benefits cost obligation $ 17,865 $ 8,105 At December 31, 1994, approximately 81% of plan assets were invested in fixed income securities and 19% in other investments. The assumed health care costs trend rate for 1994 is 10% and is assumed to evenly decline to an ultimate constant rate of 5% in the year 2000 and thereafter. If the assumed health care costs trend rate was increased by 1% in each future year, the aggregate service and interest costs of the 1994 net periodic benefits cost would increase by $1.9 million, and the accumulated postretirement benefits obligation at December 31, 1994 would increase by $16.7 million. The weighted average discount rate assumed in determining the accumulated benefits obligation was 7.5% for 1994 and 1993. The assumed long term return rate on plan assets was 7% for 1994 and 1993. NOTE 5. JOINTLY-OWNED GENERATING STATIONS The Company owns jointly with other utilities several electric production facilities. The Company is responsible for its pro- rata share of the costs of construction, operation and maintenance of each facility. The amounts shown represent the Company's share of each facility at, or for the year ending, December 31, including AFDC as appropriate. Peach Hope Keystone Conemaugh Bottom Salem Creek Energy Source Coal Coal Nuclear Nuclear Nuclear Company's Share (%/MWs) 2.47/42.3 3.83/65.4 7.51/157.0 7.41/164.0 5.00/52.0 Electric Plant in Service (000): 1994 $11,293 $26,607 $125,003 $206,804 $238,980 1993 10,746 18,055 123,428 203,858 237,496 Accumulated Depreciation (000): 1994 $3,180 $6,237 $55,190 $79,898 $53,746 1993 3,231 5,971 51,871 78,383 46,933 Construction Work in Progress (000): 1994 $1,216 $2,649 $11,002 $ 8,727 $ 387 1993 758 9,956 7,983 10,799 1,022 Working Funds (000): 1994 $44 $69 $5,051 $5,199 $2,013 1993 44 69 4,772 5,249 2,061 Operation and Maintenance Expenses (including fuel)(000): 1994 $5,085 $7,211 $29,530 $27,731 $10,471 1993 5,323 6,855 31,479 27,021 9,764 1992 4,976 7,194 29,618 25,461 9,541 Generation (MWH): 1994 257,561 419,313 1,214,776 836,725 355,390 1993 293,876 416,263 1,043,485 840,043 440,118 1992 294,222 457,771 958,740 737,356 351,672 The Company provides financing during the construction period for its share of the jointly-owned facilities and includes its share of direct operations and maintenance expenses in the Consolidated Statement of Income. Additionally, the Company provides an amount of working funds to the operators of the facilities to fund operational needs. The increase in Electric Plant in Service and decrease in Construction Work in Progress for Conemaugh is primarily due to the placement in service of flue gas disulfurization equipment (scrubber). NOTE 6. CUMULATIVE PREFERRED STOCK The Company has authorized 799,979 shares of Cumulative Preferred Stock, $100 Par Value, two million shares of No Par Preferred Stock and three million shares of Preference Stock, No Par Value. Information relating to outstanding shares at December 31 is shown in the table below. Current Optional 1994 1993 Redemption Series Par Value Shares (000) Shares (000) Price Not Subject to Mandatory Redemption: 4% $100 77,000 $ 7,700 77,000 $ 7,700 $105.50 4.10% 100 72,000 7,200 72,000 7,200 101.00 4.35% 100 15,000 1,500 15,000 1,500 101.00 4.35% 100 36,000 3,600 36,000 3,600 101.00 4.75% 100 50,000 5,000 50,000 5,000 101.00 5% 100 50,000 5,000 50,000 5,000 100.00 7.52% 100 100,000 10,000 100,000 10,000 101.88 Total $ 40,000 $ 40,000 Subject to Mandatory Redemption: $8.25 None 55,000 $ 5,500 60,000 $ 6,000 104.66 $8.53 None 360,000 36,000 600,000 60,000 102.00 $8.20 None 500,000 50,000 500,000 50,000 - $7.80 None 700,000 70,000 700,000 70,000 - Total 161,500 186,000 Less portion due within one year 12,250 12,250 Total $149,250 $173,750 Cumulative Preferred Stock Not Subject to Mandatory Redemption is redeemable solely at the option of the Company. On November 1 of each year, 2,500 shares of the $8.25 No Par Preferred Stock must be redeemed through the operation of a sinking fund at a redemption price of $100 per share. The Company may redeem not more than an additional 2,500 shares on any sinking fund date without premium. The Company redeemed 5,000 shares in both 1994 and 1993. Commencing in 1994, on November 1 of each year, 120,000 shares of the $8.53 No Par Preferred Stock must be redeemed through the operation of a sinking fund at a redemption price of $100 per share. At the option of the Company, not more than an additional 120,000 shares may be redeemed on any sinking fund date without premium. The Company redeemed 240,000 shares in 1994. Beginning August 1, 1996 and annually thereafter, 100,000 shares of the $8.20 No Par Preferred Stock must be redeemed through the operation of a sinking fund at a redemption price of $100 per share. At the option of the Company, not more than an additional 100,000 shares may be redeemed on any sinking fund date without premium. This series is not refundable prior to August 1, 2000. Beginning May 1, 2001 and annually through 2005, 115,000 shares of $7.80 No Par Preferred Stock must be redeemed through the operation of a sinking fund at a redemption price of $100 per share. On May 1, 2006, the remaining shares outstanding must be redeemed at $100 per share. ACE has the option to redeem up to an additional 115,000 shares without premium on each May 1 through 2005. This series is not refundable prior to May 1, 2006. For the next five years, the annual minimum sinking fund requirements of the Cumulative Preferred Stock Subject to Mandatory Redemption is $12.25 million for the year 1995, and $22.25 million in each of the years 1996 and 1997 and $10.25 million in each of the years 1998 and 1999. Cumulative Preferred Stock of the Company is not widely held and trades infrequently. The estimated aggregate fair market value of the Company's outstanding Cumulative Preferred Stock at December 31, 1994 and 1993 was approximately $185 million and $231 million, respectively. The fair market value has been determined using market information available from actual trades of similar instruments of companies with similar credit quality and rate. NOTE 7. LONG TERM DEBT Maturity December 31 Series Date 1994 1993 (Medium Term Notes (MTNs) have varying maturity dates and are shown with the weighted average interest rate of the related issues within the year of maturity.) (000) 5-1/8% First Mortgage Bonds 2/1/1996 $ 9,980 $ 9,980 Medium Term Notes Series B (6.28%) 1998 56,000 56,000 Medium Term Notes Series A (7.52%) 1999 30,000 30,000 Medium Term Notes Series B (6.83%) 2000 46,000 46,000 7-1/2% First Mortgage Bonds 4/1/2002 20,000 20,000 Medium Term Notes Series B (7.18%) 2003 20,000 20,000 7-3/4% First Mortgage Bonds 6/1/2003 29,976 29,976 Medium Term Notes Series A (7.98%) 2004 30,000 30,000 Medium Term Notes Series B (7.125%) 2004 28,000 28,000 7-5/8% Pollution Control 1/1/2005 - 6,500 Medium Term Notes Series B (6.45%) 2005 40,000 40,000 6-3/8% Pollution Control 12/1/2006 2,500 2,500 Medium Term Notes Series B (6.76%) 2008 50,000 50,000 10-1/2% Pollution Control Series B 7/15/2012 850 850 6-5/8% First Mortgage Bonds 8/1/2013 75,000 75,000 7-3/8% Pollution Control Series A 4/15/2014 18,200 18,200 10-1/2% Pollution Control Series C 7/15/2014 - 23,150 8-1/4% Pollution Control Series A 7/15/2017 4,400 4,400 9-1/4% First Mortgage Bonds 10/1/2019 53,857 65,767 6.80% Pollution Control Series A 3/1/2021 38,865 38,865 7% First Mortgage Bonds 9/1/2023 75,000 75,000 5.60% Pollution Control Series A 11/1/2025 4,000 4,000 7% First Mortgage Bonds 8/1/2028 75,000 75,000 6.15% Pollution Control Series A 6/1/2029 23,150 - 7.20% Pollution Control Series A 11/1/2029 25,000 - 7% Pollution Control Series B 11/1/2029 6,500 - Total 762,278 749,188 Debentures: 5-1/4% 2/1/1996 2,267 2,267 7-1/4% 5/1/1998 2,619 2,619 Total 4,886 4,886 Unamortized Premium and Discount-Net (3,876) (2,973) Total Long Term Debt $763,288 $751,101 In 1994, the Company redeemed its 10-1/2% Pollution Control Bonds Series C due 7/15/2014 and its 7-5/8% Pollution Control Bonds due 1/1/2005. The Company acquired and retired $11.9 million principal amount of First Mortgage Bonds, 9-1/4% Series due 10/1/2019. The aggregate cost of these redemptions was $1.2 million, net of related Federal income taxes. Sinking fund deposits are required for retirement of the 5-1/4% Debentures annually on February 1 through 1995 and for the 7-1/4% Debentures annually on May 1 through 1997 in amounts in each case sufficient to redeem $100,000 principal amount. The Company may, at its option, redeem an additional $100,000 annually in each case. Through December 31, 1994, the Company acquired and cancelled $333 thousand and $181 thousand principal amount of the 5-1/4% and 7-1/4% Debentures, respectively, which will be used to satisfy its requirements for 1995. Certain series of First Mortgage Bonds contain provisions for deposits of cash or certification of bondable property currently amounting to $100 thousand, which the Company may elect to satisfy through property additions. For the next five years, the annual amount of scheduled maturities and sinking fund requirements of the Company's long term debt are $12.266 million in 1996, $175 thousand in 1997, $58.575 million in 1998 and $30.075 million in 1999. The Company's long term debt securities are not widely held and generally trade infrequently. The estimated aggregate fair market value of the Company's outstanding long term debt at December 31, 1994 and 1993 was $693 million and $768 million, respectively. The fair market value has been determined based on quoted market prices for the same or similar debt issues or on debt instruments of companies with similar credit quality, coupon rates and maturities. NOTE 8. COMMITMENTS AND CONTINGENCIES Construction Program The Company's cash construction expenditures for 1995, which excludes AFDC and customer contributions, are estimated to be approximately $116 million. Current commitments for the construction of major production and transmission facilities approximate $23 million, of which it is estimated that $19 million will be expended in 1995. Insurance Programs The Company is a member of certain insurance programs that provide coverage for decontamination and property damage to members' nuclear generating plants. Facilities at the Peach Bottom, Salem and Hope Creek stations are insured against property damage losses up to $2.75 billion per site under these programs. In addition, the Company is a member of an insurance program which provides coverage for the cost of replacement power during prolonged outages of nuclear units caused by certain specific conditions. The insurer for nuclear extra expense insurance provides stated value coverage for replacement power costs incurred in the event of an outage at a nuclear unit resulting from physical damage to the nuclear unit. The stated value coverage is subject to a deductible period of the first 21 weeks of any outage. Limitations of coverage include, but are not limited to, outages (1) not resulting from physical damage to the unit, (2) resulting from any government mandated shutdown of the unit, (3) resulting from any gradual deterioration, corrosion, wear and tear, etc. of the unit, (4) resulting from any intentional acts committed by an insured and (5) resulting from certain war risk conditions. Under the property and replacement power insurance programs, the Company could be assessed retrospective premiums in the event the insurers' losses exceed their reserves. As of December 31, 1994, the maximum amount of retrospective premiums the Company could be assessed for losses during the current policy year was $6.6 million under these programs. The Price-Anderson provisions of the Atomic Energy Act of 1954, as amended by the Price-Anderson Amendments Act of 1988, govern liability and indemnification for nuclear incidents. All nuclear facilities could be assessed, after exhaustion of private insurance, up to $79.275 million each, payable at $10 million per year, per reactor and per incident. Based on its ownership share of nuclear facilities, the Company could be assessed up to $27.6 million per incident. This amount would be payable at $3.48 million per year, per incident. Energy and Capacity Arrangements UTILITY SOURCES The Company has an arrangement for the purchase of 125 MWs of capacity and related energy from Pennsylvania Power and Light through September 30, 2000. Capacity costs, including certain deferred charges, totaled $26.6 million, $24.4 million and $25.1 million, and energy costs totaled $10.8 million, $11.2 million and $13.4 million in 1994, 1993 and 1992, respectively. Commitments for capacity costs expected to be incurred are $11.7 million, $12.0 million, $12.3 million, $12.6 million, $14.2 million and $12.3 million in each of the years 1995-2000, respectively. The Company's arrangement for the purchase of 200 MWs of capacity and related energy from PECO expired May 31, 1994. Capacity costs charged to Purchased Capacity expense totaled $25.6 million through May 1994 and $55.9 million and $52.5 million for 1993 and 1992, respectively. Energy costs for the same periods amounted to $11.4 million, $21.0 million and $19.2 million, respectively. ACE also had another arrangement with PECO for the purchase of energy only which terminated in October 1994. Energy costs under this arrangement amounted to $32.5 million, $19.0 million and $17.5 million in 1994, 1993 and 1992, respectively. The Company is a member of the Pennsylvania-New Jersey-Maryland Interconnection (PJM), an integrated power pool that is connected with other utilities for the interchange of energy on an as-needed and as-available basis. The Company is required to plan for reserve capacity based on aggregate PJM requirements allocated to member companies. The Company has satisfied its current reserve requirements. The Company also has an interchange agreement with the City of Vineland, New Jersey, which operates a municipal utility located in the Company's service territory. The cost of energy purchased through interchange agreements totaled $10.4 million, $9.9 million and $9.4 million in 1994, 1993 and 1992, respectively. NONUTILITY SOURCES The Company has contracted for a total of 569 MWs of capacity and related energy from four non utility sources. The last two projects under contract for 388 MWs became operational in 1994. Nonutility capacity costs totaled $77.0 million, $30.2 million and $24.4 million, and energy costs totaled $62.5 million, $36.0 million and $27.6 million, in 1994, 1993 and 1992, respectively. Capacity and energy costs from nonutility sources are recovered through the LEC. Environmental Matters The provisions of Title IV of the Clean Air Act Amendments of 1990 (CAAA) will require, among other things, phased reductions of sulfur dioxide (SO2) emissions by 10 million tons per year, and a limit on S02 emissions nationwide by the year 2000, and reductions in emissions of nitrogen oxides (NOx) by approximately 2 million tons per year. The Company's wholly-owned B.L. England Units 1 and 2 and its jointly-owned Conemaugh Station Units 1 and 2 are affected during Phase I (1995) and all of the Company's other fossil-fuel steam generating units are affected by Phase II (2000) of the CAAA. The Company has installed a scrubber on B.L. England Unit 2 at a cost of $81 million which went into service in December 1994. By scrubbing B.L. England Unit 2, Phase I S02 emission requirements are met for both B.L. England Units 1 and 2. The Conemaugh owners installed a scrubber on Conemaugh Unit 1 which went into service in December 1994. The Company's 3.83% share of the cost was $11 million. A scrubber on Conemaugh Unit 2 is to be completed in 1995, with the Company's share of the cost estimated to be $4 million. The jointly-owned Keystone Station is impacted by the SO2 and NOx provisions of Title IV of the CAAA during Phase II. Currently, the Keystone owners plan to rely on utilizing emission allowances, and modified fuel content to a lesser extent, to meet compliance with the CAAA through the year 2000. In addition, certain purchase power arrangements will be affected by the CAAA, in amounts that are not presently determinable. Federal and state legislation authorize various governmental authorities to issue orders compelling responsible parties to take cleanup action at sites determined to present danger from releases of hazardous substances. The various statutes impose joint and several liability without regard to fault for certain investigative and cleanup costs for all potentially responsible parties. The Company has received notification with respect to two sites within New Jersey as one of a number of alleged responsible parties for cleanup and remedial actions. The Company's maximum expense for these claims is not expected to exceed $1 million. The Company believes that insurance coverage is available to satisfy any amounts in excess of the self-insured limits associated with these particular claims should any liability result. The insurer for pollution liability insurance provides comprehensive excess general liability coverage, including pollution liability, for environmental costs incurred in the event of bodily injury or property damage resulting from the discharge or release of pollutants into or upon the land, atmosphere or water. Limitations of coverage include any pollution liability 1) resulting subsequent to the disposal of such pollutants, 2) resulting from the operation of a storage facility of such pollutants, 3) resulting in the formation of acid rain, 4) caused to property owned by an insured and 5) resulting from any intentional acts committed by an insured. Other The Company is subject to a performance standard for all of its jointly-owned nuclear units. This standard is used by the BPU in determining recovery of replacement energy costs resulting from poor nuclear performance. The standard establishes a target aggregate capacity factor within a zone of reasonable performance to be achieved by the units. Performance outside of the zone results in penalties or rewards. Any penalties incurred would not be permitted to be recovered from customers and would be charged against income. For 1994, the aggregate capacity factor of the Company's nuclear units is within the reasonable performance zone, which results in no penalty or reward. A contract with an industrial company whereby the Company delivered process steam, water and by-product electricity was terminated by this company effective June 30, 1994. In 1993, the Company received approximately $12 million from this company for services and energy sales. In accordance with the termination agreement, the Company received $4.2 million in cash proceeds, 45,165 emission allowances valued at $6.5 million and made provisions to retire certain equipment. A net gain of $2.4 million net of tax resulted. The steam and electricity needs of this company are provided by a nonutility cogeneration facility. The Company has a contract for the purchase of 188 MWs of capacity and energy from this facility. In November 1994, the Company announced a program to reduce its workforce by up to 20% or 350 people. This program was initiated so that the Company can better position itself for the more competitive environment within the electric industry. Under the program, certain employees will separate from the Company and be entitled to a severance package, including salary continuation, lump sum payments, extended medical benefits and outplacement services. In December 1994, the Company accrued the costs of the workforce reduction in the amount of $17.3 million, net of tax of $9.3 million. Included is the Company's share of an early retirement program of a jointly-owned nuclear station. The Company's employee separations are expected to be substantially completed by March 1, 1995. The Energy Policy Act of 1992 permits the Federal government to assess investor-owned electric utilities that have ownership interests in nuclear generating facilities an amount to fund the decontamination and decommissioning of three Federally operated nuclear enrichment facilities. Based on its ownership in five nuclear generating units, the Company recorded a liability of $6.6 million and $8 million at December 31, 1994 and 1993, respectively, for its obligation to be paid over the next 13 years. The Company has an associated regulatory asset of $7.2 million and $8.4 million at December 31, 1994 and 1993, respectively. Amounts are currently being recovered in rates for this liability and the regulatory asset is concurrently being amortized to expense based on the annual assessment billed by the Federal government. NOTE 9. LEASES The Company leases various types of property and equipment for use in its operations. Certain of these lease agreements are capital leases consisting of the following at December 31: (000) 1994 1993 Production plant $13,521 $13,521 Less accumulated amortization 9,707 8,846 Net 3,814 4,675 Nuclear fuel 38,216 40,593 Leased property-net $42,030 $45,268 The Company has a contractual obligation to obtain nuclear fuel for the Salem, Hope Creek and Peach Bottom stations. The asset and related obligation for the leased fuel are reduced as the fuel is burned and are increased as additional fuel purchases are made. No commitments for future payments beyond satisfaction of the outstanding obligation exist. Operating expenses for 1994, 1993 and 1992 include leased nuclear fuel costs of $14.1 million, $13.9 million and $13.5 million, respectively, and rentals and lease payments for all other capital and operating leases of $5.9 million, $5.5 million and $5.5 million, respectively. Future minimum rental payments for all noncancellable lease agreements are not significant to the Company's operations. Rental charges of other subsidiary companies are not significant. NOTE 10. QUARTERLY FINANCIAL RESULTS (UNAUDITED) Quarterly financial data, reflecting all adjustments necessary in the opinion of the Company for a fair presentation of such amounts, are as follows: Operating Operating Net Earnings for Quarter Revenues Income Income Common Stock 1994 (000) (000) (000) 1st $232,134 $ 39,580 $27,130 $22,821 2nd 205,861 30,299 20,635 16,326 3rd 272,769 58,321 49,679 45,370 4th 202,461 24,794 (4,272) (8,059) Annual $913,226 $152,995 $93,174 $76,458 1993 1st $203,672 $ 35,264 $ 23,770 $19,331 2nd 192,561 27,203 14,885 10,548 3rd 268,927 68,421 55,477 51,157 4th 200,637 28,039 14,894 10,585 Annual $865,799 $158,927 $109,026 $91,621 Individual quarters may not add to the total due to rounding, and the effect on earnings per share of changing average number of common shares outstanding. The revenues of the Company are subject to seasonal fluctuations due to increased sales and higher residential rates during the summer months. Net Income reflects special charges aggregating $18.7 million, after tax of $10 million, recorded in Other Income during the fourth quarter of 1994. One of the charges is an accrual of the costs of workforce reductions for severance and benefits packages in the amount of $17.3 million, net of tax of $9.3 million. Another charge is an amount for the Company's share of deferred costs for studies at a nuclear station in the amount of $1.4 million, net of tax of $735 thousand. Management's Discussion and Analysis of Financial Condition and Results of Operations Atlantic City Electric Company (the Company) is a wholly-owned and the principal subsidiary of Atlantic Energy, Inc. (AEI). The Company is an electric utility regulated by the New Jersey Board of Public Utilities (BPU). The Company has a wholly-owned subsidiary that operates certain generating facilities. The emergence of competition in the area of electric generation, slower growth in energy sales, Federal deregulation of wholesale energy sales, prospective retail wheeling initiatives coupled with a public utility's obligation to serve and the need to mitigate future rate increases has caused the Company to re- examine its traditional approach to its business. The Company's current business plan recognizes the increasingly competitive nature of the electric energy business in general and the need to encourage economic growth and stability in the service territory and surrounding region. The Company is re- evaluating its revenue requirements and service pricing, the implementation of additional cost controls and the development of new sources of revenue. Financial Results Operating revenues for 1994, 1993 and 1992 were $913.2 million, $865.8 million and $816.9 million, respectively. The increase in 1994 revenue reflects an increase in Levelized Energy Clause (LEC) revenues as a result of a $55.0 million rate increase effective July 1994 and an increase in sales for resale. The increased revenues for 1993 reflect the effect of a rate increase of $10.9 million effective in that year. The revenue increase in 1993 also reflects the contrast between the 1993 normal and the 1992 below normal summer temperatures. Income available for common stock was $76.5 million, compared with $91.6 million in 1993 and $89.6 million in 1992. The 1994 earnings include a reduction of $17.3 million, net of tax of $9.3 million for the expected costs of the Company's employee separation programs and $1.4 million, net of tax of $735 thousand for the write-off of deferred nuclear study costs. In 1993, results reflect increased kilowatt-hour sales due to the contrast between 1993 and 1992 summer temperatures. The Company's 1993 earnings were reduced as a result of reorganization activities. The Company's 1992 earnings were increased due to the litigation settlement with PECO Energy. This increase was offset in part by lower energy sales due to cooler summer temperatures and a decrease in industrial sales. Liquidity and Capital Resources Overview Cash construction expenditures for the 1992-1994 period amounted to $388.8 million and included expenditures for upgrades to existing transmission and distribution facilities and compliance with provisions of the Clean Air Act Amendments (CAAA) of 1990. The Company's current estimate of cash construction expenditures for the 1995-1997 period is $268 million. These estimated expenditures reflect necessary improvements to transmission and distribution facilities and further compliance with provisions of the CAAA. The Company also utilizes cash for mandatory redemptions of Preferred Stock and maturities and redemption of long term debt. Optional redemptions of securities are reviewed on an ongoing basis with a view toward reducing the overall cost of funds. Redemptions of Preferred Stock (at par or stated value) and redemptions, reacquisitions and retirements, and maturities of First Mortgage Bonds for the period 1992-1994 are shown as follows: 1994 1993 1992 Preferred Stock (Series) 9.96% (Shares) - 48,000 8,000 $8.53 (Shares) 240,000 - - $8.25 (Shares) 5,000 5,000 2,500 Aggregate Amount (000) $24,500 $5,300 $1,050 First Mortgage Bonds redeemed or acquired and retired or matured in the period 1992-1994 were as follows: Date Series Principal Amount Price(%) (000) November 1994 7-5/8% due 2005 $ 6,500 100.00 June 1994 10-1/2% due 2014 23,150 102.00 Various 1994 Dates 9-1/4% due 2019 11,910 105.38* September 1993 9-1/4% due 2019 69,233 110.95* September 1993 8-7/8% due 2016 125,000 104.80 March 1993 8-7/8% due 2000 19,000 102.41 March 1993 8% due 2001 27,000 102.53 March 1993 8% due 1996 95,000 100.91 March 1993 4-3/8% due 1993 9,540 100.00 July 1992 4-1/2% due 1992 10,350 100.00 * Average price Scheduled debt maturities and sinking fund requirements aggregate $69 million for the years 1995-1997. On or before April 1 of each year, the Company and other New Jersey utilities are required to pay gross receipts and franchise taxes (state excise taxes) to the State of New Jersey. In March 1994, the Company paid $137.5 million. Included in that amount was approximately $50 million representing the second and final installment for the additional one-half year's amount of tax due as required by amended state law. This additional amount of gross receipts and franchise tax payment, plus the additional one-half year's payment in 1993 of $45 million, has been recorded on the Consolidated Balance Sheet as Unrecovered State Excise Taxes and is being recovered through rates by the Company. In December 1993, the Company paid $20 million in connection with renegotiation of a nonutility purchase power contract which the Company is recovering through its LEC. The estimated savings of this renegotiation based on currently forecasted fuel costs, is $15 million to $20 million per year, net of the $20 million payment. On an interim basis, the Company finances that portion of its construction costs and other capital requirements in excess of internally generated funds through the issuance of unsecured short term debt consisting of commercial paper and borrowings from banks. As of December 31, 1994, the Company has arranged for lines of credit of $150 million of which $141.4 million was available. Permanent financing by the Company is undertaken by the issuance of its long term debt and Preferred Stock and from capital contributions by the parent company. The Company's nuclear fuel requirements associated with its jointly-owned units have been financed through arrangements with a third party. In 1994, the Company issued and sold $54.65 million of its long term debt consisting of Pollution Control Bonds. The proceeds from the financings were used for refunding higher cost Pollution Control Bonds and for construction purposes. Additionally, $125 million in debt securities were registered and are available for issuance in 1995. In 1993, the Company issued and sold $469 million of long term debt consisting of $240 million of Series B Medium Term Notes, $225 million of First Mortgage Bonds and $4 million of Pollution Control Bonds. The proceeds from the 1993 financings were also used for refunding higher cost debt and construction purposes. In 1992, the Company issued and sold $60 million of Series A Medium Term Notes, the proceeds of which were used for the Company's construction program. During 1995-1997, the Company expects to issue $50 million in new long term debt to be used for funding of construction and repayment of short term debt. Provisions of the Company's charter, mortgage and debenture agreements can limit, in certain cases, the amount and type of additional financing which may be used. At December 31, 1994, the Company estimates additional funding capacities of $218 million of First Mortgage Bonds, or $530 million of Preferred Stock, or $432 million of unsecured debt. These amounts are not necessarily additive. RESULTS OF OPERATIONS Revenues Operating Revenues - Electric increased 5.5% and 6.0% in 1994 and 1993, respectively. Components of the overall changes are shown as follows: (millions) 1994 1993 Base Revenues $(4.2) $12.2 Levelized Energy Clauses 30.3 (5.0) Kilowatt-hour Sales 9.6 42.6 Unbilled Revenues (7.3) (1.2) Sales for Resale 17.8 0.7 Other 1.2 (0.4) Total $47.4 $48.9 Levelized Energy Clause (LEC) revenues increased in 1994 due to rate increases of $55 million in July 1994 and $10.9 million in October 1993. The decrease in 1993 LEC revenues was the net result of the increase in October 1993 and an $8.5 million decrease effective October 1992. Changes in kilowatt-hour sales are discussed under "Billed Sales to Ultimate Customers." Overall, the combined effects of changes in rates charged to customers and kilowatt-hour sales resulted in increases of 3.1% and 0.8% in revenues per kilowatt-hour in 1994 and 1993, respectively. The changes in Unbilled Revenues are a result of the amount of kilowatt-hours consumed by ultimate customers at the end of the respective periods, which are affected by weather and economic conditions, and the corresponding price per kilowatt-hour. The changes in Sales for Resale are a function of the Company's energy mix strategy, which in turn is dependent upon the Company's needs for energy, the energy needs of other utilities participating in the regional power pool of which the Company is a member, and the sources and prices of energy available. The increase in Sales for Resale for 1994 was the result of meeting the demands of the regional power pool due to the extreme weather conditions during the first six months of 1994. Effective July 1, 1994, the BPU permitted hotel-casino customers to take service under existing commercial rate schedules which is expected to reduce annual revenue by approximately $7 million. Billed Sales to Ultimate Utility Customers Changes in kilowatt-hour sales are generally due to changes in the average number of customers and average customer use, which is affected by economic and weather conditions. Energy sales statistics, stated as percentage changes from the previous year, are shown as follows: 1994 1993 Avg Avg # Avg Avg # Customer Class Sales Use of Cust Sales Use of Cust Residential 1.5% .4% 1.1% 6.7% 5.9% .8 % Commercial 2.6 .5 2.1 5.1 3.2 1.9 Industrial (2.9) (3.8) .9 2.6 4.6 (1.9) Other 3.2 4.0 (.8) 1.2 1.6 (.4) Total 1.3 - 1.2 5.4 4.4 .9 The 1994 increase in total kilowatt-hour sales was due to the extreme weather conditions during the first quarter of 1994 and an increased number of billing days in 1994 compared to 1993. This increase was partially offset by the abnormal weather conditions during the last half of the year when kilowatt-hour usage fell below 1993 levels. In 1993, total kilowatt-hour sales increased primarily due to the colder winter temperatures during the first quarter, and below normal temperatures during the summer of 1992. Improved economic conditions also contributed to the increase in 1993 sales. Commercial sales in both years benefitted from night lighting programs. The decline in 1994 industrial sales is due to the loss of the Company's largest customer to an independent power producer during the year. KWH sales and electric revenues by customer class were as follows: Residential Commercial Industrial Other KWH Sales (000) 1994 3,546,789 3,344,676 1,224,721 51,670 1993 3,495,722 3,259,541 1,261,069 50,080 1992 3,276,330 3,100,133 1,229,211 49,464 Revenues (000) 1994 $ 416,468 $ 336,459 $ 102,687 $ 10,973 1993 393,866 315,089 100,812 10,575 1992 364,232 299,866 97,475 10,548 Costs and Expenses Total Operating Expenses increased 7.5% and 3.9% in 1994 and 1993, respectively. Included in these expenses are the costs of energy, purchased capacity, operations, maintenance, depreciation and taxes. Energy expense reflects cost incurred for energy needed to meet load requirements, various energy supply sources used and operation of the LECs. Changes in costs reflect the varying availability of low-cost generation from the Company-owned and purchased energy sources, and the corresponding unit prices of the energy sources used, as well as changes in the needs of other utilities participating in the Pennsylvania-New Jersey-Maryland Interconnection. The cost of energy is recovered from customers primarily through the operation of the LEC. Until 1994, earnings were generally not affected by energy costs because these costs are adjusted to match the associated LEC revenues. In any period, the actual amount of LEC revenue recovered from customers may be greater or less than the actual amount of energy cost incurred in that period. Such respective overrecovery or underrecovery of energy costs is recorded on the Consolidated Balance Sheet as a liability or an asset as appropriate. Amounts in the balance sheet are recognized in the Consolidated Statement of Income within Energy expense during the period in which they are subsequently recovered through the LEC. The Company was underrecovered by $11 million and by $7.2 million at December 31, 1994 and 1993, respectively. As a result of implementing the Southern New Jersey Economic Initiative in rates, effective July 19, 1994, the Company is forgoing recovery of future energy costs in LEC rates of $28 million through May 31, 1995. After tax income has been reduced by $10.1 million due to the effects of this initiative in 1994. In 1994, Energy expense increased 32.7% due to the adoption of the Southern New Jersey Economic Initiative and the increase in the levelized energy clause that reduced underrecovered fuel costs. Production-related energy costs for 1994 increased by 19.9% due to increased overall generation and the high cost of energy from additional nonutility sources. The average unit cost for energy in 1994 increased to 2.04 cents per kilowatt-hour compared to 1.82 cents per kilowatt-hour in 1993. Energy expense for 1993 decreased 1.1% primarily due to an increase in underrecovered fuel costs in 1993 compared to 1992. Production- related energy cost for 1993 increased by 6.7% largely due to increased generation. The average unit cost for energy in 1993 increased to 1.82 cents per kilowatt-hour compared to 1.80 cents per kilowatt-hour in 1992. The 1993 increase in the per unit cost is a result of increased amounts of higher cost energy from nonutility sources and a decreased supply of lower cost energy from coal sources. Purchased Capacity expense reflects entitlements to generating capacity owned by others. Purchased Capacity expense increased 18.2% and 7.4% in 1994 and 1993, respectively. The increases in Purchased Capacity reflect additional capacity supplied by nonutility power producers that became operational in each year. Operations expense decreased 3.5% in 1994 and increased 8.9% in 1993. The increase in 1993 was due primarily to corporate reorganization activities by the Company. Maintenance expense decreased 17.1% in 1994 due to cost saving measures in maintenance activities. The 9% decrease in 1993 maintenance expense was due to the scheduling of maintenance projects. Depreciation and Amortization expense increased 7.9% in 1994 as a result of an increase in the depreciable base of the Company's electric plant in service. State Excise Taxes expense decreased 6.9% in 1994 and increased by 6.4% in 1993. The increase in 1993 is due to a higher tax assessment. Federal Income Taxes decreased 6.1% in 1994 and increased 21.9% in 1993 as a result of the level of taxable income during those periods. The change in the 1993 amount reflects the increase in the Federal income tax rate to 35% from 34%, effective in that year. Employee Separation Costs represents programs by the Company to reduce its workforce by about 20%, or 350 people. Other-Net within Other Income (Expense) decreased in 1994 due to the net after tax impacts of the write-off of deferred nuclear study costs of $1.4 million. Litigation Settlement in 1992 represents the Company's share of the settlement of litigation concerning the Nuclear Regulatory Commission imposed shutdown in earlier years of the Peach Bottom Atomic Power Station. The Litigation Settlement for 1993 represents an additional allocation to customers of the proceeds from the 1992 settlement as ordered by the BPU. Interest on Long Term Debt decreased in 1994 due to refunding of higher cost debt. Interest on Long Term Debt increased 11.4% in 1993 reflecting the net effects of issuance of $469 million of First Mortgage Bonds during the year, and the maturity, redemption and reacquisition of various series of First Mortgage Bonds totaling $344.8 million principal amount. At December 31, 1994, 1993 and 1992, the Company's embedded cost of long term debt was 7.6%, 7.8% and 8.8%, respectively. Preferred Stock Dividend Requirements decreased as a result of continuing mandatory and optional redemptions in each year. Embedded cost of Preferred Stock as of December 31, 1994, 1993 and 1992 was 7.6%, 7.7% and 7.7%, respectively. Outlook The nature of the electric utility business is capital intensive. The Company's ability to generate cash flows from operating activities and its continued access to the capital markets is affected by the timing and adequacy of rate relief, competition and the economic vitality of its service territory. The Company has lowered its planned capital expenditures for the period 1995- 1999 which will reduce its external cash requirements. Additionally, the Company expects to review its revenue requirements with a view toward overall rate stability in light of expected price competition. The Company believes one of its greatest assets is its high level of customer service and reliability. The financial performance of the Company will be affected in the future by the level of sales of energy and the impacts of regulation and competition. To better position itself for a more competitive environment, the Company initiated cost reduction programs in 1994. One such program was a workforce reduction program which the Company expects will result in annual after tax cost savings in excess of $10 million. Other issues which may impact the electric utility business include public health, safety and environmental legislation. Changes in operating revenues in the future will result from changes in customer rates, energy consumption and general economic conditions in the service area, as well as the impacts of load management and conservation programs instituted by the Company. The Company's revenues could also be affected by the increasing competition in the retail and wholesale energy market. The emergence of competition among suppliers of electricity may require the Company to create new rate structures and to offer incentives to its Commercial and Industrial customers. Net income of the Company may be affected by the operational performance of nuclear generating facilities. The Company is subject to a BPU-mandated nuclear unit performance standard. Under the standard, penalties or rewards are based on the aggre- gate capacity factor of the Company's five jointly-owned nuclear units. Any penalties incurred would not be permitted to be recovered from customers and would be charged against income. The Energy Policy Act, enacted in October 1992, provides, among other things, for increased competition between utility and nonutility electric generators and permits wholesale transmission access, or wheeling, with certain requirements. Other pressures such as increased customer demands for competitive rates, potential loss of municipal power sales, excess generating capacity, together with the emergence of nonutility energy sources, are expected to increase the amount of business risk for electric utilities in the future. In addition, the extent to which New Jersey public utility regulation is modified to be reflective of these new competitive realities will be a key factor affecting the Company. Development of electric generating facilities by nonutilities has occurred in the Company's service territory. Effects of nonutility generation could be offset to some extent by natural growth in the service territory and additional efforts by the Company to reduce the impact of the potential loss of kilowatt- hour sales and revenues. The CAAA will require modifications at certain of the Company's facilities. Compliance with the CAAA will cause ACE to incur additional operating and/or capital costs. Presently, the Company's construction budget for 1995 through 1997 includes approximately $16 million related to the cost of compliance. In addition, certain power purchase arrangements will be affected by the CAAA, the effects of which are not presently determinable. Federal and state legislation authorize various governmental authorities to issue orders compelling responsible parties to take cleanup action at sites determined to present danger from releases of hazardous substances. The various statutes impose joint and several liability without regard to fault for certain investigative and cleanup costs for all potentially responsible parties. The Company has received notification with respect to two sites within New Jersey as one of a number of alleged responsible parties for cleanup and remedial actions. The Company's responsibility is not expected to exceed $1 million in the aggregate. Inflation Inflation affects the level of operating expenses and also the cost of new plant placed in service. Traditionally, the rate making practices that have applied to the Company have involved the use of historical test years and the actual cost of plant. However, the ability to recover increased costs through rates, whether resulting from inflation or otherwise, depends upon the frequency, timing and results of rate case decisions. -----END PRIVACY-ENHANCED MESSAGE-----